Think Piece

Reforming Investor-State Dispute Settlement (ISDS): Conceptual Framework and Options for the Way Forward

July 2015
PDF - Download

Provisions on investor-state dispute settlement (ISDS) have been a core component of international investment agreements (IIAs) for decades. Recognising the need for neutral, independent, and efficient dispute settlement, IIAs react to shortcomings at the domestic level and grant foreign investors recourse to international arbitration against the host state for non-compliance with investment disciplines. This has been celebrated as depoliticising investment disputes and contributing to enhancing the rule of law in investor-state relations. Yet, with the steep increase in investment treaty arbitrations during the past decade, ISDS has been facing a considerable backlash, including the retreat of some countries from the existing system, the recalibration of substantive investment disciplines, and debates about ways to reform ISDS at the national, regional, and international levels. Recurring concerns involve inconsistencies in decision making, insufficient regard by some arbitral tribunals to the host state’s right to regulate in interpreting IIAs, charges of bias of the system in favor of foreign investors, concerns about the lack of independence and impartiality of arbitrators, limited mechanism to control arbitral tribunals and to ensure correctness of their decisions, and increasing costs for the resolution of investment disputes.

Reform debates are most heated in the context of the ongoing negotiations of “mega-regionals,” which are likely to serve as standard-setters for IIA-making worldwide. ISDS reform is also on the agendas of various international organisations, including the United Nations Conference on Trade and Development (UNCTAD) and the Organisation for Economic Co-operation and Development (OECD). Together with the positions of particularly influential contracting parties to IIAs, such as the United States, the European Union, the Association of Southeast Asian Nations (ASEAN), and China, these processes will determine the global contours of the ISDS system for decades to come. It is therefore crucial that the debates about ISDS reform proceed in a well-informed manner and take into account the interests of all stakeholders in a balanced way.

Ensuring policy space and reaffirming state control over the system are core policy objectives of current efforts to reform the ISDS system. What is more, it is increasingly evident that only systemic reform will allow addressing concerns with ISDS in a comprehensive fashion. Yet, despite the growing consensus about the need for ISDS reform, the scope and modalities of, and strategies for, that reform remain contested. Options for the way forward range from exiting the system altogether to institutionalising it further through the creation of an appellate mechanism or a permanent investment court, and establishing other instruments to ensure predictability and the protection of public interests.

For systemic ISDS reform to be successful, it is crucial to develop reform proposals on the basis of a normative and conceptual framework that is globally consented. This think-piece sets out the contours of such a framework. It suggests that the criticism has its origins in frictions with principles of constitutional law—democracy, the rule of law, and human rights. Responses should be framed within the same value system, that is, by reference to comparative constitutional principles that are globally shared, including principles of United Nations constitutional law and the concept of sustainable development. The conceptual framework thus developed can be used to formulate a number of concrete proposals for investment law reform, in particular increased institutionalisation of ISDS and the implementation of mechanisms that allow states to ensure that ISDS develops in ways that are democratic, respectful of human rights, and in line with the demands of the rule of law.

  Print Email

Tag: , , , , , , , , , , ,