INVESTOR STATE DISPUTE SETTLEMENT UNDER ICSID MECHANISM FROM THE VIEW OF DEVELOPING COUNTRIES LESSONS FOR VIETNAM

MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH CITY UNIVERSITY OF LAW
-----------***-----------MANAGEMENT COMMITTEE OF
SPECIAL PROGRAMS

LÊ NGỌC BẢO KHUYÊN

INVESTOR-STATE DISPUTE SETTLEMENT UNDER ICSID
MECHANISM FROM THE VIEW OF DEVELOPING COUNTRIES LESSONS FOR VIETNAM

BACHELOR OF LAW - GRADUATION DISSERTATION
Faculty: International Law
Academic Year: 2012 - 2016

Supervisor: Dr. Lê Thị Ánh Nguyệt
Author: Lê Ngọc Bảo Khuyên
Student ID number: 125 3801 012133
Class: CLC37B

HO CHI MINH CITY
2016


ACKNOWLEDGEMENT
I want to express my sincere thanks to Dr. Le Thi Anh Nguyet from Ho Chi Minh
City University of Law for her guidance on the outline of this dissertation. Thanks
to her I am able to visualize the purpose and the method to research on this
interesting topic.
I want to genuinely thank Ms. Trinh Nguyen since the idea of making the
dissertation on this ICSID topic coming up during the time working with her as a
legal intern. I also want to thank Mr. Nguyen Trung Nam for providing me the

diverse information subject to this topic.
I am especially grateful for my family, my mother, father, and sister, for their
understanding, support and encouragement through 4 years of university. Last but
not least, I am sincerely thankful and want to show my appreciation for my friends,
especially for Thanh Tuan and Ngoc Tuan. Their editorial observations as well as
their knowledge of computers are really helpful and valuable for the completion of
this dissertation.


TABLE OF CONTENTS
ABBREVIATIONS ................................................................................................. iii
LIST OF CASES .................................................................................................... iv
LIST OF CHARTS ...................................................................................................v
INTRODUCTION .....................................................................................................1
1.

Importance & Justification of the study ........................................................ 1

2.

Progress in study on the topic ........................................................................3

3.

Objective & scope of the study .....................................................................4

4.

Research methodology .................................................................................. 5

5.

Structure of the dissertation ........................................................................... 6

CHAPTER 1: THE ESTABLISHMENT AND STRUCTURE OF ICSID…… 8
1.1.

Background of the study ................................................................................ 8

1.2

The establishment of ICSID ........................................................................11

1.3.

Main features of ICSID ............................................................................... 12

1.4.

Jurisdiction of ICSID ................................................................................... 14

1.4.1.

Consent to arbitration............................................................................ 14

1.4.2.

Requirements as to the parties involved ............................................... 16

1.4.3.

Investment disputes............................................................................... 19

1.5.

The ICSID Additional Facility ....................................................................20

1.6.

Enforcement of ICSID Awards ...................................................................21

CHAPTER 2: ICSID FROM THE VIEW OF DEVELOPING COUNTRIE ...24
2.1.

Criticism on ICSID mechanism...................................................................24

2.2.

ICSID from substantive point of view ......................................................... 26

2.2.1.

Definition of investment .......................................................................26

2.2.2.

Expropriation: direct and indirect expropriation ..................................28

2.2.3. Any consideration of main features of investor-state disputes from
ICSID? ....................................................................................................................

2.3.

ICSID from procedural point of view ......................................................... 35

i


2.3.1.

The connection with the World Bank ................................................... 35

2.3.2.

Independent and Impartiality of the arbitrators ....................................37

2.3.3.

The inconsistency of using case law ..................................................... 43

CHAPTER 3: LESSONS FOR VIETNAM .......................................................... 46
3.1.

Practical settlement of investment disputes in Vietnam .............................. 46

3.1.1.

Investment disputes in Vietnam in current period ................................ 46

3.1.2.

Mechanism for settlement of investment dispute in Vietnam .............. 46

3.1.3.

Increasing risk of being claimed by foreign investors .......................... 48

3.2.

Lessons for Vietnam .................................................................................... 50

3.2.1. Review definitions and regulations carefully when negotiating and
drafting investment treaties ................................................................................ 51
3.2.2.

Limit the investor‟s access to arbitration .............................................. 54

3.2.3.

