Legal basis and effect of denunciation under international investment agreements

This memorandum addresses the notion of consent to international investment arbitration and the possibility of the termination of such consent either by virtue of withdrawal from ICSID Convention or BITs. Through a detailed analysis of Articles 71 and 72 of the ICSID Convention, this memorandum discusses the varying interpretations and their repercussions on arbitral practice and treaty-making. 
 

Executive Summary

 

This memorandum is the result of a request submitted by the United Nations Conference on Trade and Development (hereinafter client) in the framework of the Trade Law Clinic at the Graduate Institute of International and Development Studies. The questions submitted by the client relate primarily to the notion of consent to international investment arbitration and the possibility of the termination of such consent either by virtue of withdrawal from the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (hereinafter ICSID Convention) or Bilateral Investment Treaties (hereinafterBITs).

 

The recent denunciations of ICSID Convention and a number of BITs by Ecuador and Bolivia have given rise to an intense academic debate as to the legal effects of such acts. In practice, the effects of Bolivia’s and Ecuador’s denunciation of the ICSID Convention seem to be limited by the ICSID Convention itself. It would not affect arbitration clauses contained in BITs that refer to arbitration fora other than ICSID. However, the effects of denunciation regarding arbitration clauses contained in BITs referring to the ICSID arbitration are far from clear. There are many grey areas, which require further clarification, in particular regarding the moment in time when denunciation of ICSID is effective and the effects this has on specific BITs unilateral offers to ICSID arbitration. In other words, may the host State revoke its consent to arbitrate given by BITs through an ICSID denunciation? If so, when?

 

One of the major question relates to the possibility of investors bringing cases to ICSID after the denunciation notice has been deposited with the World Bank, on the one hand, and after it has taken effect, on the other hand. The answer to this question depends upon an informed interpretation of Articles 71 and 72 of the ICSID Convention. Pursuant to Article 71 of the ICSID Convention the period between the deposit of the notice of denunciation and the moment upon which it becomes effective extends to six months. Most importantly, Article 72 of the ICSID Convention provides that nothing shall affect the rights or obligations of the State or investor arising out of “consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary”. Thus, denunciation of ICSID Convention can take place but it will not be opposable to those investors falling under the scope of Article 72.

 

The notion of consent in Article 72 is controversial in doctrine. According to a restrictive interpretation, once the denunciation has been received by the World Bank, investors who have not already expressed their consent to jurisdiction cannot initiate arbitration. Hence, consent in Article 72 would imply mutual consent to arbitration, which is perfected when an investor files a notice of arbitration. The opposing view is that consent in Article 72 is simply unilateral consent such as that offered by a State in a BIT. According to this theory, any BIT in which a State offers its consent to ICSID arbitration before it denounces the Convention, continues to protect the relevant investors for the life of the BIT even after the denunciation takes effect. A third in-between interpretation holds that investors can initiate ICSID arbitration based on arbitration clauses contained in BITs but only within the period of six months after the notice of denunciation was received by the World Bank. This view is based on the literal interpretation of the ICSID Convention and may be substantiated by relevant rules of the Vienna Convention on the Law of Treaties (hereinafter VCLT). There

is no case law in this regard.

 

The purpose of this memorandum is twofold. First, it aims to give policy-makers and other stakeholders a detailed insight into the effects of ICSID denunciation. Only if States are aware of the potential consequences of their action they can make an informed decision as to whether remain party to ICSID or to denounce the Convention. Second, this memorandum provides an analysis of the varying interpretations and its repercussions on arbitral practice and treaty-making. Some of these interpretations have already been made in the course of the above-mentioned academic debate, others are new and may be raised if a denunciation is addressed or challenged before an international jurisdiction. The goal is thus to anticipate issues that may arise out of denunciation and to propose solutions to solve these problems. Some of the issues addressed in this memorandum are likely to be raised in the two pending cases before the ICSID, namely E.T.I. Telecom International N.V. v. Republic of Bolivia and Pan American Energy LLC v. Plurinational State of Bolivia

 

Click this link to download the full memorandum in pdf format.

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