ICSID ARBITRATION CLAUSES IN CONTRACTS: TIME FOR A REVIVAL? Hendrik Puschmann 1

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1 ICSID ARBITRATION CLAUSES IN CONTRACTS: TIME FOR A REVIVAL? Hendrik Puschmann 1 Revised script of a presentation to a joint conference of the Institute of Advanced Legal Studies and the University of Exeter on The Future of the Commercial Contract in Scholarship and Law Reform European and Comparative Perspectives, London, 22 September Thank you very much, Joseph Lee, I am delighted to be here. Thanks again to Maren Heidemann of IALS for the kind invitation. I shall be talking about the Convention of the International Centre for the Settlement of Investment Disputes, or ICSID. Unlike Jack Kenny s wide-ranging and fascinating discussion of the fault line between ICSID s contract-based and treaty-based jurisdiction, my presentation is on a fairly narrow subject. I intend to cover five points:- 1. It is obviously possible for investors from ICSID Contracting States to agree contractually to arbitration with another Contracting State. I am talking here not about the contractual submission to ICSID arbitration of a treaty claim (though that is, of course, also possible) but the submission to ICSID arbitration of a contractual claim by way of a straightforward arbitration agreement (as opposed to an umbrella clause in an investment treaty). Though this can be done by way of a separate arbitration agreement, it will ordinarily take the form of an arbitration clause in the contract itself. 2. This instrument could have advantages for investors compared to litigation and non-icsid arbitration, as it offers narrow, self-contained mechanisms for the review and international enforceability of awards. 3. However, it appears that it is not being used much. Circumstantial evidence suggests that investors rarely put ICSID clauses in contracts with sovereigns, and those contracts tend to be investment framework agreements as opposed to ordinary commercial contracts. 4. I have not found a convincing explanation of why this is so. 5. Therefore, it would be a good idea to carry out empirical research into the degree of utilisation of ICSID arbitration clauses in contracts, and the reasons why they are (apparently) not being 1 By way of brief introduction, I am an English, German, Irish and Northern Irish qualified lawyer working as Senior Associate at K&L Gates, a global law firm, in London and Frankfurt. I am also a Fellow Commoner of Clare Hall, Cambridge and a visiting lecturer in international law and commerce at Johannes Kepler University in Linz, Austria. Many thanks to Dr Rumiana Yotova of Cambridge University and to Ian Meredith, Dr Wojciech Sadowski and Hannah Davies of K&L Gates for their helpful feedback on drafts of this paper. Any errors or omissions are, of course, my own. I am obliged to say at this point that this presentation is for informational purposes and does not contain legal advice. It should not be relied on without first consulting a lawyer. 1

2 used. The results of this research would not only be interesting from a scholarly point of view. They would also be useful for investors negotiating contracts with state counterparties. Let me flesh out each of these points:- 1. Contractual Jurisdiction The basis for ICSID s jurisdiction over contractual claims can be found in art. 25(1) of the Convention: The jurisdiction of the Centre shall extend to any legal dispute arising directly 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. It is clear, and has never been disputed, that this submission can be made by way of an arbitration agreement in (or pertaining to) a contract, so long as three requirements are met:- (i) The agreement is between an investor who is a national of one Contracting State and another Contracting State or a designated constituent subdivision or agency The definition of national in public international law has been discussed extensively elsewhere, so I need not go into detail, save to say that it is a broad concept. It includes, for instance, nationals of (or companies based in) a Contracting State that make investments in the host state via entities in third states. 2 In terms of the host Contracting State, the concept of a subdivision or agency is rather broad and will largely depend on the internal constitutional order of the state concerned. 3 The nature of the legal entity - ministry, non-ministerial public body, province or municipality etc. - is irrelevant, so long as the state has notified the Centre that this entity is a designated subdivision or agency for the purposes of the Convention. As Christoph Schreuer puts it in his authoritative commentary of the Convention, [d]esignation would almost certainly preclude the Contracting State or the designated entity from arguing that the Convention requirements were not fulfilled because the entity was not a constituent subdivision or agency. 4 The limits of this hypothesis have not really been tested. In particular, it is an open question to what degree it applies to private-law companies owned or controlled by the Contracting State in question. It seems likely it applies to private-law companies performing public functions on behalf of the Contracting State. 5 By contrast, it is far less clear whether a private-law company that does not 2 See, e.g., Siemens AG v Argentine Republic (Jurisdiction) ICSID Case No. ARB/02/8, in particular at 137, 142 and 150. Cf also art. 25(2) of the Convention, which defines the meaning of national. 3 See C. F. Amerasinghe, Jurisdiction Rationae Personae under the Convention on the Settlement of Investment Disputes, British Year Book of International Law 1975, vol. 47 issue 1, pp ; see esp. pp. 233 et seq. 4 Christoph Schreuer et al, The ICSID Convention: A Commentary, Cambridge: CUP, 2009 (2nd ed.) at See ibid at

