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COLLEGE OF LEGAL STUDIES

2015
International Arbitration

Project
On

Should India Become a party to ICSID: Impact on


development of ICA in India

Submitted to:

Tony Gorge
Assistant Professor
College of Legal Studies,
University of Petroleum & Energy Studies, Dehradun

Submitted By:
Anuj Bedi (R760210012)
Vth Year, BBA.LLB
College of Legal Studies,
University of Petroleum & Energy Studies, Dehradun

Introduction
The Convention: The ICSID Convention is a multilateral treaty formulated by the World Bank to create an
impartial international forum for the resolution of legal disputes between foreign investors
and States through conciliation or arbitration procedures. The ICSID Convention created the
International Centre for the Settlement of Investment Disputes (ICSID) to administer these
disputes. ICSID Convention came into force in the year 1996 and till now 157 countries have
ratified it.
Apart from the ICSID Convention, all other methods of arbitration, including ICSID
Additional Facility rules, provide for the conduct of arbitration under the rules chosen by the
parties, which are complemented by the rules of procedure of the legal system of the place of
arbitration. This means that, depending on the place of arbitration and the applicable legal
system, non-ICSID arbitrations are subject to different rules of procedure, the awards ensuing
there from is subject to different means of recourse and the recognition and enforcement of
such award is in principle governed by the New York Convention.
The common principle(s) of Investment protection are as follows: I.
II.
III.
IV.
V.
VI.

No expropriation without compensation;


Fair and equitable treatment;
Full protection and security;
No arbitrary or discriminatory measures impairing the investment;
Free transfer of funds related to investment;
National and most favoured nation treatment.

The State party to the dispute is bound to respect the obligations undertaken by it under the
ICSID Convention not only vis-a-vis the State of the investors nationality but also all other
State parties to the Convention. The fact that the State of the investors nationality has to
abstain from intervening during the currency of the arbitral proceedings stresses that the
dispute be not influenced by political considerations. As observed by Prof Schreuer, "the
arbitration procedure provided by ICSID offers considerable advantages to both sides. The
foreign investor no1 longer depends on the uncertainties of diplomatic protection but obtains
direct access to an international remedy. The dispute settlement process is depoliticized and
subject to objective legal criteria. In turn, the host State by consenting to ICSID arbitration
obtains the assurance that it will not be exposed to an international claim by the investors
home State....."
However, once an award has been rendered settling the dispute, that same State may exercise
diplomatic protection or bring an international claim for violation of the convention should
the State party to the dispute fail to comply with the award.
1 World bank group us
,https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/partA.htm

Before creation of the ICSID, disputes between foreign investors and the governments of
countries which hosted them were resolved between the countries themselves. This means
that the home country of the foreign investor would espouse its cause and attempt to resolve
the dispute with the host country through diplomatic channels. With the creation of the
International Court of Justice (ICJ) disputes could be brought before that forum if both
governments consented to the same. However, this inter-state paradigm for dispute-resolution
was unsuited to the needs of expanding cross-border business in the postcolonial setting. The
ICSID Convention created an arbitral institution that gives private parties (foreign investors)
direct access to justice wherein they can seek redressal against the actions of host
governments and thus address the need of the present time.
Advantages of ICSID Convention method: The benefits of ICSID method have been summarised as followsI.
II.
III.
IV.

It provides investors with direct access to a form of settlement of dispute they may
have with a host State;
It extends the possibility of dispute settlement beyond the realm of national courts in
the host State;
Investors do not have to depend upon the willingness of their home State to exercise
diplomatic protection on their behalf;
The enforcement provisions of the ICSID Convention make it highly probable that the
final ICSID award will be effectively enforceable.

