A recent investment dispute referred by a consortium of multi-national investors from Jordan and the UAE to the International Centre for Settlement of Investment Disputes (ICSID) in Washington (see Itisaluna Iraq LLC and others v Republic of Iraq) has raised the question of the proper scope of the most favoured nation (MFN) clause contained in article 8 of the OIC Agreement (see Agreement on Promotion and Protection and Guarantee of Investments among Member States of the Islamic Conference), and more specifically whether it allows reliance on ICSID arbitration on the basis of the dispute resolution provision contained in article 17(4) of the Iraq-Japan bilateral investment treaty (BIT).
The OIC Agreement counts among its members the countries of all consortium members. It entered into force with respect to Iraq in mid-2015. As its title suggests, it has for its objective the promotion of foreign direct investment (FDI) as between its member states, incentivising FDI by both natural and legal persons from one member state in another member state, that is, a host state party to the agreement. Under the OIC Agreement, such investments are afforded relevant substantive protections and guarantees, including certain procedural benefits, such as the option to refer to arbitration any disputes that arise from any investments under the agreement. Recourse to arbitration under the OIC Agreement is underdeveloped and as such calls for procedural caution.
Guided by the dearth of arbitral practice under the OIC Agreement, the claimants sought to import into the dispute resolution provision of that agreement, arbitration under the ICSID Convention. In the claimant’s proposition, this could be done by relying on:
- Article 17(2) of the OIC Agreement, pursuant to which a disputing party “has the right to resort to the Arbitration Tribunal for a final decision on the dispute” in the event that conciliation under article 17(1) fails.
- Article 17(4)(a) of the Iran-Japan BIT, which affords a qualifying investor the option to resort to arbitration under the ICSID Convention.
- The MFN clause in article 8(1) of the OIC Agreement, read together with article 17(4)(a) of the Iran-Japan BIT, pursuant to which “[t]he investors of any contracting party shall enjoy, within the context of economic activity in which they have employed their investments in the territories of another contracting party, a treatment not less favourable than the treatment accorded to investors belonging to another State not party to this Agreement, in the context of that activity and in respect of rights and privileges accorded to those investors.”
The claimants’ proposition was evidently based on the presumption that the MFN clause contained in article 8 of the OIC Agreement was sufficiently wide in scope to extend to dispute resolution, that is, to the method of resolving disputes. Apart from the argument that no such presumption existed, the Iraqi government in its capacity as respondent countered that no consent to ICSID arbitration in terms required by article 25(1) of the ICSID Convention, which limits the submission to the ICSID to disputes “which the [disputing] parties […] consent in writing to submit to the Centre”, could be read into the OIC Agreement. Such consent needed to be express and could not simply be inferred from a combined reading of articles 8(1) and 17(2) of the OIC Agreement and article 17(4) of the Iraq-Japan BIT. As a result, the tribunal lacked jurisdiction ratione voluntatis.
Historically speaking, on the basis of the MFN clause in article 8(1) of the OIC Agreement, foreign investors facing difficulties with the default appointment process under article 17(2) of the OIC Agreement have successfully invoked more favourable default appointment regimes provided for in related investment instruments, such as default-appointment through the Permanent Court of Arbitration in The Hague. More specifically, in beIN v Saudi Arabia the foreign investor relied upon the reference to arbitration under the UNCITRAL Rules in the Saudi-Austria BIT in order to refer for the designation of a default-appointing authority to the PCA in the terms of the UNCITRAL Rules. This follows the example set by UAE-registered D.S. Construction FZCO in its proceedings against Libya (see D.S. Construction FZCO v Libya). Further, as the tribunal confirmed in Al-Warraq (see Hesham T. M. Al Warraq v Republic of Indonesia), and of immediate relevance to the instant case, reference to an MFN clause, including that contained in article 8 of the OIC Agreement, may apply both to matters of dispute settlement as well as to substantive treaty guarantees, provided that the two treaties involved deal with the same subject matter, as is the case with the protection of investment treaties.
