In May 2012, we published a post on “India under the Bilateral Investment Treaty Spotlight” noting, amongst other things, that all eyes were on India as various telecommunications companies from around the world had either threatened to or already filed notices of investment arbitration against India following the Indian government’s intention to impose retrospective taxes and/or the Indian Supreme Court’s cancellation of various 2G spectrum licenses.

The number of investment arbitrations worldwide has significantly increased over the last decade or so. Between 1965 and 2000, only 66 cases were registered with the International Centre for Settlement of Investment Disputes (ICSID) located in Washington D.C. Since 2000, there have been 285 cases registered with ICSID. ICSID currently administers 159 cases, of which 35 were registered in 2011.

We already see growing unease on the part of some states and organisations who view investor-state dispute mechanisms as infringements of state sovereignty and which give rights to foreign investors (often developed capital exporting states) which are greater than those which are available to nationals of the host state. On 26 January 2012, Venezuela became only the third contracting state to formally denounce and give notice that it would no longer be bound by the ICSID Convention. This followed Bolivia’s and Ecuador’s denunciation of the ICSID Convention in 2007 and 2009 respectively.

For more information, please see our ‘Investment Arbitrations’ article which was featured in today’s edition of Singapore Law Watch. For your convenience, we’ve also set out below the full text of the article (with minor editorial amendments):

Investment Arbitrations

On 26 January 2012, Venezuela became only the third contracting state to formally denounce and give notice that the state would no longer be bound by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). This followed Bolivia’s and Ecuador’s denunciation of the ICSID Convention in 2007 and 2009 respectively.

Venezuela’s denunciation came in the wake of a series of high value investment arbitrations brought against it pursuant to the ICSID Convention arising out of expropriation measures initiated by the Chavez administration. By denouncing the ICSID Convention, the Venezuelan state removed an avenue for investors to initiate claims against the state should more expropriation occur in the future.

The usual and most prominent forum for investor-state arbitrations is through the International Centre for Settlement of Investment Disputes (ICSID) located in Washington D.C pursuant to the ICSID Convention. Interestingly enough, despite the departures of Bolivia, Ecuador and Venezuela, at last count there are still 148 Contracting States i.e. states that have ratified the ICSID Convention. This is 2 more than the number of signatory states to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

What is Investment Arbitration?

Investment arbitrations tend to be high-value, multi-billion dollar claims and generally arise out of the energy (oil and gas), mining and high-technology sectors.

Investment arbitrations have a number of unique features that are rarely found in other sorts of commercial arbitrations.

First, the respondent to an investment arbitration is invariably a state since an investment arbitration involves an investor (almost always a foreign investor) taking the host state to arbitration for expropriation of the investment, breach of standards of fair and equitable treatment or full protection and security and/or violation of an investment treaty, whether bilateral, multilateral or domestic.

In this repect, such arbitrations often touch on and involve an examination of the host state’s domestic policies. Where the claim does not involve an outright expropriation, it is predicated on some measure or policy instituted by the state that has the effect of substantially interfering and/or devaluing the investment. In such cases, the defence that is typically raised is that such measures were necessary for national or economic security.

Second, even though the host state might not be a party to an agreement with the foreign investor, it can still can be brought into arbitration through the use of investment treaties or national investment laws.

Third, public international law and especially customary international law plays a significant role in the substantive dispute, particularly when it involves the definition of expropriation and the standard of fair and equitable treatment to be granted to the investor.

Fourth, depending on the wording of the investment treaty, forum shopping and concurrent proceedings might be permitted. There might also be no need to first exhaust local remedies by going through the host state’s courts before initiating an investment arbitration.

Fifth, an investment arbitration is likely to be less confidential and awards are more likely to be published than is the case in a conventional arbitration. In fact, the hearings of an investment arbitration may even be open to the public and recordings might be taken for public viewing.

ICSID Arbitration

Cases under the auspices of ICSID can be, and have been, heard in venues other than in Washington D.C These venues include the Singapore International Arbitration Centre (SIAC) and Maxwell Chambers in Singapore.

The ICSID Secretariat also offers administrative and logistical services for other international dispute proceedings including arbitrations conducted under the auspices of other arbitral institutions. In the course of FY2011, the Centre assisted with the organisation of hearings in cases administered by the London Court of International Arbitration, the Permanent Court of Arbitration (PCA), and the International Chamber of Commerce.

Pertinently, since 2006, ICSID has promulgated a set of Additional Facility Rules which parties may choose to apply to their ICSID arbitration. These rules allow disputes to be submitted to ICSID even though the State party to the dispute is not a Contracting State. Similarly, where the state of the foreign investor is not a Contracting State, these rules would allow the dispute to be submitted to ICSID.

