assignment

1. 1
TABLE OF CONTENTS
1. INTRODUCTION…………………………………………………………………………2
2. FOREIGN DIRECT INVESTMENT (FDI)…………………………………………......2
2.1. Definition…………………………………………………………………………2
2.2. Roles of Foreign Direct Investment in developing countries…………………..2
3. INTERNATIONAL ARBITRATION……………………………………………………3
3.1. Definition…………………………………………………………………………3
3.2. International Centre for Settlement of Investment Disputes (ICSID)………….3
4. INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
(ICSIS) AND FOREIGN DIRECT INVESTMENT (FDI)………………………………..4
4.1. Why choose International arbitration? ..........................................................4
4.2. International arbitration promotes FDI in developing countries………………5
5. CASE STUDY: OCCIDENTAL PETROLEUMCORPORATION AND OCCIDENTAL
EXPLORATION AND PRODUCTION COMPANY, V.THE REPUBLIC OF ECUADOR
5.1. Fact of the case…………………………………………………………………..6
5.2. Decision…………………………………………………………………………..7
6. CONCLUSION…………………………………………………………………………….7
7. REFERENCES…………………………………………………………………………….8

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1. INTRODUCTION
In the trend of global economic integration, the activities that attract international investment
in developing countries is rapidly growing, the process of investment disputes that may arise
between the investors with the country receiving the investment capital. Resolving
commercial disputes is an extremely complex problem because there are not the same the
owners with legal status and under the different legal system participating in this relationship.
Therefore, the selection of an appropriate dispute resolution method is a crucial issue in
ensuring and promoting international investment activities as FDI. One of the most effective
measures is international arbitration.
2. FOREIGN DIRECT INVESTMENT (FDI)
2.1. Definition
Foreign direct investment (FDI) is an investment made by a company or entity based in one
country, into a company or entity based in another country1
2.2. Roles of Foreign Direct Investment in developing countries
FDI is often assumed to be the most important source of external flow of resources and more
stable than other forms of capital inflows to developing countries. It provides numerous
advantages to the recipient countries. Foreign direct investment helps in the economic
development of the host country. For instance, FDI has helped several the East Asian
countries when they have faced economic hardships during the financial problems of 1997-
1998. Besides, the country that gets FDI from another country can also enhance the human
capital resources by getting their employees to receive training on the operations of a
particular business. In addition, it encourages in the creation of new jobs as well as increases
the salaries of the workers. This enables people to get access to a better lifestyle and more
facilities in life.
1 , 'Foreign Direct Investment - FDI' (investopedia.com) <http://www.investopedia.com/terms/f/fdi.asp>
accessed 21 November 14

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3. INTERNATIONAL ARBITRATION
3.1. Definition
International arbitration is a leading method for resolving disputes arising from international
commercial agreements and other international relationships.2
International arbitration has emerged as the model for settling international commercial
disputes. As a legal mechanism that can resolve disputes arising from international
transactions, it should be an essential feature of the legal system of countries, given the
dependency of many on international business. Thus this paper, focusing on developing
countries, shows that legal system of international arbitration will prove beneficial in
promoting economic of developing countries.
3.2. International Centre for Settlement of Investment Disputes (ICSID)
Disputes can be settled by different procedures and one of the procedures for the settlement
of international investment disputes that commonly in the investment contracts is settled in
accordance with the procedures of the International Centre for Settlement of Investment
Disputes (ICSID).
ICSID is an international arbitration institution which facilitates arbitration and conciliation
of legal disputes between international investors. The ICSID is a member of the World Bank
Group and is headquartered in Washington, D.C., in the United States. It was established in
1966 as a multilateral specialized dispute resolution institution to encourage international
flow of investment and mitigate non-commercial risks. As a member of the World Bank
Group the ICSID also receives funding from them, but it was established as an autonomous
institution by a separate treaty drafted by the International Bank for Reconstruction and
Development's executive directors and signed by member countries. The center facilitates
arbitration and conciliation, allowing independent tribunals and arbitration mechanisms to
hold proceedings under its rules, and all contracting member states agree to enforce and
uphold arbitral awards in accordance with the ICSID Convention. The ICSID also helps
2 , 'International arbitration' (wikipedia.org) <http://en.wikipedia.org/wiki/International_arbitration>
accessed 21 November 14

