Political risk and investment arbitration – again

In June, I had posted a note here reporting our findings on the relationship between the political risk an investor is exposed to in the country hosting its investment, and the likelihood that this investor will eventually file an investment arbitration claim to redress the effects of the materialisation of that risk. These findings were about oil and gas.

We’ve now expanded our study to all sectors of the economy.

Here’s the abstract:

Investment arbitrations should not happen too often, because they are costly processes for both parties. Yet they regularly happen. Why? We investigate the hypothesis that investment arbitrations are used as a means of last resort, after dissuasion has failed, and that dissuasion is most likely to fail in situations were significant political risk materializes. Investment arbitration should thus tend to target countries in which certain types of political risk has materialized. In order to test this hypothesis, we focus in this paper on two drivers of political risk: bad governance, and economic crises. We test various links between those two drivers of risk and arbitration claims. We use an original dataset that includes investment claims filed under the rules of all arbitration institutions as well as ad hoc arbitrations. We find that bad governance, understood as corruption and lack of rule of law (using the WGI Corruption and WGI Rule of Law indexes), has a statistically significant relation with investment arbitration claims, but economic crises do not.

In sum, the fact that a country is hit by an economic crisis does not seem to increase the chance that it will be sued in an investment arbitration.

Surprising? Perhaps not. When hit by an economic crisis, a country may become cautious and willing to negotiate more than on average.

The paper’s Cédric Dupont, Thomas Schultz and Merih Angin, ‘Political Risk and Investment Arbitration: An Empirical Study‘, Journal of International Dispute Settlement, 2016, forthcoming.

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