Direct Foreign Investment

Is the use of international arbitration an appropriate mechanism for the settlement of direct foreign investment disputes and is there justification for the prospect of exclusive arbitral jurisdiction by the ICSID Convention between investors and states?

A. Argument Summary

1. Introduction

The 1965 Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID) is by far the most common arbitration procedure under International Law for the settlement of investment disputes. Further to this, the vastness of importance that is to be attached to this document is twofold, namely, firstly the increase in signatory states to the ICSID and the undisputed increase in petitions under it in recent years.

The hypothesis is that all international arbitration for foreign investment disputes concerning investors against states should be conducted exclusively through the International Centre for Settlement of Investment Disputes.

2. A twofold proposal

(a) International Arbitration versus the Judiciary

(i) The superiority of arbitration

The argument will be that international arbitration is superior to judicial procedures on account of better costs, a shortened time-span, the ability for investors to raise issues as direct participants as opposed to the exclusive participation rights of States in the case of the ICJ.

(ii) The power of Trans-national Corporations (TNCs)

It will be argued that the power of TNCs has been at the forefront of the development of arbitration on the international scene and, as a result, TNCs exert a huge influence over the development of Foreign Investment Dispute Settlement under international law. The interests of investors, is best served by adopting an approach to dispute settlement that is fast, cheap and effective. It is therefore out of sheer practicality and not a bid for power that has been the key motivation for the TNC driven move in the direction of international arbitration. In response to any arguments criticizing an international forum as opposed to a domestic, one this is also a clear move in keeping with the needs of a global economy for the harmonization of laws and settlement procedures.

(b) ICSID Convention method as opposed to other forms of arbitration under international law

It will be proposed, through comparison of other methods of direct foreign investment settlement through arbitration, that the ICSID Convention is the superior mechanism. Other arbitration methods under international law will be considered, including, chapter 11 of the North American Free Trade Agreement (NAFTA) and Appendix II of the Agreement Establishing the World Trade Organization (which contains the Understanding on Dispute Settlement (DSU)). Further to this, the ICSID Convention will be compared with the Draft Multi-lateral Agreement on Investment (MAI) to determine the next step that this document will offer and whether it is needed.

B. Primary and Secondary Sources

1. Primary Sources - the neutral starting point of reading legislation and case law:

(a) On ICSID

The essential starting point is the website of the International Centre for the Settlement of Investment Disputes under www.icsid.org. This provides the Convention and other supplementary materials regarding additional facility rules and lists of signatory states. All case law is also listed in the site including all internet available and pending cases. Analysis of the extent of pending cases is a great insight into the sheer workload that is currently being faced by the ICSID.

(b) On judicial methods of dispute settlement under international law

Primary sources on international law are in abundance on the internet. The statute on the International Court of Justice, as well as further information on the court itself, are provided at www.icj.org. Case law serves to illustrate the time frames and the process for investors to engage their state to petition on their behalf.

(c) Other methods of arbitration under international law.

Information on chapter 11 of NAFTA is available at www.nafta.org and on Annex II of the WTO at www.wto.org.

Secondary Sources - opinions, institutional publications, text book publications and articles

The secondary resources provide the more inspirational portion of the reading list as it is hear where arguments and opinions are raised.

(a) Background to Foreign Investment Disputes in general

Definitions of foreign investment is given by the Organization for Economic Cooperation and Development (OECD) as well as a report on the policy of 'fair and equitable treatment that is at the core of international investment standards.

Sornarajah provides information on the nature and types of foreign investment contracts as well as the usual causes of disputes. There is also a full explanation of the history of arbitration of foreign investment disputes and other forms of settlement, namely, negotiation, international judicial tribunals and the domestic courts.

(b) The need for direct TNC Participation

The vast majority of petitioners in foreign investment disputes are TNCs and the number of such complaints is on the rise. This is a clear indication of the requirement for methods of dispute settlement such as the ICSID that will allow direct TNC participation. Sornarajah argues that there may be a cause for concern over the use of arbitration as opposed to judicial methods as this is a removal of state intervention over settlement but, as a counter argument, the judiciary is not open to investors at international level as they are actively barred from participation in the ICJ although this is not the case for EU Member states using the ECJ or the ECHR.

