A Bit about ICSID

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Copyright TDM 2009v1.5

Transnational ispute ManagementTransnational ispute Management

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ISSN : 1875-4120

Issue : (Provisional)

Published : March2009

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A BIT about ICSID

by S.M. Schwebel


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1

A BIT about ICSID*

Stephen M. Schwebel**

CONSIDER WHERE THE LAW OF FOREIGN investment has been notonly for the last twenty-five years but the last fifty, from the time when Westernimperialism expired and the ranks of capital-importing independent Statesexpanded essentially from Latin America to include Asia and Africa.

If we recall the constellation of countries circa 1960, there was a legal as wellas economic gulf between capital-exporting States and capital-importing States.There was a great gulf on the substance of the governing international lawifany. There was a great gulf on international legal processif any.

The depth of that gulf was certified by the Supreme Court of the UnitedStates in the Sabbatinocase when it observed in 1964 that: There are few if anyissues in international law today on which opinion seems to be so divided as thelimitations on a states power to expropriate the property of aliens.1

*This article is adapted from a speech made at the 25thAnnual AAA/ICC/ICSID Joint Colloquiumon International Arbitration, held in New York on November 14, 2008.

**Stephen M. Schwebel served as a Judge of the International Court of Justice (19812000), andas its President (19972000). He has been appointed chairman or party-appointed arbitrator in 54arbitrations, and has acted as counsel or expert in others. He is the author of International Arbitration:Three Salient Problems (1987), Justice in International Law (1994), and 170 articles on international lawand international arbitration. Judge Schwebel has served as President of the International Monetary FundAdministrative Tribunal (IMFAT) since 1994. He is a member of the World Bank Administrative Tribunal(WBAT) and of the Permanent Court of Arbitration (PCA). In 2000, he was appointed a member ofICSIDs Panels of Arbitrators and Conciliators by the President of the World Bank. He is a member of theBoard of Directors of the American Arbitration Association (AAA).

1 376 U.S. 398, at p. 428 (1964).

This article is adapted from a speech made at the 25th Annual

AAA/ICC/ICSID Joint Colloquium on International Arbitration,

held in New York on November 14, 2008. Copyright ICSID

Review--Foreign Investment Law Journal (and appears there at

Volume 23, No. 1, Spring 2008). The article has been reproduced

on TDM with the kind permission of that journal.


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2 ICSID REVIEWFOREIGN INVESTMENT LAW JOURNAL

On one side of that divide, capital exporters expounded a minimum standardin customary international law for the treatment of aliens and their property.They could not be denied justice; they were entitled not merely to national

treatment but to a minimum standard of treatment that included observance ofcontracts and, in the event of a taking of their investments, prompt, adequateand effective compensation.

On the other side of the divide, capital importers adhered to the Calvo doctrineof national treatment. The alien and his property were subject to national lawand national courts and were entitled to no more than was afforded to nationalsof the host State, however little that might be. Customary international lawgoverning the treatment of aliens and their property did not exist.

All this was well rehearsed by the Russian Revolution, where foreign property

was expropriated with the same compensation afforded to Russian nationals,that is, none; the Mexican nationalization of oil; and, after the Second WorldWar, by the takings in a number of notable instances.

The divide early manifested itself in the United Nations under the bannerof permanent sovereignty over natural resources. In 1962, after a decade ofpreparation, a resolution of that title came up for negotiation and adoption. Theresult was a constructive accommodation of positions. Resolution 1803 (XVII)repeatedly affirmed the permanent sovereignty of a State over its natural resources.

