Arbitration on Trial: A Verdict on the Use of Arbitration in Investor-State Dispute Settlement

The use of arbitration in investor-state dispute settlement (ISDS) enables foreign investors to sue host states for alleged breaches of international investment law. But the practise has grown increasingly controversial over the past decade, with respondent states refusing to pay damages, or withdrawing from the system entirely.

ISDS is founded on the principles of commercial arbitration that uphold contract law. When used to resolve disputes between foreign companies it is an exercise in private international law. Arbitration in ISDS, however, operates at the level of public international law, because foreign investors enjoy protection standards under treaties signed between their home state and the host state.

ISDS thus operates as a form of judicial review, adjudicating on the lawfulness of actions taken by the host State’s Government, Parliament, or Court that may have violated the property rights of the investor. Its decisions can cost host states billions of dollars of taxpayer’s money, and directly impact on rights of citizens protected under International Human Rights Law (IHRL). Yet IHRL is construed as playing little to no role in ISDS arbitration.

Thus, the question this paper seeks to answer is whether the continued use of arbitration in ISDS is justified, or not. To do that, ISDS will be put on ‘trial’, charged with being incompatible with public law and the obligations of international law as codified in IHRL. Chapter One presents the case for arbitration in ISDS, Chapter Two the case against, and Chapter 3 reaches a verdict. ISDS is at the frontline of adjudicating globalisation, of striking a balance between profit and people, business and human rights. If it is not justified in law, it can hardly be justified in policy.