Investor–state dispute settlement

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. In addition to diplomatic protection, states can and do establish ad hoc commissions and arbitral tribunals to adjudicate claims involving treatment of foreign nationals and their property by the host state ("state-state-dispute-settlement", SSDS), which can help avoid coercive resolutions and also protect against reneging.[4] Notable examples of this practice are the Jay Treaty commissions, the Iran–United States Claims Tribunal and the American-Mexican Claims Commission.[5] However, these treaties were limited to the treatment of foreign investors during a past period of time, whereas modern ISDS allows investors to make claims against states in general and on a prospective basis.

Currently, the legal protection of Foreign Direct Investment under public international law is guaranteed by a network of more than 2,750 bilateral investment treaties (BITs), Multilateral Investment Treaties, most notably the Energy Charter Treaty and number of Free Trade Agreements such as NAFTA containing a chapter on investment protection. Most of these treaties were signed in the late 1980s and early 1990s before the current explosion of investor claims under the treaties began in the late 1990s.

The majority of the treaties provides foreign investors with substantive legal protection (including the right to "fair and equitable treatment", "full protection and security", "free transfer of means" and the right not to be directly or indirectly expropriated without full compensation) and access to ISDS for redress against host states for breaches of such protection. Some of these standards are framed in vague terms, given extensive discretion to arbitrators in their interpretation and application. The overall number of known cases reached over 500 in 2012. Of these, 244 were concluded, of which approximately 42% were decided in favor of the host state and approximately 31% in favor of the investor. Approximately 27% of the cases were settled out of court.[1]

Chapter 11 of NAFTA includes an Investor-State provision.

Notably, only foreign investors can sue states under investment treaties, because states are the parties to the treaty, and only states can be held liable to pay damages for breach of the treaty. States have no corresponding right to bring an original claim against a foreign investor under the treaties, again because investors are not parties to the treaty and therefore cannot be in breach of it. Thus, a decision in favor of the state means that the state has not been ordered to pay compensation, not that it received any compensation from the investor (although costs can be awarded against the investor). A state cannot "win" in ISDS in the manner of a foreign investor - a state which wishes to sue a foreign investor does so through its own domestic courts, without the need for a treaty.

ISDS cannot overturn local laws (unlike the World Trade Organization) which violate trade agreements,[6][7] but can grant monetary damages to investors adversely affected by such laws.[8] 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".[9] On the other hand, pundits opine 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).[10] Critics also state that treaties are written so that any legislation causing lost profits is by definition a treaty violation, rendering the argument null that only treaty violations are subject to ISDS.[10]

A notable example of ISDS, which has been in existence for two decades now, is Chapter 11 of the North American Free Trade Agreement (NAFTA). NAFTA Chapter 11 allows investors of one NAFTA party (Canada, United States or Mexico) to bring claims directly against the government of another NAFTA party before an international arbitral tribunal. Because NAFTA Article 1121 waives the 'local remedies' rule, investors are not required to exhaust local remedies before filing Chapter 11 claims. While this fact has been amply criticized in public, proponents of ISDS point out that speedy dispute resolution through ISDS is critical in modern economic environments and would be defeated by adding several steps of local remedies. On the other hand, there is no other situation in international law where a private party can sue a state without showing that the state's domestic courts are not independent or reliable. The removal of the customary duty to exhaust local remedies, where reasonably available, may have been a factor in the explosion of investment treaty claims since the late 1990s, although a more obvious explanation is the explosion in the number of bilateral free trade agreements since the breakdown of the multilateral WTO Doha round in the mid-2000s.

Investors may initiate an arbitration against the NAFTA Party under the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL Rules") or under the Rules of the International Centre for Settlement of Investment Disputes ("ICSID Rules"). 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.[11]

Resistance from the EU side to the US proposal to include an ISDS clause in the draft Transatlantic Trade and Investment Partnership treaty was such as to cause this element to be abandoned in September 2015. In its place, the European Commission proposed an investment court system (ICS).[12][2][3] Not long afterwards, ICS was declared illegal by the German Association of Magistrates,[13] though the Commission dismissed the magistrates' judgement as based on a misunderstanding.[14] For its part, the United States wants ISDS reinstated.[14]

According to a 2019 study, opposition to ISDS is the single most important factor motivating opposition to TTIP among Germans.[15]

Much debate and criticism[17][18][19] has arisen concerning the impact of ISDS on the capacity of governments to implement reforms and legislative programs related to public health, environmental protection, and human rights.[20][21]

