The Business Case for Procedural Integrity in Investor-State Arbitration

Introduction

The annulment of the Rockhopper Exploration plc v Italian Republic arbitration award on 2 June 2025 by an ICSID ad hoc Committee ('Committee') sends a clear message to investors relying on international arbitration: even a strong legal claim can unravel if procedural integrity is compromised. The annulment centered on the nondisclosure by arbitrator Dr Charles Poncet, which the Committee deemed a ‘serious departure from a fundamental rule of procedure’ under Article 52(1)(d) of the ICSID Convention. Importantly, the Committee did not require proof of actual bias; the mere appearance of partiality was sufficient to annul the award.

This decision redefines the risk landscape for businesses operating in highly regulated sectors such as energy and infrastructure. It is no longer sufficient to anticipate the regulatory risk and rely on treaty-based legal protections. Companies must now scrutinize the procedural fora of international arbitration, recognizing that due process failures can neutralize substantive rights and undermine enforcement expectations.

Context of the Arbitration

In 2015, Italy introduced a ban on offshore hydrocarbon production within 12 nautical miles of its coastline, citing environmental and safety concerns. This measure directly impacted Rockhopper Exploration plc ('Rockhopper'), a UK-based energy company with interests in the Adriatic Sea. In response, Rockhopper initiated arbitration proceedings against Italy under the Energy Charter Treaty ('ECT'), alleging that the ban constituted unlawful expropriation without prompt compensation in breach of Article 13 of the ECT, and that it violated the fair and equitable treatment ('FET') standard under Article 10(1) of the ECT.

The tribunal found Italy liable for expropriation but declined to address the FET claim, considering the expropriation finding sufficient to resolve the dispute. The award was later annulled on procedural grounds, following the Committee's determination that an arbitrator's nondisclosure raised justifiable doubts as to the tribunal's independence.

Procedural Integrity: More than a Formality

The Rockhopper annulment underscores the critical role of procedural safeguards in investor-state arbitration. The Committee did not require proof of actual bias; rather, it examined whether the circumstances gave rise to a reasonable appearance of partiality. This reflects a broader principle: the legitimacy of arbitration turns not only on actual fairness but also on its appearance.

For both investors and states, this standard reinforces that transparency and disclosure are essential to sustaining confidence in arbitral institutions. A tribunal perceived as compromised risks undermining its authority and enforceability of its award. In this context, procedural rules ensure that treaty protections are applied within a framework that is commands credibility and legitimacy. 

Substantive Implications of a Partial Legal Analysis

The tribunal's decision to resolve the dispute solely based on expropriation left a significant gap in the legal analysis. By declining to address the FET claim, the tribunal avoided engaging with key elements of investor protection, including transparency, regulatory stability, legitimate expectations, and fairness and predictability of state conduct.

This contrasts with other ECT cases such as Charanne and Antin, where tribunals addressed both expropriation and FET claims to assess the broader context of regulatory change. These decisions reflect an evolving understanding that FET and expropriation standards serve complementary but distinct roles: FET protects procedural fairness and investor trust, while expropriation focuses on economic deprivation.

In Rockhopper, the procedural flaw that led to annulment also casts doubt on the adequacy of the tribunal's substantive reasoning. A tribunal whose impartiality is in question cannot be assumed to have applied treaty standards comprehensively. The result is not only a failure of process, but also a missed opportunity to clarify how investor protections apply in the face of regulatory measures. When tribunals truncate their analysis, they risk leaving core aspects of treaty interpretation underdeveloped.

Business and Regulatory Impact: Navigating a New Risk Environment

The Rockhopper annulment shifts the focus of investment risk beyond state conduct to include the integrity of dispute resolution itself. For companies operating in heavily regulated sectors the lesson is clear: legal protections under treaties offer little protection if procedural vulnerabilities undermine enforcement.

This reframing requires a more integrated approach to risk. Due diligence must extend beyond host state policy to the composition and conduct of the tribunal. Arbitrator conflicts, transparency in appointments, and procedural safeguards should be assessed with the same rigor as treaty protections and regulatory conditions. Procedural integrity becomes a strategic variable across investment planning, dispute resolution, and treaty interpretation, together constituting a robust tool for managing regulatory risk.

Broader Context and Conclusion

The Rockhopper annulment reflects a broader shift in investor-state arbitration away from expansive interpretations of treaty protections toward a more institutionally grounded model. This development aligns with cases such as Komstroy and Klesch, which have intensified scrutiny over both the scope of treaty obligations and the authority of arbitral tribunals to enforce them.

In this evolving legal landscape, a tribunal's ability to define and apply the boundaries of investor protection is directly tied to its perceived impartiality. As Rockhopper illustrates, procedural failings can destabilize even well-founded claims and obstruct the enforcement of awards. Legal teams of businesses must therefore integrate procedural risk assessment into the investment lifecycle, from initial due diligence to dispute resolution strategy.

The lesson for investors is clear: managing legal risk under investment treaties now requires close attention not only to substantive rights but also to the procedural soundness and transparency of the dispute resolution process. When tribunal impartiality is cast into doubt, even by appearance alone, the legitimacy of the outcome is undermined along with the practical value of the treaty as a tool of legal enforcement.

Tommaso Giorgio Maria Moneta is a PhD candidate at the University of Innsbruck, specializing in public international law.