On January 24, 2014, an ad-hoc annulment committee at the International Centre for Settlement of Investment Disputes (ICSID) dismissed a request by the Argentine Republic to annul a June 2011 arbitral award that had granted an Italian contractor over US$21,000,000 for harm suffered to an investment in a Buenos Aires water services concession. While this was one of the smaller awards rendered against Argentina, it is nonetheless of utmost significance for Argentina and all countries facing claims under investment treaties. As this brief article discusses, the committee’s decision exemplifies the barriers to overturning ICSID awards, due to a system that values the finality of an award more than legal correctness.
Background on ICSID annulment proceedings
In general, disputing parties have limited rights to challenge ICSID awards. This is partly because ICSID arbitral awards cannot be appealed before national courts; rather, the only way for the claimant or respondent to challenge an ICSID award is to request an ICSID ad-hoc committee to review and annul all or part of the award. Moreover, theannulment committee can only annul an award on five limited grounds: (1) if the tribunal was improperly constituted; (2) if the tribunal manifestly exceeded its powers; (3) if there was corruption on the part of the tribunal; (4) if there was serious departure from a fundamental rule of procedure; and (5) if the award failed to state the reasons on which it was based. In previous decisions, annulment committees have declared that even if an award is based on manifest errors of law or fact, the award must nevertheless stand because such errors are not a ground for annulment under the ICSID Convention.
As of December 31, 2013, a total of fifty ICSID annulment proceedings were concluded, and another eleven proceedings were pending. Reflecting the high-threshold for annulling ICSID awards, only thirteen annulment committees decided to annul the contested awards in part or in full, while twenty-two annulment applications were rejected and fifteen proceedings were discontinued.
Impregilo annulment committee takes narrow view of its tasks
The annulment decision in Impregilo v. Argentina is notable in two respects. First, an ICSID annulment committee confirmed once again that its role is not to correct legal mistakes. In other words, decisions that are incorrect in law under a treaty cannot be overturned on that basis. The annulment committee thus made it clear that the finality of the award is a more important value than the legal correctness of the award.
Second, the annulment committee applied a very narrow view on the function of the annulment process to the issue of jurisdiction. Specifically, the annulment committee stated that the most-favoured nation (MFN) provision in a treaty could extend to procedural issues unless there was a specific exclusion in the treaty text. If there was no explicit exclusion in the treaty, a tribunal could reach its own conclusion on whether to apply the MFN provision when determining jurisdiction. An annulment committee would then not review whether this was a correct decision in law, even if it related to the determination of the tribunal’s competence to hear the ICSID case in the first place.
As a consequence, the annulment committee refused to annul the decision taken by the majority of the tribunal to allow the claimant to rely upon a MFN clause to circumvent an 18-month local-litigation requirement found in the Argentina-Italy bilateral investment treaty (BIT).
What constitutes a manifest excess of power by the tribunal?
In the annulment proceedings, Argentina had argued, among other things, that by importing conditions to jurisdiction from an outside treaty, the tribunal had “manifestly exceeded its powers,” and that therefore the decision had to be annulled. However, the ad-hoc annulment committee instead stressed the limited nature of its mandate, and the fact that annulment is “… an exceptional recourse that should respect the finality of the award” (paragraph 118). On MFN, the committee noted that it might have had the authority to annul an award if a treaty expressly prohibited the application of an MFN clause to jurisdictional issues and a tribunal disregarded such an express prohibition, but not if it was silent (paragraph 136-137). It further reasoned:
“140. From the discussion in the preceding paragraphs, it is clear to this Committee that the issue of whether the MFN clause in the Argentina-Italy BIT has jurisdictional effects in the circumstances of this case that allowed Impregilo to have recourse to the Argentina-US BIT, which does not require recourse to local courts before resorting to the ICSID jurisdiction, is a complex issue, subject to debate, with opposite views that were discussed by the majority and the dissenting arbitrator. Neither applying an MFN clause to jurisdictional issues nor refusing to apply it to assume jurisdiction may be considered, per se, as a manifest excess of powers. The Committee is being asked to review in detail and de novo the complex issues involved in the jurisdictional debate in this case, to support the analysis of the dissenting arbitrator and to consider that such analysis is the one to prevail, and to conclude that the majority manifestly exceeded its powers. This is not the task of the Committee. The analysis required to reach a conclusion other than the majority’s would imply a new and complex analysis of the issues at stake, a review that is far from the responsibility of this Committee according to Article 52.
