Prevention of ISDS Disputes: From EarlyResolution to Limited Access

Yulia Levashova

ContentsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Dispute Prevention in IIAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Alternative Dispute Resolution Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Interstate Cooperation in Dispute Prevention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Reflections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Conditioning Access to ISDS: Prevention of Investment Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Lack of Compliance with Host State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Dispute Prevention Through Investor’s Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Abstract

The dispute prevention is currently one of the central themes in the investor-statedispute settlement (ISDS) reform led by the UNCITRAL Working Group III(WG). Many states have already included various dispute prevention methodsin their International Investment Agreements (IIAs). For example, in Korea orBrazil, the Ombudsman system was set up with the purpose of addressinginvestors’ grievances before they mature into a legal dispute. These nationalbodies are quite effective for the purpose of dispute prevention, especially ifthey contain an institutionalized framework that has a system for coordinationbetween various levels of governments and a system for communication with aninvestor. Another method of dispute prevention is to strengthen the cooperation of

Y. Levashova (*)Nyenrode Business University, Breukelen, Netherlands

Utrecht University, Utrecht, Netherlandse-mail: Y.Levashova@uu.nl; j.levashova@nyenrode.nl

© Springer Nature Singapore Pte Ltd. 2020J. Chaisse et al. (eds.), Handbook of International Investment Law and Policy,https://doi.org/10.1007/978-981-13-5744-2_96-1

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state parties through joint committees and commissions. Inter-state efforts toprevent disputes also include the possibility to establish an Advisory Centre onInternational Investment Law. This initiative is currently investigated within theUNCITRAL reform process. Another category of preventive methods discussedin this chapter is based on a system of filtration of certain types of disputes. Somestates in their IIAs have imposed additional conditions for investors’ access toISDS. The goal of this chapter is to discuss various options for dispute preventionand to assess their implications for the ISDS reform.

Keywords

ISDS · Dispute prevention · ADR, IIAs · Due diligence · Foreign investors

Introduction

The reshaping of investor-state dispute settlement (ISDS) is currently high on theagenda of states and international organizations. Since 2017, the UNCITRALWorking Group III (WG) is leading and facilitating the ISDS reform process.1 Atits 36th session in 2018, the WG identified three categories of concerns relating toISDS: (1) the lack of consistency and predictability of arbitral decisions; (2) short-comings in the qualifications of arbitrators and decision makers; and (3) the costs andduration of ISDS cases.2 In its 37th session, the WG considered further issues,including the prevention of disputes. The promotion of dispute prevention mecha-nisms is central to the ISDS reform and supported by numerous states. The 39thsession of WG is due to take place in March–April 2020, and the appraisal of disputeprevention and mitigation listed as a key area of reform is to be discussed during thesession.

Next to the UNCITRAL process, some states have already included variousdispute prevention methods in their International Investment Agreements (IIAs).The most prominent example of such methods is the Brazilian Cooperation andFacilitation Investment Agreements (CFIA). This chapter will first consider exam-ples of dispute prevention mechanisms already embedded in a host state’s legalframework or included (or proposed to be included) in a number of treaties. Theimplications of the prevention of ISDS disputes as a more institutionalized reformoption will be discussed against the general background of the UNCITRAL process.Secondly, the chapter will evaluate the preventive techniques applied via treatydrafting. Particular focus will be placed on the requirement of an investor’s duediligence as a medium to prevent some of the most widespread claims related to thestability of a host state’s regulatory framework. Lastly, the chapter will offer somefinal remarks.

1UNGA (2017) Supplement No 17 (A/72/17), paras 263–264.2UNCITRAL Report of Working Group III (2018), 36th session, Vienna, 29 October–2 November.

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Dispute Prevention in IIAs

The 2019 UNCTAD issue note provides that, in recent years, states have“implemented a large number of ISDS reform elements as part of broader IIAreform.”3 This also includes provisions in IIAs that are aimed at dispute prevention.

Dispute prevention is a broad term and can be described alternative disputeresolution methods that aim to avoid or resolve conflict before it escalates into alegal dispute. Dispute prevention mechanisms can be of varying nature. Firstly, thesemechanisms can consist of dispute prevention policies designed by states even beforea specific conflict has arisen. For example, the Peru’s State Coordination and ResponseSystem for International Investment Disputes includes an early alert system for dealingwith conflicts between an investor and a state.4 Preventive techniques also focus on thestrengthening of alternative methods of conflict resolution other than arbitration.Examples of such methods can be found in Brazilian Cooperation and FacilitationInvestment Agreements (CFIA).5 These include the establishment of a Joint Commit-tee competent for administrating a dispute prevention procedure; the setting up ofombudspersons or focal national points; and the facilitation of mediation, amongothers. Another category of preventive methods is based on a system of filtration ofcertain types of disputes. In some IIAs, states have imposed additional conditions forinvestors’ access to ISDS. These conditions may vary. For example, they can compriseprocedural requirements requiring investors to exhaust local remedies before initiatingarbitration proceedings. These types of requirements can be found in the Belarus-IndiaBIT6 and the United States-Mexico-Canada Agreement (USMCA). Other conditionslimiting the access of investors to ISDS include the legality requirement of aninvestment or the exclusion of frivolous claims.7 Some of these categories of disputeprevention mechanisms are further elaborated upon below.

Alternative Dispute Resolution Methods

Alternative Dispute Resolution (ADR) includes different types of non-adjudicatorytools usually facilitated by third parties that aim to resolve a conflict between an

3UNCTAD (2019) Reforming investment dispute settlement: a stocktaking, Issue Note, No 1, p 5.See also Chaisse J, Donde R (2018) The state of investor-state arbitration – a reality check of theissues, trends, and directions in Asia-Pacific. Int Lawyer 51(1):47–674Llerena (2018) The Peruvian state’s response to international investment disputes. InternationalLitigation Blog, p 2. http://international-litigation-blog.com/peru-response-to-international-investment-disputes/5Articles 19 and 24 of the Brazil-United Arab Emirates CFIA (2019). Other examples of CFIA canbe found at UNCTAD, Investment policy, International Investment Agreements. https://investmentpolicy.unctad.org/international-investment-agreements/countries/27/brazil6Article 15, Belarus-India BIT (2018).7Article 14, Iran-Slovak Republic BIT (2016).

Prevention of ISDS Disputes: From Early Resolution to Limited Access 3

investor and a state before it escalates into a legal dispute.8 ADR mechanisms makeuse of three sets of instruments. The first set of instruments are tools designed toavoid the conflict altogether through preventive policies or through the earliestresolution of a conflict usually regulated at a national level. These include theearly resolution of conflicts through the Ombudsman and the National ComplaintCentre, for example. The second set of instruments include traditional ADR mech-anisms, i.e., mediation and conciliation, to which parties may recourse when theconflict has already arisen. The third set of instruments are based on cooperation andinvestment facilitation and may include a joint body or an advisory centre where ahost state can obtain the necessary expertise about investment strategies, includingprevention methods. These three sets of instruments are discussed in the followingsub-sections.

