Rethinking Investment-Related Dispute Settlement

Investor–state dispute settlement (ISDS), a concept much unknown to the broader public and even top policy-makers only a year ago, is making headlines, especially as the European Union and the United States contemplate including the mechanism in the deal they are currently negotiating, the Transatlantic Trade and Investment Partnership (TTIP). Public awareness is growing of the supranational dispute settlement system that has gained importance over the past two decades and that allows companies and other investors to challenge sovereign government acts in international arbitration. By 2014, investors are known to have brought 608 cases (the actual number of cases is likely to be significantly higher), and a total of 101 states have faced treaty-based claims.[1] Perhaps because states could not predict how investors (ranging from nuclear companies to bond holders and minority shareholders, among others) would use the ISDS provision to challenge a wide range of measures (including measures to protect public health and environment, tax measures, and supreme court decisions), the role and design of ISDS was never properly discussed. This has led to a regime shaped through practice, controlled primarily by the investors and their lawyers, and arbitrators.[2] States have been mainly at the receiving end, more or less condemned to accepting a regime that was designed and that evolved without their active involvement, but under which they are exceedingly vulnerable.

This state of affairs is changing, however. Many states now want to take control in redefining the current rules and reassessing the role of ISDS, its relationship to democratic decision-making and its impact on policy space. They have found deep flaws in the investor–state arbitration system and are responding in different ways.[3]

States and regions have taken and are taking action through their bilateral and regional relations. New approaches to dispute settlement can be seen both in texts of concluded negotiations and in national or regional model treaties on investment. Part 1 of this piece presents several of the proposals for improving the existing regime, in both its procedural and substantive aspects. Part 2 briefly looks at the importance of domestic laws and processes and of state–state dispute settlement—two readily available alternatives to the existing regime.

Going beyond the idea of fixing the regime or turning to existing alternatives, Part 3 takes a step back and brings in new thinking, by starting from a fundamental question: what should investment-related dispute settlement mechanisms at the international level look like if they were to be built anew?[4]

1. Improving the ISDS regime

Addressing selected issues to improve investor–state arbitration and make it more transparent

Several states address their discontent with the current investor–state arbitration system by introducing selected improvements to the arbitration process while continuing to rely on it as a starting point and the principal manner to settle disputes. For example, the United States and Canada realized early on that investment arbitration could not be as secretive as the applicable arbitration rules allowed it to be—including the rules of the Centre for Settlement of Investment Disputes (ICSID), those of the United Nations Commission on International Trade Law (UNCITRAL), and others. They therefore introduced transparency rules in their investment treaties. Many states are now doing the same. Also in an attempt to improve the current arbitration system, the European Union has attempted to address the (perceived) lack of arbitrator independence and conflicts of interest by introducing a code of conduct for arbitrators and a roster of arbitrators. In the texts negotiated so far, however, the problems remain largely unresolved. For example, the arbitrator roster system that the European Union has put in place in its Comprehensive Economic and Trade Agreement with Canada (CETA) is very loose and only provides for reform at the margins. Further, the European Union does not resolve the problem of the dual rules of arbitrators and counsel in investment arbitration. The 2012 Model Bilateral Investment Treaty (BIT) template of the Southern African Development Community (SADC Model), by contrast, proposes more effective options in this respect, including the requirement of an arbitrator not to act concurrently as counsel in another treaty-based investor–state arbitration.[5]

Requiring the exhaustion of local remedies

Increasingly, states are reintroducing the requirement for investors to exhaust local remedies before bringing claims against states. This is the case in the Indian model BIT (Indian Model)[6] as well as in the SADC Model. Several EU member states also request that the requirement be included in EU treaties. Exhaustion of local remedies first appeared in the context of international responsibility and diplomatic protection. It is one of the legal requirements for a state to exercise diplomatic protection under customary international law. 

Establishing an appellate mechanism

States as well as the business community are expressing their interest in setting up an appellate mechanism for ISDS, and there already are concrete examples of such undertakings. The European Union has included explicit provisions on a possible appellate mechanism under which the legal correctness of arbitral decisions could be challenged.[7] The United States had also included provisions on the potential establishment of such a mechanism in past treaties.[8] However, the U.S. provisions were never implemented, and it is unclear when, if and how the European Union will implement its own provisions. Instead of setting up a workable process first, the European Union has moved ahead and finalized several negotiations with ISDS, but without a functioning appellate option in place.[9]

Improving substantive rights under investment treaties

Naturally, new approaches are not only made with respect to dispute settlement. Perhaps more importantly, new thinking is evolving on the substantive rights and obligations as well. Scope and definitions are being more carefully and narrowly tailored as are investor guarantees. Treaties are drafted in a more balanced way and are beginning to include positive investor responsibilities. The Indian Model is an important example of this development,[6] following examples such as the SADC Model. Brazil has also made public its most innovative approach to investment treaties, which moves away from investment protection and litigation to focus instead on investment facilitation.[10]

Redefining the substantive obligations in treaties is essential for reform, as these underpin international investment law. But insofar as the treaties continue to rely and build on existing procedural mechanisms for the settlement of disputes, reform will remain incomplete. Improving substance without improving the system that interprets the substance is an incomplete fix.

