Denunciation under the ICSID Convention: Right of State versus Remedy for Investor

I. Introduction

The International Centre for Settlement of Investment Disputes (“ICSID”) Convention (also known as the “Washington Convention”) is a multilateral treaty which aims to create an independent, depoliticised and effective dispute-settlement institution for investor-state disputes. The Convention, which entered into force on 14 October 1966, establishes ICSID as the main forum for settling disputes through arbitration and conciliation between foreign investors and host states. However, in recent years, Bolivia, Venezuela, and Ecuador have all withdrawn from ICSID. This raises concerns with regard to the effect of denunciation on the consent of the states to arbitrations a dispute resolution mechanism of investor-state disputes.

II. Legal Framework

A. Denunciation Under Article 71 and Article 72 of ICSID

Article 71 of the ICSID Convention states that:

Any Contracting State may denounce this Convention by written notice to the depositary of this Convention. The denunciation shall take effect six months after the receipt of such notice.”

According to this Article, the denunciation of the Convention takes effect six months after the receipt of notice of denunciation. For the period of six months after denunciation, rights and obligations arising from the Convention may continue to apply to the denouncing State.

On the other hand, Article 72 of the ICSID Convention states that:

Notice by a Contracting State pursuant to Article 70 or 71 shall not affect the rights or obligations under this Convention of that State or any of its constituent subdivisions or agencies or of any national of that State arising out of consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary.”

Article 72 thus provides for a condition if “consent” is given before the date of denunciation. It modifies Article 71 in two ways: first, the effective date of denunciation is the actual date of receipt and not six months after the receipt of notice of denunciation and second, any rights or obligations arising from consent shall not be affected by denunciation beyond the period of six months.

B. Consent Under ICSID Convention

Consent is the cornerstone of every arbitration. By denouncing the ICSID convention, States try to rule out the obligation to submit disputes to arbitration. As international investment arbitration is based on consent without privity, the consent needs to be perfected by the investor in due course. It is imperative to consider the time of perfection of the consent by the investor, as that would determine whether a dispute could be submitted to arbitration or not.

Authors have held different opinions on when an investor’s consent is perfected. We will look at three different time periods: the period before the actual date of denunciation, the period of six months which starts after the depositary has received the notice of denunciation, and the period which comes after six months have elapsed.

Period before denunciation

In an investment treaty, a state (“offeror”) gives a unilateral consent to submit disputes to arbitration and such consent is not binding on the state. This unilateral consent must be perfected in due course by the investor, either by sending a notice to the State confirming its consent or by sending the notice of arbitration, to make it binding on the host state. Arbitrators can only find jurisdiction over a dispute if either of the notices is sent before the actual date of denunciation, as the acceptance of the unilateral offer of consent is communicated by the investor before the State denounces the ICSID Convention. Hence, an offeror remains the master of its offer.

Period after denunciation

The traditional approach was to understand state consent as a unilateral offer which needed to be perfected by the investor before the date of denunciation. However, with the rise of the complexity of issues and consideration for investors’ rights, the approach towards understanding state consent has changed. It can be understood to be an obligation now. This means that a state has an obligation to enter into arbitration if the consent is perfected.

This way, Article 71 would apply and the obligations of the denouncing state which are expected to last for six months would give a window to the investor to communicate its acceptance of the ICSID jurisdiction before the six months period elapses. Consequently, such communication of acceptance of ICSID jurisdiction would result in an agreement to arbitrate disputes before ICSID. When the denunciation of the ICSID convention becomes effective, the agreement to arbitrate would hold and survive denunciation.

The period after the six-month period – post denunciation

Specific issues of interpretation arise where a state has denounced the ICSID convention and the statutory period of six months for the continuation of obligations has also elapsed. Three competing interpretations are discussed below.

a. The investment made prior to denunciation

In Murphy Exploration and Production Company International v. the Republic of Ecuador, the State had not denounced the ICSID convention but had communicated that it was not willing to arbitrate disputes initiated by the investor. The tribunal held that investment in the host state should be made before the withdrawal of consent by the state. This would result in the survival of ICSID jurisdiction even if the consent is withdrawn later on by the state.

b. The Principle of Irrevocability of Consent

Some commentators have argued that an express unequivocal consent to jurisdiction by the host state in an investment treaty which needs no future ratification would result in ICSID having jurisdiction over claims. This results in fulfilling the requirement of having a contracting state’s consent. This consent cannot later be withdrawn. This is mandated by Article 25 of the ICSID Convention.

c. Investor’s consent not necessary or Act of investing is sufficient

An even more liberal approach is to make investor’s consent not necessary. In some investment treaties, two countries have already negotiated that ICSID would have jurisdiction over claims. In these cases, there is no need for investors to communicate their consent. This is because their home state has already negotiated this aspect with the host state in their favour.

Moreover, the act of investing alone should be sufficient for the host state to find investor’s consent. This is because a key condition for foreign investment is the presence of a neutral and unbiased dispute resolution mechanism that stands apart from domestic courts.

III. The Conflict

There is no uniform interpretation of Article 72 of the ICSID Convention. In the case of Alcoa Minerals of Jamaica Inc. v. Jamaica, the tribunal considered the argument that arbitration clauses in BITs or in a contract are understood as irrevocable signs of unilateral consent granted by states to arbitrate investment disputes with nationals of the other states.

On the other hand, applying the strict interpretation of Article 72 by Schreur, once the denunciation of the ICSID convention becomes effective, ICSID shall no longer remain an appropriate forum for instituting the proceedings. There have been instances where the tribunal has understood the effective date of denunciation to be when the notice of denunciation was sent to the depositary. This is because the State ceases to be a Contracting Party once the denunciation notice has been sent, which is a pre-condition for ICSID’s jurisdiction under Article 25 of the Convention.

IV. Conclusion- Resolving the Conflict

There have been stark differences in the approaches taken by the tribunals and commentators with regard to consent and jurisdiction of ICSID post denunciation. In order to resolve the conflict, the authors believe that the object of entering into an investment treaty should be considered before arriving at any conclusion. Most BITs make the rights of the investors paramount.

In order to arrive at a common ground, rights of investors are to be protected and the host state’s denunciation of ICSID should be respected. However, the denunciation should be prospectively applied because, if applied retrospectively, it will endanger the rights of investors who have already invested in the host state.

The law of jurisdictional estoppel should be invoked by the investors against the host state in case they do not respect the rights of investors (in this case primarily the right to submit disputes to arbitration). The jurisdictional estoppel would operate where the investor is able to show that it relied on the assurances made by the host state to arbitrate. It results in an offer being made by the host state to refer future disputes to arbitration. Later, if the host state revokes that offer by denunciation, the investors can still submit the disputes to arbitration as they relied on the offer made, and the fact that the investment was actually made should be construed as deemed acceptance of that offer.

Leave a Reply

Your email address will not be published. Required fields are marked *