On investorsʹ claims
"Unless discriminatory approaches and the lack of transparency in the decision-making of the state authorities are eradicated, Ukraine may become a frequent respondent in investment arbitration", says Sergiy Gryshko, Partner at Redcliffe Partners.
— What makes the ICSID a popular forum for the settlement of investment disputes?
— Historically, investment disputes over, for instance, compensation for the expropriation of foreign direct investment, were considered within the framework of diplomatic protection procedure at an inter-state level. This procedure, however, was very dependent on the political situation as well as on other non-legal factors. The International Centre for Settlement of Investment Disputes (ICSID) is, on the contrary, a completely depoliticised forum to settle disputes based only on rules of international law.
The ICSID is a specialized body of the World Bank Group which ensures objective and impartial settlement of disputes between foreign investors and host states. It functions on the basis of its own "code of procedure", namely the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), and arbitration rules elaborated on its basis.
— What makes the ICSID different from other arbitration institutions?
— The main difference from other arbitration fora is the scope of the ICSID’s jurisdiction. The ICSID only hears investment cases between states and foreign investors. The ICSID does not consider disputes between private parties or those of a purely commercial nature, which do not involve risks associated with doing business in a host state.
Factors in the ICSID’s success are the exceptional level of professional excellence and ethical standards of its arbitrators and administrative personnel, as well as the very robustly drafted arbitration procedures it has in place. The ICSID is listed as an arbitration forum in the majority of investment protection agreements, which contributes to a significant inflow of cases.
The ICSID is utterly de jure and de facto independent from the World Bank and has proved to be a benchmark for transparency among international arbitration institutions.
— Do you expect an increase in the number of cases against Ukraine in the ICSID?
— The ICSID is currently considering three cases against Ukraine, one of which was filed in 2015. According to Anton Yanchuk, the Deputy Minister of Justice, and the coordinator of the legal representation of the state of Ukraine in investment arbitrations, investors filed 20 claims against Ukraine as of May 2015. However, not all of them will necessarily result in actual arbitration proceedings.
Arbitrating a dispute (for example, at the ICSID) is expensive. Investors use it only as a last resort if all other efforts to negotiate have failed. Ukraine, in its turn, has learned the lesson of being sued by foreign investors, and has become much more enthusiastic about pre-arbitration settlement of investment disputes so as to avoid going to the ICSID for arbitration.
However, a number of sensitive issues remain, with the increase in rates for subsoil use being one of them, which may push investors to have immediate recourse to investment arbitration.
— Being a respondent in an investment arbitration clearly does not help Ukraineʹs investment attractiveness. Is there anything Ukraine can do to turn things around?
— Protection of investorsʹ rights, at both domestic and international levels, is a crucial indicator of investment attractiveness. It is one of the indicators the World Bank uses in its Doing Business Survey.
At present, there are two main factors that negatively affect Ukraineʹs investment image: (i) poor protection of (Ukrainian, as well as foreign) investors; (ii) and the annexation of Crimea and the military conflict in Eastern Ukraine, which means many investors have lost control over their assets located in these territories.
At the same time, investors are becoming more aware of investment arbitration as an effective instrument to protect their rights. Generally, investment arbitrations are quite rare; however, just recently my team and I represented clients in several investment arbitrations. Investors were challenging the commercial terms of the extraction and processing of mineral resources in Ukraine. This speaks of the fact that investors are determined to protect their interests, despite the complexity of the arbitration proceedings and high costs involved. The future dynamics of investment claims against Ukraine will be largely determined by the approaches taken by the Cabinet of Ministers, the National Bank of Ukraine and other regulators, as well as of the Judiciary when it comes to protecting investors. Ukraine may become a frequent respondent in investment arbitrage unless discriminatory treatment of investors, non-transparent decision-making and violation of due process of law are eradicated.
— What do you think are the prospects for investment disputes regarding assets located in Crimea? Do they fall within the ICSID’s jurisdiction?
— In the case of assets in Crimea, the protection of investors′ interests should be built on the basic principles of a liberal economy. In other words, investors should not wait for Ukraine to protect them, but rather initiate arbitration proceedings against Russia. Ukraine can support investors with additional pieces of evidence collected by government agencies. Furthermore, the Ministry of Justice can coordinate the efforts of investors.
Unfortunately, Russia has not ratified the ICSID Convention, therefore disputes over assets located in Crimea do not fall directly within its jurisdiction. At the same time, the ICSID’s remit enables it to consider such disputes in accordance with the so-called Additional Facility. However, in this particular case, the enforcement of arbitral awards against Russia will be subject to obtaining an exequatur in national courts.
— Does the state always act as a respondent in investment disputes?
— In most cases entering into an arbitration agreement giving rise to the ICSIDʹs jurisdiction requires the investor to accept an "offer to arbitrate" made by the host state in a relevant investment protection treaty. One cannot imagine a host state filing a claim in such a context.
At the same time, there might be situations in which the ICSID’s jurisdiction is based on an arbitration clause found in an investment agreement. For example, a concession agreement or a production sharing agreement between an investor and a host state. In such a case, any breach of an agreement by an investor might be subject to ICSID proceedings.
— Are there any specifics in enforcing investment arbitration awards?
— ICSID awards have a special status. Unlike "regular" arbitral awards, investment arbitration awards do not require obtaining an exequatur in national courts, and must be enforced by those countries which have ratified the ICSID Convention in the same manner as the rulings of local courts. Where investment arbitration is not conducted under the ICSID Convention, but under the ICSID Additional Facility or UNCITRAL rules, such investment arbitration awards should be recognised and enforced in accordance with regular procedures.