Investment policies towards sustainable development and inclusive growth

10-13 December 2013, Rabat, Morocco

Organized by the Secretariat of the UNCTAD, the Islamic Development Bank and the UN Economic and Social Commission for Western Asia

(ESCWA)

Settling IIA-based investment disputes under ICSID Rules

prepared by Dr. Ilia Rachkov, LL.M., attorney at law,

partner, King & Spalding, Moscow office

Table of contents

Slide 1 Title page

Slides 2-3 Table of contents

Slide 4 Origin of the investor v. state dispute settlement

Slides 5-6 Role of Domestic Courts

Slide 7 Arbitration & Conciliation

Slide 8 Arbitration Institutions & Regimes

Slide 9 ICSID Convention

Slide 10 ICSID Additional Facility Rules

Slide 11 Non-ICSID investment arbitration

Slide 12 UNCITRAL Rules of Arbitration

Slides 13-14 Subject Matter of the Dispute (rationae materiae)

Slides 15-16 Parties to the Dispute (jurisdiction rationae personae)

Slide 17 Consent to arbitration

Slide 18 Consent by direct agreement

Slide 19 Consent through host state legislation

Slide 20 Consent through bilateral investment treaties

2

Table of contents (continued)

Slide 21 Consent through multilateral treaties

Slide 22 Scope of consent

Slide 23 Procedural conditions to consent

Slide 24 Interpretation of consent

Slide 25 Application of MFN clauses to dispute settlement

Slide 26 Procedure

Slide 27 Appointment of arbitrators

Slide 28 Provisional measures

Slides 29-30 Procedural questions

Slide 31 Applicable law

Slides 32-33 Damages & Compensation

Slide 34 Costs

Slide 35 Challenge & review of decisions

Slide 36 Annulment of ICSID awards

Slide 37 Other aspects (under ICSID Convention)

Slide 38 Enforcement of ICSID awards

3

Origin of the investor v. state dispute settlement

• Historically, no access to international remedies for foreign investors ;

• Investors were dependent on the diplomatic protection (DP) of their home state.

• DP: right or obligation of the home state?

• Conditions:

- Nationality;

- Exhaustion of local remedies;

- Theory of clean hands.

• Latin American states: Calvo doctrine (DP may amount to undesirable / impermissible interference in internal affairs)

• Case law: Mavrommatis Palestine Concessions (PCIJ, 1927: Greece v. Great Britain); ICJ: Barcelona Traction (1970: Belgium v. Spain), ELSI (1989: USA v. Italy), Diallo (2007: Guinea v. Dem. Rep. of Congo)

• DP may lead to arbitration between states: Martini (Italy v. Venezuela, 1930); Canevaro (Italy v. Peru, 1912); Lucchetti v. Peru (2005: Peru’s claim against Chile); Italy v. Cuba (2008)

• UN International Law Commission: Draft Articles on Diplomatic Protection (2006), General Assembly, 65th session, Resolution No. 61/35.

• ICSID Convention: DP is opted out (Art. 27(1)), unless the state fails to comply with the arbitral award.

4

Role of Domestic Courts

• Limited usefulness:

- In the host country’s courts, investor fears:

(i) lack of impartiality;

(ii) executive interventions in court proceedings;

(iii) sense of judicial loyalty to the forum state;

(iii) application of local law that may be at odds with international law protecting rights of foreign investors;

(iv) lack of / insufficient expertise.

- home (or third) country’s courts:

(i) lack of territorial jurisdiction over investments taking place abroad;

(ii) state immunity: host states act in the exercise of sovereign powers; waiver of immunity?

(iii) “act of state” doctrine;

(iv) acceptance of a third country law and forum?

(v) non-justiciability; political questions; lack of close connection to the local legal system.

5

Role of Domestic Courts (2) • Requirement to resort to Domestic Courts?

- Art. 26 of ICSID Convention;

- Waste Management v. Mexico (2004); Generation Ukraine v. Ukraine (2003); EnCana v. Ecuador (2006);

- BITs: up to 18 months

• Fork in the Road (CMS v. Argentina, 2003): loss of access to international arbitration applies only if the same dispute involving the same cause of action between the same parties has been submitted to the domestic courts of the host state (e.g. Pantechniki v. Albania, 2009).

