International Arbitration After the Pandemic

The remarkable pace of growth in cross-border trade and investment in the last 20 years has underpinned the growth of the world economy, and inevitably has led to rapid growth in international disputes and so the use of international dispute resolution mechanisms including international arbitration.

The world economy has performed very strongly over the last 20 years, with international trade volumes nearly doubling, and the stock of foreign direct investment (FDI) increasing four times. Developing countries are taking an ever-increasing share of the global economic pie, in terms of both trade and investment, and economic activity between developing countries is growing even faster than that between developed and developing countries.

The COVID-19 crisis has upset these trends, with global FDI flows falling by more than a third in 2020 and more steeply still in developed countries. However, we expect the pre-COVID-19 trends to re-establish themselves as the world recovers from the social and economic shock of the pandemic.

Meanwhile, international arbitration filings have grown steadily at more than 3% a year globally from 2010 to 2019 and increased 9.9% in 2020, with Asian arbitration centres – Singapore and Hong Kong most prominently – growing much more quickly than the more traditional centres in Europe and North America, mirroring the faster growth in cross-border economic activity in Asia.

2022 and beyond are likely to bring a new wave of disputes arising particularly from disruptions from COVID-19, the energy transition, and financial distress. Litigious sectors are therefore likely to include finance, energy, and construction.

Other major changes afoot include reform of Investor State Dispute Settlement, with the EU looking to establish a permanent multilateral investment court that will process all the investment disputes of the EU itself and its member states, starting with its most recently concluded trade agreements, and potentially covering also disputes under the Energy Charter Treaty.

As the global economy recovers from the COVID-19 pandemic, and fast growth in cross-border economic activity resumes, the steady increases in international commercial arbitration activity seen in the last two decades are likely to continue, as will the geographic rebalancing of dispute resolution activity. Although we expect the factors underlying increasing bilateral investment treaty dispute numbers to continue operating, changes to the ISDS system may reduce the rate at which such disputes translate into traditional BIT arbitration.