Reconceptualizing counterclaim assessment in investment treaty arbitration: a discourse on fairness through Rawlsian justice theory

Abstract

The article delves into the intricate dynamics of counterclaims within the Investor-State Dispute Settlement (ISDS) system. It critically evaluates the asymmetry and fairness concerns associated with ISDS, advocating for a recalibrated approach through the lens of Rawlsian justice. The article further explores the viability of counterclaims as a mechanism to address the imbalances between investors and host states, underscoring the necessity for a more equitable legal framework. By integrating John Rawls’ Theory of Justice, the article proposes a novel interpretative paradigm that aims to enhance the fairness and legitimacy of counterclaims in ISDS. This approach seeks to balance the rights and obligations of involved parties, ensuring a just resolution of disputes while fostering a fairer arbitration environment.

INTRODUCTION

International investment arbitration was originally designed and crafted as an alternative to the diplomatic protection,¹ marking a notable advancement in the realm of depoliticized dispute resolution.² Moreover, Investor-State Dispute Settlement (Hereinafter ‘ISDS’) alleviates the need for foreign investors to exhaust local remedies in the host state and helps to mitigate the inherent imbalance that a foreign investor faces against an entire state. The fundamental shift in this paradigm is the pursuit of fairness in protecting foreign investments.³ In light of this, ISDS offers a comparatively fair platform, enabling investors to fully engage in arbitration without the influence of extraneous, non-investment factors.

However, in recent years, ISDS faced a spate of criticisms targeting on the fairness.⁴ The main allegation concentrates on the asymmetric nature of the ISDS,⁵ and such critics pointed out that the foreign investors may take advantage of ISDS and potentially imposing detrimental side effects on local communities. These adverse impacts could range from environmental degradation⁶ to the exploitation of labour.⁷ At this juncture, the host state often resorts to domestic judicial system for justice,⁸ potentially leading to parallel proceedings resulting in adjudicatory fragmentation.⁹ Nonetheless, it is crucial not to ignore the domestic forum as the most practical and readily available option for the host state to seek redress, whose elimination would result in a lack of justice administration when investors’ misconduct recurs and goes unresolved.¹⁰ However, achieving fairness in dispute resolution is not impossible. Therefore, it is apparent that the essence lies in balancing the rights within the ISDS system between the investor and the host state.

In response to the prevailing imbalances and associated challenges within the ISDS system, the concept of counterclaims has garnered increasing attention as a potential solution to recalibrate the skewed dynamics between investors and host states.¹¹ Counterclaims offer a mechanism for host states to address damages arising from the misconduct of foreign investors, providing an avenue for both redress and deterrence.¹² Additionally, counterclaims serve as a means to avoid multiple, fragmented legal proceedings, thereby enhancing judicial economy and coherence in dispute resolution.¹³ Recognizing these advantages, the international legal community has progressively initiated discussions to define and refine the scope and specifics of counterclaims within the ISDS framework. These efforts aim to establish clear parameters for the application of counterclaims, ensuring they effectively contribute to a more balanced and equitable ISDS system. For instance, in 2019, the Institut du droit international promulgated its decision regarding the ‘Egalité des parties devant les tribunaux internationaux d’investissements’ (Equality of Parties before international Investment Tribunals).¹⁴ Article 6 of this landmark document explicitly affirms the admissibility of counterclaims in the ISDS, recognizing their underexplored potential to foster equality within the system.¹⁵ And the following paragraphs provide a detailed exposition of the criteria necessary to initiate a counterclaim. These include jurisdictional prerequisites, a sufficient nexus between the claim and counterclaim, and specific requirements under the ICSID Convention.¹⁶ Moreover, the UNCITRAL Working Group has also placed counterclaims on its agenda as part of broader ISDS reforms.¹⁷ However, substantive discussions on counterclaims remained limited. Nonetheless, these developments collectively underscore the growing recognition of the legitimacy and practicality of counterclaims within the ISDS framework.

However, the arbitral practice evinced a rather different story. Statistical data indicate that most counterclaims initiated by host states are ultimately rejected,¹⁸ with only a minority successfully reaching the award stage.¹⁹ This situation is exacerbated by inconsistent interpretative methodologies and ambiguous normative standards, which significantly undermine the effectiveness of these counterclaims. Consequently, some scholars have raised concerns about the fairness of counterclaims, arguing that investment treaty arbitration remains asymmetric even in presence of counterclaims.²⁰ A critical barrier for host states is obtaining consent from investors, which is often a formidable and elusive requirement, rendering counterclaims more illusory than practical.²¹ On the contrary, the ability to file counterclaims might lead to the risk of over-protection,²² as they could potentially be misused as a strategy to evade obligations.²³ Furthermore, there exists a plausible risk that host states might introduce entirely new claims under the guise of ‘countering the investor’, adding another layer of complexity to the arbitration process. In essence, attempting to rectify an imbalance in the original claim with an equally unfair counterclaim is not a justifiable approach. This underscores the need for a more balanced and equitable framework in investment treaty arbitration.²⁴

To address the prevalent skepticism, numerous efforts have been focused on developing a fair interpretative paradigm through which the counterclaim could function to level the playing field as expected.²⁵ Nevertheless, existing scholarly discourses predominantly analyse specific provisions concerning the activation conditions of counterclaims, neglecting a comprehensive exploration of the concept of ‘fairness’ itself.²⁶ These analyses detail interpretative methodologies but fall short in directly engaging with critiques or substantiating why such paradigms are inherently fair or conducive to fair outcomes. Consequently, there is an urgent need for a robust set of criteria that can closely link interpretative methods to the tangible manifestation of fairness. This approach would provide a clearer framework for evaluating the equity of counterclaims in investment treaty arbitration.

In the circumstances, this article aims to directly confront the doubts and challenges surrounding the fairness of counterclaims. It will shine a light on the appraisal of the current framework, particularly since the legitimacy of the counterclaim mechanism within the ISDS system has been affirmed by various norms. Section ‘UNDERSTANDING COUNTERCLAIMS IN ISDS’ provides a summary of the consensus and the controversies surrounding counterclaims, encompassing both arbitral practices and academic discourse. This sets the stage for the article’s central theme. Section ‘RAWLS’ THEORY OF JUSTICE AS FAIRNESS AND ITS RELEVANCE TO ISDS DISPUTES’ introduces the primary analytical framework for the article–John Rawls’ Theory of Justice, with a specific focus on the principle of ‘fairness as justice’. This section also discusses the relevance and applicability of Rawls’ theory to the specific issues of counterclaims in ISDS. Section ‘ASSESSING THE VALIDITY OF COUNTERCLAIMS WITHIN RAWLS’ THEORY OF JUSTICE: A PARADIGMATIC EVALUATION’ categorizes and examines the predominant interpretative approaches to the legitimacy of counterclaims in ISDS arbitrations. These include the ‘Consent-based approach’, the ‘Subject-based approach’ and the ‘Integrated approach’. Following this categorization, the article applies Rawls’ justice theory to assess the fairness of these interpretative paradigms. Section ‘CONCLUSION’ concludes.

