Investment treaty arbitration
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This article is written by Parth Rishik, from Law College, Dehradun.


Under this article, the readers will be introduced to a specific type of mixed arbitration, i.e., the arbitration of investment disputes. Arbitration which is between state and non-state actors such as individuals, or private companies is commonly referred to as mixed arbitration in international scholarship. There are two notable examples of mixed arbitrations in the field of international law, first the Iran-US Claims Tribunal and second Investment Arbitration. This article will focus on the latter mainly.

Origin of investment arbitration

The current framework of investment arbitration finds its origin in the middle 20th Century, when large multinational companies were conferred concessions for extraction of natural resources in developing countries. Traditionally, if a foreign investor or generally a national of a different state came to a dispute with the state in which investment was made, which is called a host state, the dispute will be addressed before the domestic court of the host state. This is because a foreign state cannot be brought to justice in another’s state court, since the states have immunity from foreign jurisdiction. If the domestic court of a host state is unable to present a remedy to the dispute or violation complained, the foreign investor could ask his state to file a claim in diplomatic protection against the host state, i.e., a procedure in which the home state of the investor espouses the claim of its nationals

It is important to know that Diplomatic protection is not always efficient. First the foreign investor should exhaust all local remedies as per the domestic laws. Secondly, it is notable that the right to act in diplomatic protection is a right of the home state of the investor and not the investor itself. In other words, no state is under any obligation to act in diplomatic protection. Thirdly, if the home state (of the investor), decided to act in diplomatic protection, it still needs the consent of both states to have such claims settled through the mechanism of arbitration or judicial means. Fourthly, claims and diplomatic protection practiced very often is situated with military and economic pressure by the home state which leads to important politicization of the dispute. Concluding that, the domestic tribunal of the host state often reflects as being biased and incompetent in terms of independence. It is true that such a procedure is not capable of sustaining itself and effectively in a globalizing world in which forgiven investment was and still is growing.[i]

The main reason for choosing arbitration in Concession Contracts is depoliticizing the settlement of disputes and to provide a neutral forum to settle such disputes. Thus, that led to an increase of arbitration clauses incorporated in contracts concluded by states and foreign investors regarding specific investment operations.
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Investment arbitration in investment treaties

Nowadays, investor-state arbitration is mostly used to settle disputes arising out of bilateral or multilateral investment treaties which are concluded between states. These treaties confer certain rights to investors of states that invest in other states.

Rights of Investors[ii]:

  • The right to be treated fairly and equitably;
  • The right not to be discriminated;
  • Not to have their property expropriated without compensation.

When an investor feels or considers that the rights contained in the treaty have not been respected, and therefore the host state where the investor has invested, has breached its treaty obligation, the investor can bring a claim directly against that state. This is based on a presupposition that there is a treaty signed between the host state and the home state of the investor, further the treaty contains an arbitration clause that empowers the investor to bring such a claim.

At this stage there is more than 3,000 signed investment treaties, which confers rights to foreign investors and which, for majority contains an arbitration clause which allows the foreign investor to bring claims directly against the host state if there is a breach of that treaty[iii].

This article will probe into and discuss the following topics:

  1. Principles of Investment Treaty Arbitration
  2. Types of Claims in Investment Arbitration
  3. Arbitration under ICSID convention

Principles of investment treaty arbitration

This sub topic of article will address mainly the principles and functioning of Investment Arbitration, how investment arbitration works and how parties’ consent to investment arbitration, and which possible claims can investors bring against the host state?

Investment treaty arbitration, i.e., the arbitration of investment disputes based on an investment treaty, the consent of the parties to the dispute is disconnected one from another. For the purpose of arbitration, the investment treaty includes an arbitration clause which is signed by two or more states, also it is very important to know that the class of foreign investors are not parties to that treaty. By signing an investment treaty with an investor-state arbitration clause, a state confers a general consent to the disputes through the mechanism of arbitration with foreign investors of the other states. The general interpretation to this is “an offer to Arbitrate”. The investor gives their consent at a later stage when they submit their claim through a request for arbitration in case of a dispute. Thus, once requested, they (investors) accept the offer contained in a treaty. Therefore, forming the consent of the two parties within the nexus of a dispute.

As of now, arbitration stands as the main method used for the settlement of an investor-state dispute which must be a result of bilateral and multilateral treaties states are parties to. Arbitration clauses contained in investment treaties have evolved from very simple clauses to relatively complex ones. States have the freedom to condition their consent to arbitration, possible conditions are as follow:

  1. Prior notification of the intention to bring a claim;
  2. Add a cooling off period: settlement through negotiation;
  3. Choice between various forums to use as dispute settlement: ICSID, PCA, Ad-hoc Arbitration under the UNCITRAL Arbitration rules, even domestic courts of the Host states, and less frequently used the traditional venues for commercial arbitration such as the Arbitration Institute of the Stockholm Chamber of Commerce, the international Chamber of commerce in Paris, or the London court of Arbitration.
  4. Final condition found in such treaties is to submit the dispute to the domestic courts of the Host State. Such exhaustion of local remedies is limited in time.