Actively participate in the arbitration proceedings early ...................... 55

3.2.4. Enhance the capacity of domestic institutions, especially judicial
institutions ..........................................................................................................56
CONCLUSION ........................................................................................................57
ANNEX..................................................................................................................... 59
BIBLIOGRAPHY ...................................................................................................62

ii


ABBREVIATIONS

No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Abbreviations
AF
AF Rules
ASEAN
BIT
BTA
ECT
EU
FDI
GDP
ICC
ICSID

12.

The ICSID Convention

13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

IFC
IIA
ISDS
NAFTA
PCA
SCC
The New York
Convention
The U.K
The U.S
The UN‟s Resolution

23.
24.

TRIMS
UNCITRAL

25.

UNCTAD

26.

VCCI

Additional Facility
ICSID Additional Facility Arbitration Rules
Association of Southeast Asian Nations
Bilateral Investment Treaty
Bilateral Trade Agreement
Energy Charter Treaty
European Union
Foreign Direct Investment
gross domestic product
International Chamber of Commerce
International Centre for Settlement of Investment
Disputes; (or refers to) the Centre
The 1965 Convention on the Settlement of
Investment Disputes between States and
Nationals of Other States
International Finance Corporation
International Investment Agreements
Investor-state Dispute Settlement
North American Free Trade Agreement
Permanent Court of Arbitration
Stockholm Chamber of Commerce
The 1958 Convention on the Recognition and

Enforcement of Foreign Arbitral Awards
The United Kingdom
The United States of America
The 1962 General Assembly Resolution 1803 on
Permanent Sovereignty over Natural Resources
of the United Nations
Trade-Related Investment Measures
United Nations Commission on International
Trade Law
United Nations Conference on Trade and
Development
Vietnam‟s Chamber of Commerce and Industry

iii


LIST OF CASES
1. Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case
No.ARB/81/1;
2. Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic, ICSID Case
No. ARB/97/4;
3. SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan,
ICSID Case No.ARB/01/13;
4. SGS Société Générale de Surveillance S.A. v. Republic of the Philippines,
ICSID Case No.ARB/02/6;
5. Metalclad Corporation v. The United Mexican States, ICSID Case No.
ARB(AF)/97/1;
6. Santa Elena v. Costa Rica Compía Del Desarrollo De Santa Elena, S.A. v.
The Republic Of Costa Rica, Case No.Arb/96/1;
7. Tecnicas Medioambientales Tecmed S.A. V. The United Mexican States

Case No. Arb (Af)/00/2;
8. Generation Ukraine, Inc. v. Ukraine, ICSID Case No. Arb/00/9;
9. CMS Gas Transmission Company v. Argentine Republic, ICSID Case
No.ARB/01/8;
10. Trinh Vinh Binh (Netherlands) v. Vietnamese government (Vietnam),
UNCITRAL;
11. South Fork (the U.S) v. People‟s Committee of Binh Thuan Province;
12. Saipem S.p.A. v. The People's Republic of Bangladesh, ICSID Case
No.ARB/05/07;
13. Marvin Roy Feldmen Karpa v. United Mexican States, ICSID Case No.ARB
(AF)/99/1).

iv


LIST OF CHARTS

No.

Chart Name

Page

1.

Chart 1. Foreign Direct Investment in Vietnam (2012 – 2014)

1

2.

Chart 2. Known ISDS cases, annual and cumulative (1987- 2014)

8

3.

Chart 3. Most frequent Respondent States (total as of end of 2014)

10

4.

Chart 4. Most frequent home States of investors (total as of end of 10
2014)

5.

Chart 5. Arbitrators, Conciliators, and ad hoc Committee Members 38
appointed in cases registered under ICSID Convention and Additional
Facility Rules – Distribution of Appointments by Geographic Region
(as of June 30, 2015)

6.

Chart 6. Country Comparison for the Protection of Investors (2016)

49

7.

Chart 7. Known investment treaty claims, by Respondents

59

8.

Chart 8. Types of cases registered under ICSID Convention and 60
Additional Facility Rules (as of June 30, 2015)

9.

