Protecting the government in investor-state dispute

by: Panji Prasetyo

The Indonesian government is currently reviewing all its international investment treaties after previously having terminated 20 bilateral investment treaties (BIT). A BIT is considered as an entry point for foreign investors to submit a claim against the Indonesian government seeking resolution before the International Centre for Settlement of Investment Disputes (ICSID).

It has also been suggested that in addition to the termination of BITs, an inclusion of a “prior-consent” requirement in every investment agreement would protect the sovereignty of Indonesia. By including prior consent, any foreign investor who intends to sue the government before the ICSID forum will have to first obtain the consent of the Indonesian government.

The author is of the view that the aforesaid circumstances have raised two important questions:

First, whether the international investment treaties genuinely pose a threat to Indonesia’s sovereignty?

Second, what are the necessary actions to be pursued by the government to minimize claims initiated by foreign investors?

Indonesia ratified the ICSID convention in 1968. Moreover, Indonesia has also entered into 32 active BITs with other states. Besides bilateral agreements, Indonesia has ratified multilateral investment agreements, among others, the ASEAN Comprehensive Investment Agreement.

Consequently, there is a possibility that investment disputes between the government and foreign investors will continue to be settled before an international forum, especially the ICSID forum as one of the most competent forums to settle investment disputes.

Article 25 of the ICSID convention provides the following conditions for a dispute to be settled through the ICSID forum: 1 ) the existence of an investment; 2 ) the disputing party shall be a state that has ratified the ICSID convention and an investor from a member state; 3 ) a written consent to settle the dispute before the ICSID forum.

One of the important conditions as set out in Article 25 is written consent. Article 25 does not further explain the form of written consent.

Nevertheless, based on the jurisprudence established by the ICSID forum, there are four forms of recognized written consent: (1) A direct agreement to settle a dispute through the ICSID forum between the state and foreign investor; (2) national law of the host-investment state in settling investment dispute; (3) a BIT and 4 ) ratification of a multilateral treaty.

Accordingly, the initiation of a dispute resolution mechanism by foreign investors against the Indonesia government before the ICSID forum is not necessarily under the umbrella of a BIT. The termination of a BIT does not therefore automatically release the Indonesia government from foreign investors seeking redress concerning investment disputes.

Article 26 of the ICSID convention also stipulates protection for the contracting state to the convention of its national dispute settlement mechanism prior to an investment dispute being put before an international forum by a foreign investor.

It grants rights to the contracting state to utilize another type of dispute settlement or exhaustion of local remedies prior to initiating the ICSID process.

Hence, instead of being a threat against Indonesia’s sovereignty, international investment agreements between Indonesia and other states can protect the interests of the government by allowing for the inclusion of additional conditions before an investment dispute is handled by the ICSID forum.

Furthermore, there has been a growing assumption in the mass media that the prior-consent requirement will filter the foreign investor’s lawsuit against the host-state.

However, this assumption is not entirely correct. Article 26 of the ICSID convention entitles contracting states to include an additional prerequisite for the settlement of an investment dispute.

One of the additional prerequisites mentioned by Article 26 is that the contracting state may exhaust available national dispute settlement mechanisms before a dispute is brought before the ICSID forum (exhaustion of local remedies).

Nonetheless, it is important to underline that “exhaustion” mentioned in Article 26 does not include the granting of special rights to one of the disputing parties in limiting another party’s rights to bring the dispute before the ICSID.

The inclusion of prior-consent will not automatically disqualify dispute resolution cases brought as a result of local government policies.

The application of regional autonomy within Indonesia’s governmental system has resulted in local government being able to issue independent policies, with the central government often not being involved in the policy-making process.

However, Article 25 of the convention does not differentiate between central and local government.

Hence, if the policy of the regional government is being disputed by the foreign investor, the central government shall remain fully responsible, as the consequent of the government of Indonesia being the contracting state to the convention.

If a contracting state to the convention has provided written consent to settle the investment dispute before the ICSID forum, the inclusion of prior-consent may reflect inconsistency and be presumed as not acting in good faith in performing its obligation as the contracting state to the ICSID convention.

Further, such inclusion can be read as a violation of the Pacta Sunt Servanda principle, as detailed in Article 26 of the Vienna Convention on the Law of Treaties 1969 — of which Indonesia is a contracting state — therefore an international agreement should be performed in good faith.

Hence, some actions that government can pursue to minimize foreign investors initiating a dispute resolution process include: (1) to revise all current international investment agreements by including a requirement to exhaust local remedies prior to a settlement of dispute invoking the ICSID forum; (2) improvement on regional and central government coordination in the formulation of foreign capital investment policy, regulation and cooperation agreements, at least and especially on formulation of provisions with respect to deliverables, events of default, termination clauses, compensation and remedies, governing law and choice of dispute resolution forum.

 

This article appears on “The Jakarta Post” newspaper – 27 June 2016