ISDS as an instrument for investment promotion and facilitation

The core function of ISDS: protecting and promoting investments

The original intention of ISDS is to give assurance to (foreign) investors that their investment
would receive the same level of protection given to other (domestic) investors, in a
reciprocal manner (Tietje and Baetens 2014). ISDS functions as an enforcement mechanism
for obligations under investment treaties.

Guzman (1998) also argues that BITs increase the efficiency and reduce the cost of foreign
investment by establishing binding and enforceable contracts, and developing countries join
these BITs to gain an advantage in the competition for investment. At the same time
Bhagwat et al. (2017), focusing on cross-border mergers, has found BITs to have a large,
positive effect due to the positive signalling effect of the level of property rights protection.

On the other hand, South Africa’s withdrawal from its BIT with Germany has not led to any
changes in investment levels by German firms into South Africa. As such, in the area of
investment promotion, existing literature has failed to reach a consensus regarding the
merit of BITs and ISDS in encouraging FDI flows.

Indeed, other considerations and factors may have a higher priority in the minds of
investors. These factors may include market size and growth, the availability of natural
resources and the quality of hard and soft infrastructure (Johnson et al. 2018). Also,
investors may have been more restricted by other more significant FDI barriers such as
restrictions on the legal form of the foreign entity, compulsory joint ventures with domestic
investors, and restrictions on imports of labour, capital and raw materials (Hardin and
Holmes 1997).

On the host economy side, the rapid increase in ISDS claims creates the risk of a shrinking
domestic policy space, affecting the autonomy of public governance and policy. UNCTAD
(2014), acknowledging that most disputes in ISDS also involve issues of public policy such as
environmental protection, public health or other issues of public governance, ponders
‘whether three individuals, appointed on an ad hoc basis, have sufficient legitimacy to
assess the validity of governments’ acts, particularly if the dispute involves sensitive public
policy issues’.

One of the key concerns about ISDS is that it is based on a model of international
commercial arbitration that relies on ad hoc tribunals of party-appointed arbitrators to
resolve one-off disputes. These tribunals interpret often vague treaty rules, adding to the
uncertainty of the system’s outcomes; decisions are seen as conflicting and lacking
coherence (Puig and Shaffer, 2018).

Why do countries commit to ISDS for Disputes with Foreign Investors?

Srividya Jandhyala

No matter how attractive a foreign investment opportunity appears to be, government

intervention post-investment can alter the sustainability and profitability of the project.
Host country political events, economic crises, and social factors can induce governments to
change domestic regulations, revoke licenses, withdraw subsidies, deviate from contract
terms, alter tax rates, or expropriate foreign investments. In recent years, foreign investors
have discovered a potent tool, the ISDS, to address dispute arising from actions of host
governments. Dispute between foreign firms and host governments – which might
otherwise be settled through diplomacy, informal means, or domestic courts – can now be
settled by an arbitration tribunal outside the jurisdiction of the host country.

By 2014, there were over 600 treaty-based claims brought by foreign investors against both
developed and developing countries (World Investment Report, 2015). They have
sometimes proved to be extremely costly for host governments, often in sensitive areas of
regulation, making investor-state arbitration one of the most controversial aspects of global
economic governance.

What is ISDS?

ISDS is a procedure to resolve disputes between foreign investors and host governments.
Foreign investors facing disputes with the host government may be concerned about getting
a fair trial in a host country against the government. The ISDS system allows foreign
investors to seek redress in a neutral international arbitration forum. Investors often gain
this right through clauses enshrined in BITs or FTA.

In order to bring a case forward, the foreign investor must claim that the host country
breached rules established in the agreement (uncompensated expropriation, breach of
contract). Once arbitration is initiated, a tribunal is formed. The focus of the tribunal is
usually on the request of the plaintiff for a monetary award. If the panel rules in favour of
the plaintiff, it must also determine the amount of the award. Generally, ISDS panels do not
overturn domestic laws or regulations; rather they are limited to providing compensation
for loss or damage of investment. Unlike domestic courts, states have little control over the
process or final decision of the international arbitration tribunal. Decisions have limited
avenues for appeal and cannot be amended by the domestic court system or legislation. The
ability to make claims against host governments in front of tribunals is a major departure
from conventional international law and significantly expands the rights of MNCs.

International arbitration is typically structured by the rules established by the ICSID or

UNCITRAL.

Why commit to ISDS?

