Investor state dispute settlement under icsid mechanism from the view of developing countries lessons for vietnam

MINISTRY OF EDUCATION AND TRAINING HO CHI MINH CITY UNIVERSITY OF LAW ---***--- MANAGEMENT COMMITTEE OF SPECIAL PROGRAMS LÊ NGỌC BẢO KHUYÊN INVESTOR-STATE DISPUTE SETTLEMENT UNDER IC

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

MANAGEMENT COMMITTEE OF SPECIAL PROGRAMS

LÊ NGỌC BẢO KHUYÊN

INVESTOR-STATE DISPUTE SETTLEMENT UNDER ICSID

MECHANISM FROM THE VIEW OF DEVELOPING COUNTRIES -

LESSONS FOR VIETNAM

BACHELOR OF LAW - GRADUATION DISSERTATION

Faculty: International Law Academic Year: 2012 - 2016

Supervisor: Dr Lê Thị Ánh Nguyệt

Author: Lê Ngọc Bảo Khuyên Student ID number: 125 3801 012133 Class: CLC37B

HO CHI MINH CITY

2016

I am especially grateful for my family, my mother, father, and sister, for their understanding, support and encouragement through 4 years of university Last but not least, I am sincerely thankful and want to show my appreciation for my friends, especially for Thanh Tuan and Ngoc Tuan Their editorial observations as well as their knowledge of computers are really helpful and valuable for the completion of this dissertation

TABLE OF CONTENTS

ABBREVIATIONS iii

LIST OF CASES iv

LIST OF CHARTS v

INTRODUCTION 1

1 Importance & Justification of the study 1

2 Progress in study on the topic 3

3 Objective & scope of the study 4

4 Research methodology 5

5 Structure of the dissertation 6

CHAPTER 1: THE ESTABLISHMENT AND STRUCTURE OF ICSID…… 8

1.1 Background of the study 8

1.2 The establishment of ICSID 11

1.3 Main features of ICSID 12

1.4 Jurisdiction of ICSID 14

1.4.1 Consent to arbitration 14

1.4.2 Requirements as to the parties involved 16

1.4.3 Investment disputes 19

1.5 The ICSID Additional Facility 20

1.6 Enforcement of ICSID Awards 21

CHAPTER 2: ICSID FROM THE VIEW OF DEVELOPING COUNTRIE 24

2.1 Criticism on ICSID mechanism 24

2.2 ICSID from substantive point of view 26

2.2.1 Definition of investment 26

2.2.2 Expropriation: direct and indirect expropriation 28

2.2.3 Any consideration of main features of investor-state disputes from ICSID?

2.3 ICSID from procedural point of view 35

2.3.1 The connection with the World Bank 35

2.3.2 Independent and Impartiality of the arbitrators 37

2.3.3 The inconsistency of using case law 43

CHAPTER 3: LESSONS FOR VIETNAM 46

3.1 Practical settlement of investment disputes in Vietnam 46

3.1.1 Investment disputes in Vietnam in current period 46

3.1.2 Mechanism for settlement of investment dispute in Vietnam 46

3.1.3 Increasing risk of being claimed by foreign investors 48

3.2 Lessons for Vietnam 50

3.2.1 Review definitions and regulations carefully when negotiating and drafting investment treaties 51

3.2.2 Limit the investor‟s access to arbitration 54

3.2.3 Actively participate in the arbitration proceedings early 55

3.2.4 Enhance the capacity of domestic institutions, especially judicial institutions 56

CONCLUSION 57

ANNEX 59

BIBLIOGRAPHY 62

ABBREVIATIONS

No Abbreviations

Disputes; (or refers to) the Centre

12 The ICSID Convention The 1965 Convention on the Settlement of

Investment Disputes between States and Nationals of Other States

19 The New York

Convention

The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards

22 The UN‟s Resolution The 1962 General Assembly Resolution 1803 on

Permanent Sovereignty over Natural Resources

of the United Nations

8 Generation Ukraine, Inc v Ukraine, ICSID Case No Arb/00/9;

9 CMS Gas Transmission Company v Argentine Republic, ICSID Case No.ARB/01/8;

10 Trinh Vinh Binh (Netherlands) v Vietnamese government (Vietnam), UNCITRAL;

11 South Fork (the U.S) v People‟s Committee of Binh Thuan Province;

12 Saipem S.p.A v The People's Republic of Bangladesh, ICSID Case No.ARB/05/07;

13 Marvin Roy Feldmen Karpa v United Mexican States, ICSID Case No.ARB (AF)/99/1)

LIST OF CHARTS

2 Chart 2 Known ISDS cases, annual and cumulative (1987- 2014) 8

3 Chart 3 Most frequent Respondent States (total as of end of 2014) 10

4 Chart 4 Most frequent home States of investors (total as of end of 2014)

10

5 Chart 5 Arbitrators, Conciliators, and ad hoc Committee Members appointed in cases registered under ICSID Convention and Additional Facility Rules – Distribution of Appointments by Geographic Region (as of June 30, 2015)

38

6 Chart 6 Country Comparison for the Protection of Investors (2016) 49

8 Chart 8 Types of cases registered under ICSID Convention and Additional Facility Rules (as of June 30, 2015)

60

9 Chart 9 Basis of Consent invoked to establish ICSID Jurisdiction in Cases registered under the ICSID Convention and Additional Facility Rules (as of June 30, 2015)

