Originally from The American Review of International Arbitration  (ARIA)

ABSTRACT

As the world watches the Russia-Ukraine war with bated breath, academics and armchair philosophers alike are now debating the prudence and impact of economic sanctions. This note aims to shed light on a less-explored but significant corollary to that debate: how economic sanctions are affecting the investor-state dispute settlement (ISDS) system. Given that ISDS cases take several years to materialize and resolve, it is still too early to discern the effect of the new anti-Russian sanctions. However, recently publicized ISDS disputes instigated by the anti-Iranian sanctions regime provide a novel and relevant lens for examining the question.

This note analyzes the impact of economic sanctions on three phases of ISDS proceedings: jurisdiction, the merits, and post-award. Using sanctions-affected investment treaty disputes involving Iran and South Korea as a paradigm, the note highlights not only the significant potential for economic sanctions to generate ISDS claims, but also the obstacles and defenses that would-be claimants may face in all three phases. Ultimately, the note concludes that the squeeze States face between investment treaty compliance and sanctions compliance in ISDS may necessitate long-term substantive changes in the content of investment treaties.

I.     INTRODUCTION

How are economic sanctions affecting the investor-state dispute settlement (ISDS) system and jurisprudence? While economic sanctions—loosely defined as unilateral or multilateral economic controls imposed by States for political purposes —have been around since at least the 5th century B.C.,   their multiplicity and complexity are reaching new heights.  Meanwhile, the ISDS system in use today is relatively new.  Starting in the late 1950s, developed States eager to protect their investors and developing States eager to attract private investments began offering advance consent to arbitration directly with each other’s nationals under bilateral investment treaties (BITs).   ISDS proliferated after the entry into force of the ICSID Convention in 1966 and despite mounting criticism and ongoing reform efforts, its use worldwide continues to grow. 

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C. Road Map

This paper analyzes the legal facets of how economic sanctions may affect ISDS going forward, through the lens of the unfolding Iran-Korea disputes and existing investment arbitration case law. The first part addresses sanctions-based jurisdictional implications from Dayyani and the upcoming Korea-CBI frozen asset arbitration. The second part explores the possibility of a sanctions-based defense on the merits, both hypothetically in the Iran-Korea disputes and in ISDS generally. The third part explores the pervasive impact of economic sanctions in the set-aside and enforcement phases of Dayyani and other tribunal awards, including the legal ramifications of non-payment and interference in judgment collection. In conclusion, the paper suggests that the near-term effects of sanctions on ISDS are producing long-term shifts in the structure of investment treaties.