Edited by Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio
Chapter A.14: Arbitration, investment
I. Context and background
The promotion of foreign investment is considered essential for the efficient working of the global economy. But while there is a general willingness on the part of host states to attract and to promote foreign investment, a contrary trend to regulate investments according to →public policy (ordre public) considerations can similarly be observed. In order to create mutual trust in the other state’s legal system and to stimulate foreign investment, states conclude international investment treaties (IITs) that extend a certain minimum standard of protection to investments by nationals of other contracting states.
Today, nearly 3000 bilateral investment treaties (BITs) and several multilateral investment treaties are accounted for. For instance, the ECT (Energy Charter Treaty of 17 December 1994,  OJ L 380/24, 2080 UNTS 100), a multilateral IIT with 49 contracting parties, includes protective provisions for investments in the energy field. An additional example is NAFTA (North American Free Trade Agreement of 17 December 1992 between Canada, Mexico and the United States, 32 ILM 289), which combines a legal framework for the admission and protection of investments for → Canada, the →USA and →Mexico.
In addition to the substantive protection afforded to investments, most modern IITs contain a binding offer to arbitrate made by the respective host state to investors from other contracting states. While under most international treaties only states can initiate dispute settlement proceedings in cases of breach, under most IITs the harmed individual can itself bring an action against the host state and claim for damages. This mechanism is commonly known as investor state dispute settlement (ISDS).
While some arbitration clauses in IITs provide for arbitration under the auspices of well-known arbitral institutions in the area of international commercial arbitration (→Arbitration, international commercial), such as the International Chamber of Commerce (ICC) and Stockholm Chamber of Commerce (SCC), or in accordance with the UNCITRAL Arbitration Rules (as revised in 2010, UNGA A/RES/65/22 and UN Doc A/RES/68/109, adopted on 6 December 2010), the most important arbitral institution in the field of international investment law is the International Centre for Settlement of Investment Disputes (ICSID), by the ICSID Convention (Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965, 575 UNTS 159), which provides for a specific resolution mechanism for investment disputes (see III. below).
II. Historical development
The →aliens law (Condition des étrangers, Fremdenrecht), which is part of customary international law but also enshrined in p. 98several treaties such as Treaties on Friendship, Commerce and Navigation (‘FCN-Treaties’), is generally considered the predecessor of international investment law (see Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’ in Marc Bungenberg and others (eds), International Investment Law: A Handbook (Hart Publishing 2014) 7–22). The law of aliens offers comparable standards of protection including non-discrimination, full protection and security, fair and equitable treatment and →expropriation only against compensation. However, unlike under international investment law, the protection afforded under that regime focuses on the foreign national and its property (Alfred Verdroß, ‘Les règles internationales concernant le traitement des étrangers’ (1931) 37 Rec. des Cours 323), but not on whether an ‘investment’ was made. Furthermore, only the foreign national’s home state is entitled to claim a breach of these standards in accordance with the principles of diplomatic protection. In consequence, a home state claim is only admissible where the foreign national has first exhausted all legal →remedies available under the law of the host state (see art 44(b) Draft Articles on Responsibility of States (Draft Articles on responsibility of states approved by the International Law Commission as laid down in Resolution 56/83 of the General Assembly of the United Nations of 28 January 2002, A/RES/56/83)).
In 1957, the then Chairman of the Deutsche Bank, Mr Hermann Abs, called for a multilateral treaty for the protection of foreign property. To this end, Mr Abs and Lord Hartley Shawcross in 1959 proposed a Convention to Protect Private Foreign Investment (the so-called ‘Abs–Shawcross Draft Convention’; reprinted in ‘The Proposed Convention to Protect Private Foreign Investment’ (1960) 9 J Public Law 115). Despite its title and like the 1961 Harvard Draft (‘Draft Convention on the International Responsibility of States for Injuries to Aliens’ (1961) 55 Am.J.Int’l L. 548) and the 1967 OECD Draft Convention on the Protection of Foreign Property (available at <www.oecd.org>), the Abs–Shawcroft draft focused on the protection of foreign property and/or the foreign national itself. Nonetheless, the notion of property as defined by these drafts resembled definitions of investment under contemporary IITs.
