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Investment Arbitration (ISDS) 101

What is investment Arbitration?

Investment Arbitration is a dispute resolution mechanism between foreign investors and host states also called Investor State Dispute Settlement (ISDS). ISDS was developed to protect investor interests by ensuring they have access to independent arbitrators who are able to give an enforceable award. ISDS provides investors with an alternative dispute resolution mechanism to the hosts domestic legal system while/and providing protections afforded in international treaties, and international law.


Jurisdiction of ISDS Tribunals

ISDS tribunals get their jurisdiction from International Investment Agreements (IIA) in “Umbrella Clauses”. Umbrella Clauses bring the obligations entered into by host state undertaking to protect an investment within its jurisdiction, these include Bilateral Investment Treaties (BIT) and Multilateral Investment Treaties. ISDS Tribunals also get jurisdiction from Arbitration clauses in investment contracts between investors and governments.


Main purpose of these IIA is to provide protection to foreign investment by nationals and companies of one state (foreign) in another (host) state. This ensures investors have a predictable and certain means of resolving disputes. These agreements are unique in that although they are concluded by two states, they create rights and means of investors from either state to bring proceedings against the other state, in a commercial context it can be equated to creating third party rights to a party that is not privy to the contract.


Requisites for ISDS


Parties to ISDS have to be natural and/or legal person of a foreign jurisdiction and the host state.

Governments are usually respondents in most ISDS state however governments can also institute ISDS proceeding. A corporate body incorporated in a host country with a foreign majority shareholding of citizens of a contracting state will also meet this threshold.


Most IIA encourage parties to negotiate and settle disputes before instituting proceedings. This “cooling off” period can be equated to a demand letter in civil proceedings. And in both scenarios, one cannot institute proceedings before doing the same.


Subject matter of a potential suit has to amount to an investment. Investments are broadly defined in most BIT’s and not defined in the ICSID convention as this was left to the discretion of negotiating states to define what an investment is. However, several tribunals have developed jurisprudence on defining what an investment is. If the subject of a suit is not classified by a tribunal to be an investment, then this can revoke the jurisdiction of an arbitral tribunal.


Types of ISDS proceedings


Institutional ISDS proceedings; these are proceedings that are held in a seat that is an organization. e.g Stockholm chamber of commerce, ICSID, NCIA, or ICC. These institutions provide arbitrators and other facilities essential to undertake arbitration proceedings.


Ad hoc Arbitration proceedings; these require the parties to select arbitrators, governing law and other factors essential to undertaking arbitral proceedings.



Lee Mutunga, Managing Partner

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