UNDERSTANDING COUNTERCLAIMS IN ISDS

Nature of counterclaims

As a concept derived from domestic law, counterclaims are perceived as fundamental element in the administration of justice and are typically enshrined in various procedural laws.²⁷ In terms of international law, the concept of counterclaims is similarly recognized across numerous international courts and tribunals. A quintessential example can be found in Article 80 of the Rules of the International Court of Justice (ICJ), which articulates that a counterclaim is admissible provided it falls within the court’s jurisdiction and bears a direct and substantial connection to the principal claim.²⁸ In the Oil Platforms case, ICJ determined that the counterclaim presented by the USA was within its jurisdiction, despite ongoing disputes regarding the subject matter.²⁹ Another example is the Bosnian Genocide case, the court rejected the arguments against the admissibility of the counterclaim and ultimately proceeded to adjudicate on the matter.³⁰ Counterclaims also play a significant role in international commercial arbitration. For instance, Article 23 of the 2021 UNCITRAL Arbitration Rules,³¹ along with Article 12 of its affiliated expedited rules,³² clearly delineates the provisions for counterclaims. Similarly, the 2021 ICC Arbitration Rules delegate the determination of counterclaims to the specific arbitration agreement.³³ This approach is also mirrored in the 2018 HKIAC Administered Arbitration Rules, which align with the ICC’s stance in granting the arbitration agreement a pivotal role in deciding the handling of counterclaims.³⁴

Within the framework of ISDS, a counterclaim is a legal action initiated by the host state in response to an investor’s alleged misconduct in violation of applicable laws, concurrently with the original claim.³⁵ Although it may appear to function as a defence, and indeed may serve defensive purposes to an extent,³⁶ a counterclaim is substantively distinct from a mere defence. It represents an independent request or claim asserted by the host state.³⁷ Similar to other dispute resolution mechanisms, specific and well-defined rules exist to govern the legitimacy and application of counterclaims. For instance, ICSID sets forth explicit criteria in this regard. Article 46 of the ICSID Convention, coupled with Rule 48 of the ICSID Arbitration Rules (2022), outlines the fundamental prerequisites that host states must meet to file a counterclaim. These provisions have garnered considerable consensus in both theoretical and practical legal spheres, underscoring their significance in the realm of international arbitration.³⁸

Further elaboration on these principles is found in the Anglo American PLC v. Bolivarian Republic of Venezuela award, which emphasizes the substantive aspects of such prerequisites. This award posits that a counterclaim is permissible under two conditions: (i) it has not been expressly excluded by the parties, and (ii) it falls within the scope of the arbitration agreement between the parties.³⁹ Additionally, cases like Tethyan Copper Company v. Pakistan⁴⁰ and Teinver v Argentina⁴¹ stress the importance of a contextual interpretation. This perspective asserts that beyond meeting the criteria specified in the provision, a legitimate counterclaim must also fulfil the basic elements of a standard claim under ICSID arbitration, particularly compliance with Article 25 of the ICSID Convention regarding the investor’s nationality and the investment-related nature of the dispute. Scholars have further theorized and abstracted the elements observed in investment arbitration practice into two key prongs.⁴² The first is the jurisdictional hurdle, requiring confirmed consent from both parties prior to adjudication⁴³; the second is described as the admissibility threshold, which pertains to the relevance and scope of the subject matter.⁴⁴ While the specific criteria and methods of assessment within these prongs continue to generate debate as discussed later in this article, there is a consensus in both theory and practice about the fundamental structure and essential elements that constitute an effective and legal counterclaim in the realm of international investment arbitration.

The viability of counterclaims in ISDS

The practicality of counterclaims in the ISDS context, particularly under Article 46 of the ICSID framework, is widely recognized but faces implementation challenges due to Bilateral Investment Treaties (BITs) typically focusing on investor rights only and not obligations.⁴⁵ This creates a dilemma for host states who, even after navigating jurisdictional issues, may lack a legitimate cause of action against non-state entities.⁴⁶ Two key reasons underpin this issue. First, international law’s state-centric model typically avoids imposing direct obligations on non-state entities, a principle rooted in Vattel’s works⁴⁷ and upheld in key cases like Mavrommatis Palestine Concessions,⁴⁸  Israeli Wall Opinion,⁴⁹ and Nicaragua.⁵⁰ These rulings affirm that individuals lack direct rights under international law, complicating host states’ ability to assert counterclaims against non-state actors.

The question of whether investors bear responsibilities akin to those of states, particularly in the realm of human rights protection, reignites a longstanding debate in international law. Historically, states were seen as the sole entities capable of assuming human rights responsibilities at the onset of the human rights movement.⁵¹ However, the evolution of international relations and the decentralization of global power have led to the emergence of influential non-state actors, notably transnational corporations. Some of these entities wield power comparable, if not greater than, to that of states, challenging the existing paradigm of state-centric international obligations.⁵² Despite this shift, there remains hesitancy in fully recognizing non-state actors as bearers of direct international human rights obligations.⁵³ This perspective is exemplified by the United Nations Human Rights Committee’s General Comment, which explicitly states that non-state actors do not directly bear international human rights obligations.⁵⁴ Similarly, there is a prevailing view that investment tribunals possess limited jurisdiction to adjudicate human rights violations committed by non-state actors.⁵⁵

The second contributing factor to the complexity of counterclaims in ISDS is the minimal regulation of investors’ obligations in early BITs. Initially, many developing countries, prioritizing economic growth, neglected human rights and environmental concerns in BITs, leading to a scarcity of provisions regarding investor duties.⁵⁶ Even recent BITs often contain only non-binding ‘best effort’ clauses. For example, the India Model BIT (2015) uses non-committal language in its ‘Corporate Social Responsibility’ section, underscoring its advisory nature.⁵⁷ ISDS tribunal interpretations, as seen in cases like Spyridon Roussalis v. Romania, have reinforced this stance, emphasizing that BITs impose obligations solely on states, not on investors.⁵⁸ Later, the Gustav FW Hamester v. Ghana tribunal confirmed this opinion and reiterated in the final award that the investor was not a party to the treaty and the treaty did not provide for obligations of investors.⁵⁹ This scenario makes it exceedingly difficult for host states to advance counterclaims without explicit treaty provisions outlining investors’ responsibilities.

