Some Myths Concerning Investor-State Dispute Settlement

The recently concluded Trans-Pacific Partnership (TPP) is widely expected to be near the top of the new government’s agenda upon the opening of the first session of the 42nd Parliament on December 3, 2015. While the new government has expressed support for the treaty, popular outcry has surfaced regarding a number of provisions within the mammoth trade agreement. Opposition to a proposed investor-state dispute settlement (ISDS) mechanism has been particularly strong. The Council of Canadians, a non-profit organization, has alleged that the agreement’s ISDS provisions are a “powerful tool of corporate rule, designed to undermine democracy.” Massachusetts senator Elizabeth Warren claimed in a Washington Post op-ed that ISDS would “undermine U.S. sovereignty” and “allow big multinationals to weaken labor and environmental rules.”

These criticisms are for the most part baseless. ISDS provisions have been incorporated into over three thousand treaties and conventions throughout the world, including NAFTA. Canada has been a party to twelve resolved arbitrations under Chapter 11 of NAFTA since its coming into effect in 1994. Of these, four have led to the Government of Canada disbursing financial compensation under the terms of a settlement or a ruling of an arbitration tribunal. Four cases whose outcomes are unfavourable to the federal government cannot reasonably be said to represent an undue intrusion on Canadian sovereignty, especially given that the cases were adjudicated by a neutral tribunal whose members were selected by both parties.

In 2014, Charles N. Brower of the Iran-US Claims Tribunal and Sadie Blanchard of Yale Law School published an article in the Columbia Journal of Transnational law outlining various common myths regarding ISDS. They assert that the balance of power created by international arbitration mechanisms is not nearly as asymmetric as its opponents would allege. They found that tribunals under the International Centre for Settlement of Investment Disputes (ICSID) have ruled in favour of investors in 46% of cases and have typically granted less than 40% of the damages initially sought. This does not indicate any form of systemic bias in favour of investors in international arbitration courts.

Additionally, governments possess a wide variety of tools to sanction breaches by investors. Aside from civil damages, governments may also seek criminal sanctions in their own courts. Expropriation of assets may also serve as an enforcement tool for wronged governments. Conversely, in developing countries with politicized judicial systems, arbitration tribunals established by trade agreements often serve as investors’ only recourse in recovering damages from governments.

Brower and Blanchard deconstruct allegations of ISDS eroding national sovereignty by pointing out that limiting the scope of legitimate state action is precisely the purpose of international treaties. Criticisms of this type made with respect to ISDS may be equally applied to all international conventions that include enforcement mechanisms, without which they are effectively toothless. Concerns regarding the content that is being enforced may be entirely valid. However, the mere presence of an enforcement mechanism should not be viewed as a point against the TPP.

The authors of the article also state that ISDS is highly unlikely to interfere with the imposition of environmental regulations that reduce the return on certain investments. Not a single environmental regulation has been struck down via ISDS as of the time of writing, and no damages have been awarded to investors pursuant to a claim regarding the enforcement of an environmental law.

Claims that ISDS leads to “regulatory chill,” where governments are dissuaded from enacting environmental legislation out of concern for litigation in ISDS tribunals, are equally unfounded. To successfully claim damages from a state party, plaintiffs must show that the measure was “pretextual, discriminatory, or lacking in due process.” They must demonstrate that the supposed environmental law in fact targeted them unfairly, either by not similarly binding domestic investors or by blatantly serving as a pretext for favouring domestic industry. Given that no ISDS claim concerning environmental regulation has succeeded to date, it is exceedingly unlikely that investors will be willing to face the steep costs of arbitration in hopes of an improbable victory.

Investor-state dispute resolution has become a standard feature of international trade, benefitting both investors, who are assured of fair treatment in arbitration courts, and developing countries, which benefit from increased levels of foreign investment and an effective subsidy for their judicial systems. Provisions in the TPP establishing such a framework are not unusual in the extent to which they bind governments. Rather, they provide the possibility of enforcement of the landmark trade agreement. While certain groups may have other legitimate grievances regarding the TPP, the inclusion of an ISDS mechanism is in the interest of all parties involved.

About Christopher Scarvelis

Christopher holds a DEC in Health Science from Marianopolis College and will begin pursuing studies at the McGill University Faculty of Law in the fall. At Marianopolis, Christopher was a founding member of the Marianopolis Drug Awareness Society, an organization that seeks to promote harm-reduction approaches to managing the public health implications of drug abuse. He is a member of the Canadian International Council and a regular attendee of Montreal branch events. His research interests include education policy, urban development, and the impact of domestic political institutions on international behaviour. Christopher may be reached by email at christopher.scarvelis@gmail.com.