New ICSID Arbitration Rules implications for energy and resources sectors

The Member States of the Centre for the Settlement of Investment Disputes (ICSID) have voted to approve an amended set of rules, which will enter into force on 1 July 2022. ICSID is in an international arbitration institution which is part of the World Bank Group and specialises in international investment cases, these being legal disputes between a host State and a foreign investor that has made an investment in that State.

The new rules represent the culmination of a five-year long drafting and negotiation process, with the stated purpose of achieving rules that are (1) modern; (2) simple; (3) efficient; and (4) 'green'. The result is a 'modernised' set of rules, entirely rewritten in plain, clear, gender-neutral language.

Cases conducted through ICSID will come under one of two sets of rules: the ICSID Convention (and its associated regulations and rules) or the ICSID Additional Facility (and its associated regulations and rules). The changes affect all of ICSID's rules and regulations with the exception of the ICSID Convention itself.

The amended rules should be welcomed by the energy and resources sectors, which are great users of ICSID, making up around 42% of its case load in recent years¹. The changes focus on achieving transparency, consistency in decision making, and reducing time and cost.

In this article, we summarise five noteworthy changes for the energy and resources industries:

• Wider access to the Additional Facility;
• Increased transparency;
• Reducing time and cost;
• Consistency in decision making; and
• New fact-finding and mediation rules.

1. Wider access to the Additional Facility

Most ICSID cases are initiated under the ICSID Convention, but that is only possible where the jurisdictional requirements in Article 25 of the Convention are satisfied. Those requirements include that there is a legal dispute concerning an investment between a contracting member State and a national of another contracting member State.

ICSID's "Additional Facility" allows access to ICSID's rules in certain circumstances where the jurisdictional requirements of Article 25 are not met. Currently, access to the Additional Facility is limited to disputes between parties where one is not a Contracting State or a national of a Contracting State.

When the new rules come into effect on 1 July 2022, access to the Additional Facility will be expanded to disputes where neither party is a Contracting State (or a national of a Contracting State). This change will increase the ability for parties to a dispute concerning an energy investment to have access to ICSID's specialised set of Investor-State Dispute Settlement (ISDS) arbitration and conciliation rules.

Further, under the new rules, a Regional Economic Integration Organisation (REIO) such as the EU or ASEAN can be a party to ICSID proceedings. This change reflects that REIOs have increasingly entered into international investment agreements in their own name, including the EU which is a Contracting Party to the Energy Charter Treaty.

2. Increased transparency

The ISDS framework has historically attracted criticism for a perceived lack of accountability in circumstances where privately appointed tribunals make decisions regarding States' conduct behind closed doors, and amounts are payable to successful investors (usually private companies) from public funds. Similarly, there have been calls for awards pertaining to matters of public interest (such as climate change adaptation and mitigation measures) to be publicly available. A number of the changes to ICSID's rules address these calls for greater transparency over its processes and decisions, yet the ability for parties to control whether and to what extent information becomes publicly available has been retained. The amendments should be welcomed by the energy industry because the increased transparency should give parties considering pursuing a dispute some insight into how their claim might be received. At the same time, retention of the ability of parties to object to publication of awards and to redact documents mean that commercially sensitive data and information can remain confidential².

• Mandatory notice of third party funding: A significant change is a new mandatory requirement for parties to disclose any third party funder that has provided funds for the purposes of pursuing or defending a claim (Arbitration Rule (AR) 14(1)). Where that third party is a company, the requirement extends to giving notice of any person and/or entity that owns or controls that third party. The rule reflects the increased resort to third-party funding in ISDS, typically by claimants, and is intended to prevent the potential for awards to be challenged on conflict of interest grounds (i.e. because a member of the Tribunal has a relationship with a funder or a person controlling it but is not made aware of this because funding is not disclosed).
• Deemed consent to publication of awards: The ICSID Convention requires parties to consent to the publication of awards (Convention, Article 48(5)). That position remains unchanged, but the amended Arbitration Rules now go further than they did previously and 'deem' consent to have been given to the publication of awards if no party objects in writing within 60 days of its publication (AR 62(3)). Even where the parties do not consent, ICSID will publish excerpts of the award, but the parties retain the ability to agree redactions before publication (AR 62(4)). ICSID will also publish other orders and decisions with appropriate redactions agreed within 60 days of their issuance (AR 63(1)); and other submissions or documents with the parties' consent (AR 64(1)).
• Wider scope for submissions by third parties: Non-disputing parties continue to be able to apply for permission to file a written submission in a proceeding, but the relevant criteria for permission to be granted has been expanded, and a party applying for permission must now give further information about its identity, activities, organisation and ownership (AR 67). Further, new rule AR 68(1) allows non-disputing parties who are signatories to the Treaty from which consent to ICSID's jurisdiction is derived to make a submission on the interpretation of that Treaty (AR 68(1)).
• Access to hearings by third parties: The rules continue to provide that unless a party objects, a Tribunal will allow persons other than the parties, their representatives, witnesses and experts to observe hearings (AR 65(1)), but a new rule allows ICSID to publish recordings or transcripts of hearings on the request of a party, unless the other party objects (AR 65(3)).
• Awards to include statement on costs: the Award must now include a statement of the costs of the proceeding, including the tribunal's fees and expenses, and a reasoned decision on costs (AR 59(1)(j)). This will put the costs incurred by parties 'in the spotlight' and should deter parties from incurring costs that may be perceived as 'excessive' by the public.

