CDR | 26 August 2020
ICSID slowdown reveals growing pressures
by Andrew Mizner
Despite a drop in cases at ICSID in the face of Covid-19 and Achmea, the level of investor-state arbitrations remains high overall. However, long-term challenges remain.
New arbitrations registered at the International Centre for Settlement of Investment Disputes (ICSID) declined for the second financial year in a row, but investment arbitration remains popular.
In figures published on 13 August, the World Bank’s investor-state dispute settlement (ISDS) centre registered 40 new cases for the 2020 financial year, down from 52 in FY 2019 and 57 in 2018 and while that may in part be attributable to the coronavirus pandemic during the second half of the financial year, it could anticipate the changing face of arbitration post-Achmea.
The 2019 calendar year was itself a quieter one, with 39 new cases registered, the lowest since 2014 and only the second time there have been less than 40 new cases since ICSID first broke the 50-case barrier in 2012, a watershed moment in the popularity of the institution.
The first six months of the 2020 calendar year saw 23 new cases registered – one higher than the equivalent period last year, so it is not as simple as attributing the overall decline during the financial year to Covid-19. Nonetheless, it is one of two factors likely to have played a role, as the pandemic and lockdown, led “to a significant slowdown in economic activity worldwide”, which “has had an impact on the number of new cases during the first six months of 2020”, according to Marily Paralika, Paris-based head of international arbitration for Fieldfisher .
The second is Achmea, the March 2018 ruling by the Court of Justice of the European Union that bilateral investment treaties (BITs) within the EU are incompatible with European law, which in turn led to the signature of the Agreement for the Termination of Bilateral Investment Treaties between Member States of the European Union on 5 May this year. Although that was too early to have directly stopped cases being brought, in reality “a number of investors decided not to pursue claims following that decision”.
The majority of cases – 57% – still came from BITs, but this was also a drop from 64% the previous year. The wider backlash against ISDS over the past few years may also be having an influence.
“There is a growing perception that ISDS may not sufficiently address transparency, as well as environmental, social and governance (ESG) issues or protect human rights, or the interests of developing countries,” notes Paralika.
However, the level of BIT cases remains at a historically strong level, in line with 51% in 2015 and 2016, 62% in 2017 and 60% in 2018, and she emphasises that it is “too early to draw definite conclusions”.
A further 11% of 2020’s cases came from investmetn contracts, while the remainder came from individual free trade agreements, and the percentage arising from the Energy Charter Treaty also increased to 16%.
South America accounted for nearly a third of the year’s cases. That was an increase from 21% last year, while FY 2019’s top region, Eastern Europe and Central Asia, still relatively popular, dropped from 25% to 20%.
Western Europe provided 13%, a slight increase, while Sub-Saharan Africa was 10%, consistent with last year, and Middle East and North Africa dropped to 10%.
The top source of cases remained the oil, gas and mining sector with 30%, followed by 20% for electric power and other energy.
ICSID did show its ability to bring resolution, with 68 cases concluded, a record, and despite the downturn, the number of new disputes remains historically high. “ISDS remains popular and the ICSID caseload statistics confirm this trend, even though major concerns have been expressed regarding potential conflicts of interest (double hatting), costs (especially in ad hoc proceedings), absence of arbitral diversity and lengthy duration of the proceedings, coupled with enforcement issues,” notes Paralika, as well as “transparency and ESG issues”.
Those concerns are driving reforms “including the new generation of international investment treaties, the amendment process of the ICSID Arbitration Rules and the mandate of the UNCITRAL Working Group III to assess concerns with the ISDS system”, as well as the shift towards investment courts and greater limits on ISDS in new trade treaties, she continues.
Likewise, there is a growing recognition of the need for greater diversity within the arbitrator ranks. Last month’s report from the Cross-Institutional Task Force on Gender Diversity in Arbitral Appointments and Proceedings Latest News found that the situation is improving, but that a lot more needs to be done.