In 1959, →Germany and Pakistan concluded the first BIT (Treaty for the Promotion and Protection of Investments between Pakistan and the Federal Republic of Germany of 25 November 1959, 457 UNTS 24), which served as a role model for subsequent IITs. Its approach to the term ‘investment’, referring to the term ‘asset’ (Kapitalanlage), also became a model for so-called ‘asset-based’ definitions, which are used by many or even most contemporary IITs. However, it did not provide for an ISDS mechanism. It was not until 1968 that the Indonesia–Netherlands BIT (Agreement on economic cooperation between the Government of the Republic of Indonesia and the Government of the Kingdom of the Netherlands of 7 July 1968, 799 UNTS 13) for the first time included ISDS provisions (Andrew Newcombe and Lluis Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 45); since then, the inclusion of ISDS provisions has become common practice for IITs.
Whereas the legal instruments already mentioned focused primarily on substantive protection, the World Bank’s General Counsel, Mr Aron Broches, in 1961 proposed creating a platform for the neutral settlement of investment disputes. After intense negotiation, the ICSID Convention was concluded in 1965 and entered into force shortly thereafter on 14 October 1966. The first case, Holiday Inns v Morocco, was filed with the ICSID in 1971, based as in most cases filed during the first 20 years of ICISD on a contractual arbitration clause (Holiday Inns SA and others v Morocco, ICSID Case No ARB/72/1; reported by Pierre Lalive, ‘The First “World Bank” Arbitration (Holiday Inns v Morocco): Some Legal Problems’ (1980) 51 BYIL 123). During this period, few cases were also initiated under ICSID arbitration clauses contained in domestic investment protection legislation (see Richard Happ and Noah Rubins, Digest of ICSID Awards and Decisions (OUP 2013) 324–5). However, it was not until 1990 that a first dispute was decided based on an offer to arbitrate contained in an IIT (Asian Agricultural Products Ltd v Sri Lanka, ICSID Case No ARB/87/3, Award, 27 June 1990). Today by contrast the overwhelming majority of disputes filed with the ICSID are based on arbitration clauses contained in an IIT.
States have hitherto been unable to agree on a universal instrument governing the protection of investment. Multilateral agreements such as NAFTA are limited to regions or a specific subject matter, eg the ECT. Attempts p. 99under OECD auspices to create a Multilateral Agreement on Investment failed in 1998 (OECD, ‘The Multilateral Agreement on Investment: Commentary to the consolidated text’, DAFFE/MAI(98)8/REV1, 22 April 1998). Thus, international investment law is today characterized by a multitude of bilateral and only few multilateral treaties.
III. The International Centre for Settlement of Investment Disputes (ICSID)
The ICSID is an international organization and part of the World Bank Group currently with 153 contracting states. As of 30 June 2016, the ICSID has since its foundation registered 570 arbitrations under the Rules of Procedure for Arbitration Proceedings (henceforth ICSID Arbitration Rules) and the Additional Facility Rules (both as amended on 10 April 2006, available at <https://icsid.worldbank.org>). Currently, nearly 200 arbitrations are pending. Each year, some 30 to 40 new cases are filed.
Provided that a dispute is between a contracting state and a national of another contracting state, arbitral proceedings under ICSID auspices are governed by the ICSID Convention as well as the ICSID Arbitration Rules. Unlike ‘standard’ arbitration institutions, the ICSID has a number of peculiarities. First, the ICSID Convention imposes additional jurisdictional requirements that have to be satisfied beside the jurisdictional hurdles imposed by an agreement to arbitrate. Second, ICSID arbitrations are de-nationalized, ie only the ICSID Convention as well as the ICSID Arbitration Rules govern the procedure (cf also art 44 ICSID Convention). The law of the arbitral seat is irrelevant as lex arbitri. Domestic courts are not allowed to appoint arbitrators, to rule on the challenge of arbitrators, or to annul an award. Instead, the ICSID Convention provides for its own rules and procedures for these questions. Domestic courts can play a limited role only in respect of the ordering of interim measures (see Rule 39(6)) and during the enforcement of an award. Finally, awards rendered by an ICSID tribunal will not be recognized and enforced by the contracting states on the basis of the New York Convention (New York Convention of 10 June 1958 on the recognition and enforcement of foreign arbitral awards, 330 UNTS 3). Rather, the ICSID Convention provides for distinct rules in its arts 53 to 55, assimilating ICSID awards decisions rendered by the highest courts. Thus, no separate procedure for effecting the recognition may be required (but see art 2 Gesetz zu dem Übereinkommen vom 18 März 1965 zur Beilegung von Investitionsstreitigkeiten zwischen Staaten und Angehörigen anderer Staaten, BGBl. 1969 II 369, as amended by BGBl. 1997 I 3224).
