Investment disputes brought to international arbitration

The number of investment disputes brought to international arbitration reached a new peak in 2012, amplifying the need for public debate about the efficacy of the investor-state dispute settlement (ISDS) mechanism and ways to reform it, a new United Nations Conference and Trade Development (UNCTAD) report says.

The report on recent developments in Investor–State Dispute Settlement (ISDS), published recently by UNCTAD, reveals that 62 new cases were filed in 2012. 

This is the highest number of known treaty-based disputes ever initiated in one year, confirming the increasing tendency of foreign investors to resort to investor–State arbitration.

In 68 per cent of the new cases, the respondents are developing or transition economies, the report says. Although the number of cases filed by developing-country investors has increased, the majority of new cases 63 per cent are still originating from developed countries.

The disputes filed in 2012 bring the total tally of known treaty-based cases to 518, while the number of countries that have responded to one or more such cases has risen to 95.

ISDS proceedings are provided for by a majority of the 3,200 international investment agreements (IIAs) in existence today. 

Typically, a foreign investor that believes that its rights under an IIA have been violated is allowed by the treaty to litigate against the host State government in an international arbitration forum.

The claim will be heard by an arbitration tribunal set up for each dispute individually, under the rules of the International Centre for Settlement of Investment Disputes (ICSID), or under other arbitration rules.

If the tribunal finds a violation of any of the rights granted under the investment treaty, it may award compensation to cover the damages suffered by the investor as a result of unlawful State actions.

Foreign investors challenged a broad range of government measures in 2012, including changes to domestic regulatory frameworks (with respect to gas, nuclear energy, the marketing of gold, and currency regulations), as well as measures relating to revocations of licenses (in the mining, telecommunications and tourism sectors). 

Investors also took action on the grounds of alleged breaches of investment contracts, alleged irregularities in public tenders, withdrawals of previously granted subsidies (in the solar energy sector), and direct expropriations of investments.

At least 42 arbitral decisions were issued in 2012, of which 31 are in the public domain. In 70 per cent of the public decisions addressing the merits of disputes, investors’ claims were accepted, or at least in part.

Nine decisions in 2012 awarded damages. This included the highest award in the history of ISDS (USD1.77 billion) in Occidental v. Ecuador, a case that arose out of unilateral termination by the State of an oil contract.

By the end of 2012, the total number of known cases reached 518 and the total number of countries that have responded to one or more ISDS claims increased to 95.

 The overall number of concluded cases reached 244. Out of these, approximately 42 per cent were decided in favour of the State and 31 per cent in favour of the investor. Approximately 27 per cent of the cases were settled.

“Recent developments have amplified a number of cross-cutting challenges that are facing the ISDS mechanism, which gives credence to calls for reform of the investment arbitration system,” said James Zhan, Director of UNCTAD’s Division on Investment and Enterprise, upon the release of the new findings. The division researched and published the report.

“The ISDS mechanism is already a source of considered reflection in numerous bilateral and regional IIA negotiations. However, a multilateral dialogue on ISDS could prove more effective in bringing about a harmonized approach to reform,” Zhan added. 

Earlier this year, UNCTAD launched its Investment Policy Framework for Sustainable Development (IPFSD) to facilitate a more balanced approach to investment policymaking.

The framework was released as part of the World Investment Report 2012 and attempts to better align investment policies with a new era of sustainable development objectives.

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