3. Reducing time and cost

The average duration of ICSID proceedings is very lengthy – typically around 4 years³  – and has long been a source of criticism. A number of changes have been introduced with the intention of streamlining ICSID's processes, cutting case times 'in half' and thereby reducing cost. This is obviously beneficial to the energy and resources sector where long term projects and ongoing commercial relationships mean a final and binding decision is needed as soon as possible:

• New expedited procedure: The rules include a new procedure for expedited arbitration (AR Chapter XII), which (should) allow an arbitration to be completed within 470 to 530 days after registration of a Request for arbitration. Parties can opt-in to the procedure at any time (AR, 75(1)), and where they do so, certain limitations are imposed. The rule allowing for bifurcation (splitting the proceedings into different phases to permit, for example, issues of liability to be determined before quantum of loss) does not apply (AR 75(2)(a)); time limits are imposed on the filing of pleadings (60 days for the memorial and counter-memorial and 40 days for the reply and rejoinder (AR 81)); and the length of pleadings is capped (at 200 pages for the memorial and counter-memorial and 100 pages for the reply and rejoinder (AR 81)). A hearing is to be held within 60 days after the last written submission is filed (AR 81(1)(g)). This procedure would likely be appropriate for small value or straightforward claims, but it remains to be seen whether it is taken up in practice by those in the energy and resources sector where claims are more often than not particularly fact intensive.
• Electronic filing and remote hearings: Consistent with its 'green' intentions, all ICSID filings are to be made electronically (unless special circumstances require paper filings) (AR 4(2)). The rules expressly provide for hearing of the first session to be remote (AR 29(2)) and for the tribunal to determine the method of holding the substantial hearing (which would allow for remote hearings) (AR 32(2)).
• Request Checklist: The revised Institution Rules (which apply to the procedure from filing of the Request for Arbitration to the date of registration) include an updated checklist of information to be included in a Request for Arbitration, including a description of the investment and of its ownership and control. It also recommends that additional information be included in the Request in order to expedite the proceedings, including any agreement to use the expedited procedure, and the names of the persons and entities that own or control a requesting party which is a juridical person (Institution Rules, Rules 2 and 3).
• Shortened timeframes: Timeframes generally have been imposed or condensed, consistent with the intention of having proceedings progress as quickly as possible. These include: a new requirement to submit a proposal for disqualification of an arbitrator within 21 days (AR 22(1)(a)) (previously "promptly"); time limits for the exchange of comments and the decision on a disqualification application (AR 22 and 23) (not previously time limited); and a new requirement for the first procedural order to be signed by 15 days after the first session (AR 29(5)) (previously there was no time limit). New AR 58 provides that an Award is to be rendered as soon as possible, and no later than: 60 days after the later of constitution of the Tribunal or the last submission in the case of an objection that a claim is manifestly without merit; 180 days after the last submission in the case of a preliminary objection; and 240 days after the last submission in all other cases (AR 58(1)(c)). Previously, the Tribunal was required to sign the Award within 120 days after the "closure of the proceeding" which was not defined, and in practice proceedings are often not closed until shortly before the Award is finalised.
• Clearer guidance on cost awards: Under the previous version of the rules, Tribunals had a very wide discretion when awarding costs. New AR 52(1) contains clearer guidance on how costs are to be awarded, and specifies that Tribunals should take into account the parties' conduct, including the extent to which they acted in an expeditious and cost-effective manner and complied with the rules and orders of the Tribunal. While it was always empowered to do so, the Tribunal is now encouraged to make cost orders at key stages throughout the proceedings (e.g. following an application) rather than waiting until the end of the proceedings (AR 52(3)). This should encourage parties to think about how their conduct, and applications they are considering making, might influence costs.

