RECENT ICSID DEVELOPMENTS: CASELOAD STATISTICS AND THE FIRST YEAR OF PRACTICE UNDER THE ICSID 2022 RULES

30 August, 2023

 

In a recent post on our Public International Law Notes blog, Antony Crockett and Caitlin Setter consider the recent release of ICSID’s biannual caseload statistics for FY2023 and a separate publication reviewing the first year of practice under the newly implemented ICSID 2022 Rules. You can read the full post here.

 

For further information, please contact Antony Crockett, Partner, Caitlin Setter, Registered Foreign Lawyer (Victoria, Australia), or your usual Herbert Smith Freehills contact.

Antony Crockett
Antony Crockett
Partner
+852 21014111
Caitlin Setter
Caitlin Setter
Registered Foreign Lawyer (Victoria, Australia)
+852 210141686

GERMAN FEDERAL COURT OF JUSTICE RULES ON APPLICATIONS TO DECLARE TWO PENDING INTRA-EU ICSID ARBITRATIONS INADMISSIBLE

4 August, 2023

In a recent post on our Public International Law Notes blog, Dr. Patricia Nacimiento, Dr. Bajar Scharaw, Dr. Alessandro Covi and Dr. Lara Panosch consider the 27 July 2023 decision of the German Federal Court of Justice declaring two pending intra-EU ICSID arbitrations inadmissible under EU and German procedural law. You can read the full post here.

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ICSID Publishes 2022 Annual Report

3 November, 2022

In early October 2022, ICSID published its 2022 Annual Report (available here). The Annual Report provides an overview of ICSID’s activities during the past year, and discusses ICSID’s 2022 caseload, developments in membership, the emergence of new ICSID rules and the draft Code of Conduct for Adjudicators in International Investment Disputes.

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ICSID tribunal upholds the recoverability of success fees for counsel in BSG Resources v Guinea

4 October, 2022

On 18 May 2022, an arbitral tribunal rendered its award in BSG Resources Limited (in Administration), BSG Resources (Guinea) Limited, BSG Resources (Guinea) Sàrl v Republic of Guinea (ICSID Case No. ARB/14/22) in favour of the Republic of Guinea (“Guinea“). Notably, in awarding costs, the tribunal treated as recoverable Guinea’s success fees under a private fee arrangement with counsel.

The decision on the recoverability of success fees is a significant development in the arbitration community and in particular for arbitrations under the auspices of the International Centre for Settlement of Investment Disputes (“ICSID“). The tribunal offered its interpretation of ‘costs reasonably incurred’ under Rule 52(2) of the amended ICSID Arbitration Rules, viewing success fees as a category of recoverable costs to the extent that such fees are part of a total costs figure that resembles the unsuccessful party’s expenditure. The decision prompts several unresolved questions, leaving it open to future tribunals (ICSID or otherwise) to follow suit, qualify the decision, or disregard it altogether.

Background

BSG Resources Limited (in Administration) and later BSG Resources (Guinea) Limited and BSG Resources (Guinea) Sàrl (together “BSG“) collectively commenced two ICSID arbitration proceedings against Guinea relating to two iron ore mining areas in the south-eastern part of Guinea, Zogota and Simandou. The two arbitrations were subsequently consolidated. The dispute arose under the 1995 Investment Code of Guinea, 1995 Mining Code of Guinea, the 1998 BOT Act and the 2009 Base Convention (“Invoked Instruments“).

BSG claimed that (i) Guinea unlawfully expropriated its investment by revoking its mining rights over the two iron ore mining areas in 2014 and (ii) BSG suffered discriminatory treatment from a 2012 governmental review of mining rights which specifically targeted BSG and favoured those who had funded the President’s 2010 presidential election. BSG claimed these acts were in breach of its rights under the Invoked Instruments and international law and sought around USD 5 billion in compensation.

In turn, Guinea requested that the tribunal find that (i) the tribunal lacked jurisdiction to hear BSG’s claims under the 1995 Mining Code and the BOT Act and (ii) BSG’s claims were inadmissible because the mining rights were obtained through bribery of public officials and corruption. Guinea also made counterclaims seeking reparations for the economic and moral damages incurred from the corruption and the moral damages sustained from BSG’s public media campaign.

