Unpacking international investment arbitration

Obituaries
Across the globe, developing nations are jostling to attract capital, technology and other resources necessary to modernise their economies and infrastructure through foreign direct investment. Foreign investors often commit a substantial amount of money for a lengthy period of time in host states in which they have little or no confidence in the national courts, the system of government or political stability. These foreign merchants will only be comfortable to invest their time, effort and capital in host countries when they have a reasonable assurance that they will be treated fairly and equally and their investment will not be expropriated, nationalised or undermined by the host countries. Foreign investors need a reasonable guarantee that their investments will enjoy certain protections.

arbitration insights:WITH JACOB MUTEVEDZI

Across the globe, developing nations are jostling to attract capital, technology and other resources necessary to modernise their economies and infrastructure through foreign direct investment. Foreign investors often commit a substantial amount of money for a lengthy period of time in host states in which they have little or no confidence in the national courts, the system of government or political stability. These foreign merchants will only be comfortable to invest their time, effort and capital in host countries when they have a reasonable assurance that they will be treated fairly and equally and their investment will not be expropriated, nationalised or undermined by the host countries. Foreign investors need a reasonable guarantee that their investments will enjoy certain protections.

In the event that a dispute involving their investment arises, foreign investors expect to resolve it without depending on local courts. Most investors from developed countries often have little trust that local courts and systems in developing countries can resolve complex juridical issues. These expectations from both sides have led to the conclusion of multifarious bilateral and multilateral investment treaties incorporating the international investment arbitration mechanism. Chief among the aforementioned multilateral treaties is the International Centre for Settlement of Investment Disputes Convention (ICSID) that was initiated by the World Bank in 1966. To properly enunciate the mechanism of international investment arbitration, each of the components involved must be separately understood, starting with a very brief synopsis of the concept of “arbitration”.

Arbitration Arbitration, as we have already seen in previous articles, is a method of alternative dispute resolution where parties agree to resolve their dispute outside any judicial system. The parties confer jurisdiction on an arbitral panel, usually one or three and the arbitration concludes with a final and binding decision that is enforceable in most national courts. The recognition of arbitration awards and their enforcement in most states across the globe is facilitated by the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, popularly known as the New York Convention. Zimbabwe acceded to this convention in 1994. In total, 157 states are party to this agreement thus making arbitral awards almost globally recognisable and enforceable.

Investment In his influential work, The Law of Investment Treaties, Oxford University Press, 2010 on page 19, J W Salacuse defines the term investment as “the commitment of resources by a physical or legal person to a specific purpose in order to earn a profit or to gain a return”. The meaning of the term investment has been the subject of extensive debate in the realm of international investment arbitration. According to Salacuse the term is invariably used in two senses; in the first instance, it alludes to the process of “making an investment”, while in the second and most important sense it refers to the asset acquired as a result of investing. The most frequently employed definition of investment is a wide open-ended asset-based definition. Defining what constitutes an “investment” is critical because certain arbitration tribunals set up under multilateral conventions will only exercise their jurisdiction to disputes that arise from “an investment”. For example, the jurisdiction of the International Centre for Settlement of Investment Disputes (ICSID) can only be invoked in relation to disputes that arise out of an investment. Due to the growing globalization of trade and economy, it has become increasingly difficult to determine if a transaction should be considered an investment or not.

International To maximise profits, businesses search for other markets beyond their local market. That is where the international aspect of arbitration arises. Investment is international when the investor is not a citizen or a resident of the country in which the investment is made and the investment process entails the transfer of funds or capital from a foreign country to the country of investment. Arguably, the most vital form of investment in contemporary economic life is foreign direct investment (FDI). Salacuse (2010:74) states that an investment is seen as an FDI when it is made to acquire a lasting interest in foreign enterprises. The Organisation for Economic Cooperation and Development (OECD) defines FDI as: “a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.” This kind of investment culminates in ownership rights and economic assets for a foreign investor.

Investment Arbitration under ICSID Investment arbitration is a very important, but comparatively novel phenomenon in international adjudication and law. An investor, either an individual or corporate entity, can enforce international law obligations and receive monetary compensation from a state. Historically, the World Bank was the principal mediator in such disputes. However, there was widespread concern that in doing so the World Bank exceeded its mandate and that member states might therefore be unwilling to approach it for dispute resolution. Consequently, the World Bank established the International Centre for Settlement of Investment Disputes (ICSID) Convention to address this concern in 1966. From then going forward, investment disputes could be submitted for arbitration under the auspices of ICSID thus providing a multilateral legal framework for settling international investment disputes. Investment arbitration takes place in two different types of forum. The first is the ICSID arbitration under the Washington Convention. The second theatre is commercial arbitration using the ICSID additional facility rules, the Uncitral arbitration rules or the rules of other arbitral organisations with the awards falling under the enforcement provisions of the New York Convention.

l Jacob Mutevedzi is a commercial lawyer and partner at Clairwood Chambers Attorneys and writes in his personal capacity. He can be contacted at +263775987784 or at [email protected]