Chart 9. Basis of Consent invoked to establish ICSID Jurisdiction in 61
Cases registered under the ICSID Convention and Additional Facility
Rules (as of June 30, 2015)

v


INVESTOR-STATE DISPUTE SETTLEMENT UNDER ICSID
MECHANISM FROM THE VIEW OF DEVELOPING COUNTRIES LESSONS FOR VIETNAM
INTRODUCTION
1. Importance & justification of the study
FDI inflows to Vietnam have increased significantly since the country authorised
foreign investments back in 1988. According to the World Bank, business climate
in Vietnam improved in 2015, with the country gaining three places in the 2016
Doing Business report (90th out of 189). FDI flows are expected to continue to
grow, confirming the country's position as the third most attractive country in terms
of FDI in Asia, just behind China and India1.
Chart 1. Foreign Direct Investment in Vietnam (2012 – 2014)

Foreign Direct Investment

2012

2013

2014

FDI Inward Flow (million USD)

8,368

8,900

9,200

FDI Stock (million USD)

72,891

81,791

90,991

Number of Greenfield Investments***

174

133

251

FDI Inwards (in % of GFCF****)

22.2

22.1

21.8

FDI Stock (in % of GDP)

46.9

48.0

48.9

Source: UNCTAD - 20162.

1

―Vietnam: Foreign Investment‖, Santander Trade Portal, Available online at:
Https://En.Portal.Santandertrade.Com/Establish-Overseas/Vietnam/Investing [Accessed on July 10 2016]
2
Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global
FDI Inflows and its Share in Global GDP. ** The UNCTAD Inward FDI Potential Index is Based on 12
Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D,
Education, Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a
Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From

the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets
Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.

1


Just in 2015, Vietnam has attracted large technology, industrial and HR projects
and, between January and September 2015, recorded USD 17.15 billion worth of
foreign direct investment for a total of 461 projects 3.
Such high flows of foreign direct investment goes along with the need of increasing
level of protection for foreign investors. Being one of the developing countries not
yet participate in the ICSID Convention, Vietnam has been under pressure of the
international investors community as well as other developed countries to agree to
use ICSID mechanism as the way to settling investment disputes in BITs not only to
protect the interests of foreign investors in Vietnam, but also to make the
investment environment of Vietnam more attractive and appealing.
On the other hand, developing countries usually are the Respondents under ICSID
mechanism and the ones bear the burden of compensation and other measures as
held in the awards of ICSID arbitral tribunals. Looking over the s of ICSID, 60% of
all cases were brought against developing and transition economies in 2014. This
leads to a certain doubts and questions on ICSID regime‟s impact on developing
countries.
Thus, is ICSID really a good choice for developing countries? Is there any ways for
developing countries to avoid being sued at the ICSID? Is there any ways for
developing countries to avoid huge compensation to foreign investors but still
remain a member of the ICSID Convention? From Vietnam‟s perspective, is joining
the ICSID Convention the only option for Vietnam like other developing countries
having not ratifies the Convention? How could Vietnam avoid being sued by
foreign investors?
To answer these questions, a research on how ICSID mechanism works as well as

the application of ICSID mechanism in Investor – State disputes settlement in
practice from the view of developing countries have a significant meaning for
3

Ibid, note 1

2


Vietnam to consider joining the ICSID Convention and prepare for the possibility of
being sued by foreign investors under the ICSID mechanism.
2. Progress in study on the topic
Overseas, there are many studies on international investment disputes, investment
disputes settlement mechanism, ICSID mechanism, such as:
-

Investor-state Disputes arising from Investment Treaties: A Review,
UNCTAD Series on International Investment Policies for Development
(2005);

-

International Centre for Settlement of Investment Disputes – Procedural
Issues, Course on Dispute Settlement in International Trade, Investment and
Intellectual Property, UNCTAD (2003);

-

Bassant El Attar et al, Expropriation clauses in International Investment
Agreements and the appropriate room for host States to enact regulations: a

practical guide for States and Investors, The Graduate Institute Geneva –
Centre for Trade and Economic Integration (2009), etc.

These above studies introduce the general view of ICSID, or analyse one or several
features of ICSID mechanism. These works have emphasized the outstanding points
of this mechanism as ensuring the interests of investors are protected when
investing in developing countries.
Solutions to apply such mechanism in some countries are also discussed in these
studies, especially in Latin American countries such as Argentina, or Venezuela, as
there is a large number of investor-state dispute initiating under the mechanism of
ICSID.
In the publication "Investor-state disputes: prevention and alternatives to arbitration
II" hay “UNCTAD Series on issues in international investment agreement: Dispute
settlement investor-state”, UNCTAD has pointed out common dispute between the

3


government and the international investors, and provide some solutions for
developing countries. However, currently UNCTAD has not announced any
research for the case of Vietnam.
Domestically, there are some journals and articles related to this topic, such as:
-

Pham Manh Dung, “The Washington Convention 1965: a dispute settlement
mechanism on investment”, Journal of Economics and forecasting, No.
10/20074;

-

Hoang The Lien, “Introduction of the dispute settlement mechanism of
foreign trade and foreign investment mainly in Vietnam, taken from the book
“Settling disputes with foreign elements in Vietnam”, Political Publishing
House National 20005;

-

Do Hoang Tung, Mechanism and Practicality of investment dispute
resolution of the International Centre for Settlement of Investment Disputes
(ICSID), State and Law Journal No. 4/2008 6, etc.