61

INVESTOR-STATE DISPUTE SETTLEMENT UNDER ICSID

MECHANISM FROM THE VIEW OF DEVELOPING COUNTRIES -

LESSONS FOR VIETNAM INTRODUCTION

1 Importance & justification of the study

FDI inflows to Vietnam have increased significantly since the country authorised foreign investments back in 1988 According to the World Bank, business climate

in Vietnam improved in 2015, with the country gaining three places in the 2016 Doing Business report (90th out of 189) FDI flows are expected to continue to grow, confirming the country's position as the third most attractive country in terms

of FDI in Asia, just behind China and India1

Chart 1 Foreign Direct Investment in Vietnam (2012 – 2014)

FDI Inward Flow (million USD) 8,368 8,900 9,200

FDI Stock (million USD) 72,891 81,791 90,991

Number of Greenfield Investments*** 174 133 251

Source: UNCTAD - 2016 2

1 ―Vietnam: Foreign Investment‖, Santander Trade Portal, Available online at:

Https://En.Portal.Santandertrade.Com/Establish-Overseas/Vietnam/Investing [Accessed on July 10 2016]

2

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP ** The UNCTAD Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education, Country Risk *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From the Ground Up **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped

Just in 2015, Vietnam has attracted large technology, industrial and HR projects and, between January and September 2015, recorded USD 17.15 billion worth of foreign direct investment for a total of 461 projects3

Such high flows of foreign direct investment goes along with the need of increasing level of protection for foreign investors Being one of the developing countries not yet participate in the ICSID Convention, Vietnam has been under pressure of the international investors community as well as other developed countries to agree to use ICSID mechanism as the way to settling investment disputes in BITs not only to protect the interests of foreign investors in Vietnam, but also to make the investment environment of Vietnam more attractive and appealing

On the other hand, developing countries usually are the Respondents under ICSID mechanism and the ones bear the burden of compensation and other measures as held in the awards of ICSID arbitral tribunals Looking over the s of ICSID, 60% of all cases were brought against developing and transition economies in 2014 This leads to a certain doubts and questions on ICSID regime‟s impact on developing countries

Thus, is ICSID really a good choice for developing countries? Is there any ways for developing countries to avoid being sued at the ICSID? Is there any ways for developing countries to avoid huge compensation to foreign investors but still remain a member of the ICSID Convention? From Vietnam‟s perspective, is joining the ICSID Convention the only option for Vietnam like other developing countries having not ratifies the Convention? How could Vietnam avoid being sued by foreign investors?

To answer these questions, a research on how ICSID mechanism works as well as the application of ICSID mechanism in Investor – State disputes settlement in practice from the view of developing countries have a significant meaning for

3

Ibid, note 1

Vietnam to consider joining the ICSID Convention and prepare for the possibility of being sued by foreign investors under the ICSID mechanism

2 Progress in study on the topic

Overseas, there are many studies on international investment disputes, investment disputes settlement mechanism, ICSID mechanism, such as:

- Investor-state Disputes arising from Investment Treaties: A Review, UNCTAD Series on International Investment Policies for Development (2005);

- International Centre for Settlement of Investment Disputes – Procedural Issues, Course on Dispute Settlement in International Trade, Investment and Intellectual Property, UNCTAD (2003);

- Bassant El Attar et al, Expropriation clauses in International Investment Agreements and the appropriate room for host States to enact regulations: a practical guide for States and Investors, The Graduate Institute Geneva – Centre for Trade and Economic Integration (2009), etc

These above studies introduce the general view of ICSID, or analyse one or several features of ICSID mechanism These works have emphasized the outstanding points

of this mechanism as ensuring the interests of investors are protected when investing in developing countries

Solutions to apply such mechanism in some countries are also discussed in these studies, especially in Latin American countries such as Argentina, or Venezuela, as there is a large number of investor-state dispute initiating under the mechanism of ICSID

In the publication "Investor-state disputes: prevention and alternatives to arbitration II" hay “UNCTAD Series on issues in international investment agreement: Dispute settlement investor-state”, UNCTAD has pointed out common dispute between the

government and the international investors, and provide some solutions for developing countries However, currently UNCTAD has not announced any research for the case of Vietnam

Domestically, there are some journals and articles related to this topic, such as:

- Pham Manh Dung, “The Washington Convention 1965: a dispute settlement mechanism on investment”, Journal of Economics and forecasting, No 10/20074;

- Hoang The Lien, “Introduction of the dispute settlement mechanism of foreign trade and foreign investment mainly in Vietnam, taken from the book

“Settling disputes with foreign elements in Vietnam”, Political Publishing House National 20005;

- Do Hoang Tung, Mechanism and Practicality of investment dispute resolution of the International Centre for Settlement of Investment Disputes (ICSID), State and Law Journal No 4/20086, etc

Some articles briefly indicate the overview of ICSID, or evaluate specific issues regarding the ICSID, but there is no researches studying on the application of this mechanism in resolving investor-state disputes in practice

Thus, there is no studies the ICSID mechanism from developing countries‟ perspective, both theoretical and practical as well as substantive and procedural viewpoints of ICSID mechanism in order to draw lessons and give recommendations in the context of Vietnam

3 Objective & scope of the study

6 Đỗ Hoàng Tùng, ―Cơ chế và thực tiễn giải quyết tranh chấp đầu tư của trung tâm giải quyết các tranh chấp đầu tư quốc tế (ICSID)‖, Tạp chí Nhà nước và Pháp luật số 4/2008

As objective of this dissertation, ICSID mechanism will be reviewed and analysed from developing countries‟ perspective through typical ICSID cases involving developing countries as Respondent Thereby, criticism on ICSID mechanism applied to settling investment disputes in developing countries will be examined and evaluated hereinafter to draw lessons for Vietnam