Attracting FDI through Credible Commitments

One mechanism by which host governments can credibly indicate that they will not
expropriate foreign investors (or adopt other value-decreasing policy changes post-
investment) is by tying their own hands upfront. In other words, if host governments design
a system that makes it costly for them to expropriate foreign investors, then the interests of
foreign investors and host governments are aligned, thus improving the country’s credibility
in the eyes of foreign investors. ISDS allows governments to signal such a commitment.

ISDS increases the costs of expropriation by making host governments vulnerable to

significant economic payoffs. If the arbitration tribunal rules in favour of the foreign
investor, the host government may face large financial liabilities. In addition, this may
convey negative information to a broader investment community, discouraging potential
foreign investors from choosing the host country for their investments. Thus including ISDS
clauses in international investment agreements may help to constrain the state’s policy
discretion and make incredible commitments to foreign investors.

Some studies have shown that developing countries commit to ISDS by signing BITs when
their competitors for FDI have done so (Guzman, 1998; Elkins, Guzman, & Simons, 2006),
when they face economic slow downs (Simmons, 2014), or under conditions of capital
scarcity, for example, facing high US interest rates and net external financial liabilities (Betz
& Kerner, 2015). Further, countries facing ISDS cases or those losing a dispute suffer notable
FDI losses (Allee & Peinhardt, 2011).

Less clear, however, is whether commitment to ISDS actually results in greater FDI inflows. A
large body of empirical literature testing the relationship between BITs and FDI inflows
reveals inconclusive and conditional results (…). Thus, it is unclear if foreign investors view
ISDS as credible mechanisms by which governments can effectively tie their own hands.

Arising from unintended policy

a second explanation for the rise of ISDS suggests that host governments, especially in
developing countries, signed away sovereignty without recognising the implications of their
actions. During the 1990s, about 100 BITs were being signed each year. Research suggests
that these treaties were not carefully considered for their benefits and costs, and there was
no political awareness of what governments were signing. Rather, following neoliberal
reforms many countries adopted ISDS to demonstrate that they were adhering to what had
become widely accepted as a global standards or norm about the treatment of FDI as
established by international organisations and Western states (Jandhyala, Henisz, &
Mansfield, 2011).

Resolving investment conflicts without creating political conflicts among states

A third argument suggests that government consent to ISDS was an attempt to de-politicise
disputes. Prior to the establishment of the ISDS system, foreign investors often relied on
gunboat diplomacy – with diplomatic and military intervention in defense of private
investors – which could compromise the home country’s foreign policy objectives.
ISDS is the system that allows the home governments to separate commercial disputes from
foreign policy objectives and direct investors to a legal process while credibly denying them
diplomatic support. They could call back they gunboats and diplomats, while still providing
significant rights for investors.

Recent research suggests that we should at least consider this explanation more critically.
The findings suggest that although few recent disputes invoke explicit threats of sanctions
from home governments, investment disputes are not insulated from diplomatic
intervention and access to ISDS has no substantial impact on the likelihood of home country
diplomatic intervention in a dispute between foreign investors and host governments
(Jandhyala, Gertz, & Poulsen, 2015). Similarly, diplomatic intervention by the Spanish
Government continued in response to Argentina’s nationalisation of Repsol – the Spanish oil
company – even while the company sued under the Spain – Argentina BIT.

Conclusion

ISDS continues to be controversial in both developed and developing countries. Recent

cases have highlighted the broad scope of these rights.

Some of the opposition is focused on the arbitration process itself - for example, should it
be secret, decided by commercial lawyers acting as arbitrators in cases involving public
policy, where the rights are one-sided? Others argue that investor rights are too broad
causing a chilling effect on government policy. Yet others suggest that ISDS is a weak bargain
– that states accept significant constraints on sovereignty for little in terms of returns. It is
clear that ISDS is not a perfect solution. But as long as FDI continues, there will be disputes
between foreign investors and host governments which need to be settled. Identifying a
middle path is the challenge of the next decade.

Three waves of BITs: The global diffusion of foreign investment policy

Jandhyala (2011)
We argue that there have been two intertemporal shifts in the forces underlying the
diffusion of BITs.