A major advantage of the ICSID system is that it does not allow parties to seek annulment of
an award before a national court. Under the Convention, an ICSID award is to be recognized
by contracting states as if it were a final judgment of a court of that state. The only remedies
available are those provided under the Convention and are restricted to a request for
interpretation, a request for revision based on a newly-discovered decisive fact and a request
for annulment. The five grounds for annulment are narrower than the grounds for refusing
recognition or enforcement of an award under the 1958 Convention on the Recognition and
Enforcement of Foreign Arbitral Awards ("New York Convention"). On the basis of their
rights under the New York Convention, states have usually adopted legislation under which
recognition or enforcement of a foreign arbitral award can be prevented on the grounds that
the award is contrary to the state's own public policy. This is not a ground for nonenforcement under the ICSID Convention.
ICSID arbitration offers advantages to the investor as well as to the host State. Proceedings
may be instituted by either side but in the majority of cases the investor is in the position of
claimant. The Report of the Executive Directors on the Convention describes this balance of
interests in the following terms:
While the broad objective of the Convention is to encourage a larger flow of private
international investment, the provisions of the Convention maintain a careful balance
between the interests of investors and those of host States. Moreover, the Convention permits
the institution of proceedings by host States as well as by investor.

Jurisdiction: ICSID Convention is specialized in the settlement of investment disputes. Therefore the
existence of a legal 2dispute arising out of an investment is a prerequisite for ICSIDs
jurisdiction. The concept of investment is not defined in the Convention but many BITs and
multilateral treaties contain definitions of investment.
Section 25 of the ICSID Convention states that- (1) The jurisdiction of the Centre shall
extend to any legal dispute arising directly out of an investment, between a Contracting State
(or any constituent subdivision or agency of a Contracting State designated to the Centre by
that State) and a national of another Contracting State, which the parties to the dispute
consent in writing to submit to the Centre. When the parties have given their consent, no
party may withdraw its consent unilaterally"
Therefore, three requirements have to be satisfied in order for ICSID to have suitable
jurisdiction. These requirements are consent of the parties, personal jurisdiction, and subject
matter jurisdiction.
a) Consent;
b) Personal Jurisdiction;
c) Subject matter jurisdiction.
The jurisdiction of ICSID is restricted to cases where both parties have consented to submit
their dispute to the Centre. This makes ICSID a voluntary arbitral institution. The most
important requirement for consent to ICSID arbitration is for the consent to be in writing.
Consent in ICSID may represent either a clause compromissoire with respect to future
disputes or a compromise regarding an existing dispute. Thus, while consent is required
before a request for arbitration can be registered by the Centre, consent can be given before
or after the dispute in question arises. The consent to ICSID jurisdiction can be found in the
provisions of national legislation, Bilateral Investment Treaties.
The personal jurisdiction of ICSID restricts the parties eligible for dispute resolution to a
Contracting State and a foreign investor. As well as consenting to ICSID arbitration, both
parties must qualify as proper persons. Article 25(1) requires that the dispute be 'between a
Contracting State and a national of another Contracting State...' This however is not as
straightforward as it seems. The home and host states of the investor must each be a
Contracting State, which is a state that had, at least thirty days earlier, deposited an
instrument of ratification, acceptance or approval with the World Bank.
An ICSID arbitrator or tribunal does not have jurisdiction over political, economic or purely
commercial disputes. The ICSID arbitrator or tribunal can only arbitrate 'a legal dispute
2
http://www.jus.uio.no/lm/icsid.settlement.of.disputes.between.states.and.national
s.of.other.states.convention.washington.1965/

