Major changes crystallising in investor-state dispute settlement

These changes, driven by revisions to the rules governing some ISDS proceedings, the signature of investment treaties with innovative provisions, and modernisation of the Energy Charter Treaty, promise to have a lasting impact on the global investment environment.

ISDS mechanisms are embedded in thousands of international investment treaties, ranging from bilateral treaties between individual states to multilateral treaties with global signatories. In general terms, the treaties provide important protections for foreign investors against expropriation, and discriminatory, unfair, or inequitable actions by states. They also offer a remedy via independent, often confidential, arbitration, rather than through the national courts of the host state.

The number of investor-state arbitrations has been on the rise. According to a November 2024 report by UNCTAD, the number of known ISDS cases more than doubled in the past decade, rising from under 600 in 2013 to over 1,300 by the end of 2023. At least 60 new arbitration cases were initiated in 2023. This surge underscores the growing reliance on ISDS mechanisms to resolve investment disputes.

Read more of our report on international arbitration in 2025

• International arbitration: regional, sectoral and industry developments reinforce dispute resolution status
• UAE: recent arbitration reforms while legacy DIFC-LCIA clause debate continues
• Saudi Arabia firmly on the map as key arbitration and dispute resolution hub
• New digital services and legal developments boost international arbitration usage in Qatar
• Egypt a ‘central hub’ for arbitration in the MENA region
• Investment disputes continue to drive international arbitration developments in Africa
• Southern African states form harmonised arbitration framework
• UK arbitration developments continue to enhance position as key dispute resolution jurisdiction
• French arbitration law evolves ahead of 2025 reforms
• Germany to become more attractive for international arbitration proceedings
• Singapore continues to rise as an international dispute resolution hub
• Continued improvements in international arbitration driven by new HKIAC rules and case law
• India continues work to modernise arbitration landscape
• Significant developments in Japan’s arbitration landscape
• South Korea strengthens international arbitration framework
• China continues to improve arbitration process efficiency and effectiveness
• Australian court rulings strengthen pro-arbitration stance and expand scope of arbitration
• Construction projects and contracts must consider sanctions risks
• New types of M&A disputes will drive up international arbitration cases
• Growing demand for expertise in cryptocurrency related arbitration in 2025
• Major changes crystallising in investor-state dispute settlement
• What the future holds for mediation in investor-state dispute settlement

The International Centre for Settlement of Investment Disputes (ICSID), part of the World Bank Group, remains the leading institution for resolving investor-state disputes. The ICSID Convention now boasts 166 signatory states. In its latest annual report, ICSID reported that it had administered a total of 341 cases in its last financial year, the second-highest number it has ever recorded in a single year, highlighting its pivotal role in the ISDS landscape.

Many ISDS cases are governed by rules developed by the UN Commission on International Trade Law (UNCITRAL). A significant development in 2024 was the progress made by an UNCITRAL working group on reforms aimed at improving ISDS proceedings. These reforms aim to streamline and bring uniformity to the current fragmented landscape of investment protection and dispute settlement.

Among other things, the draft convention on international investment dispute resolution purports to address alleged concerns with ISDS, including “those relating to coherence and consistency of decisions, the independence and impartiality of adjudicators, the cost and duration of proceedings as well as the overall legitimacy of the dispute settlement system”.

Signatories to the convention would have a degree of flexibility to apply various protocols in respect of existing investment treaties to which they are party. These include the UNCITRAL Code of Conduct for Arbitrators and the UNCITRAL Model Provisions on Mediation, both of which were finalised and approved in 2023, as well as the statute of an advisory centre on international investment dispute resolution, which is still pending approval. The advisory centre is designed to provide training, support, and assistance to states, particularly the least developed and developing countries, to enhance their capacity to handle international investment disputes.

Three other important protocols referenced in the draft convention are still in draft form. They concern the rules on procedural and cross-cutting issues, such as third-party funding in investor-state arbitration; the proposed standing mechanism for the resolution of international investment disputes; and an appeal mechanism for the resolution of international investment disputes.

It is expected that some of the draft reform protocols will be submitted to UNCITRAL for consideration in 2025.

While coherence across ISDS is a focus of the UNCITRAL working group, standardisation of international investment contracts is a focus of work being undertaken by the International Institute for the Unification of Private Law (UNIDROIT) in partnership with the International Chamber of Commerce’s Institute of World Business Law (ICC Institute).

Currently, there is no international standard to guide the contractual relationship between states and private investors, but the UNIDROIT and ICC Institute’s project aims at developing guidance to foster modernisation and standardisation in this area. The project, among other things, is expected to address the increasing focus on corporate social responsibility and sustainability.

