In the era of Globalisation international investment flows are large. Even small and medium sized companies are active in foreign countries and economies are increasingly interdependent. Despite this globalisation process there is no unified legal framework concerning international investments and the disputes which may arise from them.
In this perspective global governance is lacking behind globalisation. International investment is one of the key drivers of economic development. Investors demand legal security, also in countries where domestic governance is weak in order to minimise the non-commercial risks. International Investment Agreements (IIA) between two or more countries serve as primary legal basis to govern and protect international investments and to settle disputes between investors and states. The framework of thousands of IIAs and within it the system of Investor State Dispute Settlement (ISDS) is fragmented and increasingly subject to harsh critique of providing inconsistent arbitration awards and lacking legitimacy in general.
This paper addresses the development of ISDS provisions in investment agreements and how the current system could be reformed.
Chapter two provides a historical overview of investment treaty practice, the roots of the current system and the development of private courts of arbitration. Main ISDS institutions and their rules will be introduced.
The following section will point out the arguments in favour and opposing ISDS. Critique will be made visible on examples of prominent cases as well as on overall findings from treaty analysis.
The final chapter deals with possibilities to reform, amend or even replace today’s ISDS regime. It will address recent megaregional agreements such like the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) and their possible roles in shaping future rules which will govern international investment flows.
Table of Contents
1 Introduction
2 Development of International Investment Agreements
2.1 The Bilateral Investment Treaty as an Instrument of Investment Protection
2.2 International Investment after the Cold War
2.3 Rules and Institutions of International Arbitration
3 Current Arbitration Practice
3.1 Critique of the Arbitration system
3.2 Outcomes of ISDS Arbitration
4 Reforming the International ISDS Regime
4.1 Improving the Existing ISDS System
4.2 Establishing an International Investment Court
5 Conclusion
Objectives and Research Themes
This paper examines the evolution and current challenges of Investor-State Dispute Settlement (ISDS) provisions within international investment agreements, aiming to analyze the legitimacy crisis of the current private arbitration system and evaluate potential reform pathways, including the establishment of an international investment court.
- Historical development of bilateral and multilateral investment agreements
- Mechanisms and rules of international arbitration institutions
- Critical assessment of the current ISDS system and its impacts on public policy
- Analysis of recent megaregional agreements like TPP and TTIP
- Proposals for structural reform and the institutionalization of investment dispute resolution
Excerpt from the Book
3.1 Critique of the Arbitration system
Arguments opposing private arbitration instruments in IIA are mainly concerned with the sovereignty of the state. The fear of being sued and exposed to a financial risky ISDS may affect the host countries’ decision-making, for example in terms of environmental protection or workers’ rights and thus leads to a regulatory chill. Even if circumstances or public interest changes IIAs are, due to survival clauses, difficult to amend or to cancel. ISDS is a privilege for foreign investors which domestic investors don’t have (UNCTAD 2015a, p. 130). ISDS has no mechanism to appeal or correct incorrect decisions. Most cases are kept confidential and tribunals lack transparency (UNCTAD 2015a p. 147).
There is a potential Conflict of interest of persons serving as counsel in some and as arbitrator in other cases, this is reflected by a growing number of requests for disqualification of arbitrators (UNCTAD 2012, pp. 87f.). Besides that, the empirical picture whether IIA with ISDS provisions really lead to more FDI inflows is not clear (UNCTAD 2009, pp. 55-57).
Incautious broad definition of terms such as “nationals” or “investment” could lead to a problem known as treaty shopping. Any company, even a domestic one, could establish a holding company, a letterbox company could be sufficient, in a foreign country with a favourable BIT for the investor and then claim the benefits which are provided to foreign investors. For instance, because there is no BIT between the US and Venezuela but between the Netherlands and Venezuela, the US oil company ConocoPhillips files ICSID arbitration against Venezuela through holdings in the Netherlands (Wells 2010, pp. 48f.).
