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Is ICSID heading in the wrong direction?

Source: Bilaterals.org

March 3, 2015

GAR | 24 Feb 2015

Is ICSID heading in the wrong direction?

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As ICSID celebrates the 50th anniversary of its creation this week, a former acting secretary general of the centre, Nassib Ziadé, says it’s time to talk about some of its problems – including flawed appointment processes and a lack of guidance on arbitrator challenges.

For several years after I left ICSID in 2011, I chose to abstain from commenting on the centre’s practices even though I had concerns about them. My wish is to strengthen, not weaken, the institution. But support for ICSID should not mean unconditional applause, and it is in the interest of the centre’s users that those who are closely acquainted with its operations should assess its evolution objectively. I have for some time felt that ICSID has been heading in the wrong direction in several aspects of core importance to its legitimacy. Although I had hoped that the centre would take the obvious steps in adopting the necessary solutions, I regret to say that my concerns have not abated in the past four years. Sometimes breaking silence becomes a duty.

I am not alone in some of my concerns. Notably, Hamid Gharavi of Derains & Gharavi recently published an article in GAR entitled, “ICSID annulment committees: the elephant in the room”. Among other things, the article criticises ICSID’s practice of appointing members of annulment committees who also serve on ICSID tribunals – and refers approvingly to my efforts to resolve this issue when I was in charge at ICSID. However, Gharavi deals with only one aspect of a multi-faceted problem at the centre. I have therefore decided to speak out in the hope of spurring a debate that the present leadership of ICSID seems to wish to avoid.

More than one elephant

I agree with Gharavi that members of annulment committees should not sit as ICSID arbitrators, but I would go further and argue that they should also not act as counsel in ICSID arbitrations. This is all the more important because the ICSID Convention lacks an appeal mechanism and prohibits judicial review of arbitral awards in national courts, including on the grounds of public policy. As the only challenge available against an ICSID award is the internal annulment mechanism provided for by article 52 of the Convention, annulment committees are the ultimate guardians of the ICSID system. It undermines their professional credibility and the legitimacy of the ICSID system if annulment committee members perform multiple and potentially incompatible duties.

As early as 2008, when I was acting secretary-general of ICSID, I reflected on the practice to which I adhered in the following words:

In order to promote coherence in the application of the Convention and Rules by annulment committees, ICSID is particularly careful in the selection of its committee members, and would, whenever possible, appoint similarly constituted committees. ICSID would thus ultimately want to see the development of a pool of arbitrators dedicated mainly to handling annulment proceedings.

This practice has since been discontinued, to my great chagrin. Arbitrators whose awards are or have been subject to annulment proceedings routinely sit on annulment committees in other cases. This creates at least a perception that annulment committee members may be tempted to develop case law that would benefit their pending or potential ICSID arbitration cases. Rather than having a devoted pool of experts sitting exclusively on annulment committees and developing a coherent body of law, the actual pool of appointees consists of a broad range of individuals with multiple affiliations and unconscious biases.

It is also striking that one individual can sit as both arbitrator and annulment committee member (and has been challenged in one case) while also serving as co-editor-in-chief of the ICSID Review alongside the ICSID secretary-general, who plays a prominent (and, as explained below, debatable) role in the selection of tribunal and annulment committee members, as well as in the decisions on challenges of such members. It is doubtful that the founding editor of the ICSID Review and former secretary-general of ICSID, Ibrahim Shihata, would have condoned similar practices.

ICSID’s diversity problem

The centre’s appointment of tribunal members raises other concerns. Article 40(1) of the ICSID Convention expressly states that, should the chairman of the ICSID administrative council (the president of the World Bank) be called upon to appoint one or more arbitrators, the appointments should be made exclusively from the ICSID panel of arbitrators. The panel consists of individuals designated by contracting states as well as of 10 individuals designated by the chairman of the administrative council.

It is widely known that the chairman invariably relies on the recommendation of the secretary-general of ICSID when making an appointment to an arbitration tribunal. It is also known that the routine practice of the present secretary-general of ICSID is to propose to the parties in each case, for their agreement, a list of names drawn almost exclusively from outside the ICSID panel of arbitrators.

