Originally from World Arbitration and Mediation Review, Vol. 12 No. 3, 2018

I.     INTRODUCTION

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After the boom of the ISDS system, there was a backlash against the ISDS system after Argentina implemented financial policy measures amidst its 2001 financial crisis.  Some of the backlash stemmed from the uniqueness of the ISDS system which gives an investor–company, an enterprise, or a person, an inherent right to sue a sovereign state (i.e., the Host State).   This distinct feature did not sit well with sovereign states because investors started claiming damages under the garb of “expropriation” or “fair and equitable treatment” treaty provisions while challenging policy and regulatory measures issued by the Host States, with the most recent ones related to environmental protection measures, economic and social development measures, etc.  Because of this, the phenomenon of independent ad hoc tribunals protecting private investor rights over the rights of the public at large is raising legitimacy issues within the investment arbitration space.

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There are no doubts that the majority of Host States are developing countries who, with the aim of a progressive economy, enter into BITs mostly with developed States interested in protecting their own nationals. Although UNCTAD data shows that the majority of 36.5% known investor-state arbitrations are in favor of the respondent state, as opposed to 27.9% decided in favor of investors, this is hardly the true picture of the system.   Whether the development status of the respondent state has a causal link to the winning or losing rate in arbitration proceedings or, for that matter, whether the decision on the quantum of compensation may vary on it, are both moot questions.

First, the development status of an economy is most commonly measured in terms of its Gross Domestic Product (“GDP”), Gross National Income (“GNI”) or per capita income.  Since no straitjacket definition is used to define the development status of a country, these measuring terms are used to calculate what may not capture the distinct features of each economy.  The issue of bias in the ISDS mechanism concerns developing states, as they feel the system is not favorable to them. Therefore, this article aims to analyse this negative, unfavorable aspect of the ISDS system.  My research seeks to provide a comprehensive view on whether, and to what extent, investment arbitration arbitral tribunals, while deliberating, have taken into consideration the development status of a respondent state.  To give a reasoned award, the tribunal must consider various factors while adjudicating upon investment matters like the Host State’s need to act for the public welfare, policy measures, fair and equitable treatment of the investor, etc.  But does the tribunal also consider that the respondent state is a developing nation, and was this fact already known to the investor, who brought the claim?

Part II will provide, in brief, the prevalent legitimacy issues, and will discuss the widely discussed backlash in the ISDS system by developing countries.  Part III will briefly discuss the situation of respondent states in the ISDS system.  Part IV will launch into the main theme of the research by dividing it into subsections.  Subsection IV. A. discusses the current instances to date where development status has been considered by arbitral tribunals while deliberating, and also what legal debates sprung from that deliberation.  Subsection IV. B. digs deeper into the scholarship available with the results of empirical data to explore whether development status has an effect or not on awards and their quantum.  Part V takes a step beyond current discussions and imagines an ideal situation where the arbitral tribunal gives prominence to development status in its deliberation but is faced with the challenge of calculating damages and compensation.  Part VI contains concluding remarks and observations.