• Selection of domestic courts in contracts (Vivendi v. Argentina, 2000; AES v. Argentina, 2005); distinction between treaty claims and contract claims.

6

Arbitration & Conciliation • Advantage for the investor: access to an effective international remedy.

• Advantages for the host state: investment climate improvement; attraction of more foreign investment; shield against diplomatic protection.

• Arbitration is less costly & more efficient than litigation (selection of arbitrators who enjoy the selecting country’s confidence and have required expertise)

• Certain control over the procedure

• Confidentiality?

• ICSID Convention: arbitration & conciliation (Art. 28 – 35) are equivalent options, but conciliation is used rarely.

• SPP v. Egypt (ICSID, 1988)

• Arbitration is more formal & adversarial; binding & final decision based on law.

• Arbitration clause has a positive effect even without being actually used.

• Mechanisms devised primarily for classical commercial arbitration are used in investment arbitration.

7

Arbitration Institutions & Regimes • Majority of cases are brought under Convention on the Settlement of Investment

Disputes between States and Nationals of Other States (adopted on 18 March 1965 in Washington DC , in force since 1966). Autumn 2013: 158 signatory States, 148 states parties (e.g. signed but not ratified: Russia, Canada). Bolivia, Ecuador, Venezuela: denunciation in 2007, 2009 and 2012.

• The Washington Convention created the International Centre for Settlement of Investment Disputes (ICSID).

• ICSID Additional Facility

• BITs often leave choice to investors between ICSID & other types of arbitration. => non-ICSID investment arbitration:

- UNCITRAL Rules

- International Chamber of Commerce (ICC), Paris

- Permanent Court of Arbitration, The Hague

- London Court of International Arbitration (LCIA)

- Iran – USA Claims Tribunal

8

ICSID Convention • End 2012: 158 signatory States, of which 149 States have deposited instruments of ratification,

acceptance or approval of the Convention.

• Preamble: “Promote economic development through the creation of a favourable investment climate”.

• Standard clauses for use by the parties, detailed rules of procedure; institutional support (selection of arbitrators; conduct of arbitration proceedings etc.)

• Conditions:

- Investment dispute of a legal nature between a state party and a national of another state party.

- separate consent to the ICSID’s jurisdiction.

• ICSID proceedings are self-contained: domestic courts have no power to stay, to compel or to otherwise influence ICSID proceedings, to set aside or to otherwise review ICSID awards.

• Non-cooperation of a state party is not a threat to ICSID proceedings (appointment of arbitrators; decision on jurisdiction; non-submission of memorials or non-appearance; binding force & enforceability of the award)

• ICSID’s awards are binding & final and not subject to review (except for very few cases)

• Non-compliance with the award by a state = revival of the right to diplomatic protection.

• Effective system of enforcement: recognition as final in all states parties to ICSID Convention

• As of early October 2012: 174 pending cases; 271 completed cases.

9

ICSID Additional Facility Rules • In 1978, the Administrative Council of ICSID created the Additional Facility (AF).

• Open to parties that submit to its jurisdiction in certain cases that are outside ICSID’s jurisdiction, e.g.:

- only 1 side is party to the ICSID Convention or a national of such party;

- Cases that do not directly arise from an investment;

- Fact-finding proceedings.

• Practical relevance: Art. 1120 of the NAFTA (only USA ratified ICSID, Canada & Mexico did not);

• Institutional support from ICSID: similar to proceedings under ICSID Convention, but arbitration is not governed by ICSID Convention.

• => ICSID Convention’s provisions on recognition & enforcement of awards are not applicable to awards rendered under the AF; instead, the Convention of Recognition & Enforcement of Foreign Arbitral Awards (NY, 1958) applies.

• Awards rendered under the AF are not exempt from scrutiny and setting aside by competent national courts.

10

Non-ICSID investment arbitration • Regional arbitration centers: Cairo, Frankfurt, Kuala Lumpur, Hong Kong

(China International Economic & Trade Arbitration Commission, CIETAC), Vienna.

• Usually, these arbitrations are conducted under the UNCITRAL Arbitration Rules (1976, revised in 2010) or ICC Arbitration Rules (1998, revised in 2011).

• Parties can control composition of the tribunal and the law applicable in the proceedings.

• Competence of the tribunal to decide on its own competence;

• Tribunal’s power to determine the rules of procedure (in the absence of a choice by the parties);

• Confidentiality.

