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A BIT about ICSID by S.M. Schwebel
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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.
A BIT about ICSID* Stephen M. Schwebel**
CONSIDER
WHERE THE LAW OF FOREIGN investment has been not only for the last twenty-five years but the last fifty, from the time when Western imperialism expired and the ranks of capital-importing independent States expanded essentially from Latin America to include Asia and Africa. If we recall the constellation of countries circa 1960, there was a legal as well as economic gulf between capital-exporting States and capital-importing States. There was a great gulf on the substance of the governing international law—if any. There was a great gulf on international legal process—if any. The depth of that gulf was certified by the Supreme Court of the United States in the Sabbatino case when it observed in 1964 that: “There are few if any issues in international law today on which opinion seems to be so divided as the limitations on a state’s power to expropriate the property of aliens.”1
*
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. ** Stephen M. Schwebel served as a Judge of the International Court of Justice (1981–2000), and as its President (1997–2000). He has been appointed chairman or party-appointed arbitrator in 54 arbitrations, 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 art icles on international law and international arbitration. Judge Schwebel has served as President of the International Monetary Fund Administrative 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 of ICSID’s Panels of Arbitrators and Conciliators by the President of the World Bank. He is a member of the Board of Directors of the American Arbitration Association (AAA). 1 376 U.S. 398, at p. 428 (1964).
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On one side of that divide, capital exporters expounded a minimum standard in 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 of contracts and, in the event of a taking of their investments, prompt, adequate and effective compensation. On the other side of the divide, capital importers adhered to the Calvo doctrine of national treatment. The alien and his property were subject to national law and national courts and were entitled to no more than was afforded to nationals of the host State, however little that might be. Customary international law governing 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 World War, by the takings in a number of notable instances. The divide early manifested itself in the United Nations under the banner of “permanent sovereignty over natural resources.” In 1962, after a decade of preparation, a resolution of that title came up for negotiation and adoption. The result 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, and by international law.” Expropriation required “appropriate compensation” in accordance 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 faith”—thus requiring the observance of agreements with foreign investors. In all, this was a proportionate resolution which recognized that foreign investment was governed by international as well as national law.2 But soon after, confrontation displaced accommodation. Subsequent General Assembly resolutions on “permanent sovereignty over natural resources” excluded the governance, even the relevance, of international law. With the oil crisis of 1973, and the pain engendered by the surge in the price of oil, especially in developing countries, the Group of 77 was persuaded by OPEC to maintain that international economic problems were all the fault of the West. What was needed was a New International Economic Order . North/
Stephen M. Schwebel, The Story of the United Nations Declaration on Permanent Sovereignty over Natural Resources , American Bar Association Journal (May 1963), p. 463, republished in the author’s book, Justice in International Law (1994), p. 401. 2
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South dispute came to a head in 1974 with the General Assembly’s adoption of the Charter of Economic Rights and Duties of States .3 That Charter excluded international law in the treatment and taking of foreign property and asserted the sole governance of the domestic law of the host State as interpreted and applied by its courts. Key industrialized democracies voted against the Charter. At that juncture, the outlook for universal agreement in this sphere either on legal process or principle seemed remote. Two initiatives changed that outlook to a presence far more beneficent. The first—the International Centre for Settlement of Investment Disputes (ICSID)—was one of process. The second—bilateral investment treaties (BITs)—was built on the first and successfully surmounted the divide not only over process but principle as well. The legal counsel of the World Bank, Aron Broches, saw in the 1960’s at the time of the initial UN debates on permanent sovereignty the difficulties of reaching meaningful and sustainable universal agreement on the principles at stake. His ingenious contribution was to sidestep what seemed to be a sterile substantive confrontation with procedural creativity. The Bank would not take sides between the developed and the developing worlds. Rather it would create a forum for the impartial arbitral settlement of inevitable international investment disputes. Broches and his colleagues prepared the ground carefully in a series of regional conferences in which States and their legal advisers were fully consulted. He brought the persuasiveness of his vivacious personality to bear both with the legal advisers of governments and the Executive Directors of the Bank to put his insight across. The result was the conclusion in 1965 of the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States. That Convention has been—and remains—a remarkable achievement. In their recent, valuable book, Principles of International Investment Law , Professors Dolzer 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 of what was to become […] (the ICSID Convention) […]. In retrospect, it has become clear that the creation of ICSID amounted to the boldest innovative step in the modern history of international cooperation concerning the role and protection of foreign investment. This is so because 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/3281 (1954). 3
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foreign companies and individuals can directly bring suit against their host State; (b) state immunity is severely restricted; (c) international law 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 states parties to ICSID.4 The ICSID Convention entered into force in 1966. Today there are 143 States 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 have sprung, some 1700 of which are in force, as have important multilateral treaties: the Energy Charter Treaty, the North American Free Trade Agreement, and the Central American Free Trade Agreement. These three multilateral treaties in their 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 of capital-exporting and capital-importing States in concordant terms designed to promote and protect foreign investment. Those terms are much more precise and far-reaching than the content of comparable customary international law earlier invoked by capital-exporting States—a customary international law on which the United States in its 2004 Model BIT nevertheless curiously relies. By the terms of BITs, foreign investment is assured of fair and equitable treatment, full security and protection, and no less than national and most-favored-nation treatment. The foreign investor is assured of management authority and control. The terms of commitments entered into in respect of the foreign investment are to be observed. If there is a taking by the State of the foreign investment, by means direct or indirect, the State is treaty-bound to pay prompt, adequate and effective compensation. Moreover, the great majority of these treaties enable the foreign investor to require the host State to arbitrate treaty disputes, through ICSID or otherwise. That arbitration entitlement is one of the most progressive developments in the procedure of international law of the last fifty years. It is consistent with the development of international human rights (including the right to own property) and with dethroning the State from its status as the sole subject of international 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 4
Rudolph Dolzer and Christoph Schreuer, Principles of International Investment Law (2008), at p. 20.
