Counterclaims and ICSID: Are counterclaims by States against investors increasing at ICSID?

The number of counterclaims filed by States in ICSID (International Centre for Settlement of Investment Disputes) treaty proceedings has increased markedly in the last five years. In this insight we explore what this could mean for international investors.

In 2022, a claim involving an investor and the United Arab Emirates settled at ICSID, the world’s leading institution for international investment dispute resolution. The investor even agreed to pay the arbitration costs and tribunal fees.

To the untrained eye, a settlement between Swedish-Iranian businessman Amir Masood Taheri and the UAE may not be much to call home about. For international investors and other stakeholders, however, it provides yet another example of a slow-moving, but gradually increasing, proactivity by States in asserting their rights under international law at ICSID.

What is ICSID?

ICSID (International Centre for Settlement of Investment Disputes) was established in 1996 by the Convention on the Settlement of Investment Disputes between States and nationals of other States. This is also referred to as ICSID Convention.

It promotes international investment by providing States and investors with an independent and depoliticised dispute resolution service via conciliation, mediation, arbitration, or fact-finding.

ICSID is now well-established as a forum for investment disputes, having administered around 900 cases since its inception. As such, many bilateral investment treaties, laws, and contracts now stipulate ICSID – and, specifically, ICSID arbitration – as their preferred dispute resolution method.

Making claims at ICSID

While both States and investors can bring claims to ICSID, it is the latter who is usually the claimant in a dispute. Historically, most claims were made by investors against States considered to be developing nations, although more investors from emerging economies are now making claims against developed States as accessibility to ICSID arbitration has improved.

Claims by States, however, are rare. Some industry commentators have attributed this to the pro-investor mentality that influences many investment treaties, possibly to curtail the perceived power imbalance between host State and investor. Counterclaims by States are even more infrequent, accounting for less than 5% of ICSID proceedings, according to a study in the Nijhoff International Investment Law Series. In fact, prior to 2009 only 20 States had brought counterclaims against investors, not all of which were heard.

Why were counterclaims by States at ICSID uncommon?

Under Article 46 of ICSID Convention, a State can file a counterclaim “provided that [it is] within the scope of the consent of the parties and [is] otherwise within the jurisdiction of the Centre.”

This can be problematic, particularly where the original claim is based on an investment treaty, and not a contract, as many treaties historically have not contained obligations to which an investor can be held. As such, any claims or counterclaims made by States are more likely to be heard in that State’s local courts, than they are at ICSID.

There have, however, been several notable examples of successful counterclaims by a State against an investor, including the recent ICSID case of Gardabani Holdings B.V. and Silk Road Holdings B.V. v Georgia.

In this case, the claimants were two foreign investors in Georgia’s electricity sector. They alleged that the respondent, the Georgian Government, had breached their investment agreements by adjusting tariffs and reinterpreting certain provisions of the agreements.

According to the claimants, this conduct violated their right to fair and equitable treatment, impaired their investments, and breached the umbrella clause of the bilateral investment treaty between Georgia and their home country.

Georgia then filed a counterclaim against the claimants, seeking 50% of a target investment allowance (TIA) that the claimants’ company had accumulated between 2013 and 2015. ICSID Tribunal determined, not only that it had jurisdiction over the counterclaim, but that Georgia was also entitled to 50% of the TIA.

This case demonstrates the increasing willingness of States to bring counterclaims at ICSID, particularly where said counterclaims are used to defend their rights and hold investors to account. It also illustrates that properly substantiated counterclaims can lead to significant award for states, even if an investor succeeds on some of its claims.

Why are counterclaims (slowly) increasing?

Despite the challenges, the last five years have seen the largest share of recorded counterclaims by States. There are several reasons for this:

• Greater recognition of ICSID as a suitable forum that provides better guarantees of neutrality and global enforcement than does a State’s local courts.
• The trend towards more developed States as defendant in the original claim. With greater financial and legal resource at their disposal, developed States are more likely to launch counterclaims than States from emerging economies.
• More obligations on investors in bilateral investment treaties. This makes it easier for States to demonstrate that the counterclaim falls within ICSID’s scope.
• An increase in the number of unwarranted claims, due in part to greater ICSID accessibility. Third-party funding and specialised no-win-no-fee legal professionals have helped to level the playing field, but they have also provided greater means through which investors can launch unfounded legal claims.
• Improved financial viability of counterclaiming for States, following the introduction of a new rule in 2022 empowering tribunals to award security.

What does this mean for investors?

Whether entering contract or treaty-based investments with host States, investors must ensure that they carefully review their rights and obligations in tandem with legal advice before signing on the dotted line. This includes understanding how disputes will be resolved, whether that be via local courts or an institution such as ICSID.

Avoiding a dispute is always preferable. If an investor does need to make a claim, however, it is important to consult legal professionals who specialise in investment disputes and ICSID arbitration from the outset. This will ensure that both the costs and risks of potential counterclaims are managed – and even avoided – if possible.

With the likelihood of counterclaims by States increasing, investors must ensure that they are fully prepared for, and understand, both their rights and obligations in the complex world of international investment.