The four regions in settlement space: a game-theoretical approach to investment treaty arbitration. Part I: modelling

This article uses game theory to investigate investor–state dispute settlement and related dispute resolution strategies through international arbitration. When deciding whether either to bring or to defend a claim rather than pursue settlement, investors and states will select strategies to maximize their respective payoffs, either by securing compensation or successfully defeating a claim for compensation. This article develops a model decision-making strategy for claimant investors and defendant states based on the observed patterns of outcomes in actual investment treaty arbitration awards. Embedding the problem in the context of utility and hence risk-aversion, it will offer a general solution for the arbitration ‘game’. Four regions will be identified in the settlement space consisting of the respondent offer against claimant success probability. It will be shown that no settlement is possible in three of these four regions. The go-no-go probability of claimant victory below which it would not be reasonable for a potential claimant to proceed will be quantified. An algorithm is developed for calculating the settlement sum that the respondent may offer with a reasonable expectation of acceptance by the claimant.