Written by: Ishita Sehgal
Edited by: Anisha Ratnam
Gaetan Caron - Unsplash
Introduction
Investment arbitration in the Asia-Pacific region has experienced significant evolution, marked by its historical foundations, diverse regional disputes, and ongoing efforts for reform. This essay contends that the current framework, while essential for fostering foreign direct investment, remains inadequate in addressing the growing tension between investor rights and state sovereignty. A shift towards empowering states with greater regulatory freedom through structural reform is imperative to safeguard their sovereignty and public policy interests. Furthermore, the essay examines the critical reforms proposed by The United Nations Commission on International Trade Law (UNCITRAL) Working Group III, particularly the establishment of a multilateral investment court as a necessary step to restore legitimacy, ensure consistency, and address the systemic deficiencies of the existing investor-state dispute settlement framework.
Historical Development of Investor-State Arbitration in the Asia Pacific
Investor-State arbitration originated to safeguard foreign direct investments in host states, providing investors with legal recourse through bilateral investment treaties. The Investor-State Dispute Settlement (“ISDS”) mechanism aims to balance state sovereignty with investor protection, fostering economic growth. The Asia-Pacific region holds a pivotal role in the history of investment arbitration, beginning with the landmark case of Asian Agricultural Products Ltd [1], where the International Centre for Settlement of Investment Disputes awarded damages to the claimant for property destruction during Liberation Tigers of Tamil Eelam raids, a violation of Sri Lanka’s Bilateral Investment Treaty (“BIT”) obligations. Despite being the birthplace of investment arbitration, the region only accounts for 9% of global ISDS claims, with cases spanning diverse sectors like energy, construction, and manufacturing [2].
In the 1990s, Malaysia faced a few early claims that were resolved amicably or dismissed. By the 2000s, disputes surged against states like India, Indonesia, and Pakistan. The White Industries case exposed weaknesses in India’s BIT framework [3], leading to a narrower model BIT to limit ISDS’ exposure. Similarly, Indonesia terminated or renegotiated BITs to reduce investor claims, while Australia shifted its stance on ISDS following the controversial Philip Morris v. Australia case [4], where the tribunal dismissed a tobacco giant's claim on procedural grounds. These shifts reflect a regional backlash against investor overreach and growing state emphasis on regulatory autonomy. Hence, even though foreign direct investments are a catalyst for economic growth, the recent fallacies of the ISDS framework have become apparent.
Challenges in the current ISDS Framework
The ISDS framework faces significant challenges, particularly in the APAC region, where its shortcomings are starkly evident. A lack of coherence and predictability in arbitral decisions undermines the rule of law, as fragmented tribunals often fail to address public interest issues effectively. This fragmentation is exacerbated by the system's origins in commercial arbitration, which prioritises private contractual goals over broader governance or policy objectives, making it ill-suited for disputes involving public policy concerns.
Critics argue that while the concept of ISDS is sound, its current implementation suffers from inherent flaws. The system’s problematic birth is evident in cases such as the Agility v. Pakistan arbitration [5], where BIT claims exposed the monstrous nature of broad treaty interpretations. The subsequent expansion of treaty protections, such as the Fair and Equitable Treatment (“FET”) standard, has allowed foreign investors to transform failing investments into valuable claims. This dynamic often grants unlimited discretion to arbitral panels, with interpretations of what constitutes ‘fair and equitable’ treatment resting solely with arbitrators, rather than the state. Treaty shopping and treaty abuse further exacerbate these issues, with nationality structuring enabling investors to exploit treaties without actual capital flows into host countries. For example, in the APAC region, treaty shopping has undermined the legitimacy of ISDS by allowing claims that bypass the intended spirit of investment agreements.
