Lead Agency & External Counsel
Host states can improve their internal dispute-management processes by designating lead agencies that are competent and technically capable of handling investor claims and liaising with the relevant state organs. This internal team or lead agency should have sufficient capacity to coordinate all parts of the dispute process, including the identification and engagement of external counsel. At the outset, it is advisable that the lead agency obtain an independent, third-party assessment early on. This should cover the merits of (i) a jurisdictional challenge, (ii) the prospects of success of any defence, and (iii) potential settlement options.
For states facing multiple claims across sectors as wide-ranging as mining, energy, construction, and hospitality, and disputes that involve anything from alleged breaches of agreements to regulatory actions impacting particular investments, a centralised body is necessary. This ensures that incoming disputes, often many at once, are handled harmoniously and with sufficient coordination among state organs, local governments, and various political actors. Unlike companies, the size and bureaucratic makeup of a state make it far more costly and time-consuming to coordinate common steps in the dispute resolution process, such as identifying and preparing fact witnesses and experts, devising case theory, and handling media issues.
Similar challenges arise when engaging external counsel, as law firms often need to liaise with multiple branches of government at both the state and local levels. Lead agencies can serve as effective liaisons between different state entities and external counsel.
A ‘Whole-of-government’ approach
A key part of internal preparation for ISDS is ensuring the involvement of relevant state entities and individuals with sufficient decision-making authority and capacity to support the state’s defence. This requires what is often referred to as a ‘whole-of-government’ approach, meaning a coordinated, unified response across various arms of government when handling disputes brought by foreign investors. Over the past decade, this approach has gained traction as states face increasingly complex and costly disputes and seek to protect their regulatory space while minimising potential liability under investment treaties. Consistent communication and cooperation between state entities and departments can help to identify potential claims before they arise, thus allowing states more time to prepare and gather necessary resources.
Canada offers a clear example of the benefits of a whole-of-government approach through its experience with NAFTA Chapter 11 claims. In response to several ISDS cases, Canada established a centralised legal defence system led by its Trade Law Bureau, which coordinates across federal departments and provincial governments. This model has enabled consistent legal strategy, effective inter-agency communication, and active treaty management, positioning Canada as a leader in implementing the whole-of-government approach within investor-state arbitration.
Document Collection
Document preservation and collection are essential for investor-state arbitration. Gaps in a state’s document collecting system can lead to the permanent loss of valuable evidence, evidence which could have been relied upon to build a legal strategy. This loss of key documents can induce the tribunal to make adverse inferences against the state because the missing content would have supported the opposition’s claims.
Collecting documents early and systematically helps states get a clear picture of the dispute, understand how likely it is to escalate, and stay ahead of key deadlines. It also makes it easier to follow the steps required under investment treaties, contracts, or local laws. Without a proper system, states can be unprepared when arbitral proceedings are launched.
However, document collection is rarely straightforward. In most cases, relevant documents are dispersed across government departments and agencies, each with its filing systems, document retention policies, and levels of institutional memory. Some possess intact, well-ordered archives, while others have partial records or no standardised preservation procedures. This fragmented landscape significantly adds to the challenge of piecing together a coherent and comprehensive record of evidence.
Recognising these challenges, some governments have taken proactive steps to strengthen their institutional frameworks for document management. While soon to be abandoned, the Energy Charter Treaty provides a guide that emphasises the importance of preparedness and transparency when addressing investment disputes. Reflecting these principles, Saudi Arabia has established the Committee for the Settlement of Disputes with Foreign Investors, established under the Foreign Investment Act. This committee is responsible for document collecting for arbitration proceedings. These responsibilities include coordination with relevant government ministries and state agencies, centralisation of information to form a unified and coherent response, gathering of documents to assist legal teams (whether internal or external), and conducting due diligence to verify the authenticity and relevance of documents being submitted in arbitration.
These examples show just how valuable it is to invest in strong systems for collecting and managing documents. When states build these practices into their processes, they not only strengthen their position in arbitration but also send a clear message to foreign investors: they take transparency, legal certainty, and the rule of law seriously.
Counterclaim
States often prefer to systematically object to jurisdiction as an initial tactic, viewing it as a means to delay proceedings and, at times, to shift responsibility onto a subsequent government. However, this approach can blind the state to other potential remedies down the line—one of the most powerful being the counterclaim.
While the availability of counterclaims will depend on the wording and scope of the treaty’s dispute resolution provision under which the tribunal’s jurisdiction is established, counterclaims can significantly level the playing field. They help address the asymmetry inherent in the state’s constant position as respondent in ISDS proceedings and can provide valuable settlement leverage. Counterclaims also serve as an effective tool to ensure that multiple proceedings relating to the same facts are not resolved in different forums, reducing the risk of inconsistent outcomes.
Although states may pursue claims against investors in separate proceedings before local courts, where possible and relevant, counterclaims in the ISDS proceedings themselves should be treated as a primary recourse to promote procedural equality. Accordingly, states should consider the potential for counterclaims as early as upon receiving the notice of arbitration, ensuring they can be effectively integrated into the broader defence strategy.
Funding
As a preventative measure, states should allocate a portion of their national or ministerial budgets not only for legal costs but also for potential settlements of ongoing or foreseeable investor-state disputes. While attractive in theory, budget allocation for ISDS remains a complex and often politically sensitive process, particularly in states facing internal party divisions or oversight from supranational bodies. The recommendation to retain legal counsel early, combined with the reality of escalating legal costs in large and complex arbitrations, makes this even more challenging. Unexpected expenses may arise during arbitration, particularly if counterclaims are brought, further complicating the funding landscape for states.
Given these challenges, time becomes the most valuable resource for states that expect potential ISDS claims or have received a notice of dispute. Delays in securing funds can hinder a state’s ability to retain experienced counsel, engage experts, and develop a coherent case strategy from the outset. Proactive financial planning also enhances the state’s ability to engage in the appointment of arbitrations and early settlement discussions when appropriate. Requesting and securing funding early can be the difference between mounting an effective defence and being caught unprepared.
Conclusion
As ISDS evolves, so too must the attitude of states, taking a more proactive and modern approach. The myth that states are inherently disadvantaged overlooks how early preparation, institutional coordination, and effective planning can affect outcomes. By embracing a whole-of-government approach, improving document systems, preparing for counterclaims, and securing early funding, states not only minimise legal risk but also reinforce investor confidence in their government.
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