Author: K.P. Siddharth Manoj, Student of BBA LLB (Business Hons.), 2020-2025 at School of Law, Karnavati University, Gujarat
ABSTRACT
This research paper examines the application of game theory to analyse arbitration clauses in Bilateral Investment Treaties (BITs) and investor-state disputes. By framing these interactions as strategic games, the study explores how rational decision-making by investors and host states influences the choice between settlement and arbitration. The paper employs two key game-theoretic models—the Prisoner’s Dilemma and the Chicken Game—to elucidate the underlying tensions and incentives that drive dispute resolution outcomes.
The Prisoner’s Dilemma model highlights the challenges of cooperation, where mutual mistrust and misaligned incentives often lead parties to escalate disputes to arbitration despite the availability of settlement mechanisms. This dynamic results in suboptimal outcomes, characterized by prolonged and costly proceedings. Conversely, the Chicken Game model applies to high-stakes disputes where neither party is willing to concede, fearing significant financial or reputational losses. The paper illustrates these models with real-world cases, such as Philip Morris v. Uruguay and Vattenfall v. Germany, demonstrating how strategic posturing and brinkmanship shape arbitration outcomes.
The study also evaluates the role of arbitration clause design in BITs, emphasizing how procedural clarity, mandatory mediation, and enforcement mechanisms can mitigate adversarial tendencies. Recommendations include enhancing transparency, balancing power dynamics, and incorporating structured settlement mechanisms to foster cooperative dispute resolution. By aligning the interests of investors and states, well-designed arbitration clauses can reduce reliance on costly arbitration and promote stable international investment relations.
Ultimately, this paper underscores the value of game theory in understanding investor-state arbitration, offering policymakers insights to refine BIT frameworks and achieve more efficient, equitable, and predictable dispute resolution processes. The findings contribute to the broader discourse on international investment law, highlighting the interplay between strategic behavior, legal design, and economic outcomes.
