Daily Times

Investor-state disputes typically arise out of the complaints from a foreign business entity.

There are two kinds of investment disputes under international law: state-state and investor-state. A large portion of state-state disputes is handled by the World Trade Organization. Whatever the merits of the World Trade Organization, it was humiliated after the Trump regime unitarily imposed tariffs on China and, thereby, demonstrated declining confidence in the system. Yet, it is still better than other investor-state dispute resolution mechanisms available in the international law world.

These investor-state disputes typically arise out of the complaints from a foreign business entity, claiming that it has been treated unfairly by a state, for example, by confiscating its assets. Several international institutions hear such cases, including but not limited to the Permanent Court of International Arbitration (Netherlands), London Court of International Arbitration and the International Center for Settlement of Investment Disputes (ICSID). Out of all these avenues, there are none more notorious than the ICSID, which was created in 1965 as a part of the World Bank. The ICSID does not directly hear any cases.

Rather its sole responsibility is to appoint neutral and impartial ad-hoc tribunals to hear disputes between a state and a foreign investor. These investor-state disputes have risen in importance due to the increase in cross-border trade globally but ICSID has faced criticism on many grounds despite an increasing caseload.

The ICSID does not directly hear any cases. Rather its sole responsibility is to appoint neutral and impartial ad-hoc tribunals to hear disputes between a state and a foreign investor

The ICSID has been accused of breaching the international law principle of state sovereignty since it can allow foreign business entities to evade domestic national law of the state. An example of which includes what happened in the Reqo Diq case. Concerns have been raised by many international lawyers and economists, including the author of this piece, that international tribunals have been given unrestricted and arbitrary powers to override domestic legislation, especially when such legislation might concern political, social, and economic and human rights. This happened in the Reqo Diq case itself. Leaders of the European Union have gone on record rebuking investor-state dispute mechanisms when the US-Europe trade negotiations were ongoing. It alleged that such a resolution could lead to breaching and overruling EU trade laws. The Americans have also shown discomfort and agitation under the Trump administration for giving “non-Americans” a veto over domestic legislation. Canada, too, has kept away from investor-state dispute mechanisms. Under the renegotiated NAFTA (The North American Free Trade Agreement), it has refused to enter into a dispute resolution mechanism where ad-hoc tribunals can overrule domestic legislation.

The fact that ICSID breaches state sovereignty is only one part of the charge sheet against it. Another huge criticism of ICSID is that there is no appeals process present under its enacting instrument, at most there is an annulment procedure. This annulment procedure, however, is unsatisfactory as it can be seen that some decisions submitted through the procedure have been questioned, both legally and factually, but not be overturned due to a “high standard,” which has to be met for annulment. What this means is that decisions cannot be overturned even if found to be legally incorrect or unfair. Clearly, the world has lost confidence in the ICSID tribunals, for what respect could a tribunal invoke when its decisions are “legally binding” despite being incorrect?

It is bad that ICSID tribunals often make mistakes, but it is worse that these mistakes cannot be rectified even after being recognized. When a state has to suffer at the hands of the ICSID due to an award, which is legally unfounded or unfair, and still abides by such an award in the face of legislation designed to protect social or economic human rights, how could respect be commanded to such an award?

The arbitrariness of the ICSID is clear from the recent imposition of a $4.08 billion penalty and $1.87 billion in interest against Pakistan, even when the admitted loss to the investor had been the investment of about half a million US dollars. The damages are disproportionate by any stretch of imagination and it should be comprehensible to any reasonable arbitrator that the quantum of damages have been raised to an extent where an economically downtrodden country such as Pakistan cannot pay the award, or if it does pay, it would be at the expense of the social and economic rights of its population.

Pakistan has suffered at the hands of an unaccountable and defective dispute resolution mechanism at the hands of the ICSID, and following the examples, large economies of India, South Africa and Brazil should never have become a part of the ICSID. It is high time now that Pakistan following the examples of Bolivia, Venezuela and Ecuador denounce the ICSID mechanism altogether.

The writer is a barrister