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Is ICSID the best place to arbitrate energy issues?


World practice shows that international investment expands rapidly with the energy industry emerging as a key-player. Indeed, many private investors, based on their state’s Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs), seem to rely on arbitration to protect their rights over state acts of sovereignty. Since it is ‘commonplace that arbitration is consensual’,[1] parties can choose the institutions that will administer their cases: commonly the International Centre for Settlement of Investment Disputes (ICSID) Convention[2] and the United Nations Commission on International Trade Law (UNCITRAL) Rules[3] which, although targeted at commercial arbitration, could be utilized in investment disputes.


Albeit appraised, ICSID does not come without criticism. Commentators questioned its ability to deliver high-quality services over the years and the need for reform has been expressed by ICSID’s Secretariat. Indeed, several rules were revised. Rule 39 on provisional measures[4] for example, now allows the investors to maximise their chances to successfully protect their rights;[5] as parties can ask for provisional measures to be examined at the beginning of the process and satisfy any ‘urgent need for relief’.[6]


Although the ICSID tribunals can only recommend provisional measures -i.e. in the Perenco Ecuador Ltd case-,[7] it is repeatedly found that they are considered binding by the parties.[8] ICSID was also criticized for lack of transparency and public participation after 2001 when, in two UNCITRAL cases,[9] the written submissions of third parties were accepted and considered by the tribunals; ICSID was motivated to revise Rule 32 (allowing open hearings in oral proceedings) and Rule 37 (accepting amicus participation).[10]


ICSID further revised Article 48 regarding the awards rendered, which now can be published ‘with the consent of the parties’.[11] Lastly, ICSID was criticized for non-competence to control arbitrators uniformly, since panels are created on an ad hoc basis.[12] Revised Rule 6 attempted to ensure arbitrator impartiality and independence by expanding the disclosure requirements to reach the UNCITRAL standards,[13] to safeguard against cases of conflict of interest.[14] Complementing that, revised Rule 14 clarified ICSID’s control over applicable rates of payments. It seems that ICSID made progress towards producing ‘a more robust system’[15] drawing ‘inspiration from litigation-based models of dispute resolution’.[16]


However, problems such as annulment still remain.[17] Under article 52, the Convention has restricted the options for review of the arbitral award for several reasons (mainly time, costs and trust in ICSID panels of arbitrators),[18] but an appeal mechanism is thought to be able to solve the inconsistency in the awards;[19] Occidental Petroleum Corp v. Republic of Ecuador, and Murphy Exploration & Production company – International v. Republic of Ecuador are examples of cases treated differently for the same legal issue.[20] If created, the appeals mechanism should be one[21] comprehensive and organized permanent body[22] to avoid further fragmentation of the awards.[23]



Another problem has been the lack of means to enforce the arbitral awards – apart from the World Bank’s threat for withdrawing financial aid.[24] Under article 54, only pecuniary awards are required to be treated as final and binding. Also, enforcement is not required, when under national law, final judgments could not be executed; in case AIG v Kazakhstan,[25] the English Court refused execution on grounds of sovereignty. Like all other institutes, ICSID lacks remedies against a non-complying state.[26] In fact, several Latin American states[27] like Argentina repeatedly refuse to comply -see case CMS Gas Transmission Company v. Argentine Republic-[28] creating a temptation for other states to follow the example.[29] Encouragingly, however, Ecuador has recently agreed to comply in case ConocoPhillips v Ecuador.[30]


Sceptics also question ICSID’S governing structure; the World Bank serving as its part-time Secretary-General and their shared budget seem to raise questions. Lastly, ICSID’s definition of an ‘investor’ under article 25(1) seems harsh, as embedded in the Salini case;[31] the tribunal used a controversial test involving money, duration, risk and contribution to the host state’s economy to define the term, yet not fully capturing it.[32] Weirdly enough, it is thought that if uniformly used, the test could provide a ‘consistency standpoint’ for the ICSID arbitration.[33]


On the other hand, UNCITRAL Rules and Model Law,[34] although ‘not specifically tailored to resolve investor-state disputes’,[35] frequently administer such cases. Considering, though, that investor-state disputes require special treatment, many BITs allow an amendment of the Rules and commonly the parties look for guidance from outside the Rules’ text.[36] Also, unlike ICSID, the UNCITRAL Rules are not identified with any national or international institution as they were intended to be globally accepted, yet examples of success prove their potential effectiveness: Total’s former subsidiary after an eight-year UNCITRAL dispute with Russia, defeated a multi-billion arbitration claim in 2017.[37] Nevertheless, its reforms show its possibility to better reflect the investment dispute’s changing needs.


UNCITRAL Rules’ weak points and areas where reforms are necessary include its Model Law being subject to a reformed ‘interpretation and implementation’.[38] More specifically, under Article 1(1), UNCITRAL requires a dispute arising only from a contractual agreement. Commentators say this is undesirably limited and, thus, should be eliminated,[39] as in case Larsen v The Hawaiian Kingdom.[40] Also, article 1(2) clarifies that UNCITRAL Rules are subject to control of national laws, which is thought to have to change into using international law in general.[41]


As a conclusion, it seems that the energy sector has emerged as a significant player under the international investment arbitration regime. ICSID rules’ qualities seem to surpass the non-ICSID ones, as proven by its success over the years with a continuously rising caseload[42] and by its practically solvable problems. This is why it is highly selectable for investment dispute resolution, especially for energy arbitration due to the importance and complexity of the issues at stake.


