ISDS: what it is and why we should be worried

Naoise Dolan

Online Editor

What is ISDS?

Investor-state dispute settlement (ISDS) provides foreign investors with an international tribunal that they can access if they believe actions taken by a host government are in breach of a trade or investment agreement. Typically, cases are judged by a panel of three arbitrators: the parties each choose one, and mutually agree on a third.

European Union countries have previously been sued at the International Centre for Settlement of Investment Disputes (ICSID) in Washington D.C. However, the EU itself does not provide ISDS and instead directs companies seeking international arbitration to the Court of Justice of the European Union (CJEU). The CJEU consists of one judge per EU member state, has its position secured in treaties that all member states got to vote on, and holds public hearings – in contrast to the arguably narrow representation offered under ISDS.

ISDS is currently under negotiation as part of the the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the EU.

The EU is consulting the public on ‘whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU’s right and ability to regulate in the public interest’; they are taking submissions on this issue until 13 July.

Why should we be worried?

By design (and in line with many other features of TTIP), ISDS favours corporate interest.

In an EU context, it’s important to note that it provides international companies not only with a means of circumventing national courts – but also with a bypass away from the international, relatively accountable CJEU. That means that when states like the UK justify ISDS as a necessary safeguard for companies unwilling to trust local courts, they somewhat miss the relevant distinction. ISDS does not replace a national hearing with an international one; rather, it replaces a publicly aired hearing with an arbitration presided over by three judges, two of whom the international company have had a role in selecting. This mechanism is not provided for local companies – and certainly not for local citizens.

If that doesn’t already sound sinister, then consider the sorts of policy areas where companies are likely to invoke ISDS. Regulations clearly in the public interest – the environment, health and safety standards, labour laws, etc. – can, and often do, fall under the ambiguous ambit of ‘investment protection’. To take one example, Swedish energy multinational Vattenfall sued Germany for phasing out nuclear power and thereby allegedly denying ‘fair and equitable treatment’ to those profiting off it.

the sort of ‘discrimination’ ISDS deals with is stickily subjective

In theory, as long as the treaties are fair, a country shouldn’t lose out from a company holding them to the terms agreed on. In a press release, the European Commission claim that under ISDS, ‘a government would not have to pay compensation if it took a non-discriminatory measure in the public interest’. But in practice, the sort of ‘discrimination’ ISDS deals with is stickily subjective. Germany’s nuclear phase-out undeniably ‘discriminated’ against Vattenfall in that it had a disproportionate effect on that company compared to others who hadn’t invested huge sums of money in nuclear power. But was that discrimination unfair? Should Vattenfall have had a part in picking the judges who got to determine this?

A similar problem arises with transparency. The UK leaflet on ISDS claims that ‘access to hearings’ and ‘key documents’ will be made ‘publicly available, with the only exception being for confidential information’. But confidentiality, like discrimination, is not a static concept. As this Commons Library Standard Note reports, ISDS was originally introduced to deal with private disputes and has usually come with a high degree of secrecy. If the bodies deciding what counts as ‘confidential’ do not copy these standards wholesale, it certainly seems optimistic to imagine that they won’t be influenced by them.

holding these tribunals to consistent standards … hasn’t come about by sheer dint of public access in the past

But let’s be optimistic. Let’s say that the public will know everything they need to. That still only means that they can observe the results of the case after the fact, not that they have any means for ensuring fairness. According to an UNCTAD report, ‘arbitral decisions that have entered into the public domain have exposed recurring episodes of inconsistent findings’, which suggests that holding these tribunals to consistent standards will be difficult and hasn’t come about by sheer dint of public access in the past.

Is there a problem with judicial appointments in other EU bodies like the CJEU being democratically unaccountable? Undoubtedly. Is this likely to be more of an issue under ISDS than under the present system, where judges are appointed entirely by governments and have responsibilities consistent enough that they’re at least somewhat easier to track than people drafted into arbitrator roles on a case-by-case basis? Again, undoubtedly.

But lastly: even if governments never end up having to pay unfair compensation to a company, and even if ISDS records are fully available for public scrutiny, its potential chilling effect on future legislation should give us considerable pause for thought.

Regardless of the court’s decision, engaging in ISDS is hugely costly for states. According to the Commons Library note, the ‘average cost of an arbitration case is $4m per party, approximately 82% of which is legal fees’ and tribunals have generally ‘not required the investor to pay the state’s costs, irrespective of the outcome’. That means that no matter how confident a state is that a new law will pass an ISDS tribunal’s (nebulous) standard of non-discrimination, the very prospect of a company suing it could be enough to jettison the possibility of bringing it in. US companies already invoke ISDS on a large scale and come from a country that generally offers fewer labour protections than the EU does; providing them with ISDS under TTIP would be litigative catnip.

voters who don’t know what it’s like to live on minimum wage already support governments who want to cut it further, and the politicians in question already have the excuse of needing to stimulate the economy

To put this in context, it is already fiscally and politically difficult for states to bring in many regulations that ensure citizens a basic standard of life. To take one example: many voters who don’t know what it’s like to live on minimum wage already support governments who want to cut it further, and the politicians in question already have the excuse of needing to stimulate the economy when they propose such cuts. When those countries can additionally claim that international companies will sue them for raising it (as when French multinational Veolia sued Egpyt for doing just that), it becomes that bit more convenient not to pursue legislation already disfavoured by right-wing voters. Even well-intentioned governments might make the reasonable calculation that they simply do not have the funds to shoulder potential lawsuits. This not only distances democracy from the people, but genuinely holds it hostage to a greater corporate power.

In essence, ISDS has more power than current EU courts to do the wrong thing – and makes it harder for EU governments to do the right thing.