In 1978, ICSID further adopted the Additional Facility Rules, which provide for rules where only one of the states involved in the dispute (ie either the host state or the home state of the investor) is a contracting state to the ICSID Convention. As the ICSID Convention is inapplicable to relations with non-contracting states, the enforcement of an award rendered on the basis of the Additional Facility Rules cannot be based on the ICSID Convention, but rather is effected on the basis of the New York Convention.
Apart from ICSID Arbitration Rules, ICSID has also adopted conciliation rules, which, compared to arbitration, play a limited role in practice and will not be discussed here.
IV. Relevance and notion of the term ‘investment’
Naturally, the term ‘investment’ plays a central role in international investment protection law. Two key functions of this term may be identified. First, only qualification of an asset as an ‘investment’ will provide the asset or the investor with the substantive protection granted by the IIT. Second, qualification as investment is a jurisdictional requirement ratione materiae under the IIT as well as the ICSID Convention. Only where a dispute arises out of an investment under a given IIT or domestic investment legislation as well as art 25(1) ICSID Convention, is an investor who has suffered harm entitled to seek legal redress before an investment arbitral tribunal.
1. Varying approaches to the term ‘investment’
However, there is no universally accepted legal definition of what constitutes an investment under international investment law.
In contrast, other treaties include a restrictive closed-list definition of investment, such as NAFTA art 1131, which contains an exhaustive list of assets considered an investment as well as a list of assets expressly excluded from the concept.
‘Investment’ means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:
tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;
a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;
claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
any right conferred by law or contract or by virtue of any licenses and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector . . .
IITs may impose additional requirements in their definition of the term ‘investment’. For instance, they may stipulate that the investment has to be made in the host state territory, that it must be in accordance with the laws of the host state, or that the investment requires approval by local authorities. More recent IITs require that an asset have the characteristics of an investment such as ‘the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk’ (see eg art 11.28 KORUS (Free trade agreement between the United States of America and the Republic of Korea of 3 December 2010, available at <www.ustr.gov/trade-agreements>)).
Conversely, the ICSID Convention itself gives no definition of the term ‘investment’. Rather, the drafters of the ICSID Convention left it largely to the discretion of parties to a dispute to decide whether they consider a dispute as arising out of an investment (see Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States (adopted on 18 March 1965), 4 ILM 524–32, para 27). Nevertheless, ICSID tribunals have sought to identify certain objective criteria, which have to be considered when assessing whether a certain asset constitutes an investment (Schreuer and others, The ICSID Convention: A Commentary on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (2nd edn, CUP 2009) art 25 paras 152–74). These criteria include a capital contribution, a certain duration, an economic risk and a contribution to the development of the host state (see in particular Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4, Decision on Jurisdiction, 23 July 2001, para 52). However, these (objective) criteria and their applicability are heavily disputed (see eg Pantechniki SA Contractors & Engineers v Albania, ICSID Case No ARB/07/21, Award, 30 July 2009).
