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A Project – Work on
Exhaustion of Local Remedies in ICSID
Law of Arbitration and ADR
(Term paper submitted towards partial fulfilment of the assessment of the subject)
SUBMITTED BY: SUBMITTED TO:
KARAN SINGH MS. AAKANKSHA KUMAR
Roll No. – 977 FACULTY OF LAW
Sem. – IX, Sec. – ‘B’ NLU, JODHPUR
B.Sc. LL.B. (Hons.) [IPR Hons.]
SUMMER SEMESTER (JULY – NOVEMBER, 2016)
29 th^ August, 2016
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ACKNOWLEDGMENT
I owe my heartiest thanks to my subject teacher Ms. Aakanksha Kumar for showing
confidence in me and for giving me the opportunity to learn and understand the different aspects
of the topic “ Exhaustion of Local Remedies in ICSID ”. I pay my sincere regards to my subject
teacher for encouraging me at each and every step whenever it was required.
I would like to thank the Library Staff at National Law University, Jodhpur, for having
been extremely co-operative and ever willing to lend a helping hand to me during the course of
my research and analysis for the purpose of this term paper.
It is indeed a great pleasure and privilege to express my special thanks to colleagues and
other well-wishers who in different ways have given me splendid help, valuable suggestions and
encouragement. I thank almighty god for his blessings and giving me strength to complete the
project successfully.
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TABLE OF CONTENTS
S. NO. TOPIC PAGE
- Acknowledgement i
- Research Methodology and Scope ii
- Introduction 1
- (^) Purpose of the Clause 2
- Waiver of the Clause 3
- Most Favoured Nation Clauses 5
- Case Analysis 7
- (^) State Sovereignty and Local Measures 12
- Conclusion 13
- Bibliography 14
INTRODUCTION
One of the purposes of investor/State arbitration is to avoid the use of local courts. Litigation in the host State’s domestic courts is often seen as lacking the objectivity that the investor desires. In addition, domestic courts are often bound to apply domestic law even if that law falls short of the standards provided by international law.
Public proceedings in the domestic courts are likely to exacerbate the dispute and may affect the host State’s investment climate. Once the host State’s highest court has made a decision, it may be more difficult for the government to accept compromise or a contrary international judicial decision. It is for these and other related reasons that international investment arbitration dispenses with the requirement to exhaust local remedies, at least in principle. Article 26 of the ICSID Convention specifically does away with this traditional requirement “unless otherwise stated”.
Arbitral practice confirms that the exhaustion of local remedies is not required in contemporary investment arbitration. Both ICSID^1 and non ICSID tribunals^2 have held that claimants were entitled to institute international arbitration directly without first trying their luck in the local courts.
Under the ICSID Convention, a contracting state may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under the Convention.^3
Local remedy first provisions, which can be found in bilateral trade or investment treaties, local investment laws or individual agreements between a foreign investor and host state entity, stipulate that remedies provided by a local state must be exhausted before international proceedings can be brought against that state. The old rule of the exhaustion of local remedies has been largely dispensed with in the context of investment arbitration.
(^1) Lanco v. Argentina , Decision on Jurisdiction, 8 December 1998, para. 39, 40 ILM 457, 469/70 (2001) (^2) Yaung Chi Oo v. Myanmar , Award, 31 March 2003, para. 40, 42 ILM 540, 547/48 (2003) (^3) Art. 26, ICSID Convention
CHAPTER 2
WAIVER OF THE CLAUSE
The condition that local remedies must be exhausted before ICSID arbitration can be instituted, may be expressed by a State party to the Convention only up to the time consent to arbitration is perfected but not later. This is a consequence of the principle that once consent to jurisdiction has been given, it may not be unilaterally withdrawn or restricted.
The waiver of the Clause began early in the 1970s in BITs by the US and European countries. One of the most striking characteristics was that BITs allowed direct investor claims without requiring the exhaustion of local remedies and they helped to avoid domestic courts in the less developed countries, which were considered oftentimes risky to foreign investors. This is because foreign investors preferred using depoliticized process where they could safely and promptly resort to convenient international arbitration without the intervention of home states.^6
Article 26 of the ICSID Convention provides that “Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.” Any consent to ICSID arbitration is deemed to be consent to exclude any other remedy. It means this clause may or may not preclude an investor from seeking recovery from domestic courts before she brings a claim in ICSID.
If the claim is based on a contract between the investor and the hosting state, and the investor brings the contract claim before ICSID, then the investor would be bound by the Article 26 and she will be precluded local remedies. However, if the claim is based on an investment
(^6) Choi, The Present and Future of the Investor ‐ State Dispute Settlement Paradigm , 10 J. Int’l Econ. L. 725, 729‐ 30 (2007)
treaty, which is not generally “consented” to ICSID arbitration, then the investor can go back to the domestic court more easily.
