Most ISDS disputes are based on agreement between states, usually bilateral investment treaties (BITs), which aim to provide protection under international law to foreign investors. Since only states are parties to the agreements, it is also only states that have obligations under these agreements. Obligations aimed to give rights to foreign investors. Therefore ISDS clauses are designed so that a proceeding can only be initiated by the foreign investor, not by the state. But there are exceptions.
A state that is being sued may respond by claiming that the investor also breached its obligation, through a counterclaim. This is possible under most investment agreements and arbitration rules as long as the state’s counterclaim is clearly connected with the main dispute. There are many examples of counterclaims, but a notable case is Ecuador’s successful counterclaim against Perenco.
This high-profile ISDS case was an ICSID proceeding in which Perenco initially brought a claim against Ecuador due to changes in Ecuadorian legislation, which, according to Perenco, violated its rights under the investment agreement. Ecuador launched a counterclaim against Perenco, claiming that Perenco violated Ecuadorian environmental legislation, including by not informing the state of several oil spills. According to Ecuador, the failure had led to several environmental disasters in the Amazon, and Ecuadorian environmental laws provide that the company must reimburse the state with USD 2.5 billion for cleaning up of the spills.
The tribunal in Perenco v. Ecuador issued a decision in which they indicated that Ecuador’s allegations at first sight seemed justified but that it was unlikely that the damages could be as large as USD 2.5 billion. Although the tribunal seemed to agree with Ecuador’s argument, it also viewed that it would require a long and expensive investigation to determine the damages, and encouraged the parties to reach a settlement. Negotiations are still ongoing. Meanwhile, Ecuador has launched counterclaims against another energy company with similar factual circumstances, and the case is also still pending.
States have also brought claims against investors directly, which is possible under the ICSID Arbitration Rules. There have been ICSID cases in which the state sued the foreign investor for alleged breach of contract, such as Gabon v. Société Serete S.A. and Tanzania Electric Supply Co. Ltd. v. IPTL (which was launched by Tanzania’s state owned power company, but where, in practice, the state stood behind the process). Another example is when East Kalimantan (a province of Indonesia) launched an ICSID case against several coal mining companies having operation in the province, arguing that these companies had a divestment obligation. The tribunal found that it did not have jurisdiction to hear the dispute. In these types of cases, it is common that the case is not based on agreements between states, but a direct agreement between the state and the investor.