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03 October 2019
Investor-state dispute settlement (ISDS) is an important feature of investment treaties. ISDS is the procedural mechanism through which investors can claim compensation for a violation of a substantive investor-protection standard – be it included in a bilateral investment treaty or a trade treaty with investment protections – and it determines the robustness of those protections. The traditional mechanism (ie, investment arbitration between the investor and the host state, modelled on commercial arbitration) has been increasingly criticised by a range of actors for a variety of reasons. Hostility towards the traditional model – which has spread from the academic realm to the political stage – has led to changes in individual treaties and wider reform initiatives.
While important changes are afoot, 90% of existing investment treaties were concluded before 2012 (old generation treaties) and have traditional ISDS provisions. The majority of known ISDS cases have thus far been based on old generation treaties. The new generation of treaties concluded since 2012 (of which there are approximately 300) have incorporated many new features, albeit on an inconsistent basis given the whims of bilateral negotiations and individual state preferences.
Most of the changes to new treaties are to substantive provisions – for example:
However, some ISDS provisions have also been modified, including by:
Some of the old generation treaties have also been reformed by amendments or wholesale replacement. For example, in 2018 South Korea and the United States signed an amendment to their 2007 treaty, which:
In North America, the best-known system for ISDS is established in Chapter 11 of the North American Free Trade Agreement (NAFTA). In 2018, following President Trump's election based in part on his promise to scrap the NAFTA, Mexico, Canada and the United States signed a new trade agreement – the US-Mexico-Canada Agreement – after months of intense negotiations on many substantive issues. ISDS did not escape the negotiators' scrutiny. Under the new treaty – which has yet to be ratified by all three countries – Canada would withdraw from ISDS entirely, leaving it in place only between the United States and Mexico, albeit for a narrower set of disputes.
In addition to these changes in specific jurisdictions, reform initiatives are taking place on several other fronts, including at:
For example, UNCITRAL is overseeing a state-driven ISDS reform initiative through Working Group III. The group's mandate is to:
The group has identified concerns that fall into the following categories:
In order to identify relevant solutions, the group has created a workplan as follows:
States have acknowledged that a distinction must be maintained between well-founded concerns supported by facts and empirical research and unfounded concerns based on perceptions. Further, states have acknowledged that some of the concerns raised with respect to ISDS can be resolved within the framework of international investment treaties, through amendments or interpretive statements.
As the leading arbitral institution for ISDS, the ICSID is also focused on reform. While amending the ICSID Convention itself is not possible, the ICSID secretariat has been conducting extensive consultations about the ICSID Arbitration Rules to:
In March 2019 the ICSID secretariat published its second working paper on proposals for rule amendments, building on the proposals that were originally published in August 2018.
Whether these reform initiatives will achieve meaningful improvements has yet to be seen. At a recent event in London, a leading practitioner is reported to have lamented a "collective failure of imagination" when it comes to procedural improvements of ISDS. It is also unclear whether the posited reforms will appease opponents of ISDS, many of whom appear focused on eliminating ISDS altogether in any of its current forms.
For further information on this topic please contact Martin J Valasek at Norton Rose Fulbright by telephone (+1 514 847 4747) or email (firstname.lastname@example.org). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
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