Investment Treaty Arbitration - A System of Private Judges

With the increasing diffusion of investment agreements, investment treaty arbitration has become a major avenue for investors seeking protection of their investments against state acts. But this is not dispute settlement on the cheap, says professor Ole Kristian Fauchald.

For a long time investment disputes were handled either by the International Court of Justice, inter-state or in commercial arbitration. Cases before the International Court of Justice and inter-state arbitration have been infrequent and dependent on the willingness of states to bring the cases forward. Commercial arbitration is usually conducted under the auspices of one of the major international arbitration institutions, such as the International Chamber of Commerce or the London Court of International Arbitration to name just two.

Investment treaty arbitration is a form of dispute settlement that foreign investors can use when their rights under investment treaties are violated by a host country. Protection typically extends to difficulties arising from the action, or lack of action, of the host state, this includes the parliament, the courts, and public officials at both national and local levels.

The investor brings the claim to an arbitral tribunal, which makes findings on the host country’s behaviour towards the investor. The tribunal is established ad hoc and the investor and the host country each appoint an arbitrator to the case. The third arbitrator, who will be chairing the tribunal, is either appointed by the two arbitrators or by a neutral Third party.

Investment treaty arbitration is based on an investment treaty, more frequently bilateral, but increasingly also on multilateral treaties such as chapter 11 of the North American Free Trade Agreement (NAFTA). There exist currently almost three thousand such treaties in force.

With the increasing diffusion of investment agreements over the last 50-60 years, investment treaty arbitration has - in the course of the last 25 years - become a major avenue for investors seeking protection of their investments against state acts. When an investor brings a case against a state, it can either be resolved by a tribunal hosted by an arbitration institution, such as the World Bank International Centre for the Settlement of Investment Disputes (ICSID) or by a tribunal with no institutional affiliation.

An expensive system

The investment arbitration system has been criticized for many reasons. Among the issues that have been raised are: it is biased in favour of investors from OECD countries investing in less developed countries, it is expensive, opaque and it restrains the freedoms of sovereign states to adopt and implement policies.

- This is not dispute settlement on the cheap, says professor Ole Kristian Fauchald and explains that expenses have been a concern for small and medium sized enterprises, which have been struggling to use the system until now.

- It is a system of private judges whereby law firms - acting on behalf of enterprises - have been very expensive, so you have had to pay a lot for case, adds Behn. But the competition among law firms is reducing their fees and consequently costs seem to go down significantly.

Increasingly accessible

As the legal costs for arbitration are going down, the arbitration system is becoming more accessible to businesses that were previously excluded due to the high costs. In the earlier days of investment arbitration, the system was mainly used by the extractive industries and investors in large infrastructure projects.

- This was the situation in the 1990’s and early 2000’s, but the system is changing. Smaller firms have started to bring cases,says postdoctoral fellow Daniel Behn and adds that this will meet some of the criticism on the bias of the system. 

It is not a response to the legitimacy crisis, but rather a consequence of the legal field maturing, Fauchald adds. This development can be compared to that of the human rights sector when it faced the same transition.


Tags: Investment By Hanna Karv
Published May 4, 2016 10:38 AM - Last modified July 29, 2018 9:44 PM