The National University of Advanced Legal Studies

INTERNATIONAL INVESTMENT ARBITRATION

THE FUTURE OF INVESTMENT TREATY ARBITRATION:

TRENDS, CHALLENGES, AND PROSPECTS

MILLENNIAN S

LLM ITL 10586

 INTRODUCTION

Stated in general terms, the property of foreigners have, since at least the early twentieth
century enjoyed protection under international law from unacceptable measures of the host
State. While the scope and contents of the rules and principles of international law in this
respect were unclear, these rules and principles were collectively referred to as the
“international minimum standard.” Today, the debate and development of international
investment law is, to a very large extent, based on investment protection treaties, in particular
on so-called “bilateral investment protection treaties” (BITs). The first BIT was entered into in
1959 between Germany and Pakistan. Today there are approximately 3000 BITs. The vast
majority of them have clauses providing for so-called “investor-state arbitration,” also referred
to as investment treaty arbitration. This means that BITs entitle investors to commence
arbitration against the host state, even though the investor is not a party to the BIT. The BIT is
entered into between the two States in question. By operation of the BIT, the investor obtains
a derivative right to initiate arbitration. In this way BITs create an international forum for
investors, not available under customary international law.
In addition to the BITs, there are a number of multilateral investment protection treaties, for
example: the Energy Charter Treaty (ECT) and the North American Free Trade Agreement
(NAFTA). They also have arbitration clauses providing for investor state arbitration. During
the last 15-20 years we have witnessed a virtual explosion of investment treaty arbitration, with
somewhere between 500-600 decided and pending cases as of today. The most frequently used
arbitration regime is the International Center for Settlement of Investment Disputes (ICSID)
Convention and the ICSID Arbitration Rules, based on the 1965 Washington Convention on
the Settlement of Investment Disputes between States and Nationals of other States. Other
frequently used arbitration rules include the United Nations Commission on International Trade
Law (UNCITRAL) Arbitration Rules and the Arbitration Rules of the Stockholm Chamber of
Commerce.
The heart and soul of every investment protection treaty is protection against expropriation,
which represents the most severe form of governmental interference with the property and
property rights of foreign investors. Under international law it is now generally accepted that
States have the right to expropriate foreign property, but only under certain conditions. One of
these conditions is that the investor be paid compensation for the expropriated property. In
many, if not most, investment treaty arbitrations, the amount of compensation for an alleged
expropriation is one of the disputed issues. In addition to protection against expropriation, most
investment protection treaties provide for other standards of protection, such as: fair and
equitable treatment, national treatment, and most favoured nation treatment.
Another important aspect of investment-treaty arbitration, is the extent to which the host State
is responsible for the acts and omissions of its organs. As a rule of thumb, the State is
responsible for all its organs, including territorial units, provinces, and municipalities. A
threshold question is often to ascertain whether certain conduct is attributable to the State. Such
issues are addressed by the so-called rules of attribution in customary international law. These
rules have been codified in the Articles of State Responsibility prepared by the International
Law Commission.
 INVESTMENT TREATY ARBITRATION

The majority of investment protection treaties have arbitration clauses providing for investor-
state arbitration. Such arbitrations may take place under the auspices of a variety of arbitration
institutions and rules. The most frequently used rules are the ICSID Arbitration Rules.
Recognition and enforcement of ICSID awards are handled within the framework of the
selfcontained system based on the ICSID Convention. Other investment treaty awards are
recognized and enforced pursuant to the provisions of the 1958 New York Convention, or other
similar arrangements. It should be noted that neither the ICSID Convention nor the New York
Convention deal with questions of State immunity. In fact, there is no generally applicable
international convention in force which deals comprehensively with state immunity. Issues
concerning state immunity arising at the enforcement and execution stages are therefore dealt
with on the basis of municipal law and customary international law.
By and large, the system of investment treaty arbitration has been a success. At any given point
in time, there are literally hundreds of investment arbitrations pending - albeit in different
stages of progress - at the leading arbitration centres of the world, including ICSID, Stockholm,
Paris, London and The Hague, under the ICSID Arbitration Rules, the UNCITRAL Arbitration
Rules, or the SCC Rules. Investment treaty arbitration is now an everyday occurrence; whereas,
in the past it was regarded as an extraordinary measure.
The success of investment treaty arbitration is to a large degree explained by the fact that this
form of arbitration is very attractive for the foreign investor, certainly if compared to the
alternative of going to local courts in the host State. Investment treaty arbitration is also in the
interest of host States, since the possibility to go to arbitration against the host State tends to
encourage businessmen to make foreign investments. Most host States are typically interested
in attracting foreign investment. Another important aspect of investment treaty arbitration is
that this form of dispute settlement tends to de -politicize investment disputes, at least
compared to the previously existing alternative of diplomatic protection, which required the
involvement of the governments of the investor’s home State and the host State, respectively.

