Founded in 1966 under the Washington Convention, the International Center for Settlement of Investment Disputes (ICSID) has become an effective legal instrument replacing political and diplomatic measures in public international law.
The advent of the Washington Convention along with the recognition of investment disputes settlement under ICSID mechanism in many Bilateral Investment Treaties (BITs) have opened new opportunities for investors to directly take legal action against host states when investment disputes arise.
Vietnam, being one of small number of Asian countries which have not participate in the Washington Convention, has been under considerable pressure of the international investors community to agree to the settlement of investment disputes under ICSID mechanism in BITs to protect interests of foreign investors in Vietnam, as well as to make the investment environment of Vietnam more attractive. Therefore, a research on the practice of application of ICSID mechanism in Investor – State disputes settlement (especially disputes in Asia and neighboring countries of Vietnam) has a significant meaning for Vietnamese Government to consider participating in the Washington Convention as well as to prepare for the possibility of being sued by foreign investors under the ICSID mechanism.
This article is to review and analyze typical ICSID cases involving Asian states as respondents or Asian (generated) investors as claimants. Thereby, pros and cons of ICSID mechanism applied to settling investment disputes in Asia would be evaluated and concluded hereinafter to draw lessons for the Government and investors of Vietnam.
1. International investment dispute settlement in Asia under ICSID mechanism in Asia
A. International investment dispute settlement in Asia
From 1987 to the end of 2010, there were 390 recorded international investment disputes worldwide, Asian states were respondents of 50 cases. As this ratio is relatively small in comparison with other continents, the number of cases involving Asian investors as claimants was even smaller - 14 cases from 1981 to 2010. These modest numbers are explained mainly by many difficulties to which Asian states and Asian investors have to face during the investment dispute settlement process: high direct and indirect costs to follow the cases, possibility that future investments of claimants in the claimed states would be affected, possible delays during the dispute settlement process, difficulties in enforcing the awards and the lack of experienced arbitrators in Asia.
B. International investment disputes settlement under ICSID in Asia
With 245 cases settled by ICSID out of 390 recorded cases mentioned above, ICSID is considered a trustworthy system for investor-state dispute settlement worldwide. However, in 245 cases filed at ICSID, there were about 37 cases involving Asian-state respondents and 4 other cases in which Asian investors were claimants. The number of appointed Asian arbitrators, conciliators and ad hoc committee members is quite modest and accounts for only 16% of appointments distributed by geographic region worldwide.
In disputes involving Asia states or/and Asian investors registered at ICSID, the ICSID tribunals have rendered awards on variety of significant issues:
- On the definition of “investment” and other issues related to the jurisdiction of ICSID. In fact 22% of disputes concluded by ICSID Arbitral Tribunals have been awarded declining its jurisdiction;
- On determination of the investment made “in accordance with the laws of the host State”;
- On expropriation; and
- On other issues related to BITs. At present, although still being one of nine Asian countries which have yet been members of ICSID Convention, Vietnam has already signed 65 BITs with other countries and territories.
2. International investment disputes settlement under ICSID mechanism in some Asian countries
There are two approaches for host states and the investors to have their investment disputes heard by ICSID. (i) under ICSID Arbitration Rules for investment dispute between a Contracting State and a national of other Contracting State of the Washington Convention; or (ii) under ICSID Additional Facility Rules (AFR) if one party is a Contracting State or a national of a Contracting State. Typical cases analyzed hereinafter are related to arbitral procedures at ICSID and considerations of ICSID arbitrators.
In regards to ICSID jurisdiction and the roles of BITs
A worthy notice for the host states in general and Vietnam in particular is that these countries, being contracting states of ICSID or not, could also be sued at ICSID based on the grounds of BIT. Indeed, in Asian Agricultures Products Ltd. v. Sri Lanka , the Tribunal first invoked the clause on dispute settlement under ICSID in relevant BIT as a basis for the expression of written consent to the ICSID jurisdiction over each case.
Similarly, in MHS v. Malaysia , MHS brought Malaysia to ICSID arbitration invoking Art.7 of the BIT between Malaysia and the United Kingdoms. The dominant view that ICSID arbitrators shared in this case was the importance of definitions of investment activities in specific BITs. Leaving out BIT provisions is omitting the importance of similar documents in which the parties express their consent to ICSID jurisdiction. Besides, ICSID arbitrators also held that considering contribution to the economic development of the host state as a factor to established ICSID jurisdiction was misleading. Through above cases, it can be found that invoking BIT clauses to register disputes at ICSID has become a common practice.
