This article has been authored by Sidra Javed, a third-year student at Amity Law School, Lucknow.
The Convention on the Settlement of Investment Disputes established the International Centre for Settlement of Investment Disputes (ICSID) in 1966. It is an international arbitration institution to facilitate Investor-State Dispute Settlement (ISDS). The World Bank Group, headquartered in Washington, D.C., in the United States funds the ICSID. As of May 2016, the ICSID Convention has 153 contracting member states.
Recently, ISDS has been looked down upon by developing countries. As a consequence of this apprehension and rejection, a lot of developing countries including Bolivia, Venezuela, and Ecuador have left the ICSID Convention. India is one of the notable developing countries that has abstained from joining the ICSID Convention since the day of its enforcement. ISDS will continue to have rising importance considering a rise in cross-border business. ICSID being one of the leading centers facilitate international investment arbitration, it is crucial to consider India’s stand on joining the ICSID Convention.
Why is icsid criticised?
The arguments put forward by the developing countries state that the distribution of rights and obligations created by the treaties are often unequal between and developing and developed countries. The higher risk of litigation and overwhelming monetary damages can easily negate the benefits offered by the treaties. Further, the litigation costs and awarded damages in the Investor-State Disputes also tend to be a burden on most developing countries.
Following are the common criticisms of ICSID, which lead States like India to abstain or withdraw from the Convention:
1. The relationship between ICSID and the World Bank:
While the relationship between the two bodies is not one of the reasons offered by the Indian Council for Arbitration to the Indian Ministry of Finance for India to continue its absence from the ICSID Convention, it is a matter of concern for many States. ICSID’s complicated relationship with the World Bank endangers its judicial functions. The Ex-Officio Chairman of the governing body of ICSID, the Administrative Council, is also the President of the World Bank Group.
Although the World Bank is linked to ICSID, there still does not exist any evidence or conclusive proof that this link somehow compromises the judicial function or autonomy of ICSID. Therefore, these claims are more critical rather than evidence-based
2. Cost of Litigation:
ICSID proceedings are understood to be more complicated and costly. Costs in Investor-State have recently “skyrocketed,” according to the United National Conference on Trade and Development (UNCTAD). Recently, legal and arbitration costs for the parties in ISDS cases average over USD 8 million while costs exceed USD 30 million in some cases.
These costs include not only the ICSID charges, fees, and expenses, but also include payments to arbitrators while the suit is pending, and the fees paid to law firms, lawyers, and witnesses required in the proceedings. Further, on average, and ICSID arbitration lasts up to 3 to 3.6 years. It is understandable as to why developing countries would wish to avoid such costs.
3. Annulment Mechanism:
Parties are not permitted to seek annulment of an ICSID award before a national court. The readily available remedies to a party are the ones provided under the Convention and are limited to:
(1) a request for interpretation;
(2) a request for revision based on a newly-discovered decisive fact; and
(3) a request for an annulment.
If an annulment is requested by a party, an ad hoc Committee is established comprising of three arbitrators. This Committee, however, is powerless to review an award on errors of fact, modifying an award, or replacing it with a decision of their own.
INDIA AND ICSID
India and Investor-State Dispute Settlement
India is one of the fastest-growing economies in the world has readily attracted foreign investment. In 1994, the Indian government entered into the first Bilateral Investment Treaty (BIT) with the United Kingdom. From 1994 to 2000, India has entered into BITs with many major European countries including Germany, France, Italy, Belgium, Netherlands, Poland, Denmark, Switzerland, and Sweden. After 2000, India entered into BITs with other developing countries including Mexico, Argentina, China, Indonesia, Thailand, and Saudi Arabia, as well as with some of the least developed countries such as Sudan, Bangladesh, and Mozambique.
Over the last decade, however, India’s general lack of trust in ISDS has resulted in the unilateral termination of 58 of its existing BITs. A new Model BIT has also been introduced by India in 2015 to serve as a template for future investment agreements. Therefore, it is necessary to understand India’s plan to negotiate future BITs and its possibility to join the ICSID Convention.
