Blowing away the cobwebs: ICSID Amended Rules on investor-state disputes now in effect - International Trade & Investment

On 21 March 2022, the Member States of the International Centre for Settlement of Investment Disputes (ICSID) voted to approve an amended set of rules which will take effect from 1 July 2022 (the Amended Rules) and will apply to investment arbitrations commenced from that date onwards.

ICSID is an international institution established in 1966 devoted to the resolution of disputes between international investors and the States in which they invest. Arbitrations referred to ICSID are governed by the ICSID Convention and arbitration rules (ICSID Rules), which have now been amended for the fourth time since their adoption in 1967.

The long-awaited Amended Rules underwent a rigorous and extended revision process, which commenced in October 2016, with ICSID inviting its Member States to suggest topics that merited consideration for revision and involved an extensive consultation process with Member States and the public. The result is a largely overhauled set of Amended Rules, which introduce several procedures targeted at modernizing, simplifying and streamlining the procedures in ICSID arbitrations.

In this Insight we provide a detailed examination of the more significant amendments.

Expanding the application of the rules: the Amended ICSID Facility Rules

One significant amendment is the important expansion of the application of the ICSID Rules through amendments to the so-called ICSID Additional Facility Rules.

Under the old Rules, cases could be commenced:

under Article 25 of the ICSID Convention, where one party was a Contracting State (or a constituent subdivision or agency of a Contracting State) and the other party was a national of another Contracting State; or
under the ICSID Additional Facility Rules, where only one party was a Contracting State or a national of a Contracting State.

Under the amended ICSID Additional Facility Rules, the Centre can now administer proceedings where neither of the parties to the dispute is an ICSID Contracting State or a national of an ICSID Contracting State, or where a Regional Economic Integration Organization (REIO) is a party to the dispute.

This is an important development as it extends access to ICSID arbitrations (and conciliations) to non-Contracting States and nationals of non-Contracting States (such as Brazil, India and South Africa) as well as to REIOs (such as the European Union and ASEAN) - if they otherwise agree to arbitration under the auspices of ICSID, e.g. in an investment treaty, a contract with an investor, or in their domestic legislation governing foreign investment.

Greater transparency

Deemed consent to the publication of awards (and other documents)

The perceived lack of transparency of the arbitral process and, in particular, the arbitral award in investment disputes involving matters of public interest is a recurring criticism of international investment arbitration. This is an issue that has been the subject of much debate, including in the context of the recent backlash against investor-state arbitration.

In line with its goal of modernising the rules and increasing transparency in ICSID arbitrations, under the Amended Rules, the parties' consent to the publication of an award is deemed to have been given if no party objects in writing within 60 days of its publication (AR 62(3)). In the absence of consent, ICSID can always publish relevant excerpts of an award (although the parties retain the ability to agree redactions prior to publication (AR 62(4)).

In addition, under the Amended Rules, ICSID will also publish submissions and supporting documents with the parties' consent (AR 64(1)).

These amendments are to be welcomed, not least because they will ensure greater transparency and, therefore, consistency and predictability in the decision making of investment tribunals, on both matters of procedure and the legal principles applied in awards.

Third-party access to and participation in hearings

Unlike in the context of commercial arbitrations, investor-state disputes often raise issues of public interest so it is critical that members of the public, whether they be entities or individuals, have the opportunity to observe and be heard on disputed issues of public importance.

Acknowledging this, the Amended Rules expressly allow third parties who are not the disputing parties, their representatives, witnesses and experts, or other persons assisting the tribunal, to observe hearings unless either disputing party objects (AR 65).

In addition, and specifically in the context of third party intervention in the proceedings, the Amended Rules provide that any person or entity that is not a party to the dispute may apply for permission to file a written submission in the proceeding (AR 67(1)). The parties to the arbitration are permitted to make observations on whether the third party should be entitled to file its written submissions and if any condition ought to be imposed on the filing of those submissions (AR 67(3)).

In considering whether to permit third-party intervention, tribunals must consider a range of circumstances, including the identity, activities, organization and ownership of the non-disputing party, and how the submission would assist the tribunal to determine a factual or legal issue related to the proceeding by bringing a particular knowledge or insight that is different from that of the parties (AR 67(2)).

Whilst the rules seek to ensure that any third-party with an interest in the dispute can intervene in proceedings where necessary, such intervention is balanced by the tribunal's duty to ensure that the participation of the third-party does not unduly burden or unfairly prejudice either party.

