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Investor-State Arbitration, also referred to as Investor-State Dispute Settlement (ISDS), is a system that allows foreign companies or investors to bring actions against host countries for unfair practices under enforceable international agreements or contracts.[1] In this form of arbitration, a foreign investor directly institutes a claim against a host government if such government has breached an important obligation under the agreement.
This system bypasses the local court of the host nation since the local court could be biased or may find itself having a lack of complete independence, thereby, providing a neutral mechanism for dispute resolution, usually through the International Centre for Settlement of Investment Disputes (ICSID) in accordance with procedures of the United Nations Commission on International Trade Law (UNCITRAL). [2]
Legally, Nigeria demonstrates that the country endorses international arbitration as a safeguard to ensure that foreign investments are still subject to Nigerian laws and supervision. For instance, the Nigerian Investment Promotion Commission (NIPC) Act[3] gives a domestic legal foundation for the protection of all foreign investments. An important section of the NIPC Act is Section 26,[4] which clearly states that foreign investors may choose to resolve disputes through international arbitration unless some other method is agreed to by the parties.
HOW DOES INVESTOR-STATE ARBITRATION WORK IN NIGERIA
Under a typical Bilateral Investment Treaty (BIT) or Trade Agreement, a foreign investor can notify Nigeria’s Attorney-General of a dispute, and after the required waiting period, usually for 6 months, the foreign investor can initiate an arbitration proceeding against the host State.[5]
The Investor-State Arbitration agreement will typically stipulate the rules that will apply to the proceedings under the ICSID Arbitration Rules. Once the Arbitral Tribunal is constituted, it will set the procedure and timetable, usually consisting of a written and oral phase, and the arbitration may take a number of years from commencement through to the final Award.
Thus, in some cases, the investor may be obliged by the arbitration agreement to exhaust all effective domestic legal remedies prior to initiating a claim in arbitration. The Global Arbitration Review Note observes that “most investment treaty disputes against Nigeria are settled before they get to the Award stage,” and that actual adverse Awards are rare.[6]
BALANCING INVESTORS’ INTERESTS AND HOST STATES’ SOVEREIGNTY
In recent times, Investor–State arbitration has sparked debates within the investment community, with many calling for its abolition.[7] Most policymakers and States believe that the implementation of investor–state arbitration has failed to balance the interests of investors with the sovereignty of the host country.
This is mainly because, on the one hand, arbitration can provide foreign companies with the assurance that their assets are not fully subject to shifting governments, which promotes the essential inflow of capital. On the other hand, it hinders the host state’s sovereignty to manage and safeguard public interest for responsible investment, as treaties may be violated. This, therefore, creates the need to balance the conflict of interest that may arise from both parties.[8]
In investor-state arbitration, the principle of fair treatment requires the host country to provide foreign investors with fair and non-biased treatment. This principle goes beyond physical safety to include legal and administrative protection, guaranteeing that investors receive transparent and just treatment in legal matters.
Nonetheless, applying this principle often encounters difficulties, particularly when host countries enact policies or measures that affect the interests of foreign investors. For instance, the case of Philip Morris v. Australia[9] on Australia’s anti-smoking regulations. Philip Morris contended that Australia’s laws on tobacco packaging diminished the worth of its investment, breaching its legitimate expectations and fairness provisions in the investment agreement.
It is also important to note that arbitration proceedings themselves need to take public interest matters into account, and the Tribunals sometimes weigh the host state regulatory objectives against the rights of investors. In the case of P&ID v. Nigeria,[10] an arbitration Tribunal awarded $11,000,000.00 (Eleven Million Dollars) to P&ID for an alleged contract violation over a gas processing plant deal, but the English Court annulled this decision, citing severe misconduct of fraud, while also criticizing the Tribunal for not adequately assessing the investment’s validity.
These investor protection clauses are conceptually meant to shield foreign investments, but in reality, they can end up interfering with the host state’s public policies. In several international arbitration instances, the tension between the State’s sovereignty and investor protection has become more pronounced, especially when there may be economic emergencies or new policies are developed.[11]
Therefore, a key way to balance foreign investors’ rights with host state sovereignty is by enhancing transparency within the arbitration system. While many cases publish their judgments, there is often no complete transparency in arbitration regarding Tribunal procedure and reasoning for decisions.
Furthermore, another solution could be setting up a Multilateral Investment Court that could replace the ICSID and ISDS with independent Judges and a transparent procedure. Such a court would ensure that international investment law is more just and credible, striking a more effective balance between investor protection and state sovereignty.
CONCLUSION
Systemic reforms in international investment laws will be required to address the legal conflict between States’ sovereignty and investor protection. As the global economy changes, international investment law must also move forward to face new challenges and ensure that the basic principles of investor protection and the State’s sovereignty are well-balanced.
[1] Investor-State Dispute Settlement – USCIB, accessed September 4, 2025 https://www.uscib.org/docs/2011_05_05_investor_to_state_brief.pdf
[2] United Nations Conference on Trade and Development – Investor-State Dispute Settlement, accessed September 4, 2025, https://unctad.org/system/files/official-document/iteiit30_en.pdf
[3] Cap N117 LFN 2004.
[4] Section 26 of the NIPC Act
[5] Frequently asked questions about investor-state dispute settlement, accessed September 4, 2025 https://www.nortonrosefulbright.com/frequently-asked-questions-about-investor-state-dispute-settlement
[6] Investment Treaty Arbitration: Nigeria – Global Arbitration Review. Accessed 3rd, September 2025
https://globalarbitrationreview.com/insight/know-how/investment-treaty-arbitration/report/nigeria
[7] Review of 2021 Investor–State Arbitration Decisions: Insights for IIA Reform, accessed September 5, 2025 https://investmentpolicy.unctad.org/publications/1284/review-of-2021-investor-state-arbitration-decisions-insights-for-iia-reform
[8] Understanding Investment Arbitration: Principles and Practices, accessed September 5, 2025, https://lawslearned.com/investment-arbitration/
[9] UNCITRAL, PCA Case No. 2012-12
[10] UKSC/2024/0117
[11] Understanding Investment Protection Treaties: Safeguarding Your Foreign Investments, accessed September 5, 2025, https://www.mondaq.com/inward-foreign-investment/1516728/understanding-investment-protection-treaties-safeguarding-your-foreign-investments
Written by Olufe Popoola & Olatunji Bamidele for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com