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between two developing States. Russia and other successor States of the Soviet Union, and China, are parties to scores of BITs, as is Cuba. While early Chinese BITs 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 a major capital importer but exporter. There are few areas of international law and life that have been the subject of some 2700 concordant treaties; most-favorednation provisions come to mind but it is not easy to call up another. In view of that immense number of treaties, the virtual universality of their adherence, and the predominant consistency of their terms, there is room for the view that they have reshaped the body of customary international law in respect of the treatment and taking of foreign investment. That is to say, it may be maintained that certain standard, core provisions of the very great majority of BITs, such as those providing for fair and equitable treatment and for prompt, adequate and effective compensation, by the fact of being prescribed in some 2600 bilateral investment treaties and three important multilateral treaties, have seeped into the corpus of customary international law, with the result that they are binding on all States including those not parties to BITs. That arguable thesis has a measure of support in more than one arbitral award.5 Yet, the ascendance of ICSID and of the BITs that have done so much to fuel its 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 State cannot require investors to arbitrate claims against them. They maintain that international arbitral tribunals treat the government and the investor on the same plane and hence fail to take account of the consideration that the State acts for the public good and must enjoy and exercise a right to regulate for the public good. They claim that the international arbitral process is biased because those who served as arbitrators have acted or do act as counsel in investment cases, and because they are influenced by the prospect of further arbitral appointments. Arbitral awards may conflict and there is no tenured court of appeal 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 claim to arbitration. In any event, the host State is able to bring a counterclaim against
Mondev 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. 497–98. Cf., Stephen M. Schwebel, “The Influence of Bilateral Investment Treaties on Customary International Law,” Proceedings of the 98th Annual Meeting of the American Society of International Law (2004). 5
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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 pressure to 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 can prescribe, delay, enjoin, renegotiate, renege, decree, tax, incite, strangle. For the foreign investor to be able to require international arbitration of disputes goes only some way to right a balance that often—not always but often—inclines in favor of the host government. One does not hear that the United States Court of Claims is asymmetrical because it is the judicial forum for claims against the Government of the United States. What the United States does not do is win all the cases in the Court of Claims, not least because of the realization that if it did, there would be no Court of Claims. Naturally international arbitral tribunals place the litigants on the same plane. Equality of arms is the essence of the judicial and arbitral process. And to assume that every government of every State acts in ways that promote the public good, and that the foreign investor does not, is to assume a state of affairs that does not necessarily comport with reality. To assume that a tenured court, national or international, is objective, while international arbitral tribunals are not, likewise does not comport with the facts. There are tenured courts in too much of the world that are incompetent, subject to political influence, corrupt or just nationalistic in their perception of the facts and the law. While Federal Courts in the United States are of high quality, one can think of courts of certain states of the United States that are of lesser quality; and I choose this reference as illustrative rather than exhaustive of conditions in many countries. The preference of foreign investors not to subject their disputes to local courts is a preference shared by thousands of international commercial contractors the world over, a preference that is rationally and decently motivated. Investor-State arbitration is no less defensible. An international investment arbitrator of ability and integrity will decide the case before him or her on the basis of the facts and governing law. The record of ICSID arbitral awards so demonstrates as do those of the ICC, the AAA, the Stockholm Chamber of Commerce, the London Court of International Arbitration and other institutions as well as ad hoc international arbitral tribunals acting under the UNCITRAL and other rules. That the vast majority of international arbitral awards, including international investment awards, are unanimous, suggests the integrity of the process. Of the 103 ICSID awards rendered to date, sixteen percent were not unanimous, a fact that is not easily reconciled with claims that arbitrators may be predisposed to favor the party that appoints them. In nineteen of those 103 cases, the
