Representation of State

International investment agreements (IIAs) is a term used to encompass bilateral investment treaties (BITs), sector – specific investment treaties (e.g., the Energy Charter Treaty) and other international treaties with investment protection provisions (e.g., the EU-Korea Free Trade Agreement).

IIAs contain investment protection standards like protection against non-compensated direct or indirect expropriation of investments, prohibition of discrimination, the most-favoured-nation treatment and fair and equitable treatment, and usually provide for investor’s direct access to a dispute settlement mechanism if those standards are allegedly violated by a contracting party, which has received the foreign investment (host State).

Around 3,300 IIAs have thus far been concluded worldwide. 

The IIA based investor-to-state arbitration mechanism confers on the foreign investor, whose investment is located in the territory of another host State, the right to bring a host State to international arbitration in the event of an alleged violation of investment protection standards.

Foreign investors may thus invoke State's responsibility before international ad hoc arbitration tribunals, which usually consist of three arbitrators appointed by the disputing parties. The arbitrators’ task is to decide on whether IIA has been violated and, consequently, if the State has to bear international responsibility.

IIAs traditionally provide for compensation of financial losses that may be ordered by the arbitration tribunal if a violation of host State's obligations towards the foreign investor is established by the tribunal.

IIAs usually leave an investor with a choice between different arbitral rules and venues (e.g., the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States and the International Centre for Settlement of Investment Disputes (ICSID), ICSID Additional Facility (ICSID has been the most frequent forum for a settlement of investor-to-state disputes), the Arbitration Rules of the United Nations Commission on International Trade Law (UNCTIRAL), the Dispute Resolution Rules of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA) or the Arbitration Institute of the Stockholm Chamber of Commerce.

Investor-to-state dispute settlement mechanism was first introduced in the BIT between Indonesia and the Netherlands (1968) (*Andrew Newcombe and Luís Paradell, Law and Practice of Investment Treaties: Standards of Treatment. The Netherlands: Wolters Kluwer Law & Business, 2009, 44-46.).  Investment protection standards contained in IIAs and investor’s direct access to a dispute settlement mechanism (usually international investor-to-state arbitration) are meant and believed to be tools for encouraging in-flows of foreign investment in States, and thus, contributing to their development (*Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States, International Bank for Reconstruction and Development, March 18, 1965, part ΙΙΙ, recitals 10,13.).

The investor-to-state arbitration mechanism was established with the intention to depoliticize foreign investment disputes, since the objectivity and effectiveness of domestic courts was subject to doubt when ruling against foreigners. Similarly, the previously used diplomatic protection mechanism could rise political tension between the home State of an investor and the investment-receiving host State (*Shihata, Towards a Greater Depoliticization of Investment Disputes: The Roles of ICSID and MIGA, 1986, 1 ICSID Rev – FILJ 1.). Thus, depoliticization and impartiality were the rationales behind this dispute settlement mechanism.

Although the investor-to-state dispute settlement mechanism is a common part of IIAs, the public is currently actively discussing its necessity and potential reforms (e.g., negotiations of the EU-Canada Comprehensive Economic and Trade Agreement (CETA)). 

The level of transparency in investor-to-state arbitral proceedings depends on IIA to be applied to respective investment dispute and on the arbitral rules that are applied to the international arbitration proceedings based on the agreement between the disputing parties.  For instance, ICSID awards are made public only if both disputing parties consent.

Since 17 November 2015, the State Chancellery has been ensuring the State representation in international investment disputes. The State representation is based on the so-called 'hybrid model', namely the State Chancellery collaborates with outside experts invited for legal representation of the State.