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administer dispute resolution proceedings under other treaties and for alternative arbitration
mechanisms.3
4. INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
(ICSIS) AND FOREIGN DIRECT INVESTMENT (FDI)
4.1. Why choose International arbitration?
From foreign investors’ point of view, investing in developing countries, especially those
countries with young population, easy markets, is an effective way to get profit from their
investments. However, foreign investments are often long-term operation and they require
long-term relationship between investors and host countries. When deciding to invest in a
national having different culture and social platforms, including differences in law systems,
foreign investors always find the potential risks because the expectations of their investments
could not be achieved as expected, or due to changes in the host country during the time of
the projects. Moreover, investing in a country means that foreign investors must comply with
the legal requirements of that country. When disputes arise, investors will not be assured
when suing the nation in the local court due to the fear of the political influence of local
power as well as local government. On the other hand, from the host countries point of view,
investment wave can make them worry for the domestic investors, so they can change the
policies and the legal system related to foreign investment with the argues to protect the
national sovereignty and economic autonomy. Hence, foreign investors no longer feel safe to
invest due to the instability of the legal system of the host countries.
In that situation, how a foreign company can be equal to sue a country with the legal system
and big advantages behind? Businesses often resort to diplomacy and politics between their
country and the host country in which they are investing. Usually these measures take time
and resources, then the effectiveness is not ensured. In order to solve the above problems, the
developed countries move to encourage the signing Bilateral Investment Treaties (BITs) that
aim to protect the investments of its citizens in developing countries. Accordingly, the BITs
will usually have some required provisions which are "fair compensation" if the investment is
expropriated, nationalized, or "adequate protection" and "treated fairly and equally." The
3 , 'International Centre for Settlement of Investment Disputes' (wikipedia.org)
<http://en.wikipedia.org/wiki/International_Centre_for_Settlement_of_Investment_Disputes> accessed
21 November 14

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treaties always allow investors whether individuals, organizations, or multinational
corporations putting the dispute to international arbitration centers including ICSID to resolve
if there are violations of the host country. The solution selects a dispute resolving mechanism
through an independent third party that helps investors assured by avoiding the influence of
the host country when suing in local courts. In contrast, the host country will never agree to
let investors sue in court in their home country. Therefore, international arbitration center is a
harmonized choice.4
4.2. International arbitration promotes FDI in developing countries.
ICSID is one of the most popular international arbitration centers in international commercial
disputes. It has been selected to use for more than 75% of the signed BITs. In general, since
ICSID was established in 1966, it has seemed to have a mechanism resolving investment
disputes efficiently and reliably. Nations and investors preferred ICSID to other forms of
resolving disputes of international investment. The most important reason is that ICSID helps
investors have the opportunity to directly sue a country without going through any political or
diplomatic methods. Moreover, the decision of ICSID arbitration can only be considered
canceled by ICSID arbitration. In addition, ICSID has created a number of cases
accompanied by a diverse collection of analysis and criticism of many scholars and jurists all
over the world5. Most of the cases going to ICSID were came from investors that believed
that the host country violated the principle of equal treatment that has been agreed in the
bilateral or multilateral treaties for the promotion and protection of Investments. During the
history of ICSID, investors often prevail over the host countries with a high proportion of
winning. In May 2011, China faced a lawsuit which was worth $6 million in ICSID because
the local government decided to revoke the land that has been allocated for an investment
project with the reason given was its investors did not implement the project on schedule. In
2011 Indonesia also faced a lawsuit for a compensation of 75 million. Turkey had to accept a
compensation of $900 million for the Motorola corporations to close the case in ICSID in
2004. It can be seen that ICSID has given too much power to multinational corporations
4 Hoàng Nguyễn Hạ Quyên, 'Thận trọng khi tham gia giải quyết tranh chấp tại cơ quan trọng tài
ICSID' (luatbaoan.com 2012)
<http://luatbaoan.com/home/detail.asp?iData=1613&iCat=653&iChannel=79&nChannel=Products>
accessed 21 November 14
5 ThS. Nguyễn Trung Nam, 'Thực Tiễn Giải Quyết Tranh Chấp Theo Cơ Chế ICSID Tại CHâu Á Và
Bài Học Cho Việt Nam' (eplegal.com.vn ) <http://eplegal.com.vn/home/vi/press-room/publication/119-
icsid.html> accessed 21 November 14