As to costs, Guinea sought to recover its legal fees and expenses in full, which notably included a 25% success fee pursuant to an arrangement with its counsel. Success fee agreements generally involve a party’s counsel agreeing to a fee cap in return for a percentage fee uplift payable if the party wins the case. In this case, counsel for Guinea had agreed to a 25% lower rate of legal fees in return for that 25% difference being paid as a lump sum in the event of a successful outcome. Guinea argued that success fees offsetting a contingency fee arrangement are recoverable and that a 25% success fee was not unreasonable. On the other hand, BSG argued that success fees were not reasonable costs under Rule 28 of the ICSID Arbitration Rules (now Rule 52(2) of the amended ICSID Arbitration Rules) such that this risk could not be borne by the unsuccessful party. Additionally, BSG argued that Guinea should have disclosed the content of the private fee arrangement.

Decision

The tribunal found that BSG’s claims were inadmissible on the basis that the claims related to mining rights were secured through corrupt practices. Similarly, the tribunal found that Guinea’s counterclaims were inadmissible on the basis that the President engaged in bribery and corruption in relation to these mining rights. It was noted that conduct irreconcilable with international public policy must lead to a finding of inadmissibility.

Costs

Addressing the parties’ costs submissions, the tribunal ordered BSG to pay 80% of ICSID’s costs and 80% of Guinea’s costs on a ‘costs follow the event’ basis, noting that Guinea was unsuccessful in its jurisdictional objections and counterclaims, but was successful in arguing that BSG’s claims were inadmissible and successful in defending BSG’s challenge to the authenticity of documents, which incurred additional costs in instructing forensic experts for an assessment.

In particular, in respect of Guinea’s success fees due to counsel, the tribunal was of the view that Guinea was entitled to its recovery on the basis that “the success fee does not qualify as a “reward” and does not appear unreasonable, since the total amount of legal fees of both Parties are nearly identical if the Respondent’s success fees are taken into account.” The tribunal did not address BSG’s argument that Guinea should have disclosed the contents of the private fee arrangement for the purposes of recovery.

Comment

Under the English regulatory regime, success fees are no longer recoverable following the Jackson reforms (with few transition-related exceptions). Uplifts to discounted rates are also limited to 100% of a lawyer’s benchmark fee (so in the circumstances of this case, this uplift may have been recoverable under the English regulatory regime depending on the rates and how the uplift was presented). However, in the context of arbitration, arbitral institutions generally grant tribunals discretion and authority to determine and apportion costs (Article 28.3 LCIA Arbitration Rules; Article 40(2)(e) UNCITRAL Arbitration Rules; Articles 37(4) and (5) ICC Arbitration Rules; Article 61(2) ICSID Convention and Rule 52 ICSID Arbitration Rules). Accordingly, success fees may be recoverable in arbitration.

Rule 52(2) of the ICSID Arbitration Rules imposes a ‘reasonableness’ qualifier on recoverable costs. However, it is silent as to the categories of costs which are recoverable and the extent to which qualifying costs are recoverable. It therefore remains to be seen whether success fees in other circumstances – for instance, where they involve a high percentage uplift or where the total fees (including the success fee) are not proportionate to the counterparty’s costs – will be treated as recoverable.

It also remains to be seen how future tribunals will approach the issue of the disclosure of success fee arrangements with counsel. There is currently no explicit obligation for parties to disclose success fee arrangements under the ICSID Arbitration Rules, although in the event of success, disclosure is inevitable at the cost submission stage. However, following ICSID’s comprehensive reform, there is now a mandatory requirement for disclosure of any third-party funder that has provided funds to defend a claim (Rule 14(1) ICSID Arbitration Rules). The award in question was rendered on 18 May 2022, before the reform on 1 July 2022. It may be that tribunals in practice are more inclined to insist on the early disclosure of such arrangements by analogy with the third-party funding rule.

