What is ISDS (investor-state dispute settlement)?

Key Points

  • ISDS is a mechanism that permits investors to bring international arbitration claims against governments for breaches of international investment rules.
  • Investors that have ISDS rights do not need to rely on their government to bring a claim on their behalf.
  • Without ISDS provisions dispute settlement in free trade agreements is a state-to-state process, which may not work well for corporations seeking to enforce their rights.
  • Countries should consider the inclusion of ISDS provisions in FTAs but with clarifications to ensure symmetry between investor interests and the ability to regulate for legitimate public welfare purposes.
  • A cursory check of whether your next investment destination country is ISDS averse may be helpful as to how you evaluate the risks and structure the investment.


Why is this a divisive issue?

Much has been said about the inclusion (both for and against) of ISDS provisions in trade and investment agreements during the negotiations of agreements such as the Trans Pacific Partnership (TPP), and the recently concluded The Pacific Agreement on Closer Economic Relations (Pacer Plus) [1].

The protection of rights of investors is nothing new. Many the key investment rules are reflective of customary international law. This means that those rules are owed to foreign investors regardless of whether they are included in a trade agreement.

Common arguments made against the inclusion of ISDS provisions are the limit to sovereignty and that these provisions restrict legitimate government activity, such as the protection of public health or the environment.


What is ISDS?

ISDS is a mechanism that permits investors to bring international arbitration claims against governments for breaches of international investment rules.


What do ISDS provisions change?

ISDS changes the way that free trade agreement rules can be enforced.

Investors that have ISDS rights do not need to rely on their government to:

  • bring a claim on their behalf in another international arbitration forum; or
  • pursue what avenues they have open to them in domestic courts.

Instead, they can seek their own remedies through international arbitration.

ISDS is an extra mechanism that enables an investor to bring a claim against a host state that is a party to a free trade agreement. Otherwise dispute settlement in free trade agreements is a state-to-state process.


How do ISDS provisions usually work?

A foreign investor can use ISDS to seek compensation for certain breaches of a host state’s investment obligations, such as obligations in relation to expropriation, non-discrimination and minimum standards of treatment (such as protection against denial of justice).

Investment obligations may also include a commitment to ensure that foreign investors will be able to move capital relating to their investments freely, subject to appropriate safeguards. ISDS focuses on investment obligations and does not give foreign investors the right to enforce the entire trade agreement, including, for example, the intellectual property chapter.


Why is the inclusion of ISDS provisions in free trade agreements desirable?

Any country which consistently ranks well or seeks to rank well, in international surveys of ease of doing business, investment protection, transparency and corruption will not be averse to the inclusion of ISDS provisions.

The ease of doing business is severely curtailed in many countries. It is not uncommon for investors to be faced with lengthy delays and bias in domestic proceedings aimed at the protection of their property rights.  In extreme cases, corruption or political interference may make it impossible for investors to seek effective remedies through domestic courts.

ISDS provides any investor, or group of investors, with the ability to pursue remedies for breaches of mutually agreed rules in forums that are:

  • fair:
  • effective; and
  • impartial.


In most cases it will be easier, less time consuming and more cost-effective for investors to rely on ISDS provisions to bring a claim in domestic courts, than it would be through an international tribunal.


That said, what should Governments consider for symmetry?

There are real risks for Governments that legitimate regulatory activity can be affected if rules are applied more broadly, than was the policy intention, by domestic courts or an international tribunal.

The usual response from countries lower down the ease of doing business scale is to remove the availability of ISDS in free trade agreements. An alternative approach is to clarify the applicable rules under an ISDS provision.

The starting premise is that investor rights are not absolute, and Governments have the right to regulate for legitimate public welfare purposes. Governments should also modify ISDS provisions so that frivolous or unmeritorious investor claims are discouraged. And the provisions should establish fair and transparent arbitration procedures.


Does Australia have ISDS provisions in its FTAs?

The following seven (7) FTAs have ISDS provisions:

  • China-Australia Free Trade Agreement;
  • Trans-Pacific Partnership Agreement (not yet in force and perhaps not yet dead in the water either);
  • Korea-Australia Free Trade Agreement;
  • Australia-Chile Free Trade Agreement;
  • Singapore-Australia Free Trade Agreement;
  • Thailand-Australia Free Trade Agreement; and
  • ASEAN-Australia-New Zealand Free Trade Agreement.


Australia currently also has ISDS provisions in its twenty-one (21) Investment Protection and Promotion Agreements (IPPAs) with Argentina, China, Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Vietnam.


How can ANDE + Co. help?

We understand the risks when a business ventures offshore to operate in another market. We advise on all aspects of international trade and investment, including the impact of free trade and investment agreements. We also advise on international arbitration cases (treaty-based ISDS cases) initiated by investors against States under international investment agreements (IIAs).

Feel free to contact Nitij Pal and Patrick Martin to discuss this further.

[1] Note that the inclusion of an ISDS provision was deemed unsuitable for PACER PLUS and omitted. For the full text see https://www.mfat.govt.nz/en/trade/free-trade-agreements/agreements-under-negotiation/pacer/pacer-plus-full-text/