Investor-State Dispute Settlement (ISDS)

Investor-State Dispute Settlement (ISDS)

ISDS or investment court system (ICS) is a system through which individual companies can sue countries for alleged discriminatory practices.
• If an investor from one country (the “home state”) invests in another country (the “host state”), both of which have agreed to ISDS, and the host state violates the rights granted to the investor under public international law, then that investor may bring the matter before an arbitral tribunal.
• Foreign investors alone (including their subsidiaries and shareholders) are able to initiate claims against the government; the government cannot initiate an ISDS proceeding.
• The decision-makers in these ISDS proceedings are private arbitrators appointed on a case by-case basis to decide the investors’ claims against the host government.
• When deciding the case, the substantive law the arbitrators apply is not the domestic law of the “host” state that normally governs the investment. Rather, it is the law of the treaty, as interpreted by the arbitrators.
• If the arbitrators find that the government violated the treaty, they can order the government to pay the investor substantial damages. If a tribunal issues an award against the government, courts of most countries are required to enforce it.
• ISDS is an instrument of international public law and provisions are contained in a number of bilateral investment treaties, in certain international trade treaties, such as NAFTA

Why it has been established?

• Firstly, the investor may not want to bring an action against the host country in that country’s courts because it might think they are biased or lack independence.
• Secondly, investors might not be able to access the local courts in the host country. There are examples of cases where countries have expropriated foreign investors, not paid compensation and denied them access to local courts. In such situations, investors have nowhere to bring a claim, unless there is an ISDS provision in the investment agreement.
• Thirdly, countries do not always incorporate the rules they sign up to in an investment agreement into their national laws. When this happens, even if investors have access to local courts, they may not be able to rely on the obligations the government has committed itself to in the agreement.

Criticisms of ISDS

• ISDS provides an additional channel for investors to sue governments, including a belief that all disputes (even international law disputes) should be resolved in domestic courts.
• ISDS could put strains on national treasuries or that ISDS cases are frivolous.
• It decreases the potential impact of ISDS rulings on the ability of governments to regulate.