Investor-State Dispute Settlement (ISDS) is arguably one of the most controversial aspects of International Investment Law. While International Investment Agreements (IIAs) have attracted criticism for their reliance on ISDS, a suitable alternative to investor-state arbitration may be difficult to come by despite one’s best efforts to reform the system. Nimaya Dahanayake (Events Manager – External) and Sayuni Masakorala (Research and Publications Manager – External) from the Moot Court Bench International Trade Law Program interviews Andrés F. Esteban Tovar— a recognized expert in the field of international arbitration and international law, to discuss the controversial role of ISDS. Andrés is an International Associate at Foley Hoag LLP where he advises and represents States before international courts and tribunals. With extensive experience as a government lawyer, he offers expert advice on public international law, investment arbitration and WTO Law. In addition to his practical experience, he has served as a professor at several prestigious universities in Colombia, where he has taught in areas such as public international law, international economic law, litigation before international courts and tribunals, the law of economic integration and globalization and law.
Compiled by: Nimaya Dahanayake and Sayuni Masakorala
Q: What is ISDS and how is it different from State-State Dispute Settlement?
A: ISDS stands for Investor-State Dispute Settlement. It is the mechanism used to solve investment disputes in International Investment Agreements which can take the form of Bilateral and Multilateral Investment Treaties or Free Trade Agreements (FTAs). Typically, in FTAs, you would have an investment chapter, and within that, an ISDS provision. Back in the day, under International Law, States used to settle their disputes directly through diplomatic channels. States also used ‘gunboat diplomacy’, where military force was utilized as a means of securing foreign government cooperation. After World War II, with the establishment of the New World Economic Order, new ways of resolving disputes were introduced. The Barcelona Traction Case (ICJ) was one example of how States resolved disputes post-World War II.
The International Centre for the Settlement of Investment Disputes (ICSID) was established in 1966, based on the idea that States would no longer need to rely on diplomatic relations to solve issues affecting an investor. Rather, States would be able to rely on a treaty that would provide investors the right and standing to bring forth a claim, provided they satisfied certain pre-requisites. The main objective was, therefore, to depoliticize ISDS. If States relied solely on diplomatic channels to resolve their issues for instance, they would require good connections with other States, to resolve any issues. ISDS is less political, because countries have agreed to provide standing to corporations (investors) through an Investment Agreement. It must be kept in mind, however, that as a non-traditional subject of international law, there is a debate on whether corporations are subjects of International Law.
Q: What is the significance of the ISDS? Why has it attracted so much controversy?
A: Two things must be highlighted here. First, there was a need to give investors the ability to bring their claims to an arbitral tribunal and second, through the system, one could only go before the International Tribunal after domestic proceedings. If there is an investor in State A for instance, the investor would prefer to go to an International Tribunal that he feels is more independent than a domestic court. The investor has the assurance that the International Tribunal is less political.
Today, however, there is a trend towards providing investment protection without strict reliance on ISDS provisions. Some countries have recently signed treaties without ISDS provisions. Back in the day, the function of depoliticizing disputes, giving States assurances not to go to a domestic court is now changing. Other means of solving investment disputes are increasingly considered. There is also a trend towards using an Ombudsman or committees within investment treaties to settle investment disputes.
Q: How important are sunset clauses as a means of protecting investments?
A: Ideally, Host States would want to protect the investments that create development or more economic opportunities in their State. These investments contain both an economic contribution and risk. Imagine a situation where you sign a treaty with a government and in four years, it is declared that the treaty is no longer in force. Four years may not be sufficient for an investment to make an impact/take effect. Sunset clauses exist in order to prevent the government from abruptly ending protection for the investment.
However, if an investor is committing violations affecting the environment and measures taken by the State are justified, most International Tribunals will uphold the actions of the State. The fact that there is an ISDS mechanism available does not mean that investors are able to use that mechanism for their own gain. If the treaty has a statute of limitations, for instance, you have to file the claim within a certain period of time. If a State was able to make a decision in a non-arbitrary, transparent manner, then it will be upheld by the Tribunal. If the State says there is an environmental law violation, the investor (i.e., knowing the laws of that country) must uphold them through their investment or face the consequences.
Q: Could you explain the distinction between ad hoc and institutional arbitration? Is there an advantage to choosing one over the other?
A: With ad hoc arbitration, you can choose the rules of proceedings. With institutional arbitration, you have to abide by the rules created by the institution conducting the arbitration.
The use of either ad-hoc or institutional arbitration must be considered on a case-by-case basis. For instance, some procedural rules are strict about nationality, so if you know there is a case where the nationality of the investor is an issue, the stricter rules may be limiting. The choice should therefore be based on a case-by-case basis and how you’d want to manage the issues of the case.