Some articles briefly indicate the overview of ICSID, or evaluate specific issues
regarding the ICSID, but there is no researches studying on the application of this
mechanism in resolving investor-state disputes in practice.
Thus, there is no studies the ICSID mechanism from developing countries‟
perspective, both theoretical and practical as well as substantive and procedural
viewpoints of ICSID mechanism in order to draw lessons and give
recommendations in the context of Vietnam.
3. Objective & scope of the study
4

Phạm Mạnh Dũng, ―Công ước Washington năm 1965: cơ chế giải quyết tranh chấp về đầu tư‖, Tạp chí Kinh
tế và dự báo, số 10/2007
5
Hoàng Thế Liên, ―Giới thiệu chung về các cơ chế giải quyết tranh chấp ngoại thương và đầu tư nước ngồi
chủ yếu ở Việt Nam‖, trích từ cuốn ―Giải quyết tranh chấp kinh tế có yếu tố nước ngồi tại Việt Nam‖, NXB
Chính trị quốc gia 2000
6
Đỗ Hồng Tùng, ―Cơ chế và thực tiễn giải quyết tranh chấp đầu tư của trung tâm giải quyết các tranh chấp
đầu tư quốc tế (ICSID)‖, Tạp chí Nhà nước và Pháp luật số 4/2008

4


As objective of this dissertation, ICSID mechanism will be reviewed and analysed
from developing countries‟ perspective through typical ICSID cases involving
developing countries as Respondent. Thereby, criticism on ICSID mechanism
applied to settling investment disputes in developing countries will be examined
and evaluated hereinafter to draw lessons for Vietnam.
Thus, the scope of this dissertation is limited within the ICSID cases brought to
ICSID under ICSID Convention and where developing countries involved in as
Respondent as most of the cases registered at ICSID based on ICSID Convention7.
Moreover, due to the limitation of time and as set by rules, only certain matters of
ICSID mechanism are discussed in this dissertation. Last but not least, for the
purpose of this paper, ICSID mechanism for dispute settlement hereinafter should
be deemed not as conciliation but arbitration.
4. Research methodology
The author of this dissertation makes the legal research on ICSID mechanism and
interpreting ICSID Convention in order to create the general view of ICSID
mechanism. Second, statistics regarding ICSID mechanism as well as complaints
and criticism are analysed from both substantive and procedural points of view as to
build the overall description of ICSID mechanism from developing countries‟
perspective. Analysis methodology is also applied to create a picture of investment
dispute in Vietnam, which is the basis for applying lessons drawing from
developing countries.
Besides, the author also analyses cases on certain matters where developing states
involving as Respondents, as well as identifies certain issues regarding international
law in order to reach the conclusion regarding developing countries and
demonstrates the cause of the discussed issues.

7

See Annex – Chart 8

5


Finally, the synthesis methodology is used to conclude lessons and solutions for
Vietnam, which is also the aim of this dissertation.
5. Structure of the dissertation
Chapter 1: The establishment and structure of ICSID
Based on some facts and statistics, the dissertation first gives the background of the
study in order to sketch out the initial perception and sensation on ICSID
mechanism. Then, the dissertation analyses the establishment and the structure of
ICSID through objective lens in order to draw the general view of ICSID
mechanism.
Chapter 2: ICSID from the view of developing countries
In order to see and understand ICSID mechanism from the view of developing
countries, who mostly and normally are the Respondents under such regime and
bear the burden of compensation and other measures as held in the awards of ICSID
arbitral tribunals, criticism on ICSID mechanism is analysed from substantive
points of view, focusing on the interpretation of “investment” and “expropriation”
through analysing cases where developing states involving as Respondents.
Besides, prominent value in state sovereignty and the concept where the nature of
investor-state dispute may seems to be contrary to the nature of international
arbitration mechanism are also illustrated in order to reach the deeper layer of
perception of investment arbitration and show the need of balance between these
two. Such criticism is also explicated from procedural points of view with regard to
the ICSID‟s connection with the World Bank, the independence and impartiality of
arbitrators, as well as the consistency of using case law under ICSID mechanism.

