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Investor-state dispute settlement (ISDS) is an instrument of public international law, that grants a foreign investor the right to initiate dispute settlement proceedings against a foreign government (the "Host State"). Provisions foreseeing ISDS are contained in a great number of bilateral investment treaties, in certain international trade treaties, such as the North American Free Trade Agreement's Chapter 11 and in international investment agreements, such as the Energy Charter Treaty. If a foreign investor from country "A" ("Home State") invests in country "B" ("Host State"), both of which have agreed to ISDS, and the Host State violates the rights granted to the investor under public international law, then that investor may bring the matter before an arbitral tribunal. While ISDS is often associated with arbitration under the rules of ICSID (the International Centre for Settlement of Investment Disputes of the World Bank) ISDS in fact often takes place under the auspices of international arbitral tribunals governed by different rules and/or institutions, such as the London Court of International Arbitration, the International Chamber of Commerce, the Hong Kong International Arbitration Centre or the UNCITRAL Arbitration Rules.

Foreign investment protection

Historical development

Under customary international law a state can vindicate injury caused to its national by the host state by exercising diplomatic protection, which may include retorsion and/or reprisals. In addition to diplomatic protection and to avoid having to resort to coercive means, 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). Notable examples of this practice are the Jay Treaty commissions, the Iran–United States Claims Tribunal and theAmerican-Mexican Claims Commission.

Modern practice

Currently, the legal protection of Foreign Direct Investment under public international law is guaranteed by a network of more than 2750 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.

The majority of these legal instruments provides foreign investors with a substantive legal protection (including the right to "fair and equitable treatment", "full protection and security", "free transfer of means" and the right not be directly or indirectly expropriated without full compensation) and access to ISDS for redress against Host States for breaches of such protection. By 1999, only 69 cases had ever been filed at the International Centre for the Settlement of Investment Disputes (ICSID). By 2012 the overall number of known cases reached over 500; of these, 244 were concluded, of which approximately 42% were decided in favour of the Host State and approximately 31% in favour of the investor. Approximately 27% of the cases were settled. Over $719 million has been paid out under U.S. Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) alone - 70 percent which are from challenges to natural resource and environmental policies, not traditional expropriations.

NAFTA Chapter 11

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 tend to point out, that speedy dispute resolution through ISDS is critical in modern economic environments and would be defeated by adding several instances of local remedies. 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.

Debates

Much debate has arisen concerning the impact of ISDS on the capacity of governments to implement reforms and legislative and policy programs related to public health, environmental protection and human rights.

Opponents argue that investor state claims (or the threat of them) inhibit the capacity of domestic governments (the "policy space") to pass legislation addressing perfectly legitimate public concerns, such as health and environmental protection, labour rights or human rights. Proponents of ISDS argue that states and their governments are bound by public international law, which includes bilateral investment treaties and international investment agreements. Under this view, the "right to regulate" has not been "lost" by the states, but on the contrary has been consciously designed by states not to allow for breach of investor's protected rights. The accession to instruments of public international law guaranteeing such rights is an exercise of democratic constitutional power and binds the acceding state, even if its future government changes. In this perspective, they say, future governments who feel "undemocratically restricted" in their "policy space" had better remember that it is the act of a democratically elected former government that binds them.

Opponents also argue that arbitrations are sometimes carried out in secret by trade lawyers who earn income from the parties and are not accountable to the public or required to take into account broader constitutional and international law human rights norms. Critics argue that because traditional investment treaty standards are incompatible with environmental law, human rights protection, and public welfare regulation, the investment arbitration system is being used to force states to lower standards e.g., environmental and workers protection, or be sued for damages. Investor state dispute settlement has also been argued to undermine the efforts of states to regulate business through a non-corrupt judicial system under the rule of law and to threaten public interest national energy security governance. 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. Also, most ICSID awards, although confidential, are de facto published by consent of the parties. It is further pointed out that judges are not elected in most countries outside the US and UK, 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 excels the qualification of most court judges.

Digital rights activist Joe Karaganis has described investor-state dispute settlement regulations as "corporate sovereignty". According to journalist Glyn Moody, the term "represents the rise of the corporation as an equal of the nation state". Proponents of ISDS point out, that still, only states are sovereign and that no investor protection nor ISDS exists, which has not been created by states themselves by means of public international law. Also, while admitting that the position of corporations under ISDS resembles that of a state in state-state-arbitrations, they say, that this is justified, as corporations who invest in a Host State are uniquely vulnerable to Host State intervention, often for decades.

