Counterclaims at ICSID: A Rising Trend?

By Noor Kadhim, Consultant to Gateley. 

The last five years have seen a marked increase in the number of counterclaims filed by States in bilateral investment treaty (BIT) proceedings. Could this be a sign that States are becoming pro-active in the assertion of their rights under international investment law?

Investment claims against States under international treaties, national laws or contracts were relatively uncommon at the inception of the Washington Convention of 1965 (the ICSID Convention or Convention). On average, only one to two claims were filed annually between the late 1950s and the late 1990s. Since the 1990s, however, claims filed under the ICSID Convention or the Additional Facility Rules (which cover certain proceedings outside the Convention’s scope) have become more prevalent, with ICSID now recording at least ten times that amount. This rose to 56 cases filed in 2018.

The right to introduce ‘ancillary claims’, which includes counterclaims, has also been available at ICSID in Article 46 of the Convention, as well as in certain treaties, for over half a century. Curiously, though, States have rarely used it, with more than 95 per cent of ICSID treaty proceedings not involving counterclaims [1]. Until 2009, only around 20 States had brought counterclaims at ICSID, although, the last five years have witnessed the largest share of those recorded counterclaims. Are the sands (slowly) shifting then?

Several recent cases highlight increasing confidence by States in challenging, if not counterclaiming in the course of, investment claims. A notable ICSID case that settled in 2022 was that of Amir Masood Taheri v. United Arab Emirates [2]. What was most interesting about this case was not that it was against the UAE, which is an uncommon respondent in investment treaty arbitration. Nor was it because a funder was involved, whose identity was ordered to be disclosed by the Tribunal. Rather, it was that the Claimant had to go home with its tail between its legs after the Respondent State alleged that the Claimant’s evidential documents were inauthentic or even fabricated.

It was perhaps no surprise that the case promptly settled after the UAE served its Counter Memorial. The Claimant agreed to pay for the costs of the arbitration and the Tribunal’s fees incurred to the date of settlement.

The question one might ask is: what would happen if a State rejected the settlement offer? For example, how likely would the success of a State’s counterclaim against a claimant investor be, particularly in circumstances where the investor has acted in bad faith or breached the investment contract with the State, thus causing the State to have suffered economic loss? Otherwise put, could the State have asked for compensation for monetary, moral, or even reputational loss(es) suffered at the hands of an investor that either should not have advanced the investment treaty claim at all or that acted inappropriately while carrying out its protected investment?

Since the introduction of Article 46 of the ICSID Convention in 1965, it has been possible for a host State (that is, the country in which an investment was made) to file a counterclaim, but only in an ICSID arbitration. Article 46 provides:

“Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.” [3]

In addition, the new Rule 53 in the 2022 ICSID Rules empowers tribunals to award security in relation to both claims and counterclaims. This is particularly relevant for claims made by States, as the investor is more usually the impecunious party.

Although earlier tribunals recognised the theoretical possibility of making counterclaims, such as in Saluka Investments B.V. v. Czech Republic [4], it would be another 50 years before the tool was actually utilised. To this author’s knowledge, the first counterclaims were not deployed by States until around a decade ago, such as in the cases of Spyridon Roussalis v. Romania [5], Goetz v. Burundi [6], and Urbaser v Argentina [7], which considered counterclaims in the context of human rights.

As noted, the greatest number of recorded counterclaims belong to the last five years. This may be because States have become more emboldened and alive to the need to address the allegation that the ICSID Convention is unfairly weighted in favour of investors. Indeed, critics of ICSID say it was initially conceived as a post-Colonialist solution for businesspeople from developed markets whose investments were expropriated or unfairly treated by (predominantly) emerging economy States.

The situation has now changed, with more developed States facing ICSID claims. This has contributed to levelling the playing field a bit more, but it has also put the legal teams of more economically developed jurisdictions on higher alert.

Tribunals’ increased flexibility regarding counterclaims in investment cases may also be due to the increased accessibility of ICSID arbitration The use of third-party funding is increasing, as is the number of law firms specialised in the field, some of which are prepared to represent investors on a contingency basis. This has led to an exponential rise in treaty arbitrations including, unfortunately, unmeritorious claims against States or claims in which the State might wish to seek recourse against the investor. For the latter, however, the State must establish that the counterclaim falls within the definition of consent, is not disallowed by the treaty or another instrument on which the investor relies, and that it has a sufficient nexus to the facts giving rise to the primary claim. These factors will be easier to establish in contracts that permit recourse to ICSID, as opposed to treaties where investors’ obligations are less defined. In Roussalis, for example, the key question related to the relationship between article 46 ICSID Convention and the specific investment treaty at play.

Nevertheless, there are many factors that demonstrate the value in permitting counterclaims by States, including the promotion of efficiency, the centralisation of inquiry and the avoidance of duplication. Professor Michael Reisman emphasised these in his dissent in the case of Roussalis, which ultimately found that counterclaims were not included in the scope of consent. According to Reisman, these are “the sorts of transaction costs which counterclaim and set-off procedures work to avoid.” Indeed, less than a year after Roussalis, another ICSID tribunal accepted jurisdiction over a counterclaim brought by the Republic of Burundi in the case of Goetz, accepting that the counterclaim was within the scope of consent.

In Urbaser, the Tribunal had a more liberal view. It found it theoretically possible for the State to bring a counterclaim against the investors for breach of international law (in that case, the human right to water). In practice, however, the chance of success for the counterclaim was low, as there was an insufficient link between international law and the primary claim (or the objective of the treaty). In this case, the State’s counterclaim would have been more successful if it had been introduced under Article 46 and concerned an investor’s breach of a contract, a defined obligation, or domestic regulations or laws. Public international law is not included here, as individuals are not strictly the subjects of international law.

Despite these challenges, there is no denying that opportunities for States to bring counterclaims exist. For the avoidance of doubt, a handful of more recently drafted BITs now give investors obligations, as well as rights. These include the Morocco Nigeria BIT, and the Netherlands Model BIT. The Morocco-Nigeria BIT is particularly notable. Although it is not unique in referring to sustainable development goals (it is one of 60 to do so since the adoption of the Sustainable Development Goals (‘SDGs’) by the U.N. General Assembly in 2015), it incorporates sustainable development into its substantive provisions, such as on the right to regulate, the definition of investment, and the Preamble.

Returning to the UAE and its agreed settlement with Mr Taheri, it may well have been within the scope of the State’s rights not to accept a settlement but to introduce a counterclaim if it suffered monetary loss by reason of the investor’s alleged fabrication of documents. After all, a fraud is no less of a fraud and a breach is no less of a breach when committed against a State in the context of an investment.

Perhaps there is, therefore, a useful lesson to be taken from Mr Taheri’s matter, as well as the gently rising trend in counterclaims at ICSID. It may be time for States to re-assert their rights in investment treaty arbitration and finally deploy this important tool in the ICSID arsenal to its fullest potential.

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[1] Jose Antonio Rivas, ICSID Treaty Counterclaims: Case Law and Treaty Evolution, Chapter 34, Dispute Settlement System, Journeys for the 21st Century (Nijhoff International Investment Law Series, BRILL (Vol 4)).

[2] ICSID Case No. ARB/21/19.

[3] It is notable that the two conditions for admissibility of a counterclaim are prima facie similar to those in article 80(1) ICJ Rules of Court. The drafters of the ^ICSID Convention apparently drew inspiration from the various permutations of the PCIJ and ICJ rules (see Counterclaims in International Law, by Michael Waibel* Jake W. Rylatt (10.2139/ssrn.2511847; JO  - SSRN Electronic Journal).