X. Investor State Arbitration / Proposal EU and ICSID

10.1 Foreign Investment – a Major Component of Today's Economy

The increase of global investment has consequently led to an increase in arbitrations to resolve disputes between investors and states.

Unsurprisingly, investors planning on major capital-intensive projects in other countries - such as, for example, the construction of a long-distance gas pipeline, the construction of a power plant or the financing and development of communications infrastructure - seek to protect their investments in the best possible way against any acts of expropriation or changes in the host country´s laws and regulations, that effectively amount to expropriation and/or significantly decrease the value of their investment.

Moreover, foreign investors usually seek to avoid litigation in state courts, as they fear they may not receive fair and equal treatment in local courts when the opposing party is the state or any state entity. This need to provide security to foreign investors for their investments has led the majority of states to adopt investor protection legislation, and to enter into various bi- or multilateral investment treaties. Such treaties usually provide for investor-state disputes to be resolved by arbitration as the most obvious alternative to state court litigation.

Despite the fact that there is substantial foreign direct investment in Austria, there is currently no reported investment dispute involving Austria as a host country. Due to the high involvement of Austrian companies, especially in the CEE region, there are, however, a number of investor-state disputes involving Austrian nationals as investors.

10.2 The ICSID Convention

10.2.1 Historical Background

In 1965, the ICSID Convention – sometimes also referred to as Washington Convention – was launched. Its primary aim was the promotion of foreign direct investment by establishing a neutral, autonomous forum for the resolution of disputes between states and nationals of other states. The ICSID Convention created an independent organization to administer international investment disputes, the International Centre for the Settlement of Investment Disputes (ICSID). ICSID is an autonomous body, but is closely linked to the World Bank. Today, 150 states are signatories to the ICSID Convention; this shows the importance of ICSID in the context of international investment. Austria signed the ICSID Convention on 17 May 1966, and it entered into force on 24 June 1971.

10.2.2 Legal Framework for Cases Brought before the ICSID

While originally most disputes were referred to ICSID by way of arbitration agreements in contracts between states and foreign investors, most of the cases brought before ICSID today are based on arbitration provisions contained in bilateral or multilateral investment treaties.

10.2.3 Overview of the Prerequisites for Cases to Be Resolved by ICSID

In order to have a dispute resolved by ICSID, three conditions have to be met:

  • Both parties must in some way have given their consent to arbitration in accordance with the ICSID Rules;
  • One of the parties has to be a Contracting State of the ICSID Convention while the other is a national of another Contracting State; and
  • The dispute to be resolved needs to be one arising directly out of an investment.

10.3 The Prerequisites in Particular

10.3.1 Consent to Arbitration

Concering the first requirement, it is important to consider that the fact that a state is a party to the ICSID Convention does not mean that this state has given its blanket consent to refer any investment dispute to arbitration. Rather, this consent has to be given elsewhere – either in national legislation, applicable bi- or multilateral investment treaties, or directly by way of an arbitration clause contained in the contract with the foreign investor.

It is certainly advisable for investors to include an arbitration clause in contracts with states or state entities so as to preclude comprehensively any challenges to jurisdiction, and to ensure the dispute is settled pursuant to the ICSID Rules. However, if investors – for one reason or another – fail to do so and the host state has given its consent to ICSID arbitration in an applicable bilateral treaty, the investor´s treaty-based claims will still be arbitratable. In practice, the investor usually tries to bring all its claims under the investment treaty.

Where national legislation provides for arbitration for investment disputes, or the host state is party to an investment treaty providing for arbitration, these provisions are generally seen as offers to arbitrate, which a foreign investor is free to accept. This acceptance may be given by a written statement; similarly, the investor is also considered as having accepted the offer to arbitrate by merely filing a request to arbitrate with ICSID.

10.3.2 Contracting State and National of another Contracting State

The information on which states are Contracting States to the ICSID Convention is freely accessible on the ICSID website. Currently, the list of Contracting States comprises 150. Issues might arise under the second requirement where the party to an investment agreement is not the Contracting State itself, but any of its subdivisions or agencies.

In order to have any arising dispute settled before ICSID in such cases, the Contracting State has to declare that the relevant subdivision or agency is subject to its jurisdiction and must either give its approval to the agency´s or subdivison´s consent to arbitrate, or else declare that its approval is not needed. Thus, if an investor is contracting with a state agency or subdivision, it is advisable for such an investor to draft an arbitration clause that meets these requirements.

Even if these requirements are met, independent consent by the host state must be given before a claim can be raised directly against the state before ICSID.

A “national of another Contracting State” is either a citizen of another state party to the ICSID Convention, or an entity or organization incorporated in another Contracting State.