4. Consistency in decision making

The lack of consistency and therefore predictability has long been a source of criticism of ISDS. Awards made under ICSID's jurisdiction are often not public, and in any event ICSID jurisprudence is not binding on subsequent tribunals. In consequence, the circumstances in which arbitral tribunals are prepared to grant interim relief or accept preliminary objections are regularly inconsistent or even contradictory. ICSID has now specified the criteria to be satisfied for certain applications, which should go some way towards ensuring consistency in terms of when and how they are granted.

• Provisional measures: The circumstances in which a Tribunal can grant provisional measures have been clarified. Revised AR 47 specifies that provisional measures can be ordered to: (a) prevent action that is likely to cause current or imminent harm to that party or to prejudice the arbitral process; (b) maintain or restore the status quo pending determination of the dispute; or (c) preserve evidence that may be relevant to the resolution of the dispute (AR 47(1)). The rules further explain that the Tribunal is to consider the requirements of urgency and necessity, and the effect that the measures may have on each party (AR 47(3)). A party is also required promptly to disclose any material changes in the circumstances upon which the Tribunal recommended provisional measures in order that their ongoing relevance can be assessed (AR 47(5)).
• Security for costs: New AR 53 provides that the Tribunal may order security for costs. This power was not expressly provided for in the previous version of the rules but Tribunals have previously considered security for costs applications in the form of an application for provisional measures (requiring parties to meet the burden of an application for security for costs). AR 53(3) clarifies the relevant circumstances for the Tribunal to consider, including the party's ability and willingness to comply with an adverse decision on costs.
• Manifest lack of legal merit: A new provision specifies when a party may object that a claim is manifestly without legal merit. Such objection may be with respect to the substance of the claim; ICSID's jurisdiction; or the competence of the Tribunal (AR 41(1)). Objections on such grounds were previously made under rule 41, which dealt with all preliminary objections. Now, any such objection is to be filed no later than 45 days after constitution of the Tribunal (AR 41(2)(a)), and the Tribunal is to render its decision within 60 days after the last submission is filed (AR 41(2)(e)). Where an objection is made before the constitution of the Tribunal, the Secretary-General shall fix time limits for the exchange of submissions so that they can be considered promptly upon constitution (AR 41(2)(d)). This new rule should 'flush out' any such claims early on in the process and avoid their causing delay where raised later on.
• Bifurcation: New AR 42 sets out new detail for an application for bifurcation and provides more guidance on timing and procedure when requesting that a particular question be addressed in a separate phase of the proceedings. It also sets out the factors for the Tribunal to consider when deciding whether to bifurcate, including whether bifurcation would materially reduce the time and cost of the proceeding (AR 42(4)). Such a request should be made within 30 days of the memorial on the merits (AR 44(a)(i)) and is to be heard and determined in a short timeframe (AR 42(3)(d)).

5. New fact-finding and mediation rules

The amendments include new sets of rules for mediation and fact finding in the case of matters involving a State (or an REIO) and pertaining to an investment. These proceedings can be commenced alongside an existing arbitration or on an ad hoc, standalone basis. These alternative dispute resolution methods have the potential to be particularly helpful in resolving specific issues within a wider energy arbitration, which are often complex and multi-layered.

Comment

The clarity, simplicity and modernisation of the revised ICSID rules should generally be welcomed by the energy and resources industries. The changes go some way towards addressing the age-old criticisms of the ICSID process as lengthy and opaque with a perceived lack of accountability, at the same time as retaining important protections for parties for whom it is important to prevent the disclosure of confidential and sensitive information. The changes have the potential to cut down the duration of ICSID proceedings substantially, allowing for final and binding decisions to be made much more quickly. The new fact-finding and mediation rules allow for greater efficiency because they mean that discrete issues can be carved off and dealt with separately. The changes generally bring the process into line with the recent updates to various institutional arbitration rules. Whether the changes are ultimately beneficial to the energy industry will turn on its willingness to embrace the calls for greater transparency and the new alternative dispute resolution 'tools in the toolbox' on offer.

Authors: Lucy McKenzie, Tom Cummins, Emma Johnson

1 ICSID, 'The ICSID Caseload – Statistics – Issue 2022-01' (2022).

2 This note summarises the changes to ICSID's Arbitration Rules for arbitrations conducted under the Convention, but similar changes have been made to its arbitration rules conducted under the Additional Facility.

3 ICSID Secretariat, 'Proposals for Amendment of the ICSID Rules – Working Paper', 2 August 2018, paragraph 586: "The latest available numbers based on all ICSID arbitration proceedings which concluded with an Award during the past 15 years demonstrate that the average duration from registration of the case until the rendering of the Award was approximately 49 months".