The tribunal can therefore impose conditions upon third party participation, such as restrictions on the length or scope of the written submissions (AR 67(4)). Moreover, in circumstances where external parties observe proceedings, the rules protect the parties' confidential information by ensuring that the tribunal adopts the necessary procedures to prevent the disclosure of confidential or protected information (AR 65(2) and 66).

Mandatory disclosure of third-party funding arrangements

Increasingly, investors suing governments in investor-state arbitrations are turning to third parties to finance their participation in the arbitral proceeding. The typical deal struck is that, in exchange for their investment, the third-party funder is entitled to a return which may take the form of a share of the award (or settlement). In such circumstances, the third-party funder is interested in the outcome of the arbitration and may, in some cases, retain control over certain aspects of the arbitration or how a dispute is managed by the claimant investor.

To date, the involvement of third party funding has been left largely unregulated and is usually undisclosed, raising various policy issues and concerns associated with potential conflicts of interest and the funder's influence over the arbitration strategy and settlement decisions.

Due to the controversy surrounding this issue, third party funding was the subject of extensive debate during the negotiations of the Amended Rules. In response to concerns associated with the non-disclosure of third-party funding arrangements, the Amended Rules now provide that the parties must file written notices disclosing the names and addresses of entities or persons from which the party is receiving direct or indirect funding, including "a donation or grant, or in return for remuneration dependent on the outcome of the proceeding" (AR 14(1)). This is a continuing disclosure requirement.

While the Rule does not require the disclosure of the third party funding agreement, it does empower a tribunal to order disclosure of any additional information relating to the funding arrangement between a party and third-party funder (AR 14(4)).

The implementation of rules concerning the disclosure of third-party funding in the Amended Rules demonstrates ICSID's approval of third-party funding arrangements so long as the use of third-party funding is transparent. Such endorsement could see an increase in the number of investor claims seeking to hold States accountable for mistreatment, which require third-party funding to run.

Special procedures

Summary dismissal

The Amended Rules have introduced a number of 'special procedures', including a new procedure for summary dismissal.

The introduction of summary dismissal procedures in international arbitration is a relatively recent development in various institutional rules (e.g. rule 29 of the Singapore International Arbitration Centre Rules and rule 43 of the Hong Kong International Arbitration Centre Rules) and serves as a particularly useful tool when a claim or defence manifestly lacks legal merit.

Under the Amended Rules, parties are able to object on the basis that a claim is manifestly without legal merit within 45 days of the constitution of the tribunal (AR 41(2)(a)), and the tribunal must render a decision with respect to that objection within 60 days after the filing of the last submission on the objection (AR 41(2)(e)).

The idea behind AR 41 is to resolve objections to unmeritorious claims early and quickly. That said, it should be noted that the tribunal's decision against summary dismissal is without prejudice to the right of a party to later object to the tribunal's jurisdiction or the admissibility of a claim on essentially the same basis (under AR 43), or to argue in the proceeding that a claim is without legal merit (AR 41(4)).

Bifurcation

Bifurcation is a common procedural mechanism adopted in arbitration, including investment arbitration. It means that the proceedings can be split into two or more parts dealing with distinct aspects of the dispute.

It can be a useful tool to streamline arbitration proceedings and make them more efficient by allowing certain preliminary issues to be dealt with in a separate, preliminary phase of the proceeding, particularly where a decision on those issues may dispose of the balance of the dispute and spare the parties the effort and cost of having to argue them.

Until now, a tribunal's power to bifurcate proceedings in ICSID arbitration derived from Article 41(2) of the ICSID Convention (determining issues of jurisdiction separately from the merits of a dispute) and Article 44 of the ICSID Convention (determining questions of liability separately from the assessment of damages), neither of which specified the procedure to be followed or the factors to be taken into account by the tribunal.

The Amended Rules introduce new provisions specifically dealing with the question of bifurcation. The rules now set out:

the procedure to be followed when making an application for bifurcation, including by specifying that the tribunal must issue a decision on the request for bifurcation within 30 days of the last submission regarding the request (AR 42(3)); and
the factors that the tribunal must consider when making its decision, including whether bifurcation will materially reduce the time and cost of the proceeding, whether determination of the questions to be bifurcated will dispose of all or a substantial portion of the dispute, and whether the questions to be addressed in separate phases of the proceeding are so intertwined so as to make bifurcation impractical (AR 42(4)).

The new rule also empowers the tribunal to determine, on its own initiative and at any time, whether a question should be dealt with in a separate phase of the proceedings.

This new rule will both streamline and clarify the process applicable to applications for bifurcation of proceedings moving forward.

Provisional measures

Another notable development in the Amended Rules is that they clarify the circumstances in which a tribunal can make an order for provisional measures.