- During the initial wave of these treaties, the adoption of BIT helped reassure foreign
investors by offsetting weak and unstable domestic institutions in host countries.
These treaties furnished capital-exporting countries with an ancillary commitment
mechanism above and beyond that provided by host country legal institutions
(Salacuse 1990; Neumayer 2006; Salacuse and Sullivan 2005). Thus, a vast majority
of the BITs were formed between an economically advanced, capital-exporting
country and a developing, capital-importing country.
- During the second wave of BITs, however, the bulk of these treaties were signed by
pairs of developing countries. We argue that this change reflected a growing
tendency for states to view forming BITs as an appropriate act for states providing
institutional protection for foreign investment, irrespective of any specific pressure
from a potential foreign investor or its government. The motivation for such
behaviour could be a rational cascade, in which countries sign such treaties because
peer states are doing so.
Developing countries began to join an increasing number of these treaties in order to
demonstrate adherence to what had become a global standard or norm about the
treatment of FDI by host countries. Thus, diffusion in the second wave was driven to
a greater extent by pressures of emulation in a form of rational herding (Bubb and
Rose-Ackerman 2007) or a “norm cascade” (Finnemore and Sinkkink 1998).
- The third wave of BITs began with an increased realisation of the potential costs
associated with these treaties, triggered by the aftermath of the 1998-2000 East
Asian financial crisis and the 1999-2002 Argentine crisis. As both the potential costs
and benefits have become clearer, fewer states are blindly emulating their peers and
the BITs that have been established are being driven by rational calculation.

Our empirical analysis centres on BIT signing between 1970 and 2007. We assess the
relative strength of various domestic and international factors over this period. We find
that the rational political-economic calculus to sign BITs is strongest in the first wave,
weakest in the second, and relatively strong again in the third as compared to cues of
peer adoption. In the second wave, peer-country cues of adoption and perhaps the
norm of property protection for multinational investors in host countries played a larger
role. Thus, our analysis provides support for at least a three-stage model of diffusion as
compared to the two-state model outlined by Finnermore and Sikkink (1998) and
Ramirez, Soyal, and Shanahan (1997).

The first wave of BITs: Rational Solution to Domestic Time-Inconsistency Problems

We argue that, initially, BITs arose as a means to credibly commit host governments to
protecting the property rights of foreign investors.

Prior to WWII, the sole external protection for foreign investment was customary
international law, which obligated host countries to treat investment in accordance with
internationally set standards (Vandevelde 2009). This protection proved inadequate. The
international standards were vague and a source of disputes, and in some developing
countries, the treatment of foreign investors did not meet these standards (UNCTAD
2004). Further, the only mechanism offered by customary law for enforcement was
espousal – whereby nonlegal mechanisms of military force and diplomacy were used
(Vandevelde 2009).

In the aftermath of WWII, various developing and newly independent countries adopted
socialist economic policies, including large-scale nationalisations. Many of these
countries viewed foreign control over key resources and industries as compromising
their new-found sovereignty (UNCTAD 2004) and worked within the UNGA to establish
their right to expropriate foreign investment without compensation based on fair
market value. Developed countries responded to the threat of uncompensated
expropriation by creating the BIT.

BITs establish reciprocal terms and conditions for FDI. They usually address three key
areas: admission and establishment conditions for investment, the treatment of FDI
once it has been invested, and dispute settlement (Buthe and Milner 2008). In addition,
investors are given assurances regarding their property rights through clauses that
provide the right to sue the host government if its actions are deemed to substantially
expropriate the business of the firm (UNCTAD 2000).
More generally, governments of capital-exporting developed countries are likely to sign
a BIT with governments of host countries that face problems making credible
commitments. These commitment problems are particularly acute in countries with few
checks and balances, where the absence of rule of law, veto players, secure property
rights, and (in some cases) coherent administrative institutions raise the specter of rent
seeking and other forms of government predation or opportunistic policy making that
could jeopardise foreign investment (Henisz 2000a).

The Second Wave of BITs: Rational Emulation or Norm Cascade (1970-2010)

During the second wave of BITs, wealthier countries tarted emphasising the broader
political and symbolic benefits of BITs as compared to narrow economic interests.
Developing countries did likewise and formed a wide variety of BITs with one another
without much concern for their economic consequences. For instance, explaining
Pakistan’s approach to BITs in the 1990s, the attorney general of Pakistan reported that
“I was told that when the President, or Prime Minister, went abroad, our foreign
missions would tell the Ministry the BITs are one of the dooables. Since Pakistan has
signed BITs without any consequences for a long time, everyone simply considered the
treaties as a piece of paper, something for the press, a good photo opportunity – and
that was the end of it” (Poulsen and Vis-dunbar 2009, 3).

This more symbolic approach to BIT signing is also evident in the case of the Hungary –
India treaty. In a joint statement released when the Hungarian prime minister paid a
state visit to India in 2003, “both sides expressed satisfaction over the progressive
growth of Indo-Hungarian relationship, which is marked by strong cultural affinity and
understanding”. The two countries signed several agreements including a BIT, a double
taxation treaty, and agreements on defense cooperation, cooperation in informational
technology and services, and cultural and education exchange programmes.

