Introduction
Global investment across national borders is one of the defining features of today’s modern global economy. Foreign Direct Investment (FDI) is now a key driver of global trade, infrastructure development, technology transfer and job creation. The international capital flows crossing national borders are furthering economic integration and providing greater connectivity to the global economy.
However, Foreign Direct Investment (FDI) is at risk when it crosses borders. As soon as capital is invested in an international location, the investor may face uncertainty about that country’s political and social stability, changes in government regulation, restrictions on foreign ownership, or abrupt changes to existing laws governing that country. Governments are also changing how they tax foreign investments, what new environmental regulations will apply to foreign firms, and what type(s) of industries are considered to be strategic to their economies.
Investment Treaty Arbitration (ITA) has quickly become one of the most important parts of international investment law because of the complicated and often unstable environment we are currently working in. ITA gives foreign investors a means to get legal protection against host states (the country in which they are investing) who do not honour their investment treaties. Unlike commercial arbitration, where private parties are involved in a two-party dispute, investment treaty arbitration has a private entity on one side and a state on the other, thus creating new and different legal, political and public policy issues.
As the nationalism of economies grows, regulatory scrutiny grows, the environment changes and geopolitical pressures are felt, the stakes of investment arbitrations will become higher and higher than ever before. This article discusses the ways in which the legal framework is developed; the jurisdiction under which ITA operates, the enforcement and transparency of ITA and the various challenges faced within the ITA system today.
Bilateral Investment Treaties (BITs)
Bilateral Investment Treaties, or BITs, represent agreements made between two countries with the intention of providing each party (the investors) with reciprocal protections once they invest into the territory of the other country.
In general, BITs provide for certain substantive protections, such as:
-fair and equitable treatment (FET);
-protection from direct or indirect expropriation;
-national treatment;
-most-favored nation (MFN) treatment;
-free transfer of funds; and
-Access to investor-state arbitration (also known as ISDS).
BITs are intended to establish a foundation for an investment climate that is stable, predictable, and legally secure. Investors may utilize the investor-state dispute settlement (ISDS) mechanism for their own benefit and at their own expense in order to initiate arbitration against a host country based on alleged violations of a treaty between the two countries.
The ability for an investor to initiate arbitration against a host government based on its rights under a BIT is a major change from the traditional model in international law, where only a government can espouse claims by its nationals against another government through the exercise of diplomatic protection.
By providing a manner for an investor to enforce its rights under the BIT without having to rely on the host state to make a decision on behalf of an investor, it depoliticizes the dispute and increases an investor’s confidence that it will have a fair opportunity to resolve any disputes it may have with the government of the host country.
Investment Treaty Arbitration: Legal Framework
Normally, investment treaty cases are handled either through:
- ICSID
- UNCITRAL
- ICSID
The establishment of the International Centre for Settlement of Investment Disputes (ICSID) Convention was established by the World Bank through the first treaty finished in 1965, is the basis of the modern day investment arbitration system.
Article 25(1)(Jurisdiction) provides that ICSID has jurisdiction over:
All legal disputes arising out of an investment from a Contracting State party against the national of another Contracting State party, which both parties agreed to submit to ICSID in writing.
Jurisdictional Requirements
To be eligible for an ICSID arbitration award, a cumulative combination of four criteria must be present at the time of filing a request for arbitration:
- The dispute is legal and has arisen directly out of an investment;
- The dispute is between a contracting state and a national of another contracting state;
- The parties give written consent to proceed with arbitration;
The cornerstone of jurisdiction under ICSID arbitration is consent. As a practical matter, states give their written, pre-agreed consent through BITs or multilateral treaties. In return, investors provide their consent when they file an application for arbitration.
Article 54(1) of the ICSID Convention requires the contracting states recognize and enforce the ICSID awards issued to them as if those awards were final judgments issued by the courts of the Contracting State.
ICSID awards differ from awards issued by domestic courts because no domestic court has the power to review or annul the ICSID award. The Convention provides a self-contained system for annulling ICSID awards. This system for annulling the award provides the finality, neutrality, and enforcability of a ICSID award without the potential for interference by the judicial systems of contracting states.
- UNCITRAL Framework and the New York Convention
Where arbitration proceeds under the United Nations Commission on International Trade Law (UNCITRAL) Rules, enforcement is governed primarily by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).
Article III of the New York Convention requires Contracting States to recognize arbitral awards as binding and enforce them in accordance with domestic procedural rules, subject to limited defense under Article V.
The Convention’s global reach spanning over 170 states has significantly strengthened the enforceability and credibility of investment arbitration conducted outside the ICSID framework.
Transparency and Democratic Accountability
Historically, investment arbitration was criticized for operating with limited public oversight. In response, reforms have sought to enhance transparency.
The Mauritius Convention on Transparency extends the UNCITRAL Rules on Transparency to treaty-based investor-state arbitration. It enables public access to:
- Arbitral documents
- Written submissions
- Hearings
- Amicus curiae participation
These developments aim to balance investor protection with public accountability, particularly where disputes involve environmental regulation, public health measures, or sovereign regulatory policy.
Contemporary Challenges
Investment treaty arbitration faces growing scrutiny and reform pressures. Key challenges include:
- Concerns regarding regulatory chill
- Allegations of inconsistency in arbitral jurisprudence
- Perceived imbalance between investor rights and state sovereignty
- Increasing withdrawals or renegotiations of BITs
- Calls for a Multilateral Investment Court
States are increasingly reassessing the scope of substantive protections such as FET and MFN, narrowing definitions of “investment,” and refining ISDS clauses to preserve regulatory autonomy. The tension between legal certainty for investors and democratic policy space for states remains central to ongoing reform debates.
The importance of Investment Treaty Arbitration has not diminished; it remains one of the primary components of the global investment system. Thanks to the ICSID Convention and the New York Convention, investors possess rights that are enforceable and contribute to the continuing confidence in investing across national borders.
However, this system is being transformed. The growth of economic nationalism, expectations regarding environmental governance and changes in global political dynamics have led to an increase in the calls for reform. Investment Treaties are no longer only about providing investor protection; they are also about developing a system for resolving disputes that is balanced, transparent, and has legitimacy and which supports both economic development and the regulatory authority of each sovereign state.
If the reform process is undertaken with care, investment treaty arbitration will continue to provide an important means of facilitating stability, consistency, and equity within the international investment legal framework.
Shekhar Mehra is a legal writer and researcher at LEGALLANDS LLP, specializing in corporate law, business structuring, regulatory compliance and post-incorporation governance. He regularly contributes in-depth articles and thought-leadership pieces focusing on entity formation, governance frameworks, cross-border compliance and emerging policy reforms — particularly for India-UAE trade & investment contexts. His work combines technical legal insight with practical business strategy, to guide entrepreneurs, in-house legal teams and advisers through today’s complex regulatory environment.
