Open Access Research Article
RECENT REFORMS IN INVESTOR-STATE DISPUTE SETTLEMENT
Published Paper
Article Details
RECENT REFORMS IN INVESTOR-STATE
DISPUTE SETTLEMENT
AUTHORED BY
- MANSI BENIWAL
ABSTRACT
The world of international investment
has recently undergone a seismic shift, long defined by intricate webs of
agreements and the pursuit of economic prosperity. The essential aspect of this
shift is the changing story around Investor-State Dispute Settlement (ISDS)
processes, which have historically played a crucial role in protecting the
interests of international investors against alleged unfair treatment by host
nations. The concerns and critiques about the efficacy and impartiality of ISDS
processes, however, vary in accordance with changes in the global economic
environment. This article kicks off a comprehensive examination of recent ISDS
reform developments, dissecting the multifaceted dimensions of change that are
reshaping the very foundations of international investment treaties. The paper
will walk through the key pillars of change, shedding light on increased
transparency, arbitrator codes of conduct, the potential for an appeals
process, and the intricate equilibrium between safeguarding investors and
allowing regulatory independence for the host country. The paper will critically
recognize the critical juncture in which the international community finds
itself—a juncture at which the re-calibration of ISDS not only responds to
previous criticisms but also shapes the trajectory of future investment
relations. The delicate dance between investor rights and host state regulatory
space necessitates nuanced consideration, requiring a delicate balance that
fosters international investment while respecting nations' sovereign
prerogatives. Recent developments in ISDS reforms serve as guideposts in this
pursuit of equilibrium, providing insights into the transformative potential of
a system in flux.
Keywords- Investor-State Dispute Settlement,
Transparency, Regulatory Autonomy, Arbitrator codes of conduct, Appellate
Mechanism.
Introduction
ISDS is a key component of investment
treaties. “The procedural mechanism through which an investor may seek
redress for a violation of a substantive investor-protection standard, whether
included in a bilateral investment treaty (BIT) or a trade treaty with
investment safeguards, determines the robustness of those safeguards” is
known as ISDS. Recently, several individuals and organisations have been
targeting the conventional method of investment arbitration, which is based on
commercial arbitration and involves disputes between investors and host states.
Adversarial to the conventional model, which has broadened from academia to
politics, has resulted in changes to solitary treaties as well as broader
reform initiatives. ISDS has its origins in bilateral investment treaties
(BITs) signed in the mid-twentieth century, primarily to encourage and protect
foreign investment. These treaties usually included provisions that allowed
investors to sue host countries if their investments were subjected to unfair
treatment or expropriation.[i]
Navigating
the Legal Landscape: Recent Reforms in ISDS
While significant changes are taking place, the vast
majority of existing investment treaties, approximately 90%, were signed prior
to 2012 and adhere to traditional ISDS provisions. From 2012 onwards, the newer
generation of treaties introduced various reforms, both substantive and
procedural. Significant changes include the refinement of investor and
investment definitions, restrictions on fair and equitable treatment standards,
clarification of indirect pre-emption standards, and an increased focus on
corporate and social responsibility. Procedural changes include changes to ISDS
provisions ranging from removing ISDS in favour of alternative dispute
resolution mechanisms to improving the traditional model. Some treaties
restrict ISDS to specific treaty violations, include provisions to strengthen
arbitrator impartiality, allow for early dismissal of frivolous claims, and
include transparency measures that allow public access to ISDS proceedings.
Significant reforms have taken place in specific regions.
For example, the USMCA replaced NAFTA, with Canada withdrawing from ISDS entirely,
restricting its application just to conflicts between the United States and
Mexico, rather than extending it to a broader range of problems. The European
Union (EU) has led the charge against the traditional ISDS model. Recent
treaties, such as those with Canada (CETA), Singapore, and Vietnam, have
substituted an Investment Court System (ICS) for the traditional model. The
International Court of Justice (ICS) envisions a permanent and
institutionalized court, with members appointed in advance by treaty parties.
To replace bilateral investment courts established by various treaties, the EU
intends to establish a Multilateral Investment Court (MIC).
