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Foreign Investors Can Now Access Justice

Foreign Investors Can Now Access Justice

Peter Mwaura *

Daily Nation, Nairobi

1 July 2003

Recently, a central bank revoked the license of a bank owned by a foreign investor. The procedure followed conformed to domestic law to the letter, and it did not amount to a denial of due process. But the investor was dissatisfied. He complained to the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). The Washington-based Centre then established a tribunal to arbitrate. The tribunal said the revocation of the license was contrary to generally accepted banking and regulatory practice. It was against natural justice.

In particular, the tribunal noted, the investor had not been given formal notice that his license would be revoked unless certain demands were met by a certain time. It also noted that the investor had not been asked to attend the meeting at the central bank that considered the revocation. The tribunal further noted that the revocation had been made effective with immediate effect. This, it said, deprived the investor of any opportunity to challenge it in court before it was publicly announced.

However, the tribunal ruled that the decision taken by the central bank was taken in "a context comprised of serious and entirely reasonable misgivings regarding the licencee’s management, its operations, its investments and, ultimately, its soundness as a financial institution." The tribunal also took into account the importance of the particular circumstances under which the dispute had arisen in the first place. It noted that the country involved was "a renascent independent state, coming rapidly to grips with the reality of modern financial, commercial and banking practices and the emergence of state institutions responsible for overseeing and regulating areas of activity perhaps previously unknown."

Thanks to ICSID, investors can now have their day in court. But succeeding is a complex matter, as shown in the case just cited. In the arbitration of investor-state disputes the applicable laws, both domestic and international, often compound a settlement. Typically, the judicial process revolves around whether to go by the law of the host country, that of the home country of the investor, or international law.

Tribunals must decide the dispute before them in accordance with such rules of law as may have been agreed by the parties. If there is no such agreement, then they must decide the dispute in accordance with the rules of the law of the host country and such rules of international law as may be applicable. Typically, too, disputes are heard before three arbitrators, one appointed by each side and the third by mutual agreement. Most of them are jurists.

The Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, which set up ICSID in 1965, provides that the award of the arbitrators shall be binding on the parties. And it is not subject to any appeal. Moreover, each state, whether or not a party to the dispute, is required to enforce the financial obligations imposed by such an award as if it were a final judgment of its own courts.

Arbitration as a method for settling investment disputes is not new. What is new is the proliferation - beginning in the 1990s - of bilateral investment promotion and protection treaties, or BITs. Some 160 countries have concluded one or more BIT. Under BITs, each state undertakes to guarantee investors against unfair or discriminatory treatment, expropriation and currency transfer restrictions. Each state also consents to submit to arbitration under the ICSID Convention disputes arising out of investments made in its territory.

BITs and national investment laws have made it possible for more and more foreign investors to sue states under the ICSID convention, even where cases have been decided domestically. This has expanded the investor’s access to justice and due process. The explosion of investor-state disputes is reflected in the ICSID’s caseload. Today, there 56 cases pending before the Centre, including the Goldenburg scandal-related World Duty Free Company Limited vs Republic of Kenya, in which investor Nasir Ibrahim Ali is seeking $500 million in compensation for loss of his duty-free concessions. The disputes typically concern claims over such things revocation of licenses, alleged expropriations or denials of justice, environmental disputes and privatizations.

To date, 154 countries have signed the ICSID Convention. Kenya, which ratified the convention on February 2, 1967, is among the 46 - out of 54 - African countries that subscribe to the convention. Though ICSID came into existence nearly 40 years ago, it is only in the last few years since the late 1990s that there has been an increase in the number of investor-state disputes referred to the Centre for settlement. In the past, disputes between governments and private foreign investors were mediated or conciliated by the World Bank or the President of the Bank in his personal capacity. ICSID was created in part to relieve the President and the Bank staff the burden of arbitrating such disputes.

About the Author: Mr Mwaura, a former Editor-in-Chief of the Nation, is Deputy Director of the UN Information Centre in Nairobi.