Investor-state dispute settlement: Is global institutional reform possible?

Investor-state dispute settlement (ISDS) is a controversial institution of international arbitration between foreign investors and their host countries. It allows complaints by investors against their host governments, claiming investor damages due to allegedly unfair government policies. Claims by investors of indirect appropriation, in particular, have grown in recent years. Governments, in contrast, have no standing to file an ISDS complaint against investors. This paper examines trends in ISDS decisions over time according to the type of complaint, and the outcomes of these cases. The motivation is exploring alternatives to the current system United Nations Commission on International Trade Law (UNCITRAL) and International Centre for Settlement of Investment Disputes (ICSID) rules. Critics of ISDS assert the unfairness of panel judgments assumed to favor investors, while investors tend to reject proposals to rely on local courts in host countries. A workable and sustainable dispute settlement system is needed, given the preferences of most countries to encourage both inbound and outbound foreign direct investment (FDI). In this regard, institutions to establish rules for FDI and dispute settlement are justified as means of reducing transaction costs and addressing bounded rationality problems. Recently, discussions have turned towards the desirability of regional arbitration forums to replace established UNCITRAL/ICSID procedures, but the ultimate goal of a unified global forum remains elusive. The World Trade Organization provides a possible model for global institutional integration, but presents high barriers to achieving consensus. Incremental institutional change may be possible at the regional level and the development of more legal resources in developing countries could improve outcomes for those countries as FDI host states.

UNCTAD statistics on ISDS provide panel data on approximately 850 cases from 1987 to 2017. An assessment of aggregate data will show details of case filings on a year-to-year basis, revealing evolving patterns of complaints according to treaty breach and case outcomes. Straightforward regression, as well as multivariate probit analysis, will be used to explore the nature of disputes and possible problems with legitimacy of the current system. Hypotheses to be tested include systematic shifts in the importance of treaty breach allegations, differences in such breaches according to the nationality of host countries and investors, and patterns of success arbitration rates. The study will also investigate the impact of the following factors on determining these outcomes: prior case outcome patterns, prior case award patterns, the specific sector of a case filing, institutional arbitral frameworks, and firm variables.