Recent developments

While the previously discussed factors pose significant challenges to the viability of counterclaims in ISDS, it is essential not to view these issues as static. As non-state actors, particularly corporations, increasingly influence the international community, there is a growing urgency to reassess their legal status. The Texaco v. Libya case highlights the need to acknowledge specific international capacities of private contracting parties.⁶⁰ Recent decades have seen the development of various instruments and guidelines aimed at regulating the conduct of non-state actors. A prime example is the UN Guiding Principles on Business and Human Rights, which delineates corporate responsibilities regarding human rights abuses. Other significant contributions include the OECD Guidelines for Multinational Enterprises and the UN Principles of Responsible Investment, which collectively signal progress towards a more comprehensive and effective regulatory framework.⁶¹

Although these instruments are non-binding and have faced skepticism regarding their effectiveness, they have increasingly been referenced in legal adjudications. For instance, the Biwater Gauff v. Tanzania tribunal considered the protection of human rights for local communities as a crucial trial factor.⁶² While it may be premature to claim that international law fully recognizes non-state entities as independent legal subjects, corporate status no longer serves as an impenetrable shield against international responsibilities. This shift marks a significant development in the accountability of transnational corporations within the international legal system and the concept of investor liability is increasingly being integrated into BITs through various clauses.⁶³ For example, the Dutch Model BIT stipulates that a tribunal should consider any non-compliance by the claimant with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.⁶⁴ This ‘reference application model’ is becoming more prevalent in modern BITs. Additionally, some BITs explicitly mention ‘corporate social responsibility’. Notable examples include Article 12 of the Argentina–Qatar BIT (2016),⁶⁵ Article 18 of the Morocco—Nigeria BIT (2016),⁶⁶ and the preamble of the Hungary—Kyrgyzstan BIT (2020).⁶⁷ These provisions directly address CSR and its implications within the BIT framework.

Another significant development is the linkage of investor obligations to domestic regulations, often achieved through ‘compliance with domestic law’ provisions.⁶⁸ Such clauses mean that if investors fail to adhere to the regulations of the host state, the state can seek redress through the ISDS mechanism. This evolving landscape in BITs reflects a broader trend towards embedding CSR and human rights considerations into international investment agreements, thus providing host states with more robust grounds for advancing claims in ISDS proceedings. Meanwhile, recent cases have highlighted the critical intersection between investor rights and environmental protection,⁶⁹ with the Urbaser v. Argentina award standing as a notable example. In this case, the tribunal referred to the 1948 Universal Declaration of Human Rights and the 1966 International Covenant on Economic, Social, and Cultural Rights to uphold human rights to water and sanitation. While acknowledging that international human rights law does not directly impose duties on private companies, the tribunal emphasized their negative obligation to protect human rights,⁷⁰ a stance seen as a pioneering development in defining the boundaries of investor behaviour.⁷¹ Subsequent interpretations and rulings have increasingly considered the negative impacts of investor misconduct and their resulting liabilities. For instance, the tribunal in Aven v. Costa Rica acknowledged the necessity for investors to comply with both international environmental law and domestic legal requirements.⁷²

However, it is premature to claim that these developments have radically transformed the structure of ISDS. Most BITs are still primarily designed to protect investors and their investments. Nevertheless, the evolving legal landscape signifies that BITs are no longer solely about investor rights, but they also encompass certain obligations for investors. In summary, theoretically, with the verification of consent and the establishment of a connection to the primary claim, host states are empowered to file counterclaims. Regarding the practical enforcement of these counterclaims, while the subjectivity of non-state investors remains a topic of debate and skepticism, this does not absolve investors from accountability for their misconduct. Therefore, it is both feasible and justified for host states to initiate counterclaims against foreign investors who fail to adhere to the stipulations of domestic or international law.

Key highlights

While counterclaims in ISDS are theoretically feasible, their practical application remains challenging due to ambiguity in key criteria, particularly consent and connection. The assessment of consent is highly contentious. Some argue that accepting jurisdiction for a primary claim implies consent to counterclaims,⁷³ while others assert that consent for both must be distinct, creating significant uncertainty for host states and tribunals.⁷⁴ The requirement of connection between primary claims and counterclaims remains ambiguous. Arbitral practice distinguishes between legal and factual connections,⁷⁵ but no tribunal has set clear criteria for assessing sufficiency.⁷⁶ The debate continues over whether these connections should be considered cumulatively or alternatively.⁷⁷ As a result, despite recognizing the importance of counterclaims, uncertainty in their application persists, limiting their potential to address ISDS imbalances.

The analysis highlights that challenges in adjudicating counterclaims in ISDS stem more from interpretative approaches than from the mechanism itself. Diverging views on consent reflect broader inconsistencies in interpretative paradigms. A policy-oriented approach favours a flexible consent standard, emphasizing the connection between primary claims and counterclaims to achieve ISDS’s goals of balancing investor-host state relations and promoting judicial economy. Advocates argue that tribunals should prioritize policy considerations over strict consent requirements.

More in depth, these disputes reflect broader inconsistencies in interpretative paradigms. The preference for a looser standard in identifying consent aligns with a policy-oriented interpretative approach. Advocates of this view see the operation of counterclaims as essential to achieving the ISDS’s original objective of rebalancing the relationship between investors and host states, as well as promoting judicial economy. They argue that the connection between the primary claim and the counterclaim is more critical than proving a separate set of consents, urging tribunals to emphasize policy values. Conversely, others firmly believe that consent is the cornerstone of arbitration legitimacy, with tribunal jurisdiction entirely derived from the disputing parties’ mutual consent. From this perspective, confirming the investor’s explicit intention regarding the counterclaim is crucial for ensuring the legitimacy and fairness of the arbitration process. They also assert that the text of the BIT most clearly reflects the parties’ agreement, hence prioritizing policy over the explicit agreement is unconvincing. Emerging from these two dominant schools of thought is a middle-ground approach, advocating for a holistic perspective that combines elements from both when evaluating counterclaims. This approach seeks to reconcile the divergent views and offers a more balanced pathway for tribunals to navigate the complexities of counterclaim adjudication in ISDS.

This article aims to realign the focus of counterclaim adjudication in ISDS towards achieving fairness, an objective long pursued but often overlooked in existing research. Previous studies have extensively debated the merits and drawbacks of various interpretative standards, yet have neglected the fundamental purpose of these assessments, which should be guided by the principle of fairness. Consequently, the pivotal consideration in selecting criteria for each constitutive element of a counterclaim should be its ability to uphold fairness. To advance this objective, it’s crucial to determine which interpretative methods most effectively promote fairness in adjudication. A prerequisite to this endeavour is defining ’fairness’ in a concrete and applicable manner. This involves developing a methodology that can transform an abstract concept like fairness into tangible factors. By shifting the discussion from isolated debates over standards for individual elements of counterclaims to a more holistic examination of interpretative paradigms, a more comprehensive understanding can be achieved. This article proposes to utilize John Rawls’ Theory of Justice as a framework for evaluating these interpretative approaches. This involves first providing an overview of Rawls’ theory and assessing its applicability in the context of ISDS. Subsequently, each interpretative paradigm will be scrutinized through the lens of Rawlsian fairness. This approach aims to provide a more nuanced and principled basis for evaluating counterclaim standards, focusing on achieving a fair and just resolution in ISDS proceedings.