Opponents argue that ISDS threatens democracy and the rule of law,[22] in part because investor state claims (or the threat of them) inhibit the ability of domestic governments to pass legislation addressing perfectly legitimate public concerns, such as health and environmental protection, labor rights or human rights.[23][24][25][26][27]

Proponents of ISDS argue that governments retain their regulatory ability if the agreements in question specify that regulations protecting health, the environment, labor rights, and human rights are allowed. The Office of the United States Trade Representative challenges the notion that ISDS challenges "the sovereign ability of governments impose any measure they wish to protect labor rights, the environment, or other issues of public welfare".[9] The International Bar Association (IBA) mirrors these sentiments, noting that "while investment treaties limit states’ ability to inflict arbitrary or discriminatory treatment, they do not limit (and, in fact, expressly safeguard) a state's sovereign right to regulate in the public interest in a fair, reasonable, and non-discriminatory manner."[7] 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.[28] The United States is party to at least 50 such agreements, has only faced 13 ISDS cases and never lost an ISDS case.[28]

In a February 2016 op-ed against the TPP, Senator Elizabeth Warren used the example of a French company suing Egypt because Egypt raised its minimum wage as an argument against the ISDS provisions of the TPP.[27] The editorial board of The Washington Post has, however, challenged this characterization of the case, noting that "Veolia of France, a waste management company, invoked ISDS to enforce a contract with the government of Alexandria, Egypt, that it says required compensation if costs increased; the company maintains that the wage increases triggered this provision. The case — which would result, at most, in a monetary award to Veolia, not the overthrow of the minimum wage — remains in litigation."[29]

According to the International Bar Association (IBA), states have won a higher percentage of ISDS cases than investors, and that around one-third of all cases end in settlement.[7] Claimant investors, when successful, recover on average less than half of the amounts claimed.[7] IBA notes that "only 8 per cent of ISDS proceedings are commenced by very large multinational corporations."[7] IBA challenges the notion that ISDS is biased against developing countries, noting that there is "no correlation between the success rates of claims against states and their income levels or development status."[7] IBA notes that ISDS is necessary even in countries with sophisticated domestic legal systems because those domestic courts rule according to domestic laws, not international law.[7] IBA notes that "increasingly, awards require the losing party to pay arbitration costs and legal fees to the winning party", which deters investors from initiating unmeritorious cases.[7]

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.[30] The author of the study argues that the likely goal of investors is not to obtain compensation through ISDS, but to impose costs on governments contemplating regulations and therefore deter the regulatory ambitions of governments.[30] Another recent study shows that ISDS consistently sparks significant public opposition. 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." [17]

The Peterson Institute for International Economics (PIIE) claims that ISDS provisions are necessary, as they boost investment: "empirical evidence has shown that treaties including these provisions have a positive effect on foreign direct investment (FDI) flows between signatory countries.".[31] On the other hand, Hallward-Driemeier (2003) [32] analyzed the impact of Bilateral Investment Treaties (BITs) and, after conducting several tests with different dependent variables – absolute amount of FDI, the ratio of FDI to host country's GDP and the share of host country's FDI in total FDI outflows of a home country – concluded that BITs do not serve to attract additional FDI. Additionally, Emma Aisbett (2007) [33] found "no evidence for the claim that BITs signal a safe investment climate". Yackee[34] also concluded that "the apparently positive effect of BITs on FDI largely (and in some cases entirely) falls from significance", which is consistent with the empirical findings that "potential investors seem to have little awareness or appreciation of specific BITs".

The impact of FDI on the GDP of developing economies is, itself, a matter of research. While some research (Olofsdotter, 1998; Reisen and Soto, 2001) finds a positive impact on developing countries, other authors (Mencinger, 2003; Carkovic and Levine, 2005; Johnson, 2006; Türkcan, Duman, and Yetkiner, 2008; Herzer, 2012) find a negative impact, and some (De Mello, 1999) find the data to be inconclusive. 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. Thus, opponents of ISDS warn that these systems may harm the government's ability to filter FDI more favorable to development, and therefore harm GDP.[35] The Cato Institute warns[36] that the creation of a two-tier justice system, by which foreign investors are subject to a set of rules different from domestic investors, apart from being contrary to the principle of the Rule of Law, is itself a market distortion prone to inefficiencies that are bound to harm GDP.

Finally, opponents of ISDS also argue[37] that these systems increase inequalities, harm public services, threaten labor and consumer protections, threaten financial stability and the environment, all of which have perilous economic consequences.