In the annulment proceedings to Amco v. Indonesia,^7 Indonesia argued “that the Tribunal manifestly exceeded its powers by holding that Amco could bring its claim for compensation of damages based on the acts of the army and police personnel involved directly to an ICSID Tribunal without previously seeking redress before the Indonesian courts in conformity with the general international law rule on exhaustion of local remedies.” The ad hoc Committee had little problem to dispose of this argument: “By acceptance of ICSID jurisdiction without reserving under Article 26 of the Convention a right to require prior exhaustion of local remedies as a condition for obtaining access to an ICSID tribunal, Indonesia must be deemed to have waived such right ...”
(^7) 1 ICSID Reports 526
The tribunal in Gas Natural SDG v. Argentina^12 , conclusively decided that that the MFN clause of the Spain–Argentina BIT gave the company in dispute with Argentina, the right to invoke the more favourable dispute resolution clauses as provided in the US–Argentina BIT. In subsequent tribunal decisions such as, Plama v. Bulgaria^13 and Telenor Mobile v. Hungary^14 a more limited construction of MFN clauses has been preferred.
(^12) Gas Natural SDG v. Argentina , ICSID Case No ARB/03/ (^13) Plama v. Bulgaria , ICSID Case No ARB/03/ (^14) Telenor Mobile v. Hungary , ICSID Case No ARB/04/
CHAPTER 4
CASE ANALYSES
1. Loewen v. U.S.A.^15 The facts of this case revolve around the treatment of a foreigner in a host state’s judicial system. This inspection has been under-taken by a modern investor‐state arbitration tribunal. A funeral home company based in Canada, the Loewen Group, Inc. made an investment in funeral homes in the U.S.A by means of a U.S. subsidiary, LG II. LG II entered into a contract with O’Keefe, an American owner of a funeral home in Mississippi. Consequently, a dispute arose due to an alleged breach of contract, tortious act and more. O’Keefe challenged the Loewen Group and LG II in the Mississippi State Court, so settle the same. During the course of the jury trial, the plaintiff prejudicially brought to notice Loewen’s foreign nationality and made unverified accusations about LG II owners, that they were engaging in a racial bias against the ethnic community of jurors. The jury in its verdict decided in favour of the plaintiff granting them $500 million in damages, which was including the $75 million for emotional distress and $400 million for punitive damages despite the fact that the plaintiff’s monetary losses did not actually exceed a couple of million dollars. As defendants sought to appeal the judgment, they were required to post a bond for 125% of the judgment amount to be granted a stay on the execution. As the company struggled to accumulate the money while edging on bankruptcy, they agreed to settle with O’Keefe for $175 million. Even though the Loewen Group considered petitioning in the U.S. Supreme Court for the grant of a writ of certiorari prior to the settlement they ultimately did not. Of the 7000, 8000 requests for writs certioraris U.S. Supreme Court receives every year, it hears only about 80 or so cases – one percent of the total. Loewen Group subsequently, brought a NAFTA claim against the Unites States, arguing that investment treaty between Canada and the U.S., had been violated by the Mississippi state courts, including obligations such the national treatment which make it obligatory for NAFTA States to not discriminate against foreign investors, the fair and equitable obligation and the obligation to
(^15) Loewen Group, Inc., et al v. United States of America , ICSID Case No. ARB(AF)/98/3, Award on the Merits (June 26, 2003)
illegally revoked an arbitral award from the International Chamber of Commerce (ICC) against the Bangladeshi state energy company Petrobangla. Saipem had brought the arbitration proceedings against Petrobangla according to the terms of their contract with Petrobangla for construction of a natural gas pipeline. Subsequent to reference of the case to ICC for arbitration, Petrobangla petitioned Bangladeshi courts for a stay of the arbitration proceeding, and was granted an injunction restraining Saipem from going forward with the arbitration, as well as an order revoking the ICC tribunal’s authority over the matter. The arbitration under the ICSID tribunal proceeded nonetheless, and damages were awarded to Saipem. Petrobangla again, requested the Bangladesh judicial authorities for the annulment of the ICC award. The Bangladesh Supreme Court’s verdict held the ICC tribunal had lacked the requisite jurisdiction and the arbitration was deemed to unlawfully conducted. Following this decision, Petrobangla offered no compliance to the ICC decision. Saipem applied for ICSID arbitration under the Italy‐Bangladesh BIT, claiming Bangladesh had expropriated Saipem’s rights under the treaty.
Bangladesh argued its defense stating that Saipem had not exhausted its appeals in relation to the given domestic court decisions and other local forums. The ICSID arbitrators agreed that failure to exhaust local remedies was a substantive element of a claim for denial of justice, but drew attention the fact that the assertion made by the claimants was one of expropriation, and not denial of justice. The findings of the tribunal mostly disagreed with the argument that there is a local remedies element to an expropriation claim, but concluded that that determination was not required for the purposes of the issue because, in its view, Saipem had adequately pursued local remedies and therefore would have had satisfied local remedies requirement, if any. The tribunal held that favorable outcome was unlikely because Saipem had argued the pertinent issues of this matter before various courts over long period of time. Under the circumstances, the tribunal held Saipem had availed of reasonable local remedies.
