Investor-State Dispute Settlement (ISDS) Under Vietnam's FTAs … – Mondaq News Alerts

Credit: Original article can be found here

To print this article, all you need is to be registered or login on

Vietnam’s investment landscape

Vietnam has consistently been an attractive destination for
foreign investment. Following the financial crisis of 2008-9, FDI
inflows regained growth momentum at an average rate of 6.3%
annually from 2010 to 2021. Among the top FDI investors in Vietnam
are the Republic of Korea, Singapore, Japan, Taiwan, China, Hong
Kong, and The Netherland. Key sectors attracting FDI inflow are
manufacturing, real estate, and energy. Specifically, manufacturing
accounted for around 58% of FDI inflow in 2021, confirming the
position of Vietnam as an emerging manufacturing base. FDI
outflows, on the other hand, have declined since 2008.
Vietnam’s outbound investment is concentrated primarily in the
neighbouring region of Lao PDR and Cambodia.

Figure 1 FDI Inflows into and Outlfow from Vietnam,

Source: GSO

Investor-State Dispute Settlement (ISDS)

Investor-State Dispute Settlement (ISDS) is a popular investor
protection mechanism under the bilateral investment treaties (BITs)
which proliferated in the Asia-Pacific in the 1990s and 2000s.
Backlash against ISDS however arose due to the claims brought
against the countries that allegedly might have caused
‘regulatory chill’, especially in areas affecting people
welfare and environmental protection.1

Investor-state dispute
settlement (ISDS) is a mechanism, typically contained in a free
trade agreement (FTA) or investment treaty, that provides foreign
investors with the right to access an international tribunal
against the government in the country where the investors have
invested to resolve investment disputes.

Frictions between the investors and government on specific
aspect of carrying out investment projects is unavoidable, thus the
need for mechanisms for investors to redress their concerns. These
might include domestic courts, administrative tribunals, or
arbitration tribunals which are provided for under the several
bilateral investment treaties (BIT) or Investment chapter of free
trade agreements (FTA). According to data by the United Nations
Conference on Trade and Development (UNCTAD), there are 1,229 known
treaty based ISDS cases as of 2022, 852 of which have been

Vietnam has signed 67 BITs, 50 of which are currently in force.
Additionally, Vietnam also signed 27 regional trade agreements,
framework agreements or other agreements with investment
provisions. Many of these contains a mechanism for resolving
dispute between investor and States following the traditional ISDS
approach, which will be explored below under the CPTPP framework.
Since 2004, Vietnam has recorded nine known ISDS cases, including
three pending cases with investors from the United Kingdom, the
Republic of Korea, and the United States.

Figure 2 Countries with which Vietnam has an FTA and which
contain an ISDS chapter, as of February 2023

Note: ISDS provisions and process differ by FTA. Coloured countries
are those with an FTA containing an ISDS provision with Vietnam.
Source: Authors

ISDS under the CPTPP

ISDS is provided under Section 9B of Chapter 9 of the CPTPP,
featuring a two-tiered dispute resolution mechanism. The rules
however enable investors to commence arbitration without any prior
recourse to domestic proceedings or remedies.

Investors are entitled to bring a claim based on the breaches of
obligations regarding a “covered investment” under
Section 9A of the Agreement. Where the respondent Party is Chile,
Mexico, Peru, or Vietnam, the CPTPP precludes investors from
bringing arbitration claims which have already been pursued before
domestic courts or administrative tribunals (so called fork-in
the-road clause) (Annex 9-J). Where disputes arise concerning
similar rights or obligations under multiple trade agreements, the
investor may select the forum in which to settle the dispute. Once
the complainant requested the establishment of the tribunal under
one agreement, the forum selected shall be used to the exclusion of
other fora (Article 28.4).

The CPTPP excludes natural person (i.e., individual) investor to
submit a claim to arbitration against a Party to which that natural
person investor holds nationality.2 For example, a
Vietnamese who is also a permanent resident of Canada may not
submit a claim to arbitration against Vietnam. For juridical person
(i.e., organisation) investor, the claimant may submit a claim for
arbitration on its own behalf or on behalf of an enterprise that
the claimant owns or controls directly or indirectly.

