ICSID releases its background paper on annulment: Growth in the number of proceedings with a low annulment rate

On 11 March 2024, the International Centre for Settlement of Investment Disputes (ICSID) published its most recent Background Paper on the annulment remedy under the ICSID Convention (Background Paper). Now, in its third edition and available here, the Background Paper provides a comprehensive assessment of annulment as well as the drafting history behind the annulment provisions, the practical application of the annulment process and trends in annulment over the past fifty years.

Annulment

Provided for in Article 52 of the ICSID Convention, annulment offers the only method for challenging an ICSID award. Article 52 provides five narrowly construed grounds that an applicant can use as a basis for its challenge. These are (i) that the tribunal was not properly constituted; (ii) that the tribunal manifestly exceeded its powers; (iii) that there was corruption on the part of a member of the tribunal; (iv) that there has been a serious departure from a fundamental rule of procedure; and (v) there has been a failure to state reasons for the award without party agreement.

Annulment applications are submitted to an entirely new three-member ad hoc Committee whose mandate is limited to deciding whether the award should be annulled, whether fully, in part, or not at all. That mandate is limited to one or more of the five procedural grounds contained in Article 52(1) and the Committee is unable to deal with any of the substantive elements of the award. A party may request a stay of enforcement of the award pending the Committee's decision on annulment. If the stay of enforcement is granted, the award will not be enforced until the Committee reaches its decision on annulment. The Committee's decision on annulment is not subject to any further annulment proceeding and is regarded as an award for the purposes of recognition and enforcement.

Key statistics in the Background Paper

Rise in annulment applications reflects the rise in the number of awards.

Since 2011, an average of 12 annulment applications have been made each year. From 1996 to December 2023, 194 annulment applications were instituted under the ICSID Convention out of a total body of 885 ICSID Convention cases. Interestingly, five of these cases include second annulment proceedings which followed the resubmission of a dispute after the initial annulment application was upheld.

Between 2011 and 2020, ICSID saw 114 annulment proceedings, meaning that almost half the number of awards rendered during the same period were the subject of an annulment application. This trend has continued, with 41% of the awards rendered between 2021 and end of 2023 being the subject of annulment proceedings. While there is clearly an increase in the number of annulment applications, this appears to reflect the fact that the number of awards rendered each year is also on the rise.

Annulment rate in line with past trends

For the period between 2021 and 2023, the annulment rate (i.e. the percentage of awards that were fully or partially annulled during a specific period) was 5%. This constituted a slight increase when compared to the 3% rate during the 2011 to 2020 period. However, the rate of 5% matches the overall rate of annulment of all awards under the ICSID Convention.

The most common grounds invoked for annulment remain: the tribunal manifestly exceeding its powers (Article 52(1)(b)), that there was a serious departure from a fundamental rule or procedure by the tribunal (Article 52(1)(b)(d)) and the tribunal failed to state reasons in its award (Article 52(1)€). Out of the 194 annulment proceedings registered, there have been 136 requests for enforcement to be stayed, pending the conclusion of the annulment proceedings. Of these 136 requests, 119 have led to Committee decisions, with 64 requests being granted. Only 29 of these requests were granted unconditionally, whereas 35 were granted conditionally upon the provision of security or a written undertaking.

States lead the way in the number of annulment applications instituted

States tend to institute more annulment applications, accounting for 57% of all annulment applications, with investors having instituted 38% of all annulment applications. The remaining 5% falls to annulment applications that have been filed jointly by both parties. Where an award has been partially or fully annulled, the results are far more even, with 58% finding in favour of respondents and 42% finding in favour of claimants. Interestingly, a quarter of all annulment proceedings are discontinued before the Committee reached its decision on annulment.

Delay between conclusion of hearing and issuance of an annulment decision

Since the publication of the previous background paper, in April 2016, on average, it took 26 months from the registration of the annulment application until a decision was issued. Over the same period, 73 decisions on annulment have been issued, with 54 of these decisions having been issued within a year of the hearing and with an average time of 9 months between the conclusion of the hearing and the date of the decision.

Allocation of costs dependent on the outcome

In terms of costs, only in 16 instances were costs of the proceedings equally divided between the applicant and the respondent where the annulment application was rejected. In most instances (86), the applicant would bear the costs of proceedings. Where an award was annulled partially or in full, the costs of proceedings were equally divided on 15 occasions, with the applicant (3) and the respondent (5) bearing the costs in limited instances.

Diversity in Committee appointments

Focusing on the composition of the ad hoc Committees, individuals from Western Europe accounted for 57% of the appointments, with South America (13%), North America (9%) and Central America & the Caribbean (9%) totalling 31% collectively of the total representation. Those from Sub-Saharan Africa (6%), the Middle East & North Africa (4%) and Eastern Europe & Central Asia (3%) accounted for less than 15% of the total appointments.

Prior to the Background Paper's publication in 2016, women received only 15 appointments in all annulment applications. Since 2016, however, there has been a significant increase in the number of women being appointed to ad hoc Committees, with 126 appointments. This positive trend highlights the traction gained in initiatives to increase diversity in the tribunal's composition.

For more information, please contact Andrew Cannon, Partner, Kyle Melville, Associate Designate, or your usual Herbert Smith Freehills contact.