Reports on international investment treaty arbitration

Two recent international reports in relation to investment treaty arbitration will be of interest to companies that invest in, or that are considering investing in, regions that are politically or economically unstable. The reports, released by the International Centre for the Settlement of Investment Disputes (ICSID) and United Nations Conference on Trade and Development (UNCTAD) respectively:

• set out the current state of play of international investment arbitration, and
• confirm the continuing growth in international investment treaties and arbitration based on international investment treaties.

The ICSID Report provides an update on ICSID's caseload over the last year (from 1 July 2009 to 31 June 2010).

The UNCTAD Report surveys investment treaty arbitration more generally up to the end of 2009.

Companies which invest in, or which are considering investing in, regions which are politically or economically unstable should be aware of these developments and the opportunities available to structure their investments to take advantage of these protections.

Background to ICSID

ICSID was established by the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention) to which there are currently 155 signatory states.

The Washington Convention establishes a regime for contracting states and foreign investors to settle their investment disputes between neutral ad hoc arbitration tribunals. These tribunals are administered by ICSID.

The substantive rights are found in either an investment contract between a foreign investor and a contracting state or investment treaties between countries, commonly a bilateral investment treaty (BIT). The BIT usually gives foreign investors direct rights against the host state and constitutes a standing offer to submit any dispute to an ICSID arbitral tribunal or some other chosen arbitral body. Since the mid to late 1990s the rapid proliferation of BITs has led to a dramatic increase in the number of investment treaty claims.

Growth of investment treaty arbitration

2009 and 2010 saw continued growth in the number of international investment treaty disputes between states and investors.

The UNCTAD Report found that by the end of 2009, the number of known treaty-based cases had grown to 357 of which 202 (or 57%) were initiated during the last five years (starting 2005). Of the 357 disputes, 225 were filed with ICSID, 91 under the United Nations Commission on International Trade Law (UNCITRAL) rules, 19 with the Stockholm Chamber of Commerce, 8 with the Permanent Court of Arbitration in the Hague, 5 with the International Chamber of Commerce and 4 were ad hoc cases.

In 63% of cases, the basis of consent invoked to establish ICSID jurisdiction was pursuant to a BIT. This is unsurprising. The growth in the number of BITs entered into between states and the increasing awareness by foreign investors of their rights under such BITs has been the main driver of growth in international investment arbitration cases.

Types of cases

In terms of the state parties involved in ICSID cases, the majority of cases involve ‘capital-importing' countries. For example, 30% and 22% of cases involved South American and Eastern European and Central Asian countries respectively. Conversely, only 6% and 1% of cases involved North American and Western European countries respectively.

According to the UNCTAD Report, in 2009, the number of parties that have faced investment treaty arbitrations grew to 81. In all, 49 developing countries, 17 developed countries and 15 countries with economies in transition have been involved in investor-state disputes. Most claims were initiated by investors from developed countries. At the end of 2009, only 23 cases were filed by investors from developing countries and 9 cases originated from investors in transition economies.

The industries involved in ICSID cases included:

• oil, gas & mining - 26%
• electric power & other energy - 13%
• transportation - 11%, and
• other industry - 10%.

What does it mean for you?

Companies should be aware of the rapid growth in international investment treaties and the opportunities available to them to structure their investment transactions in such a way as to avail themselves of protection when investing in regions which are politically unstable. This is particularly the case for companies which are involved in ‘long term' or major ‘structural' investments such as resources and mining companies where such protections can be particularly important if the political climate deteriorates during the period of the investment.

If companies become involved in disputes in those regions, they should consider the impact of any steps they may take on their rights under international investment treaties to ensure they do not ‘lose' those rights.

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