Early Prevention and Resolution of Conflicts Between an Investor and aHost StateOne option for prevention of ISDS disputes – advocated by Brazil,9 Korea,10 SouthAfrica,11 Thailand,12 and other states during the UNCITRAL process – is theestablishment of an Ombudsman or similar mechanisms that will assist investorsto resolve conflicts in an amicable manner during the early stages of their inception.The Ombudsman system envisions a framework where investors can resolve theirdifferences with a state’s authority before it escalates into a legal dispute. ManyBrazilian CFIAs have already introduced provisions establishing ombudspersons/focal national points and a Joint Committee. For example, Article 19 of the Brazil-Guyana CFIA (2018) entitled “National Focal Points or Ombudspersons” notes that“[e]ach Party shall designate and notify each other an Agency or Authority to act as aNational Focal Point, or Ombudsperson, whose main responsibility shall be tosupport investors from the other Party in its territory and also be charged with theadministration and monitoring the implementation of this Agreement.”13 One of thekey tasks of the Ombudsperson/National Focal Point is to prevent difficulties in allinvestment issues by working together with the state’s authorities and relevantinvestors. Both parties, the investor and the state’s authority, have the possibilityto address their grievances through the Ombudsperson/National Focal Point.

8Joubin-Bret (2010) UNCTAD.9Possible reform of Investor-State Dispute Settlement (ISDS), Submission from the Government ofBrazil (11 June 2019), 28 March 2019. https://undocs.org/en/A/CN.9/WG.III/WP.171.10Possible reform of Investor-State Dispute Settlement (ISDS), Submission from the Republic ofKorea (31st July 2019). Available at https://uncitral.un.org/sites/uncitral.un.org/files/wp179_new.pdf11Possible reform of Investor-State Dispute Settlement (ISDS), Submission from the Government ofSouth Africa (17 July 2019). Available at https://undocs.org/en/A/CN.9/WG.III/WP.17612Possible reform of Investor-State Dispute Settlement (ISDS), Submission from the Governmentof Thailand (8 March 2019). https://undocs.org/en/A/CN.9/WG.III/WP.16213Article 19, Brazil-Guyana CFIA (2018).

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The Brazil-Guyana CFIA also provides for the establishment of a Joint Commit-tee that cooperates with the Ombudsperson/National Focal Point in mitigatingconflict situations.14 The Joint Committee is a body that consists of governmentalrepresentatives from both contracting states.15 This Joint Committee has a moreformal role in preventing conflict than the Ombudsperson and it is competent toadminister the dispute prevention procedure when an investor considers that ameasure by a host state has breached the respected agreement.16 The outcome ofthe dispute prevention procedure is a report, prepared by the Joint Committee, thatincludes a finding on the disputed matter. Where the conflict is not resolved throughthis process, an investor may submit the dispute to arbitration.

To summarize, therefore, Brazilian CFIAs include two phases of dispute preven-tion. First, the Ombudsperson assists investors, as well as states, in resolving anymatters and complaints arising during the investment process. Second, the JointCommittee resolves the written complaint of an investor regarding an alleged breachof the agreement. The approach adopted in Brazilian CFIAs is to increase theresponsibility of the state’s government by creating a framework for resolving alltypes of issues at an early stage.

The Brazilian approach toward dispute resolution that focuses on dispute preven-tion has to be considered in the broader context of the country’s investment policy.Brazil has never enforced BITs with ISDS provisions.17 Despite this, the country wasquite successful in attracting Foreign Direct Investments (FDIs).18 Brazil’s currentinvestment approach, which is reflected in its recent CFIAs, focuses on strengthen-ing investment facilitation, rather investment promotion. These CFIAs exclude ISDSprovisions and include a balanced combination of investor protection provisions andprovisions ensuring the state’s right to regulate. Such an alternative approach toinvestment treaties is based on the Brazilian government’s view that investors, whileinvesting in a host state, are more concerned with the “improvement of the institu-tional framework for investment with foreign governments than in after-the-factremedies that would provoke long and expensive litigation.”19 Hence, the focus inCFIAs is one of effective conflict prevention combined with a possibility for state tostate arbitration. CFIAs shift the investor-state relationship from a model of legal

14Article 19(5), Brazil-Guyana CFIA (2018).15Article 18(2), Brazil-Guyana CFIA (2018).16Article 24, Brazil-Guyana CFIA (2018).17UNCTAD, Investment policy hub, Brazil, Bilateral Investment Treaties. https://investmentpolicy.unctad.org/international-investment-agreements/countries/27/brazil18It should be noted, however, that Brazil has a large market and developed domestic institutions,these factors are important for attracting foreign investors. For some developing and least developedcountries with smaller internal markets, this is not the case; therefore, the negotiation of IIAs withISDS mechanism might play a more decisive role in attracting FDIs. See: Frenkel M, Walter B(2019) Do bilateral investment treaties attract foreign direct investment? The role of internationaldispute settlement provisions. World Econ 42:1316–134219Possible reform of Investor-State Dispute Settlement (ISDS), Submission from the Governmentof Brazil (11 June 2019)

Prevention of ISDS Disputes: From Early Resolution to Limited Access 5

adjudication to a model of cooperation that is based on institutional support forresolving an investor’s grievances and inter-state diplomacy.

Korea is another example that has had a positive experience with an Ombudsmansystem. Korea is one of the first countries to set up a Foreign Investment Ombuds-man office that assists foreign investors with all types of issues. If a conflict betweenan investor and a state’s authority arises, the Ombudsman can resolve the issue bydirectly contacting the relevant ministry and can propose a solution for bothparties.20 According to statistics, the Korean Foreign Investment Ombudsman officeis very effective, resolving 90% of all disputes between 2007 and 2011.21 Until2018, Korea was never a respondent state in ISDS proceedings. Recent claimsinitiated against Korea by foreign investors have inspired additional proposals formitigating ISDS conflicts. This is discussed further in section “Interstate Coopera-tion in Dispute Prevention”

Other countries that have set up national agencies that address complaints offoreign investors with the goal to prevent ISDS disputes are China, Colombia, Peru,Jordan, Bosnia, etc.22 Myanmar and Vietnam are in the process of establishing asimilar system through national law.23 In 2006, China established a National Com-plaint Centre for Foreign-invested Enterprises (NCCFE) that has a similar functionto Ombudsmen. The NCCFE allows investors to file a complaint against the relevantadministrative authority. The NCCFE will then further coordinate and supervise thecomplaint.24 The mechanism is aimed at the amicable settlement of conflicts and hasalso been incorporated into the recently adopted Chinese Foreign Investment Law(2019).25 In similar vein, Colombia and Peru have institutions that deal withpotential investment disputes. In Colombia, it is the Directorate of Foreign Invest-ment and Services established under auspices of the Ministry of Trade; and in Peru, itis the Peruvian System for Coordination and Response of State in InternationalInvestment Disputes. The Peruvian System has been created to coordinate theresponse to ISDS between different state agencies and to design an early alert system

