Pakistan has recently been subjected to two international arbitration awards and in one case, has started paying penalty on the compensation award, as it is in a precarious financial position. Another award is expected to be announced shortly, with a significantly higher amount.
Which body administers International Arbitration Awards?
The International Centre for Settlement of Investment Disputes (ICSID) was established in 1966 by the Convention on the Settlement of Investment Disputes between States and investors and is the world’s leading institution devoted to international investment dispute settlement. The ICSID Convention is a multilateral treaty framed by the Executive Directors of the World Bank to promote the objective of encouraging international investment. It also facilitates settlement of disputes amongst states under investment treaties and free trade agreements. The mechanism for settlement of disputes is through conciliation, arbitration or fact-finding. Every individual claim is considered by an independent Conciliation Commission or Arbitral Tribunal and more than 600 cases have been administered by ICSID.
Jurisdiction
The ICSID Convention is open for signature on behalf of all states and members of the International Bank for Reconstruction and Development (an integral part of the World Bank) and any other State which is a party to the Statute of the International Court of Justice and is considered as the premier international investment arbitration facility in the world.
Are We Good Negotiators
The first Bilateral Investment Treaty (BIT) was signed between Pakistan and West Germany in 1959, and since then Pakistan has initiated 48 BIT’s, out of which 42 were executed in the period between 1990 and 2004. The treaty claims include SGS v Pakistan, Bayindir v Pakistan, Agility v Pakistan (Kuwait BIT), Tethyan Copper v Pakistan and Karkey v Pakistan. During most, if not all of the BITs, our negotiators were apparently overly enthusiastic and negotiations were conducted in a reckless manner, or they managed to fall into the trap of agreeing to terms that were more favourable to the other nations, thereby exposing Pakistan to costly arbitration later. This was aptly highlighted in Chapter III of BOI’s Investment Policy 2013, acknowledging the “inconsistencies in the text of BITs signed over the last fifty years and the legal uncertainty created by such texts for investors and States equally.”
Chapter III of BOI’s Investment Policy 2013, acknowledges the “inconsistencies in the text of BITs signed over the last fifty years and the legal uncertainty created by such texts for investors and States equally.”
Extension of BIT to Neighbours
In the Pakistan – China BIT of 1989, which is now outdated, the definition of ‘every kind of asset’ is patently generic, and led to unproductive investments that made no real monetary contributions to Pakistan’s economy. The country has also made assurances to protect the foreign direct investment (FDI) accompanying Chinese sponsored projects .But this is a complex situation, as any violation of the provisions in the treaty would permit the investors to file a claim against the government of Pakistan in international arbitration. The said BIT is vague about the types of investments involved, the nature of disputes and the power of domestic courts. As the BIT’s are legally recognized instruments for investor confidence in developing countries, we are within our legitimate rights to review all BIT’s entered into by Pakistan.
Case 1
In August 2017, the arbitration tribunal issued a final compensation award, finding Pakistan liable under the Turkey-Pakistan BIT and requiring it to pay approximately $800 million in damages, including interest. The award is one of the largest damages award in ICSID history.
Case 2
ICSID Case No. ARB/12/1 pursuant to Article 36
The world’s biggest gold producer, Barrick Gold of Canada, and the biggest copper producer, Antofagasta of Chile, have a combined market value of more than $30 billion. They entered into a joint venture agreement with the government of Balochistan, to exploit and develop a copper ore deposit known as the Reko Diq Tanjeel project. The initial capital investment, including rail infrastructure, was to be in the range of $4-5 billion, with an annual export potential of $1 billion. Alas an arbitration tribunal of the ICSID issued a decision on the arbitration claims that Tethyan Copper Co Ltd (TCC), a joint venture between Antofagasta and Barrick, filed under the umbrella of the Pakistan Australia BIT, had violated certain provisions of its BIT in regards to TCC. The proceedings have now been initiated, as it is mandatory for the tribunal to consider submissions from both Pakistan and TCC to arrive at the amount of compensation that is owed by the former to the latter. The ruling cannot be appealed and Pakistan being a signatory state must comply or face international isolation.
Damage Control
Pakistan can seek revision or annulment of the awards through invoking articles 50 to 53 of the ICSID Convention, and may seek a stay on the grounds that a new discovery has been made, although it is up to the ICSID to decide whether the new information available is applicable to the case in hand. Out of 600 cases to date, only 17 have been annulled, which is why Pakistan has limited options left. It needs to put its house in order and conduct international negotiations on the strength of extensive research, open debate through involvement of relevant stakeholders, and a dedicated team approach to attract investors by reducing risk factors.
Caution is thrown to the winds, as negotiators desperate for a win agree to treaties and clauses that are detrimental to Pakistan’s long term economic interest. The abundant hydrocarbon and mineral resources of Pakistan need to be exploited and developed as fast as possible as time is running out. Recourse to international investment and capital can be sought within sharply defined parameters.
The author is involved in research in the areas of finance and energy.
Published in Daily Times, July 2nd 2018.