The Reluctance to join the ICSID Convention: Its Reasons
The relationship between ICSID and the developing countries has been rough, to say the least. While India has refrained from stating the specific reasons for the lack of its presence from the ICSID Convention, the Indian Council for Arbitration, in 2000, recommended to the Indian Ministry of Finance that India shall continue its absence of the ICSID Convention because:
(1) the Convention’s rules for arbitration favor the developed countries and
(2) that the ICSID award cannot be reviewed by an even if it violates India’s public policy.
At the First Session of the Consultative Meeting of Legal Experts during the drafting of the ICSID Convention in 1964, India submitted that the ICSID Convention fails to acknowledge that an investor is also under an obligation to abide by national policies and laws of a host State if that State is under an obligation to treat the investors justly and equitably. In the 2015 Model Bilateral Investment Treaty (BIT), India has introduced a provision that obligates investors and their investment to be in accordance with the policies and laws of the host State.
The enforcement of Investment Arbitral Awards in India
The Calcutta High Court dealt with the first Indian case to involve investment arbitration. In the Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures, the Kolkata Port Trust requested an anti-arbitration injunction, which would prevent Louis Dreyfus from perpetuating proceedings against it before an investment arbitral tribunal established under the India-France BIT. The court had granted the injunction and stated that since only the Republic of India was a party to the arbitration agreement in the BIT, the Kolkata Port Trust was wrongly identified as a Respondent in the arbitration.
The application for this anti-arbitration injunction by the Kolkata Port Trust was made under section 45 of the Arbitration and Conciliation Act, 1996. When the court justified its power to grant an anti-arbitration injunction, it had assumed that the Act was applicable to this investment arbitration, similar to foreign-seated commercial arbitrations.
In Union of India v. Vodafone Group Plc, the Union of India had requested that Vodafone Group plc be forbidden from proceeding with arbitration under the India-UK BIT as another arbitration under the India-Netherlands BIT had already been commenced by its Dutch holding company and was based on the same cause of action. The Delhi High Court denied the request and made the opposite assumption. It was observed that the investment arbitration in question was not a commercial arbitration and hence was not governed by the Act. Therefore, the court created its standard and held that an Indian court had the power to interfere in investment arbitration and grant an anti-arbitration injunction. A similar standard was adopted by the Delhi High Court in Union of India v. Khaitan Holdings (Mauritius), which further confirmed fundamental disagreement between the two High Courts regarding the applicability of the Act to investment arbitrations.
Article 42(1) of the ICSID Convention states that a dispute shall be decided by the Tribunal in compliance with the law agreed upon by the parties to the dispute. Consequently, parties may agree on domestic, or international, or both domestic and international rules of a legal system. Article 54(1) of the ICSID Additional Facility Rules governs the issue of applicable law by stating that the law designated by the parties to the dispute shall be used to decide the dispute.
Article 21 of the International Chamber for Commerce (ICC) Arbitration Rules states that the parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. According to Article 35 of the UNCITRAL Arbitration Rules, 2013, the arbitral tribunal is permitted to apply the rules of law as agreed upon by the parties and as applicable to the dispute.
Thus, the ICSID Convention is not so different from the other arbitration rules as far as applicable law is concerned. This observation should ease some of India’s apprehension to enter the Convention as it would still have control over the laws governing the arbitration proceedings.
Incoming investments benefit the Indian economy significantly. The Indian economy benefits significantly from incoming investments. It’s no wonder that investment arbitration has become more common in international dispute resolution as global markets have opened up and newer tools have emerged to promote investment flow. Around the same time, it has become more controversial as a result of some countries’ withdrawal from investment treaties.
The question remains: whether joining the ICSID Convention would be in adverse interest for India or not? The complex issue will be the enforcement of arbitral awards of the international investment treaty. India would be eager to preserve some discretion in challenging the enforceability of such awards if they contradict India’s domestic arbitration principles. In India, domestic courts also exercise a lot of control when it comes to deciding whether or not international arbitral awards can be implemented.
Although this factor does not provide a definitive answer as to whether India should join the ICSID, it needs to consider whether domestic courts will intervene with foreign investment tribunal awards. Given India's larger goal of becoming an investment hub, it is critical for the country to develop and adopt a consistent approach to investment arbitration, as well as to reconsider ICSID.