• Koluman Law

Protection of Foreign Investments Through Investment Arbitration

A foreign direct investment (FDI) is long term investment made by a firm or an individual in one country, into business interests located in another country, with all risks and profit opportunities. Although profit making is the main purpose of investors, profit potential is not sufficient for foreign investors to invest in a country; investors wish to secure themselves and their investments by making this investment in the countries whose investment climate is safer. Foreign investors want to safeguard themselves and their investments in the country they will invest in, to protect and isolate themselves as much as possible from political and economic risks. In this context, countries that wish to attract foreign investors make investments to their country tend to sign bilateral and multilateral investment agreements to secure foreign investments and investors, in order to help them seek their rights in international arena.


Investment arbitration is a procedure to resolve disputes between foreign investors and host States (also called Investor-State Dispute Settlement or ISDS). The possibility for a foreign investor to arbitrate agains host State is a guarantee for the foreign investor that, in case of a dispute, he will have access to independent and qualified arbitrators who will solve the dispute and render an enforceable award. This allows the foreign investor to bypass national jurisdictions that might be perceived to be biased or to lack independence, and to resolve the dispute in accordance to different protections afforded under international treaties.


There are different types of arbitration mechanisms in investment arbitration; but considering the enforcement mechanism, it can be classified as ICSID and non-ICSID. The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration institution established in 1966 for legal dispute resolution and conciliation between international investors. Unlike other institutions, ICSID only plays a role in resolving disputes related to investment arbitration. Non-ICSID arbitration includes both institutional arbitration (rather than ICSID) and ad-hoc arbitration.

There are two main differences between ICSID and non-ICSID arbitration. First of all, an award of an ICSID Tribunal is binding on all parties to the proceeding and each party must comply with it pursuant to its terms.The Convention limits the role of domestic courts to the recognition and enforcement of these awards. In recognising and enforcing ICSID awards, the domestic courts of each contracting state to the ICSID Convention are required to enforce the pecuniary obligations imposed by an ICSID award as if it were a final court judgment of the contracting state. The signatory state of ICSID Convention has no right to refuse the enforcement. By contrast, non-ICSID awards are subject to enforcement procedures in state courts and state courts have right to refuse the enforcement mainly subject to certain, limited defenses.


Other difference is about the annulment mechanisms. Pursuant to Article 53(1) of the ICSID Convention, ICSID awards are not subject to any appeal or to any other remedy except those provided for in this Convention. Only an ad hoc committee established under the Convention regulations has right to review the award. ICSID Convention restricts outside review of awards and strictly limits the grounds on which the awards can be annulled, erecting strong shields around tribunals’ awards, and raising the stakes of investor-State arbitration for respondent States even higher.

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