I. This is ISDS
Investor State Dispute Settlement (ISDS) is a dispute resolution mechanism included in some 3 000 bilateral investment treaties concluded by almost 200 states worldwide. It has also, in various forms and version, been proposed as the mechanism in many of the large trade and investment treaties currently under negotiation, such as the TTIP, the CETA and the TPP.
An ISDS procedure may take different shapes but a common characteristic is that it is conducted through international arbitration. The majority of these procedures are administered by the International Centre for Settlement of Investment Disputes (ICSID), which is part of the World Bank Group. The Arbitration Institute at the Stockholm Chamber of Commerce (SCC) also administers ISDS procedures. Together ICSID and the SCC have administered over 65% of the world’s known treaty-based investment disputes.
II. Investment Protection and ISDS
Investment treaties typically contain terms defining which investors, and which investments, are covered by the treaty and how comprehensive that protection is. It is common for states to undertake not to subject foreign investors to illegal expropriation or discrimination, and to guarantee investors fair and equitable treatment.
The purpose of these terms is typically to ensure that the investment conditions are predictable. Investment treaties were traditionally a tool for capital importing countries to attract foreign investment and a way for capital exporting countries to protect their investors. Many treaties’ terms embody a balance between these two interests. In modern times this distinction, and the interests associated with it, is less prevalent in investment treaties.
ISDS does not define the level of investment protection. This is a matter of policy, decided by states. ISDS addresses the situation where an investor claims that the conditions for its investments – for reasons attributable to the state – have changed in a manner which is seen as constituting a breach of the treaty.
III. ISDS arguments
The debate surrounding investment protection and ISDS has been characterized by misunderstandings and factual errors. A common feature is the mixing of substance (the agreed terms) and procedure to enforce the substance (ISDS). Some examples:
ISDS ”undermines” democratic decisions
ISDS cannot ”undermine” any decision but applies the terms agreed upon between states. ISDS does not formulate the terms.
States conclude treaties with other states on a regular basis. An investment protection treaty between states is a manifestation of the state’s intention and is therefore just as democratically valid as national legislation in that state.
It deserves pointing out that states are bound by agreements that they enter into. A state cannot escape responsibility for a treaty concluded with another state by adopting new legislation contrary to its international obligations. This is a fundamental principle in public international law.
ISDS undermines state sovereignty
States negotiating international agreements do so as an act of exercising their state sovereignty. This means that agreed terms in a free trade agreement, such as those defining the level of investment protection, represent an act of state sovereignty. The substantive parts of a treaty constitute state policy decisions, with ISDS as the procedure to be used when the parties cannot agree on whether the state has complied with the treaty. ISDS does not define policy – ISDS merely applies the law and policy as decided upon between states.
ISDS enables multinational companies to sue states for loss of future profits
ISDS does not ”provide” rights. It is the substantive parts of the treaty that ”provide” rights. ISDS has nothing to do with conditions for protection of investments. ISDS is the procedure used to make sure that the treaty is being applied in the way intended by states – both for states and for investors.
As far as is known, no investment treaty guarantees a profit or specifically states that ”loss of profit” constitutes a treaty breach giving investors a ground to file for damages against a state.
ISDS allows issues of public interest to be decided behind closed doors
New international transparency norms in ISDS (the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration), negotiated by United Nations member states, will mean that ISDS conducted under these new rules is more transparent than many, even most, national courts in the EU, including Sweden. It is true that international arbitration is typically a confidential proceeding but investor-state disputes are somewhat different from this norm and more transparent, even without the new UNCITRAL Rules. The development is towards more open dispute resolution between investors and states. Several ICSID examples illustrate where proceedings have been available to the public through webcasting; this would not be allowed, for example, in a Swedish public court.
ISDS is only available to very large corporations
Investment protection under existing treaties has to a large degree been sought by small and medium-sized companies (SMEs). According to a 2012 OECD study, individuals or small companies with limited international presence have initiated 22% of cases. Statistics from ICSID (2014) also indicate that individuals have initiated 16% of their cases. According to the OECD study, corporations defined by the United Nations (UNCTAD) as ”top 100 multinational enterprises” only comprise 8% of the total known caseload.
ISDS is a private system intended to circumvent national courts
Arbitration is a globally recognized, neutral, efficient and well-functioning system for dispute resolution. As an important element in providing international trade with predictable rules and rule of law, arbitration is regulated by legislation which specifies how arbitration must be conducted in order to comply with the rule of law. It is the national courts that decide, if necessary, whether or not a specific proceeding has been conducted in compliance with the rule of law. Arbitration does not ”circumvent” national courts but rather co-exists and interacts with the courts. The relationship between national courts and arbitration is the same worldwide, including under the United Nations’ Model Law on International Arbitration.
ISDS is unnecessary – a well-functioning legal system could take care of these disputes
The fact that the courts of a specific country are well functioning is not decisive when choosing international arbitration. Parties from countries with highly sophisticated legal systems, including the rest of Europe and the United States, often choose arbitration. Other factors are involved:
- Neutrality – no party has to act away from home and adapt to another country’s language and procedural peculiarities.
- Effectiveness – an international arbitration award can be enforced in more than 150 countries worldwide.
- Specialist competence – the parties can themselves appoint the arbitrators and ensure that decisions are made by individuals with specialist knowledge.
- Procedural economy – arbitration produces a final and binding conclusion to a dispute faster than most national court systems.
A free trade agreement can be negotiated without ISDS
Every agreement needs a mechanism to ensure that the terms of the agreement can be enforced. In this respect, a simple sales contract between two commercial parties is no different than a treaty between states. If an agreement lacks the possibility for a party to sue for an alleged breach of the agreement, the terms of the agreement will be inoperative in practice. A treaty on investment protection whose terms are not supported by an effective dispute resolution mechanism runs a risk of becoming a non-committing treaty in practice.
The only available options for a final conclusion to a dispute are national courts or arbitration.
A free trade agreement without ISDS but with investors referred to state courts would, for example, mean that:
- the investor would always act away from home; it has to adapt to language and procedure, which the state does not;
- the investor must trust the national court to be completely independent and have enough integrity to be able to decide against its own government;
judges in the court of first instance (and the next two or three instances, as the case may be) must be able to apply public international law as expressed in treaties;
- the dispute will likely last longer than would be the case in an ISDS procedure;
- the dispute will likely be less transparent than an ISDS procedure conducted under the UNCITRAL Rules on Transparency;
- the judgment can only be enforced in a limited number of countries (for example, a decision by an EU court can only be guaranteed enforcement in the EU, and a decision by an American court can only be guaranteed enforcement in the United States).