Irrespective of the foregoing, following a careful examination of the parties’ diverging arguments on the subject, the majority tribunal in Itisaluna (composed of Sir Daniel Bethlehem QC (presiding) and Professor Brigitte Stern (appointed by Iraq)) concluded against the operation of article 8 of the OIC Agreement to facilitate reliance on a more favourable dispute resolution clauses and of ICSID arbitration more specifically borrowed from another treaty, here the Iraq-Japan BIT. According to the majority tribunal, “the scope of the MFN clause [that is, article 8 of the OIC Agreement] as regards the incorporation of ICSID consent [pursuant to article 25(1) of the ICSID Convention] is the unavoidable question in these proceedings” (see Itisaluna, at paragraph 146). In essence, this question the majority tribunal answered in the negative.
In the majority tribunal’s view, article 8 of the OIC Agreement did not allow it to conclude in favour of the existence of a consent in writing to ICSID arbitration of the instant dispute in derivation from article 17(4) of the Iraq-Japan BIT in circumstances in which article 17 of the OIC Agreement did not make any reference to arbitration under the ICSID Convention. In the majority tribunal’s own words, at paragraph 190:
“… it follows from the terms of Article 17(2) of the OIC Agreement, in all of its parts, that it constitutes consent to arbitration in general terms, subject (on the Tribunal’s analysis) on the fulfilment of the condition precedent of prior resort to, and exhaustion of, the conciliation process.”
The majority tribunal further emphasised, at paragraph 191, that:
“… the conclusion that Article 17(2) constitutes consent to arbitration in general terms is precisely that, i.e., this general consent to arbitration does not constitute consent to ICSID arbitration, as required by Article 25(1) of the ICSID Convention.”
In addition, focusing on article 8 of the OIC Agreement and concluding in favour of the tribunal’s want of jurisdiction, the majority tribunal found, at paragraph 217, that:
“… the MFN clause (Article 8(1)) and associated exceptions (notably, Article 8(2)(a) [which prohibits the application of the MFN clause to any better treatment given by a Contracting Party in the case of “[r]ights and privileges given to investors of one contracting party by another contracting party in accordance with an international agreement, law or special preferential arrangement.”) and related provisions (Article 18) of the OIC Agreement [, which provides that OIC Agreement Contracting Parties“may enter into an agreement between them that may provide a treatment which is more preferential that that stipulated in this Agreement.”] establish an MFN framework that is essentially designed to operate as a floor, in the absence of preferential treatment arrangements between OIC Agreement Contracting Parties, rather than as a leveller of principle of wider application.”
In a dissenting opinion, Dr. Wolfgang Peter concluded in favour of the tribunal’s jurisdiction on the basis of the general consent to arbitration contained in article 17 of the OIC Agreement, supplemented by ICSID arbitration through incorporation of article 17 of the Iraq-Japan BIT, by dint of article 8 of the OIC Agreement in satisfaction of article 25(1) of the ICSID Convention. Dr. Peter further opposed the application of the exceptions in article 8(2)(a) of the OIC Agreement as limited to treatment between two contracting parties to the OIC Agreement to the exclusion of Japan (Itisaluna, at paragraph 239). According to Dr. Peter, the MFN clause was ultimately invoked to substitute an efficient arbitration procedure for a defective one (Itisaluna, at paragraph 242).
If anything, the diverging views taken by the majority tribunal and the dissenting arbitrator, read against the background of the Al Warraq tribunal’s penchant in favour of more liberal interpretation of article 8 of the OIC Agreement, demonstrate that there is presently no hard and fast rule of construction of the proper scope of the MFN clause contained in the OIC Agreement. Added to this the absence of any strictly binding precedent in investor-state arbitration, it is probably safe to conclude that for now, the scope of article 8 of the OIC Agreement will remain subject to piecemeal interpretation on a case-by-case basis, depending entirely on the precise factual matrix of each individual case.