In much that is written today about international arbitration there is a distinction made between what is referred to as commercial arbitration—the arbitration of disputes between parties to contracts with arbitration clauses—and so called investment arbitrations, disputes between host nations and investors in those nations. Although the legal foundation for these disputes is different, the ways in which the two kinds of arbitration are referred to often give the impression that the manner in which the arbitrations are conducted is distinctly dissimilar one from the other. This is not necessarily true, as this article discusses.

Ordinarily, parties to a relationship of an international business nature that may give rise to disputes agree to have their disputes resolved in arbitration, usually pursuant to the rules of certain recognized arbitral institutions. Investment arbitrations, on the other hand, may not involve agreements regarding agreements made between a state and an investor. Instead, these disputes occur as a result of the operation of treaties between nations designed to encourage the flow of investments, usually from more developed nations to less developed ones. These treaties, frequently bilateral, of which there are thousands in existence, provide that if a national of one of the two countries to the treaty experiences certain kinds of problems in the course of its investment, notwithstanding the fact that the national may not have a direct contractual relationship with the country where it has made its investment, may present a claim in arbitration against the host country. The notion that there might be ways to protect foreign investors from losses from host government action gained currency as a result of the resolution of claim by American investors against Iran in the Iran-United States Claims Tribunal in The Hague. American companies were frequently in expropriation and similar claims before The Hague Tribunal and were able to recover their losses from a security account established in the Netherlands for this purpose. In the wake of what was generally regarded as the successful resolution of investors' claims in The Hague Tribunal, many bilateral investment treaties were entered into between various countries in the hope that investors would be more willing to put their money in courntries perceived as representing political risks. Around the same time, the use of political risk insurance, government-sponsored or available through commercial insurers such as AIG, also expanded.