By Noor ul ain Tahir

Investor-State Dispute Settlement (ISDS) mechanisms have been a contentious topic in international trade agreements, and countries that have adopted Bilateral Investment Treaties (BITs) incorporating these mechanisms have faced a series of challenges and controversies related to their use. While these mechanisms were originally designed to protect the rights of foreign investors, they have increasingly come under scrutiny for their potential impact on sovereign state regulations and public interest. In this article, we will delve deeper into the challenges that countries have encountered in relation to their adopted BITs and ISDS mechanisms, examining notable cases where investors have challenged state regulations and exploring ongoing efforts to reform or replace these mechanisms for a more balanced and equitable global trade landscape. Particularly, I will explore whether implementing a Multilateral Investment Court (MIC) is a better ISDS mechanism that addresses the challenges states and investors currently face.

Exploring the Controversies

ISDS mechanisms have faced growing criticism, primarily due to concerns surrounding the erosion of state sovereignty. Critics argue that these provisions grant foreign investors significant power, enabling them to challenge legitimate government regulations that might affect their profits. This issue has ignited debates over the appropriate balance between protecting investor rights and ensuring that countries can enact regulations in the public interest without undue interference.

One of the most significant criticisms of ISDS is the potential for these mechanisms to undermine public interest policies, such as environmental regulations and health measures. Cases have emerged where foreign investors have initiated disputes against states, claiming that certain regulations have harmed their investments. These disputes raise important questions about the ability of states to implement and enforce policies for the well-being of their citizens without facing substantial legal challenges.

Analysing Challenging Cases

Several high-profile cases have highlighted the complexities and challenges associated with ISDS mechanisms. For instance, the case of Philip Morris, a tobacco giant, challenging Australia’s plain packaging laws garnered international attention. Philip Morris argued that these regulations damaged its branding and violated its investment rights. The dispute illustrated how ISDS mechanisms can be used by corporations to contest public health measures that governments implement to reduce smoking rates and protect citizens from the harmful effects of tobacco.

Another noteworthy case involved Lone Pine Resources, which sued Canada over a moratorium on hydraulic fracturing, or fracking. In this instance, the investor claimed that the moratorium violated its rights and harmed its investments. This case emphasised the potential for investor claims to challenge and potentially deter legitimate state actions taken to address environmental concerns.

Towards Reform and Alternatives: Establishing an MIC

Recognising the need to address these challenges, efforts are underway to reform ISDS mechanisms and make them more balanced. In this respect, there is a growing interest in establishing a MIC as an alternative to the ad hoc arbitration system currently in place. Proposed by the European Union, the interest to establish a MIC, stems from the EU courts’ reservations on the current ISDS system in place. This has been seen in several Court of Justice of the EU (CJEU) decisions, including the case of Slovak Republic v Achmea BV (Case C-284/16), where the CJEU found the ISDS clause in the Netherlands-Slovakia BIT to be incompatible with EU law as it undermined the exclusive jurisdiction of the CJEU to interpret EU law. 

Furthermore, against these circumstances, a report submitted by the Centre for International Dispute Settlement (CIDS) recognised certain procedural weaknesses in the ad hoc tribunals of the ISDS system. This report was submitted to the United Nations Commission on International Trade Law (UNCITRAL) in 2017, which entrusted its Working Group III to formulate possible reforms, including the possibility of replacing the current ISDS system with a MIC. In a way, the inspiration to establish an MIC for investment dispute settlement also stems from aspiring to create a system similar to what the World Trade Organisation is for trade dispute settlement.

The MIC is said to have been structured on the basis of having a first instance court along with an appeal body, consisting of tenured adjudicators remunerated on a permanent basis. The court would only have the jurisdiction to adjudicate claims where the member states to the investment treaty have assigned the court to adjudicate on. It is said to offer a more consistent and accountable approach to resolving investment disputes, and reducing the unpredictability associated with the current ISDS mechanisms. Such a court could help ensure that disputes are handled impartially and in a manner that respects both investor rights and public interest considerations.

Figure 1: Differences between ISDS and MIC

Source: European Commission – Multilateral Investment Court Factsheet

Criticisms Against MICs

Regardless of the certainty a MIC is arguably said to offer, the procedural difficulties a MIC may give rise to, in addition to the political challenges the implementation of a MIC may bring about, must first be addressed. If a ‘truly global’ MIC is to be given effect, there must be political consensus among the majority of states to move to a MIC from the existing ISDS system.  This would mean that states would essentially have to sign and ratify a new international convention inculcating such principles while amending or repealing multiple investment agreements the states may have in existence.

Moreover, while the MIC aims to ensure consistency and predictability through appointment of permanent full-time adjudicators along with a procedure to appeal, there are concerns regarding the applicability of such decisions in the local context of the member states. In other words, there is ambiguity with regard to whether a judgement given by the MIC, would qualify as an arbitral award for the purpose of enforcement. There are also concerns regarding the diversity of judges themselves, as the MIC is specifically proposed by developed nations who will form the “foundation of contracting states that will appoint judges” and finance the court. In addition, the presence of an appellate body could cause further delays in the adjudicatory process as evidenced by the Appellate Body of the WTO Dispute Settlement System.

Simply put then, as of now, a MIC may not be a real alternative to traditional ISDS mechanisms since not all concerns faced at present can be addressed with a MIC.  

Calls for a Holistic ISDS Mechanism Still Persists

The controversies surrounding ISDS mechanisms underscore the delicate balance between protecting the rights of foreign investors and safeguarding state sovereignty. While these provisions play a crucial role in facilitating international investment and trade, their potential to challenge government regulations demands careful consideration. As trade agreements continue to evolve, finding the middle ground between investor protection and public interest will be crucial for building a fair and harmonious global trade environment. While implementing a MIC may at first seem like a great alternative to traditional ISDS mechanisms, current proposals to establish one have shed light to the defects of MICs themselves. Therefore, until further discussions are held to address such problems, implementing a MIC will not be a true alternative to the ad-hoc dispute mechanism currently in place.

The views and opinions expressed in articles submitted to the Comparative Advantage Blog are those of the author and do not necessarily reflect the views of The Moot Court Bench.



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