PIIE challenges the claim that ISDS "arbitrators lack integrity", noting that arbitrators take an oath of impartiality and both sides of a case choose arbitrators.[6]

Opponents of ISDS argue that, although the system lacks safeguards regarding individual abuse,[38] the most important problem is systemic.[39] Opponents of ISDS note that arbitrators are paid on a case-by-case basis, and therefore they are personally benefited with an increase in claims. Because governments may not use the ISDS system to sue investors, if arbitrators have any bias toward companies of investors, they will encourage further claims and be personally benefited by that increase. The vague terms of most BITs ease this kind of "drift" on the interpretation of treaties by arbitrators.[40] This drift, 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 explosive growth on the number of known ISDS cases in the last few decades.[41]

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.[42] The Peterson Institute for International Economics agrees "that secrecy has gone too far" in many ISDS cases, but notes that agreements such as the Trans-Pacific Partnership did ensure greater transparency in ISDS.[6] 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. On the other hand, such traditional confidentiality is limited to disputes that affect the parties in question and not the broader public. Also, most ICSID awards, although confidential, are de facto published by consent of the parties. However, many awards under other arbitration rules are not public and, in the case of investor-arbitration at the International Chamber of Commerce, there is a requirement for blanket confidentiality for all aspects of a case.

It is further pointed out that judges are not elected in most countries outside the US, so that "public accountability of judges" may not be considered a standard of public international law. In any event, they say, the qualification of ISDS arbitrators matches or exceeds the qualification of most court judges. 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. Arbitrators are appointed by both parties at dispute, so such conflicts of interest may arise on both sides.

While ISDS has traditionally been confidential as any other arbitration, the general trend in the last decade has been to allow for more openness and transparency. On the other hand, there is still widespread confidentiality in the system.

Under Art. 29 of the U.S. Model-BIT of 2004, all documents pertaining to ISDS have to be made public and amicus curiae briefs are allowed. 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. The tribunal will make available to the public documents relating to the dispute such as the notice of intent, the notice of arbitration, pleadings, memorials, minutes or transcripts of the hearings of the tribunal, where available; orders, awards and decisions of the tribunal. In addition, third parties can and increasingly do participate in investor-state arbitration by submitting amicus curiae petitions.[43]

The World Bank's International Centre for the Settlement of Investment Disputes (ICSID) is required by ICSID Administrative and Financial Regulation 22 to make public, information on the registration of all requests for arbitration and to indicate in due course the date and method of the termination of each proceeding. It also publishes the vast majority of awards with the consent of the parties. If the parties do not consent, ICSID publishes excerpts showing the tribunal's reasoning.[44] The ICSID website has published awards for most completed arbitrations,[45] and decisions in investor-state arbitrations outside of ICSID are also publicly available online.

On 1 April 2014, the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration entered into force.[46] Article 3 foresees a general duty to publish all documents pertaining to an ISDS-procedure under UNCITRAL Rules, where the treaty establishing the ISDS-mechanism has been concluded after 1 April 2014 or where the parties so consent, subject to certain overwhelming confidentiality interests listed in Article 7. Original proposals to make all UNCITRAL arbitration under investment treaties public were not adopted after opposition by some states and by representatives of the arbitration industry who participated in the UNCITRAL working group negotiations as state representatives.

On 17 March 2015, the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration ('Mauritius Convention') was opened for signatures in Port Louis, Mauritius.[47] The Mauritius Convention will render the UNCITRAL Rules on Transparency in Treaty-based Investor State Arbitration also applicable to disputes arising out of investment treaties that were concluded prior to 1 April 2014 if both parties to the investment treaty are also party to the Mauritius Convention.[48] The convention has not yet entered into force since the three required ratifications have not yet been submitted.[49] 10 States have signed the Mauritius Convention so far.[49]

Development under the draft Pan-African Investment Code, envisaged strengthening the role of defending states by allowing them to initiate counter-claims against investors.[50]

A counter-claim may be a way of rebalancing investment law, by allowing states to file claims against investors, as a means to sanction investor misconduct.[51]

S.D. Myers v. Canada

Between 1995 and 1997 the Canadian government banned the export of toxic PCB waste, in order to comply with its obligations under the Basel Convention, of which the United States is not a party. Waste treatment company S.D. Myers then sued the Canadian government under NAFTA Chapter 11 for $20 million in damages. The claim was upheld by a NAFTA Tribunal in 2000.[53][54]

Occidental v. Ecuador

In October 2012, an ICSID tribunal awarded a judgment of $1.8 billion for Occidental Petroleum against the government of Ecuador.[55] Additionally, Ecuador had to pay $589 million in backdated compound interest and half of the costs of the tribunal, making its total penalty around $2.4 billion.[55] The South American country annulled a contract with the oil firm on the grounds that it violated a clause that the company would not sell its rights to another firm without permission. The tribunal agreed the violation took place but judged that the annulment was not fair and equitable treatment to the company.[55]

