THE AUTHOR:
Georg Scherpf, Head of the Arbitration Team at Clyde & Co Germany
Antonios Politis, Associate at Clyde & Co
On 20 January 2022, the International Center for Settlement of Investment Disputes (“ICSID”) submitted Amended Rules to the ICSID Administrative Council. The Amendments not only concern the ICSID Arbitration Rules, but the entire body of the ICSID Convention’s Rules and Regulations. This proposal was preceded by a total of six Working Papers (the most recent dated 12 November 2021) in a more than five-year consultation process, which proved to be the most comprehensive, transparent, and collaborative in ICSID’s history. Now, member States will have until 21 March 2022 to cast their votes, and if adopted by a two-thirds majority, the Rules will enter into force on 1 July 2022.
The aim was to modernise ICSID’s Rules – mainly in terms of efficiency and transparency. In addition, new rules were developed for mediation and fact-finding, as well as for provisional measures and expedited arbitration. In terms of wording and structure, all Rules have been re-drafted in more precise, structurally clearer, gender-neutral language. Another much-discussed aspect is the treatment of third-party funding and its mandatory disclosure. Finally, the new Arbitration Rules introduce and amend a number of time limits, with the intention of streamlining and accelerating arbitration proceedings.
Below, we summarise a few key aspects and noteworthy features of the proposed ICSID Arbitration Rules (the “AR”).
Increasing Procedural Efficiency
As mentioned, the reform of the ICSID Rules aims at modernising and bringing the various sets of rules on par with other, commonly used arbitration rules. To this end, AR 4(2) provides that all filings of documents shall be made electronically, unless there are special reasons justifying a paper filing. This makes the filing of pleadings and documents easier and reduces the costs of processing correspondence as well as the proceedings’ environmental footprint. In the same vein, the proposed Rules now explicitly mention remote sessions and hearings (AR 29(2) and (4)(f)).
Several Rules aim to get the proceedings underway as quickly as possible, especially at the initial stage. For example, the first procedural order is to be issued within 15 days of the first session (AR 29(5)). Furthermore, if a first session cannot be convened within 60 days of the Tribunal’s constitution, the Tribunal may hold the first session between the parties and the President of the Tribunal alone, or among the Tribunal members based on written submissions by the parties (AR 29(3)).
Another new feature is directed at the tail end of the proceedings: an award is to be rendered within a 240-day time limit after the filing of the final written submission (AR 58 (1)(c)). This addresses an issue under the current Rule 46, which states that the award should be made within 120 days of the closure of proceedings. Since the date of “closure” is entirely in the hands of the Tribunal, the 120-day rule is of little consequence. The proposed new Rules now introduce more precise time limits. Only time will tell whether this will also lead to a quicker issuance of awards.
More precise rules and corresponding time limits are also introduced for the objection of manifest lack of legal merit (AR 41), for bifurcation (AR 42-45) and for preliminary objections (AR 43-45). In addition to increasing efficiency, these procedural instruments aim at limiting the broad discretionary powers of tribunals in handling the progress and timing of proceedings.
Introducing Standards for Provisional Measures
The proposed Arbitration Rules contain more explicit rules and guidance on provisional measures, in AR 47. Previously, this was defined by Tribunals themselves and various cases established standards for provisional measures (See, e.g., Occidental v. Ecuador (II), ICSID Case No. ARB/06/11, Decision on Provisional Measures, 17 August 2007, paras 55-62; Phoenix Action v. Czech Republic, ICSID Case No. ARB/06/5, Decision on Provisional Measures, 6 April 2007, para. 32).
These standards are now anchored in the text itself and, in this respect, are intended to guide arbitral discretion and to ensure consistency in its application. Pursuant to AR 47(3), the Tribunal must consider the urgency and necessity of the measures and the effects they may have on each party.
The new Rules retain the somewhat weak wording according to which the Tribunal may only “recommend” provisional measures (AR 47(1)). This can be explained by the corresponding and limiting wording in Article 47 of the ICSID Convention, which would need to be changed in the first place (See, ICSID Rules and Regulations Amendment, Working Paper (“Working Paper”) #1, p. 225, para. 490).
Nevertheless, provisional measures under the old regime were commonly interpreted as binding (See, e.g., RSM v. Saint Lucia, ICSID Case no. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs, 13 August 2014, para. 49; Occidental v. Ecuador (II), ICSID Case No. ARB/06/11, Decision on Provisional Measures, 17 August 2007, para. 58; Maffezini v. Spain, ICSID Case No. ARB/97/7, Procedural Order No. 2 (Decision on Request for Provisional Measures), 28 October 1999, para. 9).
