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The World Bank's ICSID turns 50 this year. Here an ICSID hearing room. (Photo: ICSID)
Wednesday, April 29, 2015

Arbitration: How Effective is the ICSID?

Are arbitration bodies effective if parties won't pay up?

Inter-American Dialogue

The International Center for Settlement of Investment Disputes last month awarded U.S.-based glass container manufacturer Owens-Illinois $455 million because of Venezuela's nationalization of two of the company's plants in 2010. However, Venezuela, which withdrew from ICSID in 2012, may seek to annul or otherwise refuse to pay the award, and the company cautioned it could not predict when it would receive the funds. How effective are arbitration bodies like ICSID when countries can refuse to comply with their rulings? What incentive do countries have to comply with arbitration decisions? What recourse do companies have?

Ryan Mellske, associate at Three Crowns LLP in Washington: Grounds for annulment are limited (only 13 of 189 ICSID awards have been annulled), and Venezuela might not refuse to pay the award simply because it must honor ICSID rulings to avoid default on certain sovereign bonds. Still, when countries refuse to pay an award, an investor can attempt to recover against assets held by the country in most jurisdictions worldwide. An ICSID award is binding in all member states. Awards rendered under the rules of the United Nations Commission on International Trade Law are usually enforced by the national courts of all members to the New York Convention. An investor can also pressure the country through, for example, contract claims in commercial arbitration against the nation's state-owned entity, claims in national courts against third parties who seek to benefit from the country's wrongful acts and participation by other industry stakeholders in negotiations. The investor may also call on its home state to issue sanctions to induce compliance. These include denying trade benefits, voting against extending loans from multilateral lending institutions and reducing appropriations for foreign assistance. As a last resort, the investor's home country could bring a claim against the non-paying state before the International Court of Justice. Failure to comply with a judgment of the ICJ could be referred to the U.N. Security Council for measures to give effect to the judgment. Of course, the vast majority of governments simply pay awards because of their expectations of reciprocity, their belief that the law is legitimate and ought to be obeyed and the reality that non-compliance increases the risk to--and therefore the cost of--future foreign investment. Based on these reasons, even a country that initially refuses to pay an award may in time change its mind.

Nigel Blackaby, co-head of international arbitration at Freshfields Bruckhaus Deringer in Washington: ICSID was founded by the 1965 ICSID Convention which requires signatory states automatically to comply with awards. Article 53 states unequivocally, 'Each [state] party shall abide by and comply with the terms of the award.' As a consequence, any country that fails to do so is in breach of its international obligations to all other (roughly 160) signatories to the ICSID Convention. The specific investment treaty will also likely oblige a losing state to comply immediately with an award failing which it will be in breach of its international obligations toward the other party to that treaty. The consequence of these breaches of international law will increase the risk profile (and thus the cost of borrowing and access to borrowing) of the recalcitrant government. It may also cause those countries whose nationals have not received payment of awards to vote negatively in multilateral funding forums such as the IDB and the World Bank. Separately under Article 54 of the ICSID Convention, the courts of the other signatory states have to recognize and enforce that award as if it were a final judgment: 'Each Contracting State shall 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.' So if a government does not comply, the investor can start hunting for and freezing seizable state assets. Ultimately, if a country wishes to participate in the international community, it needs to comply with adverse awards. Even Argentina (which had historically not complied with adverse awards) eventually recognized this fact when in November 2013 it paid five long outstanding awards to British, U.S. and French investors.

