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Investor–state dispute settlement
Investor–state dispute settlement (ISDS), or an investment court system (ICS), is a set of rules through which states (sovereign nations) can be sued by foreign investors for certain state actions affecting the foreign direct investments (FDI) of that investor. This most often takes the form of international arbitration between the foreign investor and the state. As of June 2024, over US$113 billion has been paid by states to investors under ISDS, the vast majority of the money going to fossil fuel interests.
ISDS most often is an instrument of public international law, granting private parties (the foreign investors) the right to sue a state in a forum other than that state's domestic courts. Investors are granted this right through international investment agreements between the investor's home state and the host state. Such agreements can be found in bilateral investment treaties (BITs), international trade treaties such as the 2019 United States–Mexico–Canada Agreement, or other treaties like the 1991 Energy Charter Treaty.
To be allowed to bring an investor-state dispute before an arbitral tribunal, both the home state of the investor and the state where the investment was made must have agreed to ISDS, the investor from one state must have an investment in a foreign state and the foreign investor must put forward that the state has violated one or more of the rights granted to the investor under a certain treaty or agreement.
ISDS claims are often brought under the rules of the International Centre for Settlement of Investment Disputes (ICSID) of the World Bank, the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIAC), or the United Nations Commission on International Trade Law (UNCITRAL).
The ISDS system has been criticized for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs, and there have been widespread calls for reform. Since 2015, the European Union has been seeking to create a multilateral investment court to replace investor-state arbitration. Since 2017, multilateral negotiations for reform have been taking place in Working Group III of the United Nations Commission on International Trade Law.
Hartley Shawcross and Hermann Josef Abs advocated for the creation of an international investor–state dispute settlement system after World War II. Abs saw it as a solution to unwanted nationalisations by states. The Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments was concluded in 1959 and was the first investment protection treaty under international law. Under customary international law, an investor-state can vindicate injury caused by the host state by exercising diplomatic protection, which may include retorsion and/or reprisals. In addition to diplomatic protection, states can and do establish ad hoc commissions and arbitral tribunals to adjudicate claims involving treatment of foreign nationals and their property by the host state ("state-state-dispute-settlement" or SSDS), which can help avoid coercive resolutions and protect against reneging. Notable examples of this practice are the Jay Treaty commissions, the Iran–United States Claims Tribunal and the American-Mexican Claims Commission. However, these treaties were limited to the treatment of foreign investors during a past period of time, whereas modern ISDS allows investors to make claims against states in general and on a prospective basis.
As of 2024, the legal protection of foreign direct investment under public international law is guaranteed by a network of more than 2,750 bilateral investment treaties (BITs), multilateral investment treaties, such as the Energy Charter Treaty, and free trade agreements, such as the North American Free Trade Agreement (NAFTA). Most of these treaties were signed in the late 1980s and early 1990s before the increase of investor claims under the treaties began in the late 1990s.
The majority of the treaties provide foreign investors with substantive legal protection (including the right to "fair and equitable treatment", "full protection and security", "free transfer of means" and the right not to be directly or indirectly expropriated without full compensation) and access to ISDS for redress against host states for breaches of such protection. Some of these protections are framed in vague terms and give extensive discretion to arbitrators for their interpretation and application.
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Investor–state dispute settlement
Investor–state dispute settlement (ISDS), or an investment court system (ICS), is a set of rules through which states (sovereign nations) can be sued by foreign investors for certain state actions affecting the foreign direct investments (FDI) of that investor. This most often takes the form of international arbitration between the foreign investor and the state. As of June 2024, over US$113 billion has been paid by states to investors under ISDS, the vast majority of the money going to fossil fuel interests.
ISDS most often is an instrument of public international law, granting private parties (the foreign investors) the right to sue a state in a forum other than that state's domestic courts. Investors are granted this right through international investment agreements between the investor's home state and the host state. Such agreements can be found in bilateral investment treaties (BITs), international trade treaties such as the 2019 United States–Mexico–Canada Agreement, or other treaties like the 1991 Energy Charter Treaty.
To be allowed to bring an investor-state dispute before an arbitral tribunal, both the home state of the investor and the state where the investment was made must have agreed to ISDS, the investor from one state must have an investment in a foreign state and the foreign investor must put forward that the state has violated one or more of the rights granted to the investor under a certain treaty or agreement.
ISDS claims are often brought under the rules of the International Centre for Settlement of Investment Disputes (ICSID) of the World Bank, the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIAC), or the United Nations Commission on International Trade Law (UNCITRAL).
The ISDS system has been criticized for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs, and there have been widespread calls for reform. Since 2015, the European Union has been seeking to create a multilateral investment court to replace investor-state arbitration. Since 2017, multilateral negotiations for reform have been taking place in Working Group III of the United Nations Commission on International Trade Law.
Hartley Shawcross and Hermann Josef Abs advocated for the creation of an international investor–state dispute settlement system after World War II. Abs saw it as a solution to unwanted nationalisations by states. The Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments was concluded in 1959 and was the first investment protection treaty under international law. Under customary international law, an investor-state can vindicate injury caused by the host state by exercising diplomatic protection, which may include retorsion and/or reprisals. In addition to diplomatic protection, states can and do establish ad hoc commissions and arbitral tribunals to adjudicate claims involving treatment of foreign nationals and their property by the host state ("state-state-dispute-settlement" or SSDS), which can help avoid coercive resolutions and protect against reneging. Notable examples of this practice are the Jay Treaty commissions, the Iran–United States Claims Tribunal and the American-Mexican Claims Commission. However, these treaties were limited to the treatment of foreign investors during a past period of time, whereas modern ISDS allows investors to make claims against states in general and on a prospective basis.
As of 2024, the legal protection of foreign direct investment under public international law is guaranteed by a network of more than 2,750 bilateral investment treaties (BITs), multilateral investment treaties, such as the Energy Charter Treaty, and free trade agreements, such as the North American Free Trade Agreement (NAFTA). Most of these treaties were signed in the late 1980s and early 1990s before the increase of investor claims under the treaties began in the late 1990s.
The majority of the treaties provide foreign investors with substantive legal protection (including the right to "fair and equitable treatment", "full protection and security", "free transfer of means" and the right not to be directly or indirectly expropriated without full compensation) and access to ISDS for redress against host states for breaches of such protection. Some of these protections are framed in vague terms and give extensive discretion to arbitrators for their interpretation and application.