Hitherto, tribunals have considered as investments among others the construction and operation of hotels (Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ICSID Case No ARB/84/3, Decision on Preliminary Objections, 27 November 1985; Wena Hotels Ltd v Arab Republic of Egypt, ICSID Case No ARB/98/4, Decision on Jurisdiction, 29 June 1999), the operation of a state-owned sail training vessel under a bareboat charter contract (Inmaris Perestroika Sailing Maritime Services GmbH and others v Ukraine, ICSID Case No ARB/08/8, Decision on Jurisdiction, 8 March 2010, para 85), mining concessions (see eg Kaiser Bauxite Company v The Government of Jamaica, ICSID Case No ARB/74/3, Decision p. 101on Jurisdiction and Competence, 6 July 1975, para 17), holding shares in a locally incorporated company including by minority shareholders (see eg Asian Agricultural Products Ltd (AAPL) v Republic of Sri Lanka, ICSID Case No ARB/87/3, Final Award, 27 June 1990, para 95), a contract for provision of pre-shipment inspections (SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan, ICSID Case No ARB/01/13, Decision on Jurisdiction, 6 August 2003, para 140; SGS Société Générale de Surveillance SA v Republic of the Philippines, ICSID Case No ARB/02/6, Decision on Jurisdiction, 29 January 2004, paras 99–112), promissory notes (Fedax v Venezuela, ICSID Case No ARB/96/3, Award on Jurisdiction, 11 July 1997, para 29), or state bonds (Abaclat and Others v Argentina, ICSID Case No ARB/07/5, Decision on Jurisdiction, 4 August 2011; Ambiente Ufficio SpA and others v Argentina, ICSID Case No ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013). Furthermore, some tribunals have considered commercial arbitral awards as investment if the underlying transaction constitutes an investment (Romak SA v Uzbekistan, UNCITRAL, Award, 26 November 2009, para 211; White Industries Australia Limited v India, UNCITRAL, Final Award, 30 November 2011, paras 7.6.7–7.6.10; cf also Saipem SpA v Bangladesh, ICSID Case No ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007, paras 127, 130, referring to ECtHR, 3 April 2008, Application No 773/03, Regent Company v Ukraine; but see also GEA Group Aktiengesellschaft v Ukraine, ICSID Case No ARB/08/16, Award, 31 March 2011, para 161).
2. Role of private international law in shaping the term ‘investment’
On its face, the finding of an asset and, hence, of an investment seems to be merely an economic or factual operation. But the examples of assets referred to by many IIT definitions are usually legal rights such as property (→Property and proprietary rights), shares, or claims under a contract or law.
By implication, tribunals seem to refer to the host state law for finding without any further reasoning whether there is such right (see eg concerning the validity of a transfer of shares: Libananco Holdings Co Limited v Turkey, ICSID Case No ARB/06/8, Final Award, 2 September 2011, para 144; Saba Fakes v Turkey, ICSID Case No ARB/07/20, Award, 14 July 2010, para 125 et seq; as to licences and concessions see: Total SA v Argentina, ICSID Case No ARB/04/01, Decision on Liability, 27 December 2010, para 39). However, the application of domestic laws may at times have drastic consequences for the investor. In order to avoid the nullity of a concession agreement, which the tribunal in Kardassopoulos v Georgia considered to be governed by Georgian law, it reasoned that Georgia would not be allowed as a matter of international law to rely on Georgian law (Ioannis Kardassopoulos v Georgia, ICSID Case No ARB/05/18, Decision on Jurisdiction, 6 July 2007, para 184). To the extent that commentators discuss these questions, the prevailing view seems to be that the law of the host state applies in order to determine whether an asset exists (Zachary Douglas, The International Law of Investment Claims (CUP 2009) 52–69; Andrew Newcombe and Lluis Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 92; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 64).
However, it seems doubtful whether this approach sufficiently takes into account the object and purpose of IITs. The existence of an investor’s right would depend entirely on domestic regulations that are at times contradictory and in-transparent. But these are the cases where the investor depends on the protection by IITs. Also, considering solely the host state law as decisive conflicts with the prevailing construction of IIT clauses that provide that an investment has to be ‘in accordance with the host state laws’. Generally, these clauses are construed narrowly by limiting their scope of application to ‘illegality’ and by allowing bona fide exceptions (see Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law’, in Marc Bungenberg and others (eds), International Investment Law: A Handbook (Hart Publishing 2014) 566–76). Accordingly, an autonomous approach should be striven for.
Furthermore, tribunals on occasions have recourse to the rules of private inernational law (PIL) when assessing whether an investment was made ‘in the territory’ of the host state. However, two tribunals recently rejected this approach (Abaclat and Others v Argentina, ICSID Case No ARB/07/5, Decision on Jurisdiction, 4 August 2011; Ambiente Ufficio SpA and others v Argentina, ICSID Case No ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013); ruling on the Argentinian sovereign default, the tribunals considered it irrelevant that the bond instruments were deposited in banks outside Argentina and that a foreign law and a foreign forum were chosen. Rather, what was decisive was that Argentina was the ultimate beneficiary. This approach is in line with the autonomous approach endorsed above.
