The 2022 Amendments to the ICSID Arbitration Rules: Incremental Improvements Against the Backdrop of ISDS Reform by Charalampos Giannakopoulos

06/04/2022 with [241 views] no comments

The 2022 Amendments to the ICSID Arbitration Rules: Incremental Improvements Against the Backdrop of ISDS Reform

Charalampos Giannakopoulos*

On 21 March 2022, the member states of the International Centre for Settlement of Investment Disputes (ICSID) approved by overwhelming majority a comprehensive set of amendments to the Centre’s rules. The ICSID rules amendment process had been long in the making, having been formally launched in 2016. The timing roughly coincided with discussions within UNCITRAL about the possible procedural reform of Investor-State Dispute Settlement (ISDS) more generally, culminating in UNCITRAL assigning its Working Group III (WGIII) the mandate to explore avenues for reform in 2017.

The approved amendments are set to go into effect on 1 July 2022 and touch upon virtually every aspect of ICSID’s work. They include changes made to the ICSID administrative and financial regulations, institutional rules, and to the full gamut of dispute resolution services offered by the Centre. They also include entirely new sets of rules regulating ICSID mediation and fact-finding proceedings.

The focus of this post will be on the new arbitration rules in particular. A key objective of the new rules has been to ensure modernisation, simplification, and the reduction of time and costs in the process on the whole (see the backgrounder on the amendments). Four broad types of provisions in the new rules are thus singled out here for being novel and resulting in significant changes to the ICSID arbitration process.

1.            Disclosure of third-party funding

The prevalence of third-party funding in ISDS has been a point of concern and dissatisfaction for states. The fact that the most common beneficiaries of third-party funding tend to be investors has raised concerns that funders may exercise undue influence over the litigation strategy of claimants. New Rule 14 thus requires the disputing parties to disclose any third-party funding arrangement as a matter of course, including the source of the funding, and to keep this information current throughout the proceedings. If the third-party funder is a juridical person, the beneficiary of third-party funding must also disclose the ultimate beneficial owner of the third-party funder. The rule further provides that the information disclosed must be communicated by the ICSID Secretary-General to the arbitrators prior to their appointment in order to avoid inadvertent conflicts of interest. To note, the beneficiary party is not required to disclose the funding agreement or its contents by default. However, the tribunal may order such disclosure in the course of the proceedings.

2.            Guidelines on cost allocation and a greater flexibility to order security for costs

Awards on costs are of particular importance in ISDS independently of whether the award itself orders the respondent state to pay compensation. ISDS is particularly costly. Its administrative costs are not negligible and its costliest aspect by far involves the parties’ legal representation. Awards on who should bear the costs of proceedings are thus important for both sides to a dispute. For successful investors, a favourable costs award means restoring them to the position in which they would have been but for the state’s breach. For states, recovery of costs is an important tool for ensuring that they are not ‘penalised’ by high arbitration costs even after successfully defending their case. Article 61(2) of the ICSID Convention accords tribunals a wide margin of discretion to apportion such costs among the disputing parties, and this discretion had been left entirely unregulated in current Rule 28 of the ICSID arbitration rules.

New Rule 52, however, takes some steps towards greater certainty in relation to cost allocation. Contrary to the preference of some members for clear principles for cost allocation like ‘loser-pays’ (e.g., see comments by the European Union and its member states here at para 27), the new rule adopts a ‘soft’ approach in that it does not affect the tribunal’s ultimate discretion to make an award on costs by imposing a default rule. Instead, new Rule 52 seeks to control the exercise of such discretion by expressly requiring arbitrators to consider specific factors when making a costs award, viz., the outcome of the proceedings, the parties’ conduct during the proceedings, the complexity of the issues involved, and the reasonableness of the costs claimed. The softer approach is a pragmatic solution considering the hard limit on the scope of possible reform imposed by Article 61(2) of the ICSID Convention. That said, the new rule also creates a presumption in favour of ‘loser pays’ in the event a claim is dismissed in its entirety for manifestly lacking in legal merit following amended Rule 41.

The above notwithstanding, a favourable award on costs is not the end of the matter. Actual recovery of the awarded costs can be problematic in practice as there is no guarantee that the successful party will be able to recover following the other party’s inability or unwillingness to pay. Studies (e.g., Sim) and experience (see here, para 33) have shown that successful states, in particular, have difficulty recovering costs from investors whether due to the latter’s impecuniousness or use of shell companies to bring ISDS claims. A proposed solution in this respect has been to empower tribunals to make orders on security for costs. The amended ICSID rules explicitly provide for such a power in new Rule 53, and, in so doing, improve upon the existing legal framework of the ICSID Convention (especially its Article 47).