3 perform any public function, but merely happens to be owned or controlled by a Contracting State, can validly consent to ICSID arbitration merely because that state designates it as an agency. I suspect not, especially given that the intention of the drafters of the Convention seems to have been to exclude private companies from its scope. 6 (ii) The agreement pertains to an investment for the purposes of the Convention. As with national, the term investment is a broad concept that has been the subject of much case law and countless scholarly works, and so it is not necessary to include a detailed discussion here. Briefly, tribunals decide whether an investment exists on a case-of-case basis. They usually take into account a list of factors known as the modified Salini test. 7 These include the contribution of capital, the assumption of a specific, investment-type risk and the duration of the investment. As a rule of thumb, the larger the scale and the longer the term of the investment, the more likely it is to be an investment for ICSID Convention purposes. There is also the requirement that the investment must have a nexus to the Host State, though that nexus can be quite weak and need not entail actual performance of any obligations within the Host State. 8 Moreover, while purely passive, indirect investments do not count, so to speak, the threshold for a passive investment becoming active is low. It is likely that any expenditure on an asset acquired passively will turn that asset into an active investment. 9 Schreuer points out that [i]nvestment in the sense of Art. 25 [ ] can cover almost any area of economic activity, 10 and hence more or less any kind of commercial contract: loans, bonds, share purchase agreements, agreements for the sale of goods, etc. Even financial derivatives such as an oil price hedge have been held to be investments for ICSID Convention purposes. 11 In any event, according to Schreuer, a clause in an agreement by which the parties consent to submit disputes to the Centre is a strong indication that they consider their transaction an investment. 12 Therefore, investors should, in theory at least, be able to submit commercial contracts with state entities to ICSID arbitration regardless of their subject matter. 6 See Summary Record of Proceedings, Bangkok Consultative Meetings of Legal Experts, April 27-May 1, 1964 in ICSID Secretariat (ed.), History of the ICSID Convention, Vol. II, Washington, DC, 1968, pp ; see in particular p First set out in Salini Costruttori SpA and Italstrade SpA v. Morocco, Case No ARB/00/4, Decision on Jurisdiction of 23 July 2001, and subsequently modified and supplemented by other tribunals. 8 See e.g. Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2. 9 See the recent English High Court decision in Gold Reserve Inc. v Bolivarian Republic of Venezuela [2016] EWHC 153 (Comm), though this will obviously merely be persuasive outside of England and Wales. 10 Schreuer et al, op. cit. at As was the case in Deutsche Bank AG v. Sri Lanka. 12 Schreuer et al, op. cit. at