Among the international
organizations involved in multilateral reform initiatives are the OECD, WTO,
UNCITRAL, and ICSID. UNCITRAL Working Group III is addressing ISDS concerns,
with a focus on issues such as consistency in arbitral awards, arbitrators and
individuals responsible for making decisions, the financial expenses and length
of time involved in legal cases, and the provision of financial support from
external sources. The group is currently developing solutions to these
concerns.[ii] As
a leading ISDS arbitral institution, ICSID is also reforming, with a focus on
modernizing arbitration rules, increasing efficiency, and incorporating
document transmission technology.[iii]
Some recent reforms propose the
establishment of a mechanism for appellate jurisdiction within the ISDS
framework to address the issue of inconsistent rulings. The appellate body
would be responsible for reviewing legal errors as well as ensuring the
consistency and coherence of ISDS decisions. This legal oversight mechanism
aims to improve outcome predictability and contribute to the development of
sound jurisprudence. The challenge is to strike the right balance between
preserving the inherent flexibility of ISDS and establishing binding
precedents. The legal application of an appellate mechanism must tread
carefully in this delicate balance.[iv]
KEY
CONCERNS AND CHALLENGES IN ISDS REFORMS
With changes come criticisms as well
as challenges, the ISDS system needs to be reevaluated as the recent reforms
aim to achieve a equilibrium between the protection of investor rights and the
accountability and legitimacy of the dispute resolution process. Historically
the ISDS proceedings were held in private and with little transparency. Therefore,
this raised concerns about secret deals and decisions being made without public
scrutiny, casting doubt on the process's legitimacy. Access to case documents
and proceedings was restricted to stakeholders, including affected communities
and local governments. The lack of transparency created a hindrance to the ability
to understand the reasoning behind decisions and undermined public confidence
in the ISDS system.[v]
The ISDS tribunals consist of
arbitrators having a background in investment law, there may have been a lack
of diversity of perspectives. These circumstances have sparked worries over a
possible disparity in the decision-making process and a built-in preference
towards investors. Hence, reservations were expressed over potential conflicts arising
from the selection of arbitrators from a limited group of specialists.[vi]
Arbitrator’s financial ties to the industry, critics argued, would jeopardize
their ability to render impartial decisions.
The ISDS lacked a binding precedent
system unlike domestic legal systems and this omission resulted in inconsistent
rulings, which also created uncertainty for both investors and host countries.
Concerns about the arbitrary nature of the ISDS process were fueled by the lack
of coherence in decisions. Due to the lack of a standardized legal framework,
investors and states had difficulty predicting outcomes. This ambiguity
discouraged prospective investors and hampered the development of a clear body
of international investment law.[vii]
The host country's regulatory ability
in the public interest determines the scope of investor rights granted under
traditional ISDS, as this raises concerns about achieving an equilibrium
between protecting foreign investments and ensuring the rights of different
states to implement environmental, public health, and social welfare policies. The
threat of legal action by investors dampened regulatory measures, as states
were hesitant to implement policies that could be challenged through ISDS.[viii]
The balance between safeguarding investor interests and the inherent authority
of governments to regulate has emerged as a central topic of reform
deliberations.
Recent reforms also emphasize the
importance of preserving host states' regulatory autonomy while protecting
investors' legitimate rights. Legal provisions are drafted to ensure that ISDS
does not unduly restrict a host country's ability to regulate in the public
interest. By establishing these boundaries, a state's ability to enact and
enforce necessary regulatory measures is not jeopardized.[ix] The
legal implementation of these safeguards necessitates delicate considerations
of balancing economic interests with national sovereignty. Legal experts are
critical in interpreting and applying these provisions to ensure a fair
balance.
CONCLUSION
Finally, the proposed appellate
mechanism introduces a consistency and coherence element, aiming to correct the
historical issue of inconsistent rulings. This potential addition to the ISDS
framework would provide a mechanism for reviewing legal errors, promoting legal
certainty, and helping to develop more predictable jurisprudence. However,
difficulties may arise in designing and implementing such a mechanism because
agreement on its structure and function is required. Furthermore, the emphasis
on regulatory safeguards in the reform process reflects a commitment to
preserving states' sovereign right to regulate in the public interest. Creating
a fair and equitable international investment regime requires striking a
balance between investor protection and host countries' ability to enact
legitimate regulatory measures. As these reforms progress, it is clear that the
international community recognizes the need to navigate the complexities of
ISDS.[x]
Overcoming scepticism from some quarters, as well as fostering broad acceptance
and implementation of the proposed changes, are the challenges ahead. Ongoing
international cooperation and dialogue will be critical in this regard, as
states work collaboratively to create a system that not only encourages but
also protects foreign investment. In essence, recent ISDS reform developments
represent a paradigm shift toward a more balanced and adaptive framework that
addresses the shortcomings of the traditional system.[xi]
ISDS's future is in the hands of policymakers, legal scholars, and the broader
international community, who must work together to create a dispute resolution
mechanism that meets modern expectations of transparency, fairness, and
accountability.