20Nicolas F, Thomsen S, Bang M (2013) Lessons from investment policy reform in Korea. OECDworking papers on international investment, 2013/02. OECD Publishing, p 23. https://doi.org/10.1787/5k4376zqcpf1-en21Vigidal G, Stevens B (2018) Brazil’s new model of dispute settlement for investment: return to thepast or alternative for the future? J World Invest Trade 19:475–512, 48822Many countries set up national agencies, such as: Tunisia’s Foreign Investment PromotionAgency; Investment Development Authority of Lebanon; Israeli Foreign Investments and IndustrialCooperation Authority; Egypt’s General Authority for Investment and Free Zones.23Jusoh S (2019) Myanmar’s investor-state dispute settlement experience and investor grievancemechanism. In: Esplugues C (ed) Foreign investment and investment arbitration in Asia. Intersentia,pp 205–22624Guiguo W (2011) Chinese mechanisms for resolving investor-state disputes. Jindal J Int Aff1:204–233, 20925Foreign Investment Law of the People’s Republic of China (2019) Adopted during the 2ndsession of the 13th National People’s Congress on March 15, 2019

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for dealing with conflicts between an investor and a state.26 The system for preven-tion is based on information sharing that allows the Peruvian state’s authorities toreceive information about potential investment disputes.27 The Peruvian systemoperates primarily through the Special Commission, chaired by a representative ofthe Ministry of Economy and Finance, which facilitates and represents the state’sdefense in investment arbitration disputes.

To conclude, states that have an early conflict prevent system in place haveexperienced fewer disputes and better coordination between their agencies.28 Thebenefits of a unified investment body responsible for conflict prevention and reso-lution lie in strengthening a state’s capacity to deal with investment disputes bysharing information between different agencies and coordinating a strategy upon aconflict’s escalation. As has been discussed in the UNCITRAL preparatory paper ondispute prevention, the key areas of concern in conflict avoidance are the lack ofawareness of obligations contained within IIAs among relevant civil servants and thecareful monitoring of foreign investors in several economic sectors where ISDSdisputes have often arisen.29 In the past, the lack of coherency between municipaland federal agencies has led to controversial state policies and decisions that haveresulted in several investment disputes.30 What is more, state’s representationsprovided to investors through different governmental channels have resulted innumerous claims for the frustration of legitimate expectations of an investor underthe fair and equitable (FET) standard.

Furthermore, to improve the quality of preventive measures in host states, specialattention should be directed to economic areas where foreign investors are especiallyactive. In many states, the extractive industries and public utility sectors involve theparticipation of foreign investors through concession agreements and complexprivatization schemes, for example. Consequently, the effective communication ofgovernmental agencies with foreign investors in these sectors should be a continuousprocess that can help in detecting problems at an early stage.

Traditional ADR Techniques: The Example of Mediation31

Another dispute preventive mechanism that features in a number of IIAs involves thepossibility to submit the dispute to mediation or conciliation. Mediation can bedefined as a “confidential, informal, structured and voluntary mechanism, wheredisputes are resolved in an amicable and cost-effective process with the assistance

26Llerena (2018), p. 2.27UNCITRAL (2020) Possible reform of investor–state dispute settlement (ISDS) – dispute pre-vention and mitigation – means of alternative dispute resolution, New York, 30 March–3 April2020, pp 1–13, 5.28However, Indonesia that has witnessed an increase of ISDS has a national system aimed at earlyresolution of disputes, though it is not applicable to sub-national authorities.29UNCITRAL (2020), p. 6.30MTD v. Chile (2004), Bilcon v. Canada (2015), Glamis v. US (2009).31This paper focuses on mediation as an example of ADR. Conciliation and negotiation that also fallunder ADR are outside the scope of this chapter.

Prevention of ISDS Disputes: From Early Resolution to Limited Access 7

from a third party.”32 Many IIAs provide mediation as an option for parties to pursue.For example, recent EU agreements concluded with Singapore, Vietnam, and Canadacontain elaborated provisions on the mechanism of mediation. Article 8.20 of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) provides:

1. The disputing parties may at any time agree to have recourse to mediation. 2. Recourse tomediation is without prejudice to the legal position or rights of either disputing party underthis Chapter and is governed by the rules agreed to by the disputing parties including, ifavailable, the rules for mediation adopted by the Committee on Services and Investmentpursuant to Article 8.44.3(c). 3. The mediator is appointed by agreement of the disputingparties. The disputing parties may also request that the Secretary General of ICSID appointthe mediator. 4. The disputing parties shall endeavour to reach a resolution of the disputewithin 60 days from the appointment of the mediator (. . .).33

This latter provision is also supplemented by a Code of Conduct for Mediatorsand the Draft Rules for Mediation presented to the Council by the EuropeanCommission in October 2019.34 Further, even more detailed guidance on mediationin comparison to CETA has been included in the EU-Vietnam and EU-SingaporeFTAs.

In practice, however, parties are still reluctant to pursue mediation as a means tosettle a dispute.35 According to the empirical study “Survey on Obstacles to Settle-ment of Investor State Disputes,” there are several reasons for states and investors toavoid mediation.36 For states, it is a fear of public suspicion that state’s authoritiesare agreeing to settle for personal gain. As a result, respondent states are more proneto proceed with arbitration, rather than resort to mediation, despite the disadvantagesof the former.37 Furthermore, the bureaucratic apparatus in some states make it arather lengthy and overcomplicated procedure to get approval from all the relevantstate officials in order to proceed with an alternative route such as mediation. Forinvestors, the choice of mediation is often overshadowed by the financial motivationof legal councils and their preference for ISDS. Furthermore, the unwillingness ofinvestors to recourse to mediation can be explained by their fear of being perceived

32Zhao C (2018) Investor-state mediation in a China-EU bilateral investment treaty: talking aboutbeing in the right place at the right time. Chin J Int Law 18:111–135, 11433Article 8.20, CETA (2017).34European Commission (2019) Council Decision on the position to be taken on behalf of theEuropean Union in the Committee on Services and Investment established under the Comprehen-sive Economic and Trade Agreement (CETA) as regards the adoption of rules for mediation for useby disputing parties in investment disputes. COM_2019_0458_FIN35Weinstein D, Manukyan M (2019) Making mediation more attractive for investor-state disputes.Kluwer Arbitration Blog. http://arbitrationblog.kluwerarbitration.com/2019/03/26/making-mediation-more-attractive-for-investor-state-disputes/36Chew S, Reed L, Thomas C (2018) Report: survey on obstacles to settlement of investor-statedisputes. NUS Centre for International Law working paper 18/01. pp 1–41, 26. https://cil.nus.edu.sg/publication/survey-on-obstacles-to-settlement-of-investor-state-disputes/37Chew et al. (2018), p. 26.

