The Impact of Investor-state Arbitration on Developing Countries

An update on Phase 2 of CIGI’s work on international investment law

November 22, 2017
The Peace Palace, which houses the Permanent Court of Arbitration (Shutterstock)

The Centre for International Governance Innovation (CIGI) has decided to concentrate its work in the field of international investment law on one of its most contentious aspects: investor-state arbitration (ISA), also known as investor state dispute settlement (ISDS). Having completed a review of the impacts of ISA in agreements between developed democracies — a process that involved the commissioning of expert studies, a major conference in Ottawa in September 2015 and the publication of Second Thoughts: Investor State Arbitration between Developed Democracies in early 2017 — CIGI is now turning to the even larger theme of the impact of ISA on developing countries.

Work on this aspect of international governance is needed for many reasons. More than 3,200 bilateral investment treaties (BITs) have been negotiated between developed and developing countries since the adoption of the first modern BIT between Pakistan and Germany in 1959. In recent decades, these BITs have been supplemented by more than 100 investment chapters in regional trade agreements (RTAs). Most BITs have been concluded between developed capital exporting and developing capital importing states. The situation with RTAs is more complex. Many are bilateral but many others are plurilateral, being concluded by regional groups of developing states, such as the Association of Southeast Asian Nations, Mercosur, the Andean Community, various African regional economic groups and, most recently, the South Pacific regional agreement. RTAs have also been concluded between developed and developing regional groups, as well as between developing and developed states (for example, the North American Free Trade Agreement). As well, a major international agreement, the International Energy Charter, binds a considerable number of developed and developing states. These BITs and RTAs have given rise to more than 600 arbitral claims in the last 20 years. These claims, which involve major litigation and, in some cases, awards that can amount to hundreds of millions of dollars, constitute one of the most significant developments in international dispute settlement in recent years.

The sheer number of investment agreements and disputes would constitute reason enough for CIGI to be interested in the phenomenon of ISA. But many aspects of BITs, and the practice of ISA as they affect developing countries, give rise to CIGI’s concern. Criticism of ISA has not been limited to its impact on developed countries. In fact, some of the most vocal criticism has come from developing countries, because they have been the object of major claims by foreign investors involving measures taken in response to financial crises, or to regulate mineral and hydrocarbon resources, or to protect public health from degradation of the natural environment.

Criticism in the developing world has centred on both the substance and the practice of ISA. The governments of Venezuela, Bolivia and Ecuador have stated that their BITs and foreign investors’ ISA claims have impeded the social and political change that their citizens desire. The government of Argentina faced more than 40 claims arising out of emergency measures taken to deal with the economic and financial crisis of 2002. These claims were resisted by Argentina but forced the country out of the international financial market for more than a decade until it reached a settlement on the unresolved claims. Numerous controversial awards have been rendered in cases dealing with the legitimacy of a plea of necessity. Many commentators noted the difficulty of rationalizing the approaches taken by different arbitral tribunals in these awards.

More generally, it is often alleged that the many ISA awards display little coherence in their reasoning and interpretation of similar concepts. In particular, the approach taken by arbitrators to the concept of fair and equitable treatment or the concept of indirect expropriation is by no means uniform and often difficult to reconcile with earlier awards. Observers have also expressed concerns about the intellectual independence of arbitrators, particularly those who have acted as counsel in some cases and as arbitrators in others. There have been calls for this practice to stop or, at least, for the adoption of codes of conduct to regulate the selection and actions of arbitrators. There have been many calls, too, for greater transparency of the ISA process, both as to the selection of arbitrators and with respect to the conduct of proceedings and the publication of awards.

For these reasons, some commentators have raised concerns about the integrity of the ISA process and suggested that it is no longer consonant with sound international governance. Of major concern has been the absence of an appellate process comparable to that of the World Trade Organization, and the unsatisfactory nature of the review committee process, which is conducted by the International Centre for Settlement of Investment Disputes (ICSID) established under the Convention on the Settlement of Investment Disputes. For this reason, there have been calls for amendment of the ICSID process or the creation of a fully independent international investment tribunal.

The international community has extensively debated and offered many responses to these criticisms over the past two decades. Many model BITs and new RTAs — such as the United States’ and Canada’s model BITs or the Canada-European Union Comprehensive Economic and Trade Agreement — have incorporated several significant changes; the Mauritius Convention on Transparency entered into force in 2017, although so far with few parties; and the practice of ISA under the ICSID has also moved toward much greater transparency. Codes of conduct for arbitrators have been proposed. But these changes leave open the broader debate as to the impact of ISA on developing countries. It is clear that a major debate is now underway in many developing countries concerning the practice, and even the propriety, of recourse to ISA in investment disputes involving the actions of developing countries’ governments.


