Rethinking the use of deference in investment arbitration: New solutions against the perception of bias

The investor-state dispute-settlement (ISDS) system has been suffering from a crisis of legitimacy caused by the perception that there is a bias in the system in favor of investors. The solution offered by this Article is an increase in the use of deference to the policy choices and public interests of sovereign states, thereby ensuring that the system is viewed as providing a fair service to parties. In the context of ISDS, scholars have mostly explained deference as a limitation on the level of scrutiny an investment tribunal can apply to states’ public policy choices. In current arbitral practice, consideration of the specific circumstances of a case is commonly restricted to an assessment of the host states’ conduct or policies that purportedly violate investors’ treaty rights. However, this Article argues that the exercise of appropriate deference is the better standard. Appropriate deference requires tribunals to take into account the role of the foreign investors in the dispute, particularly where little due diligence was done or when there is evidence of serious misconduct by the investors. Focusing on the role of foreign investors enables a more nuanced examination of the issues before an investment tribunal. It creates a pathway for tribunals to give sovereign host states and their policy choices more credibility and support. Thinking about deference should continue to become important for the functioning of the ISDS system, since without it perceptions of bias can exacerbate the legitimacy crisis within the system.