It is important to know that an arbitration clause in an investment treaty does not automatically allow all individuals or companies from one of the state parties to the dispute to submit a claim against the other state. Investment treaty, normally contain a complex and fast definition of who can be an investor and what can be termed as investment or which types of investment the treaty applies to. This means that only those people who fall under the such definition of investor as per the treaty and who have made investment as defined in the treaty can have access to arbitration under the said treaty.

Who can be considered an investor of a state party is typically defined in distinction with natural persons and for companies (legal persons)? To understand this, we will look into the Article 1 of the Bilateral Investment Treaty between the Netherlands and Argentina. For natural persons, investors are defined by reference to their nationality. For legal persons the definition is much more: Companies registered in the state, with whom the host state holds an investment treaty, Companies established in the state with whom the host state holds an investment treaty, Companies with official or management seat in that state, or Companies controlled directly or indirectly by nationals or legal persons of that state[iv].

What an investment is, is usually defined very broadly in Investment treaties and stands relatively similar in most treaties. As per Art. 1 of the Bilateral Investment treaty between Netherlands and Argentina, there are a lot of definitions for investment, however there is a general agreement that usually a purely commercial transaction such as a purchase and sale agreement is not an investment[v]. In some treaties, this is given the status of investment but in most of the treaties it’s not.

Types of claims in investment arbitration

This sub topic of the article will further the last sub topic which was principles of investment arbitration. In this subtopic the author will discuss more in detail the claims that can be submitted to investment arbitration.

Legal bases of the consent to arbitration

Investment arbitration is a term that compresses in reality two types of arbitration. The term itself, implies that arbitration relates to the matter of investment and that there is a dispute over the investment. However, the legal basis in which the investment of arbitration is founded, has important consequences on which types of claims investors can bring and which arbitral tribunal is competent to hear such claims. Generally, the arbitration can be based:

  1. Investment Contract
  2. Investment Treaty
  3. National legislation providing access to arbitration

The current stats according to ICSID is that around 74% percent of ICSID arbitrations are based on treaty, 17% on investment contracts and 9%on national legislation. To understand the legal bases of the consent to arbitration we have to understand the co-existence of investment contract and investment treaty, and which law applies in which scenario:

  • The co-existence of contract and treaty

Generally, in the cases of oil and mining investment, the foreign investor will sign a contract of investment with the host state or with one of the host state agencies. It is not necessary to have an investment contract signed, one can well imagine a situation where an investment is acquired abroad without any contract being signed with the host state. In cases where there is existence of investment contract as well as investment treaty, a distinction should be made between the contract claims and the treaty claims. Tribunals over the year have worked on the precedence that tribunals established under a treaty have competence to hear claims which are the result of breaches of the said treaty. Conversely, claims that are based on breaches of an investment contract by the host state or by the agencies of the host states or sub divisions should be brought before the dispute settlement forum as stated in the contract. The contractual dispute settlement forum can be arbitration, domestic courts or tribunals; whichever the parties to the contract agreed upon in the contract. However, some treaties also provide for the possibility of a treaty-based tribunal to hear claims which are the result of a breach of a contract (contractual claims). The necessary thing is to look carefully how the arbitration clause is formulated under a treaty.

  • Which law applies?

If an arbitral tribunal established on an arbitration clause in a contract has competence, the provided law under the contract shall apply, most often domestic law of the host state. Thus, international law becomes supplementary or correctional to the whole procedure.

On the other hand, if an arbitral tribunal is established as per the provision of a treaty, then it is tasked to appraise whether there has been a breach of the treaty by the host state and mainly Public International law, the treaty, customary international law is applied in the procedure. Even then, the domestic law of the host state may stand relevant. For instance, to determine the contours and existence of investment related rights of the foreign investors, such as the existence and validity of an oral concession.

Types of claim

The main grounds invoked by investors in case of treaty claims are breaches of the fair and equitable treatment standard as well as the protection against arbitrary and discriminatory treatment. Such standards of treatments are present in almost all of the investment treaties. Historically, investment disputes related to expropriation of the foreigner’s investment and the resulting obligation to pay compensation. Nowadays, direct expropriation is less frequent, while on the other hand indirect expropriation is often a ground which is invoked by investors. In essence, indirect expropriation are measures taken by the host state which have a similar effect as a direct expropriation. Such acts may amount or lead to a breach of an investment treaty, provided that the said act was not taken for the protection of the public interest. Although indirect expropriation is invoked by investors for claims, it is difficult to argue the case.

Arbitration under ICSID convention

The fourth sub-topic of this article is dedicated to understanding the architecture and mechanism of arbitration of investment disputes. For the same purpose, we will focus on the International Centre for the Settlement of the Investment Disputes (ICSID). The subtopic will cover specific features of ICSID, how it works and why it is the most frequently used forum in the matters of investment dispute.