Chapter 3: Lessons for Vietnam
After analysing and reaching conclusions for certain issues on ICSID mechanism
from developing countries‟ aspect, a picture of investment dispute in Vietnam is set

6


as the basis for later applying lessons drawing from developing countries for
Vietnam.

7


CHAPTER 1: THE ESTABLISHMENT AND STRUCTURE OF ICSID
1.1. Background of the study
To begin analysing the International Centre for Settlement of Investment Disputes
(“ICSID”) mechanism from developing countries‟ perspective, imagine a state
being ordered to pay $12 billion as the arbitral awards for foreign investors, which
is twenty per cent (20%) of its gross domestic product (“GDP”). Such tremendously
shocking figures were in fact the amount Ecuador government had to face, as a
result arising out of disputes with foreign investors in 20098 under contracts and
investment treaties between Ecuador and foreign investors 9.

Chart 2. Known ISDS cases, annual and cumulative (1987- 2014)

International arbitration statistic shows that to the end of 2014, of the 42 new
known investor-state disputes, 33 were filed with the ICSID 10. About 61% of cases
8

―Impact Of Ecuador Icsid Exit‖, Latin Business Chronicle (June 30, 2009). Available online at:

[Http://Www.Latinbusinesschronicle.Com/App/Article.Aspx?Id=3502], Ecuador’s 2010 GDP was $58.91 Billion.
9

Eric Gillman, ―The End of Investor-state Arbitration In Ecuador? An Analysis of Article 422 of the Constitution
of 2008‖, 19 Am. Rev. Int’l Arb. 269, 280-83 (2008)
10

This does not cover cases that are exclusively based on investment contracts (State contracts) or national
investment laws, or cases where a party has so far only signalled its intention to submit a claim to ISDS, but
has not yet commenced the arbitration.

8


filed in 2014 related to the services sector. Primary industries account for 28% of
new cases while the remaining 11% arose out of investments in manufacturing.
Looking at the industries in which investments were made, the most numerous was
generation and supply of electric energy (at least 11 cases), followed by oil, gas and
mining, construction and financial services11. The two types of State conduct most
frequently challenged by investors in 2014 were “cancellations or alleged violations
of contracts or concessions” (at least nine cases), and “revocations or denial of
licenses or permits” (at least six cases). For cases where this information has been
reported, the amount claimed ranges from USD 8 million to about USD 2.5
billion12.
On the other hand, looking over the Respondents of ICSID, 60% of all cases were
brought against developing and transition economies in 2014. The most frequent
Respondent (total as of end of 2014) was Argentina, followed by Venezuela, Czech
Republic, and Egypt. Meanwhile, in 2014, 35 cases of the 42 known new cases
were brought by investors in which their home States are developed countries13. The
most frequent home States in total as of end of 2014 was the United States,

followed by Netherlands, the United Kingdom and Germany. This in accordance
with the historical trend where investors from developed countries, such as those
from the United States, Canada and several European Union (EU) countries, have
been the main users of the system responsible for over 80% of all ISDS claims. In
addition, one more thing should be noticed that the consent of parties invoked to
establish ICSID jurisdiction under ICSID Convention and Additional Facility Rules
is mostly made under BITs (61.0%)14.

11

―Investor-state dispute settlement: Review of developments in 2014‖, IIA Monitor No.2 (May 2015),
UNCTAD, United Nations, New York and Geneva (2015), p.2
12
Ibid
13
Ibid at p.3
14
See Annex – Chart 9

9


Chart

3.

Most

frequent

s

(total

as

of

end

of

2014)

Chart 4. Most frequent home States of investors (total as of end of 2014)

Moreover, talking about ICSID arbitration and reasons for Bolivia‟s denunciation
from ICSID on the 2nd of May 2007, Bolivian President Evo Morales asserted that
cases brought to ICSID tribunals show the “unrestrained powers granted to
corporations, especially multinational corporations, through bilateral or multilateral
investment treaties and free trade agreements”15. ICSID is considered as to protect
15

