State Counterclaims and the “Legitimacy Crisis” in Investment Treaty Arbitration

Abstract

Historically, State counterclaims in investor-State dispute settlement (ISDS) have generally failed. ISDS’s procedural and substantive asymmetry, by which investors enjoy unilateral rights to initiate arbitration against States and enjoy protections without reciprocal obligations, has greatly limited States’ ability to pursue counterclaims against investors under investment treaties. State counterclaims’ lack of success has been identified as a factor contributing to the so-called “legitimacy crisis” of ISDS, giving rise to a myriad of concerns, including concerns about regulatory chill, inconsistent decisions, and even pro-investor bias. In the last decade, some tribunals have shown greater openness towards States’ counterclaims. This article focuses on six such cases—Roussalis v. Romania, Goetz v. Burundi, Burlington v. Ecuador, Urbaser v. Argentina, Perenco v. Ecuador, and Aven v. Costa Rica—which exemplify a more permissive interpretation of the jurisdictional requirements for counterclaims and a novel approach to the imposition of substantive obligations on investors. If future arbitral awards adopt and expand these cases’ openness towards counterclaims, they could trigger a trend of increased receptiveness to and success of State counterclaims, potentially mitigating some of the concerns that fuel the backlash against ISDS. Through the lens of these cases, this article evaluates counterclaims’ potential to address the legitimacy crisis. This article suggests that increased access to and greater success of counterclaims can reduce concerns about the system’s asymmetry, but at the same time may give rise to new concerns that might be best addressed through other mechanisms, such as treaty drafting and binding interpretations.