Investment Treaty Arbitration: ICSID Amends Investor-State Arbitration Rules

The World Bank's International Centre for Settlement of Investment Disputes (ICSID) has announced several important changes to its arbitration rules, effective April 10, 2006. Investor-State arbitration under ICSID is becoming an increasingly important tool for businesses seeking to resolve disputes with government entities. The number of bilateral investment treaties (BITs), the bulk of which provide for ICSID arbitration, has exploded in recent years. There are now nearly 2,400 such treaties in existence. Numerous multilateral agreements, such as the Energy Charter Treaty, NAFTA and the recently concluded Central American Free Trade Agreement (CAFTA), also provide investors with the right to bring ICSID arbitration claims against sovereigns.

The ICSID rule changes are intended to make ICSID proceedings more streamlined and transparent, while instilling greater confidence in the arbitral process. Among other things, they create an expedited process for seeking provisional measures; introduce a new mechanism for raising preliminary objections to frivolous claims; seek to increase transparency through provisions for amicus submissions by third parties, public attendance at oral hearings, and publication of awards; and clarify the rules governing arbitrator disclosures and fees. The final rules are the product of 18 months of consultations with ICSID Contracting States, the business community, civil society, arbitration experts and other arbitral institutions. The amendments—which offer incremental changes to the established ICSID arbitral process—are likely to be greeted as welcome improvements in most quarters.

The final rules are also noteworthy for what they do not include: a new appeals process. In October 2004, ICSID had proposed a mechanism for appealing ICSID awards, but later abandoned the idea in the face of mounting criticism. The debate over whether to create an appellate mechanism for ICSID awards may be revisited in the future. Meanwhile, ICSID's existing annulment procedure continues to provide limited grounds for the review of awards, including whether the Tribunal was properly constituted, manifestly exceeded its powers, or was corrupt.

The new rules will apply to ICSID arbitrations in which the date of consent to arbitration is on or after April 10, 2006.

Procedural Innovations

Provisional Measures (Arbitration Rule 39). To enhance a Tribunal's ability to grant provisional measures (i.e., measures of interim relief to preserve the party's rights) on an expedited basis, the amended rules allow requests for provisional measures to be submitted as soon as a dispute is registered with ICSID--even before the Tribunal has been constituted. Moreover, the new rules empower the ICSID Secretary General to impose an immediate briefing schedule, so that the issue is ripe for prompt consideration by the Tribunal as soon as it is formed. Under the old rule, by contrast, parties were required to wait until the Tribunal had been constituted before they could submit a request for provisional measures. The new rule still allows parties to seek provisional measures from national courts, as well as the Tribunal, if authorized by the applicable investment treaty or arbitration agreement.

Preliminary Objections (Arbitration Rule 41). Rule 41 allows parties to raise preliminary objections to the jurisdiction and competence of the Tribunal. The amendments provide an additional basis for raising a preliminary objection: that the claim is "manifestly without legal merit." This new procedure creates an expedited mechanism for resolving, and ultimately deterring, frivolous claims. A party has 30 days after a Tribunal is constituted to submit such a preliminary objection and must "specify as precisely as possible the basis for the objection." The other party is given the right to respond, and the Tribunal is required to rule on an expedited basis. The new rule also allows the parties to agree to a different procedure.

Greater Transparency and Public Participation

Amicus Briefs (Arbitration Rule 37). The amendments add, for the first time, procedures and standards by which Tribunals shall consider requests from third parties to file amicus briefs to address issues that may not adequately be addressed by the parties (e.g., environmental or other public policy issues). Notably, a Tribunal can decide to accept the submission of an amicus brief by a third party even if the parties object. The Tribunal is, however, required to consult both parties before ruling on the amicus request. In determining whether to accept a third-party submission, the Tribunal must consider:

whether the non-party has a "significant interest" in the proceeding;
whether the submission addresses "a matter within the scope of the dispute;" and
how the submission would help resolve a legal or factual issue before the Tribunal by "bringing a perspective, particular knowledge or insight" different from those provided by the parties.

Open hearings (Arbitration Rule 32). Transparency advocates (including certain NGOs and other civil society advocates) have long pushed for the opening of ICSID hearings to the public. The amended rule goes part way towards meeting their demand, authorizing Tribunals to allow third parties to attend or observe oral hearings, but only if none of the parties to the proceedings object. An earlier version of the amendment to Rule 32, which proposed allowing Tribunals to open hearings to the public over the parties' objections, was rejected. In addition, the new rule requires Tribunals presiding over open proceedings to "establish procedures for the protection of proprietary or privileged information."

Publication of Awards (Arbitration Rule 48). While an increasing number of ICSID awards are, in fact, being made public, the rules prohibit ICSID from publishing awards without the consent of the parties. The old rules gave ICSID discretion to publish excerpts of the awards that revealed the Tribunal's legal reasoning. In an effort to boost transparency, and to help promote a more coherent and uniform application of international investment law, the amended rules now require ICSID to "promptly" publish "excerpts of the legal reasoning" of every award.

Rules Governing Arbitrators

Arbitrator Independence (Arbitration Rule 6). The rules have been amended to clarify that arbitrators have an ongoing duty to report any relationship with the parties or any circumstance that might cause a party to question the arbitrator's "reliability for independent judgment." Previously, the rules required an arbitrator only to disclose any past or existing relationships with the parties. By requiring both a greater degree of disclosure and a continuing obligation to disclose, the amendment is intended to instill greater confidence in the neutrality of ICSID Tribunals.

Arbitrator Fees (Admin. and Financial Reg. 14). The ICSID Secretary General sets standard daily fees for arbitrators. In the past, some arbitrators have reportedly asked the parties to agree to depart from the mandated fees. The amended rules make clear that requests for increases in the standard rate should only be made in exceptional circumstances and must be made through the Secretary General.

Conclusion

By creating new mechanisms or improving existing mechanisms for interim measures of relief, motions to dismiss, amicus briefs, publication of awards and arbitrator disclosure, ICSID is striving to produce a more robust system for adjudicating investor-State disputes. Although the changes are incremental, they reflect a growing trend in investor-State arbitration towards increased transparency and public participation, and a greater willingness to draw inspiration from litigation-based models of dispute resolution. The real effect of these reforms on investor-State arbitration will depend on how they are implemented in practice. Investors and corporate counsel are well advised to keep abreast of these developments as they consider investor-State arbitration as a means of resolving disputes with government entities.

For a copy of the revised rules, please click here.

Note: Changes were made to both the ICSID Arbitration Rules and, where applicable, the corresponding ICSID Arbitration (Additional Facility) Rules. The Additional Facility Rules apply to certain categories of disputes (including investor-State disputes under NAFTA Chapter 11) that fall outside the scope of the ICSID Convention.

For more information on investor-State dispute resolution and other international arbitration matters, please contact:

London:

Gary B. Born
+44 (0)20 7872 1020
[email protected]

Steven P. Finizio
+44 (0)20 7872 1073
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Washington:

David W. Ogden

Ethan G. Shenkman
+1 202 663 6495
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Rachael D. Kent
+1 202 663 6976
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New York:

John V.H. Pierce
+1 212 230 8829
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David W. Bowker
+1 212 230 8852
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Matthew E. Draper