The debate and policy review in developing countries is taking many forms. In its most extreme form, policy review consists of the withdrawal by some developing countries from the international investment regime, whether from the ICSID Convention or international investment agreements (IIAs). Bolivia, Ecuador and Venezuela, for instance, withdrew from the ICSID Convention in 2007, 2010 and 2012, respectively. Ecuador also engaged in a global process of terminating its BITs in 2008, when it terminated its agreements with Cuba, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Romania and Uruguay, and subsequently those between El Salvador, Nicaragua, Venezuela and the Netherlands. In 2010, Ecuador’s Constitutional Court declared the arbitration provisions of six more BITs (with China, Finland, Germany, the United Kingdom, Venezuela and United States) to be inconsistent with the country’s constitution.

Nineteen other BITs were terminated by developing countries between January 1, 2017, and April 1, 2017 (most of them being Indonesian and Indian BITs), although two of those were replaced by new treaties.

However, the debate about and policy review of the international investment regime cannot be described as characterized by a general trend of withdrawal from IIAs. Indeed, the United Nations Conference on Trade and Development (UNCTAD) reports a growth in the universe of IIAs in 2016, with 37 new IIAs concluded (30 BITs and seven treaties with investment provisions), bringing the total of IIAs to 3,324 at the end of 2016.

One of the most active countries in this regard is Brazil, which concluded six IIAs in 2015, followed by China, with three. In 2016, the most active country in this regard was Turkey, which concluded seven new IIAs. Developing countries have different policies with respect to foreign direct investment (FDI), which translate into practice by the conclusion of IIAs with different content.

The shift in the international investment regime is, in fact, not characterized by major differences in the number of IIAs that are being concluded or withdrawn from, but rather by the format and content of new IIAs. In particular, UNCTAD reports that since 2012, at least 110 countries have started a process of reviewing their national and international investment policies. At the bilateral level, policy reviews often involve the revision of existing agreements and the conclusion of new treaties that are friendlier to sustainable development. At the national level, at least 60 countries have developed or have been developing new model IIAs since 2012, according to UNCTAD reports.

In Brazil, after domestic consultations with the private sector and taking into account the experiences of international organizations and other countries, a model agreement on cooperation and facilitation of investment (CFIA) was approved in 2013. This model was the basis upon which Brazil negotiated CFIAs with Angola, Chile, Colombia, Malawi, Mexico and Mozambique. All of these agreements were signed in 2015 but none has yet entered into force. The model agreement is innovative in terms of its dispute prevention mechanisms, in that it includes ombudsmen and joint committees of government representatives of both parties, as well as provisions on the promotion and facilitation of investment. It contains a much-revised version of the traditional international investment law standards of treatment but does not include ISDS (although it provides for state-to-state dispute settlement).

In Colombia, the 2011 model BIT is currently under revision, a process that includes public consultations. While the new model BIT has not been made public yet, expectations are that it will follow the 2011 version and include provisions on the right to regulate through broad exception clauses. It is also expected to circumscribe the fair and equitable treatment (FET) and indirect expropriations provisions and to promote standards on corporate social responsibility (CSR).

India’s new model BIT was made public in 2015 and presents innovative features. The most notable features are the absence of a most-favoured nation provision (a traditional standard of treatment in IIAs), the replacement of the FET standard with a list of state obligations, and broad exception clauses and an explicit section on investors’ obligations (thus following in the footsteps of the 2012 Southern African Development Community [SADC] model investment treaty). It also includes provisions on CSR and compliance with the law of the host state.

Indonesia is also in the process of finalizing its model BIT, which will likely include broad exception clauses and clarifications intended to safeguard the right of states to regulate. UNCTAD reports that the model BIT will also include a definition of “investment” based on the Salini test, which requires that the investment contribute to the development of the host state. Finally, the model BIT will include ISDS as a means of solving disputes between investors and host states, but it will be subject to specific host-state consent.

Egypt’s draft new-model BIT, which is currently subject to consultations, will also include broad exception clauses intended to protect measures related to sustainable development. It also clarifies the FET standard to take into account the parties’ different levels of development. Finally, it conditions access to ISDS on a specific agreement by the parties and includes other amicable means of dispute resolution such as negotiation, mediation and conciliation.