Thus, the scope of this dissertation is limited within the ICSID cases brought to ICSID under ICSID Convention and where developing countries involved in as Respondent as most of the cases registered at ICSID based on ICSID Convention7 Moreover, due to the limitation of time and as set by rules, only certain matters of ICSID mechanism are discussed in this dissertation Last but not least, for the purpose of this paper, ICSID mechanism for dispute settlement hereinafter should

be deemed not as conciliation but arbitration

4 Research methodology

The author of this dissertation makes the legal research on ICSID mechanism and interpreting ICSID Convention in order to create the general view of ICSID mechanism Second, statistics regarding ICSID mechanism as well as complaints and criticism are analysed from both substantive and procedural points of view as to build the overall description of ICSID mechanism from developing countries‟ perspective Analysis methodology is also applied to create a picture of investment dispute in Vietnam, which is the basis for applying lessons drawing from developing countries

Besides, the author also analyses cases on certain matters where developing states involving as Respondents, as well as identifies certain issues regarding international law in order to reach the conclusion regarding developing countries and demonstrates the cause of the discussed issues

7 See Annex – Chart 8

Finally, the synthesis methodology is used to conclude lessons and solutions for Vietnam, which is also the aim of this dissertation

5 Structure of the dissertation

Chapter 1: The establishment and structure of ICSID

Based on some facts and statistics, the dissertation first gives the background of the study in order to sketch out the initial perception and sensation on ICSID mechanism Then, the dissertation analyses the establishment and the structure of ICSID through objective lens in order to draw the general view of ICSID mechanism

Chapter 2: ICSID from the view of developing countries

In order to see and understand ICSID mechanism from the view of developing countries, who mostly and normally are the Respondents under such regime and bear the burden of compensation and other measures as held in the awards of ICSID arbitral tribunals, criticism on ICSID mechanism is analysed from substantive points of view, focusing on the interpretation of “investment” and “expropriation” through analysing cases where developing states involving as Respondents

Besides, prominent value in state sovereignty and the concept where the nature of investor-state dispute may seems to be contrary to the nature of international arbitration mechanism are also illustrated in order to reach the deeper layer of perception of investment arbitration and show the need of balance between these two Such criticism is also explicated from procedural points of view with regard to the ICSID‟s connection with the World Bank, the independence and impartiality of arbitrators, as well as the consistency of using case law under ICSID mechanism

Chapter 3: Lessons for Vietnam

After analysing and reaching conclusions for certain issues on ICSID mechanism from developing countries‟ aspect, a picture of investment dispute in Vietnam is set

as the basis for later applying lessons drawing from developing countries for Vietnam

CHAPTER 1: THE ESTABLISHMENT AND STRUCTURE OF ICSID 1.1 Background of the study

To begin analysing the International Centre for Settlement of Investment Disputes (“ICSID”) mechanism from developing countries‟ perspective, imagine a state being ordered to pay $12 billion as the arbitral awards for foreign investors, which

is twenty per cent (20%) of its gross domestic product (“GDP”) Such tremendously shocking figures were in fact the amount Ecuador government had to face, as a result arising out of disputes with foreign investors in 20098 under contracts and investment treaties between Ecuador and foreign investors9

International arbitration statistic shows that to the end of 2014, of the 42 new known investor-state disputes, 33 were filed with the ICSID10 About 61% of cases

8 ―Impact Of Ecuador Icsid Exit‖, Latin Business Chronicle (June 30, 2009) Available online at:

[ Http://Www.Latinbusinesschronicle.Com/App/Article.Aspx?Id=3502 ], Ecuador’s 2010 GDP was $58.91 Billion

9 Eric Gillman, ―The End of Investor-state Arbitration In Ecuador? An Analysis of Article 422 of the Constitution

of 2008‖, 19 Am Rev Int’l Arb 269, 280-83 (2008)

10

This does not cover cases that are exclusively based on investment contracts (State contracts) or national investment laws, or cases where a party has so far only signalled its intention to submit a claim to ISDS, but has not yet commenced the arbitration

Chart 2 Known ISDS cases, annual and cumulative (1987- 2014)

filed in 2014 related to the services sector Primary industries account for 28% of new cases while the remaining 11% arose out of investments in manufacturing Looking at the industries in which investments were made, the most numerous was generation and supply of electric energy (at least 11 cases), followed by oil, gas and mining, construction and financial services11 The two types of State conduct most frequently challenged by investors in 2014 were “cancellations or alleged violations

of contracts or concessions” (at least nine cases), and “revocations or denial of licenses or permits” (at least six cases) For cases where this information has been reported, the amount claimed ranges from USD 8 million to about USD 2.5 billion12

On the other hand, looking over the Respondents of ICSID, 60% of all cases were brought against developing and transition economies in 2014 The most frequent Respondent (total as of end of 2014) was Argentina, followed by Venezuela, Czech Republic, and Egypt Meanwhile, in 2014, 35 cases of the 42 known new cases were brought by investors in which their home States are developed countries13 The most frequent home States in total as of end of 2014 was the United States, followed by Netherlands, the United Kingdom and Germany This in accordance with the historical trend where investors from developed countries, such as those from the United States, Canada and several European Union (EU) countries, have been the main users of the system responsible for over 80% of all ISDS claims In addition, one more thing should be noticed that the consent of parties invoked to establish ICSID jurisdiction under ICSID Convention and Additional Facility Rules

is mostly made under BITs (61.0%)14

Chart 3 Most frequent s (total as of end of 2014)

Chart 4 Most frequent home States of investors (total as of end of 2014)