Q: There is a perception that ISDS provisions are often unfair, and protect investors to the detriment of the host country. What are your thoughts on this?
A: There is some misconception here. If you consider the statistics provided by the UNCTAD Investment Policy Hub until December 2022, the State has prevailed in 36.7% of the cases, the investor has prevailed in 28% of the cases. They have settled 19.2% of the disputes and a claim has been discontinued in 13.6% of the cases. Further, 2.5% of all cases were where liability was found but no damages were awarded.
Even if you take into account the number of cases where the investor has prevailed and the number of cases where the disputes have been settled (i.e., assuming that an investor won when the dispute was settled), it still does not amount to 50%. But when you look at the times the State prevailed, the case was discontinued etc. State clearly prevails in the statistics.
Creating an attractive investment environment (i.e., with taxes, treaties etc.) is crucial in attracting investors. At the time, ISDS was considered to be a factor that investors would have considered for investment. But there is no conclusive evidence on this positive relationship between ISDS and investment. Investment is also driven by other factors including employment costs, tax benefits etc. The statistics reveal that States have prevailed in more cases than investors. If you take the last 30 years for instance, I think it is clear that investments have made a good difference in reducing poverty. Today, you have less people living in poverty and more capital flows.
In my experience, when you have well sustained measures that are non-arbitrary, there is little chance of having an Investor-State dispute, or little chance of an International Tribunal not upholding your measure.
Q: In that context, how do you think these ISDS provisions could strike a balance between investment and the government’s ability to regulate matters of public interest?
A: In the UNCITRAL working group III, there has been a lot of advancement with regard to procedure. But the discussion within the group is that States need to reform the substance of the treaties.
The best way to strike a balance is to revisit those agreements, and the protections provided and try to modernize or renegotiate. Older treaties (from the 1990s and 2000s) have often used vague language, etc. which leaves it open for interpretation. It is important that we revisit those investment agreements and try to include that balance within the provisions. For instance, Sri Lanka’s BIT model is not recent, and the idea would be to strike this balance or to make it clear that the government is able to regulate. The State does not lose its power to regulate in any case, but you can make it clearer by renegotiating your commitments.
It is also important to reduce the scope of the fair and equitable treatment obligation and try and include the possibility of the State filing counterclaims and also clarifying expropriation clauses.
Q: Do you think Sri Lanka’s experience in ISDS has been positive?
A: We would have to study each decision to make a complete assessment of the results. However, I was reviewing the numbers and there has been 5 cases, two cases decided in favour of the State, two cases in favour of the investor. If you look at the numbers only, the experience does not seem to have been that bad. When you compare this against, other developing countries like Argentina, they have faced 62 cases where the State has not prevailed in a large number of cases, similar to Venezuela. For me, Sri Lanka’s position looks decent, in general terms.
To add to that, Sri Lanka was a pioneer of this mechanism. Because there was a case in 1987 (AAPL v Sri Lanka) and the second case was in the 2000s (Mihaly v Sri Lanka). There are a small number of cases in a certainly large period of time. In general terms, Sri Lanka’s experience has been decent. Especially taking into account the 25 BITs in force in Sri Lanka.
Q: What is the relationship between ISDS and the Belt and Road Initiative (BRI)?
A: As we talk about these non-conclusive relationships between ISDS and investment trends in a country, that is certainly something that is clear for the BRI. ISDS is not necessarily one of the main instruments of the BRI. The investments in the future may suffer from a lack of ISDS. Most countries in the BRI, have no BITs or only have first-generation BITs. For instance, Sri Lanka’s BIT with China is from 1986—which is quite old. If China’s interest is for the investments to be protected, they would need to look to include certain provisions in the treaty or to renegotiate existing treaties.
Q: What are your thoughts on the Multilateral Investment Court proposal of the European Union (EU)?
A: With the Multilateral Investment Court, it seems as though States are trying to come up with different ideas to solve a legitimacy problem. The States had to come up with ideas of bringing back legitimacy to the system and one of those ideas have been the Multilateral Investment Court. My sense is that there is a feeling of changing things. But, as things stand right now, it seems to be difficult to reach an agreement right now. The GATT of 1994, took almost 50 years to get to the idea of the International Organization. There is an interest here, in changing the system, similar to the WTO dispute settlement mechanism and I find it interesting, but while governments have interest there is little agreement at this point.
The views and opinions expressed by experts in the In-Discussion Series of the Comparative Advantage Blog are those of the experts and do not necessarily reflect the views of the Moot Court Bench.
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