The lack of procedural safeguards is evident in cases like the 2021 COVID-19 airport dispute [6], where a French investor filed a multi-million dollar claim against a state based on pandemic-related treaty breaches. Such instances highlight how ISDS has become a mechanism for leveraging public crises for private gain, raising questions about its ability to balance investor protection with state sovereignty. These challenges underline the need for a reformed ISDS framework that ensures consistency, accountability, and fairness, while addressing the discrepancies that currently undermine its legitimacy.
Emergence of State’s Regulatory Freedom opposed to Traditional Framework
The tension between ensuring investor protection to attract foreign direct investment and preserving a state’s regulatory autonomy remains a critical challenge in international investment law. Nowrot highlights the intricate dilemma faced by states [7], which must balance the imperative of providing a stable and predictable environment for investors with the sovereign right to regulate in areas such as corporate social responsibility, human rights, and public policy. Historically, arbitral tribunals have often prioritised investor protection, even in instances where state actions ostensibly fall within their regulatory domain. A prime example is White Industries [8], where the tribunal ruled in favour of the investor, despite India’s argument that its judicial delays reflected broader systemic challenges rather than a targeted denial of justice.
To ensure greater autonomy, states in the Asia-Pacific region have developed innovative mechanisms within investment agreements to safeguard their regulatory prerogatives. These include provisions for binding joint treaty interpretations, as seen in the ASEAN Comprehensive Investment Agreement (“ACIA”), which prevents expansive arbitral interpretations that could undermine state sovereignty. Similarly, the China-Australia Free Trade Agreement introduced the public welfare notice, allowing a state to pause arbitration proceedings and consult on measures related to public interest regulation. Balancing investor protection with regulatory freedom, states have increasingly transitioned from traditional BITs to multilateral frameworks, which integrate ISDS provisions with safeguards for state policy objectives. Countries like Australia have adopted a case-by-case approach to ISDS, carefully evaluating treaty inclusions to align with national interests, a stance influenced by controversial disputes such as the Philip Morris v. Australia case [9]. These shifts reflect a broader trend in the region towards fostering foreign investment while maintaining the flexibility to legislate on critical issues like environmental protection, public health, and human rights, demonstrating a nuanced recalibration of the balance between investor rights and state sovereignty.
UNCITRAL Working Group III and its significance in the APAC region
UNCITRAL Working Group III has been at the forefront of addressing the systemic challenges faced by the ISDS mechanism [10], advocating for reforms that enhance transparency, consistency, and legitimacy. The breadth of reforms proposed reflects the diverse concerns of member states and stakeholders. Key recommendations include measures to improve transparency, such as public access to hearings and arbitral decisions, and the establishment of a code of conduct for arbitrators to ensure impartiality. To address inconsistencies in awards, the group has proposed the creation of an appellate mechanism, while expedited arbitration procedures and the regulation of third-party funding aim to reduce costs and conflicts of interest.
Central to the structural reform proposals is the concept of a Multilateral Investment Court, envisioned as a permanent, treaty-based body with standing judges and an integrated appellate system. This proposed framework seeks to resolve ongoing issues of impartiality, inconsistency, and legitimacy in ISDS, providing a unified mechanism to adjudicate disputes. Additionally, the establishment of an Advisory Centre on International Investment Law is intended to offer capacity-building support to developing nations, ensuring equitable access to arbitration resources.
These recommendations are particularly significant for the APAC region, as they not only aim to balance investor protection with state sovereignty but also strengthen legal infrastructure, enhance global credibility, and promote regional economic growth. Many APAC states, being emerging markets, often face criticisms of inconsistent legal frameworks and delayed judicial processes. The establishment of a MIC could streamline dispute resolution, ensuring legal stability, while the proposed Advisory Centre on International Investment Law would assist developing countries in navigating complex ISDS disputes and building their capacity for effective engagement.
