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To Settle or to Fight to the End? Case-level Determinants of Early Settlement of Investor-State Disputes

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Veröffentlicht/Copyright: 13. November 2020
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Review of Law & Economics
Aus der Zeitschrift Review of Law & Economics Band 17 Heft 1

Abstract

International investment arbitration is a third-party dispute resolution mechanism aimed mainly at depoliticizing investment disputes and maintaining efficient investment flows among countries. Almost one-third of treaty-based investor-state disputes brought before this system are settled before the tribunal’s final ruling. Given the classical “Against Settlement” debate in the legal literature, we build an original database of treaty-based arbitrations from 1996 to 2016 to empirically test the determinants of early settlement. We find that the probability of settlement increases if the host state has no experience of resolving those kinds of disputes but decrease if it anticipates a favorable outcome. The nature of the regulatory measures applied by the host state and the identity of foreign investors are additional important determinants of settlement. Interestingly, we find strong evidence of a Dutch effect in dispute resolution.

Keywords: investor-state dispute; arbitration; settlement; economic analysis
JEL Classification: F21; F23; K33; K41
Corresponding author: Duy Vu, VNU-University of Economics and Business, Hanoi, Viet Nam, E-mail:

This paper was presented at the 3rd Annual Conference of the French Association of Law and Economics – AFED (Nancy, October 2018) and the 6th International Workshop on Economic Analysis of Litigation (Granada, June 2019). The author thanks conference participants, and especially Christophe Charlier, Michele Pezzoni and two anonymous reviewers for helpful comments.

Appendix

A Characteristics of Dutch Bilateral Investment Treaties

Table 3:

Characteristics of 104 Dutch Bilateral Investment Treaties.

BIT provisionsStatistics
Preamble
BITs do not refer to government right to regulate, sustainable development, social investment aspect or environmental aspect91/104
Scope and definition
BITs use asset-based definition to define an investment or there is no definition103/104
BITs have no limitation on the definition of investment (e.g. they did not exclude other specific assets or contain “in accordance with host state law” requirements)92/104
BITs exclude dual nationals as “investors”0/104
BITs require substantial business activity of corporate investors3/104
Denial of benefits (DoB)a
BITs include DoB clauses1/104
Temporal scope of the treaty
BITs apply to both pre-existing and post-BIT investments89/104
Exceptions
BITs allow the contracting parties to derogate from treaty obligations in order to protect essential security, public health, environment, cultural heritage, public order and for prudential reasons3/104
Investor-state dispute settlement (ISDS)
BITs include ISDS mechanism100/104
BITs allow to submit to ISDS any dispute relating to investment92/104
BITs have limitation to the scope of ISDS (e.g. excluding certain provisions, certain economic sectors)6/104
BITs provide express or implied consent to arbitration95/104
BITs provide at least ICSID or UNCITRAL as ISDS forum options93/104
BITs include no reference to the relationship between forums (e.g. on whether the same dispute can be submitted simultaneously to several forums, including domestic court)79/104
Amendment, renegotiation and termination
BITs include modalities for amendment or renegotiation4/104
“Survival” clauseb length is more than 10 years90/104

  1. aThe purpose of Denial of benefits clauses is to exclude from the scope of treaty protections mailbox or shell companies from a third state that does not have a bilateral treaty with the host state.

    bThe aim of this clause is to extend the treaty protection beyond its expiration or termination.

B Descriptions of Regulatory Measures

Table 4:

Descriptions of Regulatory Measures.