4 (iii) The agreement is in writing. This point is quite self-explanatory and need not be discussed here Potential advantages to investors of submitting contract claims to ICSID Two principal potential advantages are (i) a self-contained, limited annulment mechanism; and (ii) the more straightforward international enforceability of ICSID awards compared to court judgments and non-icsid arbitration awards. (i) Annulment It is almost universally true that judgments and arbitral awards are open to some level of review by the courts. Judgments can, of course, usually be appealed on the merits. This is true for arbitral awards in a minority of jurisdictions only. 14 But even in jurisdictions following the UNCITRAL Model Law, under which awards are generally unappealable, awards tend to be open to review on procedural grounds, often by several layers of the court hierarchy. 15 This is not the case under the ICSID Convention, which stipulates at art. 53(1) that awards: shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention. Each party shall abide by and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention. The only review mechanism available is an ad-hoc ICSID committee with a mandate pursuant to art. 52(1) of the Convention to consider annulling the award on five grounds: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based. There is no appeal against decisions of the ad-hoc committee. 13 As Schreuer notes, [t]he need to put consent into writing has not led to difficulties in practice (op. cit. at ). 14 The best-known example being England and Wales; see ss. 45 and 69 of the Arbitration Act 1996, though these provisions are not mandatory. 15 Cf, e.g., the German regime, which follows the Model Law: set-aside applications on procedural grounds are heard by the Higher Regional Courts (Oberlandesgerichte), from where an appeal lies to the Federal Supreme Court (Bundesgerichtshof), with possible additional references to the Federal Constitutional Court (Bundesverfassungsgericht). See s of the German Code of Civil Procedure (Zivilprozessordnung). 4

5 Moreover, the grounds for annulment are exceedingly narrow, considerably narrower than even under the Model Law, in particular because the Model Law allows awards to be set aside on grounds of public policy. Art. 34 of the Model Law allows annulment on the grounds that: a) the party making the application furnishes proof that: i. a party to the arbitration agreement [ ] was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it [ ]; or ii. the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or iii. the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration [ ]; or iv. the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or b) the court finds that: i. the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or ii. the award is in conflict with the public policy of this State. (ii) Enforceability Court judgments depend on bi- or multilateral treaties to render them enforceable abroad, at least in practice (it is theoretically possible to enforce a judgment in the absence of such treaties, but I know from experience that this is very much an uphill struggle). Non-ICSID foreign arbitral awards - and this includes awards under the ICSID Additional Facility - are enforceable in most countries of the world under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards with its more than 150 signatories, 16 and with some jurisdictions following a similar regime even though they are not signatories. 17 However, recognition and enforcement under the New York Convention is subject to exceptions set out in art. V, which mirrors art. 34 of the Model Law cited above. The most significant of these is art. V(2)(b) - non-enforcement on grounds of public policy. Some jurisdictions treat this as a means of blocking enforcement in a broad range of 16 See 17 E. g. Taiwan (Arbitration Law of the Republic of China 2002). 5

6 instances. 18 Examples of jurisdictions that construe or have construed public policy particularly broadly (though to varying degrees) include India, Indonesia, Kenya, Pakistan and Nigeria. 19 In contrast, there is no public policy exception, or any other exceptions for that matter, when it comes to enforcing ICSID awards. Under art. 54(1), signatories to the Convention agree to recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. 20 ***** Finally on this point, I would note in passing that if opting for ICSID arbitration makes sense, it is advantageous for investors to have an ICSID arbitration clause even where the Convention may, in any event, be applicable pursuant to an umbrella clause in an investment treaty. As is clear from Jack Kenny s presentation, jurisdiction arising out of umbrella clauses is far from a unanimously accepted doctrine, so there is always a risk of the Host State disputing jurisdiction. 21 Arbitration clauses / agreements are not subject to the same degree of risk. 3. The degree of utilisation of the ICSID Convention for arbitration clauses in contracts I have no hard data on the degree to which investors with sovereign counter-parties utilise the option of ICSID arbitration clauses. I doubt that data exists. There are, however, several reasons that lead me to suspect that investors are not making much use of this tool:- (i) Schreuer s commentary notes that arbitration agreements were the traditional way of expressing consent to ICSID arbitration, which only [m]ore recently [ ] has been largely displaced by consent expressed through treaties and legislation. 22 So it appears 18 This is partially facilitated by the fact that there is no uniform concept of public policy, and New York Convention signatories are left to define the term individually. Most keep it quite vague; tellingly, no signatory jurisdictions have defined public policy statutorily, except for the UAE and Australia. See the excellent 2015 report of the IBA Sub-Committee on Recognition and Enforcement of Arbitral Awards, Recognition and Enforcement of Arbitral Awards - Study on Public Policy, at pp The report, including a number of countryspecific chapters, is available here: cpolicy15.aspx 19 Ibid, country-specific chapters on those jurisdictions. To put this into context, though, many jurisdictions interpret public policy narrowly and in any event accord the recognition of foreign awards public policy status in itself. See, for instance, the recent judgment of the English High Court in Pencil Hill Ltd v US Città Di Palermo S.p.A. (unreported) QBD (Merc) (Manchester), 19 January The Court held that the public policy of recognising foreign awards should be given greater weight than the public policy of blocking the enforcement of penalties that are contrary to English law. 20 Note, however, that ICSID awards are not exempt from state immunity from execution. See art. 55 of the Convention. 21 Cf Schreuer et al, op. cit. at : The exact meaning and effect of umbrella clauses has been, and continues to be, the subject of much debate and disagreement in arbitral practice. See also Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration, Oxford: OUP, 2007 at for a lucid, albeit now somewhat dated, summary of the topic. 22 Schreuer et al, op. cit. at

