ArsovNatchevGaneva

Investor Protection

Following the liberalization of the Bulgarian Economy and the gradual surge of incoming FDI in the country there’s been a natural interest in the protection methods and practices. After Bulgaria acceded to the Washington Convention and the ICSID investment dispute resolution system in 2001 the protection of foreign investment is now provided on International Level in what is now established to be the preferred fora for settlement of Investment disputes. In spite of the high fees ICSID offers a number of advantages and most importantly - escape from the bigotry and the tardiness of the domestic courts often observed when trying investment disputes.

With an ever-increasing number of foreign investors, involvement in a dispute is imminent[1]. As ICSID has slowly become recognized as one of the pre-eminent arbitration institutions by the international investment community, particularly the community involved in FDI projects in LDC’S, it is the natural forum for the settlement of disputes on international level between foreign investors and The Republic of Bulgaria.

1. ICSID Procedure

The consent of both parties to the settlement process is of central importance in the ICSID procedure. Once both parties have consented to the process, neither can withdraw unilaterally from such an agreement, according to the Convention (Washington Convention). The latter contains provisions that are designed to prevent refusal of a party to cooperate after it has agreed to enter the ICSID process.[2] The dispute must be a legal dispute which arises from an investment by a foreign investor whose home country is a signatory of the ISCID Convention and a host state signatory government; and such parties must have given their consent for the dispute to be resolved by the ICSID procedure. (Baker 54)

The parties are free to agree on the number of arbitrators as long as the number of member is uneven. If the parties are unable to form a tribunal within certain time limits, usually 90 days, the Chairman of the ICSID Administrative Council will select the arbitrator or arbitrators not yet named. These selections then make up the arbitration or conciliation tribunal. ICSID then facilitates the process by organizing the meeting times and places of the tribunal’s discussions and deliberations. The place of meetings is held at the convenience of the tribunal members but neutrality must be regarded in the selection of meeting sites. Usually the meetings are held at the Permanent Court of Arbitration at the Hague or in Arbitration centers located in Cairo, Kuala Lumpur, Melbourne, Sydney or ICSID headquarters. Other locations require the permission of ICSID.

The language of the proceedings will be either English, French or Spanish.

It’s important to stress that ICSID unlike the rest of arbitration institutions subsidizes the process of arbitration in means of assuring out-of-pocket reimbursement, travel and secretarial services. This should foster LHD’S to resort to ICSID dispute resolution more frequently, as in Bulgaria’s example the Government and the entities involved in investment related contentions are reluctant to arbitrate because of high expense cost.

The final awards issued by the ICSID tribunal is binding on both parties and enforceable under the rules of international law. The ICSID signatory state is required by the Convention to recognize the award as binding and to enforce any pecuniary obligation imposed by the tribunal whether the government or its agents were parties to the proceedings. If a signatory state refuses to honour the award of the ICSID tribunal such action would amount to a breach of the Convention’s provision to which the state is signatory. The private investor then could obtain the assistance of his government to legally pursue the claim through diplomatic channels of multilateral avenues of relief such as the International Court of Justice. However, art. 55 of the Convention states that the provisions of art. 54 requiring the award to be recognized by the host state should not alter the laws of any signatory state. Thus it would appear that any signatory state against which an award has been rendered could plead the rules of sovereign immunity from execution of the judgment of the award.[3]

As issue related to ICSID award is whether the Convention permits parties to ICSID arbitration to seek provisional measures such as attachments from national courts even if the relevant arbitration agreement does not specifically provide for recourse to the courts for this purpose. Art. 26 provides that ICSID arbitration, which has the consent of both parties, will be to the exclusion of any other remedies. In 1984 the ICSID Administrative Council amended the ICSID Arbitration rules to provide that the parties to a dispute registered with the agency are free to request any judicial authority to order provisional measures, if the parties have so stipulated in the agreement recoding their consent.[4]

2. Subrogation

A feature, which is becoming a standard addition to foreign investment contracts, is that the guarantor will succeed or be subrogated to some or all of the investor’s loss-related rights and claims upon indemnification under any insurance or guarantee policy. Such a right often represents a claim against the host government. It seems that the question arises whether the subrogated government can take advantage of this right as the indemnified investor might have to pursue ICSID arbitration proceedings against the host government in respect of the covered loss. Art 25(1) of the Convention provides that the ICSID proceedings shall only be available for investment disputes between an ICSID signatory state or designated subdivision or agency of that state and a national of another signatory state. If the subrogee is a private insurer and a national of another signatory state, the subrogee can appear as a party in an ICSID proceeding, provided that the host state gives its consent to the subrogation. In cases in which the subrogee is a governmental or intergovernmental entity and, therefore, not a national of another signatory state, such an entity cannot avail itself of the investor’s right to ICSID arbitration against the host signatory state.

3. ICSID’S Additional Facility

The Additional Facility offers conciliation and arbitration proceedings to disputes in which either the state party or home state of the foreign investor is not a signatory of the ICSID convention. The Additional Facility also extends the jurisdiction to cases in which the dispute is not an investment dispute but relates to transaction having characteristics that distinguish it from an ordinary commercial transaction. The Additional Facility can also administer proceedings that are not provided in the Convention. For example, fact-finding proceedings can be held by ICSID to which any state or foreign national can have recourse if either wishes to institute an inquiry to gather and report on facts relevant to their case.