Jorge Lara Urbaneja, partner at Arciniegas, Lara, Briceño & Plana in Bogotá: Decisions from ICSID, or in general from international or supranational institutions, are fully effective depending on the national jurisdictions where they have to be enforced. In those countries where strong institutions and the rule of law are in place, regardless of who is president or how the government is formed, there is great respect for actions or decisions coming from those judicial or political organizations that were created to assure juridical security on issues that may affect legitimate international interests. Such actions or decisions are not always welcomed in the recipient jurisdiction, or by the incumbent government, but once they become fully effective, they are complied with. Those governments and national institutions do not put a country's reputation at risk. With respect to Venezuela, the above considerations do not apply today. Venezuela and its present government are facing their worst-ever economic crisis, an aspect that could explain a default on a dollar-denominated payment. But paying an award to a U.S. company, regardless of the origin and fairness of that international decision, is far beyond what the Venezuelan government will do. The fact that ICSID had awarded that payment prior to the Venezuelan withdrawal from the international organization makes no difference. Private property rights have no legal protection in Venezuela. From the beginning, Chávez instituted expropriation without indemnification. Moreover, the Venezuela government only responds to Cuban interests and, regardless of U.S. diplomatic initiative, Owens-Illinois or any other private company is far from being included in the agenda.

Jaime Martínez Estévez, partner at Rodner, Martínez & Asociados in Caracas: Venezuela denounced its bilateral investment treaty with the Netherlands in 2008 and the ICSID Convention in 2012. However, both continue to be binding for investments made and arbitrations started prior to their terminations. Venezuelan officials have expressed constitutional and political considerations for the withdrawals, which could be used to justify ignoring the award. However, last year, Rafael Ramírez, then Venezuela's foreign minister, welcomed an ICSID award in the ExxonMobil case as a victory for Venezuela. Procedural actions could delay enforcement. Venezuela questioned the jurisdiction and is likely to request the revision and/or annulment of the decision, as it has done in other cases. Political arguments could be used to delay payment negotiations, as well. Venezuela's pressing economic situation, particularly its level of international reserves, would invite delaying tactics. In the current political and economic circumstances, an award refusal could occur regardless of the forum. ICSID enforcement conditions are better than those under the New York Convention. Annulment claims have to be settled in accordance with Article 52 of the ICSID Convention, and there is no appeal or recourse (other than per the convention) for enforcement in any of the 159 signatory countries. A refusal will have a negative effect on the prospects and cost of new investments. Venezuela would be induced to payment negotiations to avoid seizure of assets abroad and the increased cost of a forced payment. Plaintiffs will seek freezing assets in advance, based on Article 47 of the convention.

Julissa Reynoso, former U.S. ambassador to Uruguay, and Mark Beckett, both partners at Chadbourne & Parke: While Venezuela has withdrawn from the ICSID Convention, international investment awards can continue to be enforced against Venezuelan assets in other jurisdictions that are parties to the ICSID and New York Conventions. Venezuela remains a party to dozens of other investment treaties, many of which have arbitration provisions that apply even if the ICSID Convention is unavailable. The conventional wisdom is that states have the same incentive to comply with awards that they have to enter investment treaties: they want to encourage useful inflows of capital. The view has been that if a state habitually fails to comply with its obligations (including by failing to pay awards), this will send a negative signal to investors. The actual significance of the treaties as an inducement to investment is debated, and capital sometimes lacks long-term memory. But this was the premise on which the treaties were entered, and it seems safe to conclude that they continue to play an important role in attracting investment. There are signs we are entering a period of adjustment. Only a few Latin American states (Venezuela, Bolivia and Ecuador) have withdrawn from ICSID. However, other states have denounced treaties because they regard them as too intrusive into their domestic prerogatives. Indonesia, for example, has announced it will withdraw from 60 treaties, and South Africa has abandoned selected treaties. In the case of Latin American states that have entered into bilateral investment treaties (BITs) but have denounced the ICSID Convention, investors, depending on the terms in the BITs, may still be able to pursue arbitration. Many BITs provide investors different options for submitting claims to international arbitration, such as the ICSID Additional Facility, ad hoc arbitration under UNCITRAL Rules, ICC Arbitration and others. Globally, there are still more than 2,500 treaties covering 50 percent of global foreign direct investment, meaning that while this system may be fine-tuned, it isn't disappearing any time soon.

 Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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