As the Amended Rules recognise, provisional measures are an important tool to:

prevent action that is likely to cause current or imminent harm to a party or prejudice the arbitral process;
maintain or restore the status quo pending the determination of a dispute; or
preserve evidence that may be relevant to the resolution of a dispute.

The new AR 47 articulates the circumstances to which the tribunal should have regard when considering an application for provisional measures - being whether the measures is urgent and necessary, and the effect that the measure may have on each party (AR 47(3)). AR 47 also specifies the procedure to be followed when making such an application, and empowers the Tribunal to recommend provisional measures that are different from those requested by a party (AR 47(4)).

Security for costs

One of the most significant and welcome amendments to the Rules is the new provision concerning security for costs. Security for costs orders serve as protection for respondent parties with a legitimate concern that a claimant may not be able to pay their costs of the proceeding in the event the respondent is successful in their defence.

While the ICSID Convention permits tribunals to issue provisional measures in order to preserve the rights of the parties (Article 47 of the ICSID Convention), security for costs applications have typically only been granted in exceptional circumstances due in part to the absence of a specific power to do so.

The Amended Rules now expressly empower tribunals to order security for costs in circumstances where any party has brought a claim or counterclaim (AR 53(1)), and set out the procedure to be followed when applying for security for costs (AR 53(2)).

In addition, the new Rule clarifies the factors to be taken into account by tribunals when determining if security for costs should be ordered (AR 53(3)), such as:

the party's ability to comply with an adverse decision on costs;
the party's willingness to comply with an adverse decision on costs;
the effect that providing security for costs may have on that party's ability to pursue its claim or counterclaim; and
the conduct of the parties.

The tribunal is also empowered to consider the existence of third-party funding when determining an application for security for costs (AR 53(4)).

There are sanctions contemplated for non-compliance with a security for costs order: if a party fails to comply with the order, the tribunal can suspend or, if the proceedings have been suspended for more than 90 days, discontinue the proceedings (AR 53(6)).

Reducing time and cost and promoting greener arbitrations

Expedited procedure

The Amended Rules have introduced a new procedure for expedited arbitration (Chapter XII), which should allow an arbitration to be completed within less than 1.5 years from the registration of a Request to refer a dispute to ICSID. Given that the average length of reported investment treaty arbitrations is three years and seven months, with many taking much longer to conclude, this is a welcome development.

The Amended Rules provide that the parties to an arbitration may consent to expedited arbitration at any time by jointly notifying the ICSID Secretary-General in writing of their consent (AR 75). In addition, parties are permitted to opt-in to the expedited procedure following the appointment of the tribunal. If one or more of the arbitrators are unavailable to conduct the arbitration on an expedited basis, they are free to resign.

The Amended Rules impose strict deadlines for different steps in the arbitral process, to ensure that the arbitration proceeds and concludes expeditiously within the accelerated timeline. The parties are required to appoint a sole arbitration or a three-member tribunal within 20 days of submitting their notice of consent (AR 76).

There are also strict deadlines for the filing of pleadings, the length of pleadings are capped and certain special procedures, such as bifurcation, are not applicable (AR 81).

The inclusion of a chapter dealing with expedited arbitration brings the ICSID Rules in line with the rules of other preferred arbitral institutions.

Virtual hearing and electronic filing

In response to travel restrictions and border closures, arbitration practitioners had to quickly adapt to the move from face-to-face hearings to virtual hearings in many, if not most, arbitration proceedings over the past two years.

The Amended Rules recognise the importance of this shift to virtual hearings, particularly for hearings that address procedural issues as to the conduct of the arbitration, as is illustrated in AR 29, which expressly empowers the tribunal to host the first procedural meeting remotely if it deems it appropriate.

In a similar vein, and recognising the move to digitalisation, AR 4 provides that all documents shall be filed electronically, unless the tribunal in special circumstances orders that the documents be filed in a different format.

This approach is also consistent with ICSID's 'green' intention - i.e. conducting arbitrations in a way that minimises their environmental footprint, a current hot topic in arbitration.

Some concluding observations

The Amended Rules have not only been long-awaited, but are to be welcomed by parties looking to resolve investment disputes with states. This is particularly so as the Amended Rules clarify and simplify the procedure and address a number of the concerns raised in relation to the length, perceived lack of transparency, and inflexibility of the ICSID process. The amendments have the potential to streamline ICSID arbitrations, including by cutting down their duration and making them more predictable and efficient.

Overall, the Amended Rules reflect ICSID's understanding of the gaps in previous iterations of the rules and a responsiveness to the changing environment in which investment arbitration is conducted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.