Regulatory measuresDescriptionsExamples
Unilateral cancellation and termination of contractThe investment contract is cancelled early and terminated by the host stateGelsenwasser v. Algeria; Rumeli v. Kazakhstan
Revocation or denial of licenses, permits and authorizationsRevocation of administrative license, permit and authorization necessary to conduct a project, including environmental permitsRSM v. Grenada; Methanex v. USA
Public tender regulationsAny change in public tender procedures which limit the investors’ rights to participate in the project or sign the contractBosca v. Lithuania; InterTrade v. Czech Republic
Direct expropriationNationalization or outright physical seizure of the private property in generalEni Dación v. Venezuela; Miminco v. Congo
Failure to enforce an award issued in favor of the investorFailure by the host state to enforce in its territory an award issued by a previous tribunal in favor of the investorNational Gas v. Egypt; GEA v. Ukraine
Trade regulationsAny regulation involving a ban on export and importNusa Tenggara v. Indonesia; Apotex v. USA (III)
Production regulationsAny regulation concerning ban or quantitative restriction on production, coerced production methods such as enforced labeling about public health or a ban on profitCargill v. Poland; Philip Morris v. Australia
Failure of the host state to protect investments from political violenceFailure on the part of the host state to protect private investment from politically motivated acts of war or civil disturbancePantechniki v. Albania; LESI v. Algeria
Supplementary obligations to contractual onesAny obligation outside the scope of the contract required by the host state during execution of the contractMobil and Murphy v. Canada (I); Jan de Nul and Dredging international v. Egypt
Suspension of non-tariff contractual obligationsThe host state does not fulfill its contractual obligations e.g. failure to deliver materials, sudden change to purchase of electricityRenco v. Peru; HEP v. Slovenia
Non-honoring of the payment obligation under the contractThe host state does not fulfill payment obligations under the contract (including payment of sovereign bonds)SCB v. Tanzania; SGS v. Paraguay
Tax and subsidy issuesThe nature of the dispute is tax-related measures (tax assessment, tax exemption), subsidies or state-aid measuresMicula v. Romania (I); Goetz v. Burundi (I)
Currency inconvertibility and currency transfer restrictionThe host state’s action or omission concerning inconvertibility from local currency into hard currency (capital, interest, principal, profits, royalties) or transfer restrictions of hard currency outside the countryImpregilo v. Argentina (II); Pioneer v. Argentina
Failure of the host state to supervise the operation of state-owned entitiesThe claim is based on the supervisory role of the host state. E.g. failure to prevent bankruptcy of the investor’s company, to protect investors from irregular transactions, to supervise the activities of the domestic court system which resulted in adjudication delay or mishandling of lawsuitsChevron and TexPet v. Ecuador (I); Anderson v. Costa Rica

C Correlation Matrix

Table 5:

Correlation Matrix.

Variable(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)
(1) No Experience1.000
(2) Bad prospect−0.1611.000
(3) No info0.251−0.6911.000
(4) Extreme−0.0210.169−0.2141.000
(5) Individual0.0300.019−0.0300.0611.000
(6) DutchBIT−0.0050.110−0.1200.033−0.0671.000
(7) G7 Investor−0.057−0.0870.125−0.105−0.006−0.3251.000
(8) Case strength−0.0500.048−0.063−0.048−0.0490.069−0.0651.000
(9) Export host (% of GDP)−0.046−0.047−0.1080.0910.0730.112−0.120−0.0011.000
(10) GDP growth host−0.0340.097−0.0100.052−0.038−0.073−0.0050.0100.0401.000
(11) Rule of law host0.053−0.1630.092−0.0390.052−0.0040.103−0.0410.149−0.1291.000
(12) GDP host (log)−0.0230.0150.026−0.088−0.073−0.0330.128−0.067−0.315−0.0350.4101.000

  1. The sample consists of 450 treaty-based disputes brought before international investment arbitration in 1996–2016. The unit of analysis is dispute or case. The binary dependent variable is Settlement. Case Prospect means the outcome anticipated by the host state. The base level of the 3-level categorical variable is Good prospect. Correlation coefficients of industry, filing year, region and institution dummies are not reported.

D Multicollinearity Diagnostics

Table 6:

Multicollinearity Diagnostics.

VariableVIF1/VIF
No experience1.530.65
Bad prospect2.450.41
No info3.100.32
Extreme1.260.80
Individual1.220.82
DutchBIT1.340.75
G7 investor1.470.68
Case strength1.240.81
Export host (% of GDP)2.210.45
GDP growth host2.070.48
Rule of law host3.290.30
GDP host (log)2.250.45
Mean VIF5.67

  1. The sample consists of 450 treaty-based disputes brought before international investment arbitration in 1996–2016. The unit of analysis is dispute or case. The binary dependent variable is Settlement. Case Prospect means the outcome anticipated by the host state. The base level of the 3-level categorical variable is Good prospect. VIF, 1/VIF values of industry, filing year, region and institution dummies are calculated but not reported. A VIF value that is higher than 10 indicates a multicollinearity problem.

E Robustness Checks

Table 7:

Robustness Checks.

