Annulment Proceedings under the ICSID Arbitration Rules | Law Optional Notes for UPSC PDF Download

Introduction

• Annulment proceedings can be initiated by either party subsequent to the issuance of the award. The primary outcome of such proceedings is the potential annulment of the award entirely or in part. 
• Historically, investor-state arbitration lacked an appeals mechanism; however, contemporary treaty practices are evolving to address this gap.

Purpose of Annulment

• The fundamental aim of annulment is to uphold procedural justice within the arbitration process, emphasizing the integrity, propriety, and fairness of the proceedings leading to the award. 
• Notably, annulment committees are not tasked with scrutinizing the substantive correctness of awards akin to an appellate body.

Balancing Objectives

• A pivotal challenge in annulment proceedings lies in reconciling the pursuit of procedural justice with the principle of finality associated with awards. 
• Committees, like the Postova banka v. Greece Committee in 2016, underscore the necessity of striking a balance between these two objectives, underscoring the exceptional nature of annulment as a remedy with a stringent threshold.

Grounds for Annulment

• The incorrect constitution of the tribunal
• Evident abuse of authority
• Allegations of corruption involving a tribunal member
• Significant deviation from a fundamental procedural rule
• Failure to articulate the rationale underpinning the award

When an annulment committee determines that any of these grounds are substantiated, it possesses the authority to annul the award wholly or partially.

The Three Main Grounds

Manifest Excess of Power

• The concept of manifest excess of power raises two fundamental questions: what constitutes an excess of power, and when can such an excess be considered manifest?
• The practices of annulment committees shed light on these inquiries. These committees have determined that excess of power typically pertains to issues of jurisdiction and applicable law, as these factors are crucial components of the parties' consent to arbitration.
• Regarding jurisdiction, excess of power can arise from a tribunal's failure to exercise its jurisdiction or from exceeding the jurisdiction granted to it, as outlined in Article 25 of the ICSID Convention and the parties' arbitration agreement. Similarly, with applicable law, failure to apply the proper law or the application of an improper law can both be deemed as an excess of power.
• However, if the arbitration tribunal correctly identifies the proper law, endeavors to apply it to the facts, and stays within its limits, then there is no excess of power.
• There is a consensus among annulment committees that the applicable standard for assessing the manifestness of an excess of power is similar for both jurisdictional and applicable law excesses. However, there is no unanimity regarding the specific standard to be applied.
• One approach assesses how readily apparent the excess is, with various formulations such as 'plain on its face,' 'evident,' 'obvious,' 'clear,' or 'easily recognizable.'
• Another approach focuses on the effect of the excess of power, requiring it to be capable of making a difference to the outcome. Some committees see no conflict between these approaches.
• For example, the Committee in Lahoud v. DRC expressed this view in its 2016 decision.

Depature from Fundamental rule of Procedure

• When evaluating departure from a fundamental procedural rule, it's crucial to recognize that not all procedural rules qualify for annulment, nor do all deviations from such rules. Article 52 of the ICSID Convention delineates this aspect.
• To invoke this ground for annulment, two criteria must be satisfied:
  • The rule must be fundamentally essential.
  • The departure must be significant.
• Annulment committees undertake an analysis focusing on these two conditions when assessing whether arbitration tribunals have substantially deviated from a fundamental procedural rule.
• In practice, annulment committees have set a high bar for a procedural rule to be deemed fundamental. They generally consider only those rules of natural justice that ensure the essential fairness of the procedure to be fundamental. For instance, the SAUR v. Argentina annulment Committee reached this conclusion.
• These rules encompass principles such as equal treatment of parties, the right to a fair hearing, the entitlement to an independent and impartial tribunal, handling of evidence, burden of proof, and tribunal deliberations.
• Unlike the determination of the first condition, assessing the seriousness of the departure is a factual evaluation. As highlighted by the Committee in Adem Dogan v. Turkmenistan in 2016, the departure must materially impact the outcome of the award for annulment to be granted. However, gauging the material impact caused by the breach of a fundamental procedural rule is speculative.
• Consequently, committees assert that they can only determine whether the tribunal's adherence to a procedural rule could potentially have influenced the award.
• As demonstrated by the annulment decision in TECO v. Guatemala, committees argue that expecting them to do more would necessitate them to substitute for the arbitration tribunals, which is beyond their mandate.

Failure to State the Reasons for Award

• It is imperative for both the parties involved in a dispute and the public to comprehend the rationale behind a tribunal's decision regarding whether a sovereign act breaches the law.
• Annulment committees often stress that this necessity stems from public policy. For example, the annulment Committee in Tidewater v. Venezuela elucidated that the credibility of the process hinges on its transparency and comprehensibility. Therefore, they have asserted that it is the tribunal's responsibility to elucidate and communicate the factual and legal foundations that underpin their decision-making. As articulated in MINE v. Guinea, the obligation to provide reasons is fulfilled as long as the award delineates the tribunal's progression from point A to point B and eventually to its conclusion, even if it errs in fact or law.
• However, annulment committees refrain from evaluating the correctness or persuasiveness of the reasoning or delving into the quality of the reasons provided.
• Although the ICSID Convention does not precisely define what constitutes a failure to state reasons, annulment committees have undertaken the task of elaborating on this ground. Despite some divergence in their approaches, these committees have identified five scenarios in which this ground is deemed to be met. These include contradictory, frivolous and inadequate, insufficient, implicit, and unintelligible reasons.
• Among these, contradictory reasons serve as the primary basis for committees to conclude that there was a failure to state reasons. However, the bar for such a determination is set exceptionally high.
• All committees concur that contradictory reasons must genuinely cancel each other out, rendering them incapable of coexisting on any reasonable interpretation of the decision. This stringent criterion was articulated by the Committee in Continental Casualty v. Argentina.