Investor-state dispute settlement (ISDS) is a mechanism that allows foreign investors to bring claims against host states for alleged violations of international investment agreements. It has become one of the most controversial aspects of international trade and investment law, with proponents arguing that it promotes foreign direct investment and protects investor rights, while opponents claim that it undermines democratic governance and human rights.
The origins of ISDS can be traced back to bilateral investment treaties (BITs), which were first introduced in the 1950s as a means of promoting foreign investment by protecting investors from expropriation or discrimination by host states. Most BITs contain provisions allowing investors to bring claims directly against host states for alleged breaches of the treaty’s obligations, bypassing domestic courts.
Over time, ISDS has been included in other types of international agreements, such as free trade agreements (FTAs) and regional integration arrangements. Today, there are over 3,000 international investment agreements in force worldwide, nearly all of which include some form of ISDS.
Proponents argue that ISDS provides important protections for investors against political risk and enhances legal certainty. They contend that without ISDS, investors would be reluctant to invest in countries where the rule of law is weak or where there is a history of expropriation or discriminatory treatment towards foreigners. Moreover, they argue that ISDS helps promote good governance by providing an independent forum for resolving disputes between investors and host states outside the domestic legal system.
Opponents counter that ISDS undermines democracy and human rights by giving corporations undue power over government decision-making processes. They argue that it enables multinational corporations to challenge legitimate public policies enacted by democratically-elected governments on behalf of their citizens. Moreover, they contend that ISDS lacks transparency and accountability since cases are heard behind closed doors by unaccountable arbitrators who may have conflicts of interest.
One example often cited by critics is the case brought against Australia by Philip Morris International (PMI) under the Australia-Hong Kong BIT. PMI challenged Australia’s plain packaging laws, which require tobacco products to be sold in standardized packages with graphic health warnings and no branding. The company argued that these measures violated its intellectual property rights and expropriated its investments.
The case was initially heard by an arbitral tribunal sitting in Singapore, which found that it had jurisdiction over the dispute despite objections raised by Australia regarding the validity of the BIT. After a hearing on the merits, the tribunal ruled against Australia, ordering it to pay millions of dollars in compensation to PMI for alleged breaches of the BIT.
The case sparked widespread public outcry and led to calls for reforming ISDS. Many critics argued that it was unacceptable for a foreign corporation to challenge a democratically-enacted public health policy through an opaque legal mechanism outside domestic courts.
In response, some countries have begun to rethink their approach towards ISDS. For example, South Africa recently terminated several BITs and vowed not to include ISDS provisions in future agreements. Brazil has also taken steps to limit its exposure to ISDS claims by renegotiating or terminating existing treaties.
However, other countries continue to support ISDS as an important tool for promoting investment and protecting investors’ rights. The United States has been one of the most aggressive proponents of ISDS, including it in nearly all of its FTAs since 2004. However, this trend may be changing under President Biden’s administration as he has pledged not to include ISDS provisions in new trade agreements moving forward.
In conclusion, investor-state dispute settlement (ISDS) remains one of the most controversial aspects of international trade and investment law. While proponents argue that it provides important protections for investors against political risk and enhances legal certainty, opponents claim that it undermines democratic governance and human rights by giving corporations undue power over government decision-making processes. As more countries re-evaluate their approach towards ISDS in light of public criticism, it remains to be seen whether this mechanism will continue to play a prominent role in international investment law.