Is ISDS still fit for its original purpose?

As more and more voices join the choir of criticism of the international dispute settlement system ostensibly designed to protect capital accumulation, is the system still fit for its original purpose?

An archaic system that subverts remedial action taken against the climate crisis by threatening compensation that could see every EU, UK and Swiss citizen paying EUR 660 in compensation should their governments decide to abandon coal, oil and gas at some point.

These are only a few of the claims levelled against the investor-state dispute settlement (ISDS) system in recent weeks; a system ostensibly created to protect colonists' assets from newly independent states’s domestic legal orders following the wave of decolonization that came in the wake of World War II. The same goes for the Energy Charter Treaty which entered into force in April 1998 reportedly in order to promote East-West trade, protect foreign investments and energy firms in newly minted republics following the collapse of the Soviet Union.

Following the incredible and unparalleled boom of arbitration all over the world off the back of global economic liberalisation and the rapid expansion of bilateral and multilateral investment treaties, it seems the backlash against ISDS that Professor Brigitte Stern warned about at the 34th annual Freshfields and Queen Mary University arbitration lecture in 2019 has well and truly arrived.

No longer limited to international arbitration and diplomatic niches, ISDS’ dirty laundry is increasingly being aired in the public square. Of course, this challenge is not unique to ISDS. The Court of Arbitration for Sport’s longstanding ties to the International Olympic Committee also enjoyed its moment in the spotlight as the 2020 Summer Olympics in Tokyo ran their course.

Historically, investors from so-called ‘developed’ countries would cite concerns that they would not be treated fairly by ‘developing’ countries’ legal systems to argue for the inclusion of ISDS chapters in bilateral treaties. So, bilateral and multilateral investment treaties were designed to, amongst other things, grant investors free-standing international law rights to protect them regardless of any change to national laws, enforceable via a “self-contained and delocalized system with automatic enforcement of arbitral awards.”

But now ISDS appears to have developed to the point where some claim that states are required to treat foreign investors better than they treat their own nationals. Indeed, states are now so routinely hauled before ISDS tribunals, they are reportedly first consulting investment arbitration lawyers before introducing legitimate public interest measures – even emergency ones, like those aimed at mitigating the effects of the COVID-19 pandemic and climate change. For example, five energy giants are reportedly suing governments throughout the world for a total of $18 billion, claiming a loss of earnings as a result of climate change reforms. ISDS tribunals are currently seized with four of these cases under the ECT.

It therefore seems as though ISDS has become a risk to be managed rather than a neutral instrument of international relations.

As the United States defends one of the largest international arbitrations in its history against a Canadian pipeline company, and as the EU attempts to reform intra EU investor-State dispute settlement on the back of the CJEU’s judgments in Achmea and more recently in Komstroy, surely the growing disillusionment with ISDS is not because more and more developed countries are finding themselves at the receiving end of the international dispute settlement system they helped design? The EU, for one, is apparently fixated on resolving disputes before a judiciary comprising the EU and Member State courts – an about face from the vision upon which ISDS was developed.

Is it fair to blame ISDS only? Surely some blame can be attributed to the substantive free trade agreements and treaties themselves? According to some, it is the ECT, not ISDS, that empowers fossil fuel investors’ to sue states whose measures to phase out fossil fuel as an energy source negatively affect their profits.

It is not easy to assign blame to a single source. Nor should it be. Terminating the ECT and other bilateral and multilateral treaties like it will not eliminate claims by fossil fuel investors. Besides, doing so will not prevent award creditors from enforcing awards against state assets outside the EU. In fact, the original award creditors are unrestrained in their ability to assign their interest in such awards to third party funders, including vulture funds, around the world.

In reality, only about 40% percent of ISDS claims are successful and several arbitral tribunals have affirmed that states do enjoy the regulatory flexibility to introduce legitimate public interest measures so long as they do so fairly, non-retroactively, consistently and predictably, taking into account the circumstances of the investment.

However, until issues in the origins, design and structure of the current ISDS system, like the ones highlighted above, and others – including the overrepresentation of males from the global north on ISDS arbitration tribunals – are convincingly addressed, ISDS’ legitimacy is likely to continue to be challenged and the backlash against it can only be expected to grow.