Backlash in Investment Arbitration

The backlash against investment arbitration refers to the discontent and disenchantment by States with the investor-State dispute settlement (“ISDS”) system, leading them to retreat or reject the investment arbitration mechanism by various means.¹ The backlash phenomenon started at the end of the first decade of the 21^st century when Latin American States faced the highest number of claims.² Forms of backlashes include, inter alia, the denunciation of the ICSID Convention, the termination of Bilateral Investment Treaties (BITs), the exclusion of ISDS in investment treaties, the recalibration of treaty practice to increase State protection and limit foreign investors’ recourse to investment arbitration or the replacement of ISDS with other forms of dispute resolution such as the Investment Court System (“ICS”), including EU's Multilateral Court System, but also multijurisdictional challenges of arbitral awards by recalcitrant States, refusal to make payment of awards against the State, the enactment of domestic legislation to impede enforcement of awards against the State, the ban of arbitration in cases involving the State or State entities or particular sectors, and the launch of inter-State arbitration in an attempt to annul a jurisdictional award in favor of the investor.³

The core of the backlash lies in the perception of unfairness, one-sidedness of the system and negative experiences of respondent States that have faced high-profile or numerous claims, prompting them to oppose investment arbitration, particularly when it pertains to the State policy space and the State’s right to regulate.⁴ The justifications for the backlash have varied, ranging from, inter alia, inconsistency in arbitral decisions, encroachment on the right to regulate, lack of transparency, investment arbitration cost and high amount of damages awarded to investors, the ad hoc nature of investment arbitration not being suitable for public controversies, and conflict of interest or perceived bias of arbitrators in favour of investors.⁵ Some of these rationales and criticisms have been addressed by academics and arbitration practitioners.⁶

In Latin America, the birthplace of the backlash, some States have encountered the largest number of claims by foreign investors.⁷ Three Latin American States denounced the ICSID Convention: Bolivia in 2007, Ecuador in 2009 and Venezuela in 2012,⁸ and have terminated a number of BITs and adopted domestic legislations to limit investors’ rights.⁹ However, it should not be overlooked that since Bolivia’s denunciation in 2007, fourteen States have ratified the Convention (Serbia (2007), Kosovo (2009), Haiti (2009), Qatar (2010), Moldova (2011), South Sudan (2012), Montenegro (2013), Sao Tome and Principe (2013), Canada (2013), San Marino (2015), Iraq (2015), Nauru (2016), Mexico (2018) and Djibouti (2020).¹⁰

A number of States that faced ISDS claims began to terminate some or all of their BITs,¹¹ including South Africa, India, Indonesia, Bolivia, Venezuela and Ecuador.¹² Certain States have reviewed their treaty practice and enhanced State’s protection in light of pending claims, as well as restricted access to ISDS. For example, South Africa enacted legislation to exclude ISDS¹³ and India introduced a model BIT in 2015, which scales back on the scope of investment protection.¹⁴ The Member States of the European Union agreed to terminate all their intra-EU BITs after the judgment of the Court of Justice of the European Union in the Achmea case.¹⁵

After a tobacco producer, Philip Morris, commenced arbitration to challenge Australia’s tobacco plain packaging,¹⁶ the Australian Government declared on 12 April 2011 that it would no longer include ISDS provision in its future investment treaties or trade agreements.¹⁷ South Africa followed suit in 2012.¹⁸

As European countries started to become parties to ISDS claims, most notably in the Vattenfall case,¹⁹ anti-ISDS and anti-trade groups started campaigning against ISDS provisions in the Transatlantic Trade and Investment Partnership (“TTIP”) agreement negotiations between the EU and the U.S.²⁰ Although the EU initially instructed the negotiations to include ISDS,²¹ the EU Parliament eventually voted to replace ISDS with an investment court system, comprising a two-tiered court with permanent pre-selected tenured judges and an appellate mechanism (see Multilateral Investment Court).²² The investment court system has found its way in recently concluded agreements, namely the Comprehensive Economic and Trade Agreement with Canada (“CETA”),²³ the EU-Vietnam Investment Partnership Agreement (“EVIPA”), the EU-Singapore Investment Protection Agreement (“EU-Singapore IPA”), the EU-Mexico Agreement in Principle.²⁴