From Critique to Reform: The Evolving Landscape of Investor-State Dispute Settlement

Introduction

Investor-State Dispute Settlement (ISDS) is an essential part of international investment law, allowing foreign investors to bring arbitration claims directly against host States for alleged breaches of investment protections. Developed as a response to the limitations of diplomatic protection and domestic courts, ISDS was designed to ensure legal certainty and promote a stable investment climate. However, despite its significant role, the ISDS system has been criticised for the lack of legitimacy, consistency, transparency, and the adequacy of mechanisms for investor accountability. This article critically examines these concerns, before turning to recent and proposed reforms aimed at achieving a better balance between investor rights, state sovereignty, and the public interest.

Arbitrator Legitimacy and Perceived Bias

One of the main criticisms of ISDS relates to doubts about the legitimacy of arbitrators, especially for the resolution of contentious disputes on sensitive issues of public policy. Critics frequently question whether it is appropriate for a small number of appointed arbitrators, often selected ad hoc for each case, to pass judgement on complex state actions or to determine the financial consequences of regulatory changes affecting society. Additionally, it is widely observed that the pool of active ISDS arbitrators is remarkably narrow. Studies have shown that there are severe gender disparities and geographical underrepresentation in ISDS proceedings. In general, only 15 percent of all appointments of the International Centre for Settlement of Investment Disputes (ICSID) have been women. This percentage did rise to 29 percent in 2024, but a great gap still exists. Furthermore, 74 percent of arbitrators are nationals from Western countries, whereas the majority of cases involves Non-Western and developing countries. These statistics raise doubts about potential bias and conflicts of interest in the decision-making process.

The Problem of Inconsistent Outcomes

A second, related criticism is the lack of consistency. In Investor-State Dispute Settlement, there is no formal appellate process or mechanism to review arbitral awards for error. As a consequence, different tribunals applying the same treaty provisions may reach contradictory results, which can undermine both predictability and fairness. The European Union has repeatedly highlighted this problem and has advocated replacing traditional ISDS with an Investment Court System featuring a standing tribunal and a dedicated appellate body. Some recent agreements, most notably the Comprehensive Economic and Trade Agreement (CETA) reflect this approach. CETA is a bilateral trade and investment agreement between the European Union and Canada, in which the EU incorporated the Investment Court System (ICS). In CETA, an appellate tribunal can modify or reverse the findings of the tribunal. In addition, the EU has promoted the Investment Court System model in subsequent agreements, for example with Vietnam, and is advocating for the establishment of a Multilateral Investment Court within UNCITRAL, which would be a global appellate system for investment disputes. However, these innovations remain the exception, because most existing investment treaties still do not include any form of appellate review. Moreover, no binding precedent and the diversity of international investment agreements reinforce inconsistency of ISDS jurisprudence. Although tribunals occasionally reference previous awards, such references are discretionary and do not provide a systematic basis for harmonisation.

Transparency Issues and the Public Interest

Many ISDS hearings remain closed to the public, and documents are often inaccessible, even in cases that have an impact on affected communities or have broader policy implications. The lack of transparency means that opportunities for public participation are limited. This includes the ability of affected communities, civil society groups, or other stakeholders to attend hearings or comment on the legal reasoning of tribunals. Moreover, interested third parties, including non-governmental organisations (NGOs), are frequently excluded from proceedings. This may impact public trust and can limit efforts both to understand and to improve the operation of ISDS. In response, international institutions such as the United Nations Commission on International Trade Law (UNCITRAL) and UN Trade and Development (UNCTAD) have advocated for more transparent procedures.

The International Centre for Settlement of Investment Disputes (ICSID) amended its rules in 2006 and again in 2022 to increase transparency, by including measures such as the ability to allow non-disputing party attendance at hearings and publishing aspects of arbitral decisions by default. Nevertheless, transparency reforms continue to face resistance from some states and investors, who argue that greater openness may compromise party autonomy by limiting their ability to keep sensitive information confidential and to resolve disputes discreetly through settlement. Proponents of transparency argue that investor–state disputes typically concern the use of public funds and the scope of governmental regulatory powers. Therefore, democratic accountability demands a higher level of openness than in purely private commercial arbitration, especially when tribunals interpret treaty obligations that shape future state conduct. A more balanced approach seeks to preserve core elements of party autonomy, such as protecting trade secrets, while making hearings, submissions and decisions public, subject only to defined confidentiality exceptions. From this perspective, reforms such as the ICSID rule amendments represent an important but incomplete shift towards prioritising transparency where investor‑state disputes implicate the public interest.

Increasing Openness through the Mauritius Convention

Recent reform initiatives support the embedding of transparency and accountability into ISDS, from both a procedural and institutional perspective. The Mauritius Convention marks a significant step forward in efforts. Adopted in 2014, the Convention seeks to broaden application of the UNCITRAL Rules on Transparency, ensuring, for example, that details of parties, treaties involved, and substantive documents are disclosed in all covered arbitrations. Importantly, these rules also encourage and facilitate interventions by third parties who are not parties to the dispute but are permitted to submit written observations to assist the tribunal. Crucially, the Mauritius Convention allows states to apply UNCITRAL’s transparency standards to cases initiated under older investment treaties, substantially increasing the number of ISDS proceedings subject to its rules. While states can tailor reservations and exceptions, the multilateral adoption of the Convention and its incorporation into agreements such as CETA show a broadening consensus that greater transparency is necessary.

Strengthening Investor Accountability

Besides transparency and legitimacy, broader reforms focus on ensuring that investors themselves can be held accountable. A recent reform proposal is to condition an investor’s right to bring arbitration claims on their compliance with domestic or international law, including anti-bribery, anti-corruption, or other standards of responsible business conduct. Because access to ISDS is a significant benefit for investors, restricting this right creates strong incentives for legal and ethical compliance. Noteworthy recent treaties, such as the 2016 Iran–Slovakia BIT, include explicit investor duties, where breaches can result in loss of treaty protections or access to ISDS. CETA similarly prevents investors from pursuing claims where fraud or abuse of process is involved. Several cases illustrate the practical application of these standards. For example, in Metal-Tech v Uzbekistan, the tribunal denied protection after the investor was found to have engaged in bribery.

Conclusion

Investor-State Dispute Settlement remains an important but contested element of international investment law. The challenges identified in this article, arbitrator legitimacy, inconsistent decision‑making, limited transparency, and weak investor accountability, are unlikely to disappear in the short term. The central difficulty going forward is how to redesign ISDS: Looking ahead, the main challenge is the legitimacy gap of a small group of arbitrators who have significant power over state regulation. Looking forward, inclusion of a diverse pool of arbitrators, and permanent appeal bodies could enhance predictability and legitimacy. Developments such as the Mauritius Convention suggest that stronger transparency and more balanced obligations are achievable, but their uneven adoption shows that meaningful progress still depends on broader multilateral cooperation of states, international organisations, and civil society.

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