The treatment of costs in arbitration, including third party funding and contingency arrangements, remains a closely watched issue, including before the English courts. As we previously covered on our blog, in December 2021 the English Commercial Court in Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S, [2021] EWHC 3301 (Comm) refused a challenge to an arbitral award brought on the basis of the tribunal’s award of the costs of third-party funding to the successful party, finding that it did not constitute a serious irregularity under s 68 of the 1996 Arbitration Act (see our post on the decision here). That decision built on an earlier 2016 High Court decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited, [2016] EWHC 2361 (Comm) (for a full discussion, see our blog post on the decision here).

Annulment proceedings were filed on 23 August 2022 by BSG, although the grounds for annulment (and whether they separately address the costs issue) have not yet been published.

For further information, please contact Craig Tevendale, Partner, Louise Barber, Senior Associate, or your usual Herbert Smith Freehills contact.

 

Craig Tevendale
Craig Tevendale
Partner
+44 780 9200648
Louise Barber
Louise Barber
Senior Associate
+44 7713 079 966

ECUADOR IS NOW OFFICIALLY A CONTRACTING STATE OF THE ICSID CONVENTION

3 September, 2021

On June 30, 2021, Ecuador’s Constitutional Court (Constitutional Court) held that President Guillermo Lasso had the power to ratify the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) without the approval of Ecuador’s National Assembly (the Decision).[1] The Constitutional Court also held that the ratification of the ICSID Convention does not imply that Ecuador has assigned inherent domestic powers to international jurisdiction nor that the ratification of the treaty automatically binds Ecuador to investor-state arbitration.

Following the Decision, on July 16, 2021, President Lasso ratified the ICSID Convention and on August 4, 2021, deposited Ecuador’s Instrument of Ratification with the World Bank. Pursuant to Article 68(2) of the ICSID Convention, it will enter into force today, September 3, 2021.

In response to Ecuador’s latest ratification of the ICSID Convention and the Decision, Ecuador’s legislative branch, the National Assembly, voted on a resolution which (i) opposed the ratification of the ICSID Convention and the Decision, and (ii) supported the launching of a constitutional action seeking a declaration from the Constitutional Court that the ICSID Convention is unconstitutional.[2] As a result, at least three actions have been filed by members of the National Assembly during August 2021.[3] A decision from the Constitutional Court is pending. Continue reading →

ICSID RELEASES REVISED PROPOSED MEDIATION RULES

26 July, 2021

On 15 June 2021, the International Centre for the Settlement of Investment Disputes released its latest working paper as part of its Rules Amendment Project. In addition to proposing changes to the ICSID Convention and ICSID Additional Facility arbitration and conciliation, as covered in our earlier blog post, Working Paper 5 also refines the proposed new rules for ICSID fact-finding and mediation. The changes to the Mediation Rules between Working Paper 4 and Working Paper 5 have been minimal, and the ICSID Secretariat has expressed a hope that this will be the final iteration of the rules.

To further promote mediation in investor-State arbitration, in July 2021 ICSID also released a Background Paper on Investment Mediation, which provides an overview of mediation in an investor-State context, as well as an Overview of Investment Treaty Clauses on Mediation, which reviews existing treaty mechanisms that address investor-state mediation and other amicable dispute resolution mechanisms.

This blog post provides an overview of how a mediation would be initiated, conducted, and concluded under the proposed Mediation Rules – highlighting any key changes in the latest iteration of the rules and flagging key takeaways from ICSID’s additional publications.

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Federal Court of Australia clarifies recognition and enforcement of foreign arbitral awards

8 February, 2021

In a unanimous decision (accessible here), the Full Federal Court of Australia has allowed (on a limited basis as explained below) an appeal by the Kingdom of Spain of the Federal Court decision in Eiser Infrastructure Limited v Kingdom of Spain [2020] FCA 157 (Eiser). The decision at first instance had allowed the recognition and enforcement of two awards issued in investor-state arbitrations conducted under the rules of the International Centre for Settlement of Investment Disputes (ICSID) (ICSID case numbers ARB/13/31 and ARB/13/36).1

The Full Court’s decision clarifies the difference between recognition of an award and its enforcement,2 and the implication of both on whether foreign states (such as the Kingdom of Spain) are immune from ICSID awards in Australia.