11

UNCITRAL Rules of Arbitration • United Nations Commission on International Trade Law;

• UN General Assembly resolution 65/22 (6 December 2010)

• These Rules do not establish a machinery to administer proceedings in a particular case; parties to provided administrative framework for the case;

• May be applied by an existing institution (ICSID or LCIA).

• UNCITRAL Rules reflect a modern, universally established set of international arbitration rules;

• UNCITRAL Notes on Organizing Arbitral Proceedings (1996) list and describe issues which come up in international arbitrations;

• UNCITRAL Model Law on International Commercial Arbitration (1985, amended in 2006);

• UNCITRAL Model Law on International Commercial Conciliation (2002).

12

Subject Matter of the Dispute (rationae materiae)

• Dispute: “legal dispute arising directly out of an investment” (Art. 25(1) ICSID Convention), i.e. 4 elements;

- Dispute = “disagreement on a point of law or fact, a conflict legal views or interests between parties” (case concerning East Timor, Portugal v. Australia, ICJ, 1995);

- Dispute = “situation in which the 2 sides held clearly opposite views concerning the question of performance or non-performance of certain treaty obligations” (Interpretation of Peace Treaties with Bulgaria, Hungary & Romania, 1st phase, ICJ, 1950);

- Dispute = present divergence of interests and opposition of legal views (Texaco v. Libya, preliminary arbitral award, 1975).

- ICSID tribunals adopted similar definitions of disputes (e.g. AGIP v. Congo, 1979)

• Legal nature of the dispute: disputes are legal if they “concern the existence or scope of a legal right or obligation, or the nature or extent of the reparation to be made for breach of a legal obligation” (report of the Execute Directors to the ICSID Convention, para 26, ICSID Reports 28). Respondent states: dispute is political or economic. Tribunals reject this argument (Suez v. Argentina, 2006)

13

Subject Matter of the Dispute (rationae materiae), 2

• Directness of the dispute in relation to investment:

- the investment itself shall not be “direct”; only the dispute must arise “directly” out of an investment (Fedax v. Venezuela, 1997: debt instruments; Siemens v. Argentina, 2004);

- CSOB v. Slovakia (1999): loan to a Slovak collection Co., secured by a state guarantee;

- CMS v. Argentina (2003): measures of general nature to serve national welfare, not specifically directed to the particular investor’s operation. Arbitral tribunal declined this argument.

• The investment: no definition in ICSID convention, but tribunals developed the notion of investment (so-called Salini test):

- Substantial commitment;

- Certain duration;

- Element of risk;

- Significance for the host state’s development.

14

Parties to the dispute (jurisdiction rationae personae)

1) Host state: - Critical date: registration of request for arbitration by the Secretary-General of ICSID; - State acts through its central organ s, territorial entities (province or municipality) or special

entities (it does not matter whether the latter are owned by the state or not); their acts are attributable to the state (Draft Articles on Responsibility of States for Internationally Wrongful Acts, adopted by the UN International Law Commission in 2001);

- Art. 25(3) of ICSID Convention: designation of constituent subdivisions or agencies to ICSID (public register); only few countries made designations under this provision. Cable TV v. St. Kitts & Nevis (1997): tribunal had no jurisdiction, since the state did not enter into the investment contract, and the Nevis Island Administration (NIA) was not designated to ICSID as a constituent subdivision or agency, nor was NIA’s consent to arbitration approved by the state.

2) foreign investor:

- private corporations & individuals; - state-owned companies and state entities? - CSOB v. Slovakia (1999); Telenor v.

Hungary (2006). - Several claimants? – Antoine Goetz & others v. Burundi (6 shareholders), 1998;

Champion Trading Co. & Wahba family members v. Egypt (2003); Abaclat v. Argentina: 180,000 Italian bondholders (later reduced to 60,000), 2011.

- Art. 1126 NAFTA: consolidation of closely related proceedings - ICSID: coordination of closely related claims (Alcoa, Kaiser Bauxite, Reynolds v.

Jamaica)

15

Parties to the dispute (jurisdiction rationae personae), 2

• Investor’s nationality: 1) positive & negative requirements (Art. 25 of ICSID Convention);

2) Jurisdictional clause in a treaty (e.g. BIT): investor must have nationality of other state party to the treaty;

3) Individuals must be nationals both at the time of the state’s consent and on the date of registration of a request for arbitration (or conciliation);

4) Nationals of host states (including dual nationals) are barred from bringing claims before ICSID;

5) Legal entity must have the nationality of a state party to the ICSID Convention only on the day the parties consented to submit to ICSID’s jurisdiction. Nationality is defined be reference to the place of incorporation or seat of business.

