Investor–state dispute settlement
Investor–state dispute settlement, or an investment court system, is a set of rules through which states can be sued by foreign investors for certain state actions affecting the foreign direct investments of that investor. This most often takes the form of international arbitration between the foreign investor and the state. 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.
ISDS most often is an instrument of public international law, granting private parties the right to sue a state in a forum other than that state's domestic courts. Investors are granted this right through international investment agreements between the investor's home state and the host state. Such agreements can be found in bilateral investment treaties, international trade treaties such as the 2019 United States–Mexico–Canada Agreement, or other treaties like the 1991 Energy Charter Treaty.
To be allowed to bring an investor-state dispute before an arbitral tribunal, both the home state of the investor and the state where the investment was made must have agreed to ISDS, the investor from one state must have an investment in a foreign state and the foreign investor must put forward that the state has violated one or more of the rights granted to the investor under a certain treaty or agreement.
ISDS claims are often brought under the rules of the International Centre for Settlement of Investment Disputes of the World Bank, the London Court of International Arbitration, the International Chamber of Commerce, the Hong Kong International Arbitration Centre, or the United Nations Commission on International Trade Law.
The ISDS system has been criticized for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs, and there have been widespread calls for reform. Since 2015, the European Union has been seeking to create a multilateral investment court to replace investor-state arbitration. Since 2017, multilateral negotiations for reform have been taking place in Working Group III of the United Nations Commission on International Trade Law.
Foreign investment protection
Historical development
and Hermann Josef Abs advocated for the creation of an international investor–state dispute settlement system after World War II. Abs saw it as a solution to unwanted nationalisations by states. The Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments was concluded in 1959 and was the first investment protection treaty under international law. 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, which can help avoid coercive resolutions and protect against reneging. Notable examples of this practice are the Jay Treaty commissions, the Iran–United States Claims Tribunal and the American-Mexican Claims Commission. 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.Modern practice
As of 2024, the legal protection of foreign direct investment under public international law is guaranteed by a network of more than 2,750 bilateral investment treaties, multilateral investment treaties, such as the Energy Charter Treaty, and free trade agreements, such as the North American Free Trade Agreement. Most of these treaties were signed in the late 1980s and early 1990s before the increase of investor claims under the treaties began in the late 1990s.The majority of the treaties provide foreign investors with substantive legal protection and access to ISDS for redress against host states for breaches of such protection. Some of these protections are framed in vague terms and give extensive discretion to arbitrators for their interpretation and application.
The overall number of ISDS cases reached 500 in 2012. Of these, 244 were concluded, of which 42% were decided in favor of the host state, 31% in favor of the investor, and 27% settled out of court.
Foreign investors can sue states under investment treaties, but states cannot sue foreign investors, because only states are the parties to the treaty, and therefore only states can be held liable to pay damages for breach of the treaty. Thus, a decision in favor of the state means that the state does not pay compensation, not that it will receive compensation from the investor. A state that wishes to sue a foreign investor does so through the state's domestic courts.
Unlike the World Trade Organization, ISDS cannot overturn local laws which violate trade agreements, but the ISDS can grant monetary damages to investors adversely affected by such laws. 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. Critics state that some 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.
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.
NAFTA Chapter 11
An example of ISDS is NAFTA Chapter 11. NAFTA went into effect in 1994 between the parties of Canada, Mexico, and the United States. Chapter 11 allows investors of one party to bring claims against another party before an international arbitral tribunal. 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.Transatlantic Trade and Investment Partnership
Resistance from European Union to the US proposal to include an ISDS clause in the draft Transatlantic Trade and Investment Partnership treaty caused this clause to be removed from the draft treaty in September 2015. In its place, the European Commission proposed an investment court system. Not long afterwards, ICS was declared illegal by the German Association of Magistrates, though the Commission dismissed the magistrates' judgement as based on a misunderstanding., the US wants an ISDS clause reinstated.According to a 2019 study, ISDS is the single most important factor motivating opposition to TTIP among Germans.
Debates and criticism
Local remedies
Because NAFTA Chapter 11 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 criticized, proponents of ISDS assert that speedy dispute resolution through ISDS is critical in modern economic environments and would be not possible if local remedies needed to be exhausted first. Critics argue that all other situations in international law require a private party to first show that the state's domestic courts are unreliable before the private party can sue the state. Factors in the growth of investment treaty claims since the late 1990s may have been the removal of duty to exhaust local remedies, as well as the growth in the number of bilateral free trade agreements since the breakdown of the multilateral WTO Doha round in the mid-2000s.Regulatory capacity
Much debate and criticism 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.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. Other critics argue that ISDS threatens democracy and the rule of law, in part because investor state claims inhibit the ability of domestic governments to pass legislation addressing public concerns, such as health and environmental protection, labor rights or human rights. For climate, Global ISDS Tracker reports that the $80 billion awarded to fossil fuel firms exceeds the total climate finance provided by developed countries for developing countries.
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 International Bar Association states that "while investment treaties limit states' ability to inflict arbitrary or discriminatory treatment, they do not limit a state's sovereign right to regulate in the public interest in a fair, reasonable, and non-discriminatory manner." The Office of the United States Trade Representative similarly states that "ISDS does nothing that takes away the sovereign ability of governments impose any measure they wish to protect labor rights, the environment, or other issues of public welfare." 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., the United States is party to at least 50 such agreements, has only faced 13 ISDS cases and has never lost an ISDS case.
In a February 2016 op-ed against the Trans-Pacific Partnership, U.S. 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. The editorial board of The Washington Post noted 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."
According to the International Bar Association, as of 2017, states have won a higher percentage of ISDS cases than investors, and that around one-third of all cases end in settlement. Claimant investors, when successful, recover on average less than half of the amounts claimed. IBA notes that "only 8 per cent of ISDS proceedings are commenced by very large multinational corporations." 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". 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. 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.
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. 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. A 2019 study shows that ISDS clauses consistently sparks significant public opposition to treaties. 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.