Investment arbitration has become a central feature of the international legal framework governing foreign investment. It provides investors with a direct mechanism to bring claims against host states for breaches of treaty obligations, outside the domestic courts of the host state. Used prudently, it can act as a practical system of legal protections that operates alongside contracts and domestic law.
This first blog in a two-part series provides a practical overview of investment arbitration and the core protections typically available to investors under investment treaties.
The Nature of Investment Arbitration
Investment arbitration allows a foreign investor to bring claims directly against a host state before an independent international tribunal. The state’s consent to arbitration is given in a contract with the investor in an international treaty concluded with the investor’s home state or with multiple states.
When an investor initiates arbitration under the investment treaty, a binding arbitration agreement is formed. This structure enables private parties to enforce obligations grounded in public international law against a state, as opposed to the traditional system where public international law principles could only be enforced by states, against states.
Who May Bring Claims and Against Whom
Investment treaties limit standing to qualifying investors who are nationals. For individuals, nationality is usually determined by citizenship. For companies, nationality is typically based on place of incorporation or seat, though some treaties impose additional requirements such as substantial business activity.
These definitions are critical. Jurisdictional objections frequently turn on whether the claimant qualifies as an investor under the treaty with ownership structures, control, and timing often closely scrutinised.
Depending on the terms of the treaty, claims can be brought against states for governmental action, whether through their ministries, regulators, courts, and other entities exercising governmental authority. Conduct by state-owned enterprises may also be attributable to the state in certain circumstances.
What Constitutes a Protected Investment
Treaties define the investments they protect. Most adopt a broad, asset-based definition inter alia covering shares, loans, contractual rights, concessions, licences, and intellectual property.
Tribunals nevertheless assess whether the alleged investment meets objective criteria, particularly where treaties refer to contribution, duration, and risk. Purely commercial transactions or short-term sales may fall outside the scope of protection.
The way an investment is structured, financed, and documented therefore has legal significance. Economic exposure alone cannot guarantee treaty protection.
Core Substantive Protections
While treaty language varies, most investment treaties include a core set of substantive protections that define permissible state conduct.
Protection Against Expropriation
Expropriation, simply, means the taking of property. Treaties generally prohibit expropriation except where it is for a public purpose, carried out in accordance with due process, non-discriminatory, and accompanied by compensation.
Expropriation may be direct, such as formal nationalisation, or indirect, where measures substantially deprive the investor of the use or value of the investment through indirect measures such as regulatory action, licence withdrawal, and the like, depending on their effect on the investor.
Fair and Equitable Treatment
Fair and equitable treatment is among the most frequently invoked standards. It protects investors against arbitrary, abusive, or fundamentally unfair conduct by the host state in which the investment has been made.
Tribunals have interpreted this standard to include respect for legitimate expectations, transparency, consistency, due process, and good faith. While modern treaties increasingly seek to define or limit this obligation, it remains a central protection against egregious conduct by the state.
Full Protection and Security
This standard obliges states to exercise due diligence in protecting investments. While historically focused on physical security, it has in some cases been extended to legal and institutional protection, particularly where systemic failures undermine the investment.
Most Favoured Nation (“MFN”) and National Treatment
Investment treaties often include the non-discrimination standards of MFN and national treatment as protections for investors.
National treatment obliges the state to treat foreign investors no less favourably than domestic investors in like circumstances. Claims often arise where regulatory measures, licensing regimes, or enforcement practices disadvantage foreign investors relative to local actors.
Most favoured nation treatment, on the other hand, requires the state to treat investors from the claimant’s home state no less favourably than investors from any third state. In some cases, this clause has been invoked to access more favourable protections found in other treaties, though this approach is increasingly restricted by treaty drafting. Tribunal have also diverged on whether such a reading of the MFN clause is permissible.
Both standards involve a contextual comparison, and differential treatment may be justified by legitimate regulatory objectives.
Procedural Protections and Access to Arbitration
Treaties provide investors with access to international arbitration, commonly under ICSID or UNCITRAL rules. This offers neutrality, enforceability, and insulation from domestic political pressures.
Treaties oftentimes have procedural requirements for the access to arbitration. Cooling-off periods, notice requirements, limitation periods, and jurisdictional thresholds must be respected. Failure to comply can result in dismissal regardless of the merits.
Conclusion
Investment arbitration operates alongside contracts and domestic remedies and in some cases contractual obligations can be elevated to treaty disputes (through a provision often referred to as an umbrella clause). However, in most instances, treaty claims are based on breaches of international law, not merely contractual non-performance. For most cases, the state’s conduct must result in a breach of treaty standards.
Investors should seek strategic input early as in their disputes choices made in domestic forums can nonetheless affect treaty rights as treaty protections are only available if the investor and investment fall within the treaty’s scope. That determination often depends on decisions made at the investment stage.
Understanding and prudently leveraging investment arbitration as a legal framework, rather than an emergency remedy, gives investors a further tool to manage sovereign risk in cross-border investments. In the upcoming article in this series, we will explore what considerations investors need to consider while structuring their investments.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.