As is known, although the disputes between two or more parties are often determined by courts, the parties may transfer the authority to decide on a dispute between them to private persons rather than state courts on the basis of the freedom of will, which is a very basic principle of law. As mentioned in our previous articles, the settlement of this dispute after being examined by private individuals establishes the arbitration procedure.
Due to rapid industrialization and the fact that the country borders are no longer separated by strict rules in the globalized world, the commercial relations between countries and between the persons in those countries and the administrative authorities in other countries have developed and continue to develop. This development, industrialization, and the increase of commercial relations certainly led to the increase of legal disputes and the state courts became inadequate. In addition, prolonged litigations, the insufficiency of judges in the state courts in some matters, and the equality concerns of the parties have led all the actors involved in the dispute to seek an alternative dispute resolution mechanism. As a result, international arbitration institutions such as the International Chamber of Commerce (ICC) and the London Court of International (LCIA) have been established to review and resolve disputes. ICSID (International Center for Settlement of Investment Disputes), which is the subject of this article, is an arbitration institution; however, it is different from other arbitration institutions as it deals with the legal disputes arising between the foreign investor and the country in which the investment is made (host country). The mechanism in question is intended to address the distrust of the local courts of the country invested in by the foreign investor and is a highly sought-after institution in international investment disputes.
2. International Centre for Settlement of Investment Disputes – ICSID
International Centre for Settlement of Investment Disputes (ICSID); along with the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) is one of the 5 associated organizations that make up the World Bank Group. In this context, ICSID was established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force in 1966 intending to resolve international investment disputes and was also approved by Turkey. The purpose of this organization, as its name implies, is the settlement of disputes between a state party to the convention and an investor of the other state party to the convention in accordance with the provisions of the agreement through conciliation and arbitration.
One of the important points to mention regarding ICSID at this point is that since 1978, ICSID has adopted an additional set of rules that will also allow it to examine certain cases between the country and the individual outside the scope of the convention. According to the rules named “Additional Facility Rules – AFR”, in accordance with the decision of the Administrative Council, as of April 10, 2006, within the framework of the AFR, ICSID can play a role in conciliation and arbitration even if the country representing the government or the individual’s nationality is not a party to the convention. 
The ICSID Centre consists of three main administrative divisions: the Administrative Council, the Secretariat, and the Panels; the president of the Administrative Council is also the president of the World Bank. The panels are divided into two groups, the Panel of Conciliators and the Panel of Arbitrators, and when any dispute is referred to the ICSID, the proceedings are also conducted through these panels. It should be noted at this point that the ICSID does not act as an arbitrator or mediator, but allows parties to determine their arbitrators or conciliator. In addition to this point, it should be noted that according to Article 54 of the Convention, all states as a party to the convention – without the condition of being a party to the investment dispute – must accept the binding arbitral award given in accordance with the convention.
Many states around the world are party to the convention. The fact that the number has increased over the past period reveals the importance of ICSID in International Investment Disputes Resolution. Turkey, on the other hand, has transposed this convention by Law No. 3460 dated 27.05.1998 and the settlement of the investment contracts concluded between foreign investors and the Republic of Turkey by ICSID arbitration has been made possible.
In order to apply for ICSID arbitration, certain conditions must be met. These conditions are as follows:
(i) The dispute is between the contracting state or public legal entity of the contracting state and a foreign investor who is a citizen of another contracting state.
It is clear that the most important element of applying for ICSID arbitration is that the actor applying for or the actor to be applied against must be a foreign investor who has foreign capital. The absence of this requirement is unacceptable, as the application has already been introduced by foreign investors to prevent distrust of the local courts of the host state where the investment is made. In this context, if a foreign investor who is a national of a contracting state wishes to choose this path against his or her own state, he or she must make the necessary changes to the company’s partnership structures. It is also a common problem that the foreign investor who initiated the ICSID arbitration proceedings against the contracting state is a dual citizen. The procedure to follow on this matter is regulated under Article 25(2) of the Convention. According to this article, if the investor, who is a citizen of the country where the investment is made, is also a citizen of another contracting state, his or her own citizenship shall be taken as the basis for the host country of the foreign investor, which means that the requirements for ICSID arbitration have not been met.
(ii) A written agreement indicating the will of the parties to the dispute to resolve their disputes through ICSID arbitration
As with all arbitration procedures, ICSID arbitration requires that the parties have made a written agreement to go to ICSID arbitration in the settlement of possible disputes. There is no requirement as to form except that the agreement in question shall be in written form. In practice, the condition regarding a provision included in the scope of the investment agreement is deemed to be fulfilled. This consent of the parties regarding ICSID arbitration cannot be unilaterally reversed.
(iii) The dispute stems from an investment contract concluded between the parties concerned
It should be stated within the scope of the first of these conditions that the word “investment” has not been defined under the Convention. The word has deliberately not been defined and covers many types of investments such as capital investments, contracts of service, and transfers of technology. Although the concept of “investment” is not defined in the convention, the arbitral tribunals have set out some criteria for what should be understood by “investment” over time. The criteria in question are called “Salini criteria” and originate from Salini v. Morocco decision. In order for an activity to be considered an investment according to these criteria, the activity must contribute to the host contracting state, the activity must take place within a certain period of time and the investor must take a certain risk.