However, by retaining the wording, the new AR 47(1) reaffirms that provisional measures based on the ICSID Convention are, in fact, not binding. In consequence, provisional measures are not enforceable in the strict sense. At most, a Tribunal can draw negative conclusions from non-compliance (See, Working Paper #1, p. 226, para. 491). In any case, as a result of this reaffirmation of the non-binding nature of provisional measures, the discussions on this conflict between the wording and its somewhat “contra legem” interpretation by tribunals will continue.
Increasing Transparency
Transparency has been an essential aspect of the entire revision effort since the beginning of the consultation process, as it is linked to greater acceptance and legitimacy of investment tribunals. The proposed Rules aim at increasing transparency, e.g., through more extensive publication of awards, orders, and decisions.
The possibilities to amend the Rules in this regard were also limited by the ICSID Convention, which determines that both parties have to agree to the publication of awards. ICSID is now attempting to mitigate this restriction through implied consent, i.e., through a clause stipulating that consent to publication is “deemed to have been given” if no party objects to the publication within 60 days of dispatch of the respective document (AR 62(3)). Should a party object, the amendments maintain the current status quo whereby extracts of the award are published by the ICSID Secretariat. The same Rule applies to orders and other procedural decisions (AR 63).
Moreover, under AR 27(2), procedural orders and decisions shall now “indicate the reasons upon which they are made”. The extent of this now required reasoning is at the discretion of the Tribunal and will – logically – be minimal for uncontested or mere administrative and organisational matters (See, Working Paper #6, p. 23, para. 13), but, nevertheless, will make such decisions more transparent.
Handling Potential Conflicts of Interest (in particular: Disclosure of Third-Party Funding)
In terms of handling conflicts of interest, the new Rules provide some important changes:
Regarding the disqualification of individual arbitrators, the procedure is now defined in detail, and certain deadlines, as well as the immediate consequences for the ongoing proceedings, are specified (AR 22). An interesting point here is that the decision on the disqualification of the arbitrator remains in the hands of the rest of the Tribunal, i.e., either the other members or the Chairman (AR 23(1), referring to Article 58 ICSID Convention). Despite discussions to the contrary, ICSID did not seize the opportunity to entrust an independent body with this decision, as is now the case in some other commonly used arbitration rules (See, e.g., ICC Arbitration Rules (2021), Article 14(3)). In view of the clear wording of the ICSID Convention, this is ultimately not surprising but will most probably not bring the discussions to an end.
Another important – and so far most discussed – aspect of the new Rules is the mandatory disclosure of third-party funding (“TPF”). In this context, AR 14 defines the term as “any non-party from which the party, directly or indirectly, has received funds for the pursuit or defence of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the proceeding”. It also stipulates that parties must disclose the names and addresses of companies and persons from which they received the funds. This new addition to the ICSID’s transparency regime is meant to prevent challenges of the award as a result of conflicts of interest (e.g., between members of the Tribunal and actors involved with the funders). Importantly, the obligation to disclose applies throughout the proceedings – i.e., even if the TPF is agreed at a later stage (AR 14(2)).
The last addition to the Rules regulating TPF concerns the notion of disclosure of the ultimate beneficial owner: if the funder is a legal entity, the parties must also disclose who “controls” the funder (AR 14(1)). This aspect only came into play in Working Paper #6 at the request of numerous States, even though it was previously rejected by the ICSID Secretariat (See, Working Paper #6, p. 20, para. 9). The addition is already being criticised, as it requires the disclosure of more information about third-party funders than about the funded parties.
Introducing a Rule on Security for Costs
Along with AR 14 and the disclosure of TPF, a new Rule on orders for payment of security for costs has now been added in AR 53. As a result of the increasing impact of TPF, there have been concerns about whether a funded party can commit an “arbitral hit & run” by initiating an arbitration against a State and later walking away without paying for costs. After all, as non-parties to the arbitration, third-party funders cannot be forced to pay costs. Based on this new Rule, the Tribunal would have the option to order a party, usually the claimant/investor, to provide security for the payment of possible future costs that might be imposed.
The current ICSID Arbitration Rules make no reference to the possibility of ordering security for costs. However, in recent years, some respondent States have succeeded with their applications for security for costs to avoid the described scenario. The first reported case was RSM Production Corporation v. Saint Lucia in 2014 (See, RSM v. Saint Lucia, ICSID Case no. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs, 13 August 2014, para. 54 et seqq.).