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incompetent because of their inability to assess the strength of the case..38 Toovercome the reluctance of states and investors to use mediation, Indonesia proposedto introduce mediation as a mandatory step before the arbitration. In its UNCITRALsubmission, Indonesia introduced a proposal, requiring parties to resort to arbitrationas soon as notification of a dispute was launched and the consultation procedurebetween an investor and a state was exhausted.39 Mandatory mediation requiresconsent of contracting parties in advance. So far there are no examples of compul-sory mediation clauses in IIAs.40 Nevertheless, the COMESA Investment Agree-ment (2017) requires contracting parties to recourse to amicable means of conflictresolution before resorting to arbitration.41 As such, mediation is not compulsory,but can still be pursued if “no alternative means of dispute settlement are agreedupon, a party shall seek the assistance of a mediator to resolve disputes (. . .).”42

Indonesia in its UNCITRAL submission has also provided that it introduced man-datory mediation into its new agreements.43 However, so far, the text of these newtreaties has not been made publicly available.

Overall, mediation constitutes a cost-effective and quick method of resolvingdisputes.44 It has a number of tangible advantages for both parties. Firstly, it issignificantly cheaper than arbitration.45 Secondly, as a result of the consensualsolution provided to both parties, the business relationship between a host stateand an investor can be preserved and continued. On the other hand, arbitrationusually results in a breakdown of relationship between the parties. Nevertheless,there are some drawbacks to mediation, including the issue of enforcement. Theoutcome of successful mediation is a settlement agreement between the parties,however the enforcement of such an agreement depends, to a large extent, on thevoluntary compliance of the parties. In contrast to the arbitral awards that are directlyenforceable under the New York Convention and/or the ICSID Convention, there isno mechanism guaranteeing the enforcement of the mediation agreement. Theabsence of a guarantee of compliance may therefore discourage a state and aninvestor in following the mediation process.46

38Chew et al. (2018), p. 24.39UNCITRAL Submission from the Government of Indonesia (2019), p. 4.40Out of 2577 IIAs, 627 IIAs include voluntary conciliation and mediation procedures; none out ofthe 2577 IIAs contain compulsory mediation; UNCTAD (2020).41Article 26(3), COMESA Investment Agreement (2017).42Article 26(4), COMESA Investment Agreement (2017).43UNCITRAL Submission from the Government of Indonesia (2019), para 20.44European Commission (2017) Consultation Document: prevention and amicable resolution ofdisputes between investors and public authorities within the single market, p 3. https://ec.europa.eu/info/sites/info/files/2017-investment-protection-mediation-consultation-document_en_1.pdf45Weinstein and Manukyan (2019).46Zhao C (2018) Investor-state mediation in a China-EU bilateral investment treaty: talking aboutbeing in the right place at the right time. Chin J Int Law 18:111–135, 133

Prevention of ISDS Disputes: From Early Resolution to Limited Access 9

Interstate Cooperation in Dispute Prevention

Another means by which dispute prevention can be strengthened is through coop-eration between states. This option has been discussed in multiple states’UNCITRAL submissions.47 The Korean government has expressed the view thatthe “accumulation of expertise, experience, knowledge and institutional capacityplays a crucial role in an effective response to investment disputes.”48 This requires asystematic approach that is based on the collection of expertise and experience ondispute prevention from different countries. Korea and Thailand proposed to explorethe option of establishing an “Advisory Centre on International Investment Law” tobecome a focal point for the accumulation and circulation of institutional informa-tion and states’ best practices.49 Korea has proposed that one of the key objectives ofan Advisory Centre should be to advise developing states on how to avoid conflictby providing education on dispute prevention and managing potential disputes,among others.50 In the same vein, Thailand emphasized that such a centre wouldbe instrumental in assisting developing states, which lack resources and institutionalcapacity, in resolving investment disputes.51 The idea of an Advisory Centre is notcompletely new. Such a centr exists under the WTO, whose goal is to support andprovide legal advice to developing and least developed countries.52

The idea of creating a similar centre in the context of ISDS has been exploredduring the UNCITRAL process. In its report from its 38th session, UNCITRALprovided that the establishment of an Advisory Centre received general support fromstates. As such, preparatory works will be undertaken aiming at exploring the scopeof services of an Advisory Centre. It is not yet clear what the main focus of such acentre will be and who will be the main beneficiaries. For example, one idea is toprovide a full range of services to the least developed countries, with other countriesthat want to use the services of the centre would be obliged to pay a fee. It is clearthat states supporting the establishment of the centre agree that prevention effortsshould constitute the core of its activities. The sharing of best practices about disputeprevention, legal advice on the ISDS system, and the training of governmentalofficials about IIAs should be part of the centre’s activities. The latter servicesmay positively contribute to the prevention of ISDS cases. However, many issuesregarding the Advisory Centre have yet to be clarified, including, for example, itsregional scope, financing, and beneficiaries. In this regard, the Working Group hasproposed to undertake preparatory work in exploring the specific issues that are to beconsidered in setting up such centre. In terms of prevention, these preparatory tasksinclude the assessment of capacity building of developing and least developed states

47European Union, Turkey, Korea, Thailand.48UNCITRAL Submission from the Republic of Korea (2019), p. 5.49UNCITRAL Submission from the Government of Thailand (2019), p. 5.50UNCITRAL Submission from the Republic of Korea (2019), p. 5.51UNCITRAL Submission from the Government of Thailand (2019), p. 5.52WTO, ACWL (2019).

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in organizing and participating in arbitration. In this vein, training of governmentalofficials has to be reviewed in respect of (i) treaty negotiation and interpretation; (ii)dispute prevention and risk assessment; and (iii) specific skills relating to investmentproceedings, e.g., cross-examination. The Working Group has also proposed toanalyze knowledge sharing mechanisms that assemble data and act as a focal pointof information.53

An Advisory Centre can be the correct platform to assist developing states.Undoubtedly, developing and least developed countries are at a disadvantage interms of expertise and resources in comparison to developed states when having todefend themselves in ISDS cases. In its submission, Mali illustrated the latter point,providing that “African States find themselves involved in arbitral proceedings,often without being sufficiently prepared, given the lack of a strategy documentfor negotiations, with only limited expertise in complex legal issues.”54 In thisrespect, an intergovernmental agency that can provide training and knowledge forthe state’s relevant governmental stakeholders could assist developing and leastdeveloped states to respond to investment disputes in an efficient and effectivemanner.

In designing such a centre, it is important to recognize that states have differentproblems in terms of dealing with ISDS cases. In some countries, the lack ofcooperation between different agencies is more of a pressing challenge than thelack of expertise and finance in dealing with disputes. Hence, a “one size fits all”approach will not be appropriate in creating the Advisory Centre. In fact, thepossibility of having several regional advisory centres would perhaps be moreeffective in offering advice on dispute prevention and in providing legal servicestailored to a specific country in the region. Currently, such initiatives already exist,albeit in their inception stages. For example, South Eastern European (SEE) econ-omies are focusing on the prevention of disputes, emphasized in the RegionalInvestment Reform Agenda (RIRA) for the Western Balkan Six (WB6) adopted in2018.55 The objective of the RIRA is to harmonize the investment policies of WB6with the EU investment policies in the context of the SEE 2020 Strategy, CentralEuropean Free Trade Agreement (CEFTA), and EU accession plans.56 In the MAPREA framework (REA MAP), a number of key reform areas in the field of invest-ment have been identified. In relation to the ISDS, the central focus of the REAMAPis on the mapping and aligning of the legal framework for investments, including theISDS provisions with the EU standards and international best practices.57 Another

53UNCITRAL, Report of Working Group III (2019), para 44.54UNCITRAL Submission from the Government of Mali (2019), p. 2.55It includes all the SEE countries.56Regional Investment Reform Agenda for the Western Balkans Six (2018) World Bank Group, 11May 2018. https://www.rcc.int/docs/410/regional-investment-reform-agenda-for-the-western-balkans-six57Regional Investment Reform Agenda for the Western Balkans Six (2018), Table: PoliciesFramework and Reform Actions.