Before commencing arbitration, the claimant is required to
deliver “a written request for consultations setting out a
brief description of facts regarding the measure or measures at
issue” (Article 9.18.2). If the dispute is not resolved within
six months of the receipt by the respondent of such written request
for consultations, the claimant may submit to arbitration a claim
that that the respondent has breached an obligation under the
Agreement’s investment chapter, and any loss or damage that has
incurred by reason of, or arising out of, that breach.


The claimant is also required to deliver to the respondent a
written notice of intent to submit a claim to arbitration
containing specified details on the claim 90 days before submitting
such claim to arbitration (Article 9.19.3). The said written notice
must also be accompanied by a written waiver “of any right to
initiate or continue before any court or administrative tribunal
under the law of a Party, or any other dispute settlement
procedures, any proceeding with respect to any measure alleged to
constitute a breach referred to in Article 9.19” (Article

The CPTPP provides a time limitation to initiate an investment
arbitration. This period is three years and six months, counting
from the date the investor first acquired, or should have first
acquired, knowledge of the breach (Article 9.21.1). Arbitration may
be initiated in accordance with the International Centre for
Settlement of Investment Disputes (ICSID) Convention and the ICSID
Rules of Procedure for Arbitration Proceedings; the ICSID
Additional Facility Rules; the UNCITRAL Arbitration Rules; or any
other arbitral institution or arbitration rules that the claimant
and respondent agree on (Article 9.19.4).

Unless the disputing parties agree otherwise, the arbitral
tribunal shall comprise three arbitrators, with one arbitrator
appointed by each of the disputing parties and the presiding
arbitrator appointed by agreement of the disputing parties. If a
tribunal has not been established within 75 days of the submission
of the arbitration claim, the Secretary-General of ICSID shall
appoint the arbitrators not yet appointed at the request of a
disputing party.

Arbitral tribunals constituted via the ISDS mechanism in the
CPTPP may only award (separately or in combination): (a) monetary
damages and interest thereon; and (b) restitution of property (in
which case the award shall provide that the respondent may pay
monetary damages and any applicable interest in lieu of


The CPTPP contains a number of carve-outs that limit the
application of the ISDS under the Agreement. Compared to the text
of the TPP-12 (which the US pulled out from), the CPTPP suspends
the references to, and thus application of ISDS to, claims arising
out of investment authorisations and investment

Vietnam signed a side letter with New Zealand to exclude the
direct application of ISDS provisions. Accordingly, any dispute
between an investor and the respondent State that would otherwise
be subject to ISDS under the Investment Chapter must comply with a
procedure similar to the first tier of the dispute resolution
(i.e., consultation and negotiations) for six months. For the
second tier (commencement of arbitration) to operate, the
respondent State must provide specific consent to the application
of arbitration under the Investment Chapter to the dispute.

Furthermore, the CPTPP includes a ‘tobacco carve-out’
that preserves the States’ public policy space in adopting
tobacco control measures. Article 29.5 (Tobacco Control Measures)
of Chapter 29 (Exceptions and General Provisions) states that a
Party may elect to deny the benefits of Section B of Chapter 9
(i.e., the application of the ISDS mechanism) concerning claims
challenging a tobacco control measure of that Party. The denial of
benefit can be made at the time of the submission of such a claim
to arbitration or during the proceedings.

Other approaches to the ISDS mechanism

The ISDS mechanism has been subject to criticism. Opponents
raised several concerns over the ISDS system, including the
unpredictability; the lack of transparency of arbitral proceedings;
the lack of independence and impartiality of arbitrators; and the
lack of right of appeal.4 Hence, it is inevitable that
many governments have tried to address these handicaps.

For example, the ASEAN Comprehensive Investment Agreement (ACIA)
allows for the tribunal to request the Member States to provide a
joint interpretation of any provisions of the ACIA. The Member
States will then have 60 days of the delivery of the request to
submit the joint interpretation, failing which the tribunal would
be entitled to decide the issue on its own account.

