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Investor-State Dispute Settlement: Stormy Waters

Posted on 25 February 2015 by Lawrence Northmore-Ball


What were supposed to be the placid waters of investor-State dispute settlement (ISDS) are now as stormy as the waters it was intended to calm: so controversial has ISDS become that the inaugural conference of the European Federation for Investment Law and Arbitration (EFILA), which took place in London on 23 January 2015, was the subject of an Occupy protest. How has it come to this?

Disputes between States and foreign investors have long been a feature of international relations and it has long since been recognised that States owe foreign investors certain obligations under international law – see, for example, the Chorzow Factory Case (Germany v. Poland), 1928 PCIJ (Ser. A) No. 17 which established as long ago as 1928 that States which expropriate the investment of a foreign investor  (in that case by confiscating a factory) are obliged to pay that investor just compensation. 

The creation in the mid-20th century, by States, of a system in which investor-State disputes could be resolved in a neutral, non-political forum – rather than via Diplomatic Protection, which involved State to State negotiation – was a historic innovation which was intended to de-politicise investor-State disputes and enable them to be resolved via legal, rather than political means.

After all, the substantive rules of international law which regulate the treatment of foreign investors by States had evolved considerably by that time – the creation of a legal, non-political forum for the resolution of those disputes was the logical next step. Foreign investment is of course only one of many areas in which States owe obligations under international law, which derive mainly from Treaties and international custom and practice; thus, as well as creating the ISDS system, States have played a significant role in creating the rules themselves which  are enforced via that system.

A further key ingredient of this new forum was that it involved Arbitral Tribunals, or panels of  independent private individuals, rather than Judges and State courts – the actions of State courts often form part of the mis-treatment of foreign investors and requiring the investor to resolve its dispute with the State in the courts of that State would hardly serve to de-politicise the dispute.

Picture of American and European flagsAgainst that background, the proposed US-EU trade and investment agreement known as the  Transatlantic Trade and Trade and Investment Partnership or TTIP, which appeared to be a primary focus of the Occupy protest outside the EFILA conference, has brought into sharp relief the controversy that now surrounds ISDS in general.

ISDS was intended to provide a neutral forum – where necessary and desired by States – in which disputes between foreign investors and States could be resolved by reference to the pre-existing, and evolving, rules of international law (such as those on expropriation) which regulate the treatment by States of foreign investors; what it was not intended to do, as the Occupy protesters fear that TTIP will do in a number of areas ranging from agriculture to healthcare, was to provide a mechanism by which investors could enforce the harmonisation of regulatory regimes in all States and obtain compensation for any unfavourable State action. The lack of clarity about why TTIP is said to be required has only fuelled the controversy.

A further catalyst for this controversy – which is indicative of Western hypocrisy – is that developed States have in recent times found themselves as Respondents to investment arbitrations, whereas historically ISDS cases were mainly brought by investors from developed countries against developing countries. One of the leading examples of this, Philip Morris’s controversial challenge to Australian tobacco packaging laws under the 1993 Hong Kong – Australia Bilateral Investment Treaty, will provide an important test for the ISDS system and the rules of international law on foreign investment.

The controversy over the proposed TTIP, and ISDS cases such as the Philip Morris challenge, have raised fundamental questions about the responsibilities of investors and the right of States to regulate economic interests. However, the fact that ISDS has now become so controversial is surely an indication of its unique and historic achievement, namely the creation, by States themselves, of a system in which foreign investors can enforce their rights under international law against States – rights which have been shaped by States –  in a neutral, non-State forum.


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