The ICSID Convention enters into force in Iraq

The ICSID Convention entered into force in Iraq on 17 December 2015.  This comes after Iraq signed the ICSID Convention and deposited its instrument of ratification on 17 November 2015 to become the Convention's 160^th signatory State.

In a climate of on-going challenges facing investments into Iraq, this is a significant step forward in the legal context by the Iraqi Federal Government which has been seeking to attract foreign investment to help stabilise, rebuild and diversify the country's economy. Despite the country's significant security challenges in addition to the financial impact of declining world oil prices, Iraq remains an important market for international investment given that it has the world’s fifth largest proven oil reserves and needs reconstruction and infrastructure development on a massive scale.

The immediate impact of this step on the investment climate in Iraq is likely to be relatively limited given the small number of bilateral and multilateral investment treaties to which Iraq is party to and that are currently in force. However, this may signal a shift of approach and appetite as to how quickly Iraq wants to improve its legal framework for investment protection. This step is expected to be followed by the further ratification of bilateral and multilateral investment treaties and international conventions.

The International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) is one of the key instruments of international law that protect and promote foreign investment. The ICSID Convention established the International Centre for Settlement of Investment Disputes (ICSID), an international institution based in Washington DC that administers and provides facilities for the conciliation and arbitration of international investment disputes where one of the parties to the dispute is an ICSID Convention state. Many investment treaties between states, state investment laws and contracts between investors and states provide for arbitration at ICSID.

One of the key features of the ICSID Convention is that it provides for a powerful regime for the enforcement of ICSID arbitral awards. If an ICSID Convention member-State fails to honour an ICSID arbitral award, that State would find itself in breach of its international treaty obligations under the ICSID Convention. In addition, if the State in question is the recipient of any World Bank funding, any failure to comply with an ICSID award may have ramifications for its relationship with the World Bank. Further, the grounds for a member-State to resist enforcement of an ICSID arbitral award under the ICSID Convention are limited.

Iraq's bilateral investment treaty with Japan, which we have reported on previously and which entered into force on 1 February 2014, contains reference to the ICSID convention at Article 17 on the settlement of investment disputes. Now that the ICSID convention is in force between Iraq and Japan, investment disputes under the treaty can be referred to conciliation or arbitration in accordance with the ICSID Convention.

Comment

These are undoubtedly very challenging times for Iraq's economy. An armed conflict continues against Daesh or ISIS which controls a large territory in the country, including several major Iraqi cities. In addition, Iraq's economic potential is heavily based on oil and therefore is significantly constrained by the decline of global oil prices. Iraq was the world's eighth largest producer of total petroleum liquids in 2014 and it has the world's fifth largest proven petroleum reserves. Only a limited number of Iraq's known fields are in development, and Iraq may be one of the few places left where much of its known hydrocarbon resources have not been fully exploited. The development of these resources and the reconstruction of the country will continue to require a huge volume of foreign investment – mainly in the form of contracts with state owned entities. 

In addition, the uncertainty over the legal rights of contractors operating in the semi-autonomous Kurdistan Region of Iraq (KRI) continues to be a challenge for foreign investors. The dispute over the control of hydrocarbons in the KRI is fundamentally a question of Iraqi constitutional law. The KRI Government has for a number of years concluded its own contracts with international oil companies which the Federal Government has refused to recognise. It will be interesting to see how the entry into force of the ICSID Convention will impact the choices of foreign investors contracting with the KRI and the potential use of the ICSID Convention to resolve any investment disputes.

The very significant challenges and uncertainties that cloud the investment climate in Iraq at the moment underline the need for a transparent and supportive legal framework that protects the legal rights of foreign investors in Iraq. The ratification of the ICSID Convention seems to have been a major item on the Federal Government's agenda in delivering on its commitments to improve investment protections. This development is intended to demonstrate the Government's support to the development of the rule of law and its commitment to continue on connecting the Iraqi economy with the global economy. However, at this stage, the ICSID Convention will be of limited practical benefit to foreign investors until Iraq puts into force many more bilateral and multilateral investment treaties.

It is worth noting that Iraq is still not a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the arbitral award enforcement treaty which is widely relied upon by private investors in signatory jurisdictions seeking recourse through commercial arbitration, whether against private companies or state-owned entities. The ratification of the New York Convention would be a significant (and many would say, overdue) step in developing Iraq's framework of legal protection for investments, as it is to be hoped that this will be firmly on the Federal Government's agenda.

For further information, please contact Craig Tevendale, Partner, Craig Shepherd, Partner, Anees Naim, Associate or your usual Herbert Smith Freehills contact.