Thus, we argue that in the second stage, BIT creation was driven to a greater extent by
the benefits of behaving in a way that conforms to peer behaviour or is viewed as
legitimate and in keeping with accepted norms or standards, rather than as a solution to
a time inconsistency problem. Moreover, we expect peer adoption to have a stronger
effect in this period. Sociocultural linkages, such as common language, colonial history,
and common international organisation membership among countries, may contribute
to similar policy choice among states (Rose 1993). Hence, signing treaties between a
home-host dyad is likely to initiate similar treaties among the host’s social peers and the
home country.

The third wave of BITs: Heightened awareness of costs dampens peer effects

Recently, the pace of BIT signing has slowed as the number of ISDS cases filed under IIAs
has soared. Until 2000, approximately 38 investor-state disputes were filed. By 2007, the
total cumulative number jumped to nearly 300 with at least 73 countries – 58
developing countries and 15 developed – facing investment treaty arbitration (UNCTAD
2008b). BITs were by far the most common type of treaty used by foreign investors to
file claims against host states.

With the exponential increase in disputes since the early 2000s, the dynamics of treaty
signing has also changed. Several claims by investors, especially during a period of
national crisis, have generated a much greater awareness of the legal liability and the
potential costs of BIT signing. This has led several countries to question the desirability
of BITs and to probe more carefully the actual costs of signing them. For example, the
Attorney General of Pakistan commented at a global forum that “like many countries,
Pakistan had signed BITs because it was fashionable to do so and under the impression
that BITs would not ‘bite’” (Marshall 2009). He noted further that this impression had
been dispelled by the various high-value investor claims that Pakistan has since faced,
several of which were more than Pakistan’s annual health and education budget
combined. He described the difficulty a host state faces in mounting a defense to an
investor’s claim when it has little expertise in this area, a poor record of treaty
negotiations, and weak lines of communication with investors.

In addition to being held liable for large sums, several countries have also, rather
belatedly, expressed concern about private tribunals having more power than the host
state’s highest court and at providing investment protection at all costs. As a result,
several BITs in the third stage (after 2000) provide explicit safeguards for host countries
 to enact regulations – even inconsistent with the BIT - to protect legitimate public
concerns such as security, public order, health, safety, natural resources, cultural
diversity, and prudential measures for financial services (UNCTAD 2007).

With greater awareness of the legal liability and the potential costs and benefits of BIT
signing since 2000, various countries have reexamined the desirability of BITs. As the
true net benefits become apparent, there is likely to be a resurgence among later
adopters of a more rational or intrinsic cost-benefit calculus as opposed to a
bandwagon, fad, or imitative behaviour. As a result, the pattern of BIT signing is less
haphazard and more consistent with the rational decision model that characterised the
first stage.

In conclusion, our results strongly suggest that different motivations have guided BIT
signing over time. Our analysis highlights the need to understand the drivers of adopting
a political institution before we can properly assess its impact. Particularly where
motivations may range from rational political or economic foresight to a response to
institutional pressures for legitimacy, the consequences of adoption of a given
institution on a given outcome (economic or otherwise) may exhibit a broad but
analytically tractable range. Such exercises in unpacking political motivations and
analysing their economic impact are fertile grounds for collaboration in the social
sciences particularly between international political economy and international business.

Legalisation, diplomacy, and development: Do investment treaties de-politicise

investment disputes?

a b c,⇑
Geoffrey Gertz , Srividya Jandhyala , Lauge N. Skovgaard Poulsen

Empirical research on the impact of investment treaties has focused almost exclusively on
their effect on foreign investment, with mixed results. Yet, another important promise of
the treaties has been ignored altogether. Architects of the investment treaty regime, as well
as many current proponents, have suggested that the treaties allow developing countries to
de-politicise investor-state disputes; i.e. shield commercial disputes from broader political
and diplomatic considerations with developed states. While this argument is widely
accepted by legal scholars and practitioners and explicitly promoted by capital-exporting
states, it has never been subjected to empirical investigation. We provide the first such test,
using an original dataset of US diplomatic actions in 219 individual investment disputes
across 73 countries as well as detailed case studies drawing on internal US State
Department diplomatic cables. We find no evidence for the de-politicisation hypothesis:
diplomatic engagement remains important for ISDS, and the US government is just as likely
to intervene in developing countries that have ratified investment treaties with the US as
those that have not. These findings provide a critical corrective to our understanding of the
investment treaty regime, and have important implications for understanding the effects of
international legalisation on developing countries.

https://www.theguardian.com/business/2015/jun/10/obscure-legal-system-lets-
corportations-sue-states-ttip-icsid

The obscure legal system that lets corporations sue countries

Since 2000, hundreds of foreign investors have sued more than half of the world’s countries,
claiming damages for a wide range of government actions that they say have threatened
their profits.

