Overview to the Investment Arbitration: Resolving Disputes Between Investors and

States

Understanding Investment ArbitrationIntroduction

Investment arbitration, also known as Investor-State Dispute Settlement (hereinafter referred

to as “ISDS”), is a crucial mechanism for resolving disputes between foreign investors and
host states. This process allows foreign investors to sue a host state, providing a neutral
platform to address grievances arising from investment activities. ISDS differs from
International Commercial Arbitration (hereinafter referred to as “ICA”) due to the nature of
the claims and the parties involved. While ICA deals with disputes arising from commercial
contractual obligations, investment arbitration addresses disputes under public treaties
between states, offering protections such as Fair and Equitable Treatment (hereinafter
referred to as “FET”), National Treatment, and protection from expropriation.is a process
designed to resolve conflicts between foreign investors and host governments. It offers a
neutral platform for addressing disputes that arise from investment activities in a particular
country.

India's first bilateral investment treaties (hereinafter referred to as “BITs”) was signed with
the United Kingdom in 1994, marking a significant step in the country's investment
arbitration framework. By 2024, India had entered into 87 BITs, although concerns about the
breadth of investment protection led to a re-evaluation of this approach. The White Industries
arbitration case highlighted the need for a balanced framework that protects investor rights
while preserving India's regulatory autonomy.

In 2015, India introduced a new Model BIT, reflecting a shift in policy. This model
emphasized a broader right of regulation for the host state, reduced FET protection, and
required investors to exhaust local remedies before initiating arbitration. These changes
aimed to balance investor protection with India's sovereign rights, signaling a move towards a
more nuanced investment arbitration regime.

Investment arbitration in India today is governed by a combination of BITs and Free Trade
Agreements (hereinafter referred to as “FTAs”), with institutions like the International Centre
for Settlement of Investment Disputes (hereinafter referred to as “ICSID”) and the United
Nations Commission on International Trade Law (hereinafter referred to as “UNCITRAL")
providing procedural frameworks. Despite not being a party to the ICSID Convention, India
recognizes the importance of providing a stable and predictable investment environment. The
country continues to refine its approach to investment arbitration, seeking to attract foreign
investment while safeguarding national interests.

Why Does Investment Arbitration Matter?

 Encouraging Investment
ISDS encourages foreign investment by assuring investors they will be treated fairly
and have access to a neutral dispute resolution process. This assurance is particularly
important in countries where investors might otherwise be deterred by concerns about
political or legal instability. By providing a reliable and impartial mechanism for
resolving disputes, ISDS helps to mitigate the risks associated with investing in
foreign markets. This increased confidence can lead to a higher level of foreign direct
investment, which is beneficial for the economic development of host countries. can
make investors more confident about investing in countries where they might
otherwise worry about political or legal instability.
 Providing Legal Certainty
With clear rules and procedures in place for resolving disputes, investors can predict
how conflicts will be handled, making them more comfortable entering new markets.
This predictability is essential for long-term investment planning and risk
management.Investment arbitration clear rules and procedures for resolving disputes,
allowing investors to predict how conflicts will be handled. This predictability is
essential for long-term investment planning and risk management. When investors
understand the legal framework and know that there are established processes for
addressing grievances, they are more likely to commit resources to new markets.
Legal certainty reduces the perceived risk of arbitration or discriminatory actions by
host states, making it easier for investors to make informed decisions and engage in
cross-border investments.
 Protecting Investors Rights
ISDS mechanisms ensure that the rights of foreign investors in India are protected
under international treaties and bilateral investment treaties (hereinafter referred to as
 “BITs”). India has entered into numerous BITs that provide substantive protections,
including fair and equitable treatment, protection against expropriation, and the free
transfer of funds. These treaties create a legal framework that safeguards investors
from arbitrary or discriminatory actions by the Indian government. By upholding
these rights, ISDS mechanisms enhance investor confidence and contribute to a more
favorable investment climate.

How Investment Arbitration Works

Key Difference between Investment and Commercial Arbitration

a. Nature of Dispute and Parties Involved:

Investment arbitration, or investor-state dispute settlement (ISDS), centres around disputes

between foreign investors and host states arising from breaches of obligations under bilateral
or multilateral investment treaties. These disputes often involve claims related to
expropriation, fair treatment, and other protections guaranteed under international law.

In contrast, commercial arbitration deals with disputes arising from contractual obligations
between private parties, such as disputes over goods, services, or construction projects. The
parties involved in investment arbitration include foreign investors (individuals or entities)
and sovereign states, whereas commercial arbitration typically involves private entities or
individuals engaged in business transactions.

b. Legal Framework and Enforcement:

Investment arbitration operates under a framework governed by treaties like the ICSID
Convention and national laws of the host state, providing specific provisions for the
recognition and enforcement of awards. This legal framework ensures that decisions are
binding and enforceable across borders.

