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The Stakes Are High: A review of the financial costs of investment treaty arbitration

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The Stakes Are High: A review of the financial costs of investment treaty arbitration

The amounts at stake in investment treaty arbitration are very often high. The average claim in investor–state arbitrations based on international investment agreements (IIAs) is about half a million U.S. dollars.

There have been over 50 multibillion-dollar claims, which are increasingly common. At the same time, the number of cases continues to rise. In 2013 alone, investors sued host states at least 57 times under IIAs, bringing the total number of known cases to 568 at year’s end.

In this context, entering into treaties with investor–state dispute settlement clauses carries significant financial risks for governments, particularly developing countries, whose fiscal position can be seriously affected. States are always the respondent parties, never the claimants. In addition, even when they successfully defend themselves, they can incur significant costs, depending on factors that are largely outside of their control, such as the compensation claimed by the investor and the length and complexity of the proceeding. Furthermore, large claims may serve to sustain “threats of arbitration,” increasing the bargaining power of investors in informal discussions with governments to water down regulatory measures or to settle a dispute.

This paper discusses the financial implications of investment treaty arbitrations. It reviews the amounts of compensation claimed by investors from states, and the amounts of compensation awarded when they prevailed on the merits. It also discusses the trend among tribunals to award compound rather than simple interest on the amount of compensation. Next, it looks at three types of arbitration costs in more detail: lawyers’ costs, arbitrators’ fees and administrative costs.

In conclusion, the paper advances potential reforms to investment arbitration in order to contain costs. Among the recommendations are streamlining the arbitration process to reduce legal and institutional costs, improving governments’ defence capacities, and discouraging speculative or inflated claims. Treaties could also provide guidance to arbitral tribunals on the determination of the amount of compensation, the type and level of interest rates on compensation as well as cost allocation decisions. Deeper reform also needs be explored to respond to systemic faults in the system, such as establishing an international investment court or an appeals mechanism, and conceiving alternatives to investor–state arbitration, including at the national level.