The International Business Transactions Blog

Consequential Shifts in Adherence to International Investment Law Commitments

By BethEl Nager
Law Student Editor

Aaron Fellmeth
Faculty Co-Editor

Victoria Sahani
Faculty Co-Editor

The Convention establishing the International Centre for Settlement of Investment Disputes (ICSID) in 1966 (the “ICSID Convention”) added a dispute resolution forum to the World Bank Group.  Specifically, ICSID provides arbitration and concilliation services for resolving foreign direct investment (FDI) disputes between a host state and a foreign investor when the host state provides for ICSID arbitration in a treaty with the investor’s state of origin.  These treaties are typically bilateral investment treaties (BITs), free trade agreements, or investment protection agreements.  The advantage of the ICSID Convention touted by the World Bank Group is that, by providing a mandatory form of neutral dispute settlement, ICSID arbitration and concilliation reassure foreign investors that the host state cannot use sovereign immuity to avoid lawsuits or avoid paying judgments if it expropriates an FDI  or treats the investor unfairly.  Some investment treaties first require the investor to “exhaust local remedies” by purusing the dispute in the host state’s courts first before filing an ICSID case.  The disadvantage for a foreign investor is that the host state’s courts may side with the host state government due to political pressure or control.. ICSID provides an alternative, neutral, fair forum, and this stability  is expected to increase FDI.  Historically, developing countries with a history of political and economic instability were the targets for FDI, but now FDI flows to and from both capital-importing and capital-exporting countries.  Currently, there are 164 state parties to the ICSID Convention.

Only three state parties to the Convention have ever withdrawn from it, all in South America.  In 2007, Bolivia denounced the Convention, followed by Ecuador in 2009 and Venezuela in 2012.  In some cases, including that of Ecuador, denunciation of the Washington Convention was accompanied by withdrawals from many BITs between the host state and the investors’ home states that set international legal standards for the protection of FDI projects.  Withdrawal from a BIT may leave new foreign investors without international treaty protection, while denunciation of the ICSID Convention may remove the ability of foreign investors to initiate new arbitrations using the ICSID procedures against the denouncing state, although ICISD does promulgate “Additional Facility” arbitration rules that can be used in cases in which the host state is not a party to the ICSID Convention.  At the same time, the host state loses its voice in the ICSID Administrative Council regarding debates on the future of dispute resolution in international investment law.

Recently, Ecuador shifted back to a policy favoring foreign investment.  As a result, it signed the Washington Convention anew on June 20, 2021, and ratified it on August 4, 2021. One reason for this reversal of policy may have been slowed growth in the Ecuadorian economy caused by the global pandemic.

The pandemic has not inspired a pro-foreign investment policy everywhere, however. Also in 2021, Pakistan resolved to terminate 23 of the country’s 48 BITs, and further announced a decision not to ratify sixteen more BITs that the Pakistani government has signed. Pakistan had already begun to sour on BITs in 2013, announcing plans to review its existing BITs.  Recent losses in several major ICSID arbitrations brought by foreign investors, including a $5.8 billion claim by an Australian mining company, exacerbated Pakistan’s negative view.  Notably, Pakistan was the first state to sign a BIT in the modern era (with Germany in 1959), and it has a network of BITs remaining, some of which cannot be denounced at present by their terms.

These developments do not change the general substance of international investment law, including its facilities and procedures for dispute resolution, in any way.  However, they do illustrate how each state’s individual circumstances and experiences with international investment law and arbitration create a protean environment for foreign investors, who must be prepared to shift investment plans to respond to new geopolitical developments.