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aspect underlined in the REA MAP regarding the ISDS is to strengthen the preven-tion mechanism in the region.58 This includes strengthening the mandate of theSEEIC-CEFTA Joint Working Group on Investment that has been conceived as aregional platform for managing grievances of investors and preventing investmentdisputes.

The development of the “Guidelines on Dispute Prevention,” as proposed byThailand is a complementary initiative to the Advisory Centre. It is proposed that theGuidelines should contain states’ experiences and good practices on how to preventa dispute during the negotiation stage and treaty-drafting and pre-arbitration phases.The Guidelines should also include information on how to use domestic remedies forISDS management and how to encourage dialogue between host states and foreigninvestors.59

Joint Committees or Commissions Established by State PartiesAnother method of dispute prevention is to strengthen the cooperation of StateParties through joint committees and commissions for the purpose of the earlyresolution of disputes. Under international law, parties have “competence to interpreta treaty, but this is subject to the operation of other legal rules.”60 The treaty mayconfer competence on tribunals to interpret the treaty, as has been done in many IIAsthat delegate the power to decide on investment disputes between states and inves-tors.61 In several IIAs, treaty parties have found it useful to institutionalize theircompetence to interpret treaty provisions through empowering a treaty organ usuallycomposed of the treaty parties’ representatives. Such a treaty organ, which is usuallyreferred to as a joint committee or commission, can be instrumental in disputeprevention. Through the exchange of information and consultation initiated by oneof the treaty parties, a joint committee or commission can resolve the conflict at theearly stage of its inception.62 Article 2001(2) of the North American Free TradeAgreement (NAFTA) establishing the Free Trade Commission is an example of amechanism that institutionalizes the decision of a treaty organ on the interpretationof agreement. According to Article 2001(2) of the NAFTA, the FTC has theauthority to “(a) supervise the implementation of this agreement; (b) oversee itsfurther elaboration; (c) resolve disputes that may arise regarding its interpretation orapplication.”63 Similar examples of treaty organs exist in more recent IIAs.64 As was

58Regional Investment Reform Agenda for the Western Balkans Six (2018), Table: PoliciesFramework and Reform Actions.59UNCITRAL Submission from the Government of Thailand (2019), p. 5.60Crawford J (2008) Brownlie’s principles of public international law, 8th edn. Oxford, p 37861Roberts A (2010) Power and persuasion in investment treaty interpretation: the dual role of states.Am J Int Law 104(2):179–225, 18062UNCITRAL (2020), para 25.63Article 2001(2) of the NAFTA.64Out of 2577 IIAs, 121 IIAs incorporate a treaty organ established by state parties that, amongother functions, promotes early dispute resolution. UNCTAD, Treaty mapping (2019).

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already addressed in section “Early Prevention and Resolution of Conflicts Betweenan Investor and a Host State,” the Brazilian CIFAs provide for the establishment of ajoint committee that in cooperation with the national ombudsperson has authority toresolve conflicts between an investor and a host state in its early stages.

The joint committees or commissions usually take actions upon the request of oneof the parties. These types of “built-in treaty mechanisms” allow states to control theinterpretation and application of their treaties, including the early resolution ofdisputes before they advance into legal conflicts.65

Reflections

Not all disputes will and should be prevented. In some instances, a conflict can onlybe resolved through courts or arbitration. However, many disputes, especially thesethat arose out of states’ inconsistent decision-making, can be prevented through thenational pre-care system. Therefore, the institutionalization of dispute preventionpolicies on a national level presents a constructive and cost-effective approach.There are countries that have invested in such preventive polices. Brazil, Korea,and Peru have established bodies responsible for addressing early grievancesbetween an investor and a host state. Coordination systems between differentgovernmental agencies in issues related to foreign investment are also important instrengthening dispute prevention. Such systems focus on information sharing andearly alert mechanisms. This helps to prevent a lack of coherency in decision-makingbetween municipal and federal agencies that in the past often resulted in controver-sial state’s policies challenged by investors in ISDS cases.

Prevention efforts can also be facilitated through interstate cooperation. One ofthe recent proposals referred to during the UNCITRAL reform process is to set up anAdvisory Centre on International Investment Law. It is not yet clear what the scopeof services provided by the Centre will be, who the beneficiaries will be, and how itwill be financed. Several states, e.g., Korea and Thailand, support the creation of aCentre that assists developing and least developed countries in dealing with ISDSdisputes. It also agreed that preventive practices, e.g., sharing best practices andexpertise on ISDS, should be at the core of the Centre’s activities. In a nutshell, thisidea has many advantages. In particular, developing and the least developed coun-tries are often ill equipped to manage claims when faced with arbitration proceed-ings. However, whether this Centre will be effective in preventing disputes alsodepends on national efforts to coordinate their strategy in addressing FDI issues. TheCentre is not panacea for developing countries, and it is only one part of multifacetedeffort in preventing ISDS. On a national level, a centralized institution facilitating theactivities of an investor and helping to address their grievances is a first step. On an

65Gordon K, Pohl J (2015) Investment treaties over time: treaty practice and interpretation in achanging world. OECD working papers on international investment 2015/02, p 26. http://www.oecd.org/investment/investment-policy/WP-2015-02.pdf

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inter-state level, dispute prevention can be effectively supported through jointcommittees established by the parties, as well as through extensive provisions ontraditional ADR, conciliation and mediation.

Conditioning Access to ISDS: Prevention of Investment Disputes

Dispute prevention is mostly associated with institutional efforts of states to mitigateor to resolve conflict in the early stages of their inception. However, if these effortsare unsuccessful, the focus should be on the prevention of certain types of disputesthat may, for example, negatively affect the general public. In this respect, the issueof conflict prevention is closely connected to treaty interpretation and treaty drafting.States in their IIAs have been more inclined to impose additional requirements,e.g.,compliance with domestic law, as a condition for an investor to bring their claim toarbitration.

