THE AUTHOR:
Víctor Manuel Barrera Quintanar, Independent Practitioner
Relevance
Context
With the expansion of trade during the mid-to-late twentieth century, States sought a legally sound framework for investors. Investor-State dispute settlement (“ISDS”) served as a neutral forum protecting “vulnerable” foreign investors from “unreliable” host States. That power dynamic, however, has changed.
Traditionally, international investment agreements (“IIAs”) impose obligations owed by States to investors, not vice versa. While investors are not typically subjects of obligations under IIAs, private-actor wrongdoings can severely affect the host State. Counterclaims allow States to seek compensation. Correctly applied, they can contribute to a more balanced allocation of rights and obligations in ISDS.
Imperfect Alternatives
The importance of counterclaims is emphasised by the limitations of other alternatives available to States in light of investors’ misconduct.
First, investors’ wrongdoings can lead to “contributory fault” pursuant to Article 39 of the ILC Articles on State Responsibility for Internationally Wrongful Acts. Wilful or negligent conduct of the investor limits State responsibility. However, the results might disappoint. In Copper Mesa v. Ecuador, the investor’s attacks with firearms against local protestors merely led to a 30% reduction in the State’s liability. Some newer instruments expressly codify this mitigation mechanism (e.g., Netherlands Model BIT 2019, Article 23; India-Uzbekistan BIT 2024, Article 28.3 fn 4).
Second, States might contend that illegality by the investor renders the investment outside the scope of the IIA. Since IIAs generally protect investments made “in accordance with the local laws of the host State”, violation of those laws leaves the investment outside the definition and deprives the tribunal of jurisdiction. This argument was endorsed in Metal-Tech v. Uzbekistan, where bribery in securing the contract meant that the investment fell outside treaty protection. While this is a strong defence, it suffers a temporal limit: only wrongdoings during the establishment of the investment.
Third, the State could litigate against the investor before its own national courts. But this strategy creates parallel proceedings, duplicates costs, and risks contradictory decisions. Investors distrust local courts and may be reluctant to take part in domestic judicial proceedings, and local judgments do not benefit from ISDS enforcement mechanisms.
These alternatives are non-ideal and do not allow an assertive, offensive stand.
Deterrent Effect
Counterclaims might sway corporate decision-making, contributing to the rule of law. Ecuador provides the context. In Burlington v. Ecuador and Perenco v. Ecuador, disputes arose out of extensive ecological damage created by these oil consortiums and the measures adopted by Ecuador thereafter. The investors launched investment claims, and Ecuador filed counterclaims. In both cases, the investors were found liable (Burlington – US$41.7 million; Perenco – US$54 million). Admittedly, Ecuador was found liable for higher amounts.
The fact that private actors can be found liable for millions of dollars has a far-reaching effect on corporate strategy. Compliance with environmental, labour, human rights, anti-corruption, and other regulations becomes critical. Counterclaims may deter investors from violating State law, reshaping how they conduct business.
Counterclaims, however, face significant challenges.
Practice
Jurisdiction (Consent)
As arbitration is consent-based, the foremost challenge States face in submitting counterclaims is jurisdictional. Typically, the State’s consent is embodied in an open offer within the IIA or domestic investment laws, while the investor manifests consent by submitting a dispute to arbitration. The tribunal in Urbaser v. Argentina confirmed that investors accept the whole offer to arbitrate, including counterclaims, when applicable.
The specific text of each IIA is relevant. Broad consent offers covering “all disputes concerning an investment” might be wide enough to encompass counterclaims. Tethyan Copper Company v. Pakistan and Inmaris v. Ukraine provide examples of broad clauses.
Conversely, narrowly drafted clauses, limiting consent to disputes concerning State obligations, may well block counterclaims, as shown by Vestey v. Venezuela. In his Declaration in Roussalis v. Romania, Mr. Reisman’s argued that the tribunal should also consider the rules of the chosen institution, in that case, Article 46 of the ICSID Convention, since different forums for interconnected claims would lead to an “ironic, if not absurd” outcome. This criterion was followed in Goetz v. Burundi, but remains challenging.
Wide-scope drafting is a double-edged sword. While it may assist in advancing counterclaims, States might be wary of opening the door for investors to bring yet further claims. Some instruments now expressly allow counterclaims, although limitations exist. For example, Model Treaty Templates (e.g. SADC; Slovakia Model BIT 2019) are subject to modifications in negotiation stages. Other instruments do provide for counterclaims, albeit not through ISDS (e.g. ECOWAS A/SA.3/12/08).