In an effort to reform the existing ISDS mechanism, the EU
supports the creation of a multilateral investment court for
disputes arising from bilateral EU investment agreements. This
mechanism is featured in, for example, the European Union-Canada
Comprehensive Economic and Trade Agreement (CEPA), the European
Union–Singapore Investment Protection Agreement (EUSIPA) and
the European Union–Vietnam Investment Protection Agreement
(EUVIPA). It comprises of both a permanent investment tribunal and
a permanent appeal tribunal. In the case of the EUVIPA, the
permanent investment tribunal comprises nine members, with three
from the European Union, three from Vietnam, and three from third
countries. The Members of the Tribunal will be appointed for a
four-year term, renewable once. Among these nine tribunal members
appointed immediately after the entry into force of the Agreement,
five tribunal members, to be determined by lot, shall have their
terms extend to six years. This mechanism is supposed to ensure the
continuity of the tribunal. The Tribunal will hear cases in
divisions consisting of three Members, one from each of the above
three cohorts, and will be chaired by the Member from a third

The Appeal Tribunal shall be composed of six Members, two from
the European Union, two from Viet Nam, and two from third
countries. Similar to the Tribunal Members, the Appeal Tribunal
Members shall be appointed for a four-year term, renewable once.
Among these appointed immediately after the entry into force of the
Agreement, three will have an extended term of six years. The
permanent appeal tribunal would hear appeals from the awards issued
by the permanent investment tribunal.

The RCEP, another mega-deal that Vietnam is a member of, does
not currently contain ISDS provisions in its investment chapter.
The ISDS mechanism was said to have been carved out during the
negotiations to avoid delays in its conclusion. Furthermore, the
RCEP also explicitly prohibits applying its MFN clause to access
the ISDS mechanisms or procedures contained in other agreements
(Article 10.4(3)). Instead, the RCEP Member States agreed to start
negotiations on ISDS provisions within two years of the RCEP coming
into force, and for these negotiations to be concluded within three
years (Article 10.18). RCEP entered into force on 1 January 2022
when ten countries first ratified the Agreement,5
therefore the deadline for ISDS provision negotiations is
approaching. It would be interesting to see which approach the RCEP
members would choose to adopt for its ISDS system.

What should businesses be mindful of?

The ISDS mechanism in investment treaties has traditionally been
considered a means of attracting inbound FDI. But as Vietnam’s
outbound FDI increases, this mechanism can also be used as a means
of protecting the overseas investments of Vietnamese investors.
Rather than completely abandoning ISDS, states are working on
different approaches to reform the system. While the ISDS system
under the CPTPP has taken effect, the new system under the EUVIPA
is still pending ratification of the agreement. For the RCEP, which
lacks an ISDS mechanism, investment-related dispute can be solved
either under the state-to-state dispute settlement mechanisms or
under another FTA with ISDS provision between Vietnam and the
investment hosting country, for example the ASEAN-Australia-New
Zealand free trade agreement (AANZFTA). Therefore, Vietnamese
investors should be mindful of the measures available for them to
protect their legitimate interest in different host countries where
their investment interests are.


1. Kyla Tienhaara (2017). Regulatory
Chill in a Warming World: The Threat to Climate Policy Posed by
Investor-State Dispute Settlement. Transnational Environmental Law,
Volume 7, Issue 2, July 2018, pp. 229-250. Cambridge University

2. CPTPP, Article 9.1 (Definition),
paragraph 2.

3. The TPP-11 define investment agreement
as “written agreement that is concluded and takes effect after
the date of entry into force of this Agreement between an authority
at the central level of government of a Party and a covered
investment or an investor of another Party and that creates an
exchange of rights and obligations, binding on both parties under
the law applicable […]”.

4. Alvarez et al. (2016) ‘A Response
to the Criticism against ISDS by EFILA’, Journal of
International Arbitration, Kluwer Law International; Kluwer Law
International 2016, Volume 33 Issue 1) pp. 1-3

5. These are: Australia, Brunei
Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore,
Thailand and Vietnam. RCEP entered into force for the Republic of
Korea on 1 February 2022, for Malaysia on 18 March 2022, and for
Indonesia on 2 January 2023. The Philippines ratified the deal on
21 February 2023. The RCEP will therefore enter into force for the
Philippines 60 days after the deposition of its instrument of
ratification with the Depositary.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.