In regards to “illegal expropriation”
In Saipem v. Bangladesh , the dispute between Saipem and Petrobangla (Bangladesh Oil, Gas and Mineral Corporation) had been settled by ICC Tribunal and the ICC Tribunal concluded that Petrobangla had breached the contractual obligations and therefore had to compensate Saipem. However, the Supreme Court of Bangladesh rejected the jurisdiction of ICC and ruled that the ICC award on the dispute had no legal validity. As the case was filed at ICSID, ICSID Tribunal had conclusion that the right to receive payment of the foreign investor – Saipem – under the contract and under the award of ICC had been indirectly expropriated by unsound decisions of Bangladesh courts.
In Tza Yap Shum v. Peru , final conclusions of the Tribunal have showed that ICSID arbitrators tend to extend the definition of “expropriation” in BITs to actions of any competent authorities of host states that terminate or freeze the business activities of enterprises having capital contribution of the investors. This may benefit the investors when they implement their international investment activities.
In regards to definitions of “investment” and “investor” in broad terms
The case SGS v. Philippines has brought a newer view on the definition of investment into a country, accordingly the ICSID Tribunal held that investors do not have to come to a country to build factories, airports, infrastructure… to be determined having made an investment. The construction of management, control systems, or consulting, when meet specific conditions are also considered investment activities and therefore the investors could bring the host states to ICSID in cases of disputes. Additionally, in Tza Yap Shum v. Peru the arbitral award has also showed that the “investment” and “investor” definitions have been broadened to indirect and direct investments and investors having multiple nationalities.
Besides, in Mihaly v. Sri Lanka , the ICSID arbitrators in this case stated that the jurisdiction of the ICSID in general and the arbitrators in particular is to be determined not based on domestic laws but the ICSID Convention, common principles of international law and a specific BIT. Therefore, if the partner of the principal investor is national of a contracting state of the ICSID Convention, it is still eligible to make claim against the host state under ICSID Convention if dispute arises. Besides, this is noticeable to countries which prioritize FDI into infrastructure construction sector, mainly through BOT contracts. Specifically, in infrastructure construction projects with high value, investors usually have to bear considerable pre-contract costs and these costs could be deemed investments under a broad term in order to promote investment into developing countries. However, if there is no contract concluded and the parties agree to and impress on the non-binding characteristic, the pre-contract amount of money spent might not be considered an investment.
The case PSEG and Konya v. Turkey has showed that a binding BOT contract could create “investment” activities. The parties had signed a contract in form of a concession contract to construct of a power plant in Konya, Turkey. As the amendment related to the project submitted by PSEG was not finalized, PSEG brought Turkey to ICSID argued that Turkey had destructed PSEG’s investment in this country. In the Tribunal’s view on this case, the ICSID arbitrators held that this case was different from Mihaly v. Sri Lanka since the parties had already signed a concession contract which was still effective. Therefore, “investment” activity in this case was acknowledged and the ICSID had full jurisdiction over the cases under the BIT between Turkey and the USA.
DLP v. Yemen is another notable case in regards to the concept of “investment” and compensation for “moral damages”. In this case, ICSID arbitrators gave their views on the broadened scope of investment activities. The Tribunal held that the purpose of BIT is to promote and protect investment activities, therefore domestic laws should not be interpreted to limit the scope of investment activities but intended to ensure the legality of the investment or to exclude investments made in breach of fundamental principles of the host State’s law. Besides, the Tribunal ordered Yemen to compensate DLP USD 1 million for DLP’s moral damages including loss of reputation. To come to this conclusion, the Tribunal found that the duress exerted by Yemen President on DLP to sign the Settlement Agreement was a serious breach of fair and equitable treatment in the BIT between Oman and Yemen. Up to date, this has been the sole case in which ICSID Tribunal awarded compensation for moral damages on grounds of a BIT.
The amphoteric characteristic of ICSID arbitration
The fact that Washington Convention allows the dispute parties to submit application for annulment of arbitral awards and resubmission after an annulment can be seen as a similar form of appellate body in litigation. This amphoteric characteristic is a difference between ICSID arbitration and commercial arbitration in general as an award of commercial arbitration is final and only rejected by the national court of the countries where the award is requested for its enforcement. In Amco v. Indonesia, Indonesia was brought to ICSID by Amco and it was ordered to compensate USD 3.2 million to Amco by the Tribunal. Objecting to this award, Indonesia sought annulment procedures, and Ad hoc Committee accepted its request.
In regards to arbitration costs as the prevailing party is at “fault”
In Gruslin v. Malaysia , when making decision on arbitration costs in this case, ICSID Tribunal considered elements such as the unbalanced position between the parties and the fact that the Respondent– Malaysia – had not actively and quickly brought the core issue in the fist hearing, making the proceeding prolonged to the second round. This showed that the sluggishness and the lack of dexterity of the host state in arbitral proceedings could lead to unfavorable outcomes in spite of its prevailing position in the case.