Conversely, commercial arbitration primarily relies on the New York Convention for the
recognition and enforcement of arbitral awards among member states, focusing on private
contractual disputes rather than public international law. Substantively, investment arbitration
often applies the host state’s laws to determine the merits of disputes, making foreign
investors subject to changes in domestic legislation. In contrast, commercial arbitration
allows parties to choose the applicable substantive law, offering flexibility in resolving
commercial disputes without direct impact from changes in national laws unless stipulated in
the arbitration agreement.

Institutional Arbitration and Ad Hoc Arbitration

a. Institutional Arbitration:

Institutional arbitration refers to dispute resolution proceedings administered by specialized

institutions according to their established rules. In the context of investment arbitration,
institutional arbitration typically involves institutions like the ICSID, the International Court
of Arbitration of the International Chamber of Commerce, or the Arbitration Institute of the
Stockholm Chamber of Commerce. These institutions provide a structured framework for
resolving disputes between foreign investors and host states under the terms of relevant
investment treaties. For instance, ICSID operates under its own Convention, ensuring
uniformity and procedural standards across disputes. The jurisdictional requirements under
the ICSID Convention, specified in Article 25, limit its scope to disputes involving a
contracting state and a national of another contracting state, ensuring clarity in jurisdictional
issues.

b. Ad Hoc Arbitration:

Ad hoc arbitration, on the other hand, refers to arbitration proceedings conducted without the
involvement of specialized institutions. Parties to the dispute agree to resolve their
differences under agreed-upon rules, often referencing established arbitration rules such as
those provided by the UNCITRAL. This format is common in investment disputes involving
countries like India, which is not a party to the ICSID Convention. Ad hoc arbitration
provides flexibility in procedure and allows parties to tailor the arbitration process to suit
their specific needs and preferences. However, it requires careful consideration and
agreement on procedural matters, including the selection of arbitrators and the rules
governing the arbitration process.

International Centre for Settlement of Investment Disputes (ICSID)

The International Centre for Settlement of Investment Disputes (ICSID) was established in
1966 under the ICSID Convention to facilitate the resolution of investment disputes through
conciliation, arbitration, or fact-finding. Governed by its own set of Regulations and Rules,
including provisions for Administrative and Financial Regulations, as well as specific Rules
of Procedure for Conciliation and Arbitration Proceedings, ICSID provides a structured
framework for resolving disputes between contracting states and foreign investors. Currently,
the ICSID Convention has been ratified by 155 countries, with additional signatories pending
ratification, illustrating its broad international acceptance and operational scope. While
ICSID primarily facilitates disputes involving a contracting state and a foreign national, it
also administers arbitrations in certain circumstances where one party is neither a contracting
state nor its national.

Criticisms and Challenges Faced by ICSID and ISDS

Despite its widespread adoption, the ICSID system and the broader Investor-State Dispute
Settlement (ISDS) mechanism have faced significant criticism, particularly from developing
countries like India. Critics argue that ISDS provisions undermine national sovereignty by
restricting regulatory measures that governments may implement in the public interest.
India's experience, highlighted by cases such as White Industries v. India, has contributed to a
cautious approach towards ISDS. Following this case, India reduced its participation in BITs,
terminated several existing treaties, and adopted measures in its 2016 Model BIT to enhance
regulatory autonomy and require exhaustion of local remedies before initiating international
arbitration.

Furthermore, transparency in ICSID proceedings has been a contentious issue. Until

amendments in 2006, the ICSID Convention lacked provisions ensuring transparency, leaving
the level of openness to the discretion of the parties and the tribunal. This has contributed to
perceptions of opacity and inconsistency in ISDS outcomes. Another critical concern is the
absence of an appellate mechanism within ICSID. Once an award is rendered, it is final and
binding, with limited grounds for annulment under Article 52 of the ICSID Convention, such
as serious procedural irregularities or manifest excess of powers by the tribunal. This finality
has sparked debates over the fairness and accountability of ISDS decisions, with ongoing
calls for reforms to address these perceived shortcomings.
while ICSID provides a robust framework for resolving international investment disputes, its
implementation has sparked significant debate and scrutiny, particularly regarding its impact
on national sovereignty, transparency, and the absence of appellate review. These issues
continue to shape global discussions on the future of ISDS and efforts to balance investor
protection with regulatory autonomy of host states.