V. Procedural and jurisdictional aspects
1. Applicable law in investment arbitration
As in international commercial arbitration (→Arbitration, international commercial), the parties may choose the law to be applied by an arbitral tribunal, for instance in their agreement to arbitrate. Absent choice by the parties, the arbitral rules governing the arbitration generally p. 102provide for default rules on what law an arbitral tribunal has to apply (see for instance art 35(1) UNCITRAL Arbitration Rules).
Article 42(1) ICSID Convention determines the applicable substantive law, which, as under most international commercial arbitration rules, can be chosen by the parties to the dispute. Such a choice of law may also be implied (Liberian Eastern Timber Corporation v Republic of Liberia, ICISD Case No ARB/83/2, Award, 31 March 1986, 2 ICSID Rep 343, 358–9). Absent such a choice, international law and the law of the host state applies. In the early years of ICSID arbitration, in which most cases were based on contracts between the state and the investor often referring to the law of the host state, the tribunals struggled to find the correct relationship between a chosen domestic law and international law. As the ad hoc Committee in the annulment proceedings in Klöckner v Cameroon held, international law could only apply if no law had been chosen by the parties. International law could play ‘a dual role, that is complementary (in the case of a “lacuna” in the law of the state), or corrective, should the state’s law not conform on all points to the principles of international law’ (Klöckner Industrie-Anlagen GmbH and others v United Republic of Cameroon and Société Camerounasie des Engrais, ICSID Case No ARB/81/12, Decision on Annulment, 3 May 1985, para 69). However, tribunals have often sought to avoid clear statements about the applicable law and to evade a rigid application of the host state law.
The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.
In disputes arising out of an IIT, the IIT itself is the starting point for determining the applicable law. A choice-of-law clause contained in the IIT becomes binding on the investor when filing the request for arbitration. Many treaties contain provisions on the applicable law. For instance, art 26(6) ECT reads: ‘A tribunal . . . shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.’ Other IITs refer solely to the IIT as the applicable law, while yet others also consider the host state law to be applicable. But even if there is no such choice of law clause in an IIT, tribunals readily apply both the IIT as well as international law, while others refer to the host state law for the purpose of complementing the otherwise applicable law.
As has been pointed out (see III. above), arbitral proceedings under the ICSID Arbitration Rules are de-nationalized. Thus, in the context of international commercial arbitration the place of the arbitration (cf art 62 ICSID Convention) does not play its normal role in determining the applicable procedural law. Conversely, this does not apply if arbitration proceedings are conducted under ‘standard’ arbitration rules such as the UNCITRAL Rules. There is also disagreement as to the law applicable to the arbitration agreement. While some courts and authors, arguing that the arbitration agreement is contained in an international law treaty, consider international law applicable, it seems preferable to apply the general principles and, thus, the law of the seat as lex arbitri (see also Decision of Higher Regional Court (OLG) of Frankfurt, 10 May 2012, 26 SchH 11/10; US Supreme Court, BG Group PLC v Republic of Argentina, 572 U.S. 188 (2014) paras 12–138). However, this may have the consequence that the validity of the arbitration agreement is subject to scrutiny under domestic law.
Investment contracts that refer to the host state law sometimes contain so-called ‘stabilization clauses’. Although there is no uniform wording of these clauses, their general purpose is to prevent the host state from modifying the laws applicable to a certain investment contract in an attempt ‘to avoid the arbitrary actions of the contracting government . . . Otherwise the contracting state may easily avoid its contractual obligations’ (Liberian Eastern Timber Corporation v Republic of Liberia, ICISD Case No ARB/83/2, Award, 31 March 1986, 2 ICSID Rep 343, 368). Although tribunals take stabilization clauses into account, their precise effects and their theoretical foundation remain unclear. If a stabilization clause is governed by the host state law, the state could still amend/modify its laws governing stabilization clauses, thereby excluding on an ex post basis the possibility of protection under such clauses. Thus, only if a stabilization clause is governed by international law, is the investor protected from such changes.
2. p. 103Jurisdiction of arbitral tribunals and admissibility of claims
Although there is no strict doctrinal distinction between these two terms, tribunals and commentators frequently differentiate between the jurisdiction of a tribunal on the one hand and the admissibility of a claim. While jurisdiction concerns the power of a given tribunal to adjudicate, a claim is admissible if it qualifies for present determination by the tribunal, ie it is suitable or ‘ripe’ for adjudication on the merits (Zachary Douglas, The International Law of Investment Claims (CUP 2009) 141). Generally, consent and the existence of an investment by an investor are considered the only two prerequisites for a tribunal to have jurisdiction.
