HomeBusinessOn overview of investment arbitration under ICSID

On overview of investment arbitration under ICSID

arbitration insights: with Jacob Mutevedzi

Investment Treaty Arbitration is a dispute resolution mechanism between foreign investors and host states. It has also been referred to as Investor-State Dispute Settlement. Investment arbitration avails to the foreign investor, the safeguard of having disputes with host states resolved by arbitral tribunals which are assumed to be independent. There is a pervasive apprehension that the domestic courts of host states are not impartial and may thus make unfair decisions which prejudice investors. Foreign investors can thus avoid municipal courts perceived to lack autonomy.

Investors cannot invoke investment arbitration without the consent of the host state. This consent is often given by the host states through International Investment Agreements (IIA’s). These agreements can take the form of Bilateral Investment Treaties (BITs), Multilateral Investment Treaties (MITs) and Free Trade Agreements (FTAs). Infrequently, a host state can consent to investment arbitration in a direct investment agreement with an investor. Further, such consent is sometimes prescribed by statute. A host state can have a domestic law, for example a mining statute which enjoins the host state to settle disputes with investors through arbitration.

The current investor-state arbitration framework assumed its modern form in the 1960s with the advent of the International Centre for the Settlement of Investment Disputes (ICSID) Convention of 1965 and the very first Bilateral Investment Treaties. The first BIT was concluded between Germany and Pakistan in 1959. Thereafter, other European governments signed numerous BITs with developing countries. The increasing number of BITs globally has revolutionised the protection of foreign investments. Developing countries have also embraced BITs with a view to promoting and encouraging foreign investments, both from industrialised countries and among themselves. To date, the number of IIAs exceeds 3 000 binding a host of countries across the globe.

The ICSID Convention was concluded in 1965 under the sponsorship of the World Bank. It provides a dispute resolution forum for investment disputes between foreign investors and host states in the form of conciliation and arbitration. The ICSID Convention allows a host state which is a Contracting Party to the convention and a national of another contracting party to settle their investment disputes through arbitration. It is important to note that domestic investors are excluded and, therefore, cannot insist on taking their disputes with host governments to ICSID. The convention further makes provision for an effective regime for the enforcement of arbitral awards issued under the convention. Contracting parties are obligated to enforce arbitral awards in their territory in the same manner that they would enforce judgments of their own courts.

The reasons that motivated states to come up with the international treaty framework for the protection of foreign investments are manifold. The first reason was the need to attract foreign direct investment (FDI). A reading of the preamble to the ICSID Convention shows that one of the chief considerations was “the need for international cooperation for economic development and the role of private international investment therein”. The preambles of most IIAs and BITs often emphasize the contracting state’s wish to create a favourable environment for greater foreign investments. These preambles also frequently contain declarations that the reciprocal protection of investments through an international treaty will be conducive to the stimulation of FDI.

Depoliticisation of investment disputes is often touted as one of the foremost reasons for the establishment of the global investment arbitration regime. Prior to the advent of investment arbitration the only safeguard available to foreign investors was diplomatic protection. Depoliticization, therefore, refers to the removal of investment disputes from the purview of diplomatic protection in favour of a judicial forum subject to legal rules and a preformulated dispute resolution process. From an investor perspective the introduction of a judicial mechanism does away with the need to rely on a government to exercise the right to diplomatic protection. An investor’s government may be unwilling to afford protection to its citizen for reasons that are not connected to the merits of the dispute. Secondly, a state cannot present a claim in respect of its national before that citizen has exhausted domestic remedies. In investor-state arbitration, the aggrieved investor is afforded direct access to an international arbitral forum without relying on the intervention of its home state.

Further, the investor has direct control over the process, derives a direct benefit from the award and normally need not exhaust all domestic remedies.

Another reason said to justify the need for investment arbitration is the need to provide an alternative to municipal courts. Ordinarily, domestic courts would normally be the natural forum for the settlement of disputes but, as already mentioned above, local courts are considered inadequate due their perceived lack of independence from the host state, actual or apparent bias against foreign investors, lack of expertise in the application of international law and general inefficiency.

ICSID arbitration is one of an assortment of available forums for the settlement of investment disputes between private investors and states. It is not mandatory for investors from a contracting party of the ICSID convention in their agreements with host States that are also contracting parties of the convention to submit their disputes to ICSID. However, once consent to ICSID arbitration has been given, the parties lose their right to seek relief in any other forum, domestic or international, and are enjoined to pursue their claim through ICSID. This “exclusivity” operates only once the parties have consented to ICSID arbitration. Such consent takes away their right to take their disputes to any other fora since they have consented to ICSID arbitration “to the exclusion of any other remedy”.

Articles 53 to 55 of the ICSID Convention provide the rules for the enforcement of international investment awards that host States are obligated to respect.

Article 54 (1) of the ICSID Convention states that, “Each Contracting State shall recognise an award rendered pursuant to this convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.”

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