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Article by Amrit Singh

Introduction to investment arbitration

ISDS or investor-state dispute settlement is a procedural mechanism through which a foreign investor can directly claim certain rights against a host state before an arbitral tribunal. A host state, if found violating the rights, as set out in the bilateral investment treaty of parties, provides an arbitral tribunal an opportunity to order a host state to compensate an investor.

The most prominent reasons for an investor comprise nationality-based discrimination, expropriation and treatment that falls below a “minimum standard”. It is to be noted that the claims brought by foreign investors are mostly based on the above mentioned reasons. Nationality-based discrimination would simply relate to the MFN or which is known as the most favoured nation clause, which means that a host state discriminated a foreign investor ‘A’ by not providing him/her the same rights as had been provided to an investor ‘B’ who belonged to a different nation.

Secondly, expropriation would mean taking away of a private property of a foreign investor by a host state, in order to use that property for some public purposes or any other reasons. A host state could only expropriate if it provides a just compensation to an investor.

Now, it is to be noted that the ISDS mechanism has been heavily criticized and some of the most deficient aspects include the inconsistency in arbitral decisions, high cost of arbitration, lack of transparency and legitimacy and that there is no recourse for erroneous decisions. Firstly, starting off with the legitimacy aspect, this is extremely true as dispute settlement in the ISDS lacks legitimacy because of the primary reason that the current dispute resolution system that aims to resolve the dispute between a private investor and a sovereign state, is inefficient as the decisions of ad hoc tribunals can have a significant impact on the public sphere of a host state.

Secondly, there is also a danger of conflict of interest as many-a-times, arbitrators also act as counsel in other cases and since there is no open and public process for appointment of arbitrators, all of this leads to a situation wherein the fairness and objectivity of the decisions in ISDS cases can be challenged.

Thus, it can be safely concluded that transparency is also a major issue as the decision of an ad hoc tribunal affects the public at large and if parties do not consent to reveal information to the general public, then this constitutes a major breach in transparency. Moreover, there is high uncertainty and inconsistency when an arbitral tribunal interprets the provisions of a bilateral investment treaty resulting in a new decision every time as the decision more on less depends upon the mind-set and perspective of arbitrators.

EU’s proposed reform of ISDS

However, since EU’s introduction of the investment court system, things have changed a bit, however this does not mean that it has brought about a positive change. It is to be noted that ICS or investment court system has reinvented the investor-state dispute settlement mechanism by bringing the concept of a ‘court’. Further, the ICS also aims to strengthen the review mechanism and legitimacy aspect of the new system as it has established a first Instance Tribunal and an Appellate Tribunal.

The EU proposal does the same as its predecessor, as it also grants power to foreign investors only to sue corporations for almost anything and everything a host state does. A host state has the power to enact laws to promote worker rights, financial stability, environmental protections and public health but all of this can be easily challenged by an investor. For example, in the case of Philip Morris v. Uruguay, Philip Morris sued Uruguay on the basis of a BIT with Switzerland. The claim of the investor is that Uruguay has breached the fair and equitable treatment standard because the anti-smoking laws are “excessive”, “unreasonable” and “arbitrary”, bearing no relationship to the Government’s public health policy.

Now, the reason why this case needs to be discussed is because of the reason that the EU proposes that investors’ legitimate expectation should be protected and should also be protected against indirect expropriation. It is pertinent to mention that legitimate expectation in this context would mean that a state should only take those actions or enact only those laws which do not hamper the profit making business of an investor. This can be conveniently stated as investors have been regularly challenging the laws made by a host state in light of the public interest.


The ICS system also does not change the way things are working out, as an investor can challenge a law made by a state for the benefit of the public and if the investor wins the claim, then the compensation would have to be granted by a host state and that can easily range in millions and billions of taxpayers’ money.

Moreover, it must be noted that under the new EU proposal, investment tribunals could not order governments to rewrite or reverse a law. However, a prudent man could easily understand the consequences of this provision as there is no limit on the amount of compensation that can be paid to a corporation or an investor. This leads to an inference that a politician would never enact a law for the betterment of health and environment, if he/she knows that the ultimate ramification of this law or action would be an eye-watering sum in compensation.

Also, it must be highlighted the investment court system would have an in-built investor bias. Since, only an investor has a right to sue a government and not vice-versa, the judges who would have a retainer fee, would be more inclined towards ruling in the favour of an investor, since this would bring them more cases. The ICS does not resolve the issue of one-sidedness in the investor-state dispute resolution system because even in the new system, only investors have a right and a host state and its citizens have a responsibility.

Another grave issue with respect to the establishment of an investment court is that investors have an authority to bypass the ruling pronounced by domestic courts of a country by taking the matter to a foreign or an investment court. For example in a case, an Ecuadorian court ordered the US oil giant Chevron to pay 9.5 billion dollars to indigenous groups to clean-up vast oil-drilling related contamination in the Amazonian rainforest. However, Chevron smartly bypassed that order and pursued a claim before a three-person arbitral tribunal. Now, this is a very tactical move opted by the corporation in order to avoid the compensation ordered by the domestic court.

It must be noted that if such kind of a system continues, then host states would stop entering into bilateral investment treaties with investors as the ultimate conclusion of all of this would be to either settle the whole matter brought up by an investor, or to pay compensation to that investor.


The proposal introduced by the EU is not helping the cause of a host state. The establishment of an investment court seems biased towards promoting the interests of a foreign investor and this would further make them powerful to an extent that such investors would not fear anything and would do anything and everything to promote their businesses.

With the establishment of an investment court, the powers of domestic courts along with the power of a legislature to make laws for the benefit of the society, would get lessened and weakened due to the fear of getting sued by an investor. Therefore, the EU proposal is no good a solution and only provides corporations with some dominant rights and powers to bully a state when it acts in accordance with the public interest. Hence, despite the fact that the proposal originally intended to balance the rights of an investor and a host state, it enhances the interests of the former only.

About the Author:

Amrit Singh is a third-year B.A., LL.B. (Hons.) student at Institute of Law, Nirma University, Ahmedabad, India. He has previously interned at Shardul Amarchand Mangaldas & Co and with the advocates practicing at Madhya Pradesh High Court and Supreme Court of India. He has a penchant for international arbitration and is a member of the Chartered Institute of Arbitrators, Singapore International Arbitration Centre and Young-Mumbai Centre for International Arbitration.



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