Investor–state dispute settlement
[1] As of June 2024, over US$113 billion has been paid by states to investors under ISDS, the vast majority of the money going to fossil fuel interests.
[4] Since 2017, multilateral negotiations for reform have been taking place in Working Group III of the United Nations Commission on International Trade Law.
[5] Hartley Shawcross and Hermann Josef Abs advocated for the creation of an international investor–state dispute settlement system after World War II.
[8] Under customary international law, an investor-state can vindicate injury caused by the host state by exercising diplomatic protection, which may include retorsion and/or reprisals.
[13] According to the Office of the United States Trade Representative, ISDS requires specific treaty violations and does not allow corporations to sue solely for lost profits.
[15] Critics also state that government violations may be difficult to foresee, and the threat of exorbitant fines may cause a chilling effect which halts regulation or legislation in the public interest (e.g. human health and environmental protection).
NAFTA Chapter 11 was the first instance of an ISDS provision receiving widespread public attention, especially in the United States in the wake of the Methanex case.
[21] If you wanted to convince the public that international trade agreements are a way to let multinational companies get rich at the expense of ordinary people, this is what you would do: give foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever a government passes a law to, say, discourage smoking, protect the environment or prevent a nuclear catastrophe.
Yet that is precisely what thousands of trade and investment treaties over the past half century have done, through a process known as 'investor-state dispute settlement', or ISDS.
[26][27] In July 2023, David R. Boyd, the United Nations Special Rapporteur on human rights and the environment, found compelling evidence that ISDS has had a chilling effect on governments' ability to enact essential regulations to address the environmental crisis and the human rights crisis.
"[14] The White House notes that investment protections are a component of more than 3,000 trade agreements, the vast majority of which have some form of neutral arbitration.
[12] A 2017 study found that the success rate of investors in investor-state disputes has sharply fallen over time because most legal challenges today seek compensation for regulation implemented by democracies, not expropriation by non-democracies.
This trend is observed irrespective of individuals' various characteristics, such as their skill levels, access to information, and national sentiments, which are typically considered crucial factors influencing trade attitudes.
[23] In 117 ISDS cases, the foreign corporate activity, for example, fossil fuel drilling or other mineral extraction, was protested by a social movement or the local community affected.
A fourth conclusion was proposed by others (Alfaro et al., 2004; Li and Liu, 2005; Batten and Vo, 2009): FDI may have a positive or negative impact on the GDP of developing economies depending on the existence of adequate policies to "filter" speculative or predatory investment.
[50] This bias, fueled by the conflict of interest in the core of the system (that need not assume any lack of integrity on a personal level on the arbitrators side, but solely the cognitive difficulty in overcoming a bias when one's personal interest is at stake) may help explain the significant growth in the number of ISDS cases in the 2000s and 2010s.
[51] Opponents of ISDS argue that arbitrations are sometimes carried out in secret by trade lawyers who do not enjoy the typical safeguards of judicial independence and procedural fairness, who earn income only if a case is brought and proceeds, and who are not accountable to the public or required to take into account broader constitutional and international law human rights norms.
[11] Proponents of ISDS point out that confidentiality is a standard feature of all arbitration and one that enables a constructive, de-politicized and fact-oriented atmosphere of dispute resolution.
[citation needed] In response, critics make the point that any judge, whether domestic or international, who is part of a legal system not shown to be systematically biased or unreliable, has a greater claim to independence than an arbitrator because they are insulated from conflicts of interest that arise when arbitrators work on the side as lawyers, and is assigned cases in an objective manner rather than by the discretion of a disputing party or an executive official.
However, no investment treaty allows other parties who have an interest in the dispute, other than the claimant investor and respondent government, to obtain standing in the adjudicative process.
Under the Trans-Pacific Strategic Economic Partnership, the tribunals shall, subject to the consent of the disputing parties, conduct hearings open to the public.
[59] Development under the draft Pan-African Investment Code, envisaged strengthening the role of defending states by allowing them to initiate counter-claims against investors.
If the parties do not agree who to appoint, this power is assigned to executive officials usually at the World Bank, the International Bureau of the Permanent Court of Arbitration, or a private chamber of commerce.
[81] In 2011, the Australian government announced that it would discontinue the practice of seeking inclusion of investor-state dispute settlement provisions in trade agreements with developing countries.
"[82]This statement is a reaction to Philip Morris' ISDS claim under UNCITRAL rules to challenge Australian tobacco Advertising Restrictions.
[84] An alternative way ahead may be the preservation of investor protection under public international law, including ISDS, but with more concern for transparency and the balancing of economic and non-economic interests.
[85] As noted above, the European Commission proposed September 2015 an 'Investment Court System' to replace ISDS clauses (notably in the draft TTIP), with the scope for investor challenge much reduced and with 'highly skilled judges' rather than arbitrators used to determine cases.
[86] In this vein, Karel De Gucht, the EU commissioner in charge of negotiating International Investment Agreements declared on 18 December 2014 that future agreements shall become more transparent, shall "fully enshrine democratic prerogatives" and "explicitly state that legitimate government public policy decisions – on issues such as the balance between public and private provision of healthcare or "the European ban on chicken carcasses washed with chlorine" – cannot be over-ridden".
[81] In 2018, the Court of Justice of the European Union ruled that "The arbitration clause in the Agreement between The Netherlands and Slovakia on the protection of investments is not compatible with EU law".
[90] This ruling could imply that any similar arbitration tribunal considering corporate sovereignty cases would also be illegal under EU law.