In regards to “fair and equitable treatment”
In MTD v. Chile the concept of “fair and equitable treatment” was explained by the ICSID Tribunal from two aspects. On one hand, fair and equitable treatment should be understood to be treatment in an even-handed and just manner. This term was also explained with an impression on the conduct to fostering the promotion of investment rather than on passive behavior of the State or on avoidance of prejudicial conduct to the investors. On the other hand, the breach of Chile did not mean that Chile was responsible for the consequences of unwise investment decisions of the Malaysia investor. Its responsibility was only limited to the consequences of its unfair and inequitable treatment.
3. Evaluation on the efficiency of dispute settlement under ICSID in Asia and lessons for Vietnam
In general, since the date of establishment, ICSID has proved to be an efficient and reliable dispute settlement mechanism and preferred by host states and investors to other forms of dispute resolution. Most importantly, ICSID offers the investors the opportunity to sue the host states directly without having to recourse to either political or diplomatic measures. Moreover, only ICSID itself can annul the ICSID tribunal’s awards. Besides, ICSID has produced a large amount of cases together with a diverse number of analysis, review and comments from many academics and legal practitioners worldwide.
However, ICSID mechanism still has some drawbacks, such as the prominence is the influence of World Bank (WB) on ICSID since ICSID is an organization affiliated to WB, the WB president is also the ICSID Administrative Council and the WB General Counsel is ICSID’s Secretary General. The high arbitration fee as well as other relating fees at ICSID are also a burden which developing and underdeveloped countries have to take when using this mechanism. The disputing parties may take the advantage of the amphoteric characteristic of ICSID to abuse the right to request annulment of arbitral awards, causing prolonged settlement process and escalating costs.
Lessons for the Vietnamese Government:
The participation in ICSID Convention of Vietnam could be seen as a signal of enhancing Vietnam’s international commitments to protecting the interests of foreign investors in oder to maintain and attract FDI into Vietnam. Therefore, the question of whether or not Vietnam joining in ICSID is not important any more but when to join and what to prepare.
When joining Washington Convention, there would be several issues to which Vietnam would have to face. First of all, it should be noted that 74% of ICSID cases in which the investors made claimed against developing countries having average income. Meanwhile, the USA is the sole member of G8 has been respondent in an ICSID case. In the context that Vietnam has little experience in mechanisms for settlement of international investment disputes in general and ICSID in particular, Vietnam would have to face the threat of being claimed at ICSID. Besides, because of the finality of ICSID arbitral awards, once being member of Washington Convention, Vietnamese courts do not have the jurisdiction to review and annul ICSID awards.
For those reasons, although Vietnam has not been a member of the ICSID Convention yet, following preparations are still very necessary:
To actively participate in the arbitration proceedings early. From the practice of settlement disputes under ICSID in Asian countries, it can be seen that some neighboring countries such as Philippines, Malaysia or other countries having same level of economic development to Vietnam such as Turkey, Sri Lanka have begun to protect their interests as respondents more and more actively, for example exercising early control over the cases in the very first phase, proactively submitting counterclaim not merely defending, requesting the Tribunal to provide legal grounds for their conclusions, requesting annulment of awards in cases of defaults stipulated in Art.52 of the Convention… Together with the tendency in increasing fairness and considering host states’ interests more in settlement by ICSID arbitration, the proactive participation of host states in arbitration proceedings has helped them to gain advantage. For example, in 2010 there were 14 awards in favor of states (mostly developing countries) out of 20 ICSID awards, the total awards in favor of states was increased to the number of 78 out of 137 awards in total. Vietnam should be more actively review the procedures, proceeding process as well as previous cases at ICSID and search for information and profiles of ICSID arbitrators and law firms that would be appropriate to its needs (in terms of expertise, fee and cost) in advance in order to react quickly and protect its legitimate interests when Vietnam have to face a claim at ICSID.
