The Looming Crisis at ICSID

This week I am in Dallas, Texas participating in a conference sponsored by the Institute for Transnational Arbitration on the subject of Investment Treaty Arbitration in the 21st Century. Details here. The focus of the conference was on investment arbitration before the International Centre for the Settlement of Investment Disputes (ICSID).

The keynote speaker for the conference was the distinguished arbitrator V.V. (“Johnny”) Veeder. Veeder is not your typical august international arbitrator. Bubbling with energy and wit, Veeder is youthful, irreverent, unusually academic, fascinated with history, and particularly gifted with the well-timed bon mot.

Veeder’s topic was the looming crisis at ICSID. He offered an impassioned plea for the international community to appreciate the importance of investment arbitration and the role of ICSID in that process. He offered by way of illustration the fiasco of the La Brea arbitration of the 1960s between Peru and the Canadian subsidiary of Standard Oil, the International Petroleum Company. That arbitration proved highly controversial in Peru after it was revealed that the public version published by the Peruvian government redacted the final page of the award that included a provision for substantial compensation to the foreign investor. Quite literally, President Fernando Belaúnde cut and pasted the signature page of the award to exclude any reference to compensation. The discovery of this doctoring of the award created a huge scandal in Peru, and according to Veeder was instrumental in the downfall of the democratically-elected government in Peru shortly thereafter, providing the necessary excuse for a military coup led by Juan Velasco Alvarado. Veeder suggested that the modern history of Peru has been dramatically impacted by the absence of a successful investment arbitration in the 1960s.

He then turned to the current investment arbitration crisis in China. He noted with grave concern the recent news that the Secretary General of the China International Economic and Trade Arbitration Commission (“CIETAC”) has been arrested on a criminal indictment in China on charges of disloyalty to the state. The charges were brought by the Chinese government following Dr. Wang Sengchang’s role as an arbitrator in two arbitrations in Stockholm between China and Pepsico that resulted in awards adverse to China. Veeder stated that it would strike a terrible blow to arbitration everywhere if it were established Dr. Wang was subject to criminal prosecution in China for serving as an international arbitrator and rendering an award that was adverse to China.

Veeder then turned to the looming crisis at ICSID. “ICSID matters, and its continued existence and high quality are in jeopardy.” He expressed fears that ICSID appears to be under threat from within. He noted that the two most senior officers at ICSID have recently departed, that the World Bank is slashing ICSID’s budget, and that the current ICSID facilities are woefully inadequate for their current mandate. Given that there are literally thousands of ICSID clauses in investment contracts, he argued that it is “unthinkable and utterly wrong” for the World Bank to further degrade ICSID’s services. He then suggested that consumers of ICSID’s services should come to its assistance. Although vague in details, he proposed an ICSID Users Committee to serve in an advisory role to assist ICSID as it seeks to service the dispute resolution needs of the international investment community. “The brutal facts are that it takes decades to build up an institution, but institutions are often brittle and fragile.” He warned that if steps are not taken, the ICSID we currently know may no longer exist in a few years.

Although Veeder spoke indirectly about the precise threat that is putting ICSID in jeopardy, informed sources indicated that his references relate to recent moves by World Bank President Paul Wolfowitz to dramatically cut the World Bank’s budget, including ICSID’s budget. These cuts are coming at a time when ICSID is busier than ever, and at a time when literally thousands of contracts and hundreds of bilateral investment treaties reflect the settled expectation that ICSID will continue to serve the international community successfully.