Article 25(1) ICSID Convention requires an agreement in writing and, thus, consent to arbitrate is required. The consent of the host state can be contained in an IIT, but also in a contract and in the appropriate domestic legislation. But as already mentioned (see II. above), the latter two grounds for jurisdiction today are largely of historical relevance. In case of an IIT, the investor accepts the host state’s offer to arbitrate by initiating the arbitration, eg by filing a request for arbitration under art 36 ICSID Convention (see also art 26(5)(a) ECT). An agreement to arbitrate is similarly required if the arbitration is not conducted under the ICSID Arbitration Rules (see eg art II of the New York Convention). However, the validity of such an agreement is governed by the law of the arbitral seat, as stated above (see V.1.).
Since, in contrast to contractual arbitration clauses, the standing offer to arbitrate in an IIT is addressed to a potentially unlimited number of claimants (this phenomenon has been described as ‘arbitration without privity’, see Jan Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Review – Foreign Investment Law Journal 232), besides consent to arbitrate, IITs make recourse to arbitration dependent on two peculiar jurisdictional requirements: first, there has to be an investment as defined by the IIT (see IV.1. above). Second, the investor has to be a national of the other contracting state. The investor’s →nationality is governed by the law of the home state. Contrary to the law of diplomatic protection (Nottebohm Case (Liechtenstein v Guatemala)  ICJ Reports 4, 23), there is no requirement under international law of a ‘genuine link’ between the home state and the investor. Although certificates of nationality as well as an agreement between the litigant parties are strong evidence of nationality, the nationality has to exist objectively. While the ICSID has no jurisdiction over claims by individuals enjoying also the nationality of the host state (see art 25(2)(a) ICSID Convention), a juridical person registered under the laws of the host state may still be considered a national of another contracting state if it is under foreign control and the parties have agreed to treat the juridical person as foreign (art 25(2)(b) ICSID Convention). Even if a company is registered under the laws of the home state, this nationality may be disregarded under so-called ‘denial of benefits’ clauses contained in some IITs ‘if that entity has no substantial business activities in the Area of the Contacting Party in which it is organized’(see art 17(1) ECT).
Many IITs require failed attempts to resolve a dispute amicably over a specified period before a claim becomes admissible (see art 26(2) ECT; arts 1118–20 NAFTA). Also, the general principles of →lisalibi pendens and res judicata apply to investment arbitration. However, these principles are interpreted narrowly: the investor is barred from filing the same claim twice. However, only if the investor has filed a claim for a breach of the IIT under domestic law, are the claims considered the same and recourse to international investment arbitration barred.
As has been mentioned before, exhaustion of local remedies is generally not a requirement under international investment law. Quite to the contrary, art 26 ICSID Convention states that consent to ICSID arbitration will exclude any other remedy. Nevertheless, a contracting state may require the exhaustion of local remedies in its consent to arbitration. Indeed, some IITs expressly require at least failed attempts at legal recourse under domestic law over a specified period. Others contain so-called ‘fork-in-the-road’ clauses (see eg art 26(2) ECT), under which the investor is free to choose between local and international legal remedies, whereby the investor is bound by its choice and may not bring the same claim before the other forum (Gerhard Wegen and Lars Markert, ‘Food for Thought for Fork-in-the-Road: A Clause Awakens from its Hibernation’  Austrian Yearbook on International Arbitration 269). As in case of →lisalibi pendens and res judicata, the question whether two claims are the same is interpreted narrowly. Finally, tribunals have considered legal remedies available under domestic law p. 104regarding the merits of a dispute in order to assess whether there is a breach of the substantive provisions of the IIT.
VI. Applicable substantive principles in investment arbitration
1. Substantive protection afforded to investments under IITs
Although there are variations between the individual IITs in the required treatment of investments, some general standards have evolved, which may be briefly outlined here.
