Creating a Better ICSID: the “New Design”

    In improving the International Centre for Settlement of Investment Disputes (ICSID), the following competing interests must be considered: need to promote efficiency, need to unify the diverse jurisprudence of international investments, and need to promote investments abroad.  Jack Coe wrote the following: “Sustained momentum toward an award is also often countered by the need to deal with such fixtures as the petitions of prospective amici, routine attacks on jurisdiction, and seemingly hair-trigger challenges to arbitrators.”[i]  I have chosen to replace a piece of the existing treaty-based ICSID with a redesigned portion that I will call the “New Design.”  The New Design will allow ICSID to postpone addressing certain fixtures (like prospective amici and challenges to arbitrators) until there is first a finding of jurisdiction.

I.  The Inner Workings of the “New Design”

   The New Design will provide parties with a faster, more reliable, and more transparent system.  Under current procedure for the ICSID, a party submits a request for arbitration in writing to the Secretary-General[ii] and the Secretary-General and staff determine whether to register the request according to Article 36.[iii]  In making this “Preliminary Review,” the Secretary-General considers whether the dispute is manifestly outside the jurisdiction of the Centre based on the information furnished by the applicant.[iv]  After this Preliminary Review, the arbitration panel is determined and the tribunal later decides whether to hear jurisdictional matters separate from the judgment on the merit as stipulated in Article 41(2).

Existing System

1)     Preliminary review by Secretary General and staff

2)     Decision by tribunal arbitrators regarding

  • Jurisdictional decision
  • Judgment on the merits

New Design

1)     Secretary General and Counselors

  • Phase 1: Preliminary Review
  • Phase 2: Jurisdictional Review

* Unless eligible for removal

2)     Judgment on the merits by tribunal arbitrators

 

    Under the New Design, the Secretary General’s staff is replaced by a body of nine individuals known as “Counselors” who will carry-on a similar role as the existing staff.  The nine Counselors are appointed by the Secretary General but must be approved by the Panel of Arbitrators.  Of the nine individuals, three will be randomly appointed to each incoming case —not withstanding any conflict of interest.  In Phase I, the three counselors will analyze the information provided and make the preliminary decision that the Secretary-General once made (determining whether the case is manifestly outside the Jurisdiction of the centre).  A report will be made encapsulating the following: a brief summary of the fact of the case, the counselor’s final determination (whether the Centre has jurisdiction), and a brief explanation for how the three counselors reached their decision.  If the case is outside the jurisdiction of the Centre, it will be dismissed.  If the case is within the jurisdiction of the Centre, the case will continue to Phase II. 

   In Phase II, the parties begin to “litigate” only their jurisdictional arguments.  When a dispute arises where the jurisdictional issues are so closely linked to the judgment on the merit, the case is “bumped-up” to the Secretary General for evaluation and recommendations.  The Secretary General has the authority to remove the case from the New Design and allow the case to proceed under the Existing System.[v]  If the dispute is not eligible for removal, the three counselors hear the jurisdictional arguments from both parties.  Just as the counselors did in Phase I, the counselors will create a report in Phase II.  If the counselors find a lack of jurisdiction, then parties may invoke post-award remedies according to ICSID convention.[vi]  If the counselors find jurisdiction, then the parties begin to appoint arbitrators according to the existing rules.[vii]  The New Design eliminates some of the disadvantages of the existing system; furthermore, the New Design effectively promotes efficient methods of resolving disputes, unifies the diverse jurisdiction of international investments, and continues to encourage international investments.

II.   The New Design Promote Efficient Methods of Resolving Disputes

      A.  Resolves Claims in a Timelier Manner.  Parties typically invoke innovative methods of jurisdictional arguments which “contribute to surprisingly lengthy and expensive proceedings.”[viii]  The New Design offers resolution of the dispute in a quicker more efficient manner.  Under existing ICSID arbitration, if the Tribunal is not constituted within 90 days, the chairperson has 30 days to appoint arbitrators; that means the parties must wait four months before the process begins.  In the New Design, three counselors are quickly and randomly selected from a standing body and perform the preliminary review.  After the preliminary review, a hearing on jurisdictional issues alone will be heard by the same already selected three counselors.[ix]  The hearing on jurisdictional issues will take less time procedurally.  First, the three counselors are already selected unlike the existing system where there is a lengthy process prescribed to select arbitrators.[x]  Second, the three counselors are already familiar with the case because they did the preliminary review; moreover, the counselors are positioned to rapidly develop rapport.  Only after a dispute has withstood attacks on jurisdiction will the parties need to expend time and money on the search for arbitrators. 