In June 2013 the United Nations Conference on Trade and Development (UNCTAD) issued a report on reforming investor-state dispute settlement which highlighted concerns including a "perceived deficit of legitimacy and transparency," "contradictions between arbitral awards," "difficulties in correcting erroneous arbitral decisions," "questions about the independence and impartiality of arbitrators," and "concerns relating to the costs and time of arbitral procedures". Recommendations for reform included 1) Promoting alternative dispute resolution 2) Tailoring the existing system through individual IIAs 3) Limiting investor access to ISDS 4) Introducing an appeals facility and 5) Creating a standing international investment court.

Transparency

While ISDS has been traditionally been confidential as any other arbitration, the trend in the last decade has been to allow for more openness and transparency.

Under Art. 29 of the US Model-BIT of 2004, all documents pertaining to ISDS have to be made public and amicus curiae briefs are allowed.

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.

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. The ICSID website has published awards for most completed arbitrations, and decisions in investor-state arbitrations outside of ICSID are also publicly available online.

An UNCTAD report has questioned whether three individuals, appointed on an ad hoc basis, should be viewed by the public at large as having sufficient legitimacy to assess the validity of States’ acts, particularly if the dispute involves sensitive public policy issues and where the disputes create significant pressures on public finances and create potential disincentives for public-interest regulation, posing obstacles to countries’ sustainable economic development. ISDS proceedings are often kept fully confidential – if both disputing parties so wish – even in cases where the dispute involves matters of public interest. Further transparency concerns relate to so-called “nationality planning”, whereby investors structure their investments through intermediary countries with the sole purpose of benefitting from IIAs, including their ISDS mechanism.

On April 1, the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration shall come into force. Its art.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 art.7.

Tribunals

Investment disputes can only be initiated by corporations and natural persons (not by States) and in almost all cases, investment tribunals are composed of three arbitrators. As in most arbitrations, one is appointed by the investor, one by the state, and the third is usually chosen by agreement between the parties or their appointed arbitrators or selected by the appointing authority, depending on the procedural rules applicable to the dispute. Yet many aspects of judicial objectivity are missing; such arbitrators, for example, having no security of tenure. One arbitrator has criticised "the potentially pernicious impact of the desire for (re)appointment in many , not least for financial gain, in which not only withholding from the parties relevant information... but also incurring the favour of the Secretariat, may be important issues in terms of independence....” In several investor–state disputes to date, legal fees alone have amounted to over US$4 million and in one case have exceeded US$13 million. There are also arbitrator’s fees, administration fees and additional costs for involving experts and witnesses. Even more significant are the awards in investor–state cases, which are widely enforceable. The Czech Republic was obliged to pay more than US$350 million in compensation to a Dutch investor, which according to one report meant a near doubling of the country’s public sector deficit.

Examples

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 US 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.

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. Apotex has also brought a similar claim involving US regulatory provisions concerning an abbreviated new drug development application for Pravachol and patents allegedly held by Bristol Myers Squibb. Apotex has two claims involving different generic products. However up to now (August 20, 2011) the Tribunal has not decided on its own jurisdiction. Apotex withdrew its application to stay its second-filed Notice of Arbitration, without prejudice or waiver of its right to reintroduce that application after resolution of any jurisdictional issues.

Centurion Health Corporation v. Canada

Melvin J. Howard, a US citizen, on behalf of the Centurion Health Corporation and the Howard Family Trust, served Canada with a "Notice of Intent" on July 16, 2008, claiming USD $160 million. Howard alleged that a proposed project, the Regent Hills Health Care Centre was treated in a manner that contravened Canada's NAFTA Chapter 11 obligations. The claim alleged the Canadian government amongst other things breached its obligations under NAFTA Article 1102, directly and through Canada’s municipalities and Provinces, by not providing the US investor through clear guidance from the Government of Canada with the best treatment available to US competitors in the monopoly health care services market, and in particular, US surgical services and breached its obligations under NAFTA Article 1103 by failing to accord the Investor and its enterprises of Canada most favored nation treatment by providing treatment to Canadian Investors that is better than the treatment provided to the Claimant. The claim challenged the Canada Health Act, under which the federal government of Canada ensures that the provinces and territories meet certain requirements, such as free and universal access to insured health care. Accordingly, the Federal Government of Canada through the Act constitutes both a "state enterprise" and a "government monopoly" for purposes of NAFTA Articles 1502 and 1503. The arbitral proceedings were terminated by the tribunal due to the refusal of the Claimants to make the required deposit of costs of the arbitration proceedings.

