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Investor State Dispute: The Current Predicament in International Commercial Arbitration


International commercial arbitration is an effective way of settling conflicts between private parties resulting from commercial transactions performed across national borders that allow parties to prevent adjudication in national courts. Over the years, this has become a very common approach, as most parties do not want to get embroiled in the ravages of litigation with respect to any issue, particularly if the conflict is in an alien country. The arbitration clause is typically part of the agreement negotiated by the parties. Arbitration has since attracted fervor as an alternative dispute resolution method.

Investor-state dispute settlement mechanism is a type of international economic arbitration. It is an instrument of public international law which is part of a variety of bilateral investment treaties. It is a mechanism by which an investor from one country invests in another country, all of which have a bilateral investment arrangement in force, and an investor will bring an arbitration against the host country to an independent arbitration tribunal, in the event that the home country violates the rights imposed on it by the BIT.

The Bilateral Investment Treaty (BIT) is an agreement specifying the terms and conditions for private investment by citizens and companies of one State in another. This form of investment is known as Foreign Direct Investment (FDI). BITs are formed by trade deals. Many trade deals include conflicts that concern a certain class of goods or services and do not generally affect the operation of a specific company. BITs, moreover, offer immunity that applies to an individual private investor (a company or a corporation) in the event of a violation of treaty agreements involving an individual business. And these individual foreign investors can initiate arbitration claims against the state, hence the term, investor-state dispute settlement.


The ISDS has been a polarizing subject for years now. The normal ISDS provision in the BIT is intended to include a collection of protections for private foreign investors, in order to provide them with an atmosphere that will allow them to invest in that home country. Such an investment can be a win-win scenario for both sides i.e., for the home state to be strengthened by the FDI in its economy, and for investors to have a bigger market to grow their sector. It is for this reason that the said collection of rights in the bilateral investment treaties is extended, a violation of either of which, on the part of the State, will give rise to an ISDS claim. These privileges granted to investors are not exactly the same in all BITs, but usually include-

  • Fair and equitable care
  • Prompt and adequate restitution in the event of expropriation
  • Permission to transfer capital effectively (for various purposes) to and from the country with great ease.
  • No criteria for results are enforced
  • No discrimination on the part of the government in favour of a local or a third-party investor, etc.

On the surface, it seems to be the only possible option for both parties interested in the case of a conflict, but it still has its critics.


The critics of the ISDS scheme have come out with a variety of claims. Many claim that the ISDS influences the authority of nations by triggering ‘regulatory chilling,’ under which this process serves as a way for businessmen to bully states into not enforcing the regulatory policies that they want to enforce, against the threat of having to pay large sums of compensation and the increasing number of ISDS lawsuits. Lori Wallach, director of Public Citizen’s Foreign Trade Watch, claims that BITs empower businesses to contest laws of public concern outside domestic legal structures before a court of three private-sector commercial lawyers working under little to no conflict of interest rules. This arbitrator will order governments to pay unrestricted taxpayer-funded payments to companies for having to comply with policies that comprise their expected future profits and for which they invest domestically.

This clear dismantling of domestic legislation by prioritizing investor interests over government regulatory strategies is the greatest source of alarm for the system’s critics. Given the increasingly growing number of lawsuits and the lack of openness of the courts, there is a perception among others that the ISDS is a secretive process, with no oversight, which enables foreign corporations to arm their governments and grow wealthier at the expense of the public (taxpayers) and hinders the government’s ability to enforce public interest legislation. Not every country, however, is ready to let go of the mechanism with just as much readiness.


Proper analysis into all the ISDS arguments that have ever emerged in the world reveals that almost 90 per cent of all BITs in the world are running seamlessly, without any disagreement. Research also reveals that the growth in the number of ISDS claims over the last few years was proportional to the increase in foreign-invested capital stock. The Office of the United States Trade Representative (USTR) believes that the protections bestowed on foreigners are compatible with basic human rights at the center of most democracies and are the same as those accorded to domestic investors. The privileges conferred by the US BITs ensure that international investors enjoy what are effectively fundamental rights and obey the general universal concept of reciprocity. They insist that ISDS agreements are the expression of national policy, in the same manner that laws, legislation and other initiatives are accepted by the legislature.

The system’s supporters contend that the effectiveness of BITs and ISDS in providing a predictable climate for investors has led to stability in a variety of areas and should not be discarded without careful analysis of the alternatives. They contend that it should not conflict with the enforcement of regulatory laws and that, in truth, it acts both to protect investors and to protect public interests. After some initial scrutiny, the procedure was made as open as possible by making available the history of all ISDS proceedings.


In the past 40 years or so, ISDS has arisen as a popular and widely used tool to protect the interests of investors in a foreign country. Obviously, the world ‘s views have been divided. The evidence available on the subject shows the world that, scientifically and monetarily, it is a valuable method for foreign investors to feel positive about investing in foreign countries and for host countries to be able to promote FDI and improve their economies, as the statistics do not indicate that either party has a substantial advantage over the other party in these proceedings.

However, a number of countries are suspicious and wary of encroachment on their sovereignty by means of exorbitant fines and chilling effects that they invariably carry with them when it comes to the creation of regulations and legislation, and of the increasingly growing number of ISDS statements that have driven them to adopt a protectionist stance when it comes to guaranteeing the rights of investors. Some nations, such as the USA, have been able to make effective use of the scheme. While they, too, were wary of the overarching impact that could have on the government’s ability to control public health, in favour of giving rights to developers, including the reduction of their projected potential income from taxpayers’ funds, a view firmly shared by countries like India. 

Various civil society organizations from a range of countries, including European nations, South American nations, together with India and the United States, have been called upon to avoid attempting to reform the legal shortcomings in a mechanism that offers ‘excessive protection for international investors to contest laws of public interest (in foreign countries) outside the domestic courts’ and to put them to an end. The drawbacks of the method are never far from the benefits of the same, when it comes to debating the mechanism, which has contributed to it being branded as a ‘predicament’ in the world of international commercial arbitration.

Cite this article (The Bluebook 20th ed.)-

Kosha Doshi, Investor State Dispute: The Current Predicament in International Commercial Arbitration, Ex Gratia Law Journal, (February 1, 2021),

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Kosha Doshi
Student - Symbiosis Law School, Pune