01 April 2014

Why the time is right to acknowledge what is wrong with investor-state dispute settlement

Clever drafting of an ISDS clause in TTIP is unlikely to reduce any of the risks.

Ciaran Cross Independent legal researcher

The announcement last week that the European Union will have a public consultation on TTIP’s investor-state dispute settlement (ISDS) provisions, is a welcome acknowledgement of the growing opposition to the state of investment protection in international law. 

According to its negotiating mandate, the investment chapter of TTIP should provide the highest possible level of legal protection for investors, including an ‘effective and state-of-the-art investor-to-state dispute settlement mechanism’. ‘State-of-the-art’ is a term rarely heard in descriptions of ISDS. Rather, the system has been regularly accused – and not without good reason – of inherent bias towards investors, of a democratic deficit, of lacking core judicial safeguards of transparency and independence, and of investing immense power in a small core of professional arbitrators who dominate the ISDS circuit. One 2013 report labelled ISDS the world’s worst judicial system’.

ISDS enables foreign investors to enforce a wide – and often vague - range of protections by suing host-states directly at ad-hoc arbitral tribunals, established under the aegis of arbitration centres such as the International Centre for the Settlement of Investment Disputes (ICSID). ISDS mechanisms are particularly attractive to corporations because they usually allow them to ‘leapfrog’ domestic courts and litigate directly before an ad-hoc tribunal. That such litigation is so lucrative is one of the reasons that, over the past fifteen years, the number of ISDS claims has snowballed. The highest ISDS award to date was for USD$1.77 billion. Even where ISDS claims are unsuccessful, the vast cost of defending these cases is likely to deter states from pursuing future policy goals that may have a potential impact on foreign investors - often described as “regulatory chill”. 

At the core of recent criticisms of ISDS is the recognition that policies implemented in pursuance of legitimate public objectives often have direct or tangential impact on investments. Wide interpretations given to vague treaty provisions have permitted ISDS tribunals to review state’s economic and environmental policies, and measures taken for the protection of human rights. 

 In 2007, South Africa was sued by European mining investors who claimed to be disadvantaged by economic policies aimed at redressing the enduring legacy of apartheid. The resulting settlement effectively exempted the investors from the legislation and landed South Africa with a legal bill of over €5 million. 

In 2009, the energy company Vattenfall initiated ICSID proceedings to challenge Germany’s new environmental regulations on coal-fired power stations, claiming over €1.4 billion in compensation. Germany was persuaded to water down the regulations, and Vattenfall are now suing Germany again over its atomic energy policy. 

In 2011, Ecuadorian courts ordered Chevron to pay USD$18 billion in compensation for damage to the environment and public health. In response, Chevron are suing Ecuador, claiming that the judgment breaches their protection under the US-Ecuador Bilateral Investment Treaty.

Defenders of ISDS will no doubt argue that an investment chapter with explicit and comprehensive provisions, which allow member states to regulate for public purposes such as environmental policy, labour and human rights, would be enough to prevent interference by arbitral tribunals. Models of such provisions have already been drafted, by the Southern African Development Community and by UNCTAD, among others. The US and EU have made commitments in their statement on ‘Shared Principles for International Investment’ to preserve the authority of states to regulate in the public interest, to increase transparency and public participation, and encourage responsible business conduct. 

However, it is questionable whether such goals are even attainable within the world of ISDS. A growing body of case law provides compelling grounds for ISDS to be treated with the utmost caution. Mere tinkering with the provisions may not suffice. 

Existing ‘public purpose’ exceptions in investment treaties have to date proven an ineffective safeguard. When these are invoked, there is continuing legal uncertainty as to how a ‘public purpose’ effects the level of compensation payable, whether compensation is payable at all, and even whether states have the right to determine what their own public interests are. The argument that states should be entitled to find their own balance between obligations to foreign investors and other public policy considerations has had  - at best - a mixed reception in ISDS jurisprudence. 

Additionally, arbitrators have largely avoided looking at states’ other international legal obligations and have confined themselves to settling disputes by reference to investment law alone. In theory, there exist multiple ways in which international human rights standards might come to bear on investment disputes. In ISDS practice, there is persisting uncertainty as to the applicability of any legal principles beyond the narrow field of investment law. For example, the fact that measures taken by a state are motivated by a public purpose which is enshrined in international human rights law is still no guarantee that a tribunal will find the measures to be lawful within the terms of the dispute. As such, major recent efforts to develop the international legal responsibility of corporations for harm caused by their business activities risks being wholly negated by the ISDS system, as the ongoing Chevron-Ecuador saga clearly illustrates.

The ISDS system’s ongoing failure to respond to these criticisms suggests that the individual arbitrators and lawyers who dominate this world know all too well on which side their bread is buttered. Clever drafting of an ISDS clause in TTIP is unlikely to change that. Such legal niceties will be navigable by experienced arbitrators resolved to ensure that the ISDS system continues to deliver for its present beneficiaries: namely, corporations and the lawyers themselves.

Attempts by civil society groups and NGOs to openly participate in individual cases have failed to have any significant impact on these trends. All the more reason then, for the public to get involved now (and loudly) in the debate on whether we should have ISDS in the TTIP at all. The risks of its inclusion have never been clearer.

A more detailed version of this article can be accessed here.

You can find more details about the Commissions ISDS consultation and give your own input here.

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