ICSID jurisdiction over international mass investment arbitrations: due process and default rules.

• Author: McCarl, Ryan
• Position: International Centre for Settlement of Investment Disputes

In Abaclat and Others v. The Argentine Republic (formerly Giovanna a Beccara and Others v. The Argentine Republic), approximately 60,000 Italian investors are attempting to convince a panel of arbitrators at the International Centre for the Settlement of Investment Disputes (ICSID) that Argentina's default on sovereign bonds held by the investors constitutes a violation of the Argentina-Italy Bilateral Investment Treaty (BIT). The Abaclat case is significant because it is the first mass investment arbitration to be heard before ICSID. The decision asserting jurisdiction over the mass claim has attracted considerable commentary because of its implications for sovereign debt restructuring, the procedure by which a defaulting government offers to exchange new bonds of reduced value for outstanding bonds that it cannot repay.

The prominence of the due process discussions in the Abaclat opinions set the stage for an array of legal commentary about the case that focused on the due process issue. But due process is an unhelpful way to conceptualize the issues raised by mass investment arbitrations. Whether mass arbitrations are permissible depends not on parties' background due process rights, but rather on the scope of parties ' consent to arbitrate. This Article challenges the framing of the issue as one of due process. It argues, instead, that the question is best understood as an issue of treaty and contract interpretation, and of the selection of an appropriate default rule where the consent-granting clause in an investment contract (such as a bond) is ambiguous on the issue of whether parties ' consent to arbitrate extends to mass claims.

1. INTRODUCTION II. BACKGROUND III. ICSID AND MASS ARBITRATION: THE CASE OF ABACLAT IV. DUE PROCESS CONCERNS ABOUT MASS INVESTMENT ARBITRATIONS AT ICSID A. Due Process Concerns in Abaclat B. Due Process Concerns as a Red Herring C. Selecting a Default Rule for Consent to Mass Claims Arbitration V. CONCLUSION I. INTRODUCTION

   In Abaclat and Others v. The Argentine Republic (formerly Giovanna a Beccara and Others v. The Argentine Republic), (1) approximately 60,000 Italian investors are attempting to convince a panel of arbitrators at the International Centre for the Settlement of Investment Disputes (ICSID) that Argentina's default on sovereign bonds held by the investors violated the Argentina-Italy Bilateral Investment Treaty (BIT). (2)

   ICSID provides an arbitration forum for investment disputes between nation-states and foreign investors. (3) If the requirements for jurisdiction are met, (4) ICSID has jurisdiction over investment disputes arising out of BITs entered into by nation-states that are signatories to the ICSID Convention. (5)

   The Abaclat case is significant because it is the first mass investment arbitration to be heard before ICSID. (6) The decision has attracted considerable commentary because of its implications for sovereign debt restructuring, the procedure by which a defaulting government offers to exchange new bonds of reduced value for outstanding bonds that it cannot repay. (7) For sovereign debt restructuring to succeed, defaulting governments must be able to credibly threaten that "holdout" creditors who decline to participate in the exchange offer will receive nothing. (8) The Abaclat decision may potentially create a new method for creditors holding defaulted sovereign debt to attempt to collect the face value of their bonds, creating an additional incentive for high-risk investors (such as so-called "vulture funds" (9)) to refuse to participate in sovereign debt restructurings. (10)

   Class arbitration has played an increasingly important role in investment dispute resolution in recent decades. The aggregation of claims in a single arbitral proceeding saves individual claimants the costs of proving each element of their claim one-by-one, (11) but potentially multiplies the liability faced by respondents. (12) Mass arbitrations, like class action lawsuits, preclude detailed investigation into the unique facts underlying each individual claim. (13)

   In Abaclat, Argentina argued that the mass claim format violated Argentina's "defense rights" (14) and due process rights, (15) and that allowing the case to proceed without Argentina's specific consent would be "a breach of the ICSID Convention's 'outer limits.'" (16) In a landmark decision, the panel--over a heated dissent--rejected Argentina's arguments and determined that the ICSID had Jurisdiction over the arbitration and that the dispute was properly admissible under the ICSID framework. (17)

   The prominence of the due process discussion in the Abaclat opinions set the stage for an array of legal commentary about the case that focused on the due process issue. (18) But due process is an unhelpful way to conceptualize the issues raised by mass investment arbitrations. Whether mass arbitrations are permissible depends not on parties' background due process rights, but rather on the scope of parties' consent to arbitrate. The question is whether a blanket consent to arbitrate that does not specifically mention mass claims suffices to confer upon the tribunal the power to fashion a procedure to hear mass claims in a single arbitration. This is ultimately a question of treaty interpretation and the selection of an appropriate default rule, not a question of due process.