      B.  Reduces Cost.  Most cases involve jurisdictional issues.[xi]  By bifurcating jurisdiction from judgment on the merits in the majority of cases, various cost-incurring facets of ICSID arbitration are postponed.  A party only incurs the expense of third party participants (through amici briefs) if there is a finding of jurisdiction.[xii]  Likewise, a party only incurs the expense of finding an arbitrator and hearing endless challenges to arbitrators if there is a finding of jurisdiction.[xiii]  Additionally, a party only incurs the expense of securing witness testimony and soliciting expert testimony only if the counselors establish jurisdiction.  By bifurcating jurisdiction from the merits, a party incurs additional expenses only if the counselors find jurisdiction.   

      C.  Discourage ill-founded claims and Increases Early Settlement.  On average, ICSID arbitration requires three and a half years to reach a result; moreover, an additional seventeen months (on average) are required if annulment is sought.[xiv]  The New Design allows parties to have a hearing on the jurisdictional issues much sooner than the existing system.[xv]  Thus, parties will be discouraged from filling frivolous claims in hopes of receiving an early settlement offer from the other party wishing to avoid the expense of arbitration.  Bifurcation also increases the likelihood of early settlement.  Many parties “hold out” to settle until its jurisdictional defenses fail.[xvi]  However, in the New Design, a party will have the “answer” to its jurisdictional defenses in a timelier fashion and without exhausting financial resources.[xvii]  With jurisdictional issues decided, the parties are poised to attend mediation “on the merits” before selecting arbitrators.[xviii]  The New Design also breaks the arbitration timetable up into smaller phases; thus, Mediation can more easily be encouraged between phases.[xix]

III.   The New Design Unifies the Diverse Jurisprudence of International Investments.

      A. Observance of rule of law.  As ICSID currently stands, contracting states and parties can rely on little precedence.  Article 35 which applies solely to ICSID conciliation prevents party from using recommendations of the Commission as a sort of precedence.  In the New Design, the counselor’s decision’s released after Phase I and Phase II should be elevated to “lose guidelines”—equivalent to the American system’s “dicta.”  The counselor’s decisions will not be binding precedent; rather, future parties can look toward previous decisions as suggestions or guidelines.  Along this same vein, the nine counselors are appropriately positioned to offer guidance to parties regarding admissibility and jurisdictional issues.  Parties may seek guidance from the nine counselors by submitting questions to the body (whether prior to signing a BIT, prior to litigating the matter, or prior to arbitrating the matter).  While the guidance offered by the counselors would not be binding, it can offer guidance and can later show good faith effort of the party to abide by the law.[xx]  In the New Design, transparency is also increased because both preliminary review and jurisdictional review is decided by a standing body of appointed people (instead of staff attorneys with no accountability) who have the required expertise; moreover, the decisions from both Phase I and Phase II are published and accessible so that the neutrals are held accountable and the decisions are available to the public. 

      B. Fairness.  Member states and investors should be able to rely on the ICSID arbitration for a fair and just trial on the merits of the case.  Unlike many other confidential international arbitrations, ICSID is unique in that it typically publishes the existence, status, and disposition of ICSID awards on the ICSID website.[xxi]  Thus, the existing ICSID system promotes the development of jurisprudence in investor-state arbitrations.  Under the New Design, the Counselors will decide preliminary issues and jurisdictional issues before arbitrators come into the picture.  The preliminary and jurisdictional review will be made in a uniform manner because the nine counselors will be applying uniform laws to the issues at hand.  The Counselors will also publish “holdings” on the Phase I and Phase II decisions.[xxii]  The holdings will make the jurisdictional decision transparent and can serve as “dicta” for other parties considering arbitration.  Only after Phase I and Phase II decisions have been made will the fate of the court be left to various arbitrators from various backgrounds with varying expertise. 

