Written by Marta Latek
Investor-State Dispute Settlement (ISDS) mechanisms are found in more than 3 000 international investment treaties, but have been increasingly criticised in recent years.
International investment agreements, and the ISDS mechanism, were originally created to protect investors from arbitrary expropriation and ensure non-discriminatory treatment for foreign investments, in countries considered risky. In such countries, with the judiciary not fully independent from government, arbitration was considered a more neutral framework to ensure enforcement of the host state’s obligations towards investors.
The progress made on comprehensive free trade agreements (FTAs) between the EU and Canada and the United States – in both cases including provisions for ISDS – has intensified discussion on the mechanism in the EU. A number of doubts exist with respect to the impartiality of arbitrators, while the relative broad interpretation given to the provision has been considered to have substantially reduced states’ freedom to regulate, creating an imbalance between the investor’s right to protection and the host state’ sovereign right to regulate its market.
The EU supports ISDS arbitration in general, while recognising the need for its reform. Indeed a consensus seems to be emerging on systemic problems found in this increasingly used system. That has led the European Commission to propose some innovative provisions in the framework of negotiations on EU trade and investment agreements, but without calling into question the ISDS system itself.