7 that arbitration agreements between investors and host states are not used as frequently as they once were. (ii) (iii) Proceedings arising out of arbitration agreements between investors and states account for only a small proportion of ICSID s current total case load; only 8% of new cases registered in 2015 are contract based, for instance. 23 Moreover, these cases appear to arise from a fairly narrow category of contracts, namely so-called investment contracts. 24 These are framework agreements that set the scene, so to speak, for an individual investor s activities in the Host State, much like a BIT does on a larger scale. This indicates that investors do not (or at any rate not frequently) use ICSID clauses in more ordinary commercial contracts with states and state entities. Given the wide scope of the term investment, touched on above, which moreover has significantly expanded over the past few decades, ICSID would - if the parties so agreed - surely take jurisdiction over disputes arising out of things like the acquisition of state-owned assets or shares in companies being privatised, sovereign bonds or loan agreements with states etc. (iv) I have had a number of conversations with clients and others in the financial services industry who have exposure to sovereign risk. Their feedback has been that this is not an instrument that is ordinarily used in the market, though no-one I spoke to could explain to me why this is so. In some cases, people dealing with sovereign risk professionally did not even know that it was an option to put ICSID clauses into contracts. 4. Why do investors appear not to use the ICSID Convention for contractual disputes? I can only speculate about the reasons why ICSID clauses are not (or may not be) used as much as perhaps they should be from an investor perspective. It may be due to a lack of bargaining power, though instinctively I find this hard to believe. Maybe, as one colleague with whom I discussed the question speculated, the advantages of the ICSID Convention over other dispute resolution routes, particularly commercial arbitration, exist more in theory than in practice. So perhaps it is just not worth the investors while to push the sovereign counter party for an ICSID arbitration clause. This colleague cited two principal reasons in support of his hypothesis. First, he suspects that enforcement under the ICSID Convention may not be as straightforward as the legal framework suggests. Secondly, in his experience (which is significant; he is an acclaimed expert in the field) ICSID tribunals tend to show a degree of pro-host state bias. Both are valid concerns, but there is no conclusive evidence for either:- 23 See ICSID Secretariat, The ICSID Case Load - Statistics, issue , Washington DC, 2016, p Passim. 7

