Investment Disputes – New Ideas Percolating

By | May 6, 2015

There are over 2,500 bilateral investment treaties that incorporate investor-State dispute settlement (ISDS) mechanisms. These allow foreign investors to bring binding arbitration against host-States for allegedly unfair or arbitrary actions (laws or other measures) affecting the value of their investments.

There’s growing concern among informed persons over this entrenched model, as I’ve commented on before.

This unease is permeating public policy debate in many countries (including the US) and will become more intense in the months ahead. Opponents are mustering their forces. Political leadership will eventually be called on to address these concerns.

While investment treaties were designed originally to aid capital flows from rich to poor countries, the availability of binding arbitration has led to a dramatic escalation of investor litigation over the last few years.

In the early days, ISDS was used by foreign investors to correct unfair, discriminatory or arbitrary treatment like expropriation. However, in the more recent period large corporations have challenged things like environmental protection, public health and other broad policy measures.

An example is the arbitration launched by the Swedish nuclear giant Vattenfall over the German government’s freeze of nuclear energy projects. Another is the dispute by the tobacco company, Phillip Morris, challenging Australia’s plain cigarette packaging laws.

Opponents tend rail against these treaties without offering practical solutions. The reality is that there’s no easy answer to the issues being raised. It’s impossible to wipe the slate clean and deal away hundreds of bilateral investment protection treaties around the world

But there are some practical approaches to consider.

One is to better define the legitimate role of governments and kinds of disputes that are allowed to be brought to arbitration, something Canada and the EU have done in their recently concluded trade and investment agreement (CETA).

Another would be to create a permanent investment court – in contrast to the ad hoc bodies used now – and a mechanism for appeal on points of law or factual error. These institutional changes would help assuage public concern – and the concern among a growing number of jurists – that these three-person investment tribunals have the exclusive power to decide on issues affecting a wider swath of policy with no mechanism of review.

A draft set of investment treaty provisions to address these issues was recently released by the German Economic Affairs Ministry. An excellent analysis has been prepared by Luke Peterson, editor of the Investment Arbitration Reporter. It’s a paper worth reading and can be found at:

These kinds of changes could be looked at in current and future trade and investment negotiations, including in the Trans-Pacific Partnership (TPP) negotiations. Moreover, it’s not beyond possibility that protocols on these and other points could be drafted to cover existing investment treaties.

Whether these changes are possible in the real world of inter-State relations remains to be seen. But given the intensifying concerns, it’s important to at least discuss these points in an informed and dispassionate way, cleared from the rhetoric and political condemnation of ISDS we regularly hear.