Originally from Investment Treaty Arbitration and International Law - Volume 14

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To state the obvious, investor-State arbitration has received increasing push back in recent years. What may have once been perceived as an idiosyncratic rejection of investor-State arbitration (or the ICSID Convention) in the case of, Bolivia, Ecuador, Nicaragua and Venezuela, for example, denouncing the ICSID Convention,  has now evolved into a more complex situation with capital exporting countries like Canada, for instance, refusing to participate in the dispute resolution mechanism under the United States-Mexico-Canada Agreement (“USMCA”),  the European Union revising the mechanism of investor-State arbitration in its treaties with Vietnam and Canada,  Australia excluding ISDS from its BITs,  and countless articles, conferences and books regarding the “backlash” against investor-State Arbitration and the necessity of its transformation.

The criticisms to the investor-State arbitration regime include a wide variety of perceived shortcomings. Users of investor-State arbitration and outsiders point to procedural and substantive aspect of it that require improvement, from accountability and transparency, to gender and race representation in the appointment of arbitrators, to prevention and elimination of bias and conflicts of interest.  This article is concerned with one of such areas where the current investor-State arbitration regime requires attention: the allocation of financial risk in connection with costs for participating in an arbitration proceeding. Due to the realities of investor-State arbitration, where the claimants are commonly shell companies or special purpose vehicles, States (collectively and individually) bear a higher risk than the claimants of not recovering the costs of their defense (lawyers and expert’s fees, institutional fees, and tribunal’s fees ), regardless of the outcome of the case.

This article will demonstrate that, in order to address the imbalance in the allocation of risk of non-recoverability of costs between respondent-States and investors, security for costs should be generally required from the claimants. Three arguments assist this conclusion: (I) shifting the risk of costs from the respondent States (which currently bear that risk) to the claimants is justified from a policy perspective, (II) other policy concerns raised in opposition to security for costs are meritless, and (III) the current standard for security for costs is unduly burdensome. This article will conclude that the proposal to include a specific rule empowering the tribunal to order security for cots in the ICSID Arbitration Rules is, for the most part, a step in the right direction.