Isds Dispute Laws: Understanding The Applicable Legal Framework

Investor-state dispute settlement (ISDS) is a mechanism that enables foreign investors to resolve disputes with the government of the country where their investment was made (the host state) in a neutral forum through binding international arbitration. ISDS is most often an instrument of public international law, granting private parties (the foreign investors) the right to sue a state in a forum other than that state's domestic courts.

ISDS is included in many trade and investment agreements, such as free trade agreements (FTAs) and investment treaties. It is also found in domestic legislation and contracts. These instruments typically set out the substantive protections or obligations that foreign investors are entitled to, the breach of which gives rise to a right to bring a claim directly against the host state.

ISDS agreements define who has standing to bring a claim. Most define who is an investor and what is a qualifying investment. Generally, a claimant may be either an individual or an organization. They must satisfy nationality criteria by demonstrating that they are a national of a state that is a party to the treaty containing the ISDS agreement and that they have an investment in the territory of another state that is a party to the treaty.

What is the purpose of ISDS and why is it needed?

Investor-State Dispute Settlement (ISDS) is a mechanism included in many trade and investment agreements to settle disputes. It is a procedural mechanism that allows an investor from one country to bring arbitral proceedings directly against the country in which it has invested. ISDS provisions are intended to avoid state-to-state conflict, protect citizens abroad, and signal to potential investors that the rule of law will be respected.

ISDS was created in the 1960s to protect former colonizers' property assets from newly independent states. Companies argued that ISDS was necessary because the rule of law was lacking in overseas territories, usually former colonies. They wanted protection against expropriation – the taking of their private property by the government for a purpose deemed to be in the interest of the public.

Today, investors and some states claim that domestic justice systems such as courts lack independence. ISDS allows foreign companies to sue states if they believe that new laws or regulations could negatively affect their expected profits or investment potential. The system only provides for foreign companies to sue states, not the other way around.

ISDS has been criticized for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs. There have been widespread calls for reform, and since 2015, the European Union has been seeking to create a multilateral investment court to replace investor-state arbitration.

What protections and remedies does ISDS offer?

The most important protection offered by ISDS is the right to have disputes resolved in a neutral forum, before impartial adjudicators and in accordance with transparent rules. This is especially important for foreign investors who would otherwise have to resolve disputes with host states before the state's own local courts, where they often found themselves unable to obtain full - or indeed any - recovery.

Common substantive protections that can give rise to an ISDS claim include: fair and equitable treatment, full protection and security, national treatment, most-favoured-nation treatment, no expropriation without full (and prompt) compensation, and free transfer of capital.

Monetary compensation is the most common remedy. However, in certain cases, other remedies, including declaratory relief and restitution, may be available. Interim relief while proceedings are ongoing may also be available, including interlocutory measures to compel or restrain a party from certain conduct.

ISDS protections and remedies can be more favourable than local law protections available to domestic investors. For example, the local law of the host state may permit the state to expropriate property without providing any compensation, or for less than full compensation. A domestic investor would have no recourse against state expropriation. A foreign investor, however, may have additional rights where an applicable treaty provides for full (and prompt) compensation, and may therefore pursue compensation under the treaty regime through international arbitration.

Who can bring an ISDS claim?

The ISDS agreement will outline who has the standing to bring a claim. Most define who an "investor" is and what a qualifying "investment" is. Generally, a claimant can be either an individual or an organisation.

To be allowed to bring an investor-state dispute before an arbitral tribunal, both the home state of the investor and the state where the investment was made must have agreed to ISDS. The investor must be from a state that is a party to the treaty containing the ISDS agreement and must have an investment in the territory of another state that is a party to the treaty.

Claimants typically must satisfy nationality criteria by demonstrating that they:

• Are a national of a state that is a party to the treaty containing the ISDS agreement
• Have an investment in the territory of another state that is a party to the treaty

The specifics of ISDS agreements will vary, but most tend to follow a pattern. There will be a notice provision requiring a claimant to notify the host state in writing of a dispute. Some impose a "cooling-off" period in which the claimant and host state must attempt to resolve the dispute amicably. A claimant may also be required during this period to exhaust local remedies. Once this period has expired, and assuming no other pre-conditions apply (e.g. mediation), the claimant may commence arbitration.

The ISDS agreement will typically stipulate the rules that will apply to the proceedings or permit the claimant to elect between certain rules which the host state has consented to in advance. Common rules include the ICSID Arbitration Rules, ICSID Additional Facility Rules, UNCITRAL Arbitration Rules and ICC Rules of Arbitration.

The seat of the arbitration may be defined in the ISDS agreement. If it is not, it may be determined by the tribunal, once constituted, in accordance with the applicable rules. The seat is important because it establishes the supporting legal framework for the arbitration, including how and when the courts of the seat may intervene and the grounds for challenging any award. Arbitrations under ICSID Arbitration Rules do not require a seat as they are considered "de-localized" and domestic courts have no supervisory role.

