Investor-state dispute settlement — also known as investor-state arbitration, or ISA — is currently included in several thousand bilateral investment treaties as well as in an increasing number of regional trade agreements such as the Canada and European Union Comprehensive Economic and Trade Agreement (CETA).

This treaty-based legal instrument has provoked considerable controversy globally in recent years, but paradoxically, nowhere has the debate raged more fiercely than in developed democracies such as Canada, the United States, Australia, Japan and countries of the European Union. Questions are being asked over its merits, disadvantages and alternatives. Is Canadian and global public policy on the right track with this form of treaty obligation?

ISA, which empowers foreign investors to sue a government for damages, was adopted to protect developed country investments in developing countries — replacing potentially biased and unfair domestic courts and administrative procedures by a form of neutral arbitration. Today, ISA is found in agreements between many different categories of countries, including some between developed democracies.

Some of the most principled opposition to ISA has come from Canada, where Toronto law professors Gus van Harten and David Schneidermann, and environmental lawyer Howard Mann, have long called for Canada’s withdrawal from ISA commitments.

Critics argue that ISA constitutes an unwarranted exclusion of the normal role of domestic courts and a special privilege given to foreign investors. It is also argued that foreign investors should take Canadian law as they find it.

Defenders of ISA point out that its primary goal is to protect the interests of Canadian investors in countries where the judicial and executive powers cannot be expected to treat foreign investors impartially. They also point out that, while investment treaties are formally reciprocal, it is unusual for investors from a developing country to sue in a developed country.


Chapter 11 of the North American Free Trade Agreement made Canada, Mexico and the United States the first developed democracies to witness a number of arbitral claims by their foreign investors — 40 against Canada and 25 against the U.S.


When Newfoundland and Labrador expropriated the assets of AbitibiBowater without compensation, the company was successful in seeking compensation from Canada. When the Methanex Corporation of Canada objected to the ban on its gasoline additive in California, it was unsuccessful in seeking compensation against the United States. The recent arbitral decision against Canada in the Bilcon case has left observers uncertain as to the meaning of ‘fair and equitable treatment’.


Since NAFTA’s ratification, environmentalists and public service unions have expressed concern that environmental measures or public services might be at risk, and that “regulatory chill” could inhibit the development of necessary regulatory measures. Governments have denied these suggestions and have pointed out the need to consider ISA’s advantages for Canadians investing abroad instead of focusing exclusively on actions against Canada and the United States; the United States has never lost a case and Canada has lost or settled five.


Similar debates are taking place in Germany, France, Spain and Eastern European states as well as the European Union, which has now become responsible for foreign direct investment. In Australia, ISA was close to being abandoned altogether. Legislators in Japan as well as in the European Parliament have expressed considerable concern about the impact of signing the Trans-Pacific Partnership or the Transatlantic Trade and Investment Partnership (TTIP) for fear of aggressive litigation by American multinationals. Only the government of South Korea seems to be completely at ease with ISA.


Throughout the developed democratic world there is considerable unease at the possibility of arbitral actions being taken against their governments. It is not clear that, between developed democracies, ISA is necessary to protect foreign investors. But having become inextricably bound up in a global network of investment protection agreements, it seems impossible for developed democracies to exempt themselves from ISA while maintaining it against the rest of the world.


A thorough review of the experience of ISA in developed democracies would help both critics and proponents understand how this instrument of public policy might be adapted so as to better respond to the evolving needs of the global community.

"Having become inextricably bound up in a global network of investment protection agreements, it seems impossible for developed democracies to exempt themselves from ISA while maintaining it against the rest of the world."
The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.
  • Armand de Mestral is a senior fellow at CIGI. He is an expert in international economic law, and professor emeritus and Jean Monnet Chair in the Law of International Economic Integration at McGill University.