Investment protection measures like ISDS

1. Investor-State Dispute Settlement (ISDS)

ISDS is a type of investor protection measure included in many trade and investment agreements. It provides a way for foreign investors (largely transnational corporations) to claim compensation if they believe that the host state has harmed their investments by breaching the provisions of the treaty.

Under ISDS, whether compensation is warranted, or how much is due, is decided by a secretly run, ad hoc arbitration panel of three trade lawyers. Such tribunals can by-pass domestic courts and trump the decisions of an elected government: ISDS is therefore profoundly undemocratic.

Initially IDSD was introduced to provide a process for settling disputes where treaties involved states without mature or effective legal systems – it’s hard to see why its necessary to include ISDS in treaties involving countries such as the USA, Canada or the member states of the EU.

Originally ISDS allowed investors to sue for the expropriation of physical assets, but it now allows redress for any government actions (such as the introduction of new regulations or tax decisions) that potentially – even unintentionally – damage investors’  earnings.  (For example, the French company Veolia used ISDS to sue the Egyptian government for increasing the minimum wage, and the UK company Tullow Oil sued Uganda for a $400 million capital gains tax bill.) Consequently, the inclusion of ISDS in trade and investment agreements tends to have a freezing effect on governments’ policy making, even when this is for the public good, such as the introduction of new public health regulations.

Each ISDS arbitration panel is free to decide on its own approach to compensation: formal guidance on calculating compensation is non-existent. There is no limitation to the size of the awards that panels can grant but awards are likely to be greater than any compensation determined on the basis of UK law. (http://www.unitetheunion.org/uploaded/documents/FINAL%20Legal%20implications%20of%20TTIP%20for%20the%20NHS%2012%20Feb%20201511-21864.pdf)

The costs to a national government defending an ISDS claim are considerable.  If a claim is granted, the awards that ISDS panels can make are colossal.  (For example, the Swedish energy corporation Vattenfall is suing the German government for $3.7 billion over its decision to phase out nuclear power due to environmental concerns, and American company Renco sued Peru for $800 million because its contract was not extended after the company’s lead smelting operations caused massive environmental and health damage.)

ISDS also severely limits the ability of governments to move public services out of markets in which investors have substantial interests.  For example, the USA has the largest amount of foreign direct investment in the UK, $40 billion in 2011 alone. Much of this investment is in public utilities. In the past, the public sector has been particularly prone to ISDS claims. For example, both Poland and Slovakia have both been sued by investors for bringing parts of their health services back into public control. In the UK, there is a danger that if a future government were to reverse the marketisation of the NHS by repealing the Health and Social Care Act (2012), it would be vulnerable under ISDS to challenge by American companies with significant investment in the NHS.
And, of course, where governments have been successfully sued under ISDS, they have  substantially fewer resources to invest in public services.

ISDS is unfair in that it gives special privileges to foreign investors as it is not a course of action available to domestic companies or EU citizens. Nor can the UK government use ISDS to sue a transnational corporation. Corporations can also indulge in the questionable practice of ‘treaty shopping’ – choosing to invoke the trade and investment agreements that offer the most favourable terms for legal action, whether or not they are the most relevant to their dispute. For example, the Canadian mining company Lone Pine has used its US subsidiary to sue the Canadian government for $250 million for its moratorium on fracking, following environmental concerns.

Curiously, as the EU trade commissioner has admitted, there is no direct relationship between the inclusion of ISDS in a FTA and increased foreign investment, prompting questions about why governments agree to offer foreign investors a special court (http://www.euractiv.com/sections/trade-society/positive-effects-ttip-tribunals-investment-unclear-317665).

A recent study looking at the size and wealth of the foreign investors that have received compensation through ISDS has found that, up to the Spring of 2015, most beneficiaries have been companies with over $1 billion in annual revenue. The study also found that extra large corporations were the most successful in pursuing claims: 94.5% of all compensation paid was received by companies with more than $10 billion in annual revenue. In addition, it was clear that ISDS made substantial profits for the ISDS legal industry. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2713876)
NB: A legal study carried out on behalf of ClientEarth in 2015 finds it doubtful that an international agreement containing ISDS (or, presumably, the Investment Court System that the EC has proposed for TTIP) is legal under EU law as it undermines the powers of the EU courts as well as the functioning of the EU’s internal market. The report highlights how important it is to clarify the situation but that only EU leaders can do this through putting a request for a legal check on ISDS to the European Court of Justice (see http://documents.clientearth.org/wp-content/uploads/library/2015-10-15-legality-of-isds-under-eu-law-ce-en.pdf).

