Investor-state dispute settlement
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.
- 1 Foreign investment protection
- 2 Debates
- 3 Transparency
- 4 Tribunals
- 5 Examples
- 6 Perspectives for ISDS
- 7 See also
- 8 References
- 9 External links
Foreign investment protection
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 the American-Mexican Claims Commission. However, these treaties were limited to the treatment of foreign investors during a past period of time whereas modern ISDS allows investors claims against states in general and on a prospective basis.
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. Most of these treaties were signed by states in the late 1980s and early 1990s, before the current explosion of investor claims under the treaties began in the last 1990s.
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. Some of these standards are framed in vague terms, given extensive discretion to arbitrators in their interpretation and application. The overall number of known cases reached over 500 in 2012. 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.
Notably, only foreign investors can sue states under investment treaties, and only states can be held liable to pay damages for breach of the treaty. States have no corresponding right to bring an original claim against a foreign investor. Thus, a decision in favour of the State means that the state has not been ordered to pay compensation, not that it has received any compensation from the investor. A state cannot "win" in ISDS in the manner of a foreign investor.
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. On the other hand, there is no other situation in international law where a private party can sue a state without showing that the state's domestic courts are not independent or reliable. The removal of the customary duty to exhaust local remedies, where they are reasonably available, has been a factor in the explosion of investment treaty claims since the late 1990s.
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.
||The neutrality of this article is disputed. (May 2014)|
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. On the other hand, it may contradict principles of democratic accountability to allow one government to bind another for decades to come. Unlike the great majority of other treaties, investment treaties have very long minimum lifespans ranging up to 30 years.
Opponents also argue that arbitrations are sometimes carried out in secret by trade lawyers who do not enjoy the typical safeguards of judicial independence and procedural fairness, who earn income only if a case is brought and proceeds, and who are not accountable to the public or required to take into account broader constitutional and international law human rights norms. 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. On the other hand, such traditional confidentiality is limited to disputes that affect the parties in question and not the broader public.
Also, most ICSID awards, although confidential, are de facto published by consent of the parties. However, many awards under other arbitration rules are not public and, in the case of investor-arbitration at the International Chamber of Commerce, there is a requirement for blanket confidentiality for all aspects of a case.
It is further pointed out that judges are not elected in most countries outside the US, 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. In response, critics make the point that any judge, whether domestic or international, who is part of a legal system not shown to be systematically biased or unreliable, has a greater claim to independence than an arbitrator because they judge enjoys secure tenure and a set salary, is insulated from conflicts of interest that arise when arbitrators work on the side as lawyers, and is assigned cases in any objective rather than by the discretion of a disputing party or an executive official.
While ISDS has been traditionally been confidential as any other arbitration, the general trend in the last decade has been to allow for more openness and transparency. On the other hand, there is still widespread confidentiality in the system.
Under Art. 29 of the U.S. Model-BIT of 2004, all documents pertaining to ISDS have to be made public and amicus curiae briefs are allowed. However, no investment treaty allows other parties who have an interest in the dispute, other than the claimant investor and respondent government, to obtain standing in the adjudicative process.
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.
On April 1, the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration entered into force. Article 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 Article 7. Original proposals to make all UNCITRAL arbitration under investment treaties public were not adopted after opposition by some states and by representatives of the arbitration industry who participated in the UNCITRAL working group negotiations as state representatives.
Investment disputes can be initiated by corporations and natural persons 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. If the parties do not agree who to appoint, this power is assigned to executive officials usually at the World Bank, the Secretariat of the Permanent Court of Arbitration, or a private chamber of commerce.
Other individuals cannot initiate a claim against a state under an investment treaty. Also, no individual or state can initiate a claim against a foreign investor under an investment treaty. This has led to criticisms that investor-state arbitration is not balanced and that it favours the "haves" over the "have nots" by giving foreign investors, especially major companies, access to a special tribunal outside any court.
The following cases are a very limited representation of cases resolved in investor-state arbitration. Other cases have been brought under bilateral investment treaties and have led to very large awards, including for billions of dollars, against states and in favour of large or extra-large companies or very wealthy individuals, primarily from the U.S.