To some extend ISDS creates a private system of justice which is operating parallel to the, ideally democratic legitimised, national justice. A study on the reasoning behind decisions of ICSID tribunals finds that decisions of other arbitration panels are cited with 38 % as the most influential reference for arbitrators. Academic articles make up 16 % of sources which are cited in decisions. Thus 54 % of the interpretation of investment treaties is done with respect to other arbitrators and to academics, whereas the treaty itself and the formulated object and purpose of it is only counting for 29 % of interpretive sources (Gordon and Pohl 2015, pp. 13f.).
Summary of Chapters
1 Introduction: Provides an overview of the globalized investment landscape and the resulting need for legal frameworks, identifying the fragmentation of ISDS as a primary subject of investigation.
2 Development of International Investment Agreements: Outlines the historical shift from customary international law to the proliferation of bilateral investment treaties and the subsequent rise of private arbitration institutions.
3 Current Arbitration Practice: Analyzes the operational reality of ISDS, including the benefits of legal security versus the criticism regarding state sovereignty, lack of transparency, and regulatory chill.
4 Reforming the International ISDS Regime: Discusses strategies to modernize the system, evaluating improvements to existing structures and the conceptual shift toward a permanent international investment court.
5 Conclusion: Synthesizes the finding that while the current system needs reform, moving toward a formalized investment court remains a complex, yet necessary, policy challenge.
Keywords
Investor-State Dispute Settlement, ISDS, Bilateral Investment Treaty, BIT, International Arbitration, Globalisation, Foreign Direct Investment, FDI, Treaty Shopping, ICSID, UNCITRAL, Regulatory Chill, International Investment Court, TTIP, TPP
Frequently Asked Questions
What is the core focus of this research?
The paper focuses on the development, challenges, and proposed reforms of Investor-State Dispute Settlement (ISDS) mechanisms within the broader framework of international investment agreements.
What are the primary thematic areas covered?
The main themes include the history of investment treaties, the functioning of international arbitration tribunals, criticisms regarding democratic legitimacy, and the ongoing efforts to reform the system via new regional agreements.
What is the central research objective?
The primary objective is to analyze how the current fragmented ISDS system can be reformed to address concerns about state sovereignty and inconsistent arbitration outcomes.
Which scientific methodology is applied?
The paper utilizes a qualitative analysis of international treaty practice, secondary literature, and legal policy reports from organizations like UNCTAD, OECD, and the WTO.
What key topics are addressed in the main body?
The main body examines the evolution of BITs, the critique of private arbitration (such as the regulatory chill and potential conflicts of interest), and the potential transition to standing international investment courts.
Which keywords best characterize this work?
Key terms include ISDS, Bilateral Investment Treaties, International Arbitration, Foreign Direct Investment, Regulatory Chill, and International Investment Court reform.
How does the author view the 'regulatory chill' effect?
The author notes that the threat of ISDS litigation can discourage governments—particularly in developing nations—from implementing public interest regulations due to the fear of expensive, high-stakes legal challenges.
What is the significance of the Energy Charter Treaty in this paper?
The Energy Charter Treaty is highlighted as a major legal basis for ISDS cases, often invoked in high-profile disputes, such as the Vattenfall case against Germany and the Yukos case against the Russian Federation.
How is 'treaty shopping' explained?
Treaty shopping is described as the practice where companies establish shell or letterbox companies in foreign jurisdictions that have favorable BITs with the host state, allowing them to access arbitration protections they would not otherwise have.
What does the EU Commission’s proposal for an investment court entail?
The proposal envisions a standing court with 15 judges, an appellate mechanism, strict codes of conduct to prevent conflicts of interest, and greater transparency to replace the current ad hoc private arbitration model.
- Quote paper
- Christian Brandes (Author), 2016, Dispute Settlement in Investment Treaties. Private Courts of Arbitration and their Alternatives, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/434210
