Should a foreign investor opt for ICSID arbitration or UNCITRAL arbitration when a choice exists? Foreign investors involved in a dispute with a host State of investment are often able to choose between initiating ICSID arbitration under the ICSID Convention or ad hoc arbitration under the UNCITRAL Arbitration Rules in order to resolve their investment dispute.
This article will analyse and explain practical differences between ICSID and UNCITRAL arbitration. It will also explain differences in terms of cost, the definition of an investment, claims by dual nationals and the annulment and enforcement of the award that is rendered.
Cost: No Clear Winner between ICSID and UNCITRAL Arbitration
The allegedly high cost of ICSID arbitration relative to UNCITRAL arbitration would appear to be a misconception. Arbitration under the ICSID regime does require payment of both the arbitral tribunal and the arbitration institution. However, most empirical assessments of the total cost of ICSID and UNCITRAL investment arbitrations do not show that ICSID arbitration proceedings are more expensive.
According to one recent assessment, the average cost of investment arbitrations under an ICSID tribunal was USD 1.04 million and the average cost of investment arbitrations under an UNCITRAL tribunal was higher, at USD 1.38 million. There is no clear winner regarding costs, however, and both procedures are rather expensive with the key cost component being legal fees.
Investment Definition under the ICSID Convention
When bringing a claim, an investor should be careful to ensure that the dispute arises from an economic activity that qualifies as an investment under the ICSID Convention. Most BIT’s define investment quite broadly. They cover the majority of economic activities, including shares, debt instruments, concessions, land and moveable property.
In an ICSID arbitration, however, in addition to falling within the scope of an investment as defined in the respective BIT, there is also the requirement of meeting the definition of an investment under the ICSID convention. ICSID tribunals have developed three main criteria to determine the existence of an investment under the ICSID Convention: contribution (1), risk (2) and duration (3). Therefore, a party should generally not bring a dispute to the ICSID when its dispute arises from an investment that did not bring a substantial contribution to the host State economy, the investor did not undertake a risk and/or the investment was short in duration or of a temporary nature.
That said, an UNCITRAL tribunal did imbue the term investment in the relevant BIT with its own inherent meaning, similar to the practice of ICSID tribunals. Usually, however, non-ICSID tribunals will simply look at the definition of investment provided in the BIT.
Article 25 of the ICSID Convention limits arbitral jurisdiction to investment disputes between a “Contracting State” and a “national of another Contracting State“, which is defined as “any natural person who had the nationality of a Contracting State other than the State party to the dispute” on the relevant dates, including the date of registration of the request and the date of consent to arbitration.
Natural persons who are dual nationals are therefore barred by the ICSID Convention from bringing claims against host States of investment except in exceptional circumstances.
As the ICSID Convention is inapplicable to UNCITRAL arbitrations, UNCITRAL arbitral tribunals have historically been more permissive with respect to allowing the claims of dual nationals.
Poor awards that overlook key documents or are missing basic, logical steps are, unfortunately, at times rendered in investment arbitrations in spite of their significant cost.
The arbitrators appointed to ICSID and UNCITRAL investment arbitrations typically come from a rather small pool of individuals who have been criticised as a “small, secret, clubby” and homogenous group.
Poor awards rendered by UNCITRAL and non-ICSID tribunals can be set aside by State courts at the seat of arbitration in the same manner as commercial arbitration awards, ensuring an additional level of scrutiny over awards by judges who may have a more diverse outlook.
ICSID tribunals, on the other hand, operate under a specific, self-contained ICSID regime and are not subject to any seat. Accordingly, their awards cannot be set aside by State courts. They can only can be annulled on a limited number of grounds by an ad hoc committee appointed by the Chairman of the Administrative Council. In practice, the Chairman of the Administrative Council has often appointed arbitrators who are serving as arbitrators in other ICSID disputes to rule on annulment.
The Enforcement of ICSID and UNCITRAL Awards
UNCITRAL awards face the same challenges to enforcement as awards rendered in any international commercial arbitration. Non-ICSID awards may be refused recognition and enforcement under the limited grounds of Article V of the New York Convention.
ICSID awards are different. Once they make it through the self-contained annulment mechanism, ICSID Arbitration Awards enjoy automatic enforcement in any ICSID contracting State.
However, the importance of automatic enforcement is perhaps overstated, as it is typically the actual execution of an investment arbitration award that is the most problematic for foreign investors.
When choosing between ICSID or UNCITRAL arbitration, foreign investors must decide whether one arbitral forum is more appealing given the peculiar facts of a case.
UNCITRAL tribunals are less likely to refuse jurisdiction on the basis that a dispute arises from an economic activity that does not qualify as an investment and are more likely to allow the claims of dual nationals. UNCITRAL awards may face additional scrutiny at the level of State courts, which may either be positive or negative.
ICSID tribunal awards offer the advantage of automatic recognition. They are not final until they survive the internal annulment mechanism. Furthermore, arbitration under ICSID must meet the requirements and limitations of the ICSID Convention.
Kim Masek, Aceris Law
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