6) Unlike individuals, legal entities may possess the host state’s nationality. Decline of importance of possibility for local companies under foreign control to institute ICSID arbitration.

7) significance of the Additional Facility; separate submission to dispute settlement under the AF is required.

16

Consent to arbitration

• Consent by:

- direct agreement

- host state legislation (mostly in capital-importing countries); investor may accept the offer anytime;

- Treaties between home & host states: (i) bilateral investment treaties;

(ii) Multilateral treaties: NAFTA, Energy Charter Treaty

• Scope of consent

• Procedural conditions to consent

• Interpretation of consent

17

Consent by direct agreement • Agreement between the host state & investor;

• Compromissory clause in investments contracts (for future disputes) or compromis (for existin g disputes; rare);

• No need to have a single document; e.g. investment application approved by competent authority of the host state (Amco v. Indonesia, 1983);

• Broad inclusive consent clauses are typical: ”any dispute”, “all disputes”;

• Does consent to arbitration extend to the entire operation or is confined to specific agreements containing arbitration clauses? – Principle of “unity of the investment” (Duke Energy v. Peru, 2006; CSOB v. Slovakia, 1999).

• Tribunals usually take a broad view of expressions of consent of this kind (Holiday Inn v. Morocco, 1974).

18

Consent through host state legislation

• Not every reference to investment arbitration in national legislation amounts to consent to jurisdiction. => Provisions of national laws must be studied carefully: Tradex v. Albania (1996) – “yes”; Mobil v. Venezuela (2010); CEMEX v. Venezuela (2010); Brandes v. Venezuela – “no”.

• Offer by the host state must be accepted by investor: SPP v. Egypt (1985), Zhinvali v. Georgia (2003).

• Form of acceptance: either simply by instituting the arbitration proceedings, or by a written communication to the host state.

• Host state’s offer of consent may be subject to investment authorization or time limits.

19

Consent through bilateral investment treaties

• States parties to BIT offer consent to arbitration to investors who are nationals of the other contracting party;

• Some BITs: undertaking by the host state to consent to arbitration in future (Japan – Pakistan BIT, 1998);

• Host state’s sympathetic consideration of a request for dispute settlement through arbitration ≠ consent to arbitration;

• Alternatives in BITs: domestic courts of host states; ICSID arbitration; ICC arbitration; ad hoc arbitration (often: under UNCITRAL Rules). Usually the choice is with the investor.

• Offer is deemed accepted by institution of ICSID proceedings (Generation Ukraine v. Ukraine, 2003).

• Once the offer is accepted, it remains in force even if the states parties to the BIT amend or terminate it.

• Investor’s consent to the arbitration may be a condition for admission of investments in the host state.

20

Consent through multilateral treaties

• ICSID Convention is NOT one of these treaties: it requires separate consent of the host state and the foreign investor;

• Art. 1122 NAFTA;

• Art. 26(3)(a) of the Energy Charter Treaty;

• Colonia and Buenos Aires Investment Protocols of the Common Market of the Southern Cone (MERCOSUR), 1994;

• Free Trade Agreement between Mexico, Colombia and Venezuela, 1994;

• EurAsEc Investment Protection Treaty (2008);

• Institution of proceedings constitutes investor’s acceptance of the host state’s offer of consent to arbitrate.

21

Scope of consent • Salini v. Morocco (2001): “tous les différends ou divergences … concernant un investissement“.

Tribunal: not only claim for BIT violation, but also claim based on contract.

• Vivendi v. Argentina (2002): BIT France – Argentina: “any dispute relating to investments”; tribunal: “it is sufficient that the dispute relates to an investment made under BIT”.

• SGS v. Pakistan (2003): BIT Switzerland – Pakistan: “disputes with respect to investments”; tribunal: BIT does not imply that both BIT and purely contract claims are intended to be covered by BIT. => no jurisdiction with respect to contract claims which do not constitute breaches of BIT substantive standards.

• US – Argentina BIT (1991): only certain types of disputes

• Only violations of BIT’s substantive standards: El Salvador – Netherlands BIT.