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tribunal found a lack of jurisdiction and dismissed the case without passing upon the merits, another fact not easily reconciled with claims that arbitrators are motivated by the prospect of arbitral fees and further appointments. In these 103 rendered awards, the claimant company prevailed in 43 cases, and only in four of those were the company’s claims fully upheld—again, facts not easily reconciled with claims that arbitrators—or BITs—are biased in favor of the investor. It appears that investors, where they prevailed to some extent, recovered about 12% of their claims, still again a fact not easily reconciled with claims of arbitrator predisposition in favor of the investor. I may say on the basis of my own experience of fifty-five years in the international 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 on whether he or she has acted as counsel, and not on whether there may be possibility of further arbitral appointments. Conflicts of interest may arise in the arbitral sphere as in other spheres. But attacks on international investment arbitrators on grounds of inherent conflict may in some cases be little more than proxies for attack on a process that is uncongenial to the revivalist proponents of a New International Economic Order. If the governments of the world preferred an international investment court to arbitration, or a court of international arbitral appeals, they could constitute them; they have not. When some fifty States concluded the Energy Charter Treaty after an extended, highly professional negotiation, they could have opted for a court but they opted for arbitration between investors and host States. They drew up a treaty that provides for the promotion and protection of foreign investment in the vital realm of energy in terms that duplicate BIT provisions. 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 economic models, have been misguided in concluding some 2700 bilateral investment treaties, and that it has taken a think tank here and a professor there to reveal to the world the error of their ways? By the end of 2006, there were 679 South/South bilateral investment treaties running between two developing States. Many appear to have been concluded with the benefit of careful preparation of model BITs by the Asian African 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 of the advice of their own Asian-African Legal Consultative Committee, acted not in 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 aware is a petition of October 3, 2008 submitted to the President of the World Bank by the Institute of Policy Studies in Washington on its own behalf as well as that of a large number of other organizations. It condemns what it claims is “extreme disregard for Bolivian sovereignty” by ICSID’s former SecretaryGeneral in registering a case brought by Euro Telecom against Bolivia, because Bolivia “had withdrawn from the ICSID Convention nearly six months earlier.” “Determining jurisdiction in this case is not an appropriate question for an investment tribunal […]. The World Bank,” it maintains, “should not have the power to decide on its own jurisdiction.” ICSID, it claims, is “a system which undermines national sovereignty in favor of the interests of private corporations and international investors.” The petition calls for appointment of a review commission on ICSID, citing “legitimate criticisms” of certain States, and it expresses concern that ICSID and the investment treaties that it enforces “may undermine other international treaties that promote social, economic and human 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, to put it gently, uninformed. As the International Court of Justice held: Since the Alabama case, it has been generally recognized, following earlier precedents, that […] an international tribunal has the right to decide as to its own jurisdiction. This principle was expressly recognized in […] the Hague Conventions […]. The Rapporteur of the Convention of 1899 had emphasized the necessity of this principle, presented by him as 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 Bolivia’s sovereignty is no better informed. Bolivia in exercise of its sovereignty adhered to the ICSID Convention. Article 71 of that Convention provides that any Contracting State may denounce the Convention, a denunciation which “shall take effect six months after receipt of such notice.” As the Institute’s petition recognizes, Bolivia had withdrawn Letter of October 3, 2008 to Robert B. Zoellick, President, World Bank, from Sarah Anderson, Institute for Policy Studies. 7 Nottebohm (Liechtenstein v. Guatemala) (Preliminary Objection), Judgment of November 18, 1953, I.C.J. Reports 1953, pp. 111, 119. 6
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from the ICSID Convention “nearly” six months earlier; thus its denunciation had not taken effect when the request for arbitration was filed. The request for arbitration accordingly concerned a dispute that was not “manifestly outside the jurisdiction of the Centre” and ICSID’s Secretary-General was bound to register the request, pursuant to the mandatory terms of Article 36 of the ICSID Convention to which Bolivia had equally adhered. No evidence is given by the Institute in support of its claim that ICSID is a system that undermines national sovereignty and social progress. But if States choose to exercise their sovereignty through adherence to and application of the ICSID Convention in order to promote the flow and maintenance of international investment in a world that cries out for investment, one may wonder about the soundness of that claim. The extravagance of the charge of impropriety in ICSID’s registering an arbitral claim against Bolivia is the more striking in view of the fact that an arbitral tribunal has been constituted with the cooperation of Bolivia, which has appointed an arbitrator. My conclusion is that we should treat criticism of the inequities and iniquities of the international arbitral process, and of the pernicious standards and 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 whole they are beneficent, progressive processes that merit not condemnation but approbation.
