Costs dropping but length of proceedings rising in investor-state arbitration

The study reviewed over 400 investor-state cases primarily conducted under ICSID and UNCITRAL arbitration rules, and over 70 ICSID annulment decisions. This follows statistics published earlier in 2021 which showed a record number of disputes registered with ICSID in 2020, continuing a steady increase since the late 1990s.

According to BIICL, the study aims to serve as a reference point for those involved in investor-state arbitrations as well as policymakers considering the reform of the ISDS system. Tackling high costs and the prolonged duration of ISDS proceedings remains high on UNCITRAL Working Group III’s agenda. The working group’s policy paper on procedural efficiency of ISDS drew heavily on the 2017 version of a recent study by BIICL on costs, damages and duration in investor-state arbitration.

The study showed there has been a steady increase in the length of investor-state proceedings, and cases heard in the last three years lasted approximately 18 months longer than those for which decisions were published before 2017. The increase in median length is six months.

Despite the increase in duration, the study confirmed that costs have decreased over the last three years. However, the costs of investors remain higher than those of respondent states in arbitral proceedings – the mean costs incurred by investors in an arbitration with a state were $6.4 million, with a median cost of $3.8m compared to a mean cost of $4.7m and a median cost of $2.6m for a respondent state.

Rob Wilkins, international arbitration specialist at Pinsent Masons, the law firm behind Out-Law, said: “This difference could be due to the amount of preparatory work carried out by claimants before deciding to commence proceedings against a state, as well as the requirement for investors to establish their case on issues such as jurisdiction and attribution as well as discharging the burden of proving their claims.”

Scheherazade Dubash of Pinsent Masons said: “Increasing investor costs has led to the emergence and increased reliance of third-party financing of ISDS claims. Proponents of the third-party funding (TPF) model consider this as an access to justice tool, allowing financially constrained investors to bring claims against states, who may otherwise have been unable to do so. Critics question the efficacy of TPF in ISDS and voice concerns over its potential to exploit the ISDS systems and incentivise unmeritorious claims against states.  As a result of the impact that alternative financing is having on both the proceedings and the ISDS regime, the TPF phenomenon is being closely examined by UNCITRAL with recently published proposals for reforming and regulating the legal framework of TPF in ISDS.”

Whilst the mean costs for investors dropped by 3% between 2017 and 2020, states’ costs fell 15% in the same period.  The gap observed between investors’ and respondent states’ party costs is significant, with both mean and median investor costs amounting to almost double the equivalent costs for the respondent state in the past three years.

That may be explained by the fact that respondent states must dip into public funds to defend claims initiated by foreign investors and are therefore particularly cost-sensitive, often adopting measures to promote efficiency in responding to investors’ claims. States typically invite public tenders for purposes of selecting and appointing counsel, with costs being a major deciding factor.

“Unlike most investors, states are repeat participants in ISDS,” said Wilkins. “This, combined with greater scrutiny over the spending of often scarce public funds, means states have developed good internal expertise as well as procedures that allow them to demand competitive fees from external counsel, often on a fixed fee basis.”

The prospects of the successful party recovering its costs has improved as ICSID tribunals adopt UNCITRAL’s “costs follow the event” approach. Tribunals have significant discretion in determining and allocating costs between parties in the absence of detailed guidance in the applicable arbitration rules. The past three years saw a more frequent use of adjusted costs orders and a doubling of the number of paragraphs devoted to costs in arbitral awards.

BIICL said 75% of all costs orders published between 2017 and 2020 were adjustment orders, requiring the unsuccessful party to bear at least some of the successful party’s costs. This compared to 64% of costs orders between 2013 and 2017. Successful investors were more likely to recover costs than successful states.

There was no significant difference in the costs incurred or awarded by ICSID and UNCITRAL tribunals, despite different approaches to cost allocation.

The study also showed that investors are claiming and are awarded larger amounts, although the amount of damages claimed far exceeds the amount of damages typically awarded. Among successful investors, the mean damages claimed is $1.5 billion, while the mean award is $438m.

In the last three years there was a small increase in the proportion of damages awarded compared to the amount claimed, from 29% to 36%. BIICL said the larger the amount in dispute, the greater the discount that investors can expect to be awarded even if they succeed on the merits.