arising directly out of an investment.' A definition of the terms 'legal dispute' and 'investment'
were not included in the Convention but was left intentionally to be decided by the Tribunal.
This gives the tribunal wide jurisdiction to bring within its ambit various disputes and to
exclude many more which are not investments in real terms.
In case of proceedings before ICSID Tribunal the principle of non-frustration of proceeding
applies. The principle of non-frustration means that a case will proceed even if one party fails
to cooperate. This circumstance alone will be strong incentive to cooperate. ICSID
Convention is not threatened by the non-cooperation of a party. If one of the parties should
fail to act, the proceedings will not be stalled. The Convention provides a watertight system
against the frustration of proceedings by recalcitrant parties. Eg. Arbitrators not appointed by
the parties will be appointed by the Centre;16 the decision on whether there is jurisdiction in
a particular case is with the Tribunal17; non-submission of memorials or non-appearance at
hearings by a party will not stall the proceedings; non-cooperation by a party will not affect
the awards binding force and enforceability.
Parties to ICSID arbitration proceedings must be a State, or sometimes a State entity, that has
ratified the ICSID Convention and a national, whether a physical or legal person, of another
Contracting State. Thus, companies from one Contracting State who invest in another
Contracting State may have recourse to ICSID arbitration proceedings in the event of a
dispute with the host State, provided that consent to submit such disputes to ICSID has been
provided for in either a contract or in a bilateral investment treaty (BIT). An additional
requirement is that the investor must not be a national of the host State. But if a foreign
investor and the host State agree, the company will be treated as a foreign investor because of
foreign control.
In TSA Spectrum de Argentina S.A. v. Argentine Republic, a tribunal constituted pursuant to
the Rules of the International Centre for the Settlement Investment of Disputes ("ICSID")
dismissed on jurisdictional grounds the claim by TSA, a wholly-owned subsidiary of a Dutch
company, that Argentina breached its obligations under the Bilateral Investment Treaty
between the Netherlands and Argentina (the "BIT") when it terminated a concession contract
between TSA and a government agency. While the Tribunal rejected Argentinas request for
dismissal based on a forum selection clause in the concession contract, the Tribunal found
that it did not have jurisdiction under Article 25(1) of the ICSID Convention because, despite
the fact that the claimant was a Dutch national, TSA was ultimately controlled by an
Argentine citizen.
The second issue considered by the Tribunal in the above case was more controversial.
Article 25(1) of the ICSID Convention provides that ICSID has jurisdiction over disputes
between a Contracting State and a national of another Contracting State. In the case of
corporations ("juridical persons"), the first clause of Article 25(2)(b) defines a national of
another Contracting State as a juridical person with the nationality of the State other than the
State party to the dispute. In such circumstances, tribunals have generally upheld jurisdiction
even where the corporation of the other state is owned or controlled by nationals of the state
party to the dispute. Thus, in TokiosTokels v. Ukraine and Rompetrol Group N.V. v.

Romania, the Tribunal held that a Lithuanian corporation was a Lithuanian national even
though it was controlled by Ukrainian citizens. Refusing to "pierce the corporate veil," the
Tribunal found that it had jurisdiction to consider the corporations claim against Ukraine
under the first clause of Article 25(2)(b).
TSA presented a different problem, because it was incorporated in Argentina, not the
Netherlands. Therefore, the Tribunal had to determine jurisdiction based on the second clause
of Article 25(2)(b), which states that the term "nationals of another Contracting State" also
includes corporations incorporated in the State party to the dispute (here Argentina) in the
following circumstances: any juridical person which had the nationality of the Contracting
State party to the dispute on that date and which, because of foreign control, the parties have
agreed should be treated as a national of another Contracting State for the purposes of the
Convention.
This clause was applicable because TSA had the nationality of Argentina (the Contracting
Party to the dispute). Thus the issue for the Tribunal was whether TSA should nevertheless be
treated as a national of the Netherlands "because of foreign control."
In TSA, the Tribunal found that the ultimate owner (i.e. controller) of TSA, Mr. Jorge Justo
Neuss, was an Argentine citizen. Mr. Neuss, the claimant, also controlled the Dutch company
holding the TSA shares. Accordingly, the Tribunal dismissed the action because "TSA cannot
be treated, for the purposes of Article 25(2)(b) of the ICSID Convention, as a national of the
Netherlands because of absence of foreign control.
Jurisdiction is determined in the ICSID system by the Secretary-General, even though only in
a limited manner. This is performed upon the submission to him of an arbitration request. If
the request is registered by the Secretary-General and a tribunal is constituted, the tribunal
may consider jurisdiction at any time. Under Article 36(3) the Secretary-General shall not
register a request for arbitration if he discovers through the information contained in the
request that 'the dispute is manifestly outside the jurisdiction of the Centre.
Bilateral Investment Treaty & MITs: Today, the majority of ICSID disputes arise out of BITs (Bilateral Investment Treaties).20
BITs are treaties entered into between States with the aim of protecting and encouraging
investments between those States. They grant substantive protections to foreign investors
which are designed to prevent unlawful governmental interference with investments. Most
BITs also contain an offer by the State to resolve any disputes arising under the BIT through
international arbitration at ICSID. This gives investors the ability to enforce the BIT directly
against the host State by means of international arbitration.
The multilateral investment treaties (MITs) like the NAFTA (North American Free Trade
Agreement), Energy Charter Treaty are also provide consent for investment arbitration.
The use of investment protection agreements had kicked off in the last decade and there are
now approximately 2500 such agreements worldwide, with nearly one hundred and seventy
countries participating. Emerging market countries in Latin America, Asia and Africa are