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ICSID RELEASES STATISTICS FOR RECORD YEAR 2020

5 February, 2021

The International Centre for Settlement of Investment Disputes (“ICSID”) has released case statistics for 2020 (available here) showing a record number of new cases. While the figures confirm that the Covid-19 pandemic has not so far significantly affected the nature of those disputes, other changes – such as a shift to virtual hearings – are likely to affect investment arbitration in 2021 and beyond.

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COEXISTING WITH COVID-19 [2]: A CATALYST FOR PROGRESS IN INTERNATIONAL ARBITRATION?

5 October, 2020

This blog post was originally published on 16 July 2020. This version of the post has been amended to include an updated table of the individual steps taken by different arbitral institutions and organisations as at 02 October 2020 in response to the evolving situation. 

As the Covid-19 pandemic continues, infection rates in many countries are starting to fall, and businesses and governments alike are seeking to establish a “new normal” recognising that the virus will be present in society for some time yet. Other countries still face climbing numbers and a peak yet to come. For all, the prospect of multiple waves of high infection rates throughout the year and beyond remains. As such, we will continue to see an ever shifting patchwork of lockdowns and other government responses internationally.

In our earlier series of blog posts, we highlighted the individual steps taken by different arbitral institutions, organisations and the wider community as an initial crisis response to the pandemic. We produced a table setting out those steps and will continue to monitor and update this information going forward. An updated table, accurate to 02 October 2020, can be found here.

In this blog post, we turn to the future and look at how the arbitration community continues to respond to the challenges of operating internationally, as different countries prepare in different ways to live with the Covid-19 virus in the medium term at least.

A steep learning curve: the initial response

The initial wave of the pandemic created an unprecedented need for arbitral institutions and organisations to adapt at very short notice to new and different ways of working, and offer solutions to parties and practitioners that would enable disputes to continue to be resolved at a time of quarantine, enforced social distancing and fast-changing government guidance from across the globe. What became clear was that there was no “one size fits all” approach to be taken by those institutions or organisations. Some institutions (such as the SCC) already functioned largely online with online filing systems. For other organisations (such as the LMAA) the majority of their cases were resolved “on the papers” rather than in face-to-face hearings. Other institutions (such as the ICC or LCIA) needed to introduce changes in their processes, enabling cases to be filed virtually while their secretariats worked remotely and for parties and tribunals to communicate online.

As the truly global nature of the pandemic unfolded, one of the first questions faced by parties, arbitrators and practitioners was whether merits hearings ought to be held virtually or postponed. While electronic communication and the use of other online tools in an arbitration is nothing new, most arbitrations, until now, involved a face-to-face substantive hearing on the merits. For many, a shift to a fully virtual merits hearing was, at least initially, viewed as a step too far. We saw many arbitration hearings in March and early April being postponed to later in the year. However, with the realisation that this “new normal” might be with us on a global scale for some time came a change in attitude towards virtual hearings.

The institutional joint statement in April 2020 mirrored the approach of many national courts in encouraging parties to continue with the resolution of disputes, and many arbitral institutions began encouraging arbitrators to adopt virtual hearings wherever possible. As a consequence, many parties with upcoming merits hearings found their arbitrators inclined towards that option.

Where a decision has been taken to hold a hearing virtually, the arbitrators, practitioners and clients involved have been on a steep learning curve. Just as we have all become used to operating through Skype, Teams and Zoom in the workplace, we have adapted to using that same virtual technology (and others) to hold hearings.

There has been a very positive response from a number of practitioners who have participated in virtual hearings, with many surprised at how well they have worked. We have seen the development of guidelines, protocols and procedural orders to govern the efficient and effective running of virtual hearings and to ensure that the hearing remains fair to all.