In 2006, Ecuador cancelled an oil-exploration contract with Houston-based Occidental

Petroleum; in 2012, after Occidental filed a suit before an international investment tribunal,
Ecuador was ordered to pay a record $1.8bn – roughly equal to the country’s health budget
for a year. (Ecuador has logged a request for the decision to be annulled.)
In the late 1990s, the French conglomerate Vivendi sued after the Argentina province of
Tucuma stepped in to limit the price charged people for water and wastewater services.
Argentina eventually lost, and was ordered to pay the company more than $100m.

Now, El Salvador tries to fend off a multimillion-dollar suit lodged by a multinational mining
company after the tiny Central American country refused to allow it to dig for gold. The suit
was filed in 2009 by a Canadian company, Pacific Rim, which said it had been encouraged by
the government of El Salvador to spend “tens of millions of dollars to undertake mineral
exploration activities”. But, the company alleged that when valuable deposits of gold and
silver were discovered, the government, for political reasons, withheld the permits it
needed to begin digging. The company’s claim has been $284m, more than the total amount
of foreign aid El Salvador received last year. El Salvador countered that the company not
only lacked environmental permits but also failed to prove it had obtained rights to much of
the land covered by its request: many farmers in the northern Cabanas region, where the
company wanted to dig, had refused to sell their land. The ultimate question in this case is
whether a foreign investor can force a government to change its laws to please the investor
as opposed to the investor complying with the laws they find in the country.

Most IIA and FTAs grant foreign investors the right to activate the ISDS system. In Europe,
this system has become a sticking point in negotiations over the controversial Transatlantic
Trade and Investment Partnership (TTIP) deal proposed between the EU and the US, which
would massively extend its scope and power and make it harder to challenge in the future.
Both France and Germany have said that they want access to ISDS removed from the TTIP
treaty currently under discussion.

Investors have used this system not only to sue for compensation for alleged expropriation
of land and factories, but also over a huge range of government measures, including
environmental and social regulations, which they say infringe on their rights. Multinationals
have sued to recover money they have already invested, but also for alleged lost profits and
“expected future profits”. The sums awarded in damages are so vast that investment funds
have taken notice: corporations’ claims against states are now seen as assets that can be
invested in or used as leverage to secure multimillion-dollar loans. Increasingly, companies
are using the threat of a lawsuit at the ICSID to exert pressure on governments not to
challenge investors’ actions. The number of suits filed against countries at the ICSID is now
around 500 – and that figure is growing at an average rate of one case a week.

In 2009, the quiet village of Moorburg in Germany was the subject of a €1.4bn investor-

state case filed by Vattenfall, the Swedish energy giant, against the Federal Republic of

Germany. It is a prime example of how this powerful international legal system, built to

protect foreign investors in developing countries, is now being used to challenge the actions

if European governments as well. Since the 1980s, German investors have sued dozens of

countries, including Ghana, Ukraine, and the Philippines, at the WB’s Centre in Washington

DC. But with the Vattenfall case, Germany found itself in the dock for the first time. The

Kraftwerk Moorburg plant was controversial long before the case was filed. For years, local

residents and environmental groups objected to its construction, amid growing concern

over climate change and the impact of the project would have on the Elbe river. In 2008,

Vattenfall was granted a water permit for its Moorburg project, but, in response to local

pressure, local authorities imposed strict environment conditions to limit the utility’s water

usage and its impact on fish.

Vattenfall sued Hamburg in the local courts. But, as a foreign investor, it was also able to file

a case at the ICSID. These environmental measures, it said, were so strict that they

constituted a violation of its rights as guaranteed by the Energy Charter Treaty, a

multilateral investment agreement signed by more than 50 countries, including Sweden and

Germany. It claimed that the environmental conditions placed on its permit were so severe

that they made the plant uneconomical and constituted acts of indirect expropriation.

