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Investor-State Dispute Settlement – an uncertain future?

Updated: Dec 3, 2021

What is Investor-State Dispute Settlement?

Investor-State Dispute Settlement (ISDS) is a system through which investors can take legal action against a nation-state over perceived discriminatory practices concerning foreign direct investment in said nation. ISDS is thus an instrument of international law, and, as such, clauses pertaining to the recourse to this arbitration on the part of the investor are enshrined in a network of approximately 2,750 bi- and multilateral investment treaties as well as a number of free trade agreements. The total ISDS case count as of 2020, according to UNCTAD’s recent IIA report, stood at 1,104.

A background

Following the rapid expansion of world trade in the 1960s, Western nations began to realise the need for a harmonisation of the myriad of heterogeneous standards and rules that governed international trade at the time. Furthermore, decolonisation saw the emergence of scores of new nation-states in Africa and Asia in which Western multinational corporations had significant investments. Most of these new nation-states had weak judicial institutions to protect against government overreach; a supranational legal system through which governmental abuses could be checked was thus deemed necessary. Two international institutions arose out of this realisation. The first was the International Centre for Settlement of Investment Disputes, or ICSID. The ICSID was set up under the auspices of the World Bank in 1966, and through its Convention provides the rules for the enforcement of those relevant clauses found in numerous bi- and multilateral investment treaties. To be processed in accordance with the ICSID Convention, a legal dispute has to exist between a member-state and an investor from a member-state. This is an important caveat as some large economies, namely Brazil, India, Mexico and South Africa, have never been party to the ICSID’s Convention. The second institution was the United Nations Commission on International Trade Law, or UNCITRAL. Formed as a subsidiary body of the U.N. General Assembly in 1966, UNCITRAL’s official mandate is “to promote progressive harmonisation of international trade law”. To this end it drew up the UNCITRAL Model Law on International Commercial Arbitration in 1985, designed to be incorporated into domestic legislation on arbitration. Furthermore, and not to be confused with the Model Law, UNCITRAL drew up its own Arbitration Rules, which could be used instead of those offered by ICSID should both parties wish.

Both UNCITRAL and the ICSID do not conduct arbitration proceedings themselves, however the ICSID can and most often does administer those proceedings. UNCITRAL on the other hand, merely promotes legislative and procedural uniformity through its Model Law and Arbitration Rules, without conducting or administering any cases. To further complicate matters, the ICSID can help administer cases heard at its offices under UNCITRAL Arbitration Rules; however, in the majority of cases where UNCITRAL Arbitration Rules are used they are in ad hoc arbitrations.

Finally, while arbitrations are most often resolved under ICSID rules in their Paris office, there are even more institutions which offer their own completely separate rules and administrative services, including the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the International Centre for Dispute Resolution of the American Arbitration Association (ICDR), the Singapore International Arbitration Centre (SIAC) and the Hong Kong International Arbitration Centre (HKIAC). Regardless of which rules are used, ISDS tribunals are composed of one arbitrator (nominated by each the claimant investor and defendant host States) and a third arbitrator (jointly nominated by both other arbitrators). After all that, you may not be surprised to hear that the ISDS system is suffering from a “crisis of legitimacy”.

The “crisis of legitimacy”

Various critics, for at least a decade, have charged that “the system is afflicted by pro-investor bias, undue secrecy, conflicting jurisprudence and high levels of compensation, which is compounded by concerns that developing countries are burdened with excessive legal costs and frequently lose cases against foreign investors.” In what may be a validation of the colonialist critiques the system has received, serious discussion about reform only appeared to arise following ISDS claims being brought against Western nations, the most infamous being the Vattenfall v. Germany (II) case. There have been two consequences to this. The first is that states have recently begun to limit their obligations regarding foreign investors by renegotiating their international investment agreements. Only two agreements in 2020 out of the 17 concluded provide for arbitration in investor-state disputes. Secondly, in 2017 UNCITRAL formed a Working Group which during its November 2018 meeting in Vienna pledged to tackle widely-held concerns with the system: excessive costs and lengthy proceedings, inconsistent and incorrect decisions, and a lack of arbitral diversity and independence.


Langford et al. in their 2020 paper “UNCITRAL and Investment Arbitration Reform: Matching Concerns and Solutions” broadly outlined four reform options on the table: 1. Improve the existing system. 2. Add an appellate mechanism to the existing system. 3. Introduce a single multilateral investment court to hear all cases. 4. Completely reject the system as a whole, and leave investor-state disputes to be resolved in domestic courts. All four options have their benefits and pitfalls which we cannot explore here, however it does appear that the Working Group is making progress. They are set to produce a report at UNCTRAL’s 41st session, held in Vienna, from 15th – 19th November 2021. The session will focus on an adjudicator’s code of conduct in disputes, first raised in draft form in May 2020 under the title “Draft of the Code of Conduct for Adjudicators in Investor-State Dispute Settlement.” The preliminary draft looks promising – Article Six curtails what is colloquially called “double hatting”, a reference to the practice of an adjudicator simultaneously acting as counsel, expert, or other roles in ISDS proceedings as well as that of adjudicator. Considering no common ethical rule and standards are currently codified into ISDS proceedings, there will certainly be high hopes that a homogenisation of practices in this area will lead to a fairer and more equitable system for all. This is, however, just one of many issues the Working Group has identified, and all involved recognise that a root and branch reform of the system, if decided upon, will be a long and arduous process.

Covid and the climate

Placing long-term reform efforts aside, what is the short-term prognosis for ISDS? No doubt to be influenced by whatever agreements arise from the much anticipated and as-of-writing ongoing COP26 conference, ISDS has increasingly been seen as a new avenue for climate change litigation. A 2021 collaboration between Columbia University, Hasselt University and the Grantham Research Institute on Climate Change identified at least 13 “climate-related” ISDS cases filed in the nine-year period since 2012. Furthermore, around 17 percent of the ISDS cases as of January 2020 (at least 173 cases) stemmed from investments in or related to the fossil fuel sector. National climate policies in the wake of COP26 will inevitably clash with the interests of deep-pocketed and well-entrenched fossil fuel multinationals, clashes which have already resulted in cases. A selection include Uniper v. Netherlands, Westmoreland v. Canada (I and II) and Lone Pine v. Canada. Covid-19 and the cases that may potentially ensue will be paradigmatic. As has been powerfully argued, nation-states overwhelmed with health crises are in no position to fight a deluge of ISDS cases that may come their way. Yet such a scenario appears to be in the offing. In recognition of this threat the Columbia Centre on Sustainable Investment has issued a public letter calling for an immediate moratorium and a permanent restriction on all ISDS cases.

Concluding thought

Climate change and Covid-19, two of the greatest vicissitudes in recent history, have the potential to galvanise ongoing ISDS reform to achieve far more than mere incremental change. Yet in the current landscape it appears that regardless of the magnitude of reform, when it comes, it will be nation-states, not investors, who will celebrate.


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