New Criticism of ISDS Obscures its Actual History
On the basis of bilateral investment treaties, companies with activities abroad have the right to legal protection in many countries, a well proven tool against undue state interference. Rather throwing this protection out because of critiques that focus on exaggerated compensation numbers and undecided fringe cases, the present discussion on TTIP provides the opportunity to address concerns and to improve the framework of investment protection.
In the context of the TTIP negotiations, a broader public has now become aware of the possibility for investors to claim damages from states in international arbitration courts. Investment protection has a long history and plays an important role for companies in deciding where they want to invest. The possibility to bring disputes before an arbitration tribunal is intended to ensure that a foreign investor does not have to bring action before a court of the state which has infringed its property in a discriminatory manner. Hence, the original idea of investment arbitration was to safeguard foreign investors in countries with weak judicial systems against any undue state interference.
In the context of TTIP it is argued that the investor-state dispute settlement (ISDS) mechanism is not necessary since the negotiating states involved would apply their democratic principles and the rule of law anyway. In this context it is worth mentioning that the use of ISDS in countries with developed judicial systems has never been excluded or restricted, neither in the past nor at present. Therefore there is no justification why investor-state dispute settlement should be part of bilateral investment treaties with developing countries but not with developed countries.
A main concern is that arbitration proceedings undermine democratic structures and that these proceedings might infringe the "right to regulate" of sovereign states. It is said that investment protection via arbitration might have a negative impact on the capacity of states to introduce new laws if it is running the risk of being sued for damages worth billions. In this context, critics cite spectacular legal actions such as the claim by a Hong Kong affiliate of the Philip Morris tobacco company against the Commonwealth of Australia. What is true is that this case has not been resolved yet, and it is also a fact that approximately 40 percent of investment disputes are decided in favor of the respondent state.
Furthermore there are no signs that the investor-state dispute settlement mechanism is abusively applied by investors. According to a research study carried out by Susan Franck, professor at Washington and Lee University School of Law, most compensation granted to corporations under this arbitration procedure amounts to less than US-$10 million. This is much lower than the amounts repeatedly put about in public. Also, there is no need for states to worry that companies will sue them right after the introduction of new laws in the future. Results of the research done by Jeremy Caddel and Nathan M. Jensen, both at Washington University in St. Louis, proved that the majority of state decisions which lead investors to seek arbitration are not in response to legislation but associated with actions taken by the executive branch of states.
Another concern is that the investor-state dispute settlement system is a "shadow justice" system beyond established state courts of law. While indeed it is true that awards are only published if agreed by both parties, it should, however, be recalled that this is mostly due to the respondent state's efforts to avoid any negative reporting that could compromise its attractiveness as an investment location. Implementing the United Nations Commission on International Trade Law's Rules on Transparency, which came into effect in April 2014, could address the issue.
The upside to the debate on investment protection in TTIP is: It might lead to the further development and refinement of the investor-state dispute settlement mechanism itself.
Oliver Wieck is the Secretary General of the International Chamber of Commerce Germany e.V.
This article was published in the first of three theme weeks for our project "TTIP: Myths vs Reality". An introduction of the articles for the week can be found here, and introductions of the other two weeks can be found at the top of the TTIP Forum.
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