See the United Nations Conference for Trade and Development (UNCTAD) publication on the settlement of investment disputes by 'investors-states'. This is found in the UNCTAD website. Other sources include four modules provided by UNCTAD on the settlement of disputes, which are available at www.unctad.org. This crucially provides reasons as to why there was a move towards one tribunal specializing in investment disputes! Arguments for international arbitration are also found in Trans-national Dispute Management (TDM)

(c) Superiority of ICSID

The above Investigation into opinions on NAFTA can be analysed through analysis of the recent Australia-US free Trade Agreement and comparison between the WTO arrangements and NAFTA are given in P. Clarke, Why Can't NAFTA Chapter 11 be more like the WTO? The status of ICSID transparency is a huge bonus to this system as pointed out by T Wälde. Further sources are available in the Journal of World Investment and Trade and details of the MIA are found in the UNCTAD 'investor-state' and 'state-state' publications.

C. Summary of Methodology

1. Introductory Background

The introduction will give a background definition of Foreign Direct Investment (FDI) as well as descriptions of typical stock, general investment concerns, types of investments and the general need for foreign investment. There can be no economic development without a strong presence of the only form of asset raising that is possible, equity!

The subject matter of possible disputes

These are usually as a result of the dominant party, such as a state, intervening in a transaction in a way that adversely affects the rights of the foreign party and can lead to breach of the foreign investment contract.

Concern is raised mainly for two reasons, economic and environmental concern.

History and background of the ICSID Convention and its superiority

The history and background of the ICSID Convention will tie in with the needs of investors that will be highlighted in parts one and two and will naturally lead onto discussion of superiority.

(a) Judiciary

Firstly, the method of arbitration will be compared with that of judicial remedies under international law, namely, the procedure of cases heard before the International Court of Justice (ICJ), the European Court of Justice (ECJ), the European Court of Human Rights (ECHR) and domestic courts in accordance with bi-lateral, International Investment Agreements (IIAs) or otherwise. The freedom of investors to participate is the key advantage of arbitration.

(b) Other international arbitration tribunals

Discussion of NAFTA and the WTO provisions will be the main forum for comparison as well as other tribunals such as UNCITRAL, the ICC and the Stockholm Arbitration Centre. The issue of transparency will be the main highlight that distinguishes ICSID and there will also take place discussion of the need for the MIA. The conclusion will follow.

D. Summary of the contribution of the proposed dissertation

Increased globalisation coupled with an ever increasing list of countries that are party to the ICSID Convention show that the responsibility of the International Centre for the Settlement of Investment Disputes is growing. There requires to be a calculated analysis of this arbitration tribunal as the future forum for the vast majority of international arbitration proceedings.

So far there has been no writing on the concept of harmonizing the various arbitration tribunals for the purpose of a separate arena for foreign investment but as the trend of legislative harmonization takes hold, there is scope for the removal of the splintered tribunals that currently exist for arbitration of investment. Equally, it seems a futile state of affairs for there to be other large and yet less transparent procedures under NAFTA and the WTO in the instance of investment disputes. Investment is a vital artery to the global economy, which is why it has to be tackled from the clear, simplifying and logical environment of the international arena and under the single umbrella of the ICSID that has proven to be an effective mechanism since it came into being in 1965.

Bibliography

International Treaties

Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1965 (ICSID Convention)

North American Free Trade Agreement (NAFTA)

Agreement Establishing the World Trade Organisation

Multilateral Trade Agreement (MAI)

Case Law

See Attached Appendix

International Institution Publications

UNCTAD Modules 2.3, 2.4 and 2.7 Course on Dispute Settlement, (edmmisc.232ad3_en.pdf, 2003)

9th Session of the United Nations Conference on Trade and Development: TD/B/COM.2/62 17 January 2005

Occasional Note, International Investment Disputes on the Rise, (29th November 2004, UNCTAD/WEB/ITE/IIT/2004/2)

ICSID Additional facility rules for the International Convention for the Settlement of Diputes Between States and Nationals of Other States 1965, available at For the ECJ and ECHR, refer to See for example case of Certain Norwegian Loans, France v Norway, 6th July 1957, case Concerning Barcelona Traction Light and Power Company, Ltd, 24th July 1964, case Concerning Electtronica Sicula S.p.A. (ELSI), United States of America v Italy ICJ 1989/76

Please note: The above essays and dissertations were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.

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