• NAFTA, ECT: only claims arising from alleged breaches of the treaty itself.

• Umbrella clause may allow to extend the jurisdiction of tribunals to violations of contracts even if the consent to arbitration is limited to claims arising from breaches of the treaty.

• Subject matter of the dispute: “amount of compensation for expropriation” (China – Hungary BIT, 1991).

22

Procedural Conditions to Consent • No requirement to resort to domestic courts, “unless otherwise stated” (Art. 26,

ICSID Convention); but host state may make the exhaustion of local remedies a condition of is consent to arbitration (older BITs); may be required to demonstrate that a substantive standard (e.g. protection against uncompensated expropriation or fait & equitable treatment) has been violated;

• Attempt at amicable settlement: consultations or negotiations; time limit: 3 – 12 months.

• Majority of cases: claimants complied with these waiting periods before proceeding to arbitration.

• Other cases: non-compliance with the waiting period did not affect the jurisdiction of the tribunals (SGS v. Pakistan, 2003).

• Enron v. Argentina (2004): failure to comply with the waiting period would result in lack of jurisdiction.

• Most authors: negotiation periods are not of jurisdictional nature.

• Investors were able to avoid the requirement of exhaustion of local remedies by referring to MFN clause in the same BIT.

23

Interpretation of consent • Vienna Convention on the Law of Treaties (1969);

• In many cases, respondents argued: consent to arbitration must be construed restrictively. Most tribunals rejected this argument.

• Majority of tribunals: neither restrictive, nor expansive approach to interpretation of consent clauses (SPP v. Egypt, 1988);

• Some tribunals: extensive interpretation (Millicom v. Senegal, 2010; Eureko v. Poland. 2005; SGS v. Philippines, 2004; Tradex v. Albania, 1996);

• Other tribunals: restrictive approach (SGS v. Pakistan, 2003);

• CSOB v. Slovakia (1999): reference to BIT in the contract; BIT did not enter into force; tribunal: consent agreement is governed by international law;

• RosInvest Co. UK Ltd. v. Russia (2007): Russia-Danmark BIT applied, whereas the dispute was based on USSR-UK BIT (consent to arbitration worded narrower).

24

Application of MFN clauses to dispute settlement

• Most BITs contain most favoured nation (MFN) clauses.

• MFN clause = better treatment granted to a third state or its nationals under a BIT is extended to a beneficiary of other BIT.

• Sometimes, MFN clause specifies to which parts of the BIT is applies (e.g. includes / excludes dispute settlement).

• If MFN clause is worded in a generic way: does its effect extend to BIT’s provisions on dispute settlement? – Maffezini v. Spain (2000); Salini v. Jordan (2004); Gas Natural v. Argentina (2005); Plama v. Bulgaria (2005); Telenor v. Hungary (2006); RosInvest v. Russia (2007).

if procedural obstacles are concerned, tribunals accept the applicability of MFN clauses. If investors attempted to extend the scope of jurisdiction substantively to issues not covered by the arbitration clauses, tribunals denied to apply the MFN clauses.

• Is cherry-picking possible? – Yes (Siemens v. Argentina, 2004); no (Hochtief v. Argentina, 2011).

25

Procedure • Most commonly applied rules – ICSID Convention and ICSID Arbitration Rules.

• ICSID also offers Institution Rules and Administrative & Financial Regulations (approved by ICSID’s Administrative Council).

• ICSID proceedings are self-contained and denationalised, i.e. independent of any national law (including that of the tribunal’s seat); domestic courts: no power to intervene.

• Ad hoc arbitrations: parties frequently opt for UNCITRAL Arbitration Rules. Non-ICSID proceedings are not insulated from national law.

• Request for arbitration must be drafted in English, French or Spanish, contain info on the dispute, the parties, the jurisdictional requirements (incl. basis of consent), and directed to the Secretary-General of ICSID, either by the investor or by the host state (in practice, investor is almost always the claimant).

• Non-refundable lodging fee (25,000 US$) + administrative fee (32,000 US$ / year).

26

Appointment of arbitrators • ICSID: correspondence with the, then call to the parties; Secretary-General registers the request

(unless the dispute is manifestly outside ICSID’s jurisdiction) and notifies the parties in writing.