Vattenfall v Germany ended in a settlement in 2011, after the company won its case in the

local court and received a new water permit for its Moorburg plant – which significantly
lowered the environmental standards that had originally been imposed, allowing the plant

to use more water from the river and weakening measures to protect fish. The European

Commission has now stepped in, taking Germany to the EU Court of Justice, saying its

authorisation of the Moorburg coal plant violated EU environmental law by not doing more

to reduce the risk to protected fish species, including salmon, which pass near the plant

while migrating from the North Sea.

A year after the Moorburg case closed, Vattenfall filed another claim against Germany, this

time over the federal government’s decision to phase out nuclear power. This second suit –

for which very little information is available in the public domain, despite reports that the

company is seeking €4.7bn from German taxpayers – is till ongoing.

Roughly one third of all concluded cases filed at the ICSID are recorded as ending in

“settlements”, which can be very profitable for investors, though their terms are rarely fully

disclosed.

ISDS cases are typically heard by panels of three arbitrators; one selected by each side, and

the third agreed upon by both parties. Rulings are made by majority vote, and decisions are

final and binding. There is no appeals process – only an annulment option that can be used

on very limited grounds. If states do not pay up after the decision, their assets are subject to

seizure in almost every country in the world (the company can apply to local courts for an

enforcement order). While a tribunal cannot force a country to change its laws, or give a

company a permit, the risk of massive damages may in some cases be enough to persuade a

government to reconsider its actions. The possibility of arbitration proceedings can be used

to encourage states to enter into meaningful settlement negotiations.

In Guatemala, internal government documents obtained through the country’s Freedom of

Information Act show how the risk of one of these cases weighed heavily on one state’s

decision not to challenge a controversial gold mine, despite protests from its citizens and a

recommendation from the Inter-American Commission on Human Rights that it be closed

down. Such an action, the documents warned, could provoke the company, owned by

Canadian mining giant Goldcorp, to activate the ICSID or invoke clauses of the Central

American FTA to gain access to international tribunal and subsequent claims of damages to

the state. The mine was allowed to stay open.

When companies are unsuccessful in their claims against states, there may be other

advantages to be gained. In 2004, South Africa’s new, post-apartheid Mineral and

Petroleum Resources Development Act came into force. Along with a new mining charter,

the act sought to redress historical inequalities in the mining sector, in part by requiring

companies to partner with citizens who had suffered under the apartheid regime. The new

system terminated all previously held mining rights, and required companies to reapply for

licenses to continue their operations. It also instituted a mandatory 26% ownership stake in

the country’s mining companies for black South Africans. Two years later, a group of Italian

investors, who together control most of the South African granite industry, filed a landmark

investor-state claim against South Africa. The country’s new mining regime, they argued,

had unlawfully expropriated their investments and treated them unfairly. They demanded

$350m in compensation.

The case was filed by members of the Foresti and Conti families, prominent Tuscan

industrialists, and a Luxembourg-based holding company, Finstone. They cited two BITs,

both signed in the late 1990s, during Nelson Mandela’s presidency. The new, post-apartheid
government seemed to view these agreements “more as acts of diplomatic goodwill than

serious legal commitments with potentially far-reaching economic consequences”.

The companies’ case against South Africa dragged on for four years, before ending abruptly

when the Italian group dropped its claims and the tribunal ordered them to contribute

€400,000 towards SA’s costs. At the time, a government press release celebrated it as

“successful conclusion” – despite the fact that SA was still left with €5m in unreimbursed

legal fees. But the investors claimed a more significant victory: the pressure of the case,

they said, allowed them to strike an unprecedented deal with the SA government that

allowed their companies to transfer only 5% of their ownership to black SAcans – rather

than the 26% mandated by the state mining authority. No other mining company in SA has

been treated so generously since the advent of the new mining regime.

The government seems to have agreed to this deal, which goes against the spirit of post-

apartheid reparations in SA, to prevent a flood of other claims against it.

A small number of countries are now attempting to extricate themselves from the bonds of

the ISDS. One of these is Bolivia, where thousands of people took to the streets of the

country’s third-largest city, Cochabamba, in 2000, to protest against a dramatic hike in

water rates by a private company owned by Bechtel, the US civil engineering firm. During

the demonstrations, the Bolivian government stepped in and terminated the company’s

concession. The company then filed a $50m suit against Bolivia at the ICSID.

After this expensive case, Bolivia cancelled the international agreements it had signed with

other states giving their investors access to these tribunals. But getting out of this system is

not easy. Most of these international agreements have sunset clauses, under which their
provisions remain in force for a further 10 or even 20 years, even if the treaties themselves

are cancelled.