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 U.S. 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 U.S. regulatory provisions concerning an abbreviated new drug development application for Pravastatin and patents allegedly held by Bristol Myers Squibb. Apotex has two claims involving different generic products. On June 14, 2013, the Tribunal issued an Award on Jurisdiction and Admissibility, dismissing all of the claims and ordering Apotex to pay the United States' legal fees and arbitral expenses.
Centurion Health Corporation v. Canada
Melvin J. Howard, a U.S. 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 breached its obligations under NAFTA Article 1102, directly and through Canada’s municipalities and Provinces, by not providing the U.S. investor through clear guidance from the Government of Canada with the best treatment available to U.S. competitors in the monopoly health care services market, and in particular, U.S. 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 Canadian government's 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 (on minimum standards of treatment) and Article 1110 (on 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 ISDS claims by investors exploded from the late 1990s, ISDS came under greater public attention and criticism. This was true for the NAFTA claims against the United States 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.
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 Advertising Restrictions. 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 ISDS. Even if it would, most such treaties foresee post-termination-protection for many years after the termination has become effective.
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". However, insisting equally on the advantages of such investment protection agreements, he states along that [they] "protect job-creating investment from discrimination and unfair treatment" and that "the task here is to find the right balance between preventing abuse and protecting investments".
Current controversies over ISDS appear driven by attempts to expand its scope to new countries and, especially, to relations between developed countries with mature court systems and democratic governments.
- International Centre for Settlement of Investment Disputes (ICSID)
- International Investment Agreement
- Transatlantic Trade and Investment Partnership
- United Nations Commission on International Trade Law (UNCITRAL)
- Newcombe, Andrew Paul; Paradell, Lluís (2009). Law and practice of investment treaties : standards of treatment. Austin [Tex.]: Wolters Kluwer Law & Business. ISBN 978-90-411-2351-0.
- M.Waibel et.al., The Backlash against Investment Arbitration - Perceptions and Reality, Wolters Kluwer: Austin et.al, 2010
- Dupuy, P.M., Petersmann, E.U., Francioni, F., eds. (2010, February). "Human Rights in International Investment Law and Arbitration", Oxford Scholarship Online. ISBN 978-0-19-957818-4 doi:10.1093/acprof:oso/9780199578184.001.0001
- Van Harten, Gus. "OECD Document Discusses Investor State Dispute Settlement". Accessed: 7 July 2011.
- "ICSID, Arbitration Rules". Icsid.worldbank.org. Retrieved 2013-04-10.
- "International Centre for the Settlement of Investment Disputes, ICSID Cases". Icsid.worldbank.org. Retrieved 2013-04-10.
- "International Centre for the Settlement of Investment Disputes, View Decisions and Awards". Icsid.worldbank.org. Retrieved 2013-04-10.
- "Apotex Inc v USA", US Department of State. Accessed: 12 April 2010.
- McFadden, M. 1995. "Provincialism in US Courts", Cornell Law Review 81:31 at 32.
- "Apotex Inc. v. United States of America", US Department of State. Accessed: 18 April 2014
- "Melvin J. Howard, Centurion Health Corp. & Howard Family Trust v. The Government of Canada, UNCITRAL, PCA Case No. 2009-21", Investor Treaty Arbitration, n.d. Accessed: December 23, 2012.
- "Centurion Health Corporation v Government of Canada", US Department of State. Accessed: 12 April 2010.
- http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/centurion-06.pdf. Missing or empty
- "Chemtura Corp. v. Government of Canada", US Department of State. Accessed: 12 April 2010.
- "Dow AgroSciences LLC v. Government of Canada", US Department of State. Accessed: 12 April 2010.
- http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/abitibi-03.pdf. Missing or empty
- "Trade Policy Statement", Australian Government. Accessed: 5 September 2014.
- Investment Treaty Arbitration, website by Professor Andrew Newcombe, University of Victoria
- "Investor-State Dispute Settlement between Developed Countries"[dead link]
- 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)