The reason for introducing certain substantive conditions is the concern of hoststates about their flexibility to regulate in the public interest without violating IIAs.There have been a number of claims in which investors have challenged a variety ofstate decisions in sensitive public areas, e.g., renewable energy,66 waste manage-ment,67 public health issues,68 and access to water.69 In the past 10 years, manystates have undertaken efforts to rebalance their IIAs in order to, on the one hand,provide policy space for host states to regulate in public interest and, on the otherhand, to ensure the effective protection of investors.70 As part of these attempts,different proposals have been made to limit the range of claims that can be submittedto ISDS, thereby preventing some investors from initiating investment disputes. Thegrowing importance of an investor’s responsibilities in international investment lawhas an impact on a state’s preventive measures. The regime of international

66Charanne Construction v. Spain, SCC Case No. 062/2012 Award (21 January 2016). See ChaisseJ (2016) Renewables re-energized? The internationalization of green energy investment rules anddisputes. J World Energy Law Bus 10(1):269–28167Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003);Waste Management v.Mexico (Case II), ICSID Case No. ARB(AF)/00/3 Award (30 April 2004).68Philip Morris v. Uruguay, ICSID Case No. ARB/10/7 Award (8 July 2016); Apotex v. US, ICSIDCase No. ARB(AF)/12/1 Award (25 August 2014). See Chaisse J (2013) Exploring the confines ofinternational investment and domestic health protections – general exceptions clause as a forcedperspective. Am J Law Med 39(2/3):332–36169Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award(24 July 2008); Suez and Interagua v. ArgentinaSuez, Sociedad General de Aguas de Barcelona, S.A.and Interagua Servicios Integrales de Agua, S.A. v. Argentine Republic and AWG v. Argentina, ICSIDCase No. ARB/03/19 Decision on Liability (30 July 2010). See Qian X (2018) Challenges of watergovernance (and privatization) in China-traps, gaps, and law. Ga J Int Com Law (1):49–91; Chaisse J,Polo M (2015) Globalization of Water Privatization – Ramifications of Investor-State Disputes in the“Blue Gold” Economy. Boston Coll Int Comp Law Rev 38(1):1–6470European Commission (2019) Investment: objectives of the EU investment policy. http://ec.europa.eu/trade/policy/accessing-markets/investment/

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investment law, as it currently stands, provides little opportunity to hold foreigninvestors accountable for those human rights, environmental and labor violationsthat are pertinent to investment, as these subjects are rarely a part of investmenttreaties or investment contracts.71 However, limiting the access of ISDS because ofthe misconduct of a certain investor provides opportunities to enforce responsibili-ties of investors, as well as to prevent some investment disputes.

As a part of these attempts, different proposals have been made to limit the rangeof claims that can be submitted to ISDS, thereby preventing some investors frominitiating ISDS cases. For example, the investor’s conduct can be subject to thelimitations of access to ISDS through the incorporation of the legality requirement ofan investment. Also, an investor’s due diligence that is frequently brought up bytribunals in the context of the FET standard has the potential to reduce some claimsrelating to the violation of the FET standard, which is the most frequently invokedprovision in investment arbitration. The subsequent section will analyze these twooptions.

Lack of Compliance with Host State Law

In IIAs, the requirement of the legality of foreign investment as a jurisdictionalcondition for ISDS may prevent claims where an investor has violated national law.Most treaties require that an investment has to be in accordance with domestic law.However, some IIAs make this requirement more explicit by linking it to disputesettlement. The Iran-Slovak BIT (2016) includes limitations on access to ISDSprovisions, specifying that “an investor may not submit a claim under this Agree-ment where the investor or the investment has violated the Host State law.”72 TheBITclarifies that a tribunal shall dismiss the investor’s claim upon his involvement inserious violations of the host state law,e.g., fraud, tax evasion, or corruption.73 Thedraft Colombia Model BIT (2017) also includes a Corporate Social Responsibility(CSR) clause which stipulates that for the purpose of accessing the ISDS, an investorhas to accept the binding obligations of a host state under human rights andenvironmental treaties. In Cortec Mining v. Kenya, the tribunal declined jurisdiction

71The imbalance between the rights and obligations of host states and investors is explained asfollows: “(. . .) the international legal system reflects an asymmetry between rights and obligationsof TNCs. While TNCs are granted rights through hard law instruments, such as bilateral investmenttreaties and investment rules in free trade agreements, and have access to a system of investor-statedispute settlement, there are no hard law instruments that address the obligations of corporations torespect human rights.” United Nations Human Rights Council (UNHRC) (2015) Concept noteproposed under the responsibility of the designated Chair, Ambassador Maria Fernanda Espinosa,Permanent Representative of Ecuador to the UN in Geneva, for the first session of the open-endedintergovernmental working group on transnational corporations and other business enterprises withrespect to human rights, 6–15 July 2015, Geneva, para 4.72Article 14, Iran-Slovak Republic BIT (2016).73Article 14, Iran-Slovak Republic BIT (2016).

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over an investor’s claim for an unlawful revocation of the mining license under theKenya-United Kingdom BIT, even without an explicit provision requiring compli-ance with domestic law. The tribunal agreed with the respondent state that theinvestor had failed to comply with the environmental impact assessment require-ments imposed for the mining projects under Kenyan law.74 The tribunal explainedthat such an investment as licence constitutes “the creature of the laws of the HostState,” and therefore in order to give rise to protection, it has to be made inaccordance with the domestic law.75

The requirement of the legality of investment under national law as a conditionfor bringing a claim can be a filter mechanism preventing opportunistic investorsfrom lodging proceedings without proper compliance with the state’s rules andregulations introduced in the interest of general welfare. Nevertheless, this approachraises problems in that, ultimately, reliance is placed upon a tribunal’s interpretationof whether an investor has complied with domestic law. For example, in determiningwhether an investor has committed “serious violations of the host state law” underthe Iran-Slovak Republic BIT (2016), the tribunal would have to assess the serious-ness of such a violation under national law. This may result in an intrusive review ofthe application of domestic laws and policies.

Dispute Prevention Through Investor’s Due Diligence

The prevention and mitigation of ISDS cases also depend on investors’ efforts toconduct due diligence before investing in a host state. By conducting an investiga-tion into a host state’s regulatory framework an investor may, to some extent, predictwhether adversary regulatory changes are likely to occur. The due diligence processthat aims at mitigating business risks can help in preventing disputes based on astate’s regulatory instability. By conducting a proper due diligence investigation, aninvestor can avoid and manage these risks, thereby reducing the potential for legalconflict. From a host state’s perspective, the number of FET claims based on thechange of a regulatory framework could be reduced by clarifying in their IIAs oradditional protocols that an investor has a duty to conduct due diligence as arequirement for the protection of his legitimate expectations.

Breach of the FET standard is one of the most frequent bases for ISDS claims. Inthe majority of IIAs (especially older treaties that are still in force), the FET standardhas been concisely formulated, simply requiring states to provide “fair and equitabletreatment” to foreign investments.76 As emphasized by Schreuer and Dolzer, fromthe early inception of the FET standard in IIAs, the purpose of this clause was to “fill

74Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic ofKenya, ICSID Case No. ARB/15/29, Award (22 October 2018).75Cortec Mining v. Republic of Kenya (2018), para 319.76For example, according to the UNCTAD Mapping Project that includes 2,577 IIAs, 1,986 IIAscontain an unqualified FET standard provision.

