Investor-State Arbitration and the ‘Next Generation’ of Investment Treaties

I Introduction

This article is an extract from TLR The Investment Treaty Arbitration Review – Edition 8. Click here for the full guide.

I Introduction

Investor-state arbitration has grown over the years to become one of the most dynamic and controversial features of international investment law. Across the world, most states have entered into at least one international investment agreement (IIA) to promote and protect investments within their territories. From its humble beginnings, when the first bilateral investment treaty (BIT) was executed between West Germany and Pakistan in 1959,² to the present day, which is now characterised by a multi-layered and multifaceted IIA regime featuring more than 3,300 known IIAs,³ investor-state arbitration has come a long way.

In line with one of the core objectives of IIAs, which is the promotion and protection of foreign investments, a mechanism was designed for the direct invocation of arbitration claims by investors against host states.⁴ That mechanism is investor-state dispute settlement (ISDS) and the most widely used ISDS mechanism is investor-state arbitration⁵. In recent times, however, the ISDS system has attracted increasing backlash and has become the subject of debate by both the investment community and the general public, with some advocating that it be scrapped altogether.⁶ The widespread sentiment among policymakers and states is that the adoption of investor-state arbitration as an ISDS mechanism has not succeeded in fostering a balance between promoting and facilitating investments or investor protection on the one hand, and ensuring responsible investment, safeguarding the right to regulate, or protecting the public interests of the host state on the other hand. The latest decisions from ISDS tribunals appear to provide statistical support for this sentiment.

A report published by the United Nations Commission on Trade and Development (UNCTAD) reveals that by the end of 2019, about 61 per cent of ISDS tribunal merit-based decisions were rendered in favour of investors.⁷ This has undoubtedly come at a great financial and reputational cost to host states, especially developing countries, with the amounts awarded by some tribunals sometimes running into billions of dollars. The majority of these decisions were issued on the application and interpretation of the class of IIAs now commonly referred to as ‘old-generation’ IIAs.⁸

Old-generation BITs:

1. provided investors with a right to compensation for a wide range of regulatory conduct based on very vague treaty language;
2. obliged host states to compensate investors for direct or indirect expropriation;
3. entitled investors to free repatriation of their profits and other capital out of host states;
4. entitled the investors to bring a claim for damage occasioned by war, insurrection or other armed conflict;
5. obliged the host states to treat the investors in the same way as they did nationals of the host state (national treatment) or investors of other third countries (most-favoured nation treatment); and
6. almost always included the vague provision mandating host states to provide investors with fair and equitable treatment (FET).⁹

From the host states’ standpoint, these old-generation IIAs have ultimately proved inadequate to the extent that they paid scant regard to factors such as environmental or sustainable development principles, the need for the protection of health and safety and labour rights, among other things. This perceived imbalance, coupled with the steadily increasing number of ISDS cases, which have seen tribunals broadly interpreting and applying the IIA provisions, sometimes in an unjustifiably inconsistent manner, has led states to introduce new provisions that aim to address the problems noted in previous IIAs.

This chapter analyses the current framework regulating investor-state arbitration. It begins with a consideration of the areas of key stakeholders’ concerns with the ISDS regime by highlighting selected ISDS decisions around topical areas in need of reform. This chapter then undertakes an overview of selected BIT programmes, after which it highlights recent reform measures aimed at enhancing confidence in the stability of the investment environment. These reforms range from procedural matters such as the exhaustion of local dispute resolution frameworks as a prerequisite to investor-state arbitration to substantive matters such as the host state’s rights to legislate freely around FET requirements, subject to public international law standards. The chapter concludes with policy recommendations for policymakers for future IIAs.

II Working of investor-state arbitration

SDGs, Targets, and Indicators

SDG 16: Peace, Justice, and Strong Institutions

• Target 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.
• Indicator 16.3.1: Proportion of victims of violence in the previous 12 months who reported their victimization to competent authorities or other officially recognized conflict resolution mechanisms.

SDG 8: Decent Work and Economic Growth

• Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all.
• Indicator 8.10.2: Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider.

SDG 12: Responsible Consumption and Production

• Target 12.2: By 2030, achieve the sustainable management and efficient use of natural resources.
• Indicator 12.2.1: Material footprint, material footprint per capita, and material footprint per GDP.

SDG 13: Climate Action

• Target 13.2: Integrate climate change measures into national policies, strategies, and planning.
• Indicator 13.2.1: Number of countries that have communicated the strengthening of institutional, systemic, and individual capacity-building to implement adaptation, mitigation, and technology transfer.

SDG 17: Partnerships for the Goals

• Target 17.14: Enhance policy coherence for sustainable development.
• Indicator 17.14.1: Number of countries with mechanisms in place to enhance policy coherence of sustainable development.

Explanation

1. The article addresses or connects to the following SDGs:

– SDG 16: Peace, Justice, and Strong Institutions, as it discusses the need for a fair and inclusive investor-state dispute settlement (ISDS) system.

– SDG 8: Decent Work and Economic Growth, as it highlights the importance of strengthening domestic financial institutions to expand access to financial services.

– SDG 12: Responsible Consumption and Production, as it emphasizes the sustainable management and efficient use of natural resources.

– SDG 13: Climate Action, as it mentions the integration of climate change measures into national policies.

– SDG 17: Partnerships for the Goals, as it discusses the need for policy coherence for sustainable development.

2. The specific targets under these SDGs that can be identified based on the article’s content are:

– Target 16.3: Promote the rule of law and ensure equal access to justice.

– Target 8.10: Strengthen domestic financial institutions to expand access to financial services.

– Target 12.2: Achieve sustainable management and efficient use of natural resources.

– Target 13.2: Integrate climate change measures into national policies.

– Target 17.14: Enhance policy coherence for sustainable development.

3. The article does not explicitly mention indicators related to the identified targets. However, based on the content, the following indicators can be used to measure progress towards the identified targets:

– Indicator 16.3.1: Proportion of victims of violence who report their victimization to competent authorities or conflict resolution mechanisms.

– Indicator 8.10.2: Proportion of adults with access to banking or financial services.

– Indicator 12.2.1: Material footprint, per capita material footprint, and material footprint per GDP.

– Indicator 13.2.1: Number of countries with mechanisms to enhance capacity-building for climate change adaptation, mitigation, and technology transfer.

– Indicator 17.14.1: Number of countries with mechanisms in place to enhance policy coherence for sustainable development.

Table: SDGs, Targets, and Indicators

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Source: lexology.com

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