Investor-State Dispute Settlement and the Rule of Law

During the last few weeks, I have enjoyed this debate on investor-to-state dispute settlements. Several good points have been raised and ought to be discussed further. However, some of the issues raised have been almost peripheral and some of them unsubstantiated. These need to be addressed more thoroughly.


One of the most striking problems with the current debate is the tendency to blame the institution for any eventual material shortcomings of investment protection. A clearer distinction between the material aspects and the institutional aspects must be made, that is, we should distinguish between the laws and the courts. Potential problems with the laws themselves ought not to lead to the conclusion that the courts must be scrapped.


The tendency to blame the institution for material shortcomings can be seen in Simon’s criticism of ISDS allowing investors to sue the state when subsidies have been altered or stopped, although they were outlined in a contract. I wholeheartedly share Simon’s aversion to subsidies, and contracts where certain subsidies are promised are not contracts that we should embrace. However, the real problem is with the material aspects of that contract rather than the opportunity for investors to seek redress as such. I assume Simon agrees with me that just because some contracts are bad contracts, we should not scrap the idea of a contract. Perhaps it seems very obvious, but the same goes for ISDS. Let’s look at the material aspects, and let’s try to improve them.


Coming closer to the core of this issue, Jason Yackee elaborates on the effectiveness of ISDS by referring to the material aspects of investment protection; he argues that ISDS is not needed in modern trade agreements. Whereas he questions the benefits that ISDS brings, he also argues that each time the system is reformed, the scope of the protection is narrowed, making it less and less effective against arbitrary and discriminatory behaviour. He seems to be arguing that there is nothing wrong with ISDS per se, but rather that the current investment protection provisions are not broad enough, and thus not effective enough. This seems to be an argument for a reform of ISDS where the protection is strengthened, rather than narrowed, contrary to Simon’s objections.


On the other hand, Simon seems to accept the notion of external judicial reviews, especially against laws he himself describes as idiosyncratic, but he questions first whether it is the task of international treaties to bear that burden, and second whether states and citizens can accept that. On the first point, yes. That is the whole point of international treaties, whether it is the Marrakech Declaration, the Universal Declaration on Human Rights, or the Energy Charter Treaty. I agree that the first and the third are much more effective than the second, and sadly an ISDS award can only issue monetary compensation; it cannot retract laws. Either way, I doubt that abandoning those mechanisms that are effective is the right way to ensure the effectiveness of enforcing human rights. I cannot under any circumstances agree that we should rather have a world in which everyone is treated equally badly, instead of at least trying to create a world in which we are all, investor or not, treated equally well.


As regards the second point, that citizens might not accept such a judicial review, I argue the following: It is not our job to court public opinion. We ought not to make the same mistakes as some governments, i.e. base our arguments not on science and facts, but on our gut feeling. Hence, until there is a clear example of an ISDS case where the concept of fair and equitable treatment has been misused, one ought to accept that even the most “flawed” investment protection chapter is a functional one. One could have many opinions on the Philip Morris vs Australia case, but considering the fact that the only time a Philip Morris case has been concluded, it was not in the investor’s favour, we ought to take the criticism with a pinch of salt.


The issue of politicization has come up throughout most of the essays. John Veroneau rather eloquently states that “governments have bilateral agendas that may cause an individual’s claim for justice to be subordinated to interests that states share, but that individuals do not.” I share this opinion. There might be some battles that states would like to simply ignore, or even worse, use against the will of the investor to make a political point. And the alternative to ISDS is not turning back to gunboat diplomacy. The alternative would most likely be state-to-state dispute settlement. As I argued in my first essay, again the problem is politics. Here, one ought to have a look at the politics behind a number of anti-dumping investigations to see how state-to-state dispute settlement is not something that we should embrace. Geopolitical agendas have been aproned by the EU Commission’s anti-dumping and anti-subsidy cases against China, the solar panel case, and the telecom case among others, which were followed by Chinese retaliation in form of the imposition of duties against European wine and chemicals. These two cases show not only the dangers of managed trade, but also the spark of a game of tit-for-tat that I do not wish to see in the field of investment disputes.


In conclusion, the debate on investment protection using ISDS has to be based on facts and statistics in order to be fruitful. Although many of the matters mentioned by Simon and Jason are worth exploring, they do not go to the core of the issue. The core of the issue is that a dispute settlement mechanism is what makes an international treaty worth signing. The criticisms leveled against ISDS in this series of essays include both that it is too effective, and that it is not effective enough. But if the criticism against ISDS is that it is so effective, let’s broaden and copy it, making it more accessible and impartial in the process. Let’s use ISDS as a model for dispute settlement, whatever the dispute. But for that, you need treaties in which a mention of dispute settlement is made. Let’s work on that instead of scrapping one of the few effective mechanisms to solve grievances between individuals and states.


The ISDS debate is bigger than just ISDS in TPP and TTIP. From a European perspective, it is also about future BITs and FTAs, such as the ones currently being negotiated with China and India. And perhaps more importantly, it is about bringing an end to the unequal level of protection of EU investors in the United States and of U.S. investors in various EU Member States. But ultimately, it is a matter of upholding the rule of law and respecting international treaties.

Also from this issue

Lead Essay

  • Simon Lester says that the rules for international investment dispute resolution are outdated - and they’re hurting global trade. When the rules were first written, the big danger seemed to be from government expropriation, for socialist or economic nationalist reasons. This made corporations reluctant to invest in the developing world. But now, the same legal regime that once protected them is being used increasingly to win treatment for corporations that is actually too favorable, at least for corporations that are particularly adept at this type of rent seeking. Lester suggests we re-examine the rules and their consequences to improve them for an era when supply chains literally span the globe.

Response Essays

  • In a wide-ranging dissent, John K. Veroneau argues for the continued importance of investor-state dispute settlement. Economic nationalism is alive and well, he writes, and it is found today in non-tariff barriers and subsidies. Leaving disputes to be settled between states also leaves states less answerable to the private sector; this is inherently dangerous, because on many issues, states face incentives that may lead them to act in ways that do not align with the best interests of their citizens. And while “fair and equitable treatment” may be a vague standard of adjudication, it is not unprecedented, and it does not exist in a vacuum.

  • Ingrid Persson says libertarians should welcome investor-state dispute settlement because it protects property rights, with good consequences all around. The worldwide decline in outright expropriation of foreign investment capital is, she says, a direct result of previous decades’ ISDS agreements, and of the good normative work they have done. Repealing these regimes would therefore be inadvisable. Indeed, we should move in the opposite direction and protect property rights still further. This is a goal that libertarians should constantly strive for; it is highly consistent with libertarian values, and ISDS has an important ongoing role to play in the process.

  • Jason Yackee argues that the TPP and TTIP trade agreements don’t need investor-state dispute settlement and would be better off without it. Empirical evidence is mixed about whether ISDS encourages investors to invest abroad. They may or may not even know that it exists, or in what cases it can be of help. Making use of it is costly, investors lose most of their cases, and they rarely win anything like the damages they sought. Both expropriation and gunboat diplomacy are increasingly relics in the modern world, and it would be a mistake to legislate defensively against them. The costs of ISDS seem likely to rise as it is implemented more widely, but its benefits remain elusive.