Although new Rule 53 is drafted in permissive rather than mandatory language and can only be triggered following a request by one of the disputing parties, it does introduce some clarity by providing tribunals with a series of factors to consider when deciding whether to order costs (e.g., the relevant party’s ability and willingness to comply with an adverse costs decision, among others). The rule acknowledges that the existence of third-party funding may form part of the evidence that a disputing party may adduce to show, for instance, the other party’s inability to comply with an adverse costs award. This seems to imply that the existence of third-party funding is not by itself sufficient to justify an order for security for costs but, instead, that it is relevant only insofar as it acts as evidence of circumstances pointing in favour of providing security for costs. New Rule 53 also provides that, if a disputing party fails to comply with an order for security for costs against it, the tribunal may suspend the proceedings for up to 90 days, and thereafter, may discontinue the proceedings following consultations with both disputing parties.

3.            Mechanisms for cost-efficiency and timeliness during the proceedings

Questions about the cost and duration of arbitral proceedings often go hand-in-hand. The longer the arbitration goes on, the costlier it becomes. Time and thus cost can be added by various factors, including frivolous claims, a voluminous record, ineffective case management or the sheer complexity of the issues dividing the disputing parties.

The amended rules contain a number of provisions designed to improve the overall cost-efficiency and timeliness of the ICSID process. The most direct attempts to that end come (i) in amended Rule 41 on claims manifestly lacking in legal merit, and (ii) in new Rules 58, 61 and 72 on time limits. At the same time, there are also miscellaneous new provisions that may contribute in subtler but no less important ways to the overall timeliness and cost-efficiency of the process.

Amended Rule 41 on claims manifestly lacking of legal merit

Existing Rule 41(5) was adopted in 2006 in the hopes of being a timely and efficient mechanism to allow for the early dismissal of investment claims manifestly lacking in legal merit. Yet, the actual results to date have been at best mixed (see here, paras 367ff). Amended Rule 41 thus builds upon existing Rule 41(5) and seeks to remedy the latter’s observed shortcomings. The amended rule provides, among others: (i) that an objection that a claim manifestly lacks in legal merit may relate to the substance of the claim, the jurisdiction of ICSID, or the competence of the tribunal; (ii) that objections may be filed even prior to the tribunal’s constitution, in which case the Secretary-General of ICSID must fix a schedule for observations by the parties so that the tribunal may deal with the objection as soon as possible after its constitution; and (iii) that the tribunal must rule on the objection within 60 days following its constitution or the last submission made on the objection, whichever comes latest.

Time limits to render decisions

The amended rules also provide clearer time limits for the tribunal to render its decisions at different stages in the arbitral process. This is contrasted with the current rules where existing Rule 46 only provides for a time limit for the final award. According to new Rule 58, awards must now be rendered within 60 days for objections that a claim manifestly lacks in legal merit, 180 days for other kinds of preliminary objections that have caused the bifurcation of proceedings, and 240 days for all other matters. Time limits for filing a post-award remedy remain the same as provided by Articles 49–52 of the ICSID Convention, however decisions in these cases must now be issued within 60 days in the case of requests for supplementary decisions or rectifications (new Rule 61), and within 120 days in the case of requests for the interpretation, revision, or annulment of the award (new Rule 72). In introducing deadlines for the tribunal to render its decisions, the amended ICSID rules follow the practice of other multilateral institutions (e.g., in the WTO context, see Article 20 of the DSU), as well as of the European Union in its investment agreements with Canada (Article 8.39(7)), Singapore (Articles 3.18(4) and 3.19(4)), and Viet Nam (Articles 3.53(6) and 3.54(5)).

Miscellaneous provisions on cost-efficiency and timeliness

A general duty is now imposed upon the tribunal and the disputing parties to conduct themselves in good faith and in an expeditious and cost-effective manner (new Rule 3). It is also stipulated that all document filings are to be made electronically by default (new Rule 4). Document filings in other formats can be ordered by the tribunal but only in special circumstances.

As mentioned, a substantial amount of time and cost can also be accrued in the day-to-day management of a case. Approaches to case management in ISDS are largely at the choice of the president of each tribunal. Moreover, a common anecdotal observation by arbitrators is that disputing parties frequently do not seem eager or ready to agree on things that could help streamline the process, for instance, on what the uncontested facts of the case and the actual issues in dispute are, or even on identifying the most relevant and most important documents on the record. Absence of agreement on such issues renders proceedings more complex and more time-intensive. One can flag here three provisions in the amended rules that attempt to remedy these shortcomings to some extent.