8 (i) (ii) In terms of Host States seeking to circumvent or delay enforcement, there are a number of examples. Thus, it is well known that Host States such as Argentina regularly and successfully use the ICSID annulment mechanism to delay the enforcement of awards against them, given that the ad-hoc committee is likely to order a stay of enforcement while annulment proceedings are pending. 25 Some states - notably Argentina again - have recently simply declined to comply with their enforcement obligations. 26 However, there is insufficient data to assess the magnitude of this risk to investors, let alone its effect on their choice of arbitration clauses in contracts with state entities. As one expert notes, it is difficult to have a clear picture of the effectiveness of the ICSID mechanism for enforcing awards. 27 The same is true of the real or perceived pro-host State bias of ICSID tribunals. There is by no means a consensus among scholars or practitioners that ICSID is biased in favour of Host State respondents. If anything, recent scholarly works appear to point towards the absence of such a bias, 28 some even claiming to have identified systemic proinvestor bias. 29 As the author of one particularly thorough empirical inquiry into arbitrator behaviour in investor-state arbitration concludes: the results of empirical research on possible bias will vary according to the questions asked, methods used, project design, and inferences drawn. Given the diversity of approaches, it is not surprising that there is mixed (often inconclusive) evidence regarding possible bias in investment arbitration. 30 Moreover, even assuming ICSID tribunals are more likely than not to be biased in favour of state actors, and this bias is consistent enough to drive investors choice of forum for their contractual disputes with sovereign counter parties, would it not be likely that non-icsid tribunals would tend to display the same bias when adjudicating disputes between investors and states? To conclude, I have not found a convincing, empirically tested explanation of why investors appear not to use ICSID clauses in contracts with sovereign counter parties. Personally, I think that it is at least possible that investors are either not aware of this option, or have insufficient information regarding it. By this I mean that many investors may not know that they can put ICSID arbitration 25 See e.g. Ignacio Minorini Lima, Argentina, in Julien Fouret (ed.), Enforcement of Investment Treaty Arbitration Awards, London: Globe Law and Business, 2015, pp See Anna Joubin-Bret, The Effectiveness of the ICSID Mechanism Regarding the Enforcement of Arbitral Awards, in Julien Fouret (ed.), op. cit., pp ; see especially pp Ibid, p E.g. Susan Frank, Conflating Politics and Development? Examining Investment Treaty Arbitration Outcomes, Virgina Journal of International Law (2014) vol. 55 no. 1, pp Robin Broad, Corporate Bias in the World Bank Group s International Centre for Settlement of Investment Disputes: A Case Study of a Global Mining Corporation Suing El Salvador, University of Pennsylvania Journal of International Law (2015) vol. 36 no. 4, pp Gus van Harten, Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration, Osgoode Hall Law Journal (2012) vol. 50 no. 1,, pp , at p

9 clauses into ordinary commercial contracts with states or state entities (as opposed to investment framework agreements). Perhaps this is because ICSID as a contractual dispute resolution mechanism has simply gone out of fashion in the post-cold War world, where ICSID is almost exclusively associated with treaty-based disputes. In any event, it would be worth finding out. 5. Further research So what, in the words of Lenin, is to be done? Very briefly - I am conscious that I am running out of time - I see a need for empirical research into the degree to which ICSID clauses are used in commercial contracts with sovereigns and the reasons they are or are not used. What I have in mind is a survey among the sovereign risk departments of international banks asking, in essence, (i) whether they are aware of this option; (ii) whether and to what extent they use it; and (iii) if the answer to (i) is yes but the answer to (ii) is no, then why not. The focus on banks is of no real significance. I merely suggest it because (i) the nature of my practice - I do a lot of finance law - means I roughly know who to talk to and (ii) sovereign lending and sovereign bonds are, in my view, good examples of contracts where ICSID clauses may make sense for investors. If this kind of research does not show any good reasons why investors do not use ICSID clauses more, then it would be appropriate for the resulting publication to set out recommendations to investors on the types of contracts in which it may be to their advantage to use them, and guidance on how to draft the clauses (including a model clause). To my knowledge, the last guide to drafting ICSID clauses was published a quarter-century ago. 31 So, although it is an excellent piece, it could do with a bit of updating. I should be grateful for feedback and any questions. Thank you very much. 31 Georges Delaume, How to Draft an ICSID Arbitration Clause, ICSID Review - Foreign Investment Law Journal (1992) vol. 7 no. 1, pp