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 21st 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”), 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
Asha Kaushal, “Revisiting History: How the Past Matters for the Present Backlash against the Foreign Investment Regime”, Harvard International Law Journal (2009) vol. 50, no. 2, p. 491-534, p. 491; Petros C. Mavroidis, et al., “Preventing a Backlash against Investment Arbitration: Could the WTO Be the Solution”, Journal of World Investment & Trade (2011) vol. 12, no. 3, p. 425-446 at p. 435-436; David Ma, “A BIT Unfair: An Illustration of the Backlash against International Arbitration in Latin America”, Journal of Dispute Resolution (2012) vol. 2012, no. 2, p. 571-590; Carolyn Lamm and Karthik Nagarajan, “The Continuing Evolution of Investor-State Arbitration as a Dynamic and Resilient Form of Dispute Settlement”, Indian Journal of Arbitration Law, National Law University (2016) vol. V, issue 2, p. 93.
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
Olivia Chung, “The Lopsided International Investment Law Regime and Its Effect on the Future of Investor-State Arbitration”, Virginia Journal of International Law (2007) vol. 47, no. 4; Ashna Kaushal, “Revisiting History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime”, Harvard International Law Journal (2009) vol. 50, no. 2, p. 492; Michael Waibel et al., The Backlash against Investment Arbitration: Perception and Reality, Kluwer Law International (2010), pp. xxxvviii—xiv; Jeswald Salacuse, “The Emerging Global Regime for Investment” (2010) Harvard International Law Journal, vol. 51, no. 2, p. 469; Australia Government, Department of Foreign Affairs & Trade, Gillard Government Policy Statement: Trading our way to jobs and prosperity (2011), p. 14; European Commission, Concept Paper, “Investment in the TTIP and beyond –the Path for Reform, Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court” (2015) pp. 5-8.
Daniel Meyers, “In Defense of the International Treaty Arbitration System”, Houston Journal of International Law (2008) vol. 31, no. 1; Charles N. Brower and Stephan Schill, “Is Arbitration a Threat or a Boon to the Legitimacy of International Investment Law?”, Chicago Journal of International Law (2009) vol. 9, no. 2; Devashish Krishan, “Thinking about BITs and BIT Arbitration: The Legitimacy Crisis that Never Was”, in Todd Weiler and Freya Baetens (eds.), New directions in international economic law: in memoriam Thomas Wälde, (2011) Brill Nijhoff; Meg Kinnear, “Grotius Lecture: Navigating International Dispute Resolution: Innovations in Investor-State Resolution”, Arbitraje: Revista de Arbitraje Comercial y de Inversiones, Centro Internacional de Arbitraje, Mediación y Negociación (2013) vol. 6, issue 3; Stephen Schwebel, “In Defense of Bilateral Investment Treaties”, Arbitration International, (2015) vol. 31, issue 2; Charles N. Brower, “Are Fear, Disinformation, Politics and the European Commission Becoming The Four Horsemen Of The Apocalypse For International Investment Dispute Arbitration?”, Arbitraje: Revista de Arbitraje Comercial y de Inversiones (2015) Kluwer Law International, vol. 8, issue 3; Carolyn Lamm and Karthik Nagarajan, “The Continuing Evolution of Investor-State Arbitration as a Dynamic and Resilient Form of Dispute Settlement”, Indian Journal of Arbitration Law, (2016) National Law University, vol. V, issue 2.
III. Denunciation of the ICSID Convention
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 and until 12 April 2019 thirteen 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), and Mexico (2018)).10
Olivia Chung, “The Lopsided International Investment Law Regime and Its Effect on the Future of Investor-State Arbitration”, Virginia Journal of International Law (2007) vol. 47, no. 4, p. 957; Katia Gomez, “Latin America and ICSID: David versus Goliath”, Law and Business Review of the Americas (2011) vol. 17, no. 2, p. 195; UNCTAD, Recent Development in Investor-State Dispute Settlement (ISDS) (2013) IIA Issues Note, No. 1, UNCTAD/WEB/DIAE/PCB/2013/3, p. 4.
Petros C. Mavroidis, et al., “Preventing a Backlash against Investment Arbitration: Could the WTO Be the Solution”, Journal of World Investment & Trade (2011) vol. 12, no. 3, p. 425-446 at p. 435; Sergey Ripinsky, “Venezuela’s Withdrawal From ICSID: What it Does and Does Not Achieve” (April 2012) IISD Investment Treaty News.
IV. Termination of BITs
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
Luke Eric Peterson, “Venezuela Surprises the Netherlands with Termination Notice for BIT; Treaty has been Used by many Investors to ‘Route’ Investments into Venezuela” (16 May 2008) Investment Arbitration Reporter; UNCTAD, International Investment Policymaking in Transition: Challenges and Opportunities of Treaty Renewal (2013) IIA Issues Note, No. 4, 2013, UNCTAD/WEB/DIAE/PCB/2013/9, p. 3; Craig Travendale and Vanessa Naish, “Indonesia Indicates its Intention to Terminate all of its Bilateral Investment Treaties?” (20 March 2014) Herbert Smith Freehills Arbitration Notes; Akshat Agarwal, "Rethinking the Regulation of International Foreign Investment: Recent Developments in Brazil, South Africa and India" Indian Journal of International Economic Law (2019) 10, ().
V. Exclusion of ISDS in Investment Agreements
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
Philip Morris Asia v. Australia, PCA Case No. 2012-12, Notice of Arbitration, 21 November 2011, para. 1.6 (“Through plan packaging legislation, Australia violates the BIT by (i) substantially depriving Philip Morris of the real value of its investment in Australia; (ii) treating PM Asia’s investments unfairly and inequitably; (iii) unreasonably impairing the full use and enjoyment of the investments; (iv) failing to provide full protection and security for the investments, and (v) breaching its obligations under other international agreements.”).
South African Development Community Model BIT Template with Commentary, South African Development Community (2012), p. 55 (“Special Note: The Drafting Committee was of the view that the preferred option is not to include investor-State dispute settlement. Several States are opting out or looking at opting out of investor-State mechanisms, including Australia, South Africa and others.”).
VI. Replacement of ISDS with Investment Court System
As European countries started to become parties to ISDS claims, most notably in the Vattenfall case19, 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 the ICS, comprising a two-tiered court with permanent pre-selected tenured judges and an appellate mechanism.22 ICS has found its way in recently concluded agreements, namely the Comprehensive Economic and Trade Agreement with Canada (“CETA”), the EU-Vietnam Investment Partnership Agreement (“EVIPA”), and the EU-Singapore Investment Protection Agreement (“EU-Singapore IPA”).
Matthias Bauer, “The Spiral of Silence – How Anti-TTIP Groups Dominate German Online Media and Set the Tone for TTIP Opinion” (2015) European Centre for International Political Economy; Cecilia Malmström, “Investments in TTIP and beyond – towards an International Investment Court” (2015) European Commission Blog Post.