First, under new Rule 31, tribunals are now under a positive duty to convene at least one case management conference with the disputing parties following the tribunal’s first session in order to identify uncontested facts, clarify and narrow the issues in dispute, or address any other issues (procedural or substantive) in relation to the dispute. This is a welcome development and stands in sharp contrast to existing Rule 21, which leaves the organisation of pre-hearing conferences to the discretion of the ICSID Secretary-General, the tribunal, or the disputing parties. At the same time, it should be noted that the amended rules leave largely unregulated a common disruptive factor in ISDS, and one that is often lamented by arbitrators (see Landau), namely, the frequency of undisciplined party pleadings and the overall voluminous records of ISDS cases (in this respect, it is an open question whether the provisions of new Rule 29 on the kinds of issues that should be addressed by the tribunal and the parties during the first session could do much to improve upon these practices).

Second, according to new Rule 34, tribunals must now hold deliberations on any matter for decision immediately after the last submission of the disputing parties on that matter. This is again in contrast to the current situation, where tribunals are left with wide discretion in designing their internal deliberation processes (current Rules 14 and 15 provide no guidance whatsoever in this respect). In fact, what is often observed in practice is that a substantial amount of time tends to pass between the closing of oral hearings and the tribunal’s deliberations, which tends to harm rather than benefit the latter (see Landau).

Third, to further keep parties cost-conscious throughout the process, new Rule 52 on awarding costs provides that tribunals may make interim decisions on costs at any time during the proceedings rather than just in the final award. While these interim costs orders may only be executed with the final award, this practice could better enable the disputing parties to gauge the ongoing costs of their case and may encourage them to refrain from continuing conduct that could give rise to further adverse costs orders.

4.            Expedited arbitration

The last point to mention here is a novelty of the amended rules seen in the introduction of an entirely new mechanism for expedited arbitration (Chapter XII). Generally speaking, the target market for expedited arbitral procedures are litigants who are mindful of costs, for instance, because of the litigants’ size or the type of dispute brought for resolution. Indeed, ICSID’s principal rationale behind expedited investment arbitration is the view that an expedited procedure would be especially suitable for investment contract disputes involving small and medium-sized enterprises (SMEs) (see here, paras 666–667). This complements efforts already made by some states to promote outward international investment from SMEs by way of facilitating their access to ISDS (e.g., see Articles 8.19(3), 8.23(5), 8.27(9) and 8.39(6) of CETA).

In introducing a mechanism for expedited arbitration, ICSID seeks to remain competitive in the global landscape of arbitration services in two ways in particular. First, it does so by following the practice of other commercial arbitral institutions, including the ICC, SIAC, HKIAC and SCC, whose rules have provided for expedited procedures already for some time. Second, by reducing the financial burden of ICSID proceedings, the expedited arbitration mechanism seeks to address concerns expressed by a number of states during the WGIII discussions that SMEs would risk being excluded from ISDS altogether due to the latter’s high costs (see here, paras 111, 131; and here, para 90).

5.            Conclusion

ICSID’s amendment process has come at a point of inflection for ISDS, when the need for change is high on the international agenda and with UNCITRAL’s WGIII working through proposals for reform that are both structural and more incremental in nature. ICSID has taken an active role in this debate by offering its institutional experience to WGIII and by entering into a joint effort with the UNCITRAL Secretariat to develop a code of conduct for adjudicators in international investment disputes. The amended arbitration rules are an obvious complement to the above efforts.

In terms of their content, the new rules necessarily follow an incremental approach. This has been a practical limitation of all revisions of the ICSID arbitration rules to date, since a more expansive rethinking of ISDS would require the amendment of the ICSID Convention—an onerous process into which ICSID members are reluctant to enter. That said, the new rules aim to address at least some of states’ expressed concerns regarding ISDS, especially those on cost, duration, and the asymmetries created by the prevalence of third-party funding. The rules thus contribute with several incremental, yet important improvements to the existing system that could still serve to provide guidance and a point of reference for future discussions within WGIII in the above-mentioned reform areas. Moreover, this is without prejudice to other reform areas where one can see points of interaction and cross-fertilisation between the new ICSID arbitration rules and the WGIII process that are worth exploring in greater depth. In so doing, the new ICSID rules serve to safeguard ICSID’s relevance and prominence as the preferred institution for the settlement of international investment disputes among states.

* Research fellow, Centre for International Law, National University of Singapore. Dr Giannakopoulos is the author of Manifestations of Coherence and Investor-State Arbitration (Cambridge University Press, forthcoming 2022) and a co-author (with N. Jansen Calamita) of ASEAN and the Reform of Investor-State Dispute Settlement: Global Challenges and Regional Options (Edward Elgar, forthcoming 2022). The author wishes to thank N. Jansen Calamita for helpful comments on an earlier draft.