(1)(2)(3)(4)
ProbitOLSProbitProbit
BaselineExc.ARG-VENGrouping by eco.dev
No experience0.147***

(0.053)		0.116**

(0.050)		0.135**

(0.054)		0.118**

(0.053)
Case prospect (Base=Good prospect)
 Bad prospect0.136***

(0.048)		0.129**

(0.051)		0.136***

(0.052)
 No info0.135**

(0.061)		0.142**

(0.063)		0.094

(0.064)
Extreme−0.172***

(0.048)		−0.152***

(0.045)		−0.138***

(0.053)		−0.180***

(0.047)
Individual−0.214***

(0.067)		−0.132***

(0.049)		−0.190***

(0.066)		−0.211***

(0.068)
DutchBIT0.242***

(0.071)		0.214***

(0.076)		0.258***

(0.075)		0.249***

(0.070)
G7 investor−0.030

(0.050)		−0.033

(0.046)		−0.011

(0.051)		−0.023

(0.049)
Case strength0.055

(0.047)		0.045

(0.046)		0.035

(0.050)		0.064

(0.047)
Export host

(% of GDP)		−0.001

(0.002)		−0.000

(0.001)		0.001

(0.002)		−0.001

(0.002)
GDP growth host0.746***

(0.214)		0.602***

(0.156)		0.577**

(0.248)		0.846***

(0.219)
Rule of law host−0.070

(0.047)		−0.054

(0.039)		−0.111**

(0.052)		−0.072

(0.046)
GDP host (log)−0.042**

(0.018)		−0.030*

(0.016)		−0.037**

(0.018)		−0.041**

(0.017)
Case prospect 2 (Base=Good prospect)
Bad prospect0.064

(0.043)
No info0.157

(0.110)
Intercept1.070***

(0.322)
DummiesYesYesYesYes
Observations450450387450

  1. Columns 1, 3 and 4 present marginal effects from Probit models. In Column 3, the model excludes cases in which Argentina and Venezuela are respondent states. In Column 4, the model uses Case Prospect 2 to assess the prospect of the case by observing the outcomes of similar disputes in the same country income group. * indicates p < 0.10, ** indicates p < 0.05 and *** indicates p < 0.01.

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Supplementary Material

The online version of this article offers supplementary material (https://doi.org/10.1515/rle-2019-0046).

Published Online: 2020-11-13

© 2020 Walter de Gruyter GmbH, Berlin/Boston

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  1. Frontmatter
  2. Articles
  3. Equilibria Under Negligence Liability
  4. Does an Inclusive Citizenship Law Promote Economic Development?
  5. The Effects of Enforcement on Corporate Environmental Performance: The Role of Perceived Fairness
  6. Economic Analysis of Accident Law: A New Liability Rule that Induces Socially Optimal Behaviour in Case of Limited Information
  7. To Settle or to Fight to the End? Case-level Determinants of Early Settlement of Investor-State Disputes
  8. The (Mixed) Effects of Minimum Asset Requirements When There is a Possibility of Technological Change
  9. The Effect of Constitutional Commitment to Social Security on Social Expenditure Schemes
  10. Case Note
  11. Who Bears an Employee’s Special Annual Payment?
  12. A Note on the Article by Mark Ramseyer, published in RLE 2020
https://doi.org/10.1515/rle-2019-0046
Schlagwörter für diesen Artikel
investor-state dispute; arbitration; settlement; economic analysis

Artikel in diesem Heft

  1. Frontmatter
  2. Articles
  3. Equilibria Under Negligence Liability
  4. Does an Inclusive Citizenship Law Promote Economic Development?
  5. The Effects of Enforcement on Corporate Environmental Performance: The Role of Perceived Fairness
  6. Economic Analysis of Accident Law: A New Liability Rule that Induces Socially Optimal Behaviour in Case of Limited Information
  7. To Settle or to Fight to the End? Case-level Determinants of Early Settlement of Investor-State Disputes
  8. The (Mixed) Effects of Minimum Asset Requirements When There is a Possibility of Technological Change
  9. The Effect of Constitutional Commitment to Social Security on Social Expenditure Schemes
  10. Case Note
  11. Who Bears an Employee’s Special Annual Payment?
  12. A Note on the Article by Mark Ramseyer, published in RLE 2020
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