Investor-State Arbitration

About the series

As negotiators from the United States, Mexico and Canada tasked with modernizing the North American Free Trade Agreement turn their attention to the controversial topic of disputes between investors and states, this series from the Centre for International Governance Innovation (CIGI) critically assesses some of the most hotly-debated perspectives on the issue.

Launched in November 2014, this project addresses a central policy issue of contemporary international investment protection law: is investor-state arbitration (ISA) suitable between developed liberal democratic countries?

The project seeks to establish how many agreements exist or are planned between economically developed liberal democracies. It reviews legal and policy reactions to ISAs taking place within these countries and summarizes the substantive grounds upon which claims are being made and their impact on public policy making by governments.

The project reviews, critically assesses and critiques arguments made in favour and against the growing use of ISA between developed democracies — paying particular attention to Canada, the European Union, Japan, South Korea, the United States and Australia, where civil society groups and academic critics have come out against ISA. The project examines the arguments that investor-state disputes are best left to the national courts in the subject jurisdiction. It also examines whether domestic law in the countries examined gives the foreign investor rights of action before the domestic courts against the government, equivalent to those provided by contemporary investment protection agreements.

CIGI Senior Fellow Armand de Mestral was the lead researcher on the ISA project. Contributors to the project were Marc Bungenberg, Charles-Emmanuel Côté, David Gantz, Shotaro Hamamoto, Younsik Kim, Céline Lévesque, Csongor István Nagy, Luke Nottage, Ucheora Onwuamaegbu, Carmen Otero, Hugo Perezcano, August Reinisch and David Schneiderman. A conference was held in Ottawa on September 25, 2015. The papers presented at that conference were published as CIGI papers and appeared as a collective book titled Second Thoughts: Investor-State Arbitration between Developed Democracies in 2017.

In the Series

When Spain’s generous incentive system for renewable energy production was cut back, and then eliminated, in the wake of the global financial crisis, international investors turned to investment arbitration, while national investors could only present their claims before Spanish courts. This paper examines the incentive regime and the government’s changes to it in order to understand the investors’ claims and the reasoning that resulted in their rejections, both in national courts and in the only arbitration award issued up to now.
The European Union’s Central European member states are the litmus test of the policy issues within the investor-state arbitration system. This paper explores the Central European treaty and policy landscape, and analyzes investment protection issues pertaining to the region, including intra-EU bilateral investment treaties, non-expropriation cases concerning national regulatory sovereignty, the fairness of national court or administrative proceedings and the exercise of contractual rights.
As South Korea’s economy grows, the country’s investor-friendly approach to investment treaties is being challenged by its position as respondent in numerous investor-state arbitration (ISA) cases, in particular since the entry into force of the Korea-US Free Trade Agreement in 2012. The South Korean government’s ISA policy will encounter renewed public opposition if the government fails to defend its actions in three major pending arbitration cases.
Canada, together with its North American Free Trade Agreement (NAFTA) partners the United States and Mexico, has responded to a variety of criticisms that have been levelled against the investment chapter of the North American Free Trade Agreement. These responses have changed the way investor-state arbitration is practised, and the way in which Canada is formulating new international trade agreements such as the Trans-Pacific Partnership Agreement and the Comprehensive Economic and Trade Agreement.
Although the present system for resolving investment disputes between states and foreign investors has been around for about five decades, the most significant changes to it have occurred in just the past two. Important changes were forced upon the system when developed countries first were faced with actual prospects of appearing as respondents in investor-state arbitration, starting with the North American Free Trade Agreement. Further provisions have been introduced in later, new-generation, treaties, based on lessons learned and reactions from the respective constituencies. As the issue of the continuing development of the system remains relevant to all countries, there is the need for a mechanism that ensures its balanced evolution for the benefit of all its users, which would not be dependent on the reactionary steps of only segments of the user community at any given time.
The European Commission has recently taken a leadership role in reforming the traditional investor-state dispute settlement regime included in economic agreements, in part in response to pressure from the European Parliament and growing civil society criticisms of the regime. At the core of these efforts is the proposal to create a system of “investment courts,” characterized by state nomination of decision makers benefiting from tenure and by the establishment of appellate-level tribunals. The European Commission has gone to great lengths to contrast this “new, modernised system” with the “old, traditional form of dispute resolution” between investors and states. In the long term, the European Commission’s goal is to replace individual courts with a truly multilateral investment court.
The United States has more than 45 bilateral investment treaties that include investor-state dispute settlement (ISDS), but prior to the Trans-Pacific Partnership, only two partners to these agreements, Canada and Singapore, have been developed countries. The debate over the advisability of including ISDS continues, even though the North American Free Trade Agreement ushered in an era of transparency investment treaties. This paper argues that if ISDS were abandoned, governments might again be subject to strong political pressures to formally or informally espouse investor claims and such claims would become the key factor in their foreign relations with host countries. The creation of an ISDS mechanism that relieves the US government from undertaking the settlement of investment disputes, and the evolution of US investment protection that is significantly more friendly to host governments and to regulation, are the principal themes of this paper.
This paper enquires into an alternative foundation for investor rights within international investment law, linked to a theory of deliberative democracy and a procedural right to be heard. Drawing upon historical and contemporary accounts within political theory, the paper advances a justification for investor protection that is limited principally to procedural protections associated with the Latin maxim audi alteram partem (“hearing the other side”). After outlining the foundations for this approach in English administrative law and political theory, the paper turns to selected arbitral awards in order to illustrate how a right to be heard would be advantageous to all the interests involved. The author proposes bringing together theory, history and practice in order to ground a theory of investor protection that better reconciles power, politics and democracy.