The Investor-State Dispute Settlement (ISDS) regime stands on shaky ground. Its legitimacy is heavily questioned by critics and a “backlash debate” has ensued. As a result, a contested and infected debate has been on-going for some years now and multiple reform proposals have been offered, ranging from (a) moderate (and sensible) reform proposals—e.g., increased transparency; the inclusion of state counterclaims; the inclusion of higher ethical standards; reformulating deference standards; applying human rights and environmental law when interpreting international investment treaties; etc.—to more (b) radical reform proposals—e.g., the elaboration of either an Appellate System or an Investment Court System (ICS). Such latter proposals are radical because they seek the total re-designing of the entire ISDS regime. It is argued that these radical proposals ultimately seek to undercut the fundamental elements of international arbitration in favor of a supposedly “fairer” and more “just” system. The proponents of these “equitable” reforms seek to dismantle ISDS as we know it.
It is submitted that all reform proposals are best analyzed through the lens of the mental representation of the stakeholders to the ISDS regime, namely, the essential actors; service providers; value providers; and the global community at large. But what interests should be preserved and further enhanced?
This paper makes several points, inter alia, (1) that the contemporary criticism is not a new phenomenon and that we must emphatically reject the spill-overs of extreme left-leaning ideology, nationalism, protectionism, idiosyncrasy, parochialism, and populism in transnational litigation; (2) that moderate reform-proposals merit attention if—and only if—those further the fundamental elements of international arbitration, and conversely, rejected if not; (3) that the way, shape, and form of ISDS must be analyzed through the lens of its historical and philosophical underpinning; and (4) that every stakeholder’s claim must be heard, but that in the sociology of ISDS there should be a hierarchal structure deciding the validity (or normative value) of each claim depending on the stakeholders overall positioning in the regime.
Finally, the ISDS-reform discussions should be conducted in a manner that underscores broader historical, economic, political, philosophical, and sociological lessons of the project called “transnationalism,” which happens to be a brainchild of liberal capitalism.
When a State unilaterally abrogates its contractual obligations, it is under a duty to compensate the investor. The aim of the compensation regime under International Investment Law is to restore the investor to a position he or she would have been in had the breach not taken place. Thus, the award of compensation should not only include sunk costs (damnum emergens) but also lost future profits (lucrum cessans).
In this article it is argued that the rules relating to compensation promote efficiency, as per the ‘efficient breach theory’ because they dissuade governments from unilaterally abrogating concession agreements, unless they can compensate the investor, including lost future profits, whilst making some money on top of that. However, the limitation of the efficient breach theory is that it presupposes that wealth maximization is the paramount consideration for all parties involved in a contract. This article shows that this is not necessarily the case with States.
Typically, host States cite socio-economic reasons for their termination, rather than profit maximization. This can be contrasted with commercial actors whose only concern is making money. Thus, while the International Investment Law certainly encourages efficiency, it does not provide host States with sufficient flexibility to pursue its legitimate public objectives, when it breaches agreements.