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Investor–State Disputes: Prevention and Alternatives to Arbitration
Aug 27 2010

A new UNCTAD publication explores alternative methods that governments and international investors may use to resolve increasingly frequent disputes that must currently be handled through lengthy international arbitration.

The publication, Investor-State Disputes: Prevention and Alternatives to Arbitration, identifies two such approaches:

  • Methods of alternative dispute resolution (ADR) that seek to resolve disputes through negotiation or amicable settlement, such as international conciliation or mediation; and
  • Dispute-prevention policies (DPPs) that attempt to prevent conflicts between foreign investors and States from escalating into formal disputes - for example, by establishing inter-institutional "alert mechanisms" within States, or by encouraging information-sharing among governments on investment regimes.

Investor-State disputes have become increasingly frequent in recent years as the number of international investment agreements (IIAs) has grown. IIAs are intended to smooth the way for foreign investment in developing countries, by providing legal protection to foreign investors and their investments. But the treaties - most of which are bilateral investment treaties (BITs) - have become more and more complex, and disagreements over their various components, or over their practical application, have mounted. UNCTAD counted a total of 357 such disputes by the end of 2009. Of those, 202 - or 57% - were initiated during the last five years (starting in 2005). BITs themselves have grown in number from 1,881 in the year 2000 to 2,751 in 2009.

The new study says such disputes potentially reduce the benefits that IIAs can bring to developing economies. Concerns and complexities raised by these disagreements include the special nature of international investment arbitration, which involves a sovereign State as a defendant; the possibility that investor-State disputes will strain the relationship between investor and host country; a frequent focus on the payment of compensation instead of on maintaining working relationships between investors and governments; the increasingly large financial amounts at stake (claims can total millions of dollars); an increase in the time frame for claims to be settled; fears about frivolous and vexatious claims; and general concerns about the legitimacy of the system of investment arbitration as it affects measures taken by sovereign States.
The UNCTAD study highlights the advantages of the proposed alternative approaches. These include flexibility, including the possibility of finding amicable grounds for settlement, and faster and less costly resolution.

The study also finds that certain alternative approaches can improve good governance and other regulatory practices of States.

On the other hand, the new publication notes there are challenges to relying on alternative approaches. Among other potential difficulties, such alternatives are generally non-binding on the parties and might be considered a waste of time and money if they are not conducted successfully. In addition, the parties often lack familiarity and experience with the techniques involved. The publication says that alternatives may not be suitable for all investment disputes. States, with their unique attributes as parties to a dispute, may face specific difficulties in using alternative approaches effectively - for example, their flexibility in finding compromise solutions is limited by the boundaries established through existing laws and regulations. Similarly, government officials may not always be given the necessary authority and powers to use alternative approaches effectively.