I was recently asked to address the issues of investor state arbitration from an investor’s point of view with a third party funding twist.
However, instead of listing all the practical difficulties investors face and procedural hurdles that they sometimes need to overcome, I thought it may be a good idea to remind a younger audience of the genesis of investor state arbitration.
BITs were traditionally concluded between a developed and a developing country, usually at the initiative of the developed country. The first ever BIT was ratified in 1959 between Germany and Pakistan. Typically, the developed country (capital exporting) entered into a BIT with a developing country (capital importing) in order to secure better standards of legal protection for the investments of its nationals than those offered under the local laws. The developing country would agree in order to attract foreign investors.
World economic rationale changed in the late 1980s and developing countries began to sign BITs between themselves. As a result, the traditional division between capital exporting and capital importing countries no longer existed. Since then, most countries approach BITs with both concerns: (1) to attract investments and (2) to protect investors.
The economic shift has been radical in the past 10 years because the countries that used to be capital exporting, are now capital importing and vice versa. Therefore, we are seeing that investment treaty claimants are often nationals of former capital importing (i.e. developing) countries and the respondents are the former capital exporting countries (e.g. European countries). Today, Spain is the country with the single greatest number of investment treaty disputes and is respondent in the vast majority. This fact alone may largely explain the protest we are now reading in the general press about investment treaty arbitration. The European Commission now wants to change the rules of the game including the standards of protection and the appropriate forum to hear these disputes. Why is that? Maybe because the European countries are being sued now as opposed to Venezuela, Argentina, Egypt, or Pakistan.
In the same vein, an OECD survey and study has shown that the claimants in over half of a sample of 95 investment treaty cases reviewed from the past 10 years were medium and large companies with sizes varying from several hundreds of employees to tens of thousands. Needless to say that these are not impecunious claimants. Only 22% of the claimants in the cases examined were either individuals or very small business.
That being said, the biggest criticism of investment treaty arbitration is time and costs, which go hand in hand.
An Allen & Overy study published in GAR in 2014 and written by Matthew Hodgson revealed the following numbers:
High costs naturally paved the way for the remarked entry of third party funding in the world of investment treaty arbitration.
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