Originally from Reflections on International Arbitration - Essays in Honour of Professor George Bermann

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In recent years, investor-State arbitration, or investor-State dispute settlement (ISDS), has faced intense political criticism. The international arbitration community has responded by implementing a plethora of reforms to the arbitration process. However, as set forth in more detail in the recently-published book co-authored by Tai-Heng Cheng, “Investor State Arbitration in a Changing World Order” (Brill, 2021), these reforms cannot, on their own, fully address the criticisms heaped against investor-State arbitration. This is because the criticisms stem from a political backlash against the perceived inequitable distribution of benefits from international trade and capitalism. Voters in many countries are also increasingly focused on enforcing environmental, social and corporate governance (ESG) norms. Arbitration often becomes a collateral victim when elected officials take aim at treaties that do not keep pace with these norms.

Investor-State arbitration is the mechanism to resolve disputes between foreign investors and sovereign States. Such arbitrations arise from bilateral investment treaties (BITs) or multilateral free trade agreements (FTAs) with investment chapters. The disputes concern whether the actions and policies of the State have violated international obligations of the State to give foreign investors protection under international law. In their awards, arbitral tribunals can determine what financial damage, if any, foreign investors have suffered as a result. Awards can range from a few million dollars to over US$ 50 billion, as in the case of Yukos v. Russia. Investor-State arbitration is often administered by the World Bank’s arbitration arm, the International Centre for Settlement of Investment Disputes (ICSID), or the Permanent Court of Arbitration in The Hague. Typically, like in commercial arbitration, each party picks a co-arbitrator. The two co-arbitrators in turn propose a chair. If the parties cannot agree on the presiding arbitrator, the international institution will select the chair.