active participants in such agreements,21 as they see it as an inexpensive means to mitigate


risk and also attract foreign investors.
Government of India have, so far, (as on July 2009) signed BIPAs with 75 countries out of
which 66 BIPAs have already come into force and the remaining agreements are in the
process of being enforced. In addition, agreements have also been finalised and/ or being
negotiated with a number of other countries.22 Article 9 and 10 of the Indian Model Text of
Bilateral Investment Promotion and Protection Agreement (BIPA) provides the dispute
settlement clauses to be applied in case of dispute arising between the investors and the other
contracting party.
Saipem vs. Bangladesh - In this case Saipem took recourse to the dispute settlement
provision under the BIT between Bangladesh and Italy, after the undue intervention by the
Bangladesh courts resulted in non-enforcement of ICC award in favour of Saipem. The basis
of Saipems claims was the undue intervention of the Bangladeshi courts in the ICC
(International Chamber of Commerce) arbitration, which precluded the enforcement of the
arbitration award in Bangladesh or elsewhere. According to Saipem, those acts constituted an
expropriation and deprived Saipem of any compensation. Thus Saipem in its request for
arbitration sought inter alia a declaration that Bangladesh expropriated Saipem of its
investments without compensation and that Bangladesh breached its obligations under the
BIT.

NT & MFN (National Treatment and Most Favoured Nation Treatment): Most favoured nation treatment- The effect of this type of clause is to increase the level of
protection the investor is afforded in line with the best the host State provides to national of
any other State. The idea behind extending MFN status is to prevent unreasonable
discrimination between imports from different foreign nations. With these objectives in mind,
the multilateral negotiations are meant to discourage member states from engaging in
unnecessary protectionism.
National treatment- National Treatment entails that no country will unfairly discriminate
between domestically produced goods and services and those that are created in foreign
countries.
Most of the bilateral and multilateral treaties provide for national treatment and most
favoured nation treatment clause in the agreement. Though these concepts were not so
popular in the early times, the recent agreements have extended these protections for the
investors.
Eg.- By means of the MFN clause contained in the Sino-British BIT, a U.K. investor can
benefit from the more comprehensive national treatment obligations contained in the 2003
Sino-German BIT.
Enforcement of awards: Awards are binding and final and not subject to review except under the narrow conditions
provided by the convention itself.24 Non-compliance with an award by a State would be a
breach of the Convention and would lead to a revival of the right to diplomatic protection by
the investors state of nationality.25 Thus it provides for an effective system for enforcement.
Domestic courts have no power to review ICSID awards in the course of their enforcement.
However, in the case of an award against a State the normal rules on immunity from
execution will apply. In actual practice this will usually mean that execution is not possible
against assets that serve the States public functions.26 All ICSID signatories of "Contracting
States" are required to recognise and enforce ICSID arbitral awards (whether or not they are
parties to the arbitration). On 19 June 2009, the US District Court for the Southern District of
New York issued an order to enforce an ICSID award 3in Siag v. Egypt, ICSID Case No.
ARB/05/15 in which the tribunal awarded the claimants almost US$75 million, plus interest
and expenses, totalling approximately US$133million. The award is the largest ever granted
to individual claimants by the ICSID.
On 1st June 2009, in Siag v. Egypt, ICSID Case No. ARB/05/15, the International Centre for
Settlement of Investment Disputes,27 awarded the claimants almost US $75 million, plus
interest and expenses, totalling approximately US$133million. In the proceedings, the ICSID
tribunal decided that Egypt had violated an investment treaty between Italy and Egypt that
protected investments by Italians in Egypt, when the Egyptian government expropriated from
3 http://www.internationalarbitrationlaw.com/icsid-arbitration-rules/

the claimants a 161-acre resort property on the Gulf of Aqaba. In enforcement proceedings
before the US District Court for the Southern District of New York, the court issued an order
to enter judgment in the amount of the award adopting the procedure set out in Article 54 of
the New York Civil Practice Law Rules, to effectuate entry of a judgment of an ICSID award.
The award is the largest ever granted to individual claimants by the ICSID.
Annulment of the Award: An ICSID ad hoc Committee can only annul an award based on the following grounds.
Article 52(3) of the ICSID Convention permits an ad hoc committee to annul an award only if
at least one of the five grounds for annulment set out in Article 52(1) is met. These are: (a)
the tribunal was not properly constituted; (b) it manifestly exceeded its powers; (c) an
arbitrator was corrupt; (d) there was a serious departure from procedure; or (e) the tribunal
failed to state reasons.