Had it been exercised judiciously, this practice, though deviating from article 40(1), could nonetheless have furthered another important goal under the Convention, namely the one enshrined in article 14(2) of “assuring representation” of the “principal legal systems of the world.” To the contrary, however, the statistics released by ICSID show that this practice has contributed to stripping whole regions of the world of their right to secure proper representation on arbitration tribunals.

For instance, in 2013, 15 per cent of the cases registered at ICSID involved a respondent state from Western Europe or North America, while 68 per cent involved a state from Eastern Europe, Central Asia, the Middle East, North Africa or sub-Saharan Africa. Meanwhile, 70 per cent of the arbitrators originated from Western Europe or North America, and a grand total of 4 per cent came from Eastern Europe, Central Asia, the Middle East, North Africa and sub-Saharan Africa. Though the numbers in 2014 show a slight improvement (18 per cent, 58 per cent, 64 per cent and 9 per cent, respectively), they are still reflective of a highly imbalanced system of appointments. This seems to indicate a neat division of labour at ICSID: cases are brought against Arab, African, Central Asian and Eastern European States, and Western Europeans and North Americans get to decide them and determine the jurisprudence.

Of course, ICSID cannot solely be blamed for this unfortunate state of affairs. Developing countries and law firms representing them rarely appoint nationals from developing countries as arbitrators. This does not, however, exonerate ICSID from responsibility. It is precisely under these circumstances that ICSID should enhance its efforts to ensure that all legal systems of the world are fairly and inclusively represented on the arbitration tribunals that shape ICSID’s jurisprudence.

ICSID should only deviate from the appointment procedures prescribed in the Convention in the most compelling circumstances. If the secretary-general of ICSID instead routinely departs from the prescribed rules, invokes his or her discretion, and proposes the appointment of individuals who are not on the ICSID panel of arbitrators – thereby circumventing the appointment of qualified panel arbitrators from under-represented regions – it is inevitable that speculation about personal favouritism will follow. The fact that the drafters of the ICSID Convention did not expressly bestow the secretary-general with such discretion should induce the secretary-general to act with circumspection.

It is thus clear that in the area of diversity with regard to its appointment of arbitrators, ICSID is not scoring high marks. It indeed has a long way to go in ensuring that its appointments are both transparent and compliant with its governing instruments. This is all the more important because one of the main areas in which the legitimacy of an arbitration institution may be tested is its appointment of arbitrators.

No guidance on arbitrator conduct

Other areas of importance to an arbitral institution’s legitimacy are its handling of arbitrator challenges and alleged conflicts of interest. A close examination of ICSID’s record in these latter areas likewise reveals a troubling situation.

At a time when challenges to arbitrators are becoming increasingly prevalent in investment arbitration, with the associated criticism that challenges are but one symptom of a greater malaise, ICSID would have been wise to take the lead in developing codes of conduct aimed at avoiding conflicts of interest. Such codes of conduct could have addressed situations as diverse as a person serving simultaneously as counsel and as arbitrator in two different cases yet dealing with the same legal issues; a person serving as a member of an ICSID annulment committee while being an arbitrator or a counsel in an ICSID arbitration; as well as more general issues of problematic relationships between arbitrators and counsel. ICSID’s introduction of such codes could have brought much needed predictability, consistency and transparency to the process, thereby instilling trust where it has been sorely lacking. Remarkably, the Court of Arbitration for Sport in Lausanne has understood this issue so much better than ICSID, which is ironic given ICSID’s stated goal of depoliticising international investment disputes involving sovereign states.

More than any other arbitral institution, it is crucial for ICSID to have in place codes of conduct for arbitrators and counsel, because normally a challenge against an arbitrator will be decided by the two unchallenged arbitrators. The deciding arbitrators should have the benefit of detailed guidelines so that they do not have to resort to drawing mainly on their own subjective views and experiences. Such unguided efforts may, when repeated using different decision-makers, produce incoherent jurisprudence on challenges or, even worse, a decision that does not show sufficient respect for fairness and due process.