   This Article begins by providing background on the ICSID generally and the Abaclat arbitration in particular. Next, it considers the due process concerns raised about the mass claim format in the Abaclat opinions. Finally, the Article challenges the framing of the issue of whether ICSID can hear mass claims as an issue of due process. It argues, instead, that the question is best understood as an issue of treaty and contract interpretation and of the selection of an appropriate default rule where the consent-granting clause in an investment contract--such as a bond--is ambiguous on the issue of whether the consent to arbitrate extends to mass claims.

2. Background

   The International Convention for the Settlement of Investment Disputes (ICSID), the arbitration arm of the World Bank, was established by the signing of the ICSID Convention (19) in 1966. (20) Today, 147 states have ratified the Convention and 158 states have signed it. (21) ICSID tribunals are convened to arbitrate investment disputes between "Contracting States and nationals of other Contracting States." (22)

   Article 25 of the ICSID Convention gives ICSID jurisdiction over

   any legal dispute arising directly out of an investment, between a Contracting State ... and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. Where the parties have given their consent, no party may withdraw its consent unilaterally. (23) Under Article 25, two layers of consent are required for an ICSID tribunal to hear a dispute: the parties must be signatories to the ICSID Convention as either Contracting States or nationals of a Contracting State, and the parties must specifically consent to jurisdiction over disputes arising out of a particular investment or investment relationship. (24) This requisite "secondary consent" to arbitrate is often, as in Abaclat, derived from a bilateral investment treaty (BIT) to which the parties, or their states, are signatories. (25) BITs "grant foreign investors certain treaty protections as to the behavior of the host country. For example, the host country commits not to expropriate 'investments.'" (26)

   A BIT is seen as providing "blanket consent" to arbitrate, so signatory countries need not include specific arbitration clauses in individual investment contracts governed by the BIT. (27) Arbitration clauses in BITS often provide for ICSID arbitration. (28) For example, the Argentina-Italy BIT that provides the secondary consent to arbitrate in Abaclat states that "each Contracting Party grants its anticipated and irrevocable consent that any dispute may be subject to arbitration." (29)

   The proliferation of BITs illustrates the rising importance of international investment treaty arbitration. This is a recent development in international law, (30) and it is an especially powerful tool for investors. International arbitrators, such as ICSID panels, "have comprehensive jurisdiction to review sovereign acts of the state by applying broadly worded standards of review." (31) Their awards are "more widely enforceable" than decisions of national courts, (32) and they are not bound by local sovereign immunity laws."

   The concentration of such power in the hands of ICSID arbitrators has raised concerns that ICSID arbitration could "shift bargaining power" to holdout creditors and away from "the country in default." (34) Other commentators have suggested that international investment arbitration is politically suspect, as it is sometimes seen as a threat to state sovereignty (35) and as "an anomalous and exceptionally potent system that protects one class of individuals by constraining the governments that continue to represent everyone else." (36) Indeed, one developing country, Bolivia, has denounced its membership in the ICSID Convention, perhaps because of such concerns. (37)

3. ICSID AND MASS ARBITRATION: THE CASE OF ABACLAT

   Abaclat and Others v. The Argentine Republic is an ongoing arbitration before ICSID. Because it is the first mass claim brought before ICSID, (38) the Abaclat case raises highly significant issues about whether ICSID can (and should) hear mass claims. In the ICSID context, "mass claims" refers to claims brought by a very high number of investors against a state.

   In Abaclat, around sixty thousand Italian investors (39) are attempting to convince the ICSID tribunal that Argentina's nonpayment of the investors' bonds (since Argentina's 2001 default) is a violation of the Argentina-Italy BIT. As of this writing, the tribunal has ruled on jurisdiction and admissibility, but has not...