Establishing ICSID: an idea that was “in the air”

As a young ICSID neophyte, I once asked Aron Broches, the World Bank’s General Counsel from 1959 to 1979, how he had come up with the idea for the Centre. “It was in the air,” he explained.

In the late 1950s and early 1960s, there were indeed a number of proposals circulating for the creation of an international arbitral mechanism for the settlement of investment disputes, either as part of a broader investment protection scheme or as a stand-alone mechanism. I would like briefly to discuss two of the most important of these initiatives—one supported by the Organisation for Economic Co-Operation and Development (OECD), and the other pursued at the United Nations.

They provide, I think, interesting context for considering ICSID’s beginnings and the prophesies, ventured by some of the participants in the drafting of the ICSID Convention, that investment treaties might call for the settlement of investment disputes by ICSID arbitration.

At the OECD, the initiative was of course its Draft Convention on the Protection of Foreign Property, published in 1962. It combined substantive standards of treatment of investment with provisions on the arbitral settlement of disputes, including investor-State disputes. The OECD Draft was based on a Draft Convention on Investments Abroad, commonly called the Abs-Shawcross Draft Convention, after the leaders of the work to produce it, Hermann Abs of Deutsche Bank, and Hartley Shawcross, a former British Attorney General. Adopted in 1959 by the Association for the Promotion and Protection of Private Foreign Investment, the Abs-Shawcross Draft had been introduced into the OECD’s predecessor organization in 1960 by Germany.

In the Abs-Shawcross Draft, the arbitration procedures were purely ad hoc ones, drawn for the most part from the standard arbitration clauses of the World Bank’s loan and guarantee agreements (and hence of proven acceptability to developing countries). As revised in the OECD Draft, the procedures addressed a number of concerns that have a familiar ring today—frivolous claims, multiple claims arising out of the same facts and raising substantially the same issues, security for costs, and interventions in a proceeding by a non-disputing party to the treaty.

Following publication of its Draft, the OECD asked the World Bank if it would take over the project. Through its spokesman, Mr. Broches, the Bank declined to do so, believing it could not bridge the gap between industrial and developing countries on the substantive issues involved and still produce a meaningful text. Eventually reissued by the OECD in 1967, the document never progressed beyond the draft stage, although its substantive provisions inspired those of many bilateral investment treaties (BITs).

Work on what became the seminal Abs-Shawcross Draft Convention of 1959 was given a boost when, in a 1958 speech before the UN Commission for Asia and the Far East, the Prime Minister of what was then Malaya suggested that increased flows of private investment to countries in the region, might be fostered by their conclusion of a convention regulating the treatment of such investment. This was followed, at the end of 1958, by a General Assembly resolution, informally called the “Malayan resolution”, asking the UN Secretary-General to study and report on that and other measures for channelling greater flows of investment to developing countries.

A resulting 1960 report of the Secretary-General emphasised that making international arbitral procedures available for the settlement of investor-State disputes would be central to efforts to encourage more investment in developing countries. Given the difficulty of reaching agreement on a broader investment convention, the report suggested that an independent investment arbitration treaty, setting up an arbitration agency, possibly under UN auspices, might be a better alternative, “at least as an intermediary solution.” The report pointed out that an arbitration treaty might in fact provide wider protection than an investment convention; the arbitration treaty might be made to cover all investment disputes while the protection of the investment convention would normally be limited to rules that the parties had agreed to include in the convention. Another possibility mentioned by the report was that the accumulation of decisions of tribunals constituted under the auspices of the arbitration agency might in effect eventually create the “code” of substantive standards of treatment hoped for from an investment convention.

At the UN, however, the idea met with opposition from Soviet bloc as well as Latin American countries. With its less polarized membership, the World Bank was more readily able to embrace such an initiative. Soon after consultations by Mr. Broches at the UN in 1961, he broached the subject for the first time with the Executive Directors of the Bank. He thereby set in motion the process that culminated, four years later, in the opening of the ICSID Convention for signature.

Mr. Broches’s “vision and genius,” to use Professor Christoph Schreuer’s words, also extended specifically to linking ICSID to BITs. The Centre’s governing body is its Administrative Council, consisting of one representative of each State party to the ICSID Convention. Mr. Broches was elected Secretary-General of ICSID at the inaugural meeting of the Administrative Council in early 1967. In his address to the first annual meeting of the Council, held later in 1967, Mr. Broches raised the question of the settlement of disputes under BITs. There were then only about 70 BITs; and they provided for the settlement of disputes only through State-to-State arbitration. “Now that the facilities provided by the [ICSID] Convention were available, it might be advisable,” Mr. Broches suggested in his 1967 address, “to substitute these procedures, at least on an optional basis, for those provided in these treaties.”

The suggestion was reinforced in 1969, when the Secretariat of the Centre issued a set of model clauses that States might use to provide in BITs for their submission to ICSID of disputes with investors of their treaty partners. The same year saw the conclusion of the first BITs with such clauses. Within a decade, ICSID clauses had become a standard feature of the growing network of BITs.

And the rest, as they say, is history.

These remarks were originally given at the 18th Annual IBA International Arbitration Day, ICSID’s 50th Anniversary: A retrospective and a forecast of the future of investment arbitration, February 2015. © International Bar Association.

Featured image credit: “The World Bank Group headquarters buildings in Washington, D.C.” by AgnosticPreachersKid. CC-BY-SA-3.0 via Wikimedia Commons.