4. Plama Consortium Limited v. Republic of Bulgaria[5]

A good example is the following brief memo of the first ICSID case Bulgaria is a party to.

(ICSID Case No. ARB/03/24)

Introductory Note

The decision reproduced below with the parties’ consent is the first decision

rendered under the auspices of ICSID pursuant to Article 26 of the 1994

Energy Charter Treaty (ECT), which deals with the settlement of disputes

between an investor and an ECT Contracting Party[6]. It also addresses the interaction between provisions on most-favored-nation (MFN) treatment and investor-State dispute settlement in investment treaties.

On August 19, 2003, the Centre registered a request submitted by

Plama Consortium Limited, a company organized under the laws of Cyprus

(PCL or the Claimant), for the institution of an arbitration proceeding against

the Republic of Bulgaria (Bulgaria or the Respondent). The dispute concerned

difficulties encountered by the Claimant in Bulgaria following its purchase of

capital in a local joint-stock company, Nova Plama AD, which owns a local oil

refinery. The Claimant invoked the ICSID arbitration clause contained in

Article 26 of the ECT. Alternatively, the Claimant invoked the ICSID arbitration

provision of the bilateral investment treaty signed between Cyprus and

Finland, which the Claimant alleged to have been imported into the 1987

bilateral investment treaty between Bulgaria and Cyprus (the BIT) through its

MFN provision.

According to the parties’ agreement, the Tribunal was to consist of three

arbitrators: one appointed by each party and the third, presiding, arbitrator

appointed by agreement of the parties or, failing an agreement of the parties,

by the ICSID Secretary-General. The Tribunal was constituted on February

10, 2004, and was composed of V.V. Veeder (British national), Albert Jan van

den Berg (Dutch national) and Carl F. Salans (U.S. national), who served as

the President of the Tribunal.

At the first session of the Tribunal with the parties, the Respondent confirmed

its intention to file objections to jurisdiction. The Respondent objected

that Bulgaria had not consented to submit the dispute to ICSID arbitration

under Article 26 of the ECT. According to the Respondent, Article 26 relates

to disputes concerning an alleged breach of an obligation arising under Part III

of the ECT (i.e., its Articles 10 through 17). However, it argued that the

Claimant had no claims under Part III since Bulgaria had denied the Claimant

such advantages whilst the request for arbitration was being registered by

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ICSID. Under ECT Article 17(1), each Contracting Party reserves the right to

deny the advantages of Part III of the treaty to a company owned or controlled

by nationals of a non-Party State, when the company does not have substantial

business activities in the Contracting Party involved. The Respondent

claimed to have denied such advantages to the Claimant, which it considered

mailbox company without substantial business activities in Cyprus and

owned or controlled by nationals of a non-Party State. To summarize, the

Respondent argued that an investor to whom Part III advantages had been

denied under Article 17 could not have access to arbitration under Article 26

of the ECT. Furthermore, the Respondent argued that it did not consent to

ICSID arbitration under the BIT and that the MFN provision contained in

the Bulgaria-Cyprus BIT did not encompass dispute resolution.

On February 8, 2005, the Tribunal issued its decision on jurisdiction.

The Tribunal found that it had jurisdiction under Article 26 of the ECT. It

held that there was an investment, made by an investor in Bulgaria, in the

sense of Article 26, and that an allegation of a violation of the ECT was sufficient

at the jurisdictional stage, with no need to positively prove actual violations.

The Tribunal recalled that under Article 26(3)(a) of the ECT a

Contracting Party had given unconditional consent to arbitration, and held

that objections based on Article 17 of the ECT could not interfere with the

Tribunal’s jurisdiction as the right of an ECT Contracting Party to deny Part

III advantages to an investor relates to the merits of the case. The Tribunal further

considered that the exercise of this right should have no retrospective

effect. Turning to the conditions for exercise of the Contracting Pary’s right

under ECT Article 17(1), the Tribunal found that the Claimant had no substantial

business activities in Cyprus. The Tribunal nevertheless decided that

the determination of whether the Claimant is owned or controlled by nationals

of an ECT Contracting State was premature at this stage. It should be highlighted

that the factual background of the case is complex and that the

Respondent has raised major objections relating to the Claimant’s ultimate

ownership and control.

The Tribunal further concluded that the MFN provision of the BIT

could not be interpreted as providing the Respondent’s consent to submitting

a dispute under the BIT to ICSID arbitration, since an agreement to arbitrate

“should be clear and unambiguous” (para. 198). The Tribunal departed from

recent decisions rendered in Emilio Agustín Maffezini v. Kingdom of Spain

260 ICSID REVIEW—FOREIGN INVESTMENT LAW JOURNAL

(ICSID Case No. ARB/97/7)[7] and in Siemens A.G. v. Argentine Republic

(ICSID Case No. ARB/02/8)[8] The Tribunal has concluded that the principle

was that “an MFN provision in a basic treaty does not incorporate by reference

dispute settlement provisions in whole or in part set forth in another treaty,

unless the MFN provision in the basic treaty leaves no doubt that the

Contracting Parties intended to incorporate them” (para. 223).

Accordingly, the arbitration proceeding has now moved to the merits

phase on the basis of Article 26 of the ECT and within the limits set by the