Therefore, provided that it is reformed as expected, yet to a point not undermining ‘the object and purpose of the treaty…in practice’, leaving it partly meaningless’,[43] ICSID could continue to be the leading institution for energy dispute resolution in investment arbitration; This does not imply the exclusion of other institutions and of the use of other rules like the UNCITRAL Rules. In any case, it is for the world practice to reveal whether reforms of both sets of rules will be implemented successfully and how balance between them will be formed.





Endnotes

[1] Jan Paulsson, ‘Arbitration Without Privity [1995] ICSID Review - Foreign Investment Law Journal, 10 (2), 232 [2] Hereinafter the ICSID Convention [3] Hereinafter the UNCITRAL Rules [4] Howard Mann, Aaron Cosbey, Luke Peterson, Konrad von Moltke, ‘Comments on ICSID Discussion Paper; ‘Possible Improvements of the Framework for ICSID Arbitration’’ (2004) IISD, 7 [5] Steven P. Finizio et al., ‘Recent Developments in Investor-State Arbitration: Effective Use of Provisional Measures’ (2007) (Global Arbitration Review) [6] Andrew P. Tuck, ‘Investor-State Arbitration Revised: A Critical Analysis of the Revisions and Proposed Reforms to the ICSID and UNCITRAL Arbitration Rules’ (2007) 13 LBRA, 885,896 [7] Perenco Ecuador Ltd. v. Republic of Ecuador and Petroecuador [ARB/08/6] [8] Schreuer C., Malintoppi L., Reinisch A., Sinclair A., The ICSID Convention: A Commentary (Cambridge University Press 2009) [9] ICSID Secretariat, Possible Improvements of the Framework for ICSID Arbitration, 2004 Discussion Paper, 9 [10] F. Campolieti, ‘The Amicus Curiae in ICSID Arbitration Proceedings’ (2005), TDM 5 [11] En(9) [12] Alex Grabowski. ‘The Definition of Investment under the ICSID Convention: A Defense of Salini’ (2014) CJIL 15, 292 [13] Schreuer C., Malintoppi L., Reinisch A., Sinclair A., The ICSID Convention: A Commentary (Cambridge University Press 2009), 29 [14] Articles 14(1) and 40(2) of the ICSID Convention; the qualities of an arbitrator [15] En(6), 901 [16] ibid [17] Christian J Tams, Is there a Need for an ICSID Appellate Structure?, in the Hofmann, Tams, THE INTERNATIONAL CONVENTION FOR THE SETTLEMENT OF INVESTMENT DISPUTES: TAKING STOCK AFTER 40 YEARS, Nomos, Baden-Baden, 2007, 224 [18] ibid, 229 [19] En(11), 21 [20]Occidental Petroleum Corporation v Ecuador [ARB/06/11] and Murphy Exploration V Ecuador [ARB/08/4] [21] Cf. Bishop, ‘The Case for an Appellate Panel and Its Scope of Review’, Transnational Dispute Management 2/2005, 8 [22] En(11), annex 5 [23] Castro de Figueiredo, ‘Fragmentation and Harmonization in the ICSID Decision-Making Process In Reshaping the Investor-State Dispute Settlement System'' (Brill | Nijhoff ,2015), 506 [24]En(6) ,910 [25] AIG and CJSC v Kazakhstan [ARB/01/6] [26]En(6), 906 [27] K.F. OMEZ, ‘Latin America and ICSID: David versus Goliath?’ LBRA 17(2), 195 [28] CMS Gas Transmission Company v Argentina [ARB/01/8] [29] Schreuer C., Malintoppi L., Reinisch A., Sinclair A., The ICSID Convention: A Commentary (Cambridge University Press 2009) 5 [30] ConocoPhillips Company v Venezuela {ARB/7/30] 1 [31] Salini Construttori S.P.A v Morocco [ARB/00/4] [32] En(12), 297 [33] ibid, 309 [34] En(3) [35] Article 1(1) of the UNCITRAL Rules refers only to ‘disputes in relation to [a] contract.’ [36] Andrew P. Tuck, ‘Investor-State Arbitration Revised: A Critical Analysis of the Revisions and Proposed Reforms to the ICSID and UNCITRAL Arbitration Rules’ (2007) 13 LBRA, 913 [37] Case Ö 1429-15 Elf Neftegaz v Russian Federation [2016] Swedish Supreme Court paras 24-26 [38] Neil Hannan, Cross-Border Insolvency, The Enactment and Interpretation of the UNCITRAL Model Law (Springer,2017) 253 [39] Jan Paulsson & Georgios Petrochilos, REVISION OF THE UNCITRAL ARBITRATION RULES, 15 [40] Lance Paul Larsen v The Hawaiian Kingdom [PCA 1999-01] and Chevron Corporation and Texaco Petroleum Company [PCA CASE NO. 2009-23] [41] En(56) [42] Antonio R. Parra, The History of ICSID (Oxford Scholarship Online,2012), 257 [43] Gabrielle Kaufmann-Kohler, Michele Potestà, ‘Can the Mauritius Convention serve as a model for the reform of investor-State arbitration in connection with the introduction of a permanent investment tribunal or an appeal mechanism? Analysis and Roadmap’ [2016] CIDS, 84

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