In 2010, Bolivia’s president, Evo Morales, nationalised the country’s largest energy provider,

Empresa Electrica Guaracachi. The UK power investor Rurelec, which indirectly held a

50.001% stake in the company, took Bolivia to the PCA in the Hague demanding $100m in

compensation. Last year, Bolivia was ordered to pay Rurelec $35m; after months of further

negotiations, the two sides settled on a payment of just over $31m in May 2014.

A specialist industry has developed in advising companies how best to exploit treaties that

give investors access to the dispute resolution system, and how to structure their businesses

to benefit from the different protections on offer. It is a lucrative sector: legal fees alone

average $8m per case, but they have exceeded $30m in some disputes; arbitrators’ fees

start at $3,000 per day, plus expenses. While there is no equivalent of legal aid for states

trying to defend themselves against these suits, corporations have access to a growing

group of third-party financiers who are willing to fund their cases against states, usually in

exchange for a cut of any eventual award.

Increasingly, these suits are becoming valuable even before claims are settled. After Rurelec

filed suit against Bolivia, it took its case to the market and secured a multimillion-dollar

corporate loan, using its dispute with Bolivia as collateral, so that it could expand its

business. Over the last 10 years, and particularly since the global financial crisis, a growing

number of specialised investment funds have moved to raise money through these cases,

treating companies’ multimillion-dollar claims against states as a new “asset class”.

El Salvador has already spent more than $12m defending itself against Pacific Rim, but even

if it succeeds in beating the company’s $284m claim, it may never recover these costs. For

years, Salvadoran protest groups have been calling on the WB to initiate an open and public

review of ICSID. To date, no such study has been carried out. In recent years, a number of

ideas have been mooted to reform the ISDS – to adopt a ‘loser pays’ approach to costs, for

example, or to increase transparency. The solution may lie in creating an appeals system, so

that controversial judgements can be revisited.

Other countries have already decided to cut their losses, and tried to get out of these trade

treaties. Shortly after settling the lawsuit with foreign mining companies over its new post-

apartheid mining rules, South Africa began to terminate many of its own investment

agreements.

What was concerning was that an international arbitration – three individuals, making a

decision on what was in effect a legislative programme in SA that had been arrived at

democratically, and that this arbitration panel could potentially call this into question. It was

clear that these treaties are open to such wide interpretations by panels, or by investors

looking to challenge any government measure, with the possibility of a significant payout at

the end of the day.

Before moving to terminate its agreements, the SA government commissioned an internal

study to help determine whether such treaties actually did help boost foreign investment.

“There was no pattern between signing treaties and getting investment. We’ve had huge

investments from the US and Japan and India and a number of other countries where we

don’t have investment treaties.”

Brazil has never signed up to this system – it has not entered into a single treaty with these

investor-state dispute provisions – and yet it has had no trouble attracting foreign

investment.

ISDS Reform: Possible way forward

ISDS reform process often portrayed as a balancing act between ‘private sector rights’ and
‘public sector obligations’ (Ciocchini and Khoury 2018), will affect at least two important
dynamics: (1) impact on government policy space and domestic regulations; and (2)
domestic judicial reform.

One example of ISDS reform is the EVIPA. Notably, the EVIPA single-handedly addressed
both options of ISDS reform considered by the Centre for International Dispute Settlement
(CIDS), as reported in the recent note of the Secretariat of the United Nations Commission
on International Trade Law (UNCITRAL), namely (i) a permanent international dispute
settlement body; and (ii) an appeal mechanism for investor-State arbitral awards.

The EVIPA’s regime for settlement of investor-state dispute

The regime for the settlement of investor-state disputes in the EVIPA is a two-tier standing
panel based on the model of a permanent investment court, a model that has just been
experimentally applied in the CETA, which provisionally came into force on 21 September
2017. It is consistent with certain proposals for ISDS reform which are being discussed in
UNCITRAL’s Working Group III. Although untested, the ISDS regime under the EVIPA appears
highly promising as the standing body can bring highly qualified and carefully appointed
individuals to sit as ‘arbitrators’ on the Tribunal and Appeal Tribunal. These arbitrators
would be bound by the Code of Conduct stipulated in Annex 8 of the EVIPA.

However, the strict procedure relating to the appointment of the members of the Tribunal
and Appeal Tribunal effectively eliminates party autonomy, which is a cornerstone of the
traditional arbitration model, potentially presenting a significant disadvantage for investors.