The project working group met three times in 2024 and a further three sessions are scheduled for during 2025. The initiative chimes with the themes of an UNCTAD report which found that an increasing number of international investment agreements are incorporating sustainable development provisions, these having been “virtually absent” in pre-2010 agreements.

Many of the investment treaties in operation are decades old. Another 2024 UNCTAD report identified “the increasing dichotomy between new and old treaties”, it being less common for older treaties to reflect more modern treaty features, such as a focus on sustainable development and commitments regarding transparency or on the use of digital tools. UNCTAD outlined some policy options to facilitate investment in sustainable development, including suggesting that the definition of ‘investment’ in international investment agreements reflect “sustainable development criteria” and that such agreements “list specific and measurable indicators to identify economic, social and environmental sustainability characteristics”.

One important treaty that was the subject of modernisation last year is the Energy Charter Treaty (ECT). Revisions to the treaty were formally adopted at the Energy Charter Conference on 3 December 2024, ending years of stalemate over the reforms.

One of the most significant changes is the introduction of a new flexibility mechanism that will enable contracting parties to “exclude investment protection for fossil fuels in their territories, considering their individual energy security and climate goals”. If a contracting party opts to exercise this flexibility, the exclusion takes effect on a staged basis over a number of years.

Both the UK and the EU notified their withdrawal from the treaty last year – decisions due to take effect after a one-year period has passed – amidst claims that the ECT was out of step with global climate change targets: the ECT applies the same protections for fossil fuel investment as it does for investment in green energy. Several EU member states have also notified their withdrawal from the treaty, but others have expressed their intention to remain members.

A further change will now mean that investment in carbon capture use and storage (CCUS) projects will be eligible for the protections provided for under the modernised ECT.

Greater transparency over investor-state arbitral proceedings concerning ECT disputes has also been provided for in the modernised treaty, as UNCITRAL rules on transparency in such disputes have been adopted. This will mean “procedural documents in such disputes are publicly available and that the hearings may be publicly accessible”, the Energy Charter Secretariat said at the time of the December conference.

According to the Energy Charter Secretariat, some of the changes will enter into force from 3 September 2025. Other changes will begin to apply on a provisional basis from 3 September 2025 except for contracting parties which opt out of provisional application before 3 March 2025. These changes will enter into full force only after at least three quarters of the contracting parties to the ECT have ratified the amendments, and then only among the ratifying contracting parties.

Reflecting the appetite of the EU and UK, and potentially others in future, to withdraw from the ECT, the International Institute for Sustainable Development (IISD) last year developed a model inter se agreement to address “legacy arbitration risks” – i.e. the risks that the EU, UK or others continue to be subject to ECT arbitration after withdrawing from the treaty.

Article 47(3) of the ECT provides that covered investments made prior to withdrawal will continue to benefit from the treaty’s investment provisions, including access to investor-state arbitration, for a period of 20 years.

The model agreement, the legal validity of which has been questioned, is aimed at delivering a “legally viable and politically achievable way to neutralise” Article 47(3) of the ECT.

Last summer, the EU and all but one of its ECT member states signed a declaration purporting to clarify that the ECT’s investor-state arbitration provision does not apply, and never has applied, to intra-EU investment disputes. In October, following a long run of contrary decisions, Spain said it had been successful in two ICSID arbitrations where the tribunals found they did not have jurisdiction to hear intra-EU investment disputes.

One argument that is sometimes advanced by states in investor-state disputes is that they enjoy state immunity from the enforcement of arbitral awards against them. That issue was ruled on by the Court of Appeal in England and Wales in October 2024 in a jointly heard appeal involving Spain and Zimbabwe.

In the cases of Infrastructure Services v Spain and Border Timber v Zimbabwe, the claimants, having successfully secured separate awards against the respective states, applied for an order under the English Arbitration Act 1996 to register their ICSID awards as judgments of the court for enforcement purposes. The registration orders were granted to the claimants, which both states subsequently sought to set aside on the grounds of state immunity. In a joint hearing before the Court of Appeal, the Court determined that by ratifying the ICSID Convention, Spain and Zimbabwe had effectively waived their state immunity under the State Immunity Act 1978, thereby subjecting themselves to the jurisdiction of the English courts for the enforcement of ICSID awards.

The Court of Appeal's decision aligns the UK's position with that of the courts in Australia, New Zealand, the US, France, and Malaysia, all of which have interpreted Article 54 of the ICSID Convention as a waiver of state immunity and a submission to their domestic jurisdiction.

Co-written by Scheherazade Dubash of Pinsent Masons