OIC nations' need for fairer investor-state dispute reforms

As the United Nations Commission on International Trade Law (UNCITRAL) Working Group-III prepares to convene its 53rd, 54th and 55th Sessions on the Investor State Dispute Settlement Reform in the coming year, the debate over reforming the Investor-State Dispute Settlement (ISDS) system once again takes center stage. For the 57-member Organisation of Islamic Cooperation (OIC) — many of them developing nations — the outcome of these discussions could shape the future of foreign investment and sovereignty for decades to come.

The ISDS mechanism, designed to protect foreign investors from unfair treatment by host states, has become a double-edged sword. While it traditionally offers investors a sense of legal certainty, it has also exposed developing nations to unpredictable and often exorbitant compensation claims. As OIC countries participate in the UNCITRAL WG-III discussions, they face the critical challenge of balancing investor protection with economic justice and policy autonomy.

One of the central issues before WG-III concerns limitation periods i.e. the timeframes within which investors must file claims. Does the statute of limitations pause when parties engage in friendly settlement efforts? If so, when does it resume — upon the conclusion of talks, a formal declaration of failure, or any other trigger?

This legal grey zone creates serious risks. If limitation periods are not suspended during negotiations, parties may feel compelled to abandon settlement talks prematurely to preserve their right to arbitration. Conversely, without clear rules, host states from the OIC bloc and those that have sadly faced the brunt of ISDS disputes may face surprise claims long after disputes have arisen.

For OIC states, engagement — not rejection — is essential. Advocating for explicit rules confirming that limitation periods pause during genuine efforts at friendly settlement or local remedies for a certain time period that is extendable with the consent of all parties to a dispute is the need of the hour.

In recent years, developing countries including OIC members, Pakistan and Nigeria, have faced multi-billion-dollar arbitration claims. The Tethyan Copper v Pakistan and Process & Industrial Developments v Nigeria cases illustrate how speculative valuation methods, such as Discounted Cash Flow (DCF), can lead to staggering awards. In both cases, the outcomes underscored the vulnerability of developing nations when tribunals exercise broad discretion over compensation and interest calculations.

WG-III's proposals to clarify damages assessment methods have drawn mixed reactions. While some developed economies, including the European Union, favour more investor-friendly approaches, OIC countries must insist on safeguards that prevent excessive and speculative claims.

Damages should reflect proportionality and reasonableness. In the case of DCF, a prudent path forward would involve setting strict limits on the use of DCF and other predictive valuation techniques, allowing them only when there is a proven record of profitability.

Among the most ambitious reform proposals is the establishment of a Multilateral Investment Court (MIC) — a permanent body designed to replace the ad hoc system of investor-state arbitration. Proponents argue that such a court could bring greater consistency, transparency and accountability to investment disputes. Decisions would be published, and an appellate mechanism would ensure coherent interpretation of international investment treaties.

However, the MIC proposal also raises sovereignty concerns. Granting a supranational body the authority to adjudicate investment disputes could limit states' policymaking space and expose them to politically sensitive rulings.

For OIC states, engagement is the key. Negotiators and delegates need to advocate for a balanced approach that respects sovereignty while ensuring a fair representation of developing nations within the MIC. Judge selection must reflect diverse legal traditions and economic realities, ensuring that perspectives from the Global South are not overshadowed by those of developed economies.

A phased adoption of the MIC could be a pragmatic solution. States could opt into specific categories of disputes or treaties, maintaining flexibility while gradually transitioning to a more stable and transparent MIC.

Beyond legal reforms, OIC nations must also invest in institutional capacity and regional cooperation. The effectiveness of ISDS reform will depend on whether states can negotiate, mediate and manage disputes effectively.

First, OIC countries should encourage multi-tiered dispute resolution clauses in their investment treaties, requiring mediation or conciliation before arbitration. This would promote amicable settlements and reduce litigation costs. Training programmes for government lawyers and mediators in international arbitration and Islamic mediation (Sulh) could further enhance their ability to handle complex investor-state cases, especially those pertaining to intra OIC disputes.

Second, experience-sharing among member states is vital. Regular forums or workshops under organs of the OIC will help continue promoting the dialogue and exchange of knowledge on ISDS-related matters amongst member states. Such avenues allow member states to learn best practices and lessons from past disputes.

Third, a roster of qualified arbitrators and mediators familiar with both international and Islamic legal principles could be established for OIC countries. Such a roster would help ensure that culturally sensitive and relevant subject experts become part of the dispute resolution process.

Lastly, OIC countries need to push for the inclusion of public interest considerations — such as the United Nations Sustainable Development Goals (SDGs) — in ISDS settlements. Linking dispute outcomes to sustainable development priorities would not only enhance legitimacy but also align investment law with the OIC's broader 'Programme of Action 2025' on inclusive growth and sustainability.

Reforming the ISDS mechanism is not merely a legal exercise, it is a question of economic justice. For developing nations especially, the goal should not be to dismantle investor protections but to ensure that these protections coexist with national development goals and equitable treatment.