ICSID arbitrations have certain features that are particularly attractive to international investors.

1. As with other forms of arbitration, ICSID gives investors a neutral forum to resolve their disputes. This mitigates fears of alleged and perceived bias on the part of domestic courts.

Furthermore, it is also worth noting that ICSID arbitrations are often referred to as “self-contained” or “de-localised” arbitrations because the local courts of any contracting state have no role whatsoever in the ICSID proceedings. In contrast, the courts of the state in which an arbitration is held (the so-called seat) have supervisory jurisdiction over the conduct of the proceedings.

2. An award is not subject to an appeal on the merits (see Article 53). Instead, the losing party may only seek to annul the award under Article 52 on limited grounds: (a) that the Tribunal was not properly constituted; (b) that the Tribunal had manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there was a serious departure from a fundamental rule of procedure; or (e) that the award failed to state the reasons on which it was based.

Between the years 2001 to 2010, there were a total of 93 awards rendered by ICSID Tribunals. Of those, only 13 were annulled in part or in full.

3. An award rendered by an ICSID tribunal is enforceable in any contracting state as if it were a final judgment of a court in that state and permits enforcement on that basis (see Article 54).

Statistics: ICSID and PCA

The number of investment arbitrations has significantly increased since 2000. Between 1965 (when ICSID was established) and 2000, only 66 cases were registered with ICSID. Even then the bulk of cases in that period were registered only from 1997 onwards. However, since 2000, there have been 285 cases registered with ICSID. ICSID currently administers 159 cases, of which 35 were registered in 2011. Of these 35 cases,

• 2 were under the Energy Charter Treaty
• 4 under the investment law of the host state
• 5 pursuant to an investment contract between the investor and the host state

By way of comparison, in 2011, the PCA administered a total number of 69 cases, of which 11 were submitted in 2001.

• 3 state to state arbitrations
• 64 investment arbitrations: 40 pursuant to bilateral or multi-lateral investment treaties and 24 pursuant to contracts and agreements to which at least one party is a state, state-controlled entity, or intergovernmental organisation.
• 1 case under a national investment law
• 1 case under the PCA Optional Rules for Arbitration of Disputes relating to Natural Resources and/or the Environment.

The most recent ICSID caseload statistics for 2012 can be found here. 51% of cases administered by ICSID have involved state parties from South America and Eastern Europe & Central Asia. The full breakdown is as follows.

• Western Europe: 1%
• North America (Canada, Mexico & US): 5%
• Central America & the Caribbean: 7%
• South & East Asia & the Pacific: 9%
• Middle East & North Africa: 10%
• Sub-Saharan Africa: 16%
• Eastern Europe & Central Asia: 23%
• South America: 29%

As the world economy grows and capital becomes ever more mobile, we should not be too surprised to see a corresponding growth in the use of investment arbitrations by foreign investors to protect their investments, as a negotiation pressure point to extract concessions from the host state or even to persuade the state to reverse some particular law or policy.

Currently all eyes are on India as various big telecommunications companies from around the world have threatened to file or have already filed notices of investment arbitration arising out of the Indian government intention to impose retrospective taxes and/or arising out of the Indian Supreme Court’s cancellation of various 2G spectrum licenses. We commented on some of these issues in a previous post on “India under the Bilateral Investment Treaty Spotlight”.

We already see growing unease on the part of some states and organisations who view such investor-state dispute mechanisms as infringements of state sovereignty and which give rights to foreign investors (often developed capital exporting states) which are greater than those which are available to nationals of the host state. Thus far only Bolivia, Ecuador and Venezuela have taken the most extreme step of denouncing the ICSID Convention and withdrawing from it.

However, other states are exploring less extreme measures to avoid investment arbitrations that stop short of denouncing the ICSID Convention.

For example, on 12 April 2011, the Australian government released a Trade Policy Statement that noted that while it had previously included investor-state arbitration as a dispute resolution mechanism in previous treaties, it would no longer do so. GAR recently reported that Australian arbitrators Michael Pryles and Gavan Griffith QC have since joined business leaders in petitioning Australia’s prime minister to reverse her decision to exclude investor-state dispute settlement provisions from future free-trade agreements.

The explicit concern on the Australian government’s part is that such provisions “constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses. The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products or its ability to continue the Pharmaceutical Benefits Scheme“.

One can understand the frustration felt by the Australian government when their public health measures are being challenged on economic investment grounds. On the other hand, this blanket approach in refusing any form of investor-state arbitration dispute resolution mechanism does come across as a remarkably blunt tool given that appropriate exclusionary language could always be crafted in order to serve the country’s domestic social and health needs.