As under customary international law (see II. above), IITs do not prohibit →expropriation as such, but rather require it to be made solely for the public benefit, in a non-discriminatory manner and in return for compensation (Andrew Newcombe and Lluis Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 321). Such compensation must be paid immediately and must reflect the fair market value of the investment. Most IITs cover direct expropriations (ie formal deprivation of the investor’s rights) as well as other measures the effects of which would be tantamount to expropriation (so-called indirect expropriations). While the state has to compensate the investor in cases of direct expropriation irrespective of whether made for the public benefit, it is disputed whether a so-called regulatory expropriation can be permitted without compensation, ie a regulatory measure made for the public benefit having a severe economic impact (and thus an expropriatory effect) (Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ (2003) 11 N.Y.U.Envtl.L.J. 64).
Most IITs require the host state to afford to the investor fair and equitable treatment (FET). Tribunals and commentators have identified several elements that together constitute the FET standard. The key element of this FET standard is considered protection of the investor’s legitimate expectations. Besides, tribunals have stated that FET requires non-discriminatory and transparent treatment, the observance of good faith as well as abstention from coercion and harassment. As to legitimate expectations, the investor may expect: ‘the host State to act consistently, ie without arbitrarily revoking any pre-existing decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities’ (Técnicas Medioambientales Tecmed v United Mexican States, ICSID Case No ARB(AF)/00/2, Award, 29 May 2003, para 154).
The extent to which contracts concluded with the host state or its emanations can create legitimate expectations is disputed (Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 J World Investment & Trade 357, 380; Andrew Newcombe and Lluis Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009) 280).
The most-favoured-nation (MFN) treatment standard obliges the host state to afford to investors of one country treatment at least as favourable as to investors from third countries. It is, however, disputed to what extent MFN also applies to provisions of IITs on jurisdiction and admissibility, eg where an IIT imposes specific hurdles to an investor’s recourse to arbitration that other IITs concluded by the host state with third states do not impose.
The standard of full protection and security (FPS) was originally aimed at the physical protection of the foreign national under the law of aliens. The host state is not obliged to provide an absolute protection but rather has to exercise due diligence. In some more recent decisions, tribunals have extended the scope of the FPS standard also to legal protection. The host state would imply ‘a State’s guarantee to stability in a secure environment, both physical, commercial and legal’ (Biwater Gauff v Tanzania, ICSID Case No ARB/05/22, Award, 24 July 2008, para 729). However, this understanding is somewhat controversial (see eg Suez v Argentina, ICSID Case No ARB/03/17, Award, 30 July 2010, paras 158–73). Furthermore, such understanding tends to blur the distinction between the FPS and the FET standard of treatment.
By virtue of a so-called umbrella clause, the host state makes a promise under international law to observe undertakings made by it or its emanations. The exact scope of such umbrella clauses is disputed. Some tribunals question that merely contractual promises are covered by such clauses (SGS Société Générale de Surveillance SA v Pakistan, ICSID Case No ARB/01/13, Decision on Jurisdiction, 6 August 2003, para 171; but see also SGS Société Générale de Surveillance SA v Philippines, ICSID Case No ARB/02/6, Decision on Jurisdiction, 29 January 2004, para 125). Furthermore, there is a dispute regarding the extent to which breach of contracts concluded by separate and distinct state entities can be attributed to the host state p. 105(see eg Noble Ventures v Romania, ICSID Case No ARB/01/11, Award, 12 October 2005, paras 82–5; but see also Impregilo v Pakistan, ICSID Case No ARB/03/3, Decision on Jurisdiction, 22 April 2005, para 223).
2. Relevance of principles of international state responsibility
In order to determine whether conduct in breach of an IIT is attributable to the host state, tribunals often refer either expressly to the Draft Articles on Responsibility of States or to comparable considerations. In particular, it is well accepted that the conduct of state organs, regardless of whether ultra vires, as well as of territorial units has to be attributed to the state (see art 4 Draft Articles on Responsibility of States). However, so far as the conduct of separate state entities is concerned, tribunals have developed tests that deviate from art 8 Draft Articles on Responsibility of States.
According to art 33(1) Draft Articles on Responsibility of States, Part II of the Draft Articles on Responsibility of States concerning remedies does not apply in investment arbitration. Pursuant to this article, Part II only applies to obligations owed to states or the international community as a whole. However, it is undisputed that the general restorative principle applies as outlined by the Permanent Court of International Justice (PCIJ) in the Chorzów Factory case, that ‘reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’ (PCIJ Series A No 17, p. 47). This may include loss of profit and interests. Besides compensation, tribunals have also, albeit seldom, ordered restitution in kind.