―Bolivia’s Letter To ICSID‖ dated June 21, 2007,

10


and promoted foreign investment with little regard for the costs to democracy, the
environment and the public welfare. He further argues that the ICSID Convention,

and the investment and free trade treaties that implement it, often violates a
country‟s sovereignty, constitution and laws16.
Thus, in 2007, Bolivia sent a notification to the ICSID declaring its denunciation
from ICSID Convention. Concurrently, Ecuador notified its rejects ICSID
arbitration for future oil, gas, and mining disputes, and Venezuela threatened to take
the similar path17. Consequently, the statistics as well as continuous statement of
withdrawal from ICSID of developing states cast doubts on the adverse and serious
effect of ICSID mechanism on such states.
1.2 The establishment of ICSID
Foreign property rights were initially extended to the developing countries by the
capital exporters, but the former of these countries tried to limit such rights through
international diplomatic cooperation18. While the industrialized countries wanted to
protect investment security, developing countries stood up for sovereignty, which at
first meant the right not to be intervened. Later, sovereignty was interpreted as “the
right to nationalize for whatever gains”19. This resulted in insecurity for foreign
investors in developing countries, and this is also the reason why the flow of
investments from developed countries to developing countries hit a standstill in the
1960s as there was no mechanism foreign investors could rely on to protect their
rights when such circumstances occurred20.
The international community had tried to find the solutions for this, but opinion was
too divided to come to any agreement. The solution was not reached until Aron
Available at: Http://Www.Foodandwaterwatch.Org/Water/World-Water/Rght/Icsid-Letter
Ibid
17
Diana Marie Wick, The Counter-productivity of ICSID Denunciation and Proposals for Change, Faculty of
George Washington University Law School (8/2011)
18
Thomas Andersson, ―Multinational Investment In Developing Countries: A Study Of Taxation And
st
Nationalization‖, Routledge, 11 Sep 2002

19
Ibid, p.19
20
Ibid
16

11


Broches, who was General Counsel at the World Bank, proposed the creation of an
arbitration mechanism in 1961 that “could cater for the needs of both investors and
governments”21. Consequently, the final result of the proposal was the
establishment in October 14, 1966 of ICSID under the International Convention for
the Settlement of Investment Disputes (“the ICSID Convention”), which can also be
called as “the Washington Convention”. ICSID came into existence as an
autonomous international agency under the auspices of the World Bank 22 and is
deemed as the first institution designed specifically as a forum to settle investment
disputes between a state and private investors of another state. No “appropriate
forum” previously ever existed to handle investment disputes between foreign
investors and states23.
Thus, it has been stated that the Convention create the cutting edge of the
development of international law. It was no longer necessary for investors to ask
their own government to receive and settle their case through diplomatic protection.
The Convention granted investors in a foreign state, both private individuals and
corporations, the right to directly bring the lawsuit before the international arbitral
tribunals against the foreign state.
1.3. Main features of ICSID
So which feature of ICSID makes it that different to the previous forms of
investment dispute settlement? According to Rudolf Dolzer and Christoph Schreuer,
there are five features of ICSID, including:

-

Foreign individuals and corporations can directly bring a lawsuit against
their host state;

-

State immunity is severely restricted;

21

David R. Sedlak, ―Comment, ICSID's Resurgence in International Investment Arbitration: Can the Moment
Hold?‖ 23 PENN. ST. INT'L L. REV., (2004), p.150-155
22
Ibid. at p.151
23
Christoph H. Schreuer, The Icsid Convention: A Commentary, (Christoph H. Schreuer Et Al. Eds.)
Cambridge University Press, 2nd Edition, (August 31, 2009), p.82.

12


-

International law can be applied to the relationship between the host state
and the investor;

-

The local remedies rules is excluded in principle; and

-

ICSID award are directly enforceable within the territories of all states
parties to ICSID24.

These features can be clearly explained in the CMS v. Argentina25 case as follows.
In summary, the CMS Company purchased 29% shares of an Argentine company
(TGN), pursuant to Argentina‟s privatization program in 1995. In early 2002, the
Argentine authorities, in response to its growing financial crisis, has frozen gas
transportation tariffs and forced conversion of private service contracts from dollars
to pesos, which is devaluated at a one-to-one rate between Argentine peso and U.S
dollars and also abolished the periodic adjustments of prices and tariffs according to
foreign inflation indices, which already prescribed in many big contracts between
foreign investors and the state. In this case, it can be easily indicated that foreign
corporations, which is CMS, can directly bring a lawsuit against their host state
before ICSID tribunal. Second, “state immunity”, which in this case is the
“necessity defence”, is not recognized by the tribunal. Third, the U.S-Argentina
BIT‟s provisions are the ground for rulings in this dispute. Forth, domestic court did
not have jurisdiction to settle this dispute. Finally, the award is directly enforceable
within the territories of Argentina, which is a state party to ICSID Convention.
In the end, once the ICSID Convention was established, ICSID was quickly
recognized in treaties as resolution for investment dispute settlement between states
and investors, and the possibility of using this special forum was captured by
forming a clause creating the consent of the state to bring the dispute with the
investors to the arbitral tribunal.