Instead of seizing the opportunity to strengthen the legitimacy of the ICSID system through the enactment of codes of conduct, ICSID has been adamant about not issuing any specific guidelines or policy statements regarding the conduct of arbitrators and counsel.

The absurdity of this situation and its repercussions are perhaps best demonstrated by a recent challenge decision issued by ICSID in the Burlington v Ecuador case. In that case, an arbitrator was challenged by Ecuador over his multiple appointments by the same law firm. Under normal circumstances, the challenge decision lies with the two other arbitrators. Those two arbitrators had, however, been challenged in other ICSID cases – and one of them on the same grounds as in the present challenge. Did these circumstances, coupled with the absence of guidelines provided by ICSID, lead the arbitrators to decide not to issue a ruling in this case? One will never know, as the challenge decision finally issued by ICSID tersely stated that the two unchallenged arbitrators “advised the Secretary-General of ICSID that they had failed to reach a decision” on the challenge, without further elaboration. In terms of transparency, one would have expected better.

ICSID (and its secretary-general) then had to make a decision on the challenge. Instead of dealing with the main issue, namely that of an arbitrator’s multiple appointments by the same law firm, or at least giving some indication as to how this issue should be resolved in future cases, ICSID chose to declare that this aspect of the challenge was untimely so as to avoid any pronouncement on this core issue, which goes to the heart of the ICSID appointment system. ICSID nonetheless removed the arbitrator on the basis of a comment he had made concerning a document relating to another arbitration that seemed to have been improperly submitted with the challenge. A disinterested third party reading the ICSID challenge decision might conclude that it looks like an outcome-driven exercise in which the central issue was purposely left unexamined and the disqualification was based on a marginal point at best. The highly unusual circumstances of the Burlington challenge might also lead a third party to wonder whether there was personal animosity on the part of the senior staff at ICSID towards the challenged arbitrator.

Putting one’s own house in order

Before ICSID can credibly enact codes of conduct for its arbitrators and parties’ counsel, it would be well advised to publish codes of conduct and guidelines applicable to its own staff and internal practices. The international investment arbitration community is small and ICSID staff members often have close personal (if not family) links as well as shared professional connections. There should be safeguards to prevent these links being exploited in ways that undermine principles of integrity and impartiality, or affecting how ICSID staff treat parties and their counsel.

The World Bank Group has broad guidelines and ethics rules that apply to all staff, but these are arguably focused on the Bank’s core work. More focused rules applying to ICSID work would therefore help to preclude even the appearance of unfair advantage seeking by ICSID staff or other interested parties with whom staff members have close ties. For example, the guidelines would prohibit ex parte communications relating to arbitration cases between ICSID staff and parties’ counsel, including their former ICSID colleagues. It is after all a basic feature of due process that staff of an arbitral institution who leave to join a law firm should not be allowed to exploit their close contacts with the institution and its staff to benefit their new clients prejudicially and, still worse, surreptitiously. It is ultimately actions and not words (let alone imaginary tales of “Chinese walls”) that demonstrate ethical conduct in this regard.

Time to listen

ICSID is preparing to celebrate its 50th anniversary with self-praise, plaudits from a largely homogeneous inner circle that benefits from the system’s flaws, and perhaps token consideration of reform proposals. At this time, ICSID would be well advised to solicit views from a wider circle of forthright sceptics to whom it has turned a deaf ear in recent years. These may include not only experts in the field of ICSID arbitration but also individuals who have acted for states that have denounced, or are considering denouncing, the ICSID Convention. If broad consultations were undertaken, ICSID would likely hear harsh messages. It is only if these sharp criticisms are heard and acted upon that ICSID will avoid having its celebrations turn into a repetition of the festivities at Persepolis in 1971 to celebrate the 2,500th anniversary of the Iranian monarchy, which all observers agree marked the beginning of the end.

Nassib Ziadé is chief executive officer of the Bahrain Chamber for Dispute Resolution. He was deputy secretary-general of ICSID between 2007 and 2011 and acting secretary-general of ICSID between April 2008 and June 2009. The views expressed in this article are the author’s alone.

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