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through BITs. Accordingly, the ICSID is considered for the purpose of promoting and
protecting foreign investors.
In other words, joining ICSID of a developing country is a sign of increase in international
commitment of the country in protection the rights of foreign investors and then promote and
maintain FDI in the country. That is the way international arbitrations including ICSID help
promote FDI in developing countries.
5. CASE STUDY: OCCIDENTAL PETROLEUMCORPORATION AND OCCIDENTAL
EXPLORATION AND PRODUCTION COMPANY, V.THE REPUBLIC OF ECUADOR
5.1. Fact of the case
Occidental Petroleum Corp. (“Oxy”), a U.S company, started doing business in Ecuador in
the mid-1980s under a services contract with PetroEcuador, Ecuador’s national oil company.
In 1993, Ecuador amended its Hydrocarbons Law to allow parties to enter into participation
contracts. After stretched out negotiations, on May 21, 1999, Ecuador and Oxy entered into a
Participation Contract to explore and exploit hydrocarbons in Block 15 of the Ecuadorian
Amazon region.
On 19 October, 2000, Oxy sought to ways to expand its operations in Ecuador and reduce its
exposure in the country. Coincidentally, Alberta Energy Corporation Ltd (“AEC”) was
looking to expand its investment in Ecuador. In order to further these goals, Oxy and AEC
entered into a Farmout Agreement where AEC acquired a 40% economic interest in Block 15
in return for certain capital contributions. The transfer, however, violated both the
Participation Contract and Ecuadorian law, which required ministerial approval.
On May 15, 2006, following a number of demonstrations against the government and Oxy,
the government of Ecuador issued a Decree terminating with immediate effect its
Participation Contract with Oxy.
On May 16, 2006, government officials arrived at Oxy’s offices in Quito and seized all of its
property. The next day, officials and the Ecuadorian National Police seized Oxy’s oil fields in

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Block 15, including wells, drills and storage facilities. Two days later, Oxy filed a request for
arbitration.6
5.2. Decision
The majority of the Tribunal awarded that Ecuador acted in breach of Article II.3(a) of the
Treaty by failing to accord fair and equitable treatment to the Claimants’ investment, and to
accord the Claimants treatment no less than that required by international law.
It also determined that Ecuador breached Article III.1 of the Treaty by expropriating the
Claimants’ investment in Block 15 through a measure “tantamount to expropriation” . In
addition, it ruled that by issuing the Caducidad Decree, Ecuador breach ed Ecuadorian law
and customary international law.
In conclusion, Claimants were awarded the amount of US$ 1,769,625,000 Ecuador was
ordered to pay pre-award interest on the above amount at the rate of 4.188% per annum,
compounded annually from May 16, 2006, until the date of the Award, and to pay post
award interest from the date of the Award at the U.S. 6 month LIBOR rate, compounded on
a monthly basis.
This case was reportedly as the largest award ever to have been issued by an ICSID tribunal.
The Oxy award demonstrates the vast power of investment treaty arbitration tribunals and
raises important normative questions about ICSID.
6. CONCLUSION
In conclusion, after some major and meaningful analysis above, we have already known
about the role of international arbitration in promoting FDI to developing countries. When a
nation holds up the strength of this smart legal system, they will have whole world.
Especially the country with developing economies such as Vietnam should be viewed
seriously in the application of this valuable resource in order to attract investment from
foreign countries as well premise for economic development in the future.
Word count: 1992.
6 Tai-Heng Cheng & Lucas Bento, 'ICSID’s Largest Award in History: An Overview of Occidental
Petroleum Corporation v the Republic of Ecuador' (kluwerarbitrationblog.com 2012)
<http://kluwerarbitrationblog.com/blog/2012/12/19/icsids-largest-award-in-history-an-overview-of-
occidental-petroleum-corporation-v-the-republic-of-ecuador/> accessed 21 November 14

8. 8
7. REFERENCES
1 , 'Foreign Direct Investment - FDI' (investopedia.com)
<http://www.investopedia.com/terms/f/fdi.asp> accessed 21 November 14
2 , 'International arbitration' (wikipedia.org)
<http://en.wikipedia.org/wiki/International_arbitration> accessed 21 November 14
3 , 'International Centre for Settlement of Investment Disputes' (wikipedia.org)
<http://en.wikipedia.org/wiki/International_Centre_for_Settlement_of_Investment_Disputes>
accessed 21 November 14
4 Hoàng Nguyễn Hạ Quyên, 'Thận trọng khi tham gia giải quyết tranh chấp tại cơ quan trọng
tài ICSID' (luatbaoan.com 2012)
<http://luatbaoan.com/home/detail.asp?iData=1613&iCat=653&iChannel=79&nChannel=Pro
ducts> accessed 21 November 14
5 ThS. Nguyễn Trung Nam, 'Thực Tiễn Giải Quyết Tranh Chấp Theo Cơ Chế ICSID Tại
CHâu Á Và Bài Học Cho Việt Nam' (eplegal.com.vn ) <http://eplegal.com.vn/home/vi/press-
room/publication/119-icsid.html> accessed 21 November 14
6 Tai-Heng Cheng & Lucas Bento, 'ICSID’s Largest Award in History: An Overview of
Occidental Petroleum Corporation v the Republic of Ecuador' (kluwerarbitrationblog.com
2012) <http://kluwerarbitrationblog.com/blog/2012/12/19/icsids-largest-award-in-history-an-
overview-of-occidental-petroleum-corporation-v-the-republic-of-ecuador/> accessed 21
November 14