Analysis of Compensation System for Investor-State Dispute Settlement

Investor-State Dispute Settlement, abbreviated as ISDS, constitutes a fundamental component of the international legal field. It provides foreign investors with the opportunity to pursue arbitration instead of relying on the domestic court system of the host country when their international investment agreements or treaty obligations are violated by the host government. Typically embedded in bilateral or multilateral investment treaties and free trade agreements, Investor-State Dispute Settlement offers investors a means to seek fair and reasonable compensation for investment losses resulting from unfair or discriminatory measures taken by the host government. However, due to a significant increase in arbitration cases, the shortcomings of Investor-State Dispute Settlement have become increasingly apparent, leading to growing criticism and dissatisfaction that even questions its legitimacy along with its affiliated international investment system. In light of this legitimacy crisis within the international investment law system, particularly concerning ISDS, compensation was initially overlooked as a technical issue but has now gained prominence. The ultimate goal for investors initiating arbitration is seeking relief while states aim to avoid liability through their defense strategies. Consequently, compensation has emerged as both an essential objective and top priority for reforming investment arbitration. Against the backdrop of ongoing adjustments in international investment law and reforms within Investor-State Dispute Settlement, this article aims to re-examine issues pertaining to the investment arbitration compensation system, explore potential reform approaches, and propose suggestions for enhancing China’s own investment arbitration system.