10.3.3 Legal Disputes Arising out of an Investment

The term “investment” is not defined in the ICSID Convention. However, tribunals have tended to interpret this term rather broadly. An investment is any project with economic value, including not only any kind of assets and capital contribution, but also non-equity investments such as, for example, service contracts. There are limitations: Alleged wasted expenses incurred by a party in pursuing a potential investment that did not eventually materialize, have been considered by a tribunal not to be an investment (ICSID case No. ARB/00/2).

10.3.4 Specifics of ICSID Arbitrations

Investor-state arbitration is special in that the involvement of state courts is generally undesired: Investors pursuing a claim against a state do not wish to submit to the laws of that state, usually due to concerns of bias and unfair treatment by the state courts. States on the other hand are usually unwilling to submit to the laws of another state. Thus, an ICSID arbitration is entirely de-localized: The law of the place of the arbitration does not have any impact on it. It is the arbitral tribunal that decides on interim measures, without any assistance from any local courts (Art 47 ICSID Convention).

Moreover, there is no review of the arbitral tribunal´s award by state courts. Rather, the ICSID Convention provides for a review procedure by a second tribunal – the so-called “ad‑hoc committee”. This committee is constituted of three members that are appointed by the Chairman of the Administrative Council. It has the power to annul an award in full or in part; it cannot, however, modify an award. There are only five reasons on which the annulment of an ICSID award may be based:

  • The tribunal was not properly constituted;
  • The tribunal manifestly exceeded its powers;
  • Corruption on the part of a member(s) of the tribunal;
  • A serious departure from a fundamental rule of procedure; and
  • The award does not contain the reasons on which it is based

There is no review on the merits of the award.

10.4 Bilateral Investment Treaties (BITs)

10.4.1 Definition

One of the main reasons for the increase in ICSID arbitration is the ever-increasing number of Bilateral Investment Treaties (BITs). As indicated by the name, those treaties are concluded between two states and confer special rights and protections on investors being nationals of, or incorporated under the law of, one of the state parties to the contract.

As BITs are negotiated and concluded between two sovereign states, the contents of different BITs may vary greatly. Nevertheless, there tend to be at least some common features in most BITs.

10.4.2 General Content

Among the substantive rights of protection usually granted in BITs are the following:

  • Fair and equitable treatment: This means that the state is obliged to provide a reasonably stable environment for investments
  • Full protection and security: Investors shall be protected against destruction of their property and/or serious threat thereof;
  • Protection against uncompensated expropriation or nationalization: Governments are only allowed to expropriate an investment under clearly defined and restrictive conditions: it must be for a public purpose, it must not be done on a discriminatory manner, and prompt and adequate compensation has to be provided;
  • National treatment: The host state must treat the foreign investor as if it were a national of its own;
  • Most favored nation treatment: The host state must treat the investor to the same standard as any other foreign investor; and
  • Free transfer of funds: Funds related to the investment must be freely transferrable in and out of the host state.

10.4.3 Various Dispute Resolution Procedures

BITs usually provide for disputes to be resolved by arbitration, yet there might be some requirements that an investor has to meet before arbitral proceedings may be commenced. Some BITs establish that the parties must first attempt to resolve the dispute through negotiation and consultation, usually within a period of about three to six months. This consultation period is commonly triggered by a letter from the investor to the state. Sometimes BITs provide for a number of different options open to the parties on how to proceed to resolve their dispute. The parties, or perhaps only the investor, may then choose to refer the dispute to ICSID, a different arbitral institution, an ad hoc committee, or to commence proceedings before a local court. Investors therefore have to exercise care in selecting the approach that best suits their purposes, as a BIT that provides for different options frequently also provides that once a party has chosen one of those options, the other options are waived.

10.4.4 Austria as Party to BITs

Austria is currently party to 65 BITs, many of which provide for arbitration under the auspices of ICSID. The Austrian model BIT (available at www.bmwfw.gv.at) aims at providing a high standard of investor protection: In addition to incorporating all the typical substantive standards, it specifically addresses the important issue of transparency in investor-state disputes (Art 6 Austrian Model BIT). Moreover, the Austrian model BIT provides for a choice of dispute resolution, either under the auspices of ICSID, the ICC or pursuant to the UNCITRAL Rules of Arbitration.

10.5 Implications of the Lisbon Treaty on BITs Concluded by EU Member States

Under the Lisbon Treaty, foreign direct investment – as a matter of common commercial policy – has fallen exclusively under the competency of the EU, meaning that only the EU may adopt legally-binding acts concerning that subject area. This raises the question of what is to happen to BITs already concluded by EU Member States.

EU Regulation No 1219/2012 establishes procedures for the transition of BITs concluded between EU Member States and third countries. While EU Member States are required to take the necessary steps to eliminate any existing incompatibilities between EU law and investment agreements with third countries, those agreements may be maintained in force until replaced by an investment agreement between the EU and the respective third state. EU Regulation No 1219/2012, however, does not address intra-EU BITs, which remain an area of uncertainty.