A Welcome Decision, But What About ICSID Claimants?
Hashem Hijjawi, Associate in Clyde & Co’s Global Arbitration Group
In the English High Court, there are robust mechanisms in place to ensure a frivolous claim or defence is struck out at the earliest opportunity, sometimes with a penalty in the form of an adverse costs order.
Yet, in arbitration, – that increasingly popular form of dispute resolution praised ad nauseum for its efficiency, speed and fairness, – unmeritorious cases can spend months or even years trundling along before they are effectively dismissed.
Some arbitration rules, however, do provide a framework for the early determination of claims. Under Rule 41(1) of the 2022 ICSID Rules, for example, a party may object that a claim is “manifestly without legal merit”. The ICSID tribunal will then address that objection in an expedited procedure in the early stages of a case. The remaining provisions of Rule 41 set out the procedure for making such an objection. A similar provision with a similar procedure was contained in the 2006 Rules (Rule 41(5)).
In late September 2022, an ICSID tribunal delivered its award pursuant to a Rule 41 objection (under the prior, 2006 Rules) in the case of AHG Industry v Iraq. AHG Industry GmbH, a German company, brought a USD 1 billion claim against the State of Iraq, alleging, among other things, the expropriation of its investment in a cement plant in Kirkuk. The Claimant sought to establish the tribunal’s jurisdiction on the basis of various instruments, including a 2010 Iraq-Germany BIT ratified only by Iraq.
The Respondent argued that the tribunal lacked jurisdiction and requested that it dismiss the claim as manifestly without legal merit under Rule 41(5). Drawing on the key cases in this area, including Trans-Global Petroleum v Jordan and PNG Sustainable Development v Papua New Guinea, the tribunal emphasised that the legal threshold under a Rule 41 objection is very high, meaning that the absence of legal merit in the claim ought to be “clear” and “obvious”.
And clear and obvious it was for the tribunal, which held that the claim was manifestly without legal merit. Despite the multiple pathways to jurisdiction argued by the Claimant, the tribunal was not impressed. The award is peppered with its polite dissatisfaction with the Claimant’s ambitious, if not inchoate, arguments; at one point the tribunal admitted that “it has not always been easy for [it] to follow the Claimant’s logic”.
The tribunal issued a stark warning against parties presenting arguments in Rule 41 objections in an “elaborate” fashion to try to stave off an early determination that the claim lacks legal merit. If it appears, once that artificial layer of gloss has been peeled, that there is, in fact, no “tenable arguable case”, an objection under Rule 41 will succeed. This must be right; otherwise, a party resisting such an objection will simply throw enough mud and hope some of it will stick.
Described by Iraq as “convoluted”, but more diplomatically by the tribunal as “intricate”, AHG Industry’s many different arguments, and its reliance on several domestic and international treaties and agreements, in order to establish that Iraq had consented to ICSID arbitration, all failed. Iraq claimed it incurred “significant time and costs” defending the Claimant’s flawed arguments, one of which the tribunal found “not only illogical, but  wrong as a matter of international law”.
Although Iraq was emphatically successful in its Rule 41 objection, in the end, and perhaps much to its disappointment, the tribunal ruled that each party should be responsible for its own costs. The reasons given included a “sensitiv[ity] to the comprehensive and thorough manner in which the Parties sought to assist the Tribunal in its task” and the parties and their counsel’s “professionalism” throughout the proceedings. Is it too much to expect parties and their counsel to conduct themselves in this way?
The tribunal also justified its costs decision on “considerations of fairness”, which it had discussed earlier in its award. However, those considerations concerned separate, substantive issues not concerning costs. And it found completely against the Claimant on those issues, at one point even observing that it had “no doubt in its mind” that the Claimant’s claims have “fundamental flaws and are thus manifestly lacking in legal merit”.
None of this, incidentally, seems to have deterred the Claimant from filing an annulment application several months later, on 3 February 2023.
Still, Iraq managed to have a case thrown out which could have potentially cost it USD 1 billion and embroiled it in years of cut-throat litigation. Yes, the fact that more than a year lapsed between the submission of the Respondent’s objection under Rule 41 and the tribunal’s award rather undermines the so-called “expedited” nature of this procedure. And yes, during that time, costs continued to mount. Perhaps the petro-State felt exasperated and wished for a more efficient procedure to oil the wheels of its Rule 41 objection to a speedier conclusion. All fair and important points. But a good day for Iraq nonetheless, and indeed for all ICSID respondents faced with unmeritorious claims. Rule 41 is alive and well.
Claimants, however, need not apply.
A reminder of the rule’s wording:
“A party may object that a claim is manifestly without legal merit.”
The use of “party” is odd. If the drafting genesis of the rule is examined, it becomes readily apparent that the procedure was never intended to be used by claimants; instead, it was a reactive measure implemented to address respondents’ growing concerns about what they perceived were the inadequate screening powers of ICSID’s Secretary General. Aurélia Antonietti, a seasoned ICSID legal adviser, acknowledged around the time Rule 41 entered into force that its rationale was “to offer the possibility to a respondent to raise an objection that the case is manifestly lacking legal merit”.
And the Global Trading tribunal – one of the first to make a decision on a Rule 41 objection, – observed that the draftspeople of this rule “might equally well have said “the respondent”, since the procedure is hardly likely to hold much interest for a claimant”. A Rule 41 objection must, in any event, be made within 45 days of the tribunal’s constitution; insufficient time for a respondent to have filed any pleading, let alone an unmeritorious one, for the claimant to object to.
ICSID had an opportunity in its 2022 Rules to revise “party” to “respondent”. Perhaps it did not in order to cater to exceptional cases, like annulment proceedings or counterclaims.
ICSID could have also expressly expanded the scope of this rule by adding “or defence” after “claim”, thereby giving claimants an opportunity to benefit from an expedited procedure too.
This is not unheard of, even within the unique context of investor-State (as opposed to commercial) arbitration.
In an SIAC Investment Arbitration, for example, Rule 26.1 of the 2017 rules enables “a party [to] apply… for the early dismissal of a claim or a defence on the basis that [a] claim or defence is manifestly without legal merit”.
It seems that in Singapore, the term “party” is used more accurately.
It is now widely accepted that, for arbitration to be efficient, it must be possible to dismiss a claim or defence on an expedited basis. The decision in AHG Industry v Iraq is welcome, and a procedure designed to deal promptly with unmeritorious claims should be encouraged. But until there is an equivalent process for a claimant faced with an unmeritorious response to its claim, questions of fairness between the parties may loom large.
ABOUT THE AUTHOR:
Hashem Hijjawi is an Associate in Clyde & Co’s Global Arbitration Group in London. His practice encompasses all areas of international arbitration, public international law and commercial litigation. He has acted in cases in the English High Court and in ICSID, LCIA, ICC arbitrations.