THE FUTURE OF INVESTMENT ARBITRATION

The future of investment arbitration is undergoing significant transformation, responding to

criticisms and evolving global norms. One key trend is the reform of Investor-State Dispute
Settlement (ISDS) mechanisms, driven by concerns over lack of transparency, arbitrator
impartiality, and the balance of power between investors and states. This reform may involve
measures to increase transparency, such as public access to documents and hearings, and the
establishment of an appellate mechanism to ensure consistency in decisions. Another
significant development is the proposal for a Multilateral Investment Court (MIC), which seeks
to replace ad hoc arbitration with a permanent court-like institution. The MIC aims to enhance
the legitimacy and efficiency of investment dispute resolution by standardizing procedures,
ensuring the independence and impartiality of adjudicators, and promoting consistency in
decision-making.
Furthermore, there is a growing recognition of the need to align investment arbitration with
broader policy objectives, such as sustainable development and human rights. This trend is
reflected in the inclusion of provisions in investment treaties that safeguard environmental
protection, labor rights, and social welfare, as well as the consideration of these factors in
dispute resolution. Additionally, there is a shift towards recognizing and enforcing investor
obligations, including corporate social responsibility and human rights due diligence. This
includes holding investors accountable for their conduct and its impact on host states and
communities.
Another important development is the increasing use of state counterclaims in investment
arbitration. Host states are leveraging counterclaims to address issues such as regulatory
breaches, environmental damage, and human rights violations allegedly committed by
investors. This trend reflects a more balanced approach to investment disputes, where both
investor rights and state interests are considered. Overall, the future of investment arbitration
is likely to be characterized by a combination of reforms aimed at addressing existing
shortcomings, greater alignment with broader policy objectives, and the adoption of innovative
approaches to dispute resolution. However, achieving consensus on these issues will require
active engagement and cooperation among states, investors, civil society organizations, and
other stakeholders involved in the investment ecosystem.

RECENT DEVELOPMENTS

Recent developments in investment treaty arbitration, or investor-state dispute settlement

(ISDS), reflect a complex and evolving landscape. One key trend is the increasing criticism of
ISDS for its perceived lack of transparency, inconsistency in decision-making, and potential to
undermine domestic regulations. This has led to calls for reforms, including proposals for the
establishment of a multilateral investment court. Another significant development is the
evolving practice in the negotiation and drafting of bilateral and regional investment treaties.
States are now more cautious and deliberate in their approach, incorporating provisions that
address the criticisms of ISDS. These provisions often focus on enhancing transparency,
ensuring ethical conduct, and reaffirming the right of states to regulate in the public interest.
In recent years, there has been a notable shift in the behavior of states involved in ISDS cases.
States are increasingly assertive in defending their regulatory measures, leading to a higher rate
of successful defenses. This shift reflects a growing recognition of the legitimate right of states
to regulate in areas such as public health, environmental protection, and human rights. There
is also a growing awareness of the need to consider broader public policy objectives in ISDS
cases. Tribunals are being called upon to balance investor rights with other societal interests,
such as environmental protection and human rights. This trend is reflected in the increasing
number of cases where environmental and human rights considerations play a significant role
in the tribunal’s decision-making process.
The use of third-party funding in ISDS cases is another notable development. While third-party
funding can provide access to justice for smaller investors, it has raised concerns about its
impact on the dynamics of ISDS proceedings and the potential for conflicts of interest.
Additionally, there is a growing emphasis on transparency in ISDS proceedings. Some
jurisdictions have adopted rules that require the publication of documents and the participation
of amicus curiae, enhancing the transparency and legitimacy of the process. Technological
advancements are also influencing ISDS proceedings. The use of technology, such as video
conferencing and electronic document management systems, is becoming more common,
making ISDS proceedings more efficient and cost-effective.