Finally, South Africa has been engaged in a general review of its international investment policy that was initiated in 2008. The outcome of this process was the termination of many BITs by South Africa, the renegotiation of other agreements and the development of a new investment law that codifies investment protection provisions into domestic law. The National Assembly passed the Promotion and Protection of Investment Act in 2015, which aims to preserve South Africa’s right to regulate and to pursue legitimate public policy objectives.

With respect to new multilateral agreement and initiatives, the Trans-Pacific Partnership, involving a number of developing states, was concluded in 2016, but rejected by the United States in 2017, the Regional Comprehensive Economic Partnership, the Trade in Services Agreement, and the COMESA-EAC-SADC Tripartite Free Trade Area are still being negotiated. Other multilateral initiatives include the SADC model BIT (2012) and the Pan-African Investment Code (2016). In April 2017, the Mercosur member states signed the Protocol for the Cooperation and the Facilitation of Investment within MERCOSUR (among the notable features of this instrument is the absence of not only an FET provision but also any mention of ISDS); the SADC member states amended Annex 1 of the SADC Finance and Investment Protocol in August 2016; the African, Caribbean and Pacific (ACP) Group of States are developing Guiding Principles for ACP Countries’ Investment Policymaking; the Asia-Pacific Economic Cooperation Economic Leaders’ Meeting adopted the Lima Declaration; and discussions are ongoing on the content of non-binding principle on investment between the European Union and African countries. The European Union is also currently advocating for the creation of a multilateral investment court system that would solve disputes between investors and host developing countries, among others.

All these initiatives generally aim to integrate broader considerations within the international investment law regime in order to rebalance the obligations of states with the obligations of investors and in order to promote investment development, promotion and cooperation, as well as regional economic integration. Finally, these initiatives emphasize the importance of values pertaining to sustainable development, CSR and the protection of legitimate public welfare objectives through the inclusion of broader exception clauses.

Regarding the “format” of new IIAs, there is a clear shift away from concluding BITs to concluding multilateral treaties with FDI provisions. Accordingly, the lower number of BITs that have been concluded in 2016 compared to previous years must not be misinterpreted as a general tendency on the part of countries to reduce their involvement in the international investment regime. Ultimately, while there is very little evidence that the rate of formation of new agreements is slowing down, a very strong trend of developing countries to rethink their policies can be witnessed, as evidenced by the new “format” of their investment treaties and, more importantly, their content.           


The foregoing makes clear that there is a major debate taking place in the developing world concerning the propriety of ISA. CIGI would like to better understand this debate and to contribute to it in a meaningful fashion. To this end, CIGI intends to reach out to developing countries in Asia, Africa, Latin America and the Caribbean and to play a role in this very important debate over global governance of the standards controlling the treatment of international investment and the ISA dispute settlement process currently in place.

CIGI’s work program in this area will take several forms. The International Law Reseach Program organized a first seminar in Singapore in November 2016. Government officials and other arbitration experts from 11 Asian countries were invited to meet with CIGI researchers to discuss the experience of their countries, with BITs in general and with ISA in particular. For two days, subject to the Chatham House Rule, a series of questions were discussed with a view to understanding the perspective of the countries represented. Similar seminars are planned to take place in Africa and Latin America, and possibly in the Caribbean, for later in 2017 and early 2018. These seminars will be complemented by country studies undertaken by independent experts, with a view to having an in-depth vision of the experience of the countries covered with BITs and ISA. These studies should examine both legal issues and the broader economic and political impacts of foreign investment guarantees.

It is hoped that the results of this work will provide valuable comparative information to public officials responsible for developing policy with respect to foreign investment protection. The network of BITs and RTAs is genuinely global, but all too often treaties have been developed in isolation from the experience of other jurisdictions, and sometimes reflect too heavily the interests of capital exporters at the expense of developing countries’ interests. What CIGI hopes to contribute is additional information and critical commentary to complement the valuable work currently being done by UNCTAD, the Columbia Center on Sustainable Investment, and other public and private institutions. In particular, the work of CIGI will be designed to provide comparative information to policy makers in developing countries who may be involved in designing new investment agreements or deciding to adopt entirely new approaches. CIGI will provide an independent assessment of the direction of international investment policy making and the practice of ISA, with a view to facilitating sound choices consonant with the best approaches to global governance in this field. CIGI will attempt to determine the direction ISA is most likely to take in the coming years and to advise on approaches that developing countries might be well advised to avoid.

Complementing this study is another CIGI research project currently underway, which seeks to assess the extent to which it might be possible to replace ISA with remedies existing in domestic law that could be decided before domestic courts.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

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