But these recitals were balanced by the recognition that capital imported []shall be governed by the terms thereof, by the national legislation in force, andby international law. Expropriation required appropriate compensation inaccordance with national and international law. Moreover, Resolution 1803(XVII) provided that [f]oreign investments entered into by, or between,sovereign States shall be observed in good faiththus requiring the observanceof agreements with foreign investors. In all, this was a proportionate resolutionwhich recognized that foreign investment was governed by international as wellas national law.2

But soon after, confrontation displaced accommodation. SubsequentGeneral Assembly resolutions on permanent sovereignty over naturalresources excluded the governance, even the relevance, of international law.With the oil crisis of 1973, and the pain engendered by the surge in the priceof oil, especially in developing countries, the Group of 77 was persuaded byOPEC to maintain that international economic problems were all the fault ofthe West. What was needed was a New International Economic Order. North/

Stephen M. Schwebel,2 The Story of the United Nations Declaration on Permanent Sovereignty overNatural Resources, American Bar Association Journal (May 1963), p. 463, republished in the authorsbook,Justice in International Law(1994), p. 401.


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A BIT ABOUT ICSID 3

South dispute came to a head in 1974 with the General Assemblys adoptionof the Charter of Economic Rights and Duties of States.3That Charter excludedinternational law in the treatment and taking of foreign property and asserted

the sole governance of the domestic law of the host State as interpreted andapplied by its courts. Key industrialized democracies voted against the Charter.At that juncture, the outlook for universal agreement in this sphere either onlegal process or principle seemed remote.

Two initiatives changed that outlook to a presence far more beneficent.The firstthe International Centre for Settlement of Investment Disputes(ICSID)was one of process. The secondbilateral investment treaties(BITs)was built on the first and successfully surmounted the divide not onlyover process but principle as well.

The legal counsel of the World Bank, Aron Broches, saw in the 1960s atthe time of the initial UN debates on permanent sovereignty the difficulties ofreaching meaningful and sustainable universal agreement on the principles atstake. His ingenious contribution was to sidestep what seemed to be a sterilesubstantive confrontation with procedural creativity. The Bank would nottake sides between the developed and the developing worlds. Rather it wouldcreate a forum for the impartial arbitral settlement of inevitable internationalinvestment disputes. Broches and his colleagues prepared the ground carefully

in a series of regional conferences in which States and their legal advisers werefully consulted. He brought the persuasiveness of his vivacious personality tobear both with the legal advisers of governments and the Executive Directors ofthe Bank to put his insight across. The result was the conclusion in 1965 of theWashington Convention on the Settlement of Investment Disputes betweenStates and Nationals of Other States.

That Convention has beenand remainsa remarkable achievement. Intheir recent, valuable book, Principles of International Investment Law, ProfessorsDolzer and Schreuer offer this appraisal:

At first sight, the Broches concept (procedure before substance)seemed to be a limited and modest one. However, he built the design ofwhat was to become [] (the ICSID Convention) []. In retrospect,it has become clear that the creation of ICSID amounted to the boldestinnovative step in the modern history of international cooperationconcerning the role and protection of foreign investment. This is sobecause of the combination of five pertinent features of ICSID: (a)

G.A. Res. 3281 (XXIX),, U.N. GAOR, 29th Sess., Supp. No. 31, at 50, U.N. Doc. A/32813

(1954).


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foreign companies and individuals can directly bring suit against theirhost State; (b) state immunity is severely restricted; (c) internationallaw can be applied to the relationship between the host state and the

investor; (d) the local remedies rule is excluded in principle and (e)ICSID awards are directly enforceable within the territories of all statesparties to ICSID.4

The ICSID Convention entered into force in 1966. Today there are 143States Parties to it. As of October 2008, ICSID had registered 275 cases.

In 1959, Germany concluded first bilateral investment treaty, with Pakistan.From that also modest beginning, some 2600 bilateral investment treaties havesprung, some 1700 of which are in force, as have important multilateral treaties:

the Energy Charter Treaty, the North American Free Trade Agreement, and theCentral American Free Trade Agreement. These three multilateral treaties intheir provisions for arbitral recourse are equal to 1,059 bilateral treaties in force,bringing the total of BIT-like instruments in force to about 2700.

