Oil, Gas & Energy Disputes: Trends in Tough Times - Part 2*

Article by Dr. Robert Gaitskell, Q.C.**

To view Part 1 of this article, please click here.

[VII] ICSID ARBITRATION Sovereign States As Participants In Energy Projects 7.

7.1. Where the contracting parties are both private companies, no particular difficulties arise. However, things become more problematic if one of the parties is a sovereign state.

7.2. Say, for example, an oil company invests substantial funds in exploration and exploitation of certain gas and oil reserves within a certain country, the host nation. Assume, then, that for various political reasons the host no longer wishes to have this oil company carrying out activities within its borders. It expropriates the very expensive equipment on its land and expels the oil company's personnel. What can the oil company do? The oil company will have to rely upon investor-state arbitration. However, since the party it wishes to sue is a sovereign state, this raises difficulties.

7.3. For an interesting discussion of some of the difficulties that may arise where there are disputes concerning petroleum deposits, see Higgins, R. "Problems & Process: International Law and How to Use It", pp. 136-142, 1998, OUP.

7.4. The general rule is that one state cannot exercise its sovereign dominium over other sovereign states. This principle is sometimes expressed in Latin: "par in parem non habet imperium", meaning, one equal cannot exercise authority over another equal45. If a national court were to attempt to exercise jurisdiction over the actions of another state this would amount to an attempt to exercise such (forbidden) dominium. Consequently, national courts and tribunals have consistently refused to allow governments to be sued within their jurisdictions.

7.5. However, the above general position has caused great difficulties with the globalisation of economic activity. This is particularly so where such activity takes place within states where the dominant political philosophy is based upon a view that the state owns all the means of production, including the land and its resources. In those circumstances, virtually any economic activity by a multinational company is likely to involve the company entering into contractual relations with the state itself. As a result, and by a process of judicial interpretation, absolute immunity has given way (in various countries, e.g. England) to the doctrine of restrictive immunity, modifying the original common law position.

7.6. The practical solution to the above difficulty of suing a sovereign state is to be found in the arbitration procedure available under the International Convention for the Settlement of Investment Disputes ("ICSID Convention").

ICSID: The International Convention For The Settlement of Disputes 7.7. The idea of having an international agreement along the lines of the ICSID convention was first mooted in 1961 by the then General Counsel of the World Bank46. The World Bank is also known as the International Bank for Reconstruction and Development ("IBRD"). One of the principal drivers for the creation of such a convention was the increasing awareness that the best way to promote international private investment, particularly into developing countries, would be to establish effective legal machinery for impartial disputes resolution. The ICSID convention is also known as the "Washington Convention" of 1965.

7.8. By 1965 the Convention was ready for signature and ratification. The 20 ratifications required for its entry into force were quickly achieved and the Convention became operational on 14th October 1966. It was widely supported, including by newly independent African states, who wished to encourage foreign investment. At the time of its inception many of its features were important new developments. For the first time, there was a system available by which non-state entities, corporations or individuals, could sue sovereign states directly, and where State immunity was much restricted, and under which international law could be applied directly to the relationship between the investor and the host State, and where the operation of the 'local remedies' rule was excluded, and, most importantly, in which the tribunal's award would be directly enforceable.

7.9. The system was initially restricted to those cases where both the national state of the investor, and the state party, were parties to the Convention. However, this meant that if one party to the dispute did not meet this requirement, the dispute could not be submitted to ICSID, even if both parties so wished. In 1978 this difficulty was resolved by the creation by the World Bank of the so-called "Additional Facility", which permits usage of the ICSID system even if only one party meets the requirement, provided that both consent.

7.10. When the Convention was first conceived the intention was that consent to jurisdiction under that system would derive mainly from express references to it in the arbitration clauses of investment contracts. However, since then the sources of consent have been significantly broadened so that ICSID's procedures may be used where there are provisions in inter-state bilateral investment protection and investment guarantee agreements, and also where there are multilateral arrangements such as the North American Free Trade Agreement ("NAFTA"). Bilateral investment treaties are commonly known as BITs.

7.11. The success of the ICSID system is demonstrated by the fact there are, currently, many hundreds of cases being dealt with under that Convention. Such arbitrations, where one party is a non-state entity, and the other is a sovereign state, are commonly known as "mixed arbitrations".

7.12. The current position is that the ICSID Convention has been ratified by over 125 States, and newly independent States are generally keen to become signatories in order to attract foreign investment47.

7.13. ICSID is simply a framework within which the procedures of arbitration and conciliation may occur. Its offices are based at the World Bank headquarters in Washington D.C. It has an Administrative Council and a Secretariat. It maintains panels of suitable persons, recognised in the fields of law, industry or finance, "who may be relied upon to exercise independent judgment": ICSID Convention, Article 14(1). Persons chosen from these panels may then serve as arbitrators or conciliators. Each State Party may designate four persons to the Panel of Arbitrators, and four to the Panel of Conciliators. There are a few conciliations.

7.14. ICSID's jurisdiction is set out in Article 24 of the Convention:

"The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent sub-division 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".

7.15. For ICSID's jurisdiction to take effect, it is necessary for two levels of submission to its jurisdiction by the parties. The first level, as contemplated by Article 25, is the ratification of the Convention. The second level of submission is achieved when both parties give their written consent to submit their particular dispute to the ICSID procedure. Such consent may be found, for example, in a Concession Agreement between the investor and the host state. Submission may also be achieved by a BIT, and there are now thousands of such treaties in existence.

7.16. Besides the BITs referred to above, submission to ICSID is often achieved in Multilateral Investment Treaties (MITs), such as the European Energy Charter.

7.17. Potential investors should be wary of a particular problem. Many host countries require that investment be channelled through a domestic company. In such a case recourse to the ICSID Convention is lost because, if a dispute arises, the relevant agreement is one between the State and a company incorporated within that State (rather than a national of a difference State).

7.18. Once an appropriate dispute arises, either of the parties to the contract may request arbitration from the ICSID Secretary-General. Once the ICSID arbitration procedure has commenced, national courts are obliged to dismiss any claims that ought properly to be part of the ICSID procedure. It is open to the parties jointly to choose three (or, indeed, any odd number) of arbitrators, but in the absence of such overall agreement, it is the norm for each to...