      C. Expertise of neutral.  Expertise is an important factor in considering neutral.  Under the existing system, arbitrators are selected based on a variety of factors and guidelines and procedures have been developed to help parties wisely select neutral arbitrators.[xxiii]  The New Design fosters a system where (1) the neutrals hearing jurisdictional issues are experts in jurisdictional and ICSID laws and (2) the neutrals hearing the merits are experts in the law at hand.  The nine counselors should only be appointed if they have the requisite knowledge of ICSID rules and the experience to determine jurisdictional issues.  As the counselors continue to hear jurisdictional cases, they will gain more experience and continually become more knowledgeable.  If or when a dispute withstands jurisdictional attacks, then the parties can search for arbitrators with particular expertise as they do in the existing system.  The New Design elevates the existing ICSID arbitration system by fostering an environment where neutrals are experts in the area of which they serve as arbitrators. 

IV. The New Design Continues to Promote Investment

   A system that resolves investor-state disputes must balance the following two objectives: “First, it must provide investors with liberal access to a forum in which to present complaints.  Second, the selected mechanism must not create ideal standards that conflict with the regulatory practices of most orderly states.”[xxiv]  The ICSID Tribunal’s ultimate goal was to create an independent arbitration system of conflicts between governments and private investors so comprehensive that national courts were no longer necessary; consequently, the fear that an international investment would be expropriated unjustly would no longer exist because ICSID would provide a remedy thereby encouraging individuals and corporations to invest.[xxv]  The implementation of the New Design does not seem to affect the enforceability of the result.  The annulment, revision, and other proceedings are still available.  Likewise, the New Design does not affect the finality of the judgment.[xxvi] 

   With the implementation of the New Design, Parties may be more likely to use ICSID arbitration because the procedures are somewhat more transparent.  The New Design offers investors the ability to more rapidly decide jurisdictional issues.  In the cases where the counselors find a lack of jurisdiction, the parties will have to resort to other means to resolve the conflict.  The existing arbitration model does not encourage parties to maintain the investor/state relationship.  When a conflict arises, a relationship is often difficult to maintain when adjudicative means are invoked to resolve the dispute.  The only way the New Design could foreseeably help maintain the relationship is if the early jurisdictional decision leads to early settlement where the parties manage to craft a settlement that allows the parties to continue to work together (since the parties have not been bogged down with ICSID arbitration for three to five years!).  Early settlement is certainly not a sure guarantee that the parties will get along, but it is certain that parties are more likely to maintain a relationship if they settle early than if they remain in tumultuous arbitration for countless years.

   The current means of adjudicating international investment dispute must provide stability for investors in light of fears of expropriation in developing countries.[xxvii]  In a dispute, the New Design process would allow parties to immediately address its jurisdictional concerns.  If jurisdiction were found, the parties would immediately be able to consider settling or beginning the search for arbitrators and subsequently litigating the judgment on the merits.  If the parties consider settling after jurisdiction is established, then the parties can save the expense of council, arbitration challenges, and lengthy amici briefs.  The New Design eliminates the hearing on the merits of cases if there is a finding of no jurisdiction. 

 V. CONCLUSION

   Like many dispute resolution methods, parties are given great breadth and control over their arbitration.[xxviii]  Only when parties creatively employ the full spectrum of options will arbitration begin to be more effective.[xxix]  The parties need to take more control of the entire procedure.[xxx]  Jurisdictional arguments are a huge part of ICSID arbitration.  Because Respondent States are likely to challenge jurisdiction and the ICSID convention is limited to a particular class of disputes, “[a] significant number of cases have been dismissed for lack of jurisdiction and so parties are well advised to assess all cases carefully in that regard.”[xxxi]  The New Design still provides the parties with the same flexibility offered under the existing system.  If parties believe that the jurisdictional issues should not be bifurcated, they may request that the Solicitor General remove the case from the New Design.  The parties are still given the same freedom to determine the timeframes under the jurisdictional review and the subsequent hearing on the merits.  Where there is a finding of no jurisdiction, the party saves time and money.[xxxii]  The New Design, if implemented, would allow investor/states to save time and money in a reliable, fair, and transparent forum. 

