ISDS Novelty Overlooked Or Novelty Outdated?

by Emma Spiteri-Gonzi*

Investor-State Dispute Settlement (ISDS) is a procedural mechanism provided for in international investment agreements such as bilateral investment treaties (BITs) or multi-lateral investment treaties (MITs). ISDS allows an investor from one country to institute proceedings against the country where their investments where made- the Host State. So, has this novelty been overlooked or has it simply been outdated?

Disputes between investors and foreign countries have required adjudication for as long as there has been cross-border investment.  Under international law the taking of foreign property was protected under the minimum standard of treatment of aliens premised on the idea that a State is bound to respect and protect the property of nationals of other States. The problem however, lay in the individual being able to channel that right. Prior to the evolution of the modern rules-based system, foreign investors investing abroad relied heavily on the mercy of their own State. The injured citizen’s remedy lay in seeking diplomatic protection through his or her own government. If so inclined, the State would espouse the claim of its citizens against the offending Host State.

One will remember cases like Barcelona Traction, Light and Power Company Ltd (Belgium v Spain), in which the International Court of Justice (ICJ) detailed the shortcomings of diplomatic espousal remarking how the State is a ‘sole judge’ in deciding whether ‘its protection will be granted’ to a national, to what ‘extent it is granted’, and ‘when it will cease’.

The precarious procedural rights of the injured investor relying on Inter-State adjudication is further detailed in Elettronica Sicula S.P.A. (United States of America v Italy) where the court rejected the applicant’s claim for reparation and Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo) where notwithstanding a claim was successful in terms of securing the protection of Mr. Diallo’s human rights, the judgment fell short of protecting his investments.

One of the first investment treaties to provide for ISDS was the Belgium-Indonesia BIT of 1970. The clause was simple:

any dispute concerning an investment between an investor of one Contracting Party and the other Contracting Party shall, if possible, be settled amicably… Where the dispute is referred to international arbitration, parties in the dispute may agree to refer the dispute either to…’.

This clause paved the way for the multitude of ISDS clauses found in international investment agreements today.

Opponents of ISDS have pointed out that investment agreements concluded by developed countries no longer require ISDS and that this mechanism has become obsolete. The truth is that relying on the national courts of the Host State to enforce obligations in an investment agreement is not always easy, no matter how developed.

An investor in a Host State court is automatically an alien, advancing a claim in a foreign court automatically places the investor at a disadvantage of itself.

Lack of access to the court is another consideration. International investors have found that there would be no suitable forum, in certain Host States, to bring a claim unless an ISDS provision in the investment agreement had made adequate provision.

Host States are not always forthcoming with ratifying the rules entered into in an international investment agreement into their national laws. When this occurs, even if investors have access to local courts, they may not be able to rely on the obligations the government has entered into in the international investment agreement.

Today, opponents of ISDS choose to remember the procedure for providing corporations and investors with the locus standi to ‘drag’ Sovereign governments to dispute settlement.  More often it’s remarked that investment treaties are being concluded between countries with equally developed legal systems and it follows that any dispute would take place in the courts of either developed State, therefore the process has become outdated.

The past struggles of private parties to challenge the actions of governments seem all but forgotten. But perhaps we should not be so quick to forget, and not look a gift horse in the mouth.

* Emma Spiteri Gonzi, Legal Counsel- Nemea Bank Plc.

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