International Centre for the Settlement of the Investment Disputes (ICSID)

In 1965, ICSID was created by the Convention on the Settlement of Investment Disputes between the states and nationals of other states called the ICSID or the Washington Convention. The treaty came into force in 1966, and it was created as part of and under the auspices of the World Bank Group and held its seat in Washington. The establishment of the centre, as explained in the first subtopic of the article, coincided with the increased practice of including arbitration in concession contracts. Its purpose as stated in the ICSID Preamble, is to stimulate economic development through promotion of foreign investment by providing a neutral forum with the aim to settle disputes arising out in the matters of investment[vi]. There are 153 contracting parties under ICSID.

ICSID is governed by an administrative council composed of one representative from each contracting party. This administrative council is chaired by a chairman, who also has the power to appoint an arbitrator if the parties fail to do so by themselves.

ICSID also has a Secretariat, headed by the Secretary-General who is responsible for its administration. In an arbitral procedure, the Secretary-General oversees many important functions, for instance the secretariat’s legal counsels act as secretaries to the arbitral tribunal.

ICSID in many ways resembles PCA (Permanent Court of Arbitration):

  1. Administers arbitration and maintains a list of arbitrators;
  2. ICSID is also not a standing tribunal. If parties within the nexus of investment dispute wish to submit a dispute to arbitration under ICSID, a tribunal will be established. In other words different tribunals are established for different disputes, and no tribunal holds a permanent seat;
  3. Arbitrators can be a member of ICSID or be on the list of ICSID, but individuals from outside the ICSID list can also be appointed;
  4. ICSID, just like PCA, also provides facilities for conciliation.

Specific features of ICSID

The specific features of ICSID differ from the PCA, other arbitration institutions or arbitration under the UNCITRAL Arbitration Rules. They are:

  • ICSID Arbitration Rule – If a party submits to ICSID, then the parties within the nexus of dispute are obliged to follow ICSID Arbitration Rules. No other rules are applicable. In other words, ICSID Arbitration Rules apply to every dispute submitted to the Centre.
  • ICSID Jurisdiction – ICSID under Art.25 underlines in a very detailed manner that disputes can be submitted to ICSID for settlement. Art. 25 entitled to jurisdiction of the Center establishes five conditions:
  1. Dispute
  2. Result (arising) of Investment
  3. A national of one state
  4. Another state
  5. Parties submit a written consent to the center[vii].

In other words, there should be a dispute arising out of investment between a national of one state and another state, and the parties must submit a written consent to address the dispute to the ICSID. Thus, it restricts ICSID’s jurisdiction to investment disputes. Although the convention does not describe what an investment means, the tribunal over the year have defined it using what is now known as the “Salini Criteria”, named after the arbitral award of the tribunal in the case of Salini v. Morocco[viii]. Also, it is important to know that ICSID’s Jurisdiction extends to mixed disputes, i.e., disputes between a state and national of another state and the said states must have ratified the convention. Notable thing is that if an individual has two nationality, that is nationality of the host state and investor state are excluded.

  • Enforcement of awards – The awards rendered under the ICSID convention are more easily enforceable. The specific part is that the awards passed by ICSID tribunal are automatically recognized and enforced automatically by the member states as if these were the decisions of the domestic courts. An investment dispute arbitration which is done outside the ICSID, is recognized and enforced as per the 1958 New York Convention, which provides grounds on which a national court of a signatory state can refuse enforcement or even recognition of an arbitral award, which includes public policy. On the other hand, ICSID proceedings and awards are fully internationalized as it limits the domestic courts interference during or after the proceedings. This very feature makes ICSID very attractive for foreign investors. The counter side of this is Art. 52 which states certain limited grounds on which any party to dispute after the passing of an award, can request for annulment of the award. Such procedures are decided by an ad-hoc committee constituted of arbitrators appointed by the Chairman of ICSID Administrative Council, and the functioning of this is very similar to the arbitral tribunal.


Investment arbitration is still evolving as the original investment arbitration was based on the procedures of the International Commercial Arbitration and thus, the proceedings and the award were confidential in nature meaning not in access to public but over the time, with the development of ICSID this principle have changed as investment affects the infrastructure and socio-economic aspect of the host state which affects the population at large. Therefore, the proceedings and awards have taken a new path in determining the concept of confidentiality when it comes to Investment Arbitration.


[i] Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich, International investment law for the 21st Century: Essays in Honour of Christoph Schreuer, Oxford Scholarship Online, Print ISBN – 13:9780199571345.

[ii] Identifying core Elements in Investment Agreements in the APEC Region, UNCTAD Series on International Investment Policies for development, United nations Conference on Trade and Development (UNCTAD), UN New York and Geneva 2008, see ~ (Visited on 3 August 2020).

[iii] International Investment Agreements Navigator, Investment policy Hub, UNCTAD, see ~ (visited on 3rd Aug 2020).

[iv] Clause (b), Artcile 1, Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Argentine Republic, see ~ (visited on 6th August 2020)

[v] Clause (a), Artcile 1, Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Argentine Republic, see ~ (visited on 6th August 2020).

[vi] Preamble, ICSID Convention, Pg. 11, see ~ (visited on 7th August 2020).

[vii] Art. 25, ICSID Convention, Pg. 18, see ~ (visited on 7th August 2020).

[viii] Salini Costruttori S.P.A and Italstrade S.P.A v. Kingdom of Morocco, 42 ILM 609 (2003).

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