by Mikita Weaver

WORK CITED PAGE
Jack J. Coe, Jr., Settlement of Investor-State Disputes through Mediation—Preliminary Remarks on Processes, Problems and Prospects, Chapter 4 [hereinafter “Coe #1”].
Jack J. Coe, Jr., The Mandate of Chapter 11 Tribunals—Jurisdiction and Related Questions, in NAFTA INVESTMENT LAW AND ARBITRATION: PAST ISSUES, CURRENT PRACTICE, FUTURE PROSPECTS 215 (Todd Weiler ed., 2004) [hereinafter “Coe #2”].
Jack J. Coe, Jr. Transparency in the Resolution of Investor-State Disputes—Adoption, Adaption, and NAFTA Leadership, 54 Kansas L.Rev. 1339 (2006).  [hereinafter “Coe #3”].
Hew R. Dundas, Guidelines for Interviewing Prospective Arbitrators, 2 NY Disp. Res. Lawyer 1 (Spring 2009).
Margaret L. Moses, The Principles and Practices of International Commercial Arbitration (2008).
Abby Cohen Smutny, Arbitration before the International Centre for Settlement of Investment Disputes 3 B.L.I. (2002)
United Nations Conference on Trade and Development, Exploring Alternatives to Investment Treaty Arbitration and the Prevention of Investor-State Disputes United Nations (2010) [hereinafter “Exploring Alternatives”].