There are many authors who have criticized this judgment. The argument made is that the investor did not exhaust all local remedies, as they had decided not to appeal the decisions of the Bangladeshi courts that revoked the authority of the ICC arbitrators and the one that nullified the ICC Award. These conditions form sufficient substantive ground for initiating an ICSID
arbitration based on acts of the judiciary, particularly in cases related to denial of justice.^17 The main rationale is that “the prohibition of denial of justice presupposes a duty of the host state to provide a fair and effective system of justice. Therefore, until the whole system has been tried and failed, no claim of denial of justice can arise in international law.” This explanation “rests on the special nature of the administration of justice as a system” and leads to the conclusion that “any international wrong committed in the process of administering justice is actionable only after the whole system has been unsuccessfully tried.”^18
- The Kiliç Decision^19 On July 2, 2013, the majority decision in Kilic, advocated the principle of LRPs as requisites for establishing jurisdiction according to the trend identified above. The tribunal, distinctly narrowed the effectiveness of MFN clauses, in allowing parties to import more favourable remedy provisions and went further by applying a strict evidential test for the futility exception.
This tribunal elucidated on a number of reasons (additional to those with respect to construction of the particular MFN clause) for not accepting the argument that the MFN clause should allow the claimant, Kilic to avoid the LRP in the Turkey–Turkmenistan BIT. Most notably, the tribunal opined that permitting such an argument would undermine the principle of effectiveness of provisions. The easing of a “local courts” requirement several other of Turkey’s BITs would mean that the “carefully crafted” jurisdictional preconditions in the Turkey– Turkmenistan BIT would be rendered obsolete “from the moment this BIT was adopted” due to the facilitated ease with which claimants could use their MFN clause arguments to circumvent LRPs and obtain the jurisdiction of an international tribunal without approaching all local courts and exhausting remedies.
(^17) See Loewen v United States (ICSID Case No.ARB(AF)/98/3) (2003) 42 I.L.M. 811 (award June 25, 2003), at 156-
- 18 M. Sattorova. “Judicial expropriation or denial of justice? A note on Saipem v Bangladesh”. Int. A.L.R. 2010, 13(2), at 38 19 Kiliç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan (ICSID Case No. ARB/10/1)
CHAPTER 5
STATE SOVEREIGNTY AND LOCAL REMEDIES
Observing the Local Remedies Rule gives the best advantage to the host state of the preservation of the sovereignty. Sovereignty, in its context, does not mean complete freedom to do as a state wishes because such freedom would be totally inconsistent with the rationale of investment treaty arbitration. It means rather respect for the states’ internal process and assume that the states are capable of doing justice.^20
Domestic courts may be particularly useful when breaches of treaty arise from the lower ‐level officials’ actions. In Loewen,^21 the tribunal found that the conduct of the trial judge was so flawed that it constituted denial of justice as that expression is understood in international law. The United States’ only solution to correct the breach of treaty was through domestic appeals, and the tribunal highlighted the Local Remedies Rule: “It would be very strange if a State were to be confronted with the liability for a breach of international law committed by its magistrate or low‐ranking judicial officer when domestic avenues of appeal are not pursued”, because “domestic appeal of review, if pursued, might have avoided any liability on the part of the State.”
Although the legitimacy of the tribunal’s requirement of exhaustion is questionable, the requirement has led to re‐thinking of the Local Remedies Rule. If the injury is inflicted by an individual or a minor official, the exhaustion of local remedies is necessary to make certain that the wrongful act or denial of justice is the deliberate act of the State. Thereby the sovereignty of the state is preserved in the domestic court to that extent.
(^20) Dodge, Investor ‐ state Dispute Settlement between Developed Countries: Reflections on the Australia ‐ United States Free Trade Agreement 21 , 39 Vand. J. Transnat’l L. 1, 29-30 (2006) Loewen Group, Inc., et al v. United States of America , ICSID Case No. ARB(AF)/98/3, Award on the Merits (June 26, 2003)
CONCLUSION
It is questionable whether insistence by a host State on the exhaustion of local remedies prior to ICSID arbitration serves any useful purpose. Resort to local remedies before the institution of ICSID arbitration may be seen by the investor as a waste of time and money. The public proceedings in the host State’s courts may further exacerbate the dispute between the parties and may affect the host State’s investment climate. If the ICSID tribunal overturns a decision by the host State’s highest court, this may be a source of acute embarrassment. Therefore, it seems wisest to leave the Convention’s basic rule of non-exhaustion in place and to follow the example of the vast majority of consent agreements in not requiring the exhaustion of local remedies.
In most cases the BIT or the contract is very explicit with the requirement of exhaustion of local remedies. The ICSID Convention has cleared the legal implications of including a requirement of exhaustion of local remedies. There are very few cases which have actually led to complicated situations, and it can be safely assumed that such cases are going to be a rarity. Therefore, the current set of laws and cases can aid adequately in any complications regarding the exhaustion of local remedies in the future.
- Telenor Mobile v. Hungary , ICSID Case No ARB/04/
- Loewen Group, Inc., et al v. United States of America , ICSID Case No. ARB(AF)/98/3, Award on the Merits (June 26, 2003)
- Saipem S.P.A. v. People’s Republic of Bangladesh , ICSID Case No. ARB/05/07, Award, (June 30, 2009)
- Kiliç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan (ICSID Case No. ARB/10/1)