In the various decisions rendered since then, the order of security for costs has been construed as a kind of “provisional measure”, also resulting in corresponding requirements that need to be fulfilled (See, García Armas and others v. Venezuela, PCA Case No. 2016-08, Procedural Order No. 9 Decision on the Respondent’s Request for Provisional Measures, 20 June 2018, para. 186 et seqq.). The new regime proposed by ICSID is intended as a “new, stand-alone provision” for security for costs. It, therefore, no longer constitutes a “provisional measure” in the sense of AR 47. This significantly reduces uncertainty as to its legal nature and applicable standards. In particular, it seems that – by contrast to the new regime on provisional measures – it is possible to issue binding decisions (or “orders”) for security for costs. Furthermore, “urgency”, “necessity”, or other criteria usually associated with provisional measures no longer have to be fulfilled.
Under AR 53(3), the Tribunal must consider the ability and willingness of the relevant party to comply with an adverse costs order, the effect of the security on a party’s ability to bring a claim or counterclaim, the conduct of the parties and any other relevant circumstances (AR 53(3)). This specifically includes the existence of any TPF (AR 53(4)), although it was made clear that such TPF “is not in itself sufficient to justify an order for security for costs” (See, Working Paper #5, p. 307, para. 103). However, the legal standards to be applied to the question of whether a Tribunal should order security for costs is entirely at the discretion of the Tribunal (See, Working Paper #5, p. 307, para. 103).
Introducing Standards for Decisions on Costs
Unlike its predecessor Rule 28, the new AR 52.1 stipulates various factors to be taken into account by the Tribunal with regard to its decision on costs. Previously, the Tribunal was completely free to decide by whom and to what extent the costs of the proceedings should be borne. In this respect, the Tribunal had a very wide discretion: to split the costs, require that the State at least always bears its own costs, apply the “loser pays” rule, or take into account the conduct of the parties.
Based on the proposed Rules, tribunals are required to consider a specific catalogue of factors:
- the outcome of the proceeding or any part of it;
- the conduct of the parties, including the extent to which they acted in a cost-effective manner and complied with the rules, orders and decisions;
- the complexity of the issues; and
- the reasonableness of the costs claimed.
If the Tribunal renders an award that a claim manifestly lacks legal merit under AR 41(3), the prevailing party shall be awarded its reasonable costs, unless the Tribunal determines that special circumstances are justifying a different allocation of costs (AR 52(2)).
All in all, ICSID seems to have succeeded in compiling a thoroughly modernised set of rules. Obviously, not all the objectives ICSID initially pursued were achieved, and many ideas brought forward by member States never became part of the revised Rules. However, the proposed Rules appear to be a good compromise that aligns ICSID with the progress of other commonly used arbitration rules, but does not jeopardise their chances of adoption. As such, they would be a welcome and necessary update to the general regime of investment arbitration. This also seems to be the view of the European Commission, which has recommended that all 26 EU Member States which are parties to the ICSID Convention vote in favour of ICSID’s proposed Amended Rules.
We would also like to draw your attention to the forthcoming commentary, ICSID Arbitration Rules: An Article-by-Article Commentary, by Richard Happ and Stephan Wilske (eds.), which is expected to be published in July 2022 with C.H. Beck, and to which the co-author of this article, Georg Scherpf, contributed a chapter.
ABOUT THE AUTHORS
Georg Scherpf is Head of the Arbitration Team in Germany and part of Clyde & Co’s Global Arbitration Group. He advises both private and State parties on complex arbitrations and cross-border litigations. His commercial arbitration work covers a broad range of legal issues and sectors including international trade (CISG), corporate disputes (joint venture and post M&A) and energy (particularly offshore wind). His public international law experience includes advising clients in relation to bilateral investment treaties (BITs) and multilateral investment treaties including the Energy Charter Treaty (ECT). He has acted for investors in several complex treaty cases (ICSID, UNCITRAL and ad hoc) relating to infrastructure and energy investments in Spain, Czech Republic, Albania, and Germany.
Antonios Politis is an associate in Clyde & Co’s Global Arbitration Group in Hamburg, Germany. He advises and represents both private and State parties in domestic and international arbitration proceedings as well as in complex cross-border disputes before German courts. He is admitted to practice law in Germany (Rechtsanwalt) and in New York (Attorney at Law).
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