[i] Coe #1, 77.
[ii] ICSID Art. 36(1).  Details about the case are detailed in the request.  Art. 36(2).
[iii] ICSID Art. 36(3).
[iv] Article 36 is the preliminary screening method in place “to avoid the waste of time and effort involved in setting the machinery for the Centre in motion unnecessarily.” Broches
[v] That means, at this point, the three Counselors would cease Phase II.  Instead, the parties would begin searching for arbitrators (within 90+30 days allotted in ICSID convention).
[vi]  Typically parties can invoke interpretation (Art. 50), revision (Art. 51), or annulment (Art. 52). Annulment protects parties from procedural injustice that might involve the integrity of the arbitral process.  Broches, 14-15.
[vii] At any stage (Phase I, Phase II, or subsequent Arbitration), the neutrals will still retain the right sua sponte to consider whether the dispute or any ancillary claims are within the Jurisdiction of the Centre (Rule 41).
[viii] Coe #1, 76.
[ix] Judgment on the merits occurs as the final stage unless the case is eligible for removal whereupon the Secretary General determines that jurisdictional issues are so closely intertwined with judgment on the merit that Phase II is eliminated and the arbitrators will hear jurisdictional issues amidst judgment on the merits.
[x] Jurisdictional issues are heard by pre-determined counselors not arbitrators empanelled by the parties.  This may seem counterintuitive to the foundation of arbitration—where parties have the ability to appoint decision makers thereby providing the parties with a powerful instrument.  (See Dundas, 33).  After all, arbitration is about choice!  On its face, this appears to be a disadvantage of the New Design.  However, while choice of arbitrators is a facet of arbitration, so too is the speedy and efficient arbitration on the merits.  The New Design allows arbitrators to hear the case if jurisdictional grounds are first established.  The jurisdictional review is heard by unbiased parties which prevents parties from attempting to empanel biased arbitrators (equivalent of forum shopping) in an effort to succeed on sham jurisdictional arguments.
[xi] Coe #2. 
[xii] Permitting third party participants increase costs.  Coe #1 (citing Coe #3). 
[xiii] Under existing system, to constitute the tribunal with arbitrators takes a great deal of time (up to four months) and money (for attorney expenses and for challenges to arbitrators).  
[xiv] Coe lecture.
[xv] If the counselors find a lack of jurisdiction, the parties can move to annul the decision. If annulment is granted the parties can start the process over again with a much faster turnaround then had the parties already selected arbitrators.  Although annulment can still be requested based on Article 52(1)(a) improper constitution of tribunal, the arguments will be limited because there is less room for conflicts of interest when the Counselors are screened for conflicts of interest and then chosen randomly (so long as no subsequent conflicts of interest arise). 
[xvi] Coe #3, 1367.  See Ethyl Corp. v. Canada, 38 I.L.M. 736 (NAFTA Arbitral Trib. 1998 (before judgment on the merits, Canada paid Ethyl $13 million when Canada’s jurisdictional arguments failed).
[xvii] Coe #1, 91. Approximately 40 to 50% of ICSID cases settle or are discontinued; however, the average length of settlement averages around thirty-two months while only 10% of ICSID cases settle within a year. Id. at 80.  
[xviii] After all, mediation in other settings (like private commercial settings) has been quite successful.
[xix] Mediation allows the parties to explore interests and focus on reaching an agreement while encouraging the parties to maintain a relationship.  Mediation also gives the parties more control which is increasingly lost to third parties as the parties shift to arbitration on the merits. See Exploring Alternatives, 25-27.
[xx] This idea stems from the West Virginia ABA Board of Ethics.  Lawyers or students can anonymously submit inquiries to a body to seek guidance regarding ethical dilemmas.  The guidance offered by the board of ethics is not binding law.  However, the board’s “advice” or “answer” can later show a good faith effort of the anonymous individual to abide by the law if followed. The inquiries and subsequent guidance are published which adds additional transparency to the system. 
[xxi] Moses, 228. Consent is needed to publish the awards but consent is not required to publish the excerpted legal rules applied by the tribunal. Id.
[xxii] If Phase II is eliminated because the Jurisdictional matters are so closely intertwined with a hearing on the merits, then the Solicitor General (or counselors) will submit a “holding” that states the reasons for doing so.
[xxiii] Important factors to consider include the following: language, familiarity with the process, aptitude, ability, and knowledge of governing law and area of law at issue in the case at hand.  See Coe Lecture
[xxiv] Charles H. Brower, II, Investor-State Disputes Under NAFTA: A Tale of Fear and Equilibrium, 29 Pepp. L. Rev. 43, 52 (2001);
[xxv] International Centre for Settlement of Investment Dispute (March 2010), http://www.worldbank.org/icsid/ (follow “About ICSID” hyperlink).
[xxvi] The judgment is no more final.  The parties can still continue to appeal using the ICSID procedures. 
[xxvii] Moses, 220. 
[xxviii] Although parties typically have the choice to alter the rules and general proceedings, the parties tend to fall back on the rules that are already established because the existing conflict between the parties prevent them from agreeing to new rules that might in fact be more effective. 
[xxix] The only way that arbitration can be more effective than litigation is if it stops merely mimicking the phases of litigation with intense discovery and extensive pre-trial motions. 
[xxx] See Coe #1, 76-77.   Mediation can be part of the solution towards more efficiency.  With the implementation of the New Design, there would be more “stopping points” for parties to pause and consider their options.  Before jurisdiction is established, an investor may wish to try and settle the dispute if it thinks its jurisdictional arguments will fail.  After jurisdiction is established, the state may be unwilling to take-on the enormous expense required to arbitrate the case on the merits.  Under the existing system, a party may not learn of jurisdiction of the case until the matter is almost entirely arbitrated—whereby no motivation to settle exists (because after a party spends 5 million on the jurisdictional portion of the arbitration with the three arbitrators, the expense of an additional million to have a judgment on the merits is just a “drop in the bucket”). 
[xxxi] Smutney, 369.
[xxxii] One study shows that it takes an average 394 days (range from 94 days to 941 days) to issue final award from the hearing on the merits.  Exploring Alternatives, 18.

Mikita is the Editor-in-Chief of ADR Times. As an associate at Northrup Schlueter LLC, she focuses predominantly on litigation and arbitration in the field of construction insurance defense. She received her Juris Doctorate at Pepperdine and a Masters in Dispute Resolution from the Straus Institute. Mikita has been published in the Pepperdine Dispute Resolution Law Journal and worked at the Centre for Effective Dispute Resolution in London. As an avid traveler, she continues to explore various dispute resolution issues and how they vary from region to region.