ICSID Arbitration, the Law and Psychology
ICSID Arbitration
On 14 October 1966, the Washington Convention 1965 came into force. The Convention created the
International Centre for the Settlement of Investment Disputes (ICSID). On 14 February, 1986, the
Republic of Ecuador became a party to the Washington Convention. On 15 January 2007, Rafael Correa
was sworn in as President of Ecuador. By the end of 2008, 13 ICSID cases had been registered against
Ecuador. On 20 October 2008, Ecuador introduced its new Constitution preventing the Republic from
being party to any treaty by which its sovereignty is delegated to an international arbitral tribunal. On 6
July 2009, The World Bank received notice from Ecuador of its withdrawal from (ie. denunciation of) the
Washington Convention. On 5 October 2012, an ICSID tribunal rendered its Award against the Republic
for $ 1.77bn. On 11 October, Ecuador filed for annulment, and on 18 January 2013, the annulment panel
was constituted. The case is Occidental Petroleum v The Republic of Ecuador (ICSID Case No. ARB/06/11).
ICSID arbitration arises out of foreign direct investment (FDI) disputes. FDI is the contribution by foreign
investors of very significant amounts of value into the infrastructure of sovereign host States by way of
investment. The current majority view is that where a host State takes a direct investment away from a
foreigner or harms the investment, the host State must pay adequate compensation promptly and
effectively. And this is the case even though a national of the same host State would not be entitled to
compensation.
The Washington Convention created a procedurally delocalised arbitration forum within which one party
to an investment dispute can sue the other party to the investment dispute. A tribunal of arbitrators is
appointed to adjudicate the dispute and to render a legally binding Award which puts an end to the
investment dispute. At a high level of abstraction, there is a structural similarity between FDI dispute
groups comprising not only the parties and the tribunal, but also stakeholders. Investors are, for the
most part, companies which are led by directors: agents and leaders of the investor company. Host
States are also led by agents, namely, politicians in government. Tribunals are composed of arbitrators
having appropriate backgrounds and experience. Stakeholders enjoy, or suffer from the results of the
decisions taken by their agent-leaders; and those agent-leaders can (subject to the democratic
arrangement of the group) retain or lose power as directors or members of governments depending
upon what they deliver to their stakeholders.
In the context of Washington Convention arbitration, agent-leaders deliver to their stakeholders an ICSID
Award. Like any adjudication, ICSID arbitration is, broadly speaking, win-lose. As already noted, a host
State can lose heavily in ICSID arbitration if it has to pay compensation. But the investor can also lose
heavily if it fails to secure compensation for the loss or damage to its investment. The economic and
other risks can be enormous.
A large Award against a host State - as in the Occidental Petroleum arbitration - can be characterised as
amounting to an injustice against the stakeholders. And this injustice can be portrayed as the fault of
one or more of: the agent-leader of the aggrieved party; the other party to the investment dispute; the
ICSID arbitrators; and ‘outsiders’, for example, foreign governments, either in general or specifically (such
as the government of the home State of the investor). In the case of host States, social injustice caused
by foreigners (either the foreign investor or its home State, or both of them) can be used to the
advantage of the agent-leader: the agent-leader can be portrayed as one of the people for whom he or
she is seeking justice against outsiders. So, the social justice of ICSID Awards is one of several important
issues when considering the impact of ICSID arbitration. The main interest here is the impact of ICSID
Awards on the agent-leaders and stakeholders of Ecuador as host State.
Law and psychology
Prior to the Washington Convention, there was no suitable legal forum in which a non-sovereign and a
sovereign could have FDI disputes between them resolved. One solution was for the foreigner to rely on
its home State government: diplomatic negotiations would follow, and compensation (if any) would be
paid by the host State to the home State. What emerged from these diplomatic exchanges was
customary international law about a foreigner’s property and person whilst in the host State. From this
position, customary international law developed to the point where the current majority view is that
direct investment by a foreigner is entitled to the same legal protection from the host State. However,
the exact nature of the law applicable in ICSID arbitration is not necessarily clear.
Adjudicating the merits of a dispute can give rise to a parallel dispute about the adjudication process
itself: the tribunal must adjudicate these issues too. For example, one area of dispute is the identity of
the law which is applicable to the merits of the FDI dispute and, once identified, what its content is.
Another set of issues concerns the facts: what facts are to be used in order to reach a decision on the
merits according to the law, and what facts, if any, can be used to justify the decision on grounds other
than the merits. Another frequent parallel dispute concerns the tribunal’s own jurisdiction. For example,
the denunciation of the Washington Convention can give rise to the issue of when it takes effect for the
purpose of the jurisdiction of ICSID tribunals.
The Washington Convention avoids the need for diplomatic intervention where the host State and the
home State are bound by the Convention: the process has moved from diplomatic negotiation to
adjudication. But, at a high level of abstraction, the host State and its agent-leader, the investor
company and its agent-leader, and the stakeholders are unchanged. And the payment of compensation
by the host State can be the same remedy in both processes. However, the criteria used for determining
liability and quantum might be very different between diplomatic negotiation and adjudication. And the
public availability of ICSID Awards through the media will have an impact on stakeholders which would
not normally exist with the confidential nature of diplomacy. To add to the difficulties for arbitration
tribunals, the international law which is applicable to FDI disputes is in the process of evolving from its
public international law roots into (public) international investment law.
Amongst other responsibilities, an arbitration tribunal should comply with the mandate from the parties
and with the law, and should produce an Award which resolves the merits of the dispute and which is
capable of being enforced. The Convention requires that ICSID tribunals should provide reasons for their
decisions on the merits, and Pierre Lalive refers to “the exceptional duties and responsibilities” of
international arbitrators (On the Reasoning of International Arbitral Awards, 2010). And FDI tribunals
should demonstrate how they have identified the content of international investment law. To what
extent should the content of international investment law include an element which reflects social
justice as well as economic justice? If the content of international investment law is not evolving in this
direction, should ICSID Awards provide reasons which not only justify the decision in light of the
applicable law but also give reasons in relation to wider issues of social justice which do not form part of
the law? In either case, one rationale would be to prevent agent-leaders manipulating ICSID Awards for
personal advantage: Awards would be addressed to stakeholders not to the intermediary agent-leaders.
Stakeholders would learn of Awards through the national media, and the media would be convinced of
the justice of Awards.
When an ICSID tribunal is deliberating its decision and writing up its Award, should the profiles of the
agent-leaders and the stakeholders be taken into account in the contexts of compliance with Awards and
denunciation of the Convention? If so, do ICSID tribunals need outside help in doing so; and, if so, who
should help, and how? Is there a role for psychology in the deliberations leading to, and the writing up
of ICSID Awards? Is there a sufficient channel of communication between psychologists and arbitrators
whereby the latter can interpret and apply what psychology has to offer?
The presentation will be made against the background of the relationship between Ecuador and the
Washington Convention and of the Occidental Award. Although that background points only to
economics, politics, and law, the presentation will attempt, at a very elementary level, to justify the
approach that there is a role for psychology alongside those other disciplines in relation to ICSID
arbitration and the impact of ICSID Awards. In doing so, points to be considered (from a lawyer’s
perspective) include agent-leaders, social justice, economic justice, international investment law, the
relationship between law and science, profiling of arbitrators and others, media reporting, and whether
therapeutic jurisprudence can assist ICSID arbitration.
Richard Earle
May 2013