Abstract

The legitimacy of investor-state dispute settlement or ‘ISDS’ is fiercely contested. Chiefly, scholars argue this arbitration mechanism empowers investors from developed states over governments of developing host states. In response, investors (mostly) from developed states argue that without adequate protections, including investor-state arbitration, they would be unable to prevent and resist opportunistic actions like expropriations by developing host states with weak rule of law and institutions. In the resulting setting, developing states facing claims by investors seem to have limited ability to improve their standing in litigation. Based on an experiment conducted on 266 arbitrators, we argue that one potential avenue is for developing host states to exploit their ‘underdog’ status. Our results show that arbitrators may be prone to the ‘David Effect’ — a bias to favor the perceived weaker party in the arbitration. Surveyed arbitrators were more likely to award low income respondent states reimbursement of their legal costs compared to middle income states. Likewise, investors from less developed economies were also more likely to have their costs reimbursed when they win compared to investors from wealthy economies. Our study suggests that the legitimacy of legal regimes depends, in the minds of decision-makers, on a minimum expectation of fairness. This hints at the importance of arbitrators’ beliefs about the distribution of power among litigants in explaining the functioning of the investor-state arbitration system.

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