May 9, 2023 – Investor-state disputes are proliferating around the globe as business investors seek redress for government actions they deem unfair or contrary to investment agreements, according to report from the C.D. Howe Institute. In “Investor-State Disputes: The Record and the Reforms Needed for the Road Ahead,” author and C.D. Howe Institute Senior Fellow Lawrence L. Herman reviews the record of investor-state dispute settlement (ISDS) procedures, the criticisms directed at them, and the reforms required.
“Despite concerns and criticism, ISDS procedures in international investment agreements are an important development in global governance that should continue to be a part of our international fabric,” says Herman.
Herman examines both Canadian and global cases involving ISDSs, which give private parties the right to bring binding arbitration against governments under International Investment Agreements (IIAs). These rights can be invoked when investors allege a lack of fair and equitable treatment, discrimination or expropriation without adequate compensation contrary to a country’s treaty obligations.
“ISDS has become a significant feature for investments, particularly into developing countries in many parts of the world,” according to Herman. “However, because of the rights given to private parties, these agreements have become increasingly controversial – especially in an era of increasingly expanding governmental measures on climate change, sustainability, human rights and other issues impacting foreign investors and their investments in one way or another.”
In response to these concerns, multilateral, regional and bilateral efforts are making continuing improvements to ISDS mechanisms when it comes to efficiency, transparency and aspects such as permanent appointments and a system of appeals.
“While some countries have embarked on a program of terminating their bilateral investment agreements, these agreements will continue to remain as a part of the international fabric in many parts of the globe,” says Herman. “They are an important development in global governance and, even if not perfect, they not going to disappear in spite of concerns and criticisms.”
Creating permanent rosters of tribunal members as well as adding an appellate review processes to existing IIAs would help improve ISDS procedures. Short of this, Herman says ongoing efforts could include: i) promoting model arbitration clauses to reduce legal uncertainty and enhance consistency and predictability of outcomes; ii) developing codes of conduct and best practices for adjudicators plus rules to ensure their independence; and iii) making sure appointments to tribunals are of highest quality. Governments should also publicly support the value of third-party arbitration as an objective and neutral process that leads to peaceful resolution of differences, he adds.
Ultimately, investment protection treaties are about risk mitigation with host states bound by treaty to respect obligations of fair and equitable treatment and other rule-of-law standards and providing investors with a degree of assurance, says Herman. “While there are legitimate questions about the process and whether and to what degree investment treaties accomplish these objectives, these suggestions can assist in providing ways forward,” he concludes.
For more information contact: Lawrence L. Herman, Counsel, Herman and Associates, and Senior Fellow, C.D. Howe Institute; or Lauren Malyk, Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.