These treaties bridge the substantive divide between the positions ofcapital-exporting and capital-importing States in concordant terms designed topromote and protect foreign investment. Those terms are much more preciseand far-reaching than the content of comparable customary international law

earlier invoked by capital-exporting Statesa customary international law onwhich the United States in its 2004 Model BIT nevertheless curiously relies. Bythe terms of BITs, foreign investment is assured of fair and equitable treatment,full security and protection, and no less than national and most-favored-nationtreatment. The foreign investor is assured of management authority and control.The terms of commitments entered into in respect of the foreign investmentare to be observed. If there is a taking by the State of the foreign investment, bymeans direct or indirect, the State is treaty-bound to pay prompt, adequate andeffective compensation. Moreover, the great majority of these treaties enable the

foreign investor to require the host State to arbitrate treaty disputes, throughICSID or otherwise.

That arbitration entitlement is one of the most progressive developmentsin the procedure of international law of the last fifty years. It is consistent withthe development of international human rights (including the right to ownproperty) and with dethroning the State from its status as the sole subject ofinternational law.

BITs now run not only between North and South but between East and West.There are more than 600 South/South BITs, that is, bilateral investment treaties

Rudolph Dolzer and Christoph Schreuer,4 Principles of International Investment Law(2008), at p. 20.


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A BIT ABOUT ICSID 5

between two developing States. Russia and other successor States of the SovietUnion, and China, are parties to scores of BITs, as is Cuba. While early ChineseBITs were much more limited than standard BITs, Chinese BITs of recent years

approach the norm, perhaps anticipating that China is likely to be not only amajor capital importer but exporter. There are few areas of international law andlife that have been the subject of some 2700 concordant treaties; most-favored-nation provisions come to mind but it is not easy to call up another. In viewof that immense number of treaties, the virtual universality of their adherence,and the predominant consistency of their terms, there is room for the view thatthey have reshaped the body of customary international law in respect of thetreatment and taking of foreign investment. That is to say, it may be maintainedthat certain standard, core provisions of the very great majority of BITs, such as

those providing for fair and equitable treatment and for prompt, adequate andeffective compensation, by the fact of being prescribed in some 2600 bilateralinvestment treaties and three important multilateral treaties, have seeped intothe corpus of customary international law, with the result that they are bindingon all States including those not parties to BITs. That arguable thesis has ameasure of support in more than one arbitral award.5

Yet, the ascendance of ICSID and of the BITs that have done so much to fuelits jurisdictional reach has come under attack in recent years. Critics contend

that the international arbitral process that they promote is asymmetrical:investors can require States to arbitrate claims against the State but the Statecannot require investors to arbitrate claims against them. They maintain thatinternational arbitral tribunals treat the government and the investor on thesame plane and hence fail to take account of the consideration that the Stateacts for the public good and must enjoy and exercise a right to regulate for thepublic good. They claim that the international arbitral process is biased becausethose who served as arbitrators have acted or do act as counsel in investmentcases, and because they are influenced by the prospect of further arbitral

appointments. Arbitral awards may conflict and there is no tenured court ofappeal to sort out conflicts.

These charges are as colorful as they are misconceived.Placed in context, the BIT arbitral process is not asymmetrical. In point of

fact, some BITs provide that either of the disputing parties may bring a claimto arbitration. In any event, the host State is able to bring a counterclaim against

5Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, para. 117(2002), and CME Czech Republic B.V. v. Czech Republic, Final Award of March 14, 2003, paras. 49798.Cf., Stephen M. Schwebel, The Influence of Bilateral Investment Treaties on Customary InternationalLaw, Proceedings of the 98th Annual Meeting of the American Society of International Law (2004).