Chemtura Corporation v. Canada

Chemtura Corporation, a United States agricultural pesticide products manufacturer, alleged that the Government of Canada, through its 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 (minimum standard of treatment) and Article 1110 (expropriation). All claims were dismissed by the Tribunal as the measure did not amount to a substantial deprivation of the Claimant's investment and was taken legitimately and without bad faith.

Dow AgroSciences v. Canada

On August 25, 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. The tribunal issued a consent award as the parties to the dispute reached a settlement.

Perspectives for ISDS

After growing rapidly in the 1990s, the public international law of ISDS came under public attack. This was true for the NAFTA claims against the US in the late 1990s, for Germany in the wake of the Vattenfall claims in the late 2000s and also for Australia in 2011, when confronted with the Philip Morris claim and that tobacco company's request to see ISDS included in the Trans-Pacific Partnership trade agreement when it had been excluded from the AUSFTA. in 2010 the Australian Productivity Commission had found that insurance and investor-state contracts where more efficient mechanisms for protecting foreign investments in a nation with a stable and well functioning rule of law

In 2011, the Australian Government announced that it would discontinue the practice of seeking inclusion of investor state dispute settlement provisions in trade agreements with developing countries. It stated that it:

"...supports the principle of national treatment — that foreign and domestic businesses are treated equally under the law. However, the Government does not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses. Nor will the Government support provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses. The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products or its ability to continue the Pharmaceutical Benefits Scheme... In the past, Australian Governments have sought the inclusion of investor-state dispute resolution procedures in trade agreements with developing countries at the behest of Australian businesses. The Gillard Government will discontinue this practice. If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries... Foreign businesses investing in Australia will be entitled to the same legal protections as domestic businesses but the Gillard Government will not confer greater rights on foreign businesses through investor-state dispute resolution provisions."

This statement is a reaction to Phillip Morris' ISDS claim under UNCITRAL rules to challenge Australian tobacco plain packaging requirements. It may also be, that future BITs involving Australia shall not have ISDS-provisions. However, in the two years since that statement, Australia has not terminated a single bilateral investment treaty allowing for ISDSAlso, most ICSID awards, although confidential, are de facto published by consent of the parties. . Even if it would, most such treaties foresee post-termination-protection for many years after the termination has become effective.Also, most ICSID awards, although confidential, are de facto published by consent of the parties.

A more probable way ahead may be the preservation of investor protection under public international law, including ISDS, but with more concern for transparency and the balancing of economic and non-economic interests.

In this vein, Karel de Gucht, the EU commissioner in charge of negotiating International Investment Agreements has recently declared in public that future agreements shall become more transparent, shall "fully enshrine democratic prerogatives" and "explicitly state that legitimate government public policy decisions – on issues such as the balance between public and private provision of healthcare or "the European ban on chicken carcasses washed with chlorine" – cannot be over-ridden". He announced to "crack down on companies using legal technicalities to build frivolous cases against governments", to "open up investment tribunals to public scrutiny – documents will be public and interested parties, including NGOs, will be able to make submissions". Also, he said, the EU "will eliminate any conflicts of interest – the arbitrators who decide on EU cases must be above suspicion".

See also

• International Centre for Settlement of Investment Disputes (ICSID)
• United Nations Commission on International Trade Law (UNCITRAL)
• International Investment Agreement

References

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External links

• Investment Treaty Arbitration, website by Professor Andrew Newcombe, University of Victoria
• "Investor-State Dispute Settlement between Developed Countries"
• Pohl, Joachim, Kekeletso Mashigo, and Alexis Nohen. (2012). “Dispute settlement provisions in international investment agreements," OECD Working Paper
• UNCTAD's Investment Policy Framework for Sustainable Development (IPFSD)

• Foreign direct investment
• Free trade agreements
• Globalization issues
• Human rights
• International law
• Investment
• Public health
• Treaties