IISD | 30 April 2025
Resurgence of contract-based ISDS and the risk of internationalizing investor–state relations
by Harshad Pathak
Introduction
Surviving means adapting. As investment treaties face increased resistance from all quarters, especially in the shadow of climate change, the existence of treaty-based ISDS as we know it has also been brought under suspicion. In recent years, the EU and the UK notified their exit from the ECT, notwithstanding the treaty’s “modernisation.” The Ecuadorian Constitutional Court found a treaty provision providing foreign investors access to ICSID arbitration unconstitutional for violating Article 422 of the Ecuadorian constitution. Ecuadorian citizens also overwhelmingly voted to retain Article 422 in their constitution, thus effectively ruling out a return to ISDS for now. And while the UNCITRAL Working Group III continues to discuss potential reforms, the process has invited criticism, and its efficacy remains uncertain. These developments have renewed calls to prioritize contract-based arbitrations pursuant to arbitration clauses in investment agreements negotiated between foreign investors and host states. In the words of Alexis Mourre, a prominent arbitrator, “the arbitration community is ‘losing’ the fight to ensure the survival of ISDS … and should instead contemplate a return to the contractual protection of investments.” This suggestion comes at the heels of the joint project on international investment contracts (IICs) commenced by UNIDROIT and ICC’s Institute of World Business (IIC Project), which aims to develop an international standard to guide the contractual relationship between states and private investors, including by providing contractual guidance on aspects of international investment law treaty standards.
Mourre’s suggestion is unsurprising. International law and arbitration have historically played an important role in limiting the reach of (host) states’ national courts and municipal laws over disputes relating to foreign investments and thus, regulating the terms of investor–state relations. [1] Accordingly, even if not pursuant to an investment treaty, subjecting investment disputes to international arbitration procedures—including under the ICSID Convention—could continue to shield foreign investors from the jurisdiction of host states. From this perspective, the urge to replace treaty-based ISDS with contractual arbitration is not entirely unexpected.