Furthermore, robust ISDS mechanisms are vital from an investor's perspective, especially as APAC countries like China, Japan, and Singapore take the lead in global trade and investment agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the ACIA. These frameworks demand efficient and reliable dispute resolution systems to handle the growing complexity of cross-border investments. By aligning with reformed ISDS systems, APAC states can demonstrate their commitment to rule-based governance, enhancing their appeal as investment destinations. For countries like India, China, and Indonesia, which have faced significant investor claims, these reforms provide an opportunity to rebuild trust and showcase their willingness to adapt to international best practices.
Challenges and Criticisms to Structural Reform
Efforts to establish a Multilateral Investment Court face significant challenges, reflecting the complexity of overhauling the existing ISDS system. However, these obstacles, while formidable, do not outweigh the need for structural reform to address the deep flaws in the current framework. Kaufmann-Kohler and Potesta highlight the challenges regarding court composition [11]. Ensuring the selection of impartial and independent judges requires a transparent appointment process that balances the interests of states and investors. Critics fear that state-controlled appointments might lead to bias, while investor involvement risks compromising state sovereignty. Proposals for advisory panels and nonrenewable terms for judges aim to mitigate these concerns, fostering legitimacy and independence.
Another difficulty concerns the law governing the proceedings. Whether the court operates under an ‘arbitration-like model’ or as a fully-fledged international court has implications for procedural clarity and enforcement. For instance, if deemed arbitration, decisions could benefit from enforcement under the New York Convention. Alternatively, a treaty-based enforcement mechanism would be necessary, introducing uncertainties for non-contracting states. The most contentious issue is incorporating the Multilateral Investment Court into the existing network of over 3,300 investment treaties. Renegotiating these treaties would be labor-intensive and politically fraught. An opt-in convention, modeled after the Mauritius Convention on Transparency, offers a pragmatic solution, allowing states to integrate the Multilateral Investment Court without exhaustive bilateral negotiations.
Despite these challenges, the need for reform remains compelling. The current ISDS system lacks consistency, transparency, and legitimacy, undermining its credibility. Arbitrator discretion over standards like Fair and Equitable Treatment has led to unpredictable outcomes, while issues such as treaty shopping and weak enforcement exacerbate investor-state tensions.
A well-structured Multilateral Investment Court, supported by inclusive global collaboration through forums like UNCITRAL, could provide the consistency, fairness, and legitimacy that ISDS urgently needs, ensuring a balanced system for both investors and states. While reform is arduous, it is essential to create a sustainable and equitable framework for international investment disputes.
Conclusion
Asia-Pacific’s experience with international arbitration highlights the need to balance investor protection with state sovereignty. While the current ISDS framework has supported foreign investment, its flaws, such as inconsistency and lack of transparency, call for urgent reform. Proposals like the Multilateral Investment Court, championed by UNCITRAL Working Group III, offer a pathway to enhance legitimacy and fairness. By adopting these reforms, APAC states can strengthen their legal systems and maintain their appeal as investment destinations while safeguarding regulatory autonomy.
REFERENCES
[1] Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3
[2] Dymond T and Lim J, 'Investment Treaty Arbitration in the Asia-Pacific' (2020) Global Arbitration Review, Debevoise & Plimpton
[3],[8] White Industries Australia Ltd v India IIC 529 (2011)
[4],[9] Philip Morris Asia Limited v The Commonwealth of Australia, UNCITRAL, PCA Case No 2012-12
[5] Agility for Public Warehousing Company KSC v. Islamic Republic of Pakistan, ICSID Case No. ARB/11/8
[6] ADP. v. Chile ICSID Case No. ARB/21/40
[7] Nowrot K, ‘How to Include Environmental Protection, Human Rights and Sustainability in International Investment Law’ (2014) 15 JWIT 622
[10] Cotula L, Johnson L, Mehranvar L, Nanda A, and Uribe D, UNCITRAL Working Group III: Contribution on the “Right to Regulate” Provision (2024). IIED London
[11] Kaufmann-Kohler G and Potestà M, 'Challenges on the Road Toward a Multilateral Investment Court' (2017) Columbia FDI Perspectives, No 201
Comments