AMLEGALS Remark Starting the Process

In evaluating the landscape of investment arbitration and its mechanisms like ISDS, it's clear
that while these frameworks provide essential avenues for resolving disputes and promoting
international investment, they are not without their controversies and challenges. The
criticism from countries like India underscores legitimate concerns about sovereignty and the
balance between investor rights and national regulatory autonomy. The shift in India's
approach, as evidenced by its Model BIT revisions and treaty terminations, reflects a nuanced
attempt to navigate these complexities while fostering a conducive environment for foreign
investment. Moving forward, global discussions on ISDS reforms will continue to be pivotal
in addressing transparency, accountability, and procedural fairness to ensure that these
mechanisms serve the interests of all stakeholders involved, including both investors and host
states.

The framework for arbitration is often established by investment treaties or contracts, which
typically include provisions for negotiation attempts before resorting to arbitration. This
ensures that arbitration is used as a last resort after other resolution methods have been tried.

Key Participants

A tribunal of independent arbitrators is appointed to hear the case and issue a binding
decision. These arbitrators are chosen for their expertise in international law and investment
disputes. Both the investor and the state need strong legal representation to present their cases
effectively.

Crucial Factors in Investment Arbitration

Treaty Provisions
The specific terms of the relevant investment treaty or contract determine the grounds for
claims and the applicable legal framework. Common protections include fair and equitable
treatment, protection from expropriation without compensation, and full protection and
security.

Ensuring Transparency and Fairness

A fair and transparent arbitration process is essential for maintaining the legitimacy of ISDS.
Recent reforms aim to increase transparency in proceedings, including publishing awards and
allowing public access to hearings.

Considering the Costs

Investment arbitration can be lengthy and expensive, with costs including legal fees,
arbitrator fees, and administrative expenses. Parties must weigh these costs against the
potential benefits of pursuing arbitration.

The Origins and Purpose of Investment Arbitration

Investment arbitration developed to provide an impartial forum for resolving disputes arising
from international investment agreements (IIAs). IIAs are treaties between countries that
protect foreign investments by granting certain rights to investors and establishing
mechanisms for dispute resolution. The primary goal is to ensure a fair and neutral process
for handling conflicts related to foreign investment.

Criticisms and Challenges

Perceived Bias Toward Foreign Investors

Some critics argue that investment arbitration favors foreign investors over domestic ones.
They suggest that in some cases, domestic courts may already provide adequate access to
justice, making investment arbitration unnecessary.

Issues with Transparency and Accountability

There are concerns about the lack of transparency, consistency, and accountability in
arbitration proceedings. Critics point out that the confidential nature of many proceedings can
obscure decisions and rationales, making it difficult to ensure fairness and consistency.

The Risk of Regulatory Chill

Another criticism is the potential for "regulatory chill," where governments might hesitate to
implement regulations in the public interest (such as environmental or health regulations) due
to fear of facing costly arbitration claims.

Exploring Alternative Solutions

Alternative Dispute Resolution Methods

Mediation and conciliation can be quicker and potentially more cost-effective alternatives to
arbitration. These methods can offer more flexible and amicable solutions compared to the
adversarial nature of arbitration.

Ongoing Reforms and Future Outlook

Despite the criticisms, investment arbitration remains important due to its neutrality,
enforceability, and specialized expertise. The system is evolving, with ongoing discussions
about institutional design and potential reforms. States must balance investor protection with
the right to regulate in the public interest. Reforms are being considered to address
transparency issues, reduce costs, and ensure fair outcomes.

Recent Reforms and Trends

 Multilateral Investment Court: There are discussions about creating a multilateral

investment court to replace ad hoc tribunals. This court would have permanent judges,
increasing consistency and predictability in decisions.
 UNCITRAL Transparency Rules: The United Nations Commission on International
Trade Law (UNCITRAL) has introduced transparency rules that are being adopted in
new treaties, allowing for greater public access to proceedings and documents.
  ICSID Amendments: The International Centre for Settlement of Investment Disputes
(ICSID) is working on rule amendments to address concerns about efficiency, cost,
and transparency.

Conclusion

Investment arbitration is crucial for fostering a favorable environment for foreign investment
by providing a neutral and predictable dispute resolution mechanism. While the system faces
criticisms and challenges, its benefits in promoting investment and providing legal certainty
underscore its importance. Ongoing reforms and consideration of alternative dispute
resolution methods aim to address concerns and enhance the effectiveness and fairness of
investment arbitration.

By understanding these details and engaging in continuous improvement, the investment

arbitration system can better serve both investors and states, balancing protection with the
public interest.