Abstract

The issue of counterclaims has recently been the subject of debate in the context of the reform of investment arbitration. The possibility of raising counterclaims has been addressed by UNCITRAL'S Working Group III, which examined various means of implementing reforms to establish a framework for counterclaims by the States.
Raising counterclaims against investors should be examined in the light of recent increasing backlash against the Investor-State Dispute Settlement ("ISDS") mechanism. One of the arguments raised by the critics of ISDS is that the host States remain perpetual respondents and the ISDS system does not focus on investors obligations vis-à-vis States.

On the other hand, there are already existing mechanisms under the ISDS which seek to ensure that protection to investors is given only to investments compliant with local laws. Enabling the host States to bring counterclaims could also deter foreign investors from launching arbitration and undermine investors' protection under investment treaties.

The article addresses the potential legal basis and challenges for counterclaims in investment arbitration. The article first addresses the two-step assessment determining the possibility of bringing counterclaims, i.e. (i) jurisdiction (consent) and (ii) admissibility (connectedness to the primary claim). Further, the article examines the cases in which counterclaims were allowed, and rejected. Emphasis is placed on counterclaims for environmental damage in Perenco v. Ecuador and Burlington v. Ecuador.

This paper will be part of the second TDM Special Issue on "International Investment Arbitration - Environmental Protection and Climate Change Issues". More information here www.transnational-dispute-management.com/news.asp?key=1893