The Washington Convention on the Settlement of Investment Disputes was signed on 18. 03. 1965 and entered into force on 14. 10. 1966. Initially, 46 countries were members of the International Bank for Reconstruction and Development, a special UN agency. The Convention provides legal mechanisms for the settlement of transnational investment disputes and establishes a special center for these purposes. It is one of the most significant sources of investment law.
History of the Washington Convention
Globalization of world trade in the XX century. accelerated the development of international investment relations. The reason for the ratification of the Washington Convention of 1965 was the lack of existing international mechanisms for the protection of foreign investment. Therefore, the purpose of the Washington Convention was the creation of international arbitration, which will specialize in the consideration of investment disputes. Before the 1965 Washington Convention, history knew only 2 ways to protect the rights of foreign investors.
The first way is to file a lawsuit with the court of the state that accepts the investment. This method was ineffective, since in most cases the courts refused to protect the interests of foreign investors. The second way is to influence the host state through diplomatic techniques. Firstly, in this case, the investor needed to seek help from his state, and secondly, this method worked only in case of serious violations of rights (for example, nationalization of assets).
Significance of the Washington Convention
Since investment disputes between the state and a foreign citizen or legal entity are private legal, they were initially considered in the court of the country in whose territory the investor placed his capital. This did not provide adequate protection for investor rights. For the first time such disputes were removed from the national jurisdiction of the host state precisely in the Washington Convention of 1965. The consequence of its adoption was that international arbitration became the main means of resolving transnational investment disputes. After the appearance of the first international arbitration, the development of investment relations continued in the following areas:
- unification of the arbitration procedure in the consideration of international disputes in the courts of various states;
- the emergence of a legal basis for the enforcement of decisions of foreign arbitration in another state;
- the creation of international arbitration centers to resolve investment disputes.
Contents of the Convention
The main provisions of the Washington Convention of 1965 can be divided into 2 groups. Chapter I contains rules on the International Center for the Settlement of Investment Disputes (MGUIS). Chapter II outlines its competence - disputes that the Center can consider. The next group of norms is the provisions establishing the procedure for the resolution of investment disputes. Chapter III describes the conciliation procedure, and chapter IV describes the arbitration. In total, the Convention contains 10 chapters. In addition to the above, the document contains the following chapters:
- challenge of mediators or arbitrators;
- costs;
- place of the dispute;
- disputes between states;
- amendments
- final provisions.
International arbitration
The 1965 Washington Convention is the document establishing the International Center for the Settlement of Investment Disputes (ICSID). It belongs to the group of organizations of the World Bank, which, in turn, is a specialized agency of the UN. ICSID resolves transnational disputes between states and citizens or organizations. The Convention provides for two forms of the Center for Dispute Resolution: arbitration and conciliation proceedings.
In order for the dispute to be submitted to ICSID, it must meet the following conditions:
- directly related to investments;
- parties to a dispute - a state party to the Convention and a citizen or organization of another state party to the Convention;
- the parties must enter into a written agreement to conduct a conciliation or arbitration procedure.
A party that has agreed to the dispute of the ICSID cannot unilaterally reverse this decision.
Conciliation procedure
To carry out the reconciliation procedure, a commission is formed from one or an odd number of people called intermediaries. If the disputing parties do not agree on the number of intermediaries, there will be three of them. The commission resolves the dispute in cooperation with the parties. She finds out the circumstances of the dispute and offers the parties the conditions for its resolution. Based on the results of the conciliation procedure, the commission draws up a report that lists all disputed issues and indicates that the parties have reached an agreement. If this does not happen, the commission indicates that the parties have not reached an agreement.
Arbitration
According to the provisions of the Washington Convention, arbitration is also formed from one or an odd number of people. If the parties do not agree on the number of arbitrators, there will be three. Most arbitrators cannot be citizens of a state that is involved in a dispute. The decision is made in accordance with such rules of law, as agreed upon in the agreement. If they did not, then the dispute is considered according to the law of the state party to the dispute, and the applicable rules of international law. The decision on the case is adopted by a majority vote and signed by all arbitrators. The Secretary General of ICSID will then send a copy of the decision to the disputing parties. It is considered to have entered into force from the moment the parties have received it.
