ICSID: How impartial is the main BIT arbitration forum of Bangladesh?

Most BITs and the model BIT (Art 13) of Bangladesh have preferred the Centre for the Settlement of Investment Disputes (ICSID) as its arbitration forum, which warrants a contextual and purposive understanding of ICSID. The wave of FDI nationalisation in the 1960s and 1970s scared investors to invest, which reduced economic growth and World Bank (WB)/IMF debt-servicing capacity of many developing states. To resuscitate foreign investors' confidence and get its loaned funds back, the WB took steps to protect FDIin host states and developed its own FDI dispute resolution mechanism, a private law pathway that avoids international law and national law mechanisms. The WB created ICSID a self-contained arbitration forum to settle FDI disputes between host states and private foreign investors, who can take their disputes directly to ICSID by-passing the domestic judiciary of host states. Hence ICSID was engineered to serve a pressing necessity of the time to protect the debt-servicing interest of the World Bank and its creditors' FDIs by circumventing potential nationalisation. ICSID acted as a carrot for investors by incentivising with a foreign yet private outlet for FDI-dispute resolution as a reliable protection. It also served as a stick for debtor host states which were threatened not to expropriate FDIs to spoil their future prospect of WB/IMF loans.

ICSID arbitration allows foreign investors to sue host states' alleged violation of contractual obligations, a right that affords disproportionate protections to FDIs and makes host states vulnerable. There is no appeal process to challenge any contradictory facts and/or erroneous interpretation of arbitration clauses. Its award has no precedential effect on any future disputes with similar circumstantial fact, which erodes the possibility of developing ICSID arbitral jurisprudence and consistent commercial treaty interpretations. It is far from being impartial, apolitical, and objective. ICSID arbitrators are qualified commercial litigators, who are in most cases nominated from a pre-determined list of panellists and predominantly, indeed 95% are male from Europe and North America. According to the Corporate Europe Observatory, about 15 male elitist western arbitrators having close ties with the corporate world and sharing the view that the protection of FDI profits is non-negotiable are in charge of deciding FDI disputes. This homogeneity of ICSID arbitrators reveals a lack of plurality in understanding the legal and cultural diversities of developing host states. The very operational narratives of ICSID arbitrators inculcate an inherent bias towards foreign investors, who are overwhelmingly from European and North American.

Foreign investors religiously prefer ICSID arbitration. A UNCTAD report of December 2013 shows that ICSID arbitrated 407 FDI disputes compared to 158 by UNCTRAL (Research Report No. 13, Centre for Independent Studies, Sydney, April 2016, 6). The Harten Study 2012 into ICSID awards exposes its pro-investor tendencies in which arbitrators typically adopting an expansive claimant-friendly interpretation, an 'approach [that] would be accentuated where the claimant was a national of a major Western capital-exporting state'. Parties must pay for ICSID arbitration, which is very cost-intensive. According to OECD Working Paper on International Investment 2012, No.03, 19, the average cost of initiating arbitration is US$ 8 million, which is affordable for only rich foreign investors.  Its compensatory awards for the winning party (usually foreign investors) are excessively exorbitant and the magnitude of awarded damages is on the rise. UNCTAD study suggests that the investors of developed states and investors, which initiated 35 out of 42 cases in 2014, substantially benefited from these damage awards (IIA Issues Note No 1, February 2015, 1, 6, 10). This ICSID arbitration outlet available to foreign investors is unavailable to their domestic counterparts, who are obliged to go to domestic courts - a discriminatory FDI protection.

ICSID arbitration is not open to the public unless both parties consent, which foreign investors are unlikely to consent in disputes involving host states' public interest and policy. It settles FDI disputes privately, many of which involve public issues and interests, such as the environment, human rights, public health, green technology transfer, corporate culture and social responsibility - all having grave economic, political, and socio-cultural ramifications. Confidential arbitral proceeding for binding compensatory awards prevents public scrutiny and criticism, ignition of public interest lobby, and potential barriers to enforcement of awards. Its policy of confidentiality is narrowly focused to avoid public reactions in favour social inclusion and distributive economic justice. It also keeps away from public domain the extent and conditions of natural resource exploitation in economically under-developed host states. Confidential dealings of some major financial institutions resulted in successive global financial crises. There has been widespread public cynicism about the credibility of these institutions making secret decisions. ICSID is one of such institutions making awards requiring many host states to pay millions in damages, pushing them to the brink of bankruptcy with no public scrutiny and sensitivity to the public interest. Its obsession with confidentiality undermines the value of open and public proceedings.

The above features of ICSID arbitration should be an important consideration for Bangladesh in negotiating essential safeguards in its BITs and FDI agreements carefully. It is better for Bangladesh to avoid secretive arbitration rules and tribunal in favour of an open arbitration forum. Such transparency would provide educational value in capacity-building for effective and informed participation in international arbitration proceedings. Bangladesh may negotiate a provision in its BIT by stating that the parties shall make arbitration materials available and hearings open to the public, which should not be difficult and costly in this age of advance information and communication technology. The International Chamber of Commerce (ICC) and UN Commission on International Trade Law (UNCITRAL) amended their arbitration rules in 2012 and 2014 respectively to improve transparency, disclosure obligations, speed, and cost-efficiency for greater accessibility to the public. ICSID is yet to undertake similar reforms and not bound by the ICC/UNCITRAL standard of transparency and case management.

UNCITRAL Rules make its award non-binding if it has 'been set aside or suspended by a court of the country [or] the recognition or enforcement of the award would be contrary to the public policy of this State' (Art 36(1v)). Such reservation based on court's authority and public policy is unavailable in ICSID, which unequivocally makes its awards conclusive: 'courts shall treat the award as if it were a final judgment of the courts of a constituent state' (Art 54). ICSID Convention states that the exhaustion of local remedies is not a condition for the admissibility of an arbitration claim by investors (Art 26). The ICSID Convention requires its arbitrators to 'exercise independent judgement' (Art 14). But in practice, ICSID does not disqualify those panellists who have acted as the legal counsel for foreign investors to be ICSID arbitrator in a subsequent dispute involving the same previous investor clients, an overt conflict of interest. In contrast, the impartiality of arbitrators is mandatory under the UNCITRAL Rules 2010 (Art 12) and the International Bar Association Guidelines on Conflict of Interest in International Arbitration 2014 strictly requires that the arbitrators must be free from conflict of interest.

The above ICSID arbitration features should serve a sufficient warning for Bangladesh to make a searching reappraisal of its choice of international arbitration forum and law based on comparative advantage. Among the main institutional arbitration forums and laws, ICSID is comparatively more rigid and pro-investor oriented. Exploring more palatable options, including UNCITRAL and ICC, may be rewarding for Bangladesh. Unwitting preference to ICSID is likely to expose Bangladesh to international arbitrations having marginalising effect on its national interest as has precisely happened in the Saipem and Niko arbitrations by ICSID.

The writer is Professor of Law and Director, Higher Degree Research (PhD), Macquarie Law School, Macquarie University, Sydney, Australia.