• Nearly always 3 arbitrators: each party appoints an arbitrator; president is appointed either by agreement of the parties, or by the arbitrators.

• Is tribunal not constituted within 90 days: Chairman of the Administrative Council (= President of the World Bank) appoints outstanding arbitrators (upon consultation with the parties) from the Panel of Arbitrators (kept by ICSID).

• Arbitrators shall not be nationals of the state party to the dispute or co-nationals of the investor party to the dispute (unless each member of the tribunal is appointed by agreement of the parties).

• High moral character; recognised competence in the fields of law, commerce, industry, or finance; may be relied upon to exercise independent judgment; independent of the parties; declaration on relationship with the parties; conflict of interest = bar to the appointment.

• Disqualification of arbitrators: manifest lack of qualities required for appointment. Vivendi v. Argentina (2001): President of the ad hoc Committee (considered Argentina’s request to annul the arbitral award) disclosed that a partner of his law firm was giving legal advice to the claimant.

27

Provisional measures • Tribunal can take provisional measures.

• No prejudice to a subsequent determination of jurisdiction.

• Urgency & necessity. It may be necessary to (i) induce the parties to cooperate in the proceedings & to furnish all relevant evidence;

(ii) take early measures to secure compliance with an eventual award;

(iii) stop the parties from resorting to self-help or seeking relief through other remedies;

(iv) prevent a general aggravation of the situation through unilateral actions.

• Secure access to evidence that was essential to the proceedings; posting financial guarantees to secure recovery of the cost of the proceedings (unsuccessful attempts); allegations of “hostile propaganda” or adverse publications.

• Most important category: requests to order termination or suspension of related domestic proceedings (SGS v. Pakistan, 2002)

• Article 47 ICSID Convention: Is decision for provisional measures bindings or merely a recommendation? – It is binding upon the parties (Maffezini v. Spain, 1999).

• Non-compliance with provisional measures will be taken into account by the tribunal when making the award (AGIP v. Congo, 1979).

28

Procedural questions • Addressed at the tribunal’s 1st session with parties

• Include: representation of the parties; place & language of proceedings; number and sequence of pleadings; calendar with time limits for submission of pleadings and dates of hearings; records of hearings; production of evidence.

• Typically: written phase (claimant’s memorial; respondent’s counter-memorial; claimant’s reply; respondent’s rejoinder; voluminous supporting documentation); then oral phase.

• Amicus curiae (since 2006): entity that is not a party may be allowed to file written submission re a matter within the scope of the dispute.

• Respondent raises objections to the tribunal’s jurisdiction (no later than the counter-memorial is due): proceedings on the merits are suspended. => bifurcation of the proceedings.

• Objection that the claim is manifestly without merit (since 2006) => summary procedure (Global Trading v. Ukraine, 2010): commercial activities ≠ investment.

• If tribunal decides that the dispute is (i) not within its jurisdiction or (ii) outside its competence or (iii) manifestly without legal merit, it renders an award to that effect, and the proceedings are closed. Otherwise tribunal resumes proceedings on the merits.

• Oral phase: hearing in the presence of tribunal, its officers, parties & their representatives; witnesses & experts may be heard. Hearings are closed to the public, but tribunal may allow other persons to attend, unless a party objects.

29

Procedural questions (2) • Evidence: documents, witness testimony, expert opinions. Tribunal has discretion in deciding on the

relevance, credibility & admissibility of evidence. Tribunal may order that documents be produced. Criteria for their materiality, relevance and specificity.

• Default (i.e. non-participation of an uncooperative party) = extra burden on the tribunal and the cooperative party. Kaiser Bauxite v. Jamaica (1975), LETCO v. Liberia (1986), Goetz v. Burundi (1998).

• Some cases: state did not cooperated initially, but appeared at a later stage in the proceedings (Benvenuti & Bonenfant v. Congo, 1980; AMT v. Zaire, 1997).

• Settlement at any time is possible, may be incorporated into the award (if the parties so request).

• Discontinuation of proceedings, if one party requests and the other does not object, or if both parties fail to take any steps during 6 consecutive months.

• Most awards are rendered unanimously, but majority decisions are possible. A member of the tribunal may attach a dissenting opinion or declaration.

• Award must deal with all questions submitted to the tribunal & contain a full statement of reasons. Failure to deal with all questions or serious shortcoming in the reasoning may result in charge of failure to state reasons (both are grounds for annulment).