RAWLS’ THEORY OF JUSTICE AS FAIRNESS AND ITS RELEVANCE TO ISDS DISPUTES

The applicability of Rawls’ Theory of Justice in ISDS

Rawls conceptualized his theory of justice in the context of social cooperation, suggested that social justice principles should ‘provide a way of assigning rights and duties in the basic institutions of society … and … define the appropriate distribution of the benefits and burdens of social cooperation’.⁷⁸ Rawls’ focus is on the coordination and distribution of rights among participants in societal affairs. Rawls’ justice-as-fairness framework consists of two key principles. The first is the principle of ‘equal basic liberty’,⁷⁹ and the second combines ‘fair equality of opportunity’ with the ‘difference principle.’⁸⁰ These are principles that rational and free individuals, considering their own interests, would agree upon in an initial position of equality with others.⁸¹ Together, Rawls argues, these principles promote the values of equal protection, civil liberties, fair equality of opportunity, social equality, and reciprocity.⁸² The first principle establishes that, ‘each person is to have an equal right to the most extensive scheme of basic liberties compatible with a similar scheme of liberties for others.’⁸³ The second principle stipulates that ‘social and economic inequalities are to be arranged so that they are both (a)reasonably expected to be to everyone’s advantage [fair equality of opportunity], and (b) attached to positions and offices open to all [difference principle].’⁸⁴

In Rawls’ hypothetical ‘original position of equality’, individuals are asked to imagine themselves in a state of ignorance when making decisions that affect others. This means they operate behind a ‘veil of ignorance,’⁸⁵ where they are unaware of their own social status, wealth, intelligence, luck, natural talents, or other personal characteristics.⁸⁶ In this scenario, the decision-maker could very well be among the least advantaged members of society. Since no one is aware of their own circumstances, they cannot design principles that would benefit themselves specifically.⁸⁷ As a result, the principles of justice emerge from a fair agreement or compromise. In this context, decision-makers, lacking knowledge of their own position in society, are more likely to make choices that are equitable for all, including the most disadvantaged.⁸⁸ Although Rawls conducted his thought experiment under the autarkic assumption of a ‘closed system isolated from other societies,’ he did not entirely dismiss the potential application of his theory to private contracts. He saw no inherent conflict in extending his definition of justice to cover ‘traditional’ justice, which involves individual actions and entitlements.⁸⁹ He himself noted, however, that his theory of justice could be extended to actions within the society, including determining the content of its laws, shaping its institutions, guiding court decisions and judgments, and influencing the attitudes of its members.⁹⁰ In fact, since its unveiling in 1971, Rawls’s Theory of Justice as fairness has received copious attention across disciplines, including law.⁹¹

While BITs establish fundamental guidelines for the relationship between investors and host states, both parties retain significant autonomy in negotiating specific investment projects. This autonomy allows for the negotiation of contract terms, investment conditions, and dispute resolution mechanisms. Such flexibility aligns with Rawls’ emphasis on the importance of achieving agreements through negotiation within a framework of social cooperation. The cooperative framework enables both investors and host states to reconcile their respective interests through dialogue within an established system of international norms, ultimately formulating contract terms that protect investor rights while accommodating the developmental priorities of the host state. This degree of autonomy allows the ISDS mechanism to operate within a cooperative social framework, where both parties, through flexible mechanisms, are able to reach mutually advantageous agreements tailored to specific socio-economic contexts. This process not only reflects Rawls’ Theory of Justice concerning social cooperation and distributive fairness but also provides an effective means for addressing the complex socio-economic interactions that arise in the context of globalization.

There is nothing bars the extension of his theory to international investment arbitration.⁹² Building on Professor Emmanuel Gaillard’s idea of defining international arbitration as an emerging ‘system,’ we can draw a parallel to the original Rawlsian paradigms. International investment arbitration, like Rawls’ theory, can be understood as a set of social arrangements, which can be ‘viewed as a body of norms sufficiently organized, comprehensive, and effective enough to qualify as a system.’⁹³ To recall Lord Wilberforce’s remarks made during the adoption of the English Arbitration Act of 1996, some might argue that international arbitration constitutes a legal order in its own right. This is the notion behind the French Court of Cassation’s reference to arbitrators as ‘international judges.’⁹⁴

International investment arbitration is characterized by various elements of social cooperation. The first relevant fact is the existence of an extensive body of rules generated at an international level and governing various aspects of international investment arbitration. The fact that parties and arbitrators increasingly rely on these rules and guidelines illustrates two key phenomena. First, it highlights the growing uniformity of arbitration proceedings. Second, and perhaps more significantly, this extensive normative activity underscores the international, if not universal, nature and origin of the rules governing international arbitration.⁹⁵ The second fact is international investment arbitration as a dispute resolution mechanism is heavily used by parties around the world. According to the Investment Policy Hub, the total number of treaty-based ISDS cases has reached 1,332.⁹⁶ It is also estimated that between 3,000 to 3,400 treaties globally contain ISDS provisions, highlighting the widespread inclusion of such agreements in international investment treaties.⁹⁷

While BITs establish fundamental guidelines for the relationship between investors and host states, both parties retain significant autonomy in negotiating specific investment projects. This autonomy allows for the negotiation of contract terms, investment conditions, and dispute resolution mechanisms. Such flexibility aligns with Rawls’ emphasis on the importance of achieving agreements through negotiation within a framework of social cooperation. The cooperative framework enables both investors and host states to reconcile their respective interests through dialogue within an established system of international norms, ultimately formulating contract terms that protect investor rights while accommodating the developmental priorities of the host state.

ISDS, as a mechanism for dispute resolution, supported by states through narrowly defined judicial controls and oversight, should be understood as a manifestation of ‘rational selection.’⁹⁸ In this framework, states and investors deliberately choose ISDS mechanisms based on their perceived effectiveness and suitability for resolving particular investment disputes. This selection process reflects a rational and strategic decision-making approach, wherein actors opt for institutions that are most likely to achieve favourable and efficient outcomes. Consequently, ISDS emerges not merely as a legal tool, but as an institution shaped by both legal pragmatism and the pursuit of optimal dispute resolution strategies.

Thus, Rawls’ paradigm of fairness in social cooperation arrangements (although theorized by Rawls at a greater societal level of abstraction) can be conceptually applied to assess the fairness of the arrangements that state parties jointly select when opting to submit their disputes to international arbitration.⁹⁹ The principles underlying Rawls’ Theory of Justice as fairness can be extended to this context, as the cooperative nature of arbitration and the mutual agreement between state parties reflect key elements of fairness and equity in decision-making.

Rawls’ theory of intergenerational justice in counterclaims

The applicability of Rawls’ Theory of Justice under the circumstance of counterclaims is particularly relevant in Rawls’ discussions of intergenerational justice. Traditional social contract theory faces significant challenges when addressing justice between generations, as it is problematic to suggest that future generations, who have not yet been born, can meaningfully ‘consent’ to the terms of any given agreement. However, the abstract nature of Rawls’s ‘original position’ allows for an analysis that avoids these issues, as it operates at a higher level of generality and does not depend on actual consent.¹⁰⁰

Intergenerational justice is deeply intertwined with issues of environmental protection and sustainability. By extending Rawls’ ‘veil of ignorance’ hypothetical to the context of intergenerational resource conservation, we can gain valuable insights into how decisions about the use and preservation of natural resources should be made to ensure fairness between present and future generations.