There has also been an argument put forward by a United Nations expert that trade treaties are legally invalid where they lead to a violation of human rights, or breach any other obligation set out in the UN charter (which trumps all other agreements in international law).  There is particularly concern that ISDS undermines human rights by adversely affecting the fundamental principles of the UN –  state sovereignty, democracy and the rule of law (see https://citizenactionmonitor.wordpress.com/2015/10/28/un-official-advises-governments-how-to-protect-their-vital-interests-in-trade-negotiations/).

Further information

An excellent video explanation of ISDS: https://www.youtube.com/watch?v=spBdTcaY3_Q#t=235).

For detailed arguments against ISDS, see  http://corporateeurope.org/international-trade/2014/04/still-not-loving-isds-10-reasons-oppose-investors-super-rights-eu-trade

The Trades Union Council submission to the EC’s Consultation on ISDS: https://www.tuc.org.uk/international-issues/tuc-submission-european-commissions-consultation-isds

How ISDS inhibits tax justice: https://www.tni.org/en/publication/taxes-on-trial

2. Investment Court System (ICS)

As a result of public protest against TTIP, particularly its inclusion of ISDS, the nature of  investment protection in TTIP (and future FTAs) has been reviewed recently. As a result,  the EC has suggested a slightly different process known as ‘Investment Court System’ (ICS). The initial response to ICS from TTIP’s US negotiators appears to be less than positive.

The  EC’s proposals include:

  • criteria for cases that can be taken to Tribunal are to be precisely defined;
  • judgements are to be made by publicly appointed judges with qualifications similar to those of permanent international courts;
  • there should be access to an Appeal Tribunal;
  • governments’ right to regulate will be enshrined and guaranteed in the provisions of the trade and investment agreements;
  • proceedings will be transparent, with open hearings and comments available on-line; and
  • ultimately, a permanent International Investment Court should be set up to replace all other investment protection measures in FTAs that the EU is party to.

For more details see http://europa.eu/rapid/press-release_IP-15-5651_en.htm

However, critics of ICS have seen it essentially as a re-branding of ISDS that retains many of its flaws, arguing that:

  • there is no evidence to justify the sidelining of domestic courts and the inclusion of extraordinary protections for foreign investors in TTIP and similar agreements. The countries involved in TTIP and similar treaties have mature legal systems – there is no evidence that they cannot deal fairly with foreign investment disputes. In fact, they are better able to do this than ISDS or ICS tribunals. Moreover, investment has always entailed a degree of risk: investment protection measures like ICS give unprecedented protection to overseas investors at the expense of national governments and their citizens;
  • ICS judges would not have to meet the usual requirements for judicial appointments;
  • in a system in which only one side to a dispute (foreign investors) can bring claims, and where judges would be paid a considerable daily fee, the temptation might be to make judgements that would ensure future work;
  • foreign investors are given considerable rights and protections, but no enforceable responsibilities (e.g. if they breach environmental or labour standards);
  • the proposal for an International Investment Court (IIC) lacks credibility because the EC continues to push for an investment protection measure like ISDS in current treaty negotiations  – i.e. before moving to set up the IIC ; and
  • the guarantee of a government’s right to regulate is less reassuring than it appears at first sight. For example, the guarantee is underpinned by a ‘necessity test’ governing those state decisions that are protected by the right to regulate. The precedence from most ISDS tribunals has been for this test to be applied incredibly strictly, making it very hard for a challenged law or regulation to qualify for protection under the right to regulate. Plus the EU’s proposal makes it clear that compensation ordered by ISDS-type tribunals in response to new laws etc is not precluded by the right to regulate.

Further information on ICS

Gus Van Harten of Osgoode Hall Law School at York University writes on Key flaws in the European Commission’s proposals for foreign investor protection in TTIP  (including about the right to regulate) http://ssrn.com/abstract=2692122.

Corporate Europe Observatory’s 2016 report The zombie ISDS: Rebranded as ICS, rights for corporations to sue states refust to die. http://corporateeurope.org/sites/default/files/attachments/the_zombie_isds.pdf

 updated February 2016

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