Moreover, talking about ICSID arbitration and reasons for Bolivia‟s denunciation from ICSID on the 2nd of May 2007, Bolivian President Evo Morales asserted that cases brought to ICSID tribunals show the “unrestrained powers granted to corporations, especially multinational corporations, through bilateral or multilateral investment treaties and free trade agreements”15 ICSID is considered as to protect

15 ―Bolivia’s Letter To ICSID‖ dated June 21, 2007,

and promoted foreign investment with little regard for the costs to democracy, the environment and the public welfare He further argues that the ICSID Convention, and the investment and free trade treaties that implement it, often violates a country‟s sovereignty, constitution and laws16

Thus, in 2007, Bolivia sent a notification to the ICSID declaring its denunciation from ICSID Convention Concurrently, Ecuador notified its rejects ICSID

arbitration for future oil, gas, and mining disputes, and Venezuela threatened to take

the similar path17 Consequently, the statistics as well as continuous statement of withdrawal from ICSID of developing states cast doubts on the adverse and serious

effect of ICSID mechanism on such states

1.2 The establishment of ICSID

Foreign property rights were initially extended to the developing countries by the capital exporters, but the former of these countries tried to limit such rights through international diplomatic cooperation18 While the industrialized countries wanted to protect investment security, developing countries stood up for sovereignty, which at first meant the right not to be intervened Later, sovereignty was interpreted as “the right to nationalize for whatever gains”19 This resulted in insecurity for foreign investors in developing countries, and this is also the reason why the flow of investments from developed countries to developing countries hit a standstill in the 1960s as there was no mechanism foreign investors could rely on to protect their rights when such circumstances occurred20

The international community had tried to find the solutions for this, but opinion was too divided to come to any agreement The solution was not reached until Aron

Broches, who was General Counsel at the World Bank, proposed the creation of an arbitration mechanism in 1961 that “could cater for the needs of both investors and governments”21

Consequently, the final result of the proposal was the establishment in October 14, 1966 of ICSID under the International Convention for the Settlement of Investment Disputes (“the ICSID Convention”), which can also be called as “the Washington Convention” ICSID came into existence as an autonomous international agency under the auspices of the World Bank22 and is deemed as the first institution designed specifically as a forum to settle investment disputes between a state and private investors of another state No “appropriate forum” previously ever existed to handle investment disputes between foreign investors and states23

Thus, it has been stated that the Convention create the cutting edge of the development of international law It was no longer necessary for investors to ask their own government to receive and settle their case through diplomatic protection The Convention granted investors in a foreign state, both private individuals and corporations, the right to directly bring the lawsuit before the international arbitral tribunals against the foreign state

1.3 Main features of ICSID

So which feature of ICSID makes it that different to the previous forms of investment dispute settlement? According to Rudolf Dolzer and Christoph Schreuer, there are five features of ICSID, including:

- Foreign individuals and corporations can directly bring a lawsuit against their host state;

- State immunity is severely restricted;

- International law can be applied to the relationship between the host state and the investor;

- The local remedies rules is excluded in principle; and

- ICSID award are directly enforceable within the territories of all states parties to ICSID24

These features can be clearly explained in the CMS v Argentina25 case as follows

In summary, the CMS Company purchased 29% shares of an Argentine company (TGN), pursuant to Argentina‟s privatization program in 1995 In early 2002, the Argentine authorities, in response to its growing financial crisis, has frozen gas transportation tariffs and forced conversion of private service contracts from dollars

to pesos, which is devaluated at a one-to-one rate between Argentine peso and U.S dollars and also abolished the periodic adjustments of prices and tariffs according to foreign inflation indices, which already prescribed in many big contracts between foreign investors and the state In this case, it can be easily indicated that foreign corporations, which is CMS, can directly bring a lawsuit against their host state before ICSID tribunal Second, “state immunity”, which in this case is the

“necessity defence”, is not recognized by the tribunal Third, the U.S-Argentina BIT‟s provisions are the ground for rulings in this dispute Forth, domestic court did not have jurisdiction to settle this dispute Finally, the award is directly enforceable within the territories of Argentina, which is a state party to ICSID Convention

In the end, once the ICSID Convention was established, ICSID was quickly recognized in treaties as resolution for investment dispute settlement between states and investors, and the possibility of using this special forum was captured by forming a clause creating the consent of the state to bring the dispute with the investors to the arbitral tribunal

1.4 Jurisdiction of ICSID

It is crucial whether a dispute can be referred to arbitration under the ICSID Convention The scope of the Convention is defined in Article 25.1 as follows:

“Article 25:

(1) The jurisdiction of the Centre shall extend to any legal dispute arising out

of an investment, between a Contracting State (or any constituent subdivision

or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent

in writing to submit to the Centre When the parties have given their consent,

no party may withdraw from its consent unilaterally”

Consequently, investment disputes fall within the scope of the ICSID Convention if the following four requirements are met:

- It must be a legal dispute;

- The parties must have agreed to submit their dispute to ICSID;

- The dispute must be between a Contracting State or its subdivisions and a foreign investor from another Contracting State;

- It must arise directly out of an investment

The first requirement is fulfilled whenever there is a dispute about legal rights The other three requirements have been relied upon by states to challenge the jurisdiction of tribunals formed under the ICSID rules Thus, the dissertation will focus on these three latter requirements

1.4.1 Consent to arbitration

a The mere ratification of the ICSID Convention is not in itself consent to arbitration by a state

ICSID arbitrations require that all parties concerned have agreed to submit to the ICSID arbitration The Preamble of the ICSID Convention stated that:

“No Contracting State shall by the mere fact of its ratification, acceptance or approval of this Convention and without its consent be deemed to be under any obligation to submit any particular dispute to conciliation or arbitration.” 26

Thus, merely ratifying the ICSID Convention is not itself a consent to arbitration by

a state As stated in the Preamble, ratification does not oblige the state to submit a given dispute to arbitration It just means that the state confirm to become the party

of the ICSID Convention, and because of that it does not give jurisdiction to an ICSID tribunal The necessary consent may be contained in an arbitration agreement made between the state and the investor related to the investment contracts, or after the dispute has arisen

b Types of consent

Consent to bring the disputes to ICSID arbitral tribunal can be classified into two types: contractual ICSID arbitration and non-contractual ICSID arbitration

(i) Contractual ICSID arbitration:

The Centre provides Model clauses for existing and future dispute27, which can be used in the contracts between the investors and the states Such consent can also be included in separate arbitration agreement, or recorded in separate instruments such

as exchanged letter, telefaxes

26

The Preamble of the ICSID Convention

27 According to ―ICSID Third Annual Report 1968/1969‖, the Secretariat has developed a set of 32 annotated model 3 consent clauses which were issued early in the year In addition, to assist States engaged in negotiating bilateral treaties designed to stimulate investments by the nationals of one party within the territory

of the other, the Secretariat has prepared a set of model clauses relating to the Convention that might be inserted into such new treaties or that might constitute the subject of protocols to existing instruments supplementing any provisions therein for the settlement of Investor-state disputes

Available online at: http://icsid.worldbanl.org

(ii) Non-contractual ICSID arbitration:

ICSID accepts arbitration arising not only from a direct consent to arbitrate between investor and the host state, but also arbitration arising from indirect agreement to ICSID arbitration established in:

- The host state‟s national legislation:

This is also recognized as “offer to consent by the host state”, meaning that the consent will be effective if the foreign investor accepts such offer to arbitrate by filing its claim with ICSID;

- BITs between the host state and the home state of investor:

Many BITs contains provision giving parties the right to choose a place for settlement their disputes For example, under the U.S Model BIT, any investment dispute between Contracting States can be referred to the ICSID

1.4.2 Requirements as to the parties involved

For the Convention to be applicable, one of the parties to the dispute must be a Contracting State or a “constituent subdivision or agency”28 which has been registered with the Centre Nevertheless, the registration has primarily an evidentiary purpose in order to avoid doubts as to whether a state entity can be a party to ICSID arbitration Therefore, the lack of formal registration does not

28

Article 25.1 of the ICSID Convention

prevent an entity becoming an eligible party if it has been made clear that it is a constituent subdivision or agency of the Contracting State29

The other requirement, which is more important, is that the other party must be a national of another Contracting State According to Article 25.2 of the ICSID Convention, “national of a Contracting State” is:

- “Any natural person who had the nationality of a Contracting State other than the State party to the dispute…”, and

- “Any juridical person which had the nationality of a Contracting State other than the State party to the dispute…”

a Nationality of “natural person”

With regard to natural person, the key concern is their country of citizenship and how to qualify as an investor for ICSID jurisdiction purpose30 As stated in Article 25.2, “nationality” is an important feature when considering ICSID jurisdiction However, such term is not defined in the ICSID Convention In fact, the definition

of nationality can be defined differently in investment treaties The nationality of a natural person in most BITs is defined by reference to the domestic laws of the Contracting States

For example, US Model BIT provides that “nationals” means, for the United States,

“a natural person who is a national of the United States as defined in Title III of the Immigration and Nationality Act”31

This conforms to the concept of absolute state sovereignty in deciding the criteria for defining “nationality” On the other hand, several BITs may contain other requirements of residence or domicile

The issue may arise in case of dual nationality in which a national of one Contracting State is also the national of another Contracting State Most BITs do not give solution for this issue However, this can be resolved by determining the effective nationality of the person in accordance with the relevant rules of the Contracting State, or by reference to the general principles of international law32

b Nationality of “legal entity”

With regard to a legal entity, it is sufficient that it has the nationality of another Contracting State only at the time that they entered into the arbitration agreement It

is also not necessary that the legal entity is a privately owned company Partly or wholly state-owned companies also are covered The nature of its activities is relevant – they must be private and commercial33

It is stated in Article 25.2(b) that a legal entity with the nationality of the host state, under some certain circumstances, could be considered as a „national of a different Contracting State‟ This conclusion based on the fact that foreign investors are often requested to pass their investment through locally-incorporated companies Thus, in these circumstances, parties may agree that the local entity may be given the status

of a “national of a different Contracting State” in order to give ICSID its jurisdiction Moreover, expressly giving the status of a “national of a different Contracting State” to the local company is also not mandatory Taking Amco v Indonesia case34 as an example, “it was sufficient for the state party to know that the local company was owned by an investor from a different Contracting State”35 Often the local company is not controlled directly by the foreign investor but is “at

32

See Marvin Roy Feldmen Karpa v United Mexican States, ICSID Case No ARB (AF)/99/1), Interim Decision on Preliminary Jurisdictional Issues, December 6, 2000, where an ICSID Tribunal was faced with a case under NAFTA involving a U.S citizen with the permanent residence in Mexico Mexico challenged the jurisdiction based on dual nationality The Tribunal rejected the objection relying on general international law and held that residence fulfils only a subsidiary function to that of citizenship,

33

See ICSID, 24 May 1999, Ceskoslovenska Obchodni Banka, AS (Czech Republic) v The Slovak Republic, decision on jurisdiction, XXIVa YBCA 44 (1999) 48; 14 ICSID Rev-FILI 250 (1999)