• Date of the award = date of dispatch to the parties (important for exact determination of the time limits for post-award remedies).

• ICSID may publish awards upon the parties’ consent, but must (since 2006) publish excerpts of the legal reasoning of each award. => most awards are published in one way or another. (Non-ICSID awards & other decisions are published sporadically.)

30

Applicable law • International law (including on protection of foreign investments / investors) + national law.

• International law: mainly BITs; multilateral treaties: NAFTA, Energy Charter Treaty; customary international law (state responsibility; denial of justice; law on expropriation; nationality of individuals & legal entities).

• International law gives the investor assurance that the international minimum standard will be observed.

• Parties to the dispute may agree on the governing law in their contract(s). Usually, the law of the host state is selected. (Home state’s or third country’s law: in financing contracts, e.g. SPP v. Egypt, 1992 – English law; Azpetrol v. Azerbaijan, 2009).

• Art. 42 ICSID Convention: any agreement on choice of law that the parties may have reached; in the absence: host state’s law + international law.

• NAFTA, ECT, some BITs contain provisions on applicable law. => Clause on applicable law in the treaty becomes a choice of law agreed by the parties to arbitration.

• NAFTA (Art. 1131), ECT (Art.26), a number of BITs refer only to international law, including NAFTA/ECT/BIT itself.

• Other BITs: host state’s domestic law + international law.

• Frequent formula used in BITs: host state’s law + BIT itself (together with other treaties) + contract relating to the investment + general international law.

• AAPL v. Sri Lanka (1990); Goetz v. Burundi (1999); Maffezini v. Spain (2000);

• Most tribunals applying Art. 42 of ICSID Convention examined issues under both systems of law (international and domestic).

• If there is a contradiction between both, international law overrides domestic law.

31

Damages & Compensation • Draft articles on responsibility of states for internationally wrongful acts: restitution,

compensation, satisfaction. In investment arbitration: nearly always monetary compensation. (In rare cases, tribunals order restitution: Texaco v. Libya, 1977; Goetz & others v. Burundi, 1998, 1999; ADC v. Hungary, 2006; ATA v. Jordan, 2010)

• Enron v. Argentina: claimants requested declaration of certain taxes unlawful & issuance of a permanent injunction against their collection. Did the tribunal had power to decide? – Yes.

• Chorzów Factory (PCIJ, 1928): restoration of the situation that would have existed if the illegal fact were not committed. => Valuation experts to calculate monetary reparation.

• Legal or illegal expropriation / nationalisation? Public purpose, non-discrimination, fair procedure.

• Damage actually suffered by the victim (including consequential damage and incidental benefits arising as a consequence of illegal act).

32

Damages & Compensation (2) • Replacement value of property taken? Actual losses? Lost profit (but not speculative)? No

double counting! Negligent behaviour by the investors (MDF v. Chile, 2004).

• Subsequent increase in the value of investment (ADC v. Hungary, 2006).

• Adequate compensation = based on fair market value immediately before taking or publication of the decision to take (World Bank, Guidelines on the Treatment of Foreign Direct Investment).

• Amount that a willing buyer would normally pay to a willing seller in a free transaction, at arm’s length.

• Future prospects or earning capacity of the investment => discounted cash flow method (DCF, most frequently used);

• No income => liquidation value (usually a much lower price than valuation on the basis of going concern).

• Interest (also to cover loan costs), due from the date when the principal amount became due (e.g. wrongful act committed, AAPL v. Sri Lanka, 1990; or date when investor definitely lost control over investment). Rate of interest: legal interest rate in the applicable legal system or LIBOR. Compounding interest.

33

Costs • Libananco v. Turkey: costs awarded to claimant: 60 million US$.

• Charges for use of facilities & expenses of ICSID; fees & expenses of arbitrators; expenses of parties during in connection with proceedings (by far the largest portion).

• Art. 62 ICSID Convention: tribunal’s discretion (unless the parties agree otherwise).

• No uniform practice. Often: fees & expenses of ICSID and arbitrators to be shared equally by the parties; each party to bear its expenses.

• Conduct of the parties in the proceedings: costs may be imposed as a sanction for dilatory or other improper conduct. LETCO v. Liberia (1986): full costs awarded to Liberia (due to its procedural bad faith).

• More recent approach: costs follow the event (losing party pays).