To actively control arbitration costs and legal costs. As mentioned above, a challenge for host states is the arbitration costs and related legal costs in proceedings. From the practice of settlement under ICSID in Asia, it can be seen that issues on costs usually invoke debates between disputing parties, they also cause the inconsistency in approaches of arbitrators. Under common international rules, arbitrators usually follow the USA’s approach (each party shall bear their own legal costs and half of arbitration cost, e.g. in Fraport and Gruslin ) or the UK’s approach (the losing party shall bear all costs or on a ratio rendered in the award, e.g. in PSEG v. Turkey). However, decisions on costs of arbitrators depend heavily on the conduct and position of each party in the proceeding. For example in Gruslin v. Malaysia, the Tribunal held that the respondent (Malaysia) had slowly provided its arguments thereby prolonged the proceeding, together with other reasons, therefore Malaysia was ordered to pay half of arbitration cost although it had been awarded prevailing. On contrary, in Cementownia v. Turkey, Turkey succeeded in proving a fraud claim made by Cementownia, and then the Tribunal ordered Cementownia to pay Turkey USD 5.3 mio and other costs associated with the case. Hence, actively defending, not making delays in proceedings and providing appropriate arguments and requests on arbitration and legal costs play important roles in controlling and minimizing costs.
Regarding the power abuse of the national court. Another important notice for Vietnam is the recognition and enforcement of ICSID arbitral awards. Pursuant to the Civil Procedures Code (2004) of Vietnam, foreign arbitral awards must be recognized and enforced by competent courts of Vietnam to be implemented. Besides, when a disputing party requests annulment of an arbitral award, the court also has to join in. However, if the courts abuse their power supervising arbitral proceedings to annul those awards without legitimate grounds, this action could result in the same legal consequence as Saipem v. Bangladesh in which the ICSID Tribunal, after considering decisions of Bangladesh’ courts on ICC arbitral award, held that there had been signs of abuse. This case generated from a contract between two companies, the dispute should have been settled by commercial arbitration according to agreement of the two parties. However, once national courts get involved in the proceedings, depending on specific cases, international obligations of host states under their BITS could be reviewed by a judicial body such as ICSID.
To review definitions and regulations on “investment” in BITs and multilateral commitments. A large number of disputes filed at ICSID generated from different interpretations of the definition and scope of “investment” under BITs and multilateral commitments. Looking at ICSID cases in Asia, it can be seen that many states had to “taste bitter” as the interpretation of the tribunals on the concept of “investment” was much larger than expected. In SGS v. Philippines, although SGS was not a resident of Philippines, services provided by SGS outside Philippines’ territory, however as the investment purpose of SGS made to serve its agreement with the Philippine Government, the Tribunal concluded that SGS had made investment “inside Philippines’ territory”. In MHS v. Malaysia, the ICSID Tribunal annulled an award for the reason that the arbitrator in question had not taken into account the importance of a BIT as a basis for disputing parties to express their consents to ICSID jurisdiction. In the context that Vietnam has not been a member of the ICSID, clearly definitions of “investment” in BITs as well as detailed requirements for the investments to be protected under the laws of contracting parties are essential. The regulations that investments shall be in compliance with the laws of contracting states (e.g. BIT between German and Philippines) and the investment made in to a specific project shall be approved by appropriate competent authorities of contracting states (e.g. the Inter-governmental Agreement between Malaysia and the Belgo-Luxemburg Economic Union (IGA)) are precious experiences for Vietnam to learn in order to minimize the risk of being claimed with unreasonable requests by foreign investors.
Many other ICSID cases involving Asian investors or Asian states have showed the tendency to broaden the concept of “expropriation” including indirect and direct measures (e.g. in Tza Yap Shum v. Peru) or other actions which have the same effect as “expropriation”. Therefore, Vietnam need to review its BITs and other international commitments to limit the scope of this concept at a reasonable level, as well as to actively review and examine policies, decisions and management measures on foreign investments to avoid measures which might be considered “expropriation” in a broad term.
Lessons for Vietnamese investors:
In the context of which more and more Vietnamese investors with strong financial resources such as Viettel, Hoang Anh Gia Lai, etc. begin to make investment abroad, studies and consideration on risks of policies adopted by host states are very important in order to make necessary preparation in case their interests are infringed.
For ICSID has been considered an effective tool in the eyes of the investors, besides studying ICSID cases, right from making plans on investing abroad, Vietnamese investors should investigate the laws of host states whether they have regulations on investment dispute settlement under ICSID, or whether or not the BITs between Vietnam and those countries (if any) provide clauses on investment dispute settlement under ICSID or under other form of arbitration. If both these two conditions are not satisfied, in the negotiation phase, the investor need to bring clause on dispute settlement under ICSID in to the contract with competent representatives of that countries. However, when considering decision to bring a dispute to the ICSID, Vietnamese investors have to take into account issues on arbitration cost and legal costs relevant to arbitration proceedings, possible negative reactions of the claimed state to their future investment activities. If pursuing arbitration proceedings at ICSID is costly or detrimental, other approaches might be considered such as seeking resolution through diplomacy between two governments or by negotiation, looking for sponsors for the case pursuit… Decision on registering dispute at ICSID must be considered in the overall business and market penetration strategy when making investment abroad./.