24

Rudolf Dolzer and Christoph Schreuer, Principle of International Investment Law, Oxford Universoty Press,

New York, (2008), p.20
25
CMS Gas Transmission Company v. Argentine Republic, ICSID Case No.ARB/01/8. Available at:
/>n&caseId=C4

13


1.4. Jurisdiction of ICSID
It is crucial whether a dispute can be referred to arbitration under the ICSID
Convention. The scope of the Convention is defined in Article 25.1 as follows:
“Article 25:
(1). The jurisdiction of the Centre shall extend to any legal dispute arising 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 from its consent unilaterally”.
Consequently, investment disputes fall within the scope of the ICSID Convention if
the following four requirements are met:
-

It must be a legal dispute;

-

The parties must have agreed to submit their dispute to ICSID;

-

The dispute must be between a Contracting State or its subdivisions and a
foreign investor from another Contracting State;

-

It must arise directly out of an investment.

The first requirement is fulfilled whenever there is a dispute about legal rights. The
other three requirements have been relied upon by states to challenge the
jurisdiction of tribunals formed under the ICSID rules. Thus, the dissertation will
focus on these three latter requirements.
1.4.1. Consent to arbitration
a.

The mere ratification of the ICSID Convention is not in itself consent to
arbitration by a state

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ICSID arbitrations require that all parties concerned have agreed to submit to the
ICSID arbitration. The Preamble of the ICSID Convention stated that:
“No Contracting State shall by the mere fact of its ratification, acceptance or
approval of this Convention and without its consent be deemed to be under
any obligation to submit any particular dispute to conciliation or
arbitration.”26
Thus, merely ratifying the ICSID Convention is not itself a consent to arbitration by
a state. As stated in the Preamble, ratification does not oblige the state to submit a
given dispute to arbitration. It just means that the state confirm to become the party
of the ICSID Convention, and because of that it does not give jurisdiction to an

ICSID tribunal. The necessary consent may be contained in an arbitration
agreement made between the state and the investor related to the investment
contracts, or after the dispute has arisen.
b.

Types of consent

Consent to bring the disputes to ICSID arbitral tribunal can be classified into two
types: contractual ICSID arbitration and non-contractual ICSID arbitration.
(i)

Contractual ICSID arbitration:

The Centre provides Model clauses for existing and future dispute27, which can be
used in the contracts between the investors and the states. Such consent can also be
included in separate arbitration agreement, or recorded in separate instruments such
as exchanged letter, telefaxes.

26

The Preamble of the ICSID Convention
According to ―ICSID Third Annual Report 1968/1969‖, the Secretariat has developed a set of 32 annotated
model 3 consent clauses which were issued early in the year. In addition, to assist States engaged in
negotiating bilateral treaties designed to stimulate investments by the nationals of one party within the territory
of the other, the Secretariat has prepared a set of model clauses relating to the Convention that might be
inserted into such new treaties or that might constitute the subject of protocols to existing instruments
supplementing any provisions therein for the settlement of Investor-state disputes.
Available online at:
27

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(ii) Non-contractual ICSID arbitration:
ICSID accepts arbitration arising not only from a direct consent to arbitrate between
investor and the host state, but also arbitration arising from indirect agreement to
ICSID arbitration established in:
-

The host state‟s national legislation:
This is also recognized as “offer to consent by the host state”, meaning that
the consent will be effective if the foreign investor accepts such offer to
arbitrate by filing its claim with ICSID;

-

BITs between the host state and the home state of investor:
Many BITs contains provision giving parties the right to choose a place for
settlement their disputes. For example, under the U.S Model BIT, any
investment dispute between Contracting States can be referred to the ICSID
or the UNCITRAL;

-

Multilateral investment treaties between countries including the host state
and the home state of the investor:
For examples, under NAFTA, investors are able to file the claims to ICSID
(including ICSID Additional Facility), or UNCITRAL for settlement, or
under Energy Charter Treaty, investor are allowed to choose ICSID
(including ICSID Additional Facility), UNCITRAL, or SCC to settle their

disputes.