141. For these reasons, it is clear that this Committee has no authority to determine whether or not the Tribunal should apply Article 3.1 of the BIT in order to establish its jurisdiction to review the merits of the dispute. The interpretation made by an Arbitration Tribunal in one way or another on the possible extension of the MFN clause to jurisdictional issues can never by itself constitute a clear, obvious, and self-evident excess of powers.”
In other words, the annulment committee considered that if a provision is open to some level of interpretation, then it will not review that interpretation—even if the tribunal’s interpretation is wrong. Only where a provision is fully clear and then ignored by the tribunal, would the committee consider annulling the tribunal’s finding. However, the annulment committee’s approach to demand absolute clarity in the MFN provision is particularly paradoxical considering the overall investment treaty at issue: the committee says that the states have to explicitly instruct arbitrators not to expand the MFN clause to procedural issues. But at the same time, the annulment committee is allowing the tribunal to circumvent what the state parties to the Italy-Argentina BIT did explicitly state: the investor must litigate in local courts for 18 months before initiating an international arbitration.
Proper treaty interpretation requires that each provision is interpreted in a way that does not lead to contradictions within the treaty that in turn render some provisions inutile. In the present case, however, clarity in one area (the 18 months requirement) is overridden by the MFN clause that does not explicitly state that it does not extend to procedural issues. If disregard of a clear 18-month requirement when determining its own competence is not a manifest excess of power by the tribunal, the question is what can be?
As mentioned, the ICSID Convention provides only limited grounds for annulment of arbitral awards and annulment requests are more often dismissed than granted. Given the proliferation of ICSID arbitration and the inconsistency of arbitral awards on fundamental issues of treaty law, it is questionable whether a narrow understanding of the annulment committees’ tasks and responsibilities is still appropriate. In this regard it would seem timely to initiate a discussion about reform opportunities at ICSID and beyond. One option for states to consider would be an expansion of the annulment process available under Article 52 of the ICSID Convention; for example, broadening the grounds for annulment to cover errors of law or fact. Another option would be the establishment of a standing appellate body for investment arbitrations (either for ICSID only, or also for arbitrations under other rules). Reforms at ICSID, however, could prove difficult, since amendments to the ICSID Convention need to be ratified by all contracting parties before entering into force, and to date the Convention has never been amended. Should states prefer deeper reform of dispute settlement in the area of investment, the idea of an appeals process might better be discussed outside any pre-existing arbitration framework, especially if they wished to move away from an arbitration-based system to a more judicial type of dispute settlement. For instance, a new treaty setting up a global appellate body or an appellate division within a permanent investment court could be considered here.
Author: Nathalie Bernasconi-Osterwalder is senior international lawyer and head of the investment program of the International Institute on Sustainable Development. Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Decision of the ad hoc Committee on the Application for Annulment, January 24, 2014; and Award, June 21, 2011  See further Nathalie Bernasconi-Osterwalder and Diana Rosert, Investment Treaty Arbitration: Opportunities to reform arbitral rules and processes (IISD, 2014), Section 4.3.  However, a “few committees hypothesized that in certain cases those errors [erroneous interpretation or misapplication of the applicable law] could in fact warrant annulment.” See Lise Johnson, Annulment of ICSID Awards: Recent Developments (IISD background paper, 2010), p. 7. Retrieved from http://www.iisd.org/investment/research/reform.aspx  See ICSID, The ICSID Caseload – Statistics (Issue 2014-1), p. 17 (Chart 11). Retrieved from https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=CaseLoadStatistics. For pending annulments, see ICSID, List of Pending cases. Retrieved from http://icsid.worldbank.org