CHALLENGES

Skewed System
A criticism raised is that the system of investment protection and investment treaty arbitration
works only in favour of investors, without taking due account of the interests of the host State.
The fact of the matter, however, is that the number of BITs has been growing for the last decade,
and continues to grow. Presumably, therefore, host States take the view that some benefits
follow from investment protection treaties, be they bilateral or multilateral. From a legal point
of view, BITs do provide a clear and reliable framework for protecting foreign investments.
Among economists, views are divided as to the extent to which BITs actually have any effect
at all on the volume of foreign investments. Several commentators have questioned whether
there is any empirical data supporting the assumption - and the hope - that investment
protection treaties do indeed increase the volume of foreign investment. For the purposes of
this contribution, it is really irrelevant if that is the case or not. Most States apparently take the
view that they benefit from BITs; that is why they continue to negotiate and sign them. It has
also been suggested that host States usually are on the losing side in investment disputes. Some
States, particularly in Latin America, but also other States, have been unhappy with their roles
as respondents in arbitrations. They have, therefore, taken measures to distance themselves
from investment treaty arbitrations, or at least limit their exposure to investment treaty
arbitration. This has led some States to denunciate the ICSID Convention pursuant to Article
71 and/or to terminate BITs. The number of States having taken such measures is small. In
addition, both the ICSID Convention and most BITs provide for transitional periods, or have
so-called sunset provisions, meaning that the treaty will continue in force for a specified
number of years following termination.
As far as decided cases are concerned, the fact is that there is no evidence of any bias in favour
of investors. On the contrary, host States have, in general, done well, in the sense that they have
probably won as many cases as they have lost. Investors sometimes fail to meet the
jurisdictional requirements of BITs. In addition, they often fail to convince arbitral tribunals
that the investment has been expropriated, or that it has been subject to unfair and inequitable
treatment. For investors it is clearly of critical importance to have access to the dispute
settlement mechanisms provided in BITs and multilateral treaties. This is perhaps the most
important aspect of BITs, i.e. that they provide a neutral forum for the resolution of disputes,
mostly in the form of international arbitration. As mentioned above, foreign investments have
always enjoyed protection under customary international law. Prior to the BIT era, however,
the foreign investor did not have access to a neutral forum. The traditional method then was to
use diplomatic channels, typically by asking the home State to exercise diplomatic protection,
its ius protectionis. It is probably fair to assume that most host States also welcome the
arbitration mechanism in most BITs. This way they can escape the economic and political
pressures often exercised by powerful home States of foreign investors within the framework
of diplomatic protection. On balance, it would seem therefore that the system of investment
treaty arbitration has well served the interests of host States, as well as of investors.

Sovereignty concerns
A third aspect, with respect to which critical voices have been raised, is that of sovereignty.
The argument is that BITs impose restrictions on, and indeed undermine, the sovereignty of the
host State by preventing it from implementing its policies in various areas, such as, health and
environment. It is, of course, correct that a BIT constitutes a limitation on the sovereignty of
the host State, in the sense that it is bound by the undertakings in the BIT, as it is by the
undertakings in any other treaty. That is indeed the whole purpose of the BIT and, in fact, of
most treaties. This consequence is not unique to investment-protection treaties. One of the
hallmarks of sovereignty is that a State must be sovereign enough to agree to certain limitations
of its sovereignty. One of the cornerstones of international law is that a state cannot rely on its
internal, national law to avoid its obligations under international law. This follows, inter alia,
from Article 27 of the Vienna Convention and Article 32 of the ILC Articles on State
Responsibility. This could mean, for example, that a democratically elected parliament may
not have unfettered freedom with respect to its legislative activities, since the international
obligations of the State in question may result in certain restrictions. The advocates of this
argument fear that arbitral tribunals will interfere with the formulation and implementation of
government policies. As the saying goes, however, “the proof of the pudding is in the eating.”
Even though environmental and health regulations have been tried by several arbitral tribunals
in investment treaty arbitrations, it is submitted that there are few examples of where they have
unduly interfered with governmental measures. On the whole, it would seem that arbitral
tribunals have taken a balanced approach to such questions.

Transparency
Transparency in investment arbitration presents a multifaceted challenge, primarily due to the
tension between confidentiality and the need for openness. While confidentiality allows parties
to protect sensitive information, critics argue that it can lead to a lack of accountability and
legitimacy in the system. Advocates for transparency assert that investment arbitration involves
public interests and funds, necessitating a more transparent process to build trust and ensure
accountability. Enhanced transparency could also improve access to information regarding
legal reasoning and decisions, fostering consistency and predictability. However, achieving
transparency in practice requires a delicate balance, as it must respect parties' legitimate
interests in confidentiality and commercial secrecy. Efforts to address transparency concerns
have led to initiatives like the UNCITRAL Rules on Transparency, mandating certain
documents and hearings to be made public unless parties agree otherwise. Despite these efforts,
challenges persist, including defining the scope of transparency, establishing effective
enforcement mechanisms, and navigating cultural differences in transparency expectations.
Addressing these challenges requires nuanced approaches that consider the complexities of
investment arbitration and the interests at stake.

