What is Investor-State Dispute Settlement?

The investment-related dispute resolution procedures provided in the investment chapter of the TPP have proved to be one of the most contentious elements of the agreement and a major battleground in the negotiations. The disagreement on this point, which reports indicate has been largely between the United States and Australia, has centred on the provision for investor-state dispute settlement (commonly referred to in this context as ISDS).

ISDS potentially allows investors from the signatory states (whether individuals or corporations) to bring a claim for compensation or other relief directly against another signatory state where an investment in the host state has been subject to treatment that breaches the investment protections set out in the TPP. This is a well-established mechanism found in bilateral and multilateral investment treaties that assists investors in safeguarding their investments against certain political, regulatory, judicial and other state-driven risks that are especially significant in cross-border transactions.  

There always remains the issue of sovereign immunity when suing a state, but if you have a right to bring such a claim because of the way your investment is treated, this can provide at the very least significant leverage, and at best, a compensable claim which will be recognised and upheld by the state that violated your rights under the TPP.

The types of protections which are typically provided to investors by such mechanisms include a requirement for 'fair and equitable treatment', a prohibition on expropriation without compensation, a prohibition on discrimination, a requirement for full protection and security of investments, and, in some cases, a requirement that investors are treated as well as investors from other states with which the host state has such investment protection mechanisms (known as a 'most favoured nation' provision) and as well as domestic investors (known as the 'national treatment standard').

It is understood that the United States has been advocating for ISDS provisions in the TPP based on the mechanisms used in the 2012 US model bilateral investment treaty, as well as in some existing free trade agreements to which the US is a party (notably the Central American Free Trade Agreement and the North American Free Trade Agreement). These instruments provide for investor-state arbitration, the mechanism which is used in a broad range of investment treaties.

Following a change of government in 2013, the Australian negotiating position has softened on the ISDS issue. Australia now takes a pragmatic view on ISDS provisions on a case-by-case basis. In recent FTAs entered into by Australia, it has sometime included ISDS provisions (such as the Australia-Korea FTA) and sometimes not (such as in the Japan-Australia Economic Partnership). Any divergence of position which remains might be addressed by including certain public interest carve-outs from the ISDS mechanism for particular issue areas (for example, public health). This could allow the ISDS mechanism to have the effect desired by the US in providing investors with a means of dispute resolution directly against sovereign states, while removing the most sensitive areas of public policy from its ambit. The content of any such carve-outs will be of great interest to parties across many sectors and regions.