BIBLIOGRAPHY
1.
Pohl, J.A.N., Mashigo, K. and
Nohen, A. (2012) Dispute
Settlement Provisions in International Investment Agreements, OECD Working Papers on
International Investment.
2. Special issue: Uncitral and investment arbitration reform ... -
brill.
3.
Dispute settlement -
appellate body. WTO. (n.d.).
4. Investor-state dispute settlement - UNCTAD (2014) UNITED
NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
5.
UNCTAD’s Reform Package for
International Investment Regime (2018) UNITED NATIONS CONFERENCE ON TRADE
AND DEVELOPMENT.
6.
Bjorklund, A. (2014) The diversity deficit in
International Investment Arbitration, Academic
Forum of ISDS.
7.
Bjorklund, A.K. et al. (2020) The diversity deficit in
International Investment Arbitration, Brill.
8.
Mundi, J. (2023) Wiki note: Right to regulate in the
public interest: Treaty practice, Jus
Mundi.
9.
Jaime, Dr.M.-L., Betancourt,
J.-C. and Vidyarthi, A. (2021) Could
an appellate review mechanism ‘fix’ the ISDS system?, Kluwer Arbitration Blog.
10. IIA issues note: Recent developments in investor-state dispute
settlement: Publications: UNCTAD investment policy hub, IIA Issues Note:
Recent Developments in Investor-State Dispute Settlement | Publications |
UNCTAD Investment Policy Hub.
[i] Pohl, J.A.N.,
Mashigo, K. and Nohen, A. (2012) Dispute
Settlement Provisions in International Investment Agreements, OECD Working Papers on
International Investment. Available at:
https://www.oecd.org/daf/inv/investment-policy/WP-2012_3.pdf (Accessed: 04
December 2023).
[ii] Special issue: Uncitral and investment arbitration reform ... - brill. Available at:
https://brill.com/view/journals/jwit/21/2-3/article-p167_1.xml (Accessed: 04
December 2023).
[iv] Dispute
settlement - appellate body. WTO. (n.d.).
https://www.wto.org/english/tratop_e/dispu_e/appellate_body_e.htm
[v] Investor-state dispute settlement -
UNCTAD (2014) UNITED
NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. Available at:
https://unctad.org/system/files/official-document/diaeia2013d2_en.pdf
(Accessed: 04 December 2023).
[vi] UNCTAD’s Reform Package for International
Investment Regime (2018) UNITED NATIONS CONFERENCE ON TRADE
AND DEVELOPMENT. Available at:
https://investmentpolicy.unctad.org/uploaded-files/document/UNCTAD_Reform_Package_2018.pdf
(Accessed: 04 December 2023).
[vii] Bjorklund, A. (2014) The diversity deficit in
International Investment Arbitration, Academic
Forum of ISDS. Available at:
https://www.jus.uio.no/pluricourts/english/projects/leginvest/academic-forum/papers/2020/5-diversity.pdf
(Accessed: 04 December 2023).
[viii] Bjorklund, A.K. et al. (2020) The diversity deficit in
International Investment Arbitration, Brill.
Available at: https://brill.com/view/journals/jwit/21/2-3/article-p410_7.xml
(Accessed: 04 December 2023).
[ix] Mundi, J. (2023) Wiki note: Right to regulate in the
public interest: Treaty practice, Jus
Mundi. Available at:
https://jusmundi.com/en/document/publication/en-right-to-regulate-in-the-public-interest
(Accessed: 04 December 2023).
[x] Jaime, Dr.M.-L., Betancourt, J.-C. and
Vidyarthi, A. (2021) Could an
appellate review mechanism ‘fix’ the ISDS system?, Kluwer Arbitration Blog.
Available at:
https://arbitrationblog.kluwerarbitration.com/2021/02/11/could-an-appellate-review-mechanism-fix-the-isds-system/
(Accessed: 04 December 2023).
[xi] IIA issues
note: Recent developments in investor-state dispute settlement: Publications:
UNCTAD investment policy hub, IIA Issues Note: Recent
Developments in Investor-State Dispute Settlement | Publications | UNCTAD
Investment Policy Hub. Available at:
https://investmentpolicy.unctad.org/publications/61/iia-issues-note-recent-developments-in-investor-state-dispute-settlement
(Accessed: 04 December 2023).
Article Information
RECENT REFORMS IN INVESTOR-STATE DISPUTE SETTLEMENT
Authors: MANSI BENIWAL
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/08
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.