Pursuant to art 61(2) ICSID Convention, a tribunal decides which party bears the parties’ expenses as well as the arbitrators’ fees and expenses and ICSID charges. Currently, tribunals disagree on the applicable standard for allocation of the costs of arbitration. While some order that the unsuccessful party must bear the costs, others order that each party bear its own costs (see David Smith, ‘Shifting Sands: Cost-and-Fee Allocation in International Investment Arbitration’ (2011) 51 Va.J.Int’l L. 749, 751).
VII. Modern trends and outlook
International investment arbitration and the increasing number of proceedings are not always regarded as an unalloyed success. The proceedings are at times considered in-transparent. The fact that a panel of three arbitrators has the power to rule on acts adopted by sovereign states, or even by elected parliaments, is heavily criticized. This is even more the case considering that the circle of arbitrators acting in investment disputes is rather limited. Standards of treatment such as FET and the obligation to pay compensation for indirect expropriations even if adopted for public purposes are deemed unreasonable limits to the regulatory power of the sovereign state. Finally, the extensive costs (and in particular legal fees) a state may incur, even when not in breach of its international obligations, can impose a severe financial burden on a state’s budget. Although these criticisms have some merit, their ‘all-or-nothing’ attitude, mixed with general political resentments, is unhelpful.
However, there have been attempts to respond to these criticisms. In 2013, for instance, →UNCITRAL adopted the Rules on Transparency in Treaty-based Investor-State Arbitration (Official Records of the General Assembly, Supplement No 17 (A/ 68/ 17)), which were implemented by the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration ('Mauritius Convention', Official Records of the General Assembly A/69/116, opened for signature on 17 March 2015). These rules provide, within limits, for public access to certain documents generated during investment arbitrations, as well as public access to hearings and the possibilityof third party submissions. Furthermore, tribunals have permitted the submissions of so-called amicus curiae briefs (see also Rule 37(2) ICSID Arbitration Rules). In 2012, the United Nations Conference on Trade and Development (UNCTAD) published a study called ‘Investment Policy Framework for Sustainable Development’ (available at <http://unctad.org>), which seeks to provide states with a toolbox for the wording and negotiation of IITs focusing on sustainable development. It remains to be seen whether these measures will improve the general public’s acceptance of investment arbitration and help resolve the actual or perceived problems.
Finally, acquisition by the EU of exclusive competences for certain investments by virtue of the Treaty of Lisbon (Treaty of Lisbon amending p. 106the Treaty on European Union and the Treaty establishing the European Community, signed at Lisbon, 13 December 2007,  OJ C 306/1, consolidated version,  OJ C 326/1) has raised numerous questions. These relate, on the one hand, to the internal dimension and the precise scope of competences transferred from EU Member States to the EU (see eg Jan A Bischoff, ‘Just a Little BIT of “Mixity”? The EU’s Role in the Field of International Investment Protection Law’ (2011) 48 CMLR 1527–69). On the other hand, EU participation in future IITs (necessitated by EU law) requires new procedures to allocate responsibility between the EU and its Member States under international law. Currently, several free trade agreements contain a chapter on investment protection subject to negotiation by the EU. These negotiations are similarly subject to the public criticism outlined above.
Jan A Bischoff, ‘Just a Little BIT of “Mixity”?, The EU’s Role in the Field of International Investment Protection Law’ (2011) 48 CMLR 1527;
Marc Bungenberg and others (eds), International Investment Law: A Handbook (Hart Publishing 2014);
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012);
Zachary Douglas, The International Law of Investment Claims (CUP 2009);
Richard Happ and Noah Rubins, Digest of ICSID Awards and Decisions 1974–2002 (OUP 2013);
Richard Happ and Noah Rubins, Digest of ICSID Awards and Decisions 2003–2007 (OUP 2009);
Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (OUP 2008);
Andrew Newcombe and Lluis Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009);
Jan Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Review – Foreign Investment Law Journal 232;
Noah Rubins and Stephan Kinsella, International Investment, Political Risk and Dispute Resolution: A Practitioner’s Guide (Oceana Publications 2005);
Christoph Schreuer and others, The ICSID Convention: A Commentary on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (2nd edn, CUP 2009);
Alfred Verdroß, ‘Les règles internationales concernant le traitement des étrangers’ (1931) 37 Rec. des Cours 323.