34 Amco Asia Corporation and others v Republic of Indonesia, ICSID Case No.ARB/81/1 –

See more at: http://www.italaw.com/cases/3475#sthash.fQoir5om.dpuf

35

L Mistelis, Supra note 27, p.24

the end of a pyramid of control”36 Questions regarding the nationality of the controlling party may arise when “certain parts of the pyramid are not nationals of Contracting States”37 Thus, in this case, the tribunal concluded that the direct

parent company is the relevant party which had to have the nationality of another Contracting State

1.4.3 Investment disputes

An „investment‟ within the scope of Article 25 is not defined in the ICSID Convention The draftsmen wanted to leave it primarily to the parties to decide what constituted an investment An arbitration clause providing for ICSID arbitration is

an implied agreement that their “investment” falls under Article 25 The same applies to the unilateral offers to arbitrate contained in the various investment protection laws and investment treaties They extend the ICSID arbitration option to all types of investment covered by the relevant legal instrument

As a consequence, the wide definitions of investment contained in NAFTA or the ECT for example are indirectly also relevant for the determination of what constitutes an investment for the purposes of Article 25

It appears from the case-law and legal scholarship that investment has the following typical characteristics38:

- The project should have a certain duration;

- There should be a certain regularity of profit and return;

- There is typically an element of risk for both sides;

- The commitment involved would have to be substantial;

- The operation should be significant for the host state‟s development ICSID arbitral tribunals have held various projects and transactions qualifying as

“investment” under Article 25 of the Convention It can range from infrastructure

projects to the issuing of promissory notes “Disputes arising directly out of an investment” have been recognized to include disputes related to capital contributions, equity investment in corporations and joint ventures, non-equity direct investment via service contract, transfer of technology, natural resource concession agreements, and operation of production and service facilities in the host state39

Moreover, after examining many decisions of ICSID tribunals, it is assumed that to date “investment” is recognized as covering not only direct but also indirect investment and modern contractual and other transaction having economic value40 Thus, this term is considered to be interpreted to broadly, which will be analysed more fully and thoroughly in the next chapter

1.5 The ICSID Additional Facility

The purpose of the Additional Facility (the “AF”) is to fill a “jurisdictional gap” in case either the host state or the investor‟s home state is not a party to the ICSID Convention However, the AF in fact was not created by the ICSID Convention The Administrative Council of the Centre adopted the Additional Facility Rules on September 27, 1978, which is the basis for AF‟s establishment The AF Rules are designed to open access to the Centre in certain situations where the Convention‟s jurisdictional requirements have not been met

The AF is useful as arbitration in this forum receives “institutional support from ICSID in a similar way as proceedings under the ICSID Convention.”41

For instances, the Secretary-General of the Centre is authorized to administer conciliation or arbitration proceedings between a state and a national of another

39

Investor-state Disputes arising from Investment Treaties: A Review, UNCTAD Series on International Investment Policies for Development (2005)

40 UNCTAD, ―Series on issues in international investment agreements, Scope and Definition‖ (1999)

41 Rudofl Dolzer & Christoph Schreuer, ―Principles of International Investment Law‖ (2008), p 225

state when only one state involved is an ICSID Contracting State42, or he or she is also be the one responsible for appointing arbitrators if parties fail to agree43 Beside the similarities with arbitration under the ICSID Convention, there are also some differences An award under the AF Rules is not enforceable through the ICSID Convention but through the law of the forum and any applicable treaties The

AF Rules stipulate that proceedings must be held in a state party to the United Nation Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) Another feature of AF is that AF arbitral awards “are not exempt from the scrutiny and setting aside of competent national courts”44

Thus, a key difference between arbitration under ISCID and AF is that the

AF applies national laws “to the enforcement of awards made under the AF Rules”45

, which is why arbitration proceedings must be held in states parties to the New York Convention

1.6 Enforcement of ICSID Awards

Awards issued by ICSID tribunals have generally been easily enforced, which is a key factor in why ICSID has been effective46 Article 53.1 of the ICSID Convention states that:

“The award shall be binding on the parties and shall not be subject to any appeal”

Thus, there is no ground in ICSID Convention that parties can rely on in order to refuse to recognized and enforce the ICSID tribunal awards Furthermore, it requires national courts of the Contracting States to recognize and enforce monetary

42

Article 2 Of The Additional Facility Rules

43

Article 9 Of The Additional Facility Rules

44 David A Gantz, ―Investor-state Arbitration Under ICSID, the ICSID Additional Facility and the UNCTAD Arbitral Rule‖s, U.S-Vietnam Trade Council Education Forum (2004), p.10

45

Ibid

46 Daniel D Bradlow & Alfred Escher Eds., ―Legal Aspects of Foreign Direct Investment‖ 113 (1999), p 44

awards immediately, as if they were final judgement of these states local courts47 In other words, “final awards of ICSID are automatically enforceable and do not require the recognition of domestic courts48, and such awards are enforceable in any state party to the ICSID Convention”49 Hence, parties are bound by the award and

it shall not be subject to appeal or to any other remedy except those provided in the Convention

Subject to any stay of enforcement in connection with any of the above proceedings, parties have obligations to abide by and comply with the ICSID awards Under Article 54, every Contracting State is required to recognize the ICSID awards as binding and to enforce the pecuniary obligations imposed by the award “as if it were a final decision of the domestic court”50 Since there are difference between common law and civil law jurisdictions and different judicial systems in unitary and federal or other non-unitary States, there is no particular method needed to be followed in its domestic implementation, but each Contracting State is required to meet the requirements of Article 54 in accordance with its own legal system.51

