Think Piece

Investor-State Conflict Management: A Preliminary Sketch

By Global Practice on Trade and Competitiveness – Investment Climate Unit, World Bank Group, 
December 2015
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Pointing to the concept of investor-state conflict management and its practical importance, this note sketches the minimum key institutional infrastructure elements that would be required to enable governments to manage investor-state conflicts, and prevent them from unnecessarily escalating to investor-state arbitration. In today’s inter-dependent world, the search for alternatives to investor-state dispute resolution entails much more than procedural and institutional solutions and discussions. It raises a profound philosophical question—what should be the parameters of governance orienting the evolution of the international investment regime? The differentiation between power-based, rights-based, and interest-based dispute resolution used in the context of conflict theory is quite useful when translated to the context of the historical evolution of international investment relations, and international investment law in particular. From a trend where investor-state investment disputes used to be predominantly resolved through diplomatic protection, with the proliferation of international investment agreements (IIAs) and the increase in investor-state arbitration, the trend has shifted towards rights-based dispute resolution.

International investment relations have become increasingly “rule-oriented.” In general, that should be considered a positive development for both international and domestic investment governance. However, the legalisation of international investment relations is also exerting strong pressures over host countries’ administrations, leading various political actors to resist those pressures and challenge the legitimacy of the current international investment regime. It is not surprising that a significant share of the literature on international investment law has recently focused on how the international investment regime—and investor-state dispute settlement procedures in particular—should be revisited and adjusted to properly respond to the realities of the 21st century. There are, however, significant disagreements as to what kind of improvements to make and how they should be implemented. Nevertheless, the main point of this note is that any serious attempt to modernise the international investment regime should bear in mind that, to properly perform its function, the regime can no longer afford to leave all problems arising between investors and host states to be exclusively addressed through investor-state arbitration.

After two decades of experience with investor-state arbitration, the time has come for the international investment regime to complement dispute resolution procedures with conflict management mechanisms (CMMs). Two key reasons justify this assertion. First, in principle and from many vantage points, in many circumstances consensual solutions to investor-state conflict would be much more efficient than adjudication. Second, the exclusive reliance on adjudication as a means to manage investor-state conflict is generating such high economic and political costs that the legitimacy of the international investment regime is being corroded. This is a serious problem if we take into account how central relations between investors and host states have become within current international economic dynamics. After evolving from power-based to rule-based dispute settlement, it is time for the international investment regime to evolve once again, now in the direction of incorporating interest-based CMMs within its structure.

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