1.4.2. Requirements as to the parties involved
For the Convention to be applicable, one of the parties to the dispute must be a
Contracting State or a “constituent subdivision or agency”28 which has been
registered with the Centre. Nevertheless, the registration has primarily an
evidentiary purpose in order to avoid doubts as to whether a state entity can be a
party to ICSID arbitration. Therefore, the lack of formal registration does not

28

Article 25.1 of the ICSID Convention

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prevent an entity becoming an eligible party if it has been made clear that it is a
constituent subdivision or agency of the Contracting State29.
The other requirement, which is more important, is that the other party must be a
national of another Contracting State. According to Article 25.2 of the ICSID
Convention, “national of a Contracting State” is:
-

“Any natural person who had the nationality of a Contracting State other
than the State party to the dispute…”, and

-

“Any juridical person which had the nationality of a Contracting State other
than the State party to the dispute…”

a.

Nationality of “natural person”

With regard to natural person, the key concern is their country of citizenship and
how to qualify as an investor for ICSID jurisdiction purpose30. As stated in Article
25.2, “nationality” is an important feature when considering ICSID jurisdiction.
However, such term is not defined in the ICSID Convention. In fact, the definition
of nationality can be defined differently in investment treaties. The nationality of a
natural person in most BITs is defined by reference to the domestic laws of the
Contracting States.
For example, US Model BIT provides that “nationals” means, for the United States,
“a natural person who is a national of the United States as defined in Title III of the
Immigration and Nationality Act”31. This conforms to the concept of absolute state
sovereignty in deciding the criteria for defining “nationality”. On the other hand,
several BITs may contain other requirements of residence or domicile.

29

L. Mistelis, ―Regulation and infrastructure of international commercial arbitration, Section D: Investment
arbitration and specialist arbitration‖, University of London Press, (2005), p.24
30
A Broches, The Convention on the Settlement of Investment Disputes between States and Nationals of
Other States of 1965: Explanatory Notes and Survey of its Application, 28 Yearbook of Commercial Arbitration
627, 642 (1993)
31
US Model BIT, Article 1

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The issue may arise in case of dual nationality in which a national of one
Contracting State is also the national of another Contracting State. Most BITs do
not give solution for this issue. However, this can be resolved by determining the
effective nationality of the person in accordance with the relevant rules of the
Contracting State, or by reference to the general principles of international law 32.
b.

Nationality of “legal entity”

With regard to a legal entity, it is sufficient that it has the nationality of another
Contracting State only at the time that they entered into the arbitration agreement. It
is also not necessary that the legal entity is a privately owned company. Partly or
wholly state-owned companies also are covered. The nature of its activities is
relevant – they must be private and commercial33.
It is stated in Article 25.2(b) that a legal entity with the nationality of the host state,
under some certain circumstances, could be considered as a „national of a different
Contracting State‟. This conclusion based on the fact that foreign investors are often
requested to pass their investment through locally-incorporated companies. Thus, in
these circumstances, parties may agree that the local entity may be given the status
of a “national of a different Contracting State” in order to give ICSID its
jurisdiction. Moreover, expressly giving the status of a “national of a different
Contracting State” to the local company is also not mandatory. Taking Amco v
Indonesia case34 as an example, “it was sufficient for the state party to know that the
local company was owned by an investor from a different Contracting State”35.
Often the local company is not controlled directly by the foreign investor but is “at

32

See Marvin Roy Feldmen Karpa v. United Mexican States, ICSID Case No. ARB (AF)/99/1), Interim
Decision on Preliminary Jurisdictional Issues, December 6, 2000, where an ICSID Tribunal was faced with a
case under NAFTA involving a U.S citizen with the permanent residence in Mexico. Mexico challenged the
jurisdiction based on dual nationality. The Tribunal rejected the objection relying on general international law
and held that residence fulfils only a subsidiary function to that of citizenship,
33
See ICSID, 24 May 1999, Ceskoslovenska Obchodni Banka, AS (Czech Republic) v. The Slovak Republic,
decision on jurisdiction, XXIVa YBCA 44 (1999) 48; 14 ICSID Rev-FILI 250 (1999)
34
Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No.ARB/81/1 –
See more at: />35
L. Mistelis, Supra. note 27, p.24

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