Ethyl Corporation v. Canada

In April 1997 the Canadian parliament banned the import and transport of MMT, a gasoline additive, over concerns that it poses a significant public health risk. Ethyl Corporation, the additive's manufacturer, sued the Canadian government under NAFTA Chapter 11 for $251 million, to cover losses resulting from the "expropriation" of both its MMT production plant and its "good reputation".[56]

A similar challenge was launched by three Canadian provinces, under the Agreement on Internal Trade, and was upheld by a Canadian dispute settlement panel.[57] Consequently, the Canadian government repealed the ban and paid Ethyl Corporation $15 million as compensation.[58]

Dow AgroSciences v. Canada

On 25 August 2008, Dow AgroSciences LLC, a U.S. corporation, served a Notice of Intent to Submit a Claim to Arbitration under Chapter 11 of NAFTA, for losses allegedly caused by a Quebec ban on the sale and certain uses of lawn pesticides containing the active ingredient 2,4-D.[59] The tribunal issued a consent award as the parties to the dispute reached a settlement.[60]

Apotex v. the United States

Under Chapter 11 of NAFTA, Apotex Inc., a Canadian pharmaceuticals corporation, has alleged that U.S. courts committed errors in interpreting federal law, and that such errors were in violation of NAFTA Article 1102 (national treatment) and Article 1105 (minimum standard of treatment under international law). Apotex also alleged that the challenged U.S. court decision in favor of the Pfizer drug company expropriated Apotex’s investments in generic versions of the antidepressant Zoloft under NAFTA Article 1110 as was manifestly unjust.[61]

Apotex relied on the doctrine that a manifestly unjust domestic legal decision breaches international law and can be viewed as a substantive denial of justice.[62] Apotex has also brought a similar claim involving U.S. regulatory provisions concerning an abbreviated new drug development application for Pravastatin and patents allegedly held by Bristol Myers Squibb.[61] Apotex has two claims involving different generic products. On 14 June 2013, the Tribunal issued an Award on Jurisdiction and Admissibility, dismissing all of the claims and ordering Apotex to pay the United States' legal fees and arbitral expenses.[63]

Chemtura Corporation v. Canada

Chemtura Corporation, a United States agricultural pesticide products manufacturer, alleged that the Canadian government's Pest Management Regulatory Agency (PMRA) wrongfully terminated its pesticide business in lindane-based products, which are used on canola, rapeseed, mustard seed and cole crops to control flea beetle infestations, and on cereal crops to control wireworm. Chemtura alleged NAFTA violations of Article 1105 (on minimum standards of treatment) and Article 1110 (on expropriation). All claims were dismissed by the Tribunal, given that the measure did not amount to a substantial deprivation of the Claimant's investment and was taken legitimately and without bad faith.[64]

Philip Morris v. Uruguay

The Philip Morris v. Uruguay case (Spanish: es:Caso Philip Morris contra Uruguay) started on 19 February 2010, when the multinational tobacco company Philip Morris International filed a complaint against Uruguay seeking $25 million in damages.[65] The company complained that Uruguay's anti-smoking legislation devalued its cigarette trademarks and investments in the country and based its lawsuit on the bilateral investment treaty between Switzerland and Uruguay. The International Centre for Settlement of Investment Disputes (ICSID), a part of the World Bank decided it had jurisdiction on 2 July 2013,[66] and three years later ruled in favor of Uruguay, ordering Philip Morris to pay Uruguay $7 million, in addition to all court costs.[67]

KT Asia Investment Group v. Kazakhstan

The claimant (company incorporated in The Netherlands) was a shell company owned by Kazakh national (Mr. Ablyazov). It owned shares in BTA Bank, which the claimant alleged were nationalized by the respondent (Kazakhstan). The state position was that as owned by a Kazakh national the claimant was not eligible for investment protection under the Dutch-Kazakh BIT. This argument was dismissed by the Arbitrage. The Kazakh state then alleged that it didn’t nationalize the bank, but it bailed it out (wiping out the shares’ value in the process). The latter was due to the embezzlement of depositors’ trust (and funds) by Mr. Ablyazov. Investigating the matter the Arbitrage reached the conclusion that the investment doesn’t meet the Salini test, thus it is not protected under the BIT. As a result the Arbitrage decided it has no jurisdiction to decide the dispute.[68]