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gaps that may be left by the more specific standards, in order to obtain the level ofinvestor protection intended by the treaties.”77 In interpreting these openly formu-lated FET standard clauses, investment tribunals were faced with the task of definingthe meaning and scope of the standard. This involved determining what conductwould give rise to responsibility and liability under the FET standard. In severalinvestment decisions, especially in the early period of decisions on the FET standard,tribunals established a broad scope of the host state’s obligations under the FETstandard.78 This included, for example, the host state’s obligation to act with full“transparency” towards an investor,79 to respect the “legitimate expectations of theinvestor,”80 or to provide a “stable and predictable legal and business framework.”81

Presently, the protection of the legitimate expectations of an investor constitutes acentral element of the FET standard.82 The tribunal’s conclusion that a state hasfrustrated the legitimate expectations of an investor almost always leads to a findingof a breach of the FET standard.83 The investor’s legitimate expectations are usuallybased on (i) a specific representation made by the host state to an investor regardingtheir investment, or (ii) an assumption on the part of the investor that the generalregulatory framework relied upon by it at the time the investment was made willremain stable.

Under the concept of legitimate expectations in international investment law,states are required to maintain a certain degree of stability and predictability in theirregulatory framework, as this is relied upon by investors when making

77Dolzer R, Schreuer C (2008) Principles of international investment law. Oxford University Press,p 122 and Weiler T (2013) The interpretation of international investment law: equality, discrimi-nation, and minimum standards of treatment in historical context. Brill, p 289. In discussing the USpractice, for example, Weiler observed that the FET standard has the potential of being a “catch-allprovision” from the very beginning.78Paparinskis M (2013) The international minimum standard and fair and equitable treatment.Oxford University Press, p 112 and Sonarajah M (2015) Resistance and change in the internationallaw on foreign investments. Cambridge University Press, p 247. Sonarajah observed that “the lawon the fair and equitable standard is of recent vintage, created largely through interpretations placedon the phrase by arbitrators who favoured expansion.”79Tecmed v. Mexico (2003), para 167.80Examples where the tribunal relied primarily on the breach of legitimate expectations in theassessment of the FET standard include Eureko BV v. Republic of Poland [2005] UNCITRALArbitration, IIC 98, Partial Award (19 August 2005), para 235; Azurix Corp. v. The ArgentineRepublic, ICSID Case No. ARB/01/12 Award (14 July 2006); CMS Gas Transmission Co. v. TheArgentine Republic, ICSID Case No. ARB/01/8 Award (12 May 2005), paras 274–276; LG&EEnergy Corp., LG&E Captial Corp. & LG&E International v. The Argentine Republic, ICSID CaseNo. ARB/02/1 Decision on Liability (3 October 2006) and others.81Occidental v. Ecuador, LCIA Case No. UN3467 Final Award (1 July 2004), para 183; PSEG v.Turkey, ICSID Case No. ARB/02/5 Award (19 January 2007), para 253; LG&E Energy Corp v. TheArgentine Republic (2006), para 131.82Bonnitcha (2014), pp. 161–162 and Laird et al. (2015), p. 105.83Levashova (2019) The right of states to regulate in international investment law: the search forbalance between public interest and fair and equitable treatment. Kluwer International

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investments.84 Tribunals have considered there to be a breach of an investor’slegitimate expectations where a host state makes substantial subsequent changes tothe legal framework that were effective at the time when the investment was made,and which have resulted in serious financial losses being suffered by the investor orin the inability of the investor to continue operating their investment.85

In this regard, many states are concerned with their right to adopt and change theirlaws for public good as these regulatory changes may trigger investment claims.Currently, a significant number of ISDS claims relate to a state’s changes torenewable energy policies. Spain, Italy, and the Czech Republic are among therespondent states that currently face investment claims because of alterations totheir regulatory frameworks for renewable energy.86 These host states’ changes tothe regulatory renewable energy regime were primarily motivated by an increasingelectricity tariff deficit. The deficit resulted from the difference between the subsidiesin the form of feed-in tariffs, granted by these host states to producers of renewableenergy, and the tariffs that had to be paid by consumers.

In these cases, the investor’s due diligence has been a significant factor in thedetermination of a state’s liability. In some cases, tribunals have even provided thatexercising due diligence is necessary in order for an investor to have his legitimateexpectations protected under the FET standard. Investors are expected to conductproper due diligence before investing in a host state by demonstrating their reason-able efforts to collect information about the rules and regulations that are pertinent tothe proposed investment. In some cases, due diligence extends to an investor’s dutyto assess the possible risks related to the broader economic situation and sociopolit-ical background of a host state.

In Stadtwerke Munchen and others v. Spain, the tribunal provided that for aninvestor’s expectations to be reasonable, it “must also arise from a rigorous duediligence process carried out by the investor.”87 In this case, the tribunal assessed theinvestor’s due diligence, which was based mostly on the communication withgovernmental and semi-governmental agencies that provided information to suggestthat the legal framework would continue to apply. According to the tribunal, thesecommunications did not qualify as a rigorous due diligence process. The tribunal

84Vandevelde (2010), p. 66.85Valenti (2014), p. 41.86E.g. Antaris Solar GmbH and Dr. Michael Göde v. Czech Republic, PCA Case No. 2014-01,Award (8 May 2018); Natland and others v. Czech Republic (2013); Masdar Solar & WindCooperatief U.A. v. Kingdom of Spain (2018); CSP Equity Investment Sarl v. Kingdom of Spain(2013); DCM Energy and others v. Kingdom of Spain (2017); Aharon Naftali Biram, and others v.Kingdom of Spain (2016); FREIF Eurowind v. Kingdom of Spain (2017); Portigon AG v. Kingdomof Spain (2017); ESPF Beteiligungs GmbH and others v. Italian Republic (2016); Sun ReserveLuxco Holdings SRL v. Italy (2016); Eskosol S.p.A. in liquidazione v. Italian Republic (2015);Blusun S.A., J.-P. Lecorcier ANDM. Stein v. Italy (2016). For example, Spain has been subject to 50investment claims (almost all of them, except one, lodged between 2011 and present), whereas theregulatory changes to renewable energy framework were the subject matter of the dispute in morethan 90% of all cases. UNCTAD (2020) Investment policy hub.87Stadtwerke Munchen and others v. Spain (2019), para 264.