[W]here members of society are ignorant about which generation they would be born into, they would in the original position, agree upon rules that ensure a condition of “permanent livability;” one that assures that sufficient resources are available for the sustenance of each succeeding generation.¹⁰¹

In ISDS, counterclaims often arise in situations where investors’ activities, such as large-scale infrastructure projects, mining, or natural resource exploitation, have adverse effects on the environment, public health, or local communities.¹⁰² These activities may generate short-term economic benefits but pose long-term risks and burdens that will affect future generations, such as environmental degradation, depletion of natural resources, or the undermining of sustainable development. Intergenerational justice, therefore, strengthens the case for allowing and encouraging state counterclaims in ISDS. It recognizes that the consequences of today’s investment activities are not confined to the immediate parties and time frame, but can have lasting impacts on the welfare of future generations. In this context, counterclaims act as a balancing tool to ensure that investors not only enjoy the benefits of their investments but also bear responsibility for the externalities they create, particularly those that disproportionately affect future populations. In addition, allowing counterclaims promotes a more equitable and comprehensive system of justice, where both the rights of investors and the duties they owe to the state and its citizens—both present and future—are recognized. This reflects a Rawlsian commitment to fairness, ensuring that the economic arrangements and dispute resolution mechanisms in ISDS are not exploitative or unjust to future generations who will inherit the consequences of today’s actions.

Therefore, from Rawls’ point of view, it is evident that fairness is a concept far from static and it needs to be assessed more in substance rather than just in form.¹⁰³ Applying this to counterclaims, we see that while BIT stipulations should be respected in evaluating a counterclaim’s validity, there’s room for interpretation when specific rules are unclear.¹⁰⁴ Counterclaims offer a vital opportunity for host states to defend their interests. Yet, an overly expansive approach to counterclaims can threaten the legitimacy of the arbitration process. Thus, finding a middle ground that accounts for both the rules and the need for rebalancing is essential. Rawls’ theory contributes uniquely to this dilemma by offering a framework to navigate between strict rule adherence and policy-driven flexibility. It provides a philosophical basis for assessing fairness in substance, not just in form, aligning with the fundamental goal of counterclaims in international arbitration: to reconcile investor rights with host state protections within a fair and just framework.

In this way, the fairness of a counterclaim is reflected in how rights and obligations are distributed based on the chosen interpretation. Rawls offers a framework for evaluating fairness in terms of the allocation and distribution of rights and obligations, which is a fundamental aspect of interpreting and managing counterclaims. The subsequent sections of the analysis will explore various interpretative paradigms for the prerequisites of filing a counterclaim. They will be assessed within the framework of Rawls’ concept of justice to determine whether they can be considered ’fair’ in terms of the distribution of rights and obligations they entail.

ASSESSING THE VALIDITY OF COUNTERCLAIMS WITHIN RAWLS’ THEORY OF JUSTICE: A PARADIGMATIC EVALUATION

Three analytical approaches for evaluating the legitimacy of counterclaims

Different tribunals may have differing interpretations of what constitutes sufficient consent, the necessary nexus between claims, and the scope of their jurisdiction, which are the key requirements for the states to effectively lodge a counterclaim. This part of the analysis aims to systematically organize the current methods of interpretation used in arbitral practice and those proposed by academic scholars. By examining these different approaches, we can gain a clearer understanding of how tribunals are navigating these critical aspects of counterclaims and the implications these interpretations have on the fairness and balance of the arbitration process.

The consent-based approach

The existing interpretive paradigms for counterclaims in international arbitration can be categorized into three distinct types. The first approach is heavily focused on the textual provisions of BITs. This perspective emphasizes the autonomy of the parties involved in arbitration and posits that the tribunal’s jurisdiction is fundamentally derived from their mutual consent.¹⁰⁵ As such, consent is considered the cornerstone of a counterclaim and its absence renders any other considerations irrelevant. This approach also links the subject matter of the counterclaim (jurisdiction ratione materiae) to the broader concept of consent.¹⁰⁶ In essence, whether a tribunal has the authority to hear a counterclaim hinges on whether the disputing parties have consented to its jurisdiction over that particular subject matter. This interpretative method can be referred to as the ‘consent-based’ or ‘rules-based’ approach.

One of the key arbitral decisions exemplifying this approach is the case of Spyridon Roussalis v. Romania. In this case, the tribunal notably dismissed a counterclaim due to the absence of explicit consent. The dispute involved an investment agreement between the claimant, the sole shareholder of a company, and a state-owned Romanian company. Romania alleged a failure to fulfil a promise of a USD 1.4 million investment after the agreement. The claimant argued that the dispute settlement clause in the BIT did not authorize the tribunal to adjudicate counterclaims from the host state. The majority of the tribunal concurred, emphasizing that consent to arbitrate must be determined by the dispute resolution clause in the BIT.¹⁰⁷ They interpreted the clause as authorizing jurisdiction only for claims by an investor against the host state, thereby excluding the tribunal’s jurisdiction over counterclaims by the host state.¹⁰⁸ This decision, among others, highlights a judicial preference for a strict, textually grounded interpretation of the criteria for accepting and adjudicating counterclaims in the context of international investment arbitration. This approach prioritizes the explicit agreements and stipulations outlined in BITs, placing significant weight on the predetermined rules and conditions agreed upon by the parties.¹⁰⁹

This approach was also evident in the case of Gavazzi v. Romania, which involved a dispute related to the privatization of a major steel company. Romania’s counterclaim based on allegations of breach of contract and related domestic regulations was ultimately rejected by the tribunal. They concluded that the Italy-Romania BIT (1990) explicitly allowed only investors to initiate arbitration, excluding host states from being eligible claimants.¹¹⁰ The tribunal refuted the notion that a host state’s right to file a counterclaim should be presumed unless explicitly excluded by the BIT.¹¹¹ They asserted that the text of the BIT was decisive, stating: ‘[w]here there is no jurisdiction provided by the wording of the BIT in relation to a counterclaim, no jurisdiction can be inferred merely from the spirit’ of the BIT.’¹¹² Consequently, under this paradigm, the tribunal’s jurisdiction over counterclaims hinges on the explicit wording of the BIT, reinforcing the principle that both parties must explicitly agree to allow counterclaims within the arbitration framework.

Proponents of the ‘consent-based’ paradigm in interpreting counterclaims in international investment arbitration heavily draw on a systematic interpretation of Article 46 of the ICSID Convention.¹¹³ They argue that Article 46 essentially reiterates the consent requirement found in Article 25 of the same convention. Article 25 mandates explicit consent to confer jurisdiction to the ICSID Centre. Therefore, the phrase ‘within the scope of the consent of the parties’ in Article 46 is interpreted as requiring an independent, explicit consent for counterclaims, going beyond the general consent stipulated in Article 25. Supporters of this viewpoint also refer to the Travaux préparatoires (preparatory works) of Article 46 to bolster their argument. The initial draft of Article 46 faced criticism for not providing clear guidance on the necessity of dual consent for counterclaims. In response to this critique, the chairman of the drafting committee, Aron Broches, added the phrase ‘provided that they are within the jurisdiction of the Center’ to the draft.¹¹⁴ This addition was seen as a clarification that the tribunal’s competence to hear disputes extends only to those already within the jurisdiction of the ICSID Centre as established by the mutual consent of the parties.

Moreover, the commentary on the draft of the ICSID Convention highlighted that Article 46 ‘does not extend the competence of the Tribunal to disputes not already within the jurisdiction of the Centre.’¹¹⁵ This interpretation implies that the consent for a counterclaim cannot be automatically inferred from the consent given for the primary claim. At the very least, the text of the BIT should explicitly indicate mutual agreement from both parties to include counterclaims within the scope of the arbitration agreement.

