A Sustainability Toolkit for Trade Negotiators:

Trade and investment as vehicles for achieving the 2030 Sustainable Development Agenda

5.5.1 Carefully Defining and Limiting Access to ISDS

In order to limit exposure to litigation, states are increasingly redefining and limiting access of investors to ISDS. One approach used is provisions on exhaustion of local remedies—requiring investors to resort to domestic processes and courts before taking the claim to the international level, in line with customary international law. Parties can specify that the investor may be freed of the requirement if it is demonstrated that there are no reasonably available legal remedies at the domestic level. Alternatively, the exhaustion requirement could be time-bound to a number of years after initiating the claim at the national level. It will be useful for the parties to include a time limit for bringing the claim both at the domestic and the international level.

Another possibility is including a requirement for prior written consent of disputing parties to submit a dispute to arbitration. Most ISDS provisions are understood to represent an “open offer” of the host state vis-a-vis any investor of the host state to resolve a dispute through arbitration. It is reasoned that by bringing a claim against the state, the investor accepts the offer to arbitrate. This means that the government gives consent to arbitration in advance of any dispute and without knowing the potential claimant. Re-introducing a written consent requirement would allow a government to decide which types of measures could be adequately dealt with through arbitration, thereby avoiding a situation where three arbitrators decide over important public interest laws and policies.

Another approach is to limit the scope of provisions subject to ISDS, either by positive listing (any obligation not listed would be subject to ISDS), or by negative listing (specifying which treaty obligations are excluded from ISDS). Parties could also make access to ISDS conditional on investor behaviour, for example denying access to ISDS if the investment has been illegally made.

Beyond restricting access to ISDS, other options include: no ISDS in the agreement (rare, but done by Brazil, for example, and argued by some countries as appropriate in agreements between countries with well-functioning judicial systems parties); moving away from the arbitration model and to a system of ISDS that is more formal and judicial (such as a court, discussed below); retaining arbitration as a starting point but amending and improving its functioning.

Some of the options listed below require new institutional structures, so in this context, parties might also consider a moratorium on ISDS until these structures are set up and ready to function.

Option 1:Require exhaustion of local remedies: requiring investors to resort to domestic processes and courts before taking the claim to the international level, in line with customary international law

This option recognizes the long standing international legal principle that a state should be given the opportunity to redress an alleged wrong within its own domestic legal framework before its international responsibility can be called into question. This option could also encourage the role of domestic courts, rather than international arbitral tribunals, in deciding on challenges to environmental laws or other public welfare measures.

Examples

“In respect of a claim that the Defending Party has breached an obligation under Chapter [X] … a disputing investor must first submit its claim before the relevant domestic courts or administrative bodies of the Defending Party for the purpose of pursuing domestic remedies in respect of the same measure or similar factual matters for which a breach of this Treaty is claimed. Such claim before the relevant domestic courts or administrative bodies of the Defending Party must be submitted within one (1) year from the date on which the investor first acquired, or should have first acquired, knowledge of the measure in question and knowledge that the investment, or the investor with respect to its investment, had incurred loss or damage as a result.

For greater certainty, in demonstrating compliance with the obligation to exhaust local remedies, the investor shall not assert that the obligation to exhaust local remedies does not apply or has been met on the basis that the claim under this Treaty is by a different party or in respect of a different cause of action.

Provided, however, that the requirement to exhaust local remedies shall not be applicable if the investor or the locally established enterprise can demonstrate that there are no available domestic legal remedies capable of reasonably providing any relief in respect of the same measure or similar factual matters for which a breach of this Treaty is claimed by the investor.” (Indian Model BIT, Article 15.1)

How Commonly Used

Examples

“When the disputing investor submits a written request for consultation to the disputing Party under paragraph [X], the disputing Party may require, without delay, the investor concerned to go through the domestic administrative review procedure specified by the laws and regulations of that Party before the submission to the arbitration set out in paragraph [X].

The domestic administrative review procedure shall not exceed four months from the date on which an application for the review is filed. If the procedure is not completed by the end of the four months, it shall be deemed to be completed and the disputing investor may submit the investment dispute to the arbitration set out in paragraph [X]. The investor may file an application for the review unless the four months consultation period as provided in paragraph [X] has elapsed [footnote omitted].” (China – Korea FTA, Article 12.12(7))

How Commonly Used

Option 2:Include a requirement for prior written consent of disputing parties to submit a dispute to arbitration

Avoids the situation where arbitrators rule on important public interest laws and policies, or other delicate public policy issues that cannot be appropriately resolved through arbitration.

Examples

“If the investment dispute cannot be settled through the procedures of settlement referred to in paragraphs [X], within twelve months from the date of the written notification or neither party is interested in submitting the dispute to the courts of the Contracting Party in whose territory the investment has been made under paragraph [X], the Parties to the dispute may agree, through written consent, to submit it, either to: …”  (Mauritius-Egypt BIT, Article 10.4)

How Commonly Used

Examples

“”For investment disputes regarding the obligation of the disputing Party under [the treaty’s umbrella clause], the disputing Party may give necessary consent for the submission to the arbitration on a case-by-case basis.” (Japan – Oman BIT, Article 15(5)(b))

How Commonly Used

Option 3:Carefully define the scope of application for ISDS, carving out certain measures or specifying a limited list of obligations to which ISDS can be applied

This could help prevent investors from using ISDS to challenge or chill public welfare regulations adopted to promote sustainable development goals.

Examples

The carve-outs or limitations could be adopted just specifically for certain specified obligations. For example, many older BITs signed by China limit ISDS only to disputes involving the amount of compensation for expropriation:

“If a dispute involving the amount of compensation for expropriation cannot be settled within one year resort to negotiations as specified in Paragraph 1 of this Article, it may be submitted at the request of either party to an ad hoc arbitral tribunal.  (China-Syria BIT, Article 9.3)

How Commonly Used

Examples

Another approach creates a positive list of the types of obligations that shall be covered by ISDS; those obligations not on the list are not covered:

“ the disputing investor may […] submit to arbitration a claim:

… that the disputing Member State has breached an obligation arising under Articles [X] relating to the management, conduct, operation or sale or other disposition of a covered investment; …” (ASEAN-China Investment Agreement, Article 32(a))

How Commonly Used

 

 

“Without prejudice to the rights and obligations of the Parties under Chapter Twenty-Nine (Dispute Settlement), an investor of a Party may submit to the Tribunal constituted under this Section a claim that the other Party has breached an obligation under:

(a) Section C, with respect to the expansion, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of its covered investment; or
(b) Section D……”
(CETA Article 8.18(1))

How Commonly Used

Option 4:Make access to ISDS by the investor conditional upon the investor’s behaviour

Clarifying that investors may only bring claims if they have “clean hands” sends an important signal to investors to act responsibly.

Examples

“For greater certainty, a claimant may not submit a claim under this Section if its investment has been made through fraudulent misrepresentation, concealment, corruption or conduct amounting to an abuse of process.”  (Vietnam-EU FTA, Chapter 8, Section 3, sub-section 1, Article 1)

How Commonly Used

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