Generally, the tribunal will be constituted of three arbitrators, as opposed to a sole arbitrator. Typically, each party may nominate an arbitrator to the panel and a president is chosen by the two party-nominated arbitrators, in consultation with the parties.

Once the tribunal is constituted, it will set the procedure and timetable. Usually, there is a written phase (legal briefs with supporting evidence) and an oral phase (hearing for cross-examination of witnesses and legal argument). The arbitration may take a number of years, from commencement through to final award.

Successful claims are often brought by large multinational corporations: companies with over US$1 billion in annual revenue and individuals worth more than US$100 million have received about 94.5% of the aggregate ISDS-ordered financial transfers (93.5% if pre-award interest is included). The vast majority (86%) of investor claimants are from high-income countries, whereas the majority (66%) of cases are against lower and middle-income countries.

How are ISDS awards enforced?

There are two main regimes for enforcing ISDS awards: the ICSID Convention and the New York Convention.

The ICSID Convention provides that ICSID awards are to be treated as final court judgments of Contracting States. There are 153 Contracting States to the ICSID Convention. ICSID awards are not subject to any appeal or review except as provided for under the ICSID Convention itself. Recognition and enforcement of ICSID awards is dealt with in Section 6 of the ICSID Convention. There are five key principles set forth in that section:

• Contracting states are obliged to recognise an ICSID award as binding and enforce the pecuniary obligations imposed by that award as if it were a final judgment of a court in that state.
• There is no scope for national courts to refuse recognition of ICSID awards that have not been annulled, including on jurisdictional, procedural, public policy or merits-based grounds.
• All that is required to seek recognition is to furnish to the competent court or other authority a copy of the award certified by the Secretary-General of ICSID.
• Although there is no scope for a national court to refuse recognition of ICSID awards, an ICSID tribunal or annulment committee may provisionally stay enforcement under the ICSID Convention. For example, an annulment committee may stay execution if an application for annulment is made. Otherwise, ICSID awards are immediately binding and enforceable.
• Execution is governed by national laws concerning the execution of judgments. The application of national laws relating to immunity of foreign states from execution is preserved and therefore may still apply.

In the case of non-ICSID arbitrations, the award may be enforced under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). There are 157 Contracting States to the New York Convention. The New York Convention facilitates award compliance by constraining the grounds on which a court may refuse to recognise or enforce a foreign award.

There are four key principles to enforcement of a non-ICSID award under the New York Convention:

• Contracting states are obliged to recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where enforcement is sought.
• To seek enforcement, the award creditor must supply an authenticated original or certified copy of the award and the original or a certified copy of the arbitration agreement, and where necessary, a certified translation.
• There are prescribed grounds on which recognition and enforcement of a non-ICSID award may be refused, such as public policy grounds or if the award has been set aside at the seat.
• A decision on enforcement may be adjourned or deferred if an application for setting aside of the award has been made in the courts of the place of arbitration.

What are the major criticisms of ISDS?

Investor-state dispute settlement (ISDS) has been criticised for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs.

Investor Bias

The system has been criticised for lacking safeguards against individual abuse. Critics note that arbitrators are paid on a case-by-case basis, and therefore stand to benefit financially from an increase in claims. As governments may not use the ISDS system to sue investors, if arbitrators are biased towards investors, this will encourage further claims. The vague terms of most bilateral investment treaties (BITs) allow for such bias when arbitrators interpret the treaties.

Lack of Transparency

ISDS proceedings have been criticised for their lack of transparency and the limited possibilities for third parties to participate. Critics argue that arbitrations are carried out in secret by trade lawyers who are not accountable to the public and do not enjoy the typical safeguards of judicial independence and procedural fairness. However, proponents of ISDS point out that confidentiality is a standard feature of arbitration, creating a de-politicised and fact-oriented atmosphere for dispute resolution.

Lack of Consistency in Arbitral Decision-Making

Arbitral awards in the investor-state dispute context have been criticised for their lack of consistency and for being contradictory. For example, there are widely different interpretations of the "fair and equitable treatment" standard. As a result, tribunals are free to choose their valuation methods, which often leads to the use of various methodologies and contradictory decisions.

Lack of Appellate Authority

There is a lack of appellate authority to correct substantive errors and ensure consistency of outcomes.

High Costs and Time Associated with ISDS

The length and costs of arbitral proceedings are rising, and both sides to a proceeding incur higher costs as monetary awards, legal fees, and related costs can be relatively high. While some states struggle to find the resources to defend themselves, small-claim or impecunious investors might never be able to get their "day in court".

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