1. Introduction:

The investor-state dispute settlement (ISDS) as a vital mechanism for encouraging foreign direct investment, has undergone significant evolution over recent decades. This legal framework, often rooted in bilateral investment treaties and arbitral precedent, aims to protect sustainable investment through the establishment and application of secondary rules such as compensation for deprivative measures and interferences undertaken by states. With the increase in foreign investment and the rise in disputes, the ISDS system has faced growing challenges. These challenges often lead to investor claims against host states. Arbitral precedent demonstrates that tribunals usually prioritize the interests of foreign investors over the sovereignty of states by rendering crippling awards. The inconsistency and fragmentation in investor-state disputes prompted the United Nations Commission on International Trade Law (UNCITRAL) to establish its Working Group III. By examining and identifying the existing gaps in areas such as compensation in foreign investment disputes, Working Group III has proposed solutions to balance between the regulatory right of states and the interests of foreign investors. The output reflects evolving approaches concerning the criteria and methods of quantification of compensation. It can be argued that the credibility of standards such as the principle of full compensation or subjective approaches like discounted cash flow (DCF) method, is now being questioned. Thus, we are witnessing a transition from traditional North-South paradigms towards more complex multipolar models in the realm of international investment governance.

Employing a critical and analytical methodology and relying on reports from UNCITRAL Working Group III and proposals made by certain States and relevant investment arbitral jurisprudence, this study seeks to present recent achievements of Working Group III in the field of compensation and attempts to outline prospective developments.

2. Research Gap and Objective:

The issue is critical because massive ISDS compensation awards threaten states' democratic sovereignty as well as their financial capacity to enact vital public interest legislation. More importantly, Iran has also been negatively affected by the traditional approaches to compensation in certain disputes. Furthermore, this study directly engages with Public International Law, particularly the principles of state responsibility concerning full reparation and customary rules on expropriation. It is also worth noting that international investment law can be considered a branch of Public International Law. This research aims to analyze how the ongoing reforms could address these systemic challenges. The findings seek to contribute to a more just and sustainable framework for international investment relations.

3. Methodology:

Employing a critical and analytical methodology and relying on reports from UNCITRAL Working Group III and proposals made by certain States and relevant investment arbitral jurisprudence, this study seeks to present recent achievements of Working Group III in the field of compensation and attempts to outline prospective developments. The analysis focuses specifically on how these evolving standards are being shaped through state practice and arbitral decisions. Furthermore, it examines the practical implications of these changes for both investors and host states in future dispute settlement cases.

4. Key Findings:

The WGIII reform process reflects a shift from the traditional standard of full compensation towards more flexible criteria, such as appropriate compensation and a greater emphasis on equitable considerations. This change allows arbitrators to consider the specific circumstances of each case rather than applying rigid formulas. It helps ensure that compensation amounts are fair to both investors and host states. This research aims to analyze how the ongoing reforms could address these systemic challenges. The findings seek to contribute to a more just and sustainable framework for international investment relations.

5. Contribution to the Field:

By using the latest 2025 statistics on compensation in international investment law, as well as the official positions of states, this article seeks to fill a gap in the Persian literature regarding UNCITRAL's recent achievements. It also provides comparative analysis with other international legal frameworks and can offer practical recommendations for reforming Iran's investment dispute resolution mechanism

6. Implications and Applications:

The new approaches, particularly those mentioned in the article, support the right of states to the enactment of laws in the public interest. This legislative freedom is crucial for the legitimacy of the international investment law regime. This evolution establishes a more equitable legal structure where public interests and sustainable development are considered alongside investor protection. Such an approach not only helps mitigate contentious disputes but also provides the stability and predictability necessary to attract productive investment.

7. Conclusion:

This article concludes that secondary rules, such as compensation in the investor-state dispute settlement, demand urgent revision. By relying on traditional criteria like full compensation, which may lead to some crippling awards, ISDS has faced legitimacy crisis. UNCITRAL, through its Working Group III, seeks to promote a transition from the traditional system towards a new and more equitable order in international investment law that better balances investor protection with the sovereign right to regulate.

8. Keywords:

Working Group III, Reforms, Investor-State Dispute Settlement (ISDS), Compensation, Precedent, New Approaches.