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further underlined that “legitimate expectations must be grounded in the law and notbased upon promotional literature about what the law says.”88 Comparably, inAntaris v. Czech Republic, the tribunal denied the investor’s claim for the protectionof legitimate expectations, as there was “no evidence of any real due diligence.89

At the same time, in similar renewable energy cases, some tribunals have notmandated any specific form of due diligence from an investor. Examples of this lattercategory can be found within three recent decisions against Spain: SolEs Badajoz v.Spain, Cube Infrastructure v. Spain, and Novenergia v. Spain. In these cases, the roleof the due diligence enquiry was limited. In SolEs Badajoz v. Spain and CubeInfrastructure v. Spain, the tribunals stated that there was no requirement to conducta formal due diligence process and that it cannot be considered a pre-condition to asuccessful claim for the protection of legitimate expectations.90

As demonstrated by case law above, the form and content of what constitutesproper due diligence are not clearly defined. Nevertheless, tribunals increasinglyrefer to the importance of this duty and, in some cases, emphasize that an investor’sprotection will depend on the performed due diligence. In Isolux v. Spain, Antaris v.Czech Republic, Belenergia v. Italy and Stadtwerkhe Munchen v. Spain, tribunalsfound that the host state did not violate the investor’s expectations, mostly becausean investor had not demonstrated any (or only limited) due diligence efforts beforeinvesting in the host state.91

At present, no treaties refer to investor’s due diligence in the context of the FETstandard, or as a condition to access to ISDS. By introducing the investor’s obliga-tion to conduct formal due diligence process that requires legal assessment of aregulatory framework can certainly prevent some of the conflicts arising out of aninvestor’s claim of stability.

Furthermore, the notion of an investor’s due diligence does not have to be limitedto legitimate expectations. A human rights due diligence performed by an investorcan be an effective mechanism in preventing corporate human rights related abuses.Some treaties have already included human rights due diligence. The NetherlandsModel Investment Agreement (2019) contains a provision emphasizing the impor-tance of an investor’s duty to conduct a due diligence process in order to identify,prevent, mitigate, and account for the environmental and social risks and impacts ofits investment.92 Corporate human right due diligence that was initially conceptual-ized through the work of the UN Special Representative on Business and HumanRights, John Ruggie, has been incorporated in numerous national and regional laws

88Stadtwerke Munchen v Spain (2019), para 287.89Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Kingdomof Spain (2018), para 432.90Cube Infrastructure Fund SICAVand others v. Kingdom of Spain (2019), para 396; SolEs BadajozGmbH v. Kingdom of Spain, ICSID Case No. ARB/15/38, Award (July 2019), para 331.91Antaris v. Czech Republic (2018), para 440; Belenergia v. Italy (2019), para 587.92Article 7(3), The Netherlands Model BIT (2019).

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mandating companies to perform due diligence processes in different sectors.93 Bydrawing from examples from other legal sectors, jurisdictions, and fields of law, acareful drafting of the required investor’s due diligence processes, including specificsteps in conducting such risk assessment procedures, may benefit states and inves-tors in early mitigation and ultimately the prevention of investment disputes.

Conclusion

Prevention of disputes is currently one of the central themes in the ISDS reformprocess. States are resolving to improve the prevention of disputes on both a nationaland an inter-state level. Some countries such as Brazil are convinced that preventionmechanisms and state-to-state arbitration can replace ISDS, as they argue that theimprovement of the institutional framework for investment is far more important forinvestors than the existence of traditional ISDS provisions in treaties. In the case ofBrazil, this approach is effective. However, many other states are not ready toeliminate ISDS. Rather, the objective is to improve the ISDS system by introducingeffective procedural and substantive safeguards for addressing violations under anIIA in a balanced manner. This involves the integration of prevention policies andmechanisms at both the national law and international treaty level.

Dispute prevention mechanisms vary. Some of them, e.g., the Ombudsmansystem in Korea or Brazil or the NCCFE in China, are established with the purposeof addressing investors’ grievances before they mature into a legal dispute. Thesenational bodies are quite effective for the purpose of dispute prevention, especially ifthey contain an institutionalized framework that has a system for coordinationbetween various levels of governments and a system for communication with aninvestor.

Another method of dispute prevention is to strengthen the cooperation of stateparties through joint committees and commissions for the purpose of resolvingdisputes at an early stage. Some IIAs have incorporated joint committees consistingof representatives of contracting parties with the aim to exchange information and toresolve conflicts at the early stages. Inter-state efforts to prevent disputes also includethe possibility to establish an Advisory Centre on International Investment Law. Thisis currently being discussed within the UNCITRAL reform process. The Centre’spurpose is to help developing and least developed countries in dealing with ISDSdisputes. Dispute preventive services, including the provision of legal advice andsharing of best practices, will be the core activity of the Centre. Overall, such aCentre –modelled upon the WTO Advisory Center –will assist developing and leastdeveloped countries, which often have insufficient expertise and financing, to

93UKModern Slavery Act (2015); The Netherlands Child Labor Due Diligence Bill (2019); France,Law on the Duty of Vigilance (2017). At the moment of writing, many states, including Finland,Germany, Switzerland for example, are in the process of adopting/approving mandatory humanrights due diligence for companies.

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manage the ISDS claims and to prepare for arbitration. However, the success of thisCentre will depend on national efforts to coordinate their strategy in addressing theFDI issues.94

ADR methods other than arbitration, such as mediation, have also receivedincreasing attention in recent years. In EU agreements with Canada, Vietnam, andSingapore, efforts were made to strengthen recourse to mediation by disputingparties by incorporating detailed provisions on mediation and by issuing mediationrules. However, both states and investors are currently reluctant to turn to mediationinstead of ISDS. States’ authorities are discouraged to have recourse to mediation asan alternative to ISDS, because of their fear of being suspected to settle for personalgain fear of being suspected to be corrupt as a result of not proceeding to ISDS,discourage states to have recourse to mediation as an alternative to ISDS. Forinvestors, the choice of mediation is often surpassed by their concern of beingperceived as incompetent and weak due to their inability to assess the strength ofthe case. Indonesia has proposed mediation as a mandatory step before proceeding toinvestment arbitration. This option may generate resistance from states, as mediationis a priori, a voluntary mechanism that is based on cooperation between both parties.Furthermore, the issue of somewhat problematic enforcement of a settlement agree-ment resulting from successful mediation may create additional challenges.

The last category of preventive methods discussed in this chapter is based on asystem of filtration of certain types of disputes. The examples are the investmentclaims with a strong public interest dimension. States in their IIAs have been moreinclined to include public interest provisions and to impose certain conditions on aninvestor prior to being able to bring their claims to arbitration. The legality require-ment of an investment has featured in some IIAs as a condition for accessing ISDS.The requirement of legality as a condition for bringing a claim may preventopportunistic investors from lodging proceedings without proper compliance withthe state’s rules and regulations introduced in the interest of general welfare.

The prevention of FET claims can be also linked to an investors’ efforts toconduct due diligence before investing in a host state. Many FET claims are basedon investor’s allegations of lack of stability in a state’s regulatory framework. In agrowing body of FET cases, tribunals have emphasized the importance of aninvestor’s due diligence especially when an investor argues that his legitimateexpectations have been frustrated. Tribunals differ in defining the threshold ofrequired due diligence. States, on the other hand, are able to regulate this issue intheir treaties. The number of FET claims based on the change of a regulatoryframework could be reduced by clarifying in their IIAs or additional protocols thatan investor has a duty to conduct due diligence as a requirement for the protection ofhis legitimate expectations. The due diligence process that aims at mitigatingbusiness risks can help in preventing disputes based on a state’s regulatoryinstability.

94Sauvant K (2019) An Advisory Centre on International Investment Law: key features academicforum on ISDS. Paper 2019/14, 10 September 2019

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