Backlash in Investment Arbitration: Examining Recent Developments and Implications

AM Editorial Team

The backlash against investment arbitration is a phenomenon where States express their dissatisfaction and disillusionment with the investor-State dispute settlement (ISDS) system. The backlash started in the late 2000s when Latin American States faced a surge in claims. The forms of backlash include the termination of Bilateral Investment Treaties (BITs), denunciation of the ICSID Convention, exclusion of ISDS in investment treaties, recalibration of treaty practice to increase State protection, and replacement of ISDS with other forms of dispute resolution such as the Investment Court System (ICS). The backlash also involves multijurisdictional challenges of arbitral awards by recalcitrant States, refusal to make payment of awards against the State, enactment of domestic legislation to impede enforcement of awards against the State, and the launch of inter-State arbitration to annul a jurisdictional award in favor of the investor.

The backlash is rooted in concerns about the legitimacy and fairness of the ISDS system. Critics argue that the system favors foreign investors over States and undermines the sovereignty of States. The backlash has led to a legitimacy crisis for the ISDS system and calls for reform. The European Union has been at the forefront of efforts to reform the system, with the proposed ICS aimed at addressing the concerns of States while preserving the benefits of the ISDS system. However, the effectiveness of these efforts remains to be seen.

II. Background

The international investment regime has been facing a growing backlash in recent years. The main cause of this backlash is the perception of unfairness and one-sidedness of the system, as well as negative experiences of respondent States that have faced high-profile or numerous claims. This has led to opposition to investment arbitration, particularly when it pertains to the State policy space and the State’s right to regulate. The reasons for this backlash are varied, including inconsistency in arbitral decisions, encroachment on the right to regulate, lack of transparency, high costs of investment arbitration, high amount of damages awarded to investors, the ad hoc nature of investment arbitration not being suitable for public controversies, and conflict of interest or perceived bias of arbitrators in favor of investors.

Some of these criticisms have been addressed by academics and arbitration practitioners. However, civil society and non-governmental organizations continue to voice their opposition to the imbalance in the international investment law system. Furthermore, the lack of transparency and the ad hoc nature of investment arbitration have contributed to the discontent. The opposition to investment treaty arbitration has also been fueled by the perceived pro-investor bias of tribunals, which has been exemplified in the Philip Morris case. The opposition has also been reflected in the critiques of the WTO’s dispute settlement system and the parallel proceedings that may result from investment arbitration. The Harvard Law School has been one of the contributors to the critique of investment treaty arbitration and has called for reforms to address the system’s shortcomings.

III. Denunciation of the ICSID Convention

Several Latin American states, including Bolivia in 2007, Ecuador in 2009, and Venezuela in 2012, have denounced the ICSID Convention. These states have also terminated several BITs and introduced domestic legislation to limit foreign investors’ rights. However, it is worth noting that since Bolivia’s denunciation, 14 states, including Canada, Mexico, and Qatar, have ratified the Convention. The Convention’s ratification by these states highlights its continued relevance in the international investment community. Despite the backlash against the Convention, the number of ratifying states has steadily increased, indicating its importance in protecting foreign investors’ rights.

V. Exclusion of ISDS in Investment Agreements

In response to Philip Morris’ challenge against Australia’s tobacco plain packaging, the Australian Government announced in 2011 that it would no longer include ISDS provisions in future investment treaties or trade agreements. South Africa followed suit in 2012. This move towards the exclusion of ISDS provisions in investment agreements is seen as a solution for improvement and a way to protect policy objectives and regulatory measures.