ICSID solutions
According to the Washington Convention of 1965, an arbitration decision made in accordance with its rules is binding on the parties. The state must recognize the decision of the ICSID and fulfill the financial obligations that it provides. The strength of the arbitral award is equivalent to a decision of a national court. It is not subject to appeal in national courts.
The Convention establishes the basis for the annulment of an arbitral award. These include:
- Explicit abuse of authority
- corruption of a member of the arbitration tribunal;
- violation of the essential rules of the procedure;
- improper formation of arbitration;
- lack of motivation for the decision.
The decision is canceled by a committee of three people on the list of arbitrators. They are subject to the following requirements:
- must not be members of the arbitration tribunal;
- must have a different citizenship than members of such arbitration;
- cannot be citizens of the state involved in the dispute;
- cannot be included in the list of arbitrators by their state;
- should not be persons who were conciliators in the same dispute.
Additional procedure
Some disputes that do not meet the requirements of the Washington Convention of 05/18/1965 may also be referred to ICSID. In 1979, the Center developed the Rules of the additional procedure. In accordance with them, arbitration may consider the following types of disputes :
- those that are not investment;
- those arising from investment activities, and the state party to the dispute or the state investor is not a party to the Washington Convention.
Decisions made under the Rules of the Supplementary Procedure are enforceable under the rules of the New York Convention of 1958. They do not have the same unconditional force as arbitration decisions made under the rules of the Washington Convention. The national court may refuse to enforce such a decision if it is contrary to the procedural rules or public policy.
Thanks to the additional procedure, states that are not parties to the 1965 Convention can submit disputes to the resolution of the ICSID. For example, Russia did not ratify the 1965 Convention, although it signed it in 1992. Bilateral agreements on the protection of investments, in which the Russian Federation is a party, provide for the possibility of considering a dispute at ICSID under the rules of the additional procedure.
Common Disputes
In the practice of international arbitration, there are many investment disputes caused by nationalization - the forced seizure of foreign property. Cases of indirect nationalization have spread: freezing accounts, restricting money transfers abroad, etc. Investors turn to arbitration to receive compensation for the seizure of their property.
International practice has developed the following criteria for deciding whether a property of a foreign investor has nationalized in a particular case:
- degree of interference with property rights (to what extent did it affect the investor's economic activity);
- the justification of coercive measures (for example, the protection of public order is a good reason for the seizure of property);
- the extent to which the measure violated the reasonable expectations of the investor (depends on whether the state guaranteed a certain degree of protection to the investor when he placed his investments).
International investment protection
It is generally accepted that at present the international system for protecting foreign investments consists of three elements:
- bilateral agreements between states;
- Seoul Convention Establishing an International Investment Guarantee Agency, 1985;
- The 1965 Washington Convention on the Settlement of Investment Disputes.
This system represents the basis for the development of international investment in individual sectors of the economy. For example, the Energy Charter Treaty, in which the Russian Federation is a party, contains the same mechanisms for protecting the rights of investors and service providers as the Washington Convention. This agreement aims to protect investments in the energy sector of the economy.
Investment protection in Russia
Investment regulation is based on intergovernmental bilateral investment promotion agreements. By concluding such an agreement, the Russian Federation protects the rights of its investors and guarantees the application of the same regime for foreign investments on its territory. As of 2016, Russia has entered into 80 bilateral agreements.
The agreements are concluded on the basis of the Model Agreement approved by the Decree of the Government of the Russian Federation of June 9, 2001 N 456. It provides the following methods for resolving investment disputes:
- conversation;
- appeal to the national court;
- arbitration under the rules of the UNCITRAL rules;
- ICSID review of the Washington Convention;
- consideration in ICSID according to the rules of the Additional Procedure.
In order to attract foreign investment in the Russian Federation, it is necessary to provide investors with more guarantees of legal protection. It is advisable that Russia ratify the Washington Convention of 1965 and provide more opportunities for resolving disputes with investors under the rules of ICSID.