2. Turning to existing alternatives to the regime

Strengthening domestic law and processes

Some states are exiting the current international legal framework for investment and building stronger domestic frameworks. South Africa, for example, is introducing a new investment code[11] to replace its first-generation investment treaties, which it is successively terminating, and is working domestically on improving substantive law and processes, both administrative and judicial. South Africa was and continues to be active at the regional level in this field as well.

Turning to state–state dispute settlement

Several states have opted for or are considering turning to state–state dispute settlement as the sole dispute settlement mechanism (and not in addition to ISDS). Examples include Australia and the Philippines in some instances. For example, Australia’s Free Trade Agreement with the United States, and the Philippines’ with Japan, subject investment issues to state–state dispute settlement. The SADC Model also highlights state–state as its preferred option for the settlement of disputes. State–state dispute settlement can take the form of arbitration or rely on existing judicial mechanisms, such as the International Court of Justice (ICJ) or regional courts. Brazil, for instance, has incorporated state–state arbitration in its two recent investment treaties with Angola and Mozambique.[10]

3. Establishing new processes and mechanisms

Setting up an investment court

Most recently, the discussions have moved beyond just fixing the current system. This became particularly clear at the World Investment Forum held by the United Nations Conference on Trade and Development (UNCTAD) in October 2014 and at UNCTAD’s Expert Meeting on Transformation of the International Investment Agreement Regime in February 2015, where more profound reform, including the idea of an investment court formed an important part of the discussion.

The proposal to establish an investment court for ISDS has also become an important point of discussion within the European Union. EU Trade Commissioner Cecilia Malmström expressed support for the creation of a permanent investment court under the TTIP and acknowledged that, as a broader, medium-term solution “a multilateral court would be a more efficient use of resources and have more legitimacy.”[12]

While the idea of an investment court is most intriguing, it seems a lost opportunity to tie the discussion on its establishment to a particular trade deal. Also, it appears as if the European Union is linking the discussion to an already pre-determined decision that the court will deal with treaty-based investor–state dispute settlement. This effort would seem very narrow.

Going beyond a court: Putting in place an investment dispute resolution facility

A better approach would be to build a more forward-looking and innovative mechanism to deal with investment-related disputes. Should such a mechanism be limited to the types of disputes that are currently resolved under treaty-based investor–state arbitration and serve the unique purpose of allowing an investor to bring a legal claim for compensation against a state for alleged violation of investor guarantees? Or should a new mechanism have a broader function—a function of dealing with relationships between a wider set of stakeholders: relationships between the investor or investment and the government, the investment and the local community, the government and the local community, and individual relationships between the investment and local people employed by or living in the vicinity of the investment? These relationships are based on rights, responsibilities and obligations that may run in both directions between the parties involved, not just one. It seems that efforts to create a new and alternative mechanism to resolve disputes should go beyond a particular negotiation and one particular way to resolve disputes that is more open and multifaceted than the systems in place today.

A new mechanism could ensure not only broad access to justice and the ability to resolve disputes between different stakeholders, but its functions could also be more designed. For example, it could set up a wider range of “services,” such as mediation and conciliation. Mediation would differ from what is currently referenced in some investment treaties, which typically foresee mediation between the state and the investor. A new mechanism could propose a mediation process involving a wider range of stakeholders, including communities affected by the investment, for instance. Beyond mediation, a newly created mechanism could also incorporate an investigation and fact-finding function, inspired by existing processes such as the inspection panels known in some of the development banks.

An investment dispute resolution facility would not necessarily have to be linked to a certain body of substantive law. Like at the ICJ, jurisdiction could be based on a specific agreement amongst all the parties involved to submit a given dispute to the international dispute resolution facility. Unlike at the ICJ, personal jurisdiction could be broader and based on agreement to resolve a dispute among states, investors, individuals, local communities and other interested groups. In addition, jurisdiction could be based on a treaty, contract or other instrument. Instruments such as investment contracts and treaties, community development agreements, or any future binding instrument on business and human rights, for instance, could refer disputes to such a dispute resolution facility.

Different alternatives for financing such a mechanism would have to be explored with contributions from states, the private sector, or both. In particular, it would be important to guarantee access to justice for all, including the most disadvantaged.