4. Arbitration Procedure
As with all arbitration procedures, the ICSID arbitration procedure begins with giving the written notice of the dispute to the Secretariat by the contracting state or foreign investor who is a citizen of another contracting state who wishes to go to trial under this roof. The notification in question must include the subject of dispute, consent for arbitration, and information and documentation regarding the dispute. This transaction is called an arbitration request and a copy of the arbitration request is forwarded to the other party. Upon this process, the application is rejected or accepted according to the evaluation made by the Secretariat. Upon the acceptance of the relevant application, the arbitral tribunal shall be established, and, as a rule, proceedings shall begin at the ICSID centre. Certainly, it is also possible to have proceedings in different places on the joint declarations or agreements of the parties.
In ICSID arbitration, just as in the international commercial arbitration procedure, arbitrators must decide whether or not they are competent to resolve the dispute before them. This is due to the kompetenz-kompetenz principle as stated in our previous articles. During the ICSID arbitration, certainly, it is possible for the parties to determine the procedural rules to be applied during the arbitration. If the rules of procedure are not determined by the parties, the “Arbitration Rules” issued by ICSID will be applied. The same applies to the law applicable to the dispute. In this context, the principle of freedom of will has been fully accepted by ICSID and it is stated in Article 42 of the Convention that the dispute will be resolved within the framework of the legal rules that the parties agree on.
Another important issue regarding ICSID Arbitration is that it is not possible to apply other arbitration rules (e.g. UNCITRAL Arbitration Rules) during ICSID Arbitration. In this context, ICSID has its own rules and applies only these rules to disputes that will be seen under the umbrella of ICSID. Again, and perhaps the most important thing about ICSID is that the decisions issued as a result of ICSID jurisdiction are automatically recognized in comparison with other arbitration decisions and that the decisions can be executed automatically in all member states. As is known, the decisions of arbitrators should, under normal circumstances, undergo a “recognition” procedure in the court of the state in which the decision will be enforced, as required by the 1958 New York Convention. However, ICSID decisions are not subject to such a requirement because they are held above the states and consequently ICSID decisions have consequences like those made in a local court. However, the fact that ICSID decisions are automatically recognized and enforceable in all Member States does not mean that there are no areas where states are inviolable. The issue that should be considered within the scope of immunity is originally due to the principle that one state cannot be tried in the local court of another state. Although the immunity of the States has been open for debate for a long time, it should be noted first that under an arbitration order against a host state, a foreign investor may not confiscate any movable or immovable property owned by the host state. These goods include embassies, state aircraft, bank accounts of embassies, state ships, and all other goods.
The contrary case of the automatic enforceability is regulated under Article 52 of the Convention. According to this article, each party can apply for the annulment of the arbitral award in question, but it should be noted that the said application will still be concluded by an arbitral tribunal established by the arbitrators determined by ICSID. The important point here is that the “annulment” application is quite different from an “appeal” application. Under normal circumstances, the arbitral award resulting from the ICSID arbitration is the final decision, binding and not subject to appeal. Therefore, there is absolutely no legal remedy against the decision of the arbitrator in all material respects. It should be noted at this point that the annulment application is an application that can be used only for reasons related to the execution of the arbitration procedure. According to Article 52 of the Convention, ICSID arbitration is a form of proceeding that is completely separated from the local courts and is therefore completely independent of the law of the place where the arbitration is held or the host contracting state. The reasons for annulment are listed in Article 52; according to that, it is possible to apply for annulment only if the arbitration committee has not been duly established, if the arbitration committee has exceeded its limits of authority or if there is any corruption in the arbitral tribunal. Perhaps the most important aspect to be mentioned about ICSID arbitration is that it is not possible to annul the relevant decision on the basis of “public order”.
Although the disputes between the actors that are parties to an agreement must be decided by the courts as a rule, in accordance with the principle of freedom of will, the parties may decide to settle disputes between them by other alternative means. At this point, perhaps the most important and complex alternative way of dispute resolution is, certainly, the settlement of disputes between states and foreigners investing in these states. Because, as might be expected, the court of any state does not make a decision against its own state. For this reason, the International Centre for Settlement of Investment Disputes was established as an alternative means of dispute resolution in order to enable investors to act confidently and to maintain the principle of equality, and it is aimed to resolve the disputes arising between the member states of the Convention and the investor citizens of the member states in a transparent manner.
Today, many investor-host state disputes are resolved in this way. It is known that the number of disputes brought to ICSID arbitration by 2017 is 597. The majority of the disputes in question consist of the disputes that have emerged since the 2000s due to the developing industry.
As is seen, as investments increase, disputes between investors and states gradually increase as well. In this context, it is imperative that both the member states of the Convention and foreign investors receive legal assistance for the protection of their rights in the following aspects: the regulation of investment agreements with ICSID arbitration clause, the investment process, the resolution of the dispute and the complex procedures before ICSID.
For more information and questions:
Att. Z. Deniz SEZER ([email protected])
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-Hansu Law Office is a law firm serving domestic and foreign clients especially in the field of real estate, corporations, tax, energy, and intellectual property law. This bulletin has been prepared to share developments in the field of law in Turkey. The bulletin should not be considered as a legal opinion or guidance. The opinion of legal counsel should be sought with respect to specific questions and issues.