Whether India is a signatory to the ICSID Convention: India did not sign or ratify the Convention till now.
ICSID Additional Facility: Though India is not a signatory to the ICSID Convention, still India can use the service of the
ICSID Additional Facility which was created in the year 1978. It is designed primarily to
offer methods for the settlement of investment disputes where only one of the relevant States,
either the host State or the State of the investors nationality, is a party to the Convention. The
Additional Facility may also be used for disputes which do not directly arise out of an
investment, or for fact-finding proceedings.28 The Additional Facility is subject to its own
rules and regulations. The ICSID Convention does not apply to it.
Currently claims by Indian investors against foreign states or claims by foreign investors
against India can only be pursued through the ICSID Additional Facility Rules, the
UNCITRAL rules or ad hoc arbitrations. In all cases, the award is subject to national laws on
the recognition of foreign arbitral awards. Moreover, nothing prevents national courts from
interfering with arbitral proceedings. For investors, the major advantage of the ICSID system
is that it is self-contained. ICSID tribunals have the power to make interim measures and are
exempt from the scrutiny or control of domestic courts in contracting states.29 This may well
ensure more efficient proceedings. Predictability is also increased because of ICSID's quickly
growing body of arbitral case law, both procedural and substantive.
Impact on India: It appears that the Government of India may soon be sued by foreign investors to the tune of
billions of dollars under its various bilateral investment treaties. A bilateral investment treaty
(BIT) is an agreement between two sovereign states that grants certain protections to
investments made by one state - including private inve 4stments - in the other state, including
fair and equitable treatment, and protection from expropriation.
Customarily, BITs provide for an alternative dispute resolution mechanism, through which an
aggrieved investor may seek damages from the host state in an arbitral tribunal sitting in a
neutral venue such as the International Centre for the Settlement of Investment Disputes
(ICSID) rather than the courts of the host nation.
Until very recently, there was not a single published investment arbitration decision to which
the Indian government was party - though there were nine unpublished claims. This changed
in November 2011, when an arbitral tribunal held India liable, because of long-standing
judicial delays experienced by a foreign investor.
But the damages in this case were only about $5 million, a relatively small sum when
compared to the size of many other awards (for example, Exxon Mobil was recently awarded
$907 million in a case against Venezuela). India, to date, appears to have fared better than
4 http://www.indialawjournal.com/volume5/issue_3/article5.htmls

