Counterclaims in investment arbitration: perspectives and limitations

One of the perceived reasons for the legitimacy crisis of the investor-State dispute settlement system is rooted in its inherent asymmetry: it empowers foreign investors to bring claims against host States, but not the reverse. This article examines whether host State counterclaims can mitigate this imbalance and whether counterclaims can become more widespread. Arbitral tribunals have developed a two-pronged test for counterclaims, requiring the respondent State to establish both the investor’s consent and a close connection to the original claim. The application of this test, however, reveals significant divergence. Tribunals are split on whether consent can be inferred from broad dispute resolution clauses in bilateral investment treaties. Similarly, the “close connection” requirement has been interpreted either restrictively as a legal nexus to the treaty’s provisions or more liberally as a factual nexus to the investment operation. However, a more permissive approach is emerging, particularly for counterclaims grounded in international law, such as those related to environmental harm or human rights. Landmark cases, such as Urbaser v. Argentina, demonstrate that the procedural avenue for counterclaims is intrinsically linked to the existence of substantive investor obligations. This evolution is now being codified through the work of UNCITRAL Working Group III, whose draft provisions explicitly endorse counterclaims based on a wide range of legal sources. In conclusion, while counterclaims present a promising path to rebalance ISDS, their viability remains heavily dependent on specific treaty interpretation. Their future as a standard feature of investment arbitration is inextricably tied to the evolution of substantive treaty law.