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Investor–State Dispute Settlement and Impact on Investment Rulemaking
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Series on International Investment Policies for Development
Full Report ( 120 Pages, 745.0 KB )

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Investment treaty provisions on investor–State dispute settlement have frequently been used in recent years, and as a result there has been in an increase in arbitral tribunal awards touching upon key procedural and substantive aspects of investment law. This has contributed to the development of a jurisprudence that, although it is still taking shape, has impacted on the evolution of investment rulemaking, as witnessed in recent bilateral investment treaties and economic integration agreements with investment provisions.

Indeed, as demonstrated by this paper, the experience with the investor–State dispute settlement of a number of countries (mostly in the Asia-Pacific region) appears to have influenced the development of new international investment agreements (IIAs) by those countries. Observing how previous IIAs were interpreted and applied by arbitral tribunals, their Governments have come up with new provisions and new language, which address most of the problems that arose in the context of investment disputes. Thus, the definition of "investment" has been made more precise, several provisions dealing with standards of protection have been redrafted and clarified, the concept of transparency in the context of investment agreements has been improved and redefined, and it has been made clear that investment protection and liberalization must not be pursued at the expense of other key public policy objectives. Furthermore, investor–State dispute settlement procedures have been updated and modernized through, inter alia, fostering the provision of more information for civil society and its increased participation in those procedures.

Although inferring trends in jurisprudence arising from investor–State dispute settlement cases has to be handled with caution, this study suggests that two important lessons can be derived from practice over the last decade. First, the increase in investment disputes has tested the wisdom of negotiating IIAs with extremely broad and imprecise provisions delegating to arbitral tribunals the task of identifying the meaning that the disputed provision should have. Second, when negotiating IIAs countries should pay attention not only to the wording of the agreement, but also to the interaction between the IIA and the arbitration convention(s) referred to in the IIA.

From a systemic perspective, it is noteworthy that most countries that are parties to the emerging new generation of IIAs that reflect investor–State dispute settlement experience are also still parties to numerous "old" IIAs containing provisions using the same broad and imprecise language that has triggered investment disputes elsewhere. The resultant risk of incoherence is especially high for developing countries that lack expertise and bargaining power in investment rule-making, and that may have to conduct negotiations on the basis of divergent model agreements of their negotiating partners. However, the growing legal sophistication of investment dispute resolution also points to a further strengthening of the rule of law at the international level that should benefit developing countries that lack the political and economic power of developed nations. Furthermore, the increased number of arbitrations may also motivate developing host countries to improve domestic administrative practices and laws in order to avoid future disputes; this would further strengthen the predictability and stability of the legal framework that the conclusion of IIAs was supposed to produce in the first place.

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