A party who is dissatisfied with the award of an ICSID arbitral tribunal may apply for the interpretation, revision or amendment of the award based on the grounds including excess of powers on the part of the tribunal, serious departures from a fundamental rule of procedure and failure to state the reasons on which the award is based52 If the application is for annulment of the award, an ad hoc committee of three members will be established to determine the application In case the arbitral

Lucy Reed, supra note 45

51 ―Report of the Executive Directors on the Convention‖, ICSID/15 April 2016

52

ICSID Arbitration Rules, r.50

award is annulled, in whole or in part, each parties can ask for the dispute to be submitted to a new tribunal, which then forms a new award53

Because of the characteristic of final binding, ICSID is seen as the “self-contained delocalized enforcement system”54 which makes it different from other international commercial arbitration regimes

CHAPTER 2: ICSID FROM THE VIEW OF DEVELOPING COUNTRIES 2.1 Criticism on ICSID mechanism

The arbitration mechanism, particularly ICSID mechanism, are criticized to be more likely against a developing country whose government lacks expertise in defending such actions and the possibility of a bias being likely exhibited towards developing countries The Bretton Woods project claims that 20% of ICSID cases were brought

by companies ranking within the top 500 globally, of which seven had revenues that exceed the GDP of the country they were bringing a case against55

Compared with developed nations, developing countries have a “disproportionate number of claims lodged against them with a higher opportunity cost of losing a claim In relation to government budgets and per capita incomes, developing countries pay significantly more in damages”56 For instance, the average amount claimed by US investors against developing countries is $450 million at average, while such average amount claimed against high-income countries is about $150 million The financial cost in these arbitral tribunals, particularly on poor, developing countries in relation to their budgets and financial resources, may prove

an extreme burden Thus, in arbitral proceedings, the financial cost places a heavier burden on developing countries than developed ones due to the disparity in financial resources and budgets

According to the Attorney General of Pakistan57, many BITs signed by Pakistan had been viewed as “photo-op” agreements, and their full import became clear only after foreign investors began to invoke the treaty rights in the course of initiating investor-state arbitrations against Pakistan “These are signed without any

55 Bretton Woods Project, ICSID—International Centre for Settlement of Investment Disputes Bretton Woods Project 14 July 2009 Available at: http://www.brettonwoodsproject.org/item.shtml?x=537853 [accessed on July 19, 2016]

knowledge of their implications And when you are hit by the first investor-state arbitration you realize what these words mean”

With the same point of view, at the beginning of his term, Bolivian President Evo Morales stated that the flood of BITs signed by the previous government, which gave foreign investors the right to file lawsuits through international arbitral tribunals, makes him feel like a “prisoner” in the Presidential palace The problem became “crystal clear” when the international gas companies asserted that if the promise to increase the Bolivians‟ share of revenues from the natural gas resources

in his campaign was carried out, they would consider suing his government

As deciding to denounce the ICSID Convention, Bolivia has argued that:

- the ICSID was established to favour the interests of foreign investors over the interests of the states;

- ICSID tribunals misapply investment treaty obligations and expand protections such as that of fair and equitable treatment in favour of multinational corporations;

- the fact that some arbitrators serving on ICSID tribunals, or their law firms acting at the same time as lawyers for other investors in similar disputes , raises question on their capacity to interpret investment treaty provisions in an impartial and independent manner;

- the confidentiality of arbitration hearings charged with resolving matter

of public interest; and

- the lack of a substantive appeals mechanism for arbitration rulings, capable of ensuring consistent outcomes from one case to the next58 Thus, from the developing countries‟ perspective, it has been doubted that wealthy private investors, especially those from developed countries and have global power, have used investor-state dispute to make an impact on environmental and other

58 ―Bolivia’s Letter To ICSID‖, supra Note 11

public interest policies and regulations, punish the government for acting in accordance with their people, and to make sure that their profits and interests are

guaranteed despite poor-quality performance

2.2 ICSID from substantive point of view

2.2.1 Definition of investment

As mentioned before, in order for ICSID arbitration to have the jurisdiction over a dispute, such dispute must be a legal dispute arising out of an investment Nevertheless, the definition of the term “investment” does not specifically described

in the ICSID Convention Hence, such term can be flexibly explained by different tribunals in different cases

a SGS v Pakistan 59 - Accepting jurisdiction due to a broad interpretation

of “investment”

In this case, on one hand, it was stated by the Tribunal that the ICSID Convention let the contracting parties define the term “investment” with a large measure of freedom On the other hand, “investment” in the Switzerland–Pakistan BIT is broadly defined, as including “every kind of asset” and, in particular, “claims to money or to any performance having economic value” and “concessions under public law… as well as all other rights given by law, by contract or by decision of the authority in accordance with law”.60

According to Tribunal‟s findings, the fact that SGS made certain expenditures in the territory of Pakistan to conduct its obligations under the PSI Agreement with the Pakistan‟s government constituted an

“investment” under the Switzerland–Pakistan BIT

As indicated in Tribunal‟s finding, how “investment” is defined in investment treaties is really important A broad definition of “investment” can be interpreted to cover a wide range of conducts and expenditures made by investors, which may

include a contract for services under which a state (Pakistan) had hired an investor (SGS) for a period of time as in this case Thus, the host state, especially developing state, should carefully measure the scope of “investment” and the host states‟ obligations under those agreements to lower the risks of being sued based on such broad interpretation

b SGS v Philippines 61 - Broad interpretation of “investment” as including a contract for the provision of services performed mostly outside the territory of the host state