Inconsistency of Awards
One issue which remains a problem, however, is the perceived unpredictability and
inconsistency of investment awards. In fact, this should not come as a surprise. Arbitral awards
based on treaties are rendered within the framework of public international law, which is a
decentralised and non-hierarchic system of law. There is no principle of binding precedent,
stare decisis, in public international law, nor, for that matter in international arbitration in
general. The traditional ball-and-chain with respect to international commercial arbitration has
been - and to a large extent continues to be - that arbitral awards are kept confidential, and thus
not published. Not so with respect to investment awards. Such awards are today, to a large
extent, published or to be more precise, sooner or later they reach the public domain, with or
without the consent of the parties. It is therefore possible to observe that there are in fact
discrepancies and inconsistencies in the practice of investment tribunals. Some decisions seem
to deviate from rules and principles which are perceived as established. While the awards seem
to be getting longer and longer, they are not necessarily getting clearer and clearer. Lack of
coherence and consistency sooner or later results in unpredictability and uncertainty. For many
years now this has been a matter of concern.

FUTURE PROSPECTS

Investment arbitration, a mechanism for resolving disputes between investors and states, has
emerged as a critical component of the international investment regime, offering a forum for
adjudicating disputes arising from investment agreements and treaties. The future prospects of
investment arbitration are shaped by several key trends and developments. Firstly, the
increasing complexity of investment agreements and the expanding scope of investor-state
disputes are expected to drive continued demand for arbitration as a means of resolving these
disputes. This trend is likely to be further fueled by the growing number of bilateral and
multilateral investment treaties, as well as the proliferation of free trade agreements containing
investment provisions.
Secondly, the evolution of investment arbitration practice is likely to be influenced by efforts
to enhance transparency, efficiency, and legitimacy. Stakeholders are increasingly emphasizing
the importance of transparency in arbitration proceedings, leading to calls for greater public
access to hearings, documents, and awards. Efforts to enhance efficiency include the use of
procedural tools such as case management conferences and expedited procedures, aimed at
reducing the time and cost of arbitration. Moreover, the legitimacy of investment arbitration is
being scrutinized, with calls for reforms to address concerns about arbitrator impartiality,
conflicts of interest, and consistency in decision-making.
Thirdly, the future of investment arbitration is closely tied to broader developments in
international trade and investment law. The ongoing negotiations on reforming the investor-
state dispute settlement (ISDS) system within the United Nations Commission on International
Trade Law (UNCITRAL) are expected to have a significant impact on the future landscape of
investment arbitration. These negotiations are focused on addressing key issues such as the
selection and appointment of arbitrators, the conduct of proceedings, the review of awards, and
the enforcement of awards.
The future prospects of investment arbitration are characterized by both opportunities and
challenges. While the demand for arbitration is expected to remain strong, efforts to enhance
transparency, efficiency, and legitimacy will be critical in shaping the future evolution of
investment arbitration. Moreover, ongoing developments in international trade and investment
law, are likely to have a significant impact on the future landscape of investment arbitration.

CONCLUSION

The future of investment arbitration is poised at a critical juncture, marked by both challenges
and opportunities. On one hand, the increasing complexity of international investment
agreements (IIAs) and the growing number of investor-state disputes indicate a continued need
for a robust arbitration mechanism. On the other hand, the legitimacy and effectiveness of
investment arbitration have been called into question, particularly regarding issues of
transparency, consistency, and the balance between investor rights and state sovereignty. The
recent backlash against investor-state dispute settlement (ISDS) mechanisms, as seen in the
growing trend of states terminating or renegotiating investment treaties, suggests a shift
towards a more nuanced and balanced approach to resolving investment disputes. This shift is
likely to manifest in several ways: increased transparency and public participation in the
arbitration process, enhanced scrutiny of arbitrators and their decisions, greater emphasis on
mediation and other alternative dispute resolution mechanisms, and the development of a
multilateral investment court. Additionally, the rise of regional and bilateral investment treaties,
as well as the inclusion of investment chapters in mega-regional trade agreements, will further
shape the future landscape of investment arbitration. Ultimately, the future of investment
arbitration will depend on striking a delicate balance between the interests of investors and
states, ensuring that the system remains fair, transparent, and responsive to the evolving needs
of the global economy.