What is ISDS?
How many treaties include ISDS agreements?
What is the purpose of ISDS and why is it needed?
What protections and remedies does ISDS offer?
Do ISDS protections and remedies differ from those available under national laws?
Who can bring an ISDS claim?
How does ISDS work?
How are ISDS awards enforced?
How much does ISDS cost and who bears the cost?
What are the major criticisms of ISDS?
What happens when a country withdraws from a treaty with an ISDS agreement?
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 (host state) in a neutral forum through binding international arbitration.
ISDS agreements are most commonly found in international treaties between states, but may also be found in domestic legislation and contracts. These instruments typically set out the substantive protections or obligations to which foreign investors are entitled, breach of which gives rise to a right to bring a claim directly against the host state.
How many treaties include ISDS agreements?
It is not known precisely how many treaties include ISDS agreements; estimates range from 3,000 to 3,400 globally. Many are found in bilateral investment treaties. Some are included as chapters of free trade agreements, such as Chapter 11 of the North American Free Trade Agreement (NAFTA). Others form part of sector-specific treaties such as the Energy Charter Treaty.
What is the purpose of ISDS and why is it needed?
Without ISDS, many foreign investors would be left with no meaningful remedy in the face of arbitrary, capricious or other unfair treatment by a host state.
Historically, foreign investors had no choice but to seek to resolve disputes with host states before the state's own local courts. However, they often found themselves unable to obtain full – or indeed any – recovery. Obstacles included an absence of protections under the local law, domestic sovereign or crown immunity rules and a lack of judicial independence. Diplomatic intervention on behalf of the foreign investor, to the extent available, was inconsistent and not always appropriate to resolve the dispute. State-to-state dispute resolution mechanisms would politicise otherwise private disputes. ISDS emerged in part from a desire to depoliticise disputes by removing them from the realm of diplomacy and inter-state relations.
What protections and remedies does ISDS offer?
Arguably, the most important procedural protection is the right to have disputes resolved in a neutral forum, before impartial adjudicators and in accordance with transparent rules.
Common substantive protections (breach of which may 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 (eg, conduct that might aggravate the dispute or render the dispute nugatory).
Do ISDS protections and remedies differ from those available under national laws?
Depending on the host state's legal regime, 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 therefore 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.
The ISDS agreement will set out 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 organisation.
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; and
- have an investment in the territory of another state that is a party to the treaty.
The specifics of ISDS agreements will vary; however, most tend to follow a pattern. A notice provision will require 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 that no other preconditions apply (eg, 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 to which the host state has consented in advance. Common rules include the International Centre for Settlement of Investment Disputes (ICSID) Arbitration Rules, the ICSID Additional Facility Rules, the United Nations Commission on International Trade Law Arbitration Rules and the International Chamber of Commerce 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 the ICSID Arbitration Rules do not require a seat, as they are considered 'de-localised' 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 to final award.
Anecdotal evidence suggests that voluntary compliance with awards is not unusual. However, where an award is not voluntarily complied with, there are two main regimes for enforcement.
If the award is an ICSID award, it may be enforced under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), which provides that ICSID awards are to be treated as final court judgments of contracting states. There are 153 contracting states to the ICSID Convention.
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. 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.
Sovereign immunity may be an obstacle to execution against a state's assets. Some ISDS agreements contain waivers of sovereign immunity, including from execution against assets.
How much does ISDS cost and who bears the cost?
The cost varies from case to case. A number of factors influence cost, including:
- the complexity of the claim;
- whether preliminary defences are raised (eg, a jurisdictional objection);
- the extent of documentary production; and
- whether the proceedings are conducted in one or multiple languages.
There is no universal principle as to who bears the cost of ISDS. The ISDS agreement may stipulate how costs will be allocated. If it is silent, the applicable rules may stipulate a principle of costs allocation, such as 'loser pays'. More often than not, the allocation of costs is left to the discretion of the arbitral tribunal, which may take into account factors such as the relative success of the parties and their conduct during the proceedings. Arbitration costs − such as the cost of the tribunal's fees, any institutional fees and hearing centre rental costs − are often treated separately from the costs of prosecuting or defending a claim, which typically include legal fees, expert fees and travel costs.
What are the major criticisms of ISDS?
The most common criticisms levelled at ISDS in recent years include:
- the risk of foreign investors challenging legitimate domestic regulation;
- a lack of transparency in ISDS proceedings;
- a lack of consistency in arbitral decision making;
- a lack of appellate authority to correct substantive errors and ensure consistent outcomes;
- perceptions of arbitrator bias or lack of independence resulting in decisions that allegedly tend to favour investors; and
- the cost and time associated with ISDS.
Although ISDS is not perfect, many of the criticisms levelled at it are not supported by the empirical evidence. In 2015 the International Bar Association issued a statement correcting misconceptions and inaccurate information around the debate on ISDS. For example, data shows that states have won a higher percentage of cases than investors.
What happens when a country withdraws from a treaty with an ISDS agreement?
Most treaties containing ISDS agreements provide that the treaty protections (including ISDS) will continue to apply for a certain period (typically 10 to 15 years) after a country withdraws from the treaty. Such a 'sunset clause' will protect only those investors and investments that qualify for protection at the time the withdrawal becomes effective. Chapter 11 of NAFTA is a notable exception, as it does not contain a sunset clause. A notice of withdrawal under NAFTA becomes effective within six months and any investor claim would need to be brought within that period.
For further information on this topic please contact Martin Valasek or Alison FitzGerald at Norton Rose Fulbright Canada LLP by telephone (+1 514 847 4747) or email ([email protected] or [email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com