The subject-based approach

The ‘subject-based’ approach, as an alternative to the ‘consent-based’ paradigm, emphasizes the content and relevance of the counterclaim in relation to the primary claim. This perspective prioritizes the substantive link between the two claims over the explicit demonstration of consent.

A key case illustrating this approach is Saluka Investments B.V. v. Czech Republic. In Saluka, the tribunal interpreted the scope of the treaty to include any disputes related to investments, allowing for counterclaims in principle, provided they were closely related to the primary claim.¹¹⁶ This interpretation was underpinned by the tribunal’s emphasis on the interrelation of the subject matters of the claims rather than solely on explicit consent. Professor Michael Reisman, a leading proponent of this approach, articulated his perspective in a dissenting opinion in Spyridon Roussalis v. Romania. Reisman argued from a judicial economy standpoint, asserting that consent to ICSID jurisdiction inherently includes consent to Article 46, which permits counterclaims.¹¹⁷ He criticized the majority’s dismissal of the counterclaim due to the absence of explicit text in the BIT as contradictory to the objectives of international investment law.¹¹⁸

This viewpoint has gained support from both scholars and arbitral practice. Zachary Douglas, for instance, contends that a factual link to the investment dispute implies consent to arbitrate, thus falling within the tribunal’s jurisdiction.¹¹⁹ Mark N. Bravin and Alex B. Kaplan further argue that requiring express consent for counterclaims would contradict the ICSID Convention’s purpose of comprehensive dispute settlement.¹²⁰ In Goetz v. Burundi II, the tribunal echoed this sentiment, asserting that explicit mention of counterclaims in a BIT is not essential. The tribunal considered the acceptance of ICSID arbitration under the BIT as implicit consent to the scrutiny of counterclaims as per Article 46.¹²¹ The tribunal also highlighted practical considerations, noting that excluding counterclaims would force host states to rely solely on domestic courts, potentially leading to subsequent investment arbitrations.¹²² Finally, the tribunal in Goetz v. Burundi II assessed the subject matters of the claims, finding them closely related, thus accepting the counterclaim despite the absence of explicit textual consent. This case exemplifies the subject-based approach, where the substantive connection between claims is deemed sufficient to establish jurisdiction for counterclaims, aligning with the broader aims of the ICSID Convention and facilitating a more comprehensive resolution of investment disputes.¹²³

In summary, the subject-based approach to counterclaims in international investment arbitration is fundamentally driven by policy considerations. This perspective contends that overly stringent requirements for explicit consent in the rules governing counterclaims are impractical and unrealistic. Proponents of this approach argue that for counterclaims to serve their intended function effectively, tribunals should adopt a more pragmatic interpretation. This interpretation emphasizes the substantive correlation between the primary claim and the counterclaim. Instead of focusing narrowly on the explicit consent articulated in the treaty or BIT, this approach considers the broader context and the interconnected nature of the disputes at hand. The underlying rationale is that if the counterclaim is closely related to the subject matter of the original claim, it should be within the ambit of the tribunal’s jurisdiction.

The integrated approach

The emergence of a third paradigm, naming the ‘integrated approach’, suggests that the ‘consent-based’ and ‘subject-based’ approaches are not necessarily mutually exclusive and can be harmonized in assessing the validity of counterclaims. This perspective seeks to balance the functions of the two key elements: consent and substantive connection.

In arbitral precedents, there is a tendency to treat the consent element as a matter of jurisdiction and the connection between the claims as a test of admissibility. For instance, in the case of Metal-Tech Ltd v. Republic of Uzbekistan, the tribunal regarded the absence of consent for a counterclaim as depriving it of jurisdiction, thereby precluding any need to examine the counterclaim’s admissibility or its connection to the main claim under Article 46.¹²⁴ This approach underscores the traditional sequential evaluation mode, distinguishing jurisdiction (based on state consent to arbitrate) from admissibility (concerning the appropriateness of the specific claim presented). As Veijo Heiskanen notes, while jurisdiction pertains to the scope of the state’s consent to arbitrate, admissibility relates to whether the international tribunal should resolve the claim.¹²⁵

This perspective implies a deeply rooted view in arbitral practice that jurisdiction and admissibility are separate stages, each requiring its own assessment.¹²⁶ However, the distinction between them is often nuanced, sharing similar effects and challenging to delineate clearly.¹²⁷ Judge Higgins, in her Separate Opinion in Oil Platforms, noted that the requirement for a direct connection with the subject matter of the claim often brings a counterclaim into the same jurisdictional area, paving the way for a more holistic and integrated approach.¹²⁸ Proponents of the integrated approach, such as Mees Brenninkmeijer and Fabien Gélinas, argue that the focus should not be solely on whether a counterclaim falls within the initially consented jurisdiction. Instead, the key consideration should be whether the counterclaim is part of the main dispute over which the tribunal already has jurisdiction.¹²⁹ This approach suggests a more comprehensive assessment, considering both the consent and the substantive connection of the claims, thereby aligning with the broader objectives of fair and efficient dispute resolution in international investment arbitration.

The integrated approach also draws on the concept of incidental jurisdiction, which refers to an international adjudicatory body’s ability to address ancillary matters typically beyond its direct jurisdiction but connected to another matter within its purview.¹³⁰ This concept, while not explicitly stated in the statutes of many international judicial institutions, is often seen as part of the inherent competence of arbitrators and has been implicitly applied by various courts and tribunals.¹³¹

One historical example is the Chorzow Factory case, where the Permanent Court of International Justice accepted a counterclaim based on the Versailles Treaty, which was outside its direct jurisdiction but closely linked to the principal claim.¹³² Similarly, in investment arbitration, tribunals sometimes exercise incidental jurisdiction to examine contractual obligations before determining treaty breaches. For instance, in Strabag SE v. Libya, the tribunal conducted an in-depth review of several contractual claims before addressing violations of the BIT.¹³³

Proponents of the integrated approach argue that the jurisdictional basis established for a primary claim does not necessarily limit the jurisdiction for a counterclaim. They contend that none of the rules of arbitration, including those in investment arbitration, explicitly restricts jurisdiction in this manner. Thus, exercising incidental jurisdiction in the context of counterclaims does not conflict with the principle of consent.

In essence, the integrated approach advocates for a combined assessment of consent and subject matter. It posits that the two elements are not isolated but interrelated. What is crucial under this approach is not solely the consent or the subject matter of the counterclaim but the counterclaim in its entirety. The primary criterion is the connection between the main claim and the counterclaim. If the counterclaim is deemed an ancillary issue related to the main claim, the tribunal may apply incidental jurisdiction to address it. This approach offers a more nuanced and flexible framework for evaluating counterclaims, focusing on the overall context and interconnectedness of the disputes at hand.