Final remarks

Investment-related dispute settlement is in flux. Governments are recognizing the flaws of the current system on democratic processes and decision-making and the effects on policy space, as well as the inherent problems of the arbitration system, such as transparency, the perceived or actual lack of independence of arbitrators, and the preponderance of the finality of awards over their legal correctness. Discussions are resurfacing about the need for putting in place a judicial mechanism, a court, to deal with investor–state conflicts. While there is great value in exploring the merits of a court, this debate should be broadened. Investment-related conflicts go well beyond the type of unidirectional relationship set up in investment treaties that allow for investors to challenge states. The groups of stakeholders involved in investment projects and the issues arising are manifold. Any mechanism to be discussed should be designed independently of investment treaty negotiations, so that its architecture does not reflect only that unidirectional relationship that most investment treaties currently address. Instead, dealing with investment disputes arising under an investment treaty would be one among many other types of situations the new court or mechanism could resolve.


References

[1] United Nations Conference on Trade and Development (UNCTAD). (2015, February). Recent trends in IIAs and ISDS. IIA Issues Note No. 1, p. 5. Retrieved from http://unctad.org/en/publicationslibrary/webdiaepcb2015d1_en.pdf.

[2] For an investigation on how investment arbitrators have exercised their authority in recent case law, see Van Harten, G. (2013). Sovereign choices and sovereign constraints: Judicial restraint in investment treaty arbitration. Oxford: Oxford University Press.

[3] On selected problems in the arbitration system, see Bernasconi-Osterwalder, N., & Rosert, D. (2014, March 12). Investment treaty arbitration: Opportunities to reform arbitral rules and processes. Geneva: IISD. Retrieved from http://www.iisd.org/publications/investment-treaty-arbitration-opportunities-reform-arbitral-rules-and-processes.

[4] This was the starting point of the discussions at an expert meeting held in Montreux in October 2014. For more information, see: International Institute for Sustainable Development (IISD). (2015, February). Investment-related dispute settlement: Reflections on a new beginning, Results of an IISD expert meeting held in Montreux, Switzerland, October 17–18, 2014. Geneva: IISD. Retrieved from https://www.iisd.org/publications/investment-related-dispute-settlement-reflections-new-beginning.

[5] Southern African Development Community (SADC). (2012, July). SADC model bilateral investment treaty template with commentary. Gaborone: SADC. Retrieved from http://www.iisd.org/itn/wp-content/uploads/2012/10/SADC-Model-BIT-Template-Final.pdf.

[6] See the Model Text of the Indian Bilateral Investment Treaty, available at https://mygov.in/sites/default/files/master_image/Model%20Text%20for%20the%20Indian%20Bilateral%20Investment%20Treaty.pdf.

[7] See, for example, Article X.42 under Chapter 10, Section 6, of the current text of the Comprehensive Economic and Trade Agreement between the European Union and Canada (CETA), available at http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf, and Article 9.33(1)(c) of the current text of the current draft European Union–Singapore Free Trade Agreement (FTA), available at http://trade.ec.europa.eu/doclib/docs/2014/october/tradoc_152844.pdf.

[8] See, for example, Article 15.19(10) of the United States–Singapore FTA, available at https://ustr.gov/sites/default/files/uploads/agreements/fta/singapore/asset_upload_file708_4036.pdf, and Article 10.20(10) of the Dominican Republic–Central America–United States FTA (CAFTA-DR), available at https://ustr.gov/sites/default/files/uploads/agreements/cafta/asset_upload_file328_4718.pdf.

[9] See, for example, Chapter 10, Section 6, of the current text of the CETA, available at http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf.

[10] The text of the Brazil–Mozambique Cooperation and Investment Facilitation Agreement (CIFA) is available in Portuguese at http://www.itamaraty.gov.br/index.php?option=com_content&view=article&id=8511&catid=42&Itemid=280&lang=pt-BR; the text of the Brazil–Angola CIFA, also in Portuguese, is available at http://www.itamaraty.gov.br/index.php?option=com_content&view=article&id=8520:acordo-brasil-angola-de-cooperacao-e-facilitacao-de-investimentos-acfi-luanda-1-de-abril-de-2015&catid=42&lang=pt-BR&Itemid=280.

[11] South Africa released a draft of the Promotion and Protection of Investment Bill as released for public comment on October 29, 2013. A revised bill is expected to be submitted to Parliament in 2015. See the original draft, available at http://www.thedti.gov.za/news2013/Protection_Investment_Bill2013.pdf.

[12] Malmström, C. (2015. March 18). Discussion on investment in TTIP at the meeting of the International Trade Committee of the European Parliament. Retrieved from http://europa.eu/rapid/press-release_SPEECH-15-4624_en.htm.

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