34

Challenge & review of decisions • Awards are final & not subject to any appeal.

• Finality v. correctness: in international arbitration, finality is typically given more weight.

• Annulment under the ICSID Convention: self-contained system for review: - ad hoc committee: 3 members appointed by the Chairman of ICSID’s Administrative

Council;

- Request by any party (also for partial annulment) within 120 days;

- Only awards are subject to annulment;

- Stay of the enforcement while annulment proceedings are pending (optional); payment guarantee by the award debtor?

• Annulment is concerned only with legitimacy of the decision-making process, not with substantive correctness (appeal is concerned with both); no replacement award, but resubmission to a new composition of tribunal.

• 5 grounds for annulment (Art. 52(1) of the ICSID Convention): (a) Tribunal not properly constituted; (b) Tribunal manifestly exceeded its powers; (c) Corruption on the part of a member of the tribunal; (d) Tribunal seriously departed from a fundamental rule of procedure; (e) Award failed to state reasons on which it is based.

35

Annulment of ICSID awards • No obligation to annul; error must be significant to annul the award (Vivendi v.

Argentina, 2002)

• In reality, only 3 grounds were applied to annul awards: - excess of powers (e.g. decision on the merits without jurisdiction or exceeding it, cf. Art. 25

ICSID Convention), must be manifest, i.e. obvious. Mitchell v. Congo (2006). Failure to exercise jurisdiction (Vivendi v. Argentina, 2002). Non-application of the applicable law (Wena v. Egypt, 2002).

- serious departure from a fundamental rule of procedure; only if it affects fairness of proceedings, e.g. right to be heard,. Party must react immediately (objection or request to comply), otherwise it may be interpreted as waiver to object.

- failure to state reasons: insufficiency & inadequacy of reasons are usually invoked. Ad hoc committee can reconstruct missing reasons; implicit reasoning is sufficient. Ad hoc committees: reasons must be sufficiently relevant, appropriate and allow parties to understand the award. Vivendi v. Argentina (2002): award lacks any expressed rationale on a point + this point itself is necessary to the tribunal’s decision. Contradictory reasons. Must the tribunal deal with every single point raised by the parties?

• resubmission to a new tribunal: only those parts of the award which were annulled can be re-considered; other parts become res judicata (Vivendi v. Argentina, 2005). Reasoning of the annulment is not binding. Parties may not introduce new claims they had not presented to the first tribunal.

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Other aspects (under ICSID Convention)

• Supplementation & rectification (Art. 49(2) ICSID Convention): to correct inadvertent omissions & minor technical errors upon a party’s request (to be made within 45 days).

• Interpretation (in case of dispute between the parties on the meaning or scope of an award, Art. 50 ICSID Convention). No time limit. Not to decide new points! General complaints about the award’s lack of clarity do not suffice (Wena v. Egypt, 2005).

• Revision: if decisive new facts (unknown to the applicant before) come to light after the award was rendered (Art. 51 ICSID Convention). 90 days after discovery of new facts or 3 years after award. New facts must be capable of affecting the award decisively, i.e. they would have led to a different decision had they been known to the tribunal.

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Enforcement of ICSID awards • Awards are final & binding on parties, but do not create binding precedents for the

future.

• No recognition as a foreign arbitral award or state court judgment is needed.

• Awards can be enforced not only in the host state, but in any state party to ICSID Convention. Prevailing party selects the state where the enforcement seems most promising (availability of suitable assets).

• Enforcement is governed by the law on execution of judgment in each country. States must designate competent court / authority.

• Domestic court may only check authenticity of the award.

• Immunity from execution? UN Convention on Jurisdictional Immunities of States & Their Property (2004) is not yet in force for many countries. Distinction: commercial v. non-commercial property.

• Non-compliance with the award = breach of ICSID Convention.

• Right of diplomatic protection revives (Art. 27 ICSID Convention).

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Thank you for your patience & attention!

Dr. Ilia Rachkov , LL.M.

(Frankfurt am Main),

attorney at law (Russia),

partner, King & Spalding, Moscow office,

senior lecturer, chair of international law,

Moscow State Institute of International

Relations (MGIMO)

Tel. +7 909 992 76 25 (mobile)

mailto: irachkov@kslaw.com;

ilia.rachkov@gmail.com

Skype: ilia.rachkov1

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