Under the Contract, SGS was required to provide the services both within and outside the Philippines territory, although the majority of these were abroad The Switzerland–Philippines BIT, on the other hand, clearly required the investment to

be made within the territory of the host state, in accordance with its laws and regulations However, Tribunal found that although SGS carried out pre-inspection shipment services abroad, its liaison offices in the Philippines were a “substantial and non-severable aspect of the overall service”.62 It further stated that there “was

no distinct or separate investment elsewhere than in the territory of the Philippines but a single integrated process of inspection arranged through the Manila Liaison Office, itself unquestionably an investment “in the territory of the Philippines”63 The Tribunal also placed emphasis on the scale and duration of SGS‟s activity in the territory It concluded that SGS‟s activities constituted an investment made in the territory of the host state and in accordance with the BIT

Similar to the tribunal‟s decision in SGS v Pakistan, the SGS v Philippines Tribunal‟s liberal interpretation of the requirement that the investment should be made in the territory of the host state means that even those activities that are primarily carried out abroad may still be covered under the BIT, provided they are connected to some activities in the host state‟s territory

Thus, too much flexibility in defining the term “investment” leads to uncertainty and unpredictable in defining claimant and measure the risks of being threaten by a flurry of lawsuits brought to the arbitral tribunals by the foreign investor64 Moreover, such broad interpretation provides only a weak filtering mechanism to help limit the scope of a BIT‟s protection to those investments that meaningfully contribute to host states‟ economic developments

2.2.2 Expropriation: direct and indirect expropriation

According to some critics, the term “expropriation” has been defined by the ICSID arbitral tribunals too broadly

a Metalclad Corp v Mexico

Metalclad Corp v Mexico65 is a typical case to explain why ICSID tribunal defined the term “expropriation” too broadly This case created a controversial debate on the meaning and scope of measures “tantamount to expropriation” and whether this concept of indirect expropriations could include any regulatory measure that had a significant economic impact on the investor, despite the measure‟s motivation In the decision, it held that “expropriation” included:

“…not only open, deliberate and acknowledged takings of property, such as

outright seizure or formal or obligatory transfer of title in favour of the host

64

In Other Cases, Such As Fedax V Venezuela Case And Csob V The Slovak Republic Case, The Loans Are Held To Qualify As ―Investment‖, While In The Lanco V Argentina, Shareholding Was Sufficient To Find Jurisdiction As An ―Investment‖ In Cms Gas Transmission Company V Argentina Case, The Tribunal Recognized That Non-Controlling Minority Shareholdings Constitute An ―Investment‖ For Purposes Of The Icsid Convention And Most Bits However, The Risk In This Case Is That The State Can Be Sued By The Same Claim Based On The Same Measures Over And Over Again Due To The Great Number Of Non- Controlling Minority Shareholders In Each Company

65

Metalclad Corporation v The United Mexican States, ICSID Case No ARB(AF)/97/1,

Metalclad, A Us Corporation, Acquired Coterin, A Company Which Obtained A Hazardous Waste Landfill Permit In A State In Mexico Metalclad Was Informed By The Federal Government Officials That The Only Permit Required For The Construction And Operation Of The Landfill Was A Federal Permit, And That The Municipal Authority Could Not Refuse Granting The Permit However, After Construction, The Municipal Authority Ordered The Operation Of The Facilities To Be Stopped Due To, Among Other Things, Metalclad’s Lack Of A Permit From The Municipal Authority Metalclad Could Not Operate And, Thus Request Arbitration Claiming A Breach Of NAFTA

See more at: http://www.italaw.com/cases/671#sthash.VUFMHAoR.dpuf

State, but also covert or incidental interference with the use of property

which has the effect of depriving the owner, in whole or in significant part, of

the use or reasonably-to-be-expected economic benefit of property even if

not necessarily to the obvious benefit of the host State”.66

Thus, in this case, the Tribunal stated that the federal government‟s notification on

the required permits along with the other conducts of the government, which made

Metalclad justifiably relied on, was “tantamount to expropriation”

This “economic impact” test is a very harsh test for “expropriation” since it virtually

indicates every types of government measure For instance, the government may

impose some costs or limit some economic benefit of a corporation as

environmental protection measures Thus, the test immediately raised concerns as

whether it is the applicable international law standard on expropriation

Moreover, as Metaclad is an U.S corporation, the tribunal award is doubted to

protect the investor even more than the U.S themselves Such definition of

“expropriation”, which is called under U.S law as “takings”, is much broader than

what is permitted by the U.S courts The property rights under the U.S law requires

that to find a “taking”, close to 100% of the value of property must be destroyed by

a regulation and no other viable economic use of the property remains67 In other

words, if Metaclad had been able to operate a non-toxic waste treatment facility or

even open a store on such property, which indicates that “other viable economic use

of the property” still remains, it would not succeed in an “expropriation claim” in

the U.S courts In addition, as there is a growing numbers of states becoming parties

to international human rights treaties or treaties regarding the environmental

protection, such broad definition of expropriation under ICSID mechanism has

66

Nathalie Bernasconi-Osterwalder and Lise Johnson, International Investment Law and Sustainable

Development - Key cases from 2000–2010, IISD, July (2011), p.77

67 Mary Bottari and Lori Wallach, ―NAFTA’s Threat to Sovereignty and Democracy: The Record of NAFTA

Chapter 11 Investor-state Cases 1994-2005, Lessons for the Central America Free Trade Agreement (2005),

Public Citizens Global Trade Watch

Comment [U1]: footnote