Tag Archives: International investment

UNCTAD 2014 ISDS Trends

UNCTAD have released an infographic with statistics about ISDS trends in 2014.

It presents the number of concluded, on-going and new cases cases during 2014. It also answers the following questions:

What was the outcome of the concluded cases? Which are the most frequent home-countries of claimant investors? How many claims were made against developing countries?

UNCTAD is the United Nations body responsible for dealing with development issues, particularly international trade and is governed by its 194 member States.

ISDS trends 2014_2_red2

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What caused the rise of ISDS claims?

In a recent report by the European Centre for International Political Economy, Demystifying Investor-State Dispute Settlement, the history of the rise of investment protection and ISDS claims is analyzed.

The report responds to the question whether the increasing use of ISDS is a signal that investors have too much power in challenging actions by States.

It concludes the following:

a. At its core, the number of ISDS cases reflects the amount of investment in the world. The growth of ISDS cases and the growth of foreign direct investment (FDI) largely follow the same trend.

b. The key explanation behind the rise of cases is that the volumes of FDI have grown enormously. A portion of such FDI is made in developing countries and transition economies, hence resulting to greater problems faced by investors.

c. There is a growing support of the principle of international rule of law in commerce, demonstrated by the rising numbers of Bilateral Investment Agreements (BITs), as well as the WTO agreements.

d. The most active claimants in ISDS are investors from EU countries. This is not surprising as the EU is by far the biggest source of FDI in the world, representing 43% of all global outward FDI.

e. ISDS cases are concentrated to specific sectors that are highly dependent on public buyers or political support, for example the electricity sector. This is also not surprising since sectors with significant government involvement naturally have a greater degree of political and regulatory risk.

The increasing number of ISDS cases may be described as an increase of trust and reliance on international law in general, and to international arbitration specifically, both by investors and States.

Does ISDS compensate for loss of profit?

In case of expropriation, investment treaties typically provide for compensation in accordance with the “fair market value” of the investment at the time the expropriation takes place.

An assessment of the value of an investment may also include the reasonable and predictable performance of the investment in the future – which will largely be determined by evidence. It is the investor who must be able to convincingly demonstrate  (i) the causal link between the government action and the loss of profit, which in practice can be quite difficult since typically many factors impact the profit of an investment other than a governmental action, and (ii) how much profit the investment in fact had generated, had the measure not taken place.

In practice, government and investor often seek expertise from accountants or other experts in conducting the calculation. It is therefore ultimately a pure question of fact which the tribunal must consider. In some cases, the facts are not very complicated. In others, the issue is very  complex.

It is, however, not very common that investors are fully successful in receiving the full amounts as claimed, even if the investor succeeds on the merits of the case.

For instance, in Metalclad v. Mexico, the tribunal noted that future profit cannot be used in determining the investment value if the investment has not been operating for a sufficiently long period to establish a performance record. In Swembalt v. Latvia, the tribunal rejected investor’s claim for loss of profit due to failure of the investor to provide a basis of its calculation.

To say that ISDS “guarantees compensation for lost profits” is thus disguising the reality. When the investment treaty does not specifically define the calculation of damages, theoretically an investor may receive compensation for loss of profit. But the practical reality is something completely different.