The respective assessment of the various paradigms

The exploration of different interpretative methods for counterclaims in international investment arbitration reveals a complex dilemma. Each approach—whether it is consent-based, subject-based, or the integrated approach—has solid theoretical underpinnings and practical justifications, yet none emerge as clearly superior in all respects. Each paradigm has its strengths and limitations, and none can completely evade certain deficiencies. On the one hand, a strict adherence to the text of BITs (the consent-based approach) respects the explicit terms of the agreement but may unduly limit the host state’s ability to address grievances, potentially reducing the counterclaim to a mere formality and contradicting the principle of judicial economy.¹³⁴ On the other hand, prioritizing policy needs (the subject-based approach) or adopting a holistic consideration (the integrated approach) may extend the tribunal’s jurisdiction beyond what was originally intended by the disputing parties.¹³⁵

Moreover, while counterclaims serve as a mechanism for host states to address misconduct by foreign investors, this policy-driven consideration cannot completely overshadow the fundamental requirement of consent. Thus, neither extreme on the spectrum of interpretation leads to a fully fair outcome, necessitating a middle ground that can be evaluated through the lens of Rawls’ Theory of Justice. However, it’s important to recognize that Rawls’ theory, particularly the concept of the ‘veil of ignorance’, is an idealized model based on theoretical conditions that are quite removed from the realities of international investment arbitration. Rawls himself acknowledged the challenges in applying the veil of ignorance concept.¹³⁶ Consequently, it’s unlikely that any interpretative paradigm will align perfectly with Rawls’ theory. The following analysis, therefore, focuses on assessing the extent to which each interpretative method approximates this ideal, seeking a balance that aligns as closely as possible with the principles of fairness and justice envisioned by Rawls.

The scrutinization of ‘consent-based’ approach

The ‘consent-based’ interpretative approach in evaluating counterclaims centres around the notion of consent as the pivotal factor in determining the allocation of rights and obligations between disputing parties. To assess its fairness within the framework of Rawls’ Theory of Justice, we need to consider the original position before the signing of the agreement and its implications. And it is noteworthy that in this section the point of discussion shall dwell on the fairness of interpretative approach regarding the counterclaim but not that of counterclaim per se.

The first principle demands the equal access to the negotiation of contract concerning the distribution of rights and allocations. Under the ‘consent-based’, the prove of consent is the most paramount step to initiate a counterclaim. In terms of BIT, the equal access means the investor and host state shall sit at the same table and negotiate the consent provision together. However, it is far from reality. First of all, till January 2024 only less than 7.3 per cent of all the effective BITs explicitly mentioned ‘counterclaim’,¹³⁷ indicating that typically the bargaining process between the home state and host state over consent of counterclaim positioned on the periphery, which is equivalent to an exclusion of negotiation. Even if we focus on the minor positive side, it is still an indisputable truth that the foreign investor virtually plays a role of outsider as opposed to the two states in terms of the design of BIT. Since states typically pursue two strategies during BIT negotiations. In cases where the state possesses a standard BIT text, it might be formally crafted by the state and released to the public, or it could take a more informal form for the state’s internal use. In situations where there is no model BIT, states might look to their treaty experience for guidance.¹³⁸

Therefore, it is evident that the majority text of BITs is predominantly predetermined, leaving little space for negotiation even for two states, let alone for the investors. Just as arbitrator Sir Franklin Berman expressed in his dissent opinion, the foreign investors were described as ‘a stranger to the treaty negotiation’, for in the overwhelming majority of instances, they have no access to the bargain of BIT.¹³⁹

Secondly, when BIT lacks an explicit consent provision regarding the counterclaim, except for the word-by-word analysis as to the text, the travaux préparatoires will become a more robust source which many tribunals indeed validated in arbitral practice.¹⁴⁰ However, the situation has seen no amelioration and the investor cannot reach the material as well. In Perenco Ecuador Ltd v. Republic of Ecuador, the tribunal admitted that ‘[i]n investor-State arbitration, the private claimant does not speak for its State of nationality nor does it necessarily have access to the State’s records relating to the negotiating history of the treaty which it invokes.’¹⁴¹ Moreover, even if the investor requested the state to uncover the draft recording, rare of them could achieve their wishes. In HICEE B.V. v. The Slovak Republic, Judge Brower disagreed, noting the difficulty of obtaining any records of the travaux or other supplementary sources from the investor’s home State.¹⁴²

Thirdly, it is argued that the signature of BIT provides government the opportunity to consult investor and the state could solicit feedback from stakeholders,¹⁴³ then the investors and the related social group could make their voice heard. Nonetheless, it still remains an open question whether a state would genuinely consult its citizens and act in the ‘public interest’ when signing such an agreement.¹⁴⁴ The research suggests that in many instances, the treaties appear to have been drafted with insufficient forethought by the executive branch, and without useful safeguards, exceptions, and limitations.¹⁴⁵ Also, empirical study indicates that the most essential motivation for the government to accept the advice from the domestic group, especially for dispute settlement clause, lies in the consideration of political incentives. It means that only when the interest of investors resonates with political reward sought by the state, their proposal could be taken into account.¹⁴⁶ Furthermore, whether the public participation could really facilitate the conclusion of agreement is still in doubt. Therefore, this lack of negotiation space for investors suggests a deviation from the ideal of equal access envisioned in Rawls’ first principle. Moreover, the use of travaux préparatoires as a means of interpretation, which investors typically cannot access, further alienates them from the negotiation process.

We now turn the sight to the second principle, that is to say, without equal access to the negotiation procedure, whether the cost of the agreement will be imposed on the most disadvantaged party. Admittedly, it is rather difficult to tell who shall be treated as the most disadvantaged in a sociological context with various participants and complicated structures, while it seems a little easier to make the distinction under the context of counterclaim. As there exist only two sides in a contract, the counterclaim could only be lodged by host state, thus the investor gets involved passively even without consciousness of when it will occur. From this perspective, the investor could be labelled as the most disadvantageous party. Now, align with difference principle, we are required to apprise whether the distribution of the rights and obligations could indeed bring the investor some edge. If the tribunal prioritizes consent verification, investors may struggle to rebut the consent argument due to limited access to negotiation records¹⁴⁷ and travaux préparatoires. This situation potentially imposes a disproportionate cost on investors, contrary to Rawls’ difference principle, which advocates for arrangements that benefit the least advantage. This situation potentially imposes a disproportionate cost on investors, contrary to Rawls’ difference principle, which advocates for arrangements that benefit the least advantaged.

In summary, the ‘consent-based’ approach appears to diverge from Rawlsian fairness principles. It does not fully adhere to the first principle of ensuring equal negotiation access, nor does it align with the second principle of benefitting the least advantaged party. The approach’s emphasis on strict consent criteria may lead to practical difficulties for investors in countering claims, and its interpretation practices may not facilitate the fair and equitable resolution of disputes as envisaged in Rawls’ theory.

The assessment of ‘subject-based’ approach

The ‘subject-based’ approach, focusing on the connection between the counterclaim and the primary claim, raises unique considerations under Rawls’ Theory of Justice. This approach centres on the debate over the nature and extent of the connection between the claims, often divided between advocates of a legal nexus and those favouring a factual linkage. The ambiguity in defining ’sufficiently close’ linkage contributes to ongoing controversies in this area.