We have also seen other new ideas and initiatives come from within the community during this challenging time. New websites and initiatives have been launched to help keep practitioners up to date with Covid-19 developments or to facilitate the use of online platforms to enable cases to truly operate virtually.

Responding to an ever-shifting international picture: the need for flexibility

So what does the “new normal” mean going forward?

Commercial arbitration has grown in popularity over the past decades as parties recognise the benefits it brings in cross-border transactions by offering a neutral forum and an adaptable, international, procedure. But the international nature of the parties, practitioners, institutions and arbitrators also means that arbitration must be able to adapt and flex to fit the unique requirements of those international participants, both in terms of their transactions and disputes, but also to the specific implications of the pandemic for each country in which those participants reside.

Clearly, if circumstances require it, all those involved in the process should be able to revert back to “lockdown” ways of working. And if circumstances require it, all the learning of the past months will be able to be put into use in continuing to hold wholly virtual substantive hearings. But what seems more likely is that we will see more flexible and adaptable approaches to respond quickly to the immediate, and often changing, circumstances.

“Hybrid” or “semi-virtual” hearings are likely to be the answer to that need for flexibility. A mixture of virtual and physical attendance will help to mitigate the effects of travel restrictions and local or national lockdowns. They will also enable those involved in hearings (such as the parties and their counsel, the Tribunal and any witnesses or translators that might be involved) to participate to the fullest extent possible. Some participants may meet in a single or in multiple locations, with appropriate social distancing, while others attend virtually. These hybrid hearings can be set up to change format at short notice, enabling those involved to plan for a myriad of different scenarios but ensure that the final hearing remains fair, offering each party the opportunity to put their case.

Impact on the future: a catalyst for change in the post-Covid world?

Many sectors of the economy have proven themselves to be extremely adaptable in the face of the pandemic, and arbitration is no different in that regard. At this stage, however, it is difficult to gauge the longer term impact of Covid-19 on the process and procedure of arbitration globally, particularly if a future vaccine were to reduce or remove the need for social distancing.

However, the longer arbitral participants are required to work in a different way, the more those new ways of working will be seen as the norm. The more positive experiences participants have of virtual or hybrid hearings, the more likely it is that these will remain at least options for future merits hearings. When faced with participants from across the globe, parties may become less comfortable with the expense of holding a face-to-face hearing if they are reassured in the effectiveness of a virtual or hybrid option. Indeed, the dramatic reduction in the carbon footprint of these virtual and hybrid hearings may lead to an environmental “silver-lining” to the pandemic in terms of changes in business practice for many, including in international arbitration.

Most importantly, we have seen innovation and blue sky thinking at its best in the last few months. And that shift in mind-set towards different ways of delivering the product of arbitration effectively and efficiently has been exciting to see and experience. That ability to adapt and change to challenging circumstances is likely to continue, and we will see the longer term impact of that innovation for many years to come.

For more information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Consultant, Charlie Morgan, Senior Associate, or your usual Herbert Smith Freehills Contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112

Charlie Morgan
Charlie Morgan
Senior Associate
+44 20 7466 3868

COEXISTING WITH COVID-19: A CATALYST FOR PROGRESS IN INTERNATIONAL ARBITRATION?

16 July, 2020

As the Covid-19 pandemic continues, infection rates in many countries are starting to fall, and businesses and governments alike are seeking to establish a “new normal” recognising that the virus will be present in society for some time yet. Other countries still face climbing numbers and a peak yet to come. For all, the prospect of multiple waves of high infection rates throughout the year and beyond remains. As such, we will continue to see an ever shifting patchwork of lockdowns and other government responses internationally.

In our earlier series of blog posts, we highlighted the individual steps taken by different arbitral institutions, organisations and the wider community as an initial crisis response to the pandemic. We produced a table setting out those steps and will continue to monitor and update this information going forward. An updated table, accurate to 16 July 2020, can be found here.

In this blog post, we turn to the future and look at how the arbitration community continues to respond to the challenges of operating internationally, as different countries prepare in different ways to live with the Covid-19 virus in the medium term at least.

Continue reading →