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the investor and, in at least eight cases, has done so. But much more than that,the government of a State has many means, legal and not, for bringing pressureto bear upon the foreign investor. The government has not only the police

power; it has the police. It can bring the weight of its bureaucracy to bear. It canprescribe, delay, enjoin, renegotiate, renege, decree, tax, incite, strangle. For theforeign investor to be able to require international arbitration of disputes goesonly some way to right a balance that oftennot always but ofteninclines infavor of the host government. One does not hear that the United States Courtof Claims is asymmetrical because it is the judicial forum for claims against theGovernment of the United States. What the United States does not do is winall the cases in the Court of Claims, not least because of the realization that if itdid, there would be no Court of Claims.

Naturally international arbitral tribunals place the litigants on the sameplane. Equality of arms is the essence of the judicial and arbitral process. Andto assume that every government of every State acts in ways that promote thepublic good, and that the foreign investor does not, is to assume a state of affairsthat does not necessarily comport with reality.

To assume that a tenured court, national or international, is objective, whileinternational arbitral tribunals are not, likewise does not comport with thefacts. There are tenured courts in too much of the world that are incompetent,

subject to political influence, corrupt or just nationalistic in their perceptionof the facts and the law. While Federal Courts in the United States are of highquality, one can think of courts of certain states of the United States that are oflesser quality; and I choose this reference as illustrative rather than exhaustive ofconditions in many countries. The preference of foreign investors not to subjecttheir disputes to local courts is a preference shared by thousands of internationalcommercial contractors the world over, a preference that is rationally anddecently motivated.

Investor-State arbitration is no less defensible. An international investment

arbitrator of ability and integrity will decide the case before him or her onthe basis of the facts and governing law. The record of ICSID arbitral awardsso demonstrates as do those of the ICC, the AAA, the Stockholm Chamberof Commerce, the London Court of International Arbitration and otherinstitutions as well as ad hoc international arbitral tribunals acting under theUNCITRAL and other rules.

That the vast majority of international arbitral awards, including internationalinvestment awards, are unanimous, suggests the integrity of the process. Of the103 ICSID awards rendered to date, sixteen percent were not unanimous, afact that is not easily reconciled with claims that arbitrators may be predisposedto favor the party that appoints them. In nineteen of those 103 cases, the


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A BIT ABOUT ICSID 7

tribunal found a lack of jurisdiction and dismissed the case without passingupon the merits, another fact not easily reconciled with claims that arbitratorsare motivated by the prospect of arbitral fees and further appointments. In

these 103 rendered awards, the claimant company prevailed in 43 cases, andonly in four of those were the companys claims fully upheldagain, facts noteasily reconciled with claims that arbitratorsor BITsare biased in favor ofthe investor. It appears that investors, where they prevailed to some extent,recovered about 12% of their claims, still again a fact not easily reconciled withclaims of arbitrator predisposition in favor of the investor.

I may say on the basis of my own experience of fifty-five years in theinternational investment arena, including experience as a judge and arbitrator,that achieving the requisite measure of objectivity depends above all on the

character of the individual, and not on whether he or she is tenured, not onwhether he or she has acted as counsel, and not on whether there may bepossibility of further arbitral appointments.

Conflicts of interest may arise in the arbitral sphere as in other spheres. Butattacks on international investment arbitrators on grounds of inherent conflictmay in some cases be little more than proxies for attack on a process that isuncongenial to the revivalist proponents of a New International EconomicOrder.

If the governments of the world preferred an international investment courtto arbitration, or a court of international arbitral appeals, they could constitutethem; they have not. When some fifty States concluded the Energy CharterTreaty after an extended, highly professional negotiation, they could haveopted for a court but they opted for arbitration between investors and hostStates. They drew up a treaty that provides for the promotion and protectionof foreign investment in the vital realm of energy in terms that duplicate BITprovisions. Does that suggest that those States were unaware of their interests,that they overlooked their regulatory powers, that they were set on depreciating

the currency of their courts?Can it really be supposed that the States of North and South, East and West,

developed and developing, of virtually all political complexions and economicmodels, have been misguided in concluding some 2700 bilateral investmenttreaties, and that it has taken a think tank here and a professor there to reveal tothe world the error of their ways?