Admissibility (Nexus)
Even when the tribunal finds jurisdiction, admissibility requires a direct connection between the investor’s claim and the State’s counterclaim (e.g. Article 46 of the ICSID Convention), since unrelated counterclaims are inconsistent with the principle of good administration of justice.
One might ask if the nexus needs to be in law, fact, or both. Tribunals tend to require that the claim and counterclaim derive from the same legal instrument. Yet, investors have no inherent international personality and IIAs are asymmetrical. How, then, could a counterclaim arise out of the same instrument under which the investor supports its claim?
This consideration has led ISDS tribunals to favour counterclaims deriving from investment contracts, which contain reciprocal obligations. In Klöckner v. Cameroon, the investor and the State entered into an interdependent network of contracts. Although the State’s counterclaim was based on a different contract, the tribunal found that both claims shared a single legal basis. Subsequent practice has endorsed Klöckner (e.g. Grenada Private Power v. Grenada).
Adopting a wider view, the tribunal in Urbaser v. Argentina prioritised a factual nexus over a strictly legal one. Argentina faced a financial loss claim and counterclaimed, arguing that the investor’s failure to properly develop a vital water and sewage services project violated the human right to drinkable water. The tribunal found a strong factual nexus, as the claims revolved around the same infrastructure, water concession, and region. Even if based on different legal instruments, there was a single factual basis. The nexus requirement was satisfied, and it was in “good administration of justice” to entertain both claims, avoiding inconsistent decisions.
Applicable Law (Merits)
Since private parties are not traditionally direct subjects of international law, a further challenge is identifying the substantive applicable law that supports the counterclaim. Investors’ obligations may derive from diverse sources.
First, treaties. New-generation IIAs contain obligations owed by investors regarding labour, human rights, anti-corruption, environmental, and social responsibility (e.g. Morocco-Nigeria BIT 2016, not yet in force). African bodies reflect a clear tendency in this regard (e.g. Pan-African Investment Code, non-binding, Articles 20, 24, 43). IIAs may also refer to domestic and international law that the investor must observe (e.g. Netherlands Model BIT 2019, Article 7(1)). The India-Uzbekistan BIT 2024 is noteworthy: Article 12 requires compliance with national laws, anti-corruption, and tax norms; Article 16 explicitly allows counterclaims.
Second, customary international law (“CIL”). Although imposing obligations on investors under CIL is significantly challenging, as it generally only binds States, some ISDS and non-ISDS precedents suggest that it is possible, particularly regarding human rights. In Urbaser v. Argentina, the tribunal referred to the Universal Declaration of Human Rights while evaluating the investor’s acts. In Nevsun Resources v. Araya, the Supreme Court of Canada considered that human rights CIL could bind non-State actors.
Third, domestic law. States might implement international obligations through domestic law, to which foreign investors are bound. As such, international law might be indirectly applicable. In Perenco v. Ecuador, the tribunal considered that domestic environmental norms derived from concepts emanating from international environmental law.
Fourth, investment contracts can directly regulate investors’ obligations, thus providing the basis for counterclaims, if the obligations are clearly set out.
Fifth, soft law. These instruments normally do not create binding obligations, but can provide supplementary grounds. In Urbaser v. Argentina, the tribunal referred to the United Nations Guiding Principles on Business and Human Rights as evidence of the expectation that foreign investors respect human rights.
Conclusion
Counterclaims are a powerful tool, and, arguably, the best avenue for States to assert their rights against investors’ wrongdoings. Further, they might have a deterrent effect. Yet, an unclear or narrowly drafted framework leads to jurisdiction and admissibility challenges, paired with difficulties in identifying the obligations owed by the investor. A clearer regime can help overcome these challenges and address current power dynamics.
Indeed, in January 2026, UNCITRAL Working Group III approved part of the text of Draft Provision 10 (“DP10”) on counterclaims (A/CN.9/1239), which concentrates on some of the obstacles discussed. Paragraph 1 expressly allows for counterclaims, removing ambiguity. Subsection “a” provides a more flexible nexus standard by requiring that the counterclaim arises directly out of the “subject matter” of the claim, or has a direct connection with the factual or legal basis. Subsection “b”, cumulative with subsection “a”, provides that the counterclaim can be brought where the “claimant has failed to comply with its legal obligations to the respondent, including under any legally binding instrument to which the respondent is a party”.
Paragraph 2 provides that the submission of a claim by the investor constitutes consent to counterclaims under Paragraph 1. As it concerns consent to jurisdiction, this rule was approved on the understanding that it would be formulated as a treaty provision.
These developments, together with instruments such as the India-Uzbekistan BIT 2024 and the Morocco-Nigeria BIT 2016, might help to set a trend for a more efficient counterclaim framework, helping to rebalance investor-State relationships.