First and foremost, before we start from the first principle to evaluate the equal access, it is necessary to confirm the agreement under the limelight. Since the subject matter of two claims become the central element to decide the outcome, the stipulation concerning its content will naturally take the centre. Under the ‘subject-based’ approach, the relevant agreements for Rawlsian analysis are those clauses in BITs concerning types of investments and the scope of related disputes. Unlike dispute settlement provisions, investment clauses often inherently involve the investor’s input, as they are integral to transnational investment processes.¹⁴⁸ This involvement suggests a degree of participation by investors, albeit not fully equal access. The investors’ inherent knowledge of their investments allows for some level of participation, yet it may not reach the ideal of truly equal negotiation envisioned by Rawls.

Next, we need to investigate whether the second principle could complement the deficiencies. The choice of standard for establishing a connection between claims significantly impacts the allocation of the burden of proof. If the legal connection dominates the interpretation method, investor and host state shall contend with the similarity between the legal basis of counterclaim and that of original claim. As precedents exemplified, the counterclaims were always built upon the rules of domestic law,¹⁴⁹ which host states are more familiar with. This scenario could disadvantage investors, conflicting with Rawls’ second principle. Conversely, if a factual nexus is emphasized, focusing on the nature of the investment and related facts, investors might have an advantage due to their intimate knowledge of their investments.¹⁵⁰ This could fulfil the second principle, as it allows investors to leverage their familiarity with the investment in dispute resolution.

In summary, the ‘subject-based’ approach potentially offers a fairer outcome compared to the ‘consent-based’ approach. It better aligns with the first principle of Rawls’ theory, as investors are more likely to engage in discussions about investment clauses. Moreover, if tribunals prioritize factual connections in determining the validity of counterclaims, the approach can satisfy the second principle, addressing the needs and advantages of the least advantaged party, in this case, the investor. This approach provides a more balanced framework for assessing the fairness of counterclaims, considering both the nature of the dispute and the equitable distribution of burdens and benefits among the disputing parties.

The evaluation of the ‘integrated’ approach

The ‘integrated’ approach to counterclaims, where adjudication depends on the closeness of the counterclaim to the primary claim and the tribunal’s ability to exercise incidental jurisdiction, aligns closely with Rawls’ Theory of Justice, particularly in terms of procedural fairness and the equitable distribution of burdens.

Under the ‘integrated’ approach, the relevant agreement within the framework of Rawls’ theory emerges during hearings or case management conferences as outlined in Rule 31 of the ICSID Arbitration Rules (2022). Here, both the host state and investors are given the opportunity to clarify and narrow down the claims to be arbitrated. This process inherently satisfies Rawls’ first principle, as it encourages both parties to engage in the discussion and definition of the claims under the tribunal’s guidance.

Then we need to have a closer look at the second principle to scrutinize if such ‘integrated’ paradigm indeed brings some initiatives for the investors at the same time delving deeper into the factors relating to incidental jurisdiction, which include the nature of incidental issue and the necessity to rule.¹⁵¹ As for the nature of incidental issue, Coastal State Rights case heard before Permanent Court of Arbitration rendered an eloquent discussion. In this case, the dispute arose between Ukraine and Russia concerning the rights under Annex VII to the 1982 United Nations Convention on the Law of the Sea. Russia raised objections to the jurisdiction of the Tribunal, asserting that the core dispute revolved around sovereignty over land territory. According to Russia, Ukraine’s submissions would necessitate the Tribunal to initially determine ‘which State holds actual sovereignty in the pertinent maritime zones’, a determination contingent upon whether Ukraine has sovereignty over the land territory of Crimea or not. However, the court did not stand with Russia, it held that although the verification of the sovereignty attribution ‘may not be regarded a dispute concerning the interpretation or application of the Convention’, the dispositive nature of these ancillary issues convinced the court to adjudicate them.¹⁵²

The necessity to rule aims to check whether the substance of counterclaim shall be deemed as an indispensable step towards achieving the desired outcome. In Certain German Interests case, PCIJ was requested to settle a claim filed from Germany against Poland based on Article 23(1) Upper Silesia Convention providing PCIJ with jurisdiction over disputes regarding the ‘interpretation and application’ of the treaty. Nonetheless, Poland quoted a series of other conventions in the defence argument. In the face of the rejection of jurisdiction from Germany, PCIJ made an explicit explanation: ‘Now the interpretation of other international agreements is indisputably within the competence of the Court if such interpretation must be regarded as incidental to a decision on a point in regard to which it has jurisdiction.’¹⁵³ Since these two factors sometimes depict the same thing, a more ideal solution is to combine them while verifying the incidental jurisdiction.

Cases like Coastal State Rights and Certain German Interests demonstrate how tribunals consider the relevance and indispensability of ancillary issues in their rulings. Importantly, the investor, who initiates the original claim, largely shapes these incidental issues. The investor’s choices regarding the form and content of the claim define the scope within which the host state can respond. Thus, when applying the ‘integrated’ approach, the host state often bears the burden of proving the relevance and necessity of its counterclaim under incidental jurisdiction, while the investor faces fewer obstacles in defence, as they have already framed the context of the dispute.

In conclusion, compared to the ‘consent-based’ and ‘subject-based’ approaches, the ‘integrated’ approach takes a more balanced step towards achieving fairness as envisioned in Rawls’ Theory of Justice. It facilitates equal participation in defining the scope of the dispute and tends to distribute the burden of proof more equitably between the disputing parties. This approach, by integrating considerations of both consent and the substantive connection of the claims, offers a more holistic and just framework for assessing counterclaims in international investment arbitration.

CONCLUSION

The counterclaim mechanism in the ICSID Convention was initially met with high expectations, seen as a potential tool to rectify the inherent imbalances in ISDS and to enhance fairness. However, the reality has been less satisfactory. Ambiguities in interpretation and inconsistent arbitral awards have sparked criticism, with some questioning the inherent fairness of the counterclaim mechanism itself. This article posits that these controversies stem from a fundamental issue: the lack of a clear standard for assessing fairness. Without a concrete frame of reference, it’s challenging for tribunals to determine what constitutes a fair resolution. To address this, the article proposes adopting Rawls’ Theory of Justice as a benchmark for evaluating fairness in relation to counterclaims. Despite its origins in domestic social contract theory, Rawls’ framework is adaptable to the ISDS context, given the similar behavioural structures and interaction methods of participants.

A detailed analysis of three interpretative paradigms—consent-based, subject-based, and integrated approaches—reveals that only the integrated approach aligns closely with the principles of fairness as outlined in Rawls’ theory. This approach, which combines elements of consent and substantive connection, provides a more holistic and balanced framework for assessing the legitimacy of counterclaims. While Rawls’ theory and the integrated approach have their limitations, they represent a significant step forward in addressing successfully the challenges of counterclaim adjudication in ISDS. The integrated approach, in particular, offers a pragmatic pathway for tribunals to directly tackle issues of fairness, moving towards a more just and equitable system of international investment arbitration. This approach not only contributes to the resolution of individual disputes but also helps in enhancing the legitimacy and perceived fairness of the ISDS system as a whole.

Footnotes