Foreign investor protections in the Trans-Pacific Partnership

Gus Van Harten

Extraordinary investor protections, high public costs

Like most of Canada’s trade agreements, but unlike the WTO’s multilateral trade
agreements, the TPP would give foreign investors special rights to protect their assets by
suing countries for compensation when they are affected by laws, regulations, and other
decisions that the foreign investor thinks are unfair. Nothing like these rights exists for other
actors in international law, whether they are other foreign nationals, domestic investors, or
citizens – even in the most extreme situations of mistreatment.

Protection beyond domestic law and other areas of international law

There is a simple reason why ISDS lawyers have encouraged foreign investors to use treaties
like the TPP to attack countries’ decisions, even at a potentially high cost in legal and
arbitration fees for both the foreign investor and the sued country. The reason is that the
treaties give advantages for foreign investors that are not available to them in domestic law
and other areas of international law.

Some of the special legal benefits that ISDS provides for foreign investors:

- There is no right of a government or any other affected party to bring a claim against
a foreign investor in ISDS.
- Foreign investors can challenge directly any decision of a country at the international
level.
- Foreign investors can be awarded uncapped amounts of compensation as the
primary remedy for sovereign conduct that is deemed by the arbitrators to have
been unlawful.
- The provisions that describe the rights and protections of foreign investors – such as
“fair and equitable treatment” or “indirect expropriation” or “de facto
discrimination” – are very broadly worded. As a result, they give immense power to
the lawyers who sit as arbitrators and decide foreign investor claims.
- The foreign investor directly controls or influences half of the make-up of the
arbitration tribunal’s membership.
- The lawyers appointed as arbitrators in each case, especially the “core” arbitrators
who have been appointed over and over, stand to profit from their own decisions.
Because they do not have secure tenure and are paid a lucrative daily or hourly rate,
the arbitrators have an evident interest to encourage claims, which can be brought
only by one side (the foreign investors), and to stretch out the proceedings.
- There is no opportunity for review of the arbitrators’ decisions in any court.

What is ISDS?
The ISDS mechanism is a non-judicial ‘arbitration’ process that is used to protect rights and
privileges of foreign investors under trade and investment agreements such as NAFTA and
the proposed TPP. Foreign investors are not required to try to resolve a complaint through
the domestic courts of the host country before launching an ISDS claim and they do not
need to seek consent from their home government.

Who has benefited financially from ISDS?

Overwhelmingly, the foreign investors that have been benefited financially from the rights
in agreements like the TPP have been very large companies and very wealthy individuals.

By following the money, we find that the clearest financial impact of foreign investor rights
has been to require billions of dollars in public money to be paid to multinationals and the
very wealthy. For other foreign investors, the money typically spent on lawyers and
arbitrators, whose fees amount to about $8 million per case on average, appeared to
outpace any financial award to the investor, even in cases where compensation was
awarded. Accounting for the factor of legal and arbitration fees, the ISDS system has greatly
enriched investment lawyers and arbitrators.

The TPP goes beyond NAFTA

Not fair, not independent

The TPP gives for-profit lawyers – sitting as arbitrators – the power to decide what
sovereigns can do, and then to award potentially vast amounts of public money to foreign
investors. TPP arbitrators are “for profit” because they are paid by the day or by the hour.
Unlike other kinds of arbitrators, ISDS arbitrators’ decisions are subject to little or no
scrutiny in any court.

The financial interest of the arbitrators is uniquely present in ISDS arbitration because only
one side (the foreign investors) can bring the claims that lead to the arbitrators’
appointments and remuneration. Repeat arbitrators in particular have a unique incentive to
interpret the law in ways that encourage foreign investors to bring more claims. Missing are
the judicial safeguards of a set of salary, secure tenure, an objective method of case
assignment, a prohibition on working on the side as a lawyer or arbitrator, and so on.
Worse, the TPP arbitration process is procedurally unfair because, with the exception of the
foreign investor and national government of the sued country, it denies full standing to
other parties who have a legal interest in the process. That is, anyone else who has a legal
interest in the case is not given full rights to access documents, submit evidence, and make
arguments.

The price tag on democracy and regulation

The TPP would take us in the wrong direction and be very difficult to reverse. It would
expand the transfer of power to ISDS arbitrators from legislatures, governments, and courts.
The arbitrators would not be accountable like a legislature. They would not be capable of
regulating like a government. They would not be independent or fair like a court.

At the core of the TPP’s threat to democracy and regulation is the uncertainty and
potentially huge price tag that its ISDS process would put on any law or regulation that is
opposed by a large multinational company or a billionaire investor. The problem is not that
foreign investors would be too big to fail; it is that the TPP would make the biggest and
richest ones too risky to regulate.