A Primer on Investor-State Arbitration


Per Investopedia, foreign direct investment occurs Foreign direct investment occurs when an individual or a company acquires “an ownership stake in a foreign company or project made by an investor, company, or government from another country. Post-pandemic, foreign direct investment is again on a growth track, and as with other trending industries or growth areas, litigation has accompanied this. Investor-state arbitration is a specialized forum that allows foreign investors to seek recourse when they encounter legal challenges or unfair treatment by host states.

Investor-State Arbitration Basics

Investor-state arbitration typically arises from bilateral or multilateral investment treaties (“BITs” or “MITs”) and certain investment chapters in free trade agreements. These agreements provide certain legal protections and guarantees to foreign investors – like fair and equitable treatment, protection against expropriation without compensation, and the right to repatriate profits.

When a dispute arises between an investor and a host state, the investor may initiate arbitration proceedings against the state. The dispute is typically heard before an independent arbitration tribunal.

Benefits of Investor-State Arbitration

Investor-state arbitration provides foreign investors with a forum to protect their investments when they believe their rights have been violated. It’s also beneficial for these reasons:

  • Efficient resolution: as is typical with any arbitration, investor-state arbitration allows parties to resolve disputes more efficiently compared to traditional litigation in national courts. Parties also have the ability to select arbitrators with relevant expertise and knowledge, ensuring a higher level of understanding and competence in the decision-making process.
  • Enforcement of awards: the arbitration awards are generally enforceable across multiple jurisdictions through The New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which facilitates the recognition and enforcement of foreign arbitral awards. This enforceability gives foreign investors confidence that their awards will matter at the end of the day.
  • Confidentiality: investor-state arbitration offers a level of confidentiality that many desire for their sensitive commercial disputes. Confidentiality safeguards protect proprietary information and maintain privacy and allows parties to protect their reputations while the dispute is being resolved.

Criticisms and Challenges 

There also have been criticisms levied against these processes:

  • Lack of transparency: some argue that investor-state arbitration lacks transparency (opposite the confidentiality angle), which they believe leads to concerns about the consistency and predictability of decisions.
  • Regulatory chill: investor-state arbitration provisions have faced criticism for potentially chilling host states from enacting and implementing regulatory measures in the public interest.
  • High costs: arbitration costs can be substantial, particularly in complex cases, because you’re not only paying for attorney time, you’re paying for arbitrator time. This can burden both investors and host states, especially when public funds are used to defend a dispute.


Investor-state arbitration plays a crucial role in providing foreign investors with a means to protect their investments and seek recourse when disputes arise with host states. Though such arbitration offers several advantages, such as investor protection, efficiency, and enforceability, it is not without its criticisms and challenges. Balancing the interests of investors and host states, ensuring transparency, addressing costs, and promoting diversity are ongoing considerations in the development and evolution of investor-state arbitration.

To learn more about international arbitration, I urge you to sign up and join us for our (FREE) June 6 International Arbitration Webinar.