By the end of 2006, there were 679 South/South bilateral investmenttreaties running between two developing States. Many appear to have beenconcluded with the benefit of careful preparation of model BITs by the AsianAfrican Legal Consultative Committee. That Committee (now Organization)strongly supports dispute settlement by ICSID and otherwise. Are we to believe


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that these pairs of developing States, contracting with each other, in the light ofthe advice of their own Asian-African Legal Consultative Committee, acted notin their own interests but in the interests of the multinationals?

The most recent effusion of a think tank in this sphere of which I am awareis a petition of October 3, 2008 submitted to the President of the World Bankby the Institute of Policy Studies in Washington on its own behalf as well asthat of a large number of other organizations. It condemns what it claims isextreme disregard for Bolivian sovereignty by ICSIDs former Secretary-General in registering a case brought by Euro Telecom against Bolivia, becauseBolivia had withdrawn from the ICSID Convention nearly six months earlier.Determining jurisdiction in this case is not an appropriate question for aninvestment tribunal []. The World Bank, it maintains, should not have the

power to decide on its own jurisdiction. ICSID, it claims, is a system whichundermines national sovereignty in favor of the interests of private corporationsand international investors. The petition calls for appointment of a reviewcommission on ICSID, citing legitimate criticisms of certain States, andit expresses concern that ICSID and the investment treaties that it enforcesmay undermine other international treaties that promote social, economic andhuman rights [].6

The claim that an international arbitral tribunal constituted under World

Bank auspices should not have the power to decide on its own jurisdiction is, toput it gently, uninformed. As the International Court of Justice held:

Since theAlabamacase, it has been generally recognized, following earlierprecedents, that [] an international tribunal has the right to decide asto its own jurisdiction. This principle was expressly recognized in []the Hague Conventions []. The Rapporteur of the Convention of1899 had emphasized the necessity of this principle, presented by himas being of the very essence of the arbitral function and one of the

inherent requirements for the exercise of this function [...].7

The claim of disregard of Bolivias sovereignty is no better informed. Boliviain exercise of its sovereignty adhered to the ICSID Convention. Article 71of that Convention provides that any Contracting State may denounce theConvention, a denunciation which shall take effect six months after receiptof such notice. As the Institutes petition recognizes, Bolivia had withdrawn

Letter of October 3, 2008 to Robert B. Zoellick, President, World Bank, from Sarah Anderson,6

Institute for Policy Studies.7 Nottebohm (Liechtenstein v. Guatemala) (Preliminary Objection),Judgment of November 18,

1953, I.C.J. Reports 1953, pp. 111, 119.


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A BIT ABOUT ICSID 9

from the ICSID Convention nearly six months earlier; thus its denunciationhad not taken effect when the request for arbitration was filed. The request forarbitration accordingly concerned a dispute that was not manifestly outside

the jurisdiction of the Centre and ICSIDs Secretary-General was bound toregister the request, pursuant to the mandatory terms of Article 36 of the ICSIDConvention to which Bolivia had equally adhered.

No evidence is given by the Institute in support of its claim that ICSIDis a system that undermines national sovereignty and social progress. But ifStates choose to exercise their sovereignty through adherence to and applicationof the ICSID Convention in order to promote the flow and maintenance ofinternational investment in a world that cries out for investment, one maywonder about the soundness of that claim.

The extravagance of the charge of impropriety in ICSIDs registering anarbitral claim against Bolivia is the more striking in view of the fact that anarbitral tribunal has been constituted with the cooperation of Bolivia, whichhas appointed an arbitrator.

My conclusion is that we should treat criticism of the inequities andiniquities of the international arbitral process, and of the pernicious standardsand procedures of bilateral investment treaties, for the hyperbole that it is.

The processes and principles of investment arbitration, like those of

other human institutions, leave room for improvement. But on the wholethey are beneficent, progressive processes that merit not condemnation butapprobation.

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A Bit about ICSID