Category Archives: Debate

A better debate on ISDS

Let us start with a better debate on ISDS. Describing ISDS as a method by which investors are “circumventing decisions states deem in their best interest” is simply not correct. Yet, this argument recently came up in an Op-Ed at the New York Times.

But a better debate should start with a comprehensive understanding of the basis and functioning of ISDS.

From the outset, the Op-Ed reflects a lack of understanding of the rule of law. Governments are not immune. We cannot go back to the days where “the King can do no wrong”. When a government violates a certain right, an individual who suffers damage from the violation should be able to bring a claim to enforce his/her right.

The right to bring a claim against the state in ISDS does not come from thin air. It comes from an investment treaty, concluded by the very same state. The treaty typically provides, for the substantive part, certain rights to foreign investor and, for the procedural part, the right to bring a claim against government to enforce this right.

In comparison, the human right regime similarly provides for the right of individuals to bring a claim against a government for an alleged violation of a human rights protection. In fact, the European Court of Human Rights received more than 65,000 claims in the year 2013 alone. As we have written before, a large number of ISDS claimants are also individuals.

Governments have also been using ISDS to bring claims against investors, provided the underlying agreement provides for this possibility. See for example an ICSID case, Republic of Peru v Caraveli.

A better debate on ISDS should carefully put numbers into perspective. The Op-Ed is critical towards the huge claims in the Vattenfall and Pacific Rim cases to illustrate the system’s flaws. These cases are not yet decided thus it is at best unwise to assess ISDS as a legal mechanism based on undecided claims.

The Op-Ed further points out the unusually high award in Occidental Petroleum v Ecuador. This fact however does not define ISDS as a legal mechanism. If the investor’s claim is granted, the amount of damages does not depend upon ISDS as a procedural form, but upon the size of the investment in the first place. A calculation of damages needs to be done also when domestic courts are charged with the task of deciding claims based on an alleged violation of rights.

The ICSID statistic is clear that in 43% of cases, government was successful in defending its case.

The Op-Ed is therefore nothing more than a selective mentioning of different ISDS claims. It does not analyze the functioning of the system or even the merits of the claims. The important debate on the future of ISDS and the importance of the rule of law deserves a more fact-based approach.

Who is the investor?

The description of the investor in the ISDS debate has grown to almost mythical proportions. For an outside observer it would be easy to get the impression that the beneficiaries of investment treaty protection treaties – and the users of investor-state dispute settlement – are a narrow group of multinational companies, who use treaties to bully states. This assumption is simply not supported by the basic facts.

Investment protection treaties, be they bilateral or multilateral like the NAFTA or the TTIP that is now being negotiated, generally put no lower threshold on the size of investment to be protected. The treaties’ definitions of which types of investments are protected in practice presuppose some kind of risk-taking and long-term commitment in the host state but apart from that, definitions are wide and include a wide range of activities. As a matter of principle, investors small and big, get the same protection.

In reality, about one fourth of all ISDS claims have been brought by individuals or very small corporations, according to a comprehensive OECD study. This share of the caseload increases significantly if also medium-sized companies are included. Conversely, the same survey found that the very large multinational companies count for only 8% of the known cases.

Unlike the impression often painted in the debate, a minority of claims relate to public health or environmental protection. By way of example, one of the sectors with most ISDS claims launched in the last few years is the renewable energy sector, as many states have recently withdrawn different incentives for renewable energy investments. Some international investors claim that these measures violate the Energy Charter Treaty, which has led to over 20 arbitration cases.  Many of these solar and wind power companies are relatively small.

It also deserves pointing out that a large number of investment treaty claims have been launched by private persons (see cases listed at www.italaw.com).