most countries. This apparent quiet, however, has come to an abrupt end. Sistema, a Russian
telecom company, delivered a notice of investment arbitration in February this year over the
cancellation of its 2G licences held by its local group. Last month, Telenor ASA, the
Norwegian telecom company claiming Dutch nationality through a subsidiary, threatened
arbitration over the cancellation of its 2G licences held by its joint-venture company.
The Children's Investment Fund, a UK hedge fund, threatened to initiate investment
arbitration in April against India over its pricing policies for Coal India. And, just weeks ago,
a Dutch subsidiary of Vodafone served a notice of dispute on the Indian government over
proposed legislation that would result in the company owing nearly $3 billion in back taxes.
These possible international arbitrations against the government arise through the vast
network of BITs to which India is a party. India has at least 72 BITs in force with countries
such as the Netherlands, the United Kingdom, France, Germany and the Russian Federation.
Possible bases for claims include expropriation of an investment without adequate
compensation, unfair and inequitable treatment and denial of justice by Indian courts. These
protections are not without limits, however, permitting sovereign states some degree of
regulatory flexibility at the expense of investors, foreign and domestic alike. The question of
where to draw this line is frequently at the heart of a dispute involving claims arising under a
BIT.
Notwithstanding the protections afforded to foreign investors, BITs also place limitations
upon a foreign investor seeking to bring a claim. Many BITs contain a 'cooling off period'
clause, generally of six months, during which the parties must attempt to settle their dispute
amicably through negotiations. Only after that period has lapsed, the dispute can be submitted
for arbitration. Further, BITs do not protect against one-off commercial transactions.
Instead, they extend protection to investments such as mineral concessions and intellectual
property. Many investment arbitration tribunals have declined jurisdiction on the ground that
the dispute in question did not arise out of a qualified 'investment' as defined by a BIT, even
though there might appear to be an investment in the common sense or economic
understanding of the term.
Foreign investors are also limited by India not being party to the Convention on the
Settlement of Investment Disputes between states and nationals of other states (ICSID
Convention). State parties to the ICSID Convention are bound to recognise awards as if they
were final judgments of their own highest courts. This can help streamline the process of
recognition and enforcement of an arbitral award for a successful foreign investor.
Otherwise, a losing host state may refuse to recognise an arbitral award on the ground, for
example, that it violates the public policy of the host state. Finally, some of the possible legal
claims against India involve evolving areas of the law, such as a state's freedom to amend its
tax laws retroactively, if doing so is in the national interest, or to revoke licences that may
have been improperly granted. From the perspective of a foreign investor, the success of
these arguments cannot be taken for granted. In other words, even if India soon faces more
investment arbitration claims, there is no certainty that all these claims will prevail.

News of the growing number of claims against the government coincides with unconfirmed
reports that India is planning to exclude arbitration clauses from BITs currently under
negotiation with the European Union, Australia, New Zealand and other countries. Its
decision to do so could limit some future liability. However, BITs without an alternative
dispute resolution mechanism may also deter foreign investors sensitive to the protections
afforded to them by BITs because such protections would need to be enforced in Indian
courts.
This is an important time for India in the light of these new and threatened claims under BITs.
Foreign investors often use the statements and actions of government officials, while the
cases are pending to support their claims against the government. Accordingly, Indian
government officials would be wise to deal cautiously with these foreign investors during the
resolution of these cases.

Conclusion
Now-a-days direct arbitration between the host State and the foreign investor is the preferred
option for the settlement of investment disputes. If arbitration is not supported by a particular
arbitration institution, it is referred to as Ad hoc arbitration. Ad hoc arbitration requires an
arbitration agreement that regulates a number of issues. These include the selection of
Arbitrators, the applicable law and a large number of procedural questions. A number of
institutions like UNICITRAL , have developed standard rules that may be incorporated into
the parties agreement. But Ad hoc arbitration is subject to the rules of the arbitration law of
the country in which the tribunal has its seat.
Thus, a step forward is the ICSID Arbitration under the ICSID Convention which provides
much more security to both investors as well as the host State. The investors are ensured that
the arbitration award is not subject to review by the national court of the host State which are
sometimes looked as not being impartial forum for such disputes. And the host State by
consenting to ICSID Arbitration attracts more number of investors which is a growing need
for a country like India.
The Tribunal in Amco v. Indonesia explained that ICSID arbitration is in the interest not only
of investors but also of host States. It concluded "Thus, the Convention is aimed to protect, to
the same extent and with the same vigour the investor and the host State, not forgetting that to
protect investments is to protect the general interest of development and of developing
countries."
Most investors prefer seeking recourse to a neutral dispute-resolution mechanism instead of
the domestic courts of the host country. In this light, the ICSID has emerged as a prominent
forum for investor-state arbitration and of late, most Bilateral Investment Treaties (BITs)
designate this institution as the proper forum for resolving prospective investment disputes.
Thus India should also look forward and step into it with confidence. However, the growing
importance of the ICSID also has its critics. But even though a country may feel vulnerable to
arbitration by consenting to this method but the benefits are always more than the demerits as
a country by consenting to ICSID arbitration promotes the competitive environment for
business. And India is no more only a capital importing country but in the last few years has
grown as a capital exporting country as well and thus the benefits received by the foreign
investors in India are always on a reciprocating basis. Thus to remain competitive and to keep
the growth intact India should sign and ratify the ICSID convention.