As has been widely reported, the UK has just joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The benefits from this trade agreement are likely to be small (less than 1% of GDP in ten years’ time) according to the government’s own research (but disputed by the Trade secretary, Kemi Badenoch).
Leaving aside the possibly negligible economic benefits of joining the CPTPP, many critics of the agreement are more focussed on its impact on regulations around food imports and most specifically, environmental standards.
The key tool by which trade and/or investment treaties can affect national legislation is through Investor State Dispute Settlement (ISDS). These arbitration panels operate within a realm called private international law.
Treaty signatories agree to be bound by the arbitration judgments, which have a quasi-legal character and operate through well-established legal principles, in much the same way as domestic contract law. Here the state is not so much an international sovereign political body, as a (still sovereign) voluntary party to a contract; the trade agreement.
The European Union has already sought to limit the coverage of ISDS between its members, and the European Parliament seems unlikely to ratify any new trade international agreements that have ISDS as part of their regulatory apparatus.
However, the UK Government seems more relaxed about entering into such arrangements, and the civil service is confident that it can continue its record of having never lost a ISDS case that has reached arbitration. Whether this optimism is warranted or not, ISDS remains contentious and potentially anti-democratic.
What is Investor State Dispute Resolution?
On one level, ISDS is exactly what it says. As part of a bilateral treaty, whether the treaty concerns trade and/or investment, ISDS is intended to provide a neutral arena where a corporate investor – believing that an action by the host state has violated the property rights guaranteed under the treaty – can seek recourse. It has become a contentious element of international treaties because of its actual history as a tool to settle disputes, rather than necessarily its private law character.
The roots of ISDS lie in the period of post-colonial development in the second half of the 20th Century. Requiring investment from rich country corporations, poorer countries entered into Bilateral Investment Treaties (BITs).
This required credible commitments to recognise and not appropriate corporate property. The solution was a dispute settlement mechanism that investors could appeal to if their assets in the host country were nationalised or otherwise compromised. These mechanisms were also demanded by the post-imperial states seeking to continue the recognition of property and economic rights originally established as part of colonial governance.
The existence of formalised ISDS therefore offers reassurance to developed countries’ corporations that they can continue to safely invest in lesser developed countries, knowing they had recourse to an agreed mechanism should their property rights be threatened or violated. However, because ISDS was under-specified in early BITs, this private international law mechanism has been developed through use.
Rather than a settled and established court, each dispute is arbitrated by an expert panel, nominated by the parties with an independent chair agreed by the nominated arbitrators.
Initially, the mechanisms under various BITs were under-used, and only focussed arbitration on nationalisation or explicit appropriation of corporate assets. However, during the first decade of the new millennium, the number of ISDS cases grew. This was partly the result of the development of practice and a new tort (civil wrong) of ‘regulatory takings’ becoming recognised as actionable by ISDS panels.
The problem of ‘regulatory takings’
As part of the normative structure of international private law, there is a strong presumption that parties and specifically in the case of BITs, investors should receive fair and equitable treatment (FET) at the hands of the state.
This is often an issue when domestic companies have received legal or regulatory preference in spheres where multinational enterprises are also operating. As FET cases have become the most common subject of ISDS arbitration panels, the associated idea of ‘regulatory takings’ has become increasingly appealed to.
‘Regulatory takings’ refers not to actual loss of property or assets, but rather a loss against the expectations at the point of investment, and crucially encompasses perceived losses caused by states’ governments’ policy changes.
Under the FET norm, this idea of losses measured against a prior expectation of profit, has been seen as a way that corporations whose activities become constrained by regulation can seek damages due to policy changes, from most notably but not exclusively, measures to protect the environment. It is this aspect of ISDS which has attracted much criticism.
Because only corporations can bring cases under ISDS agreements, what might have previously been the subject of state diplomacy over comparative regulations, is now rendered as the operation of an actionable ‘right’ not to have a firms future business plans undermined by a states’ change in policy.
This move of regulatory discussion out of the international diplomatic realm and into the arena of private international law, is for critics, made worse by the character of the arbitration panels themselves.
A community of adjudicators
One of the reasons that the arbitration panels at the heart of ISDS appear to be favourable to corporate interests is because of the closed character of the community from whom arbitrators and panel chairs are drawn. Over the decades in which ISDS has developed, a specialised professional community has developed, with its members circulating between representing corporations, being nominated by states or serving as chairs.
However, as only corporations can initiate cases, corporations have come to be seen as the key clients of ISDS. Moreover, as clients who continually lose cases are unlikely to continue to fund arbitration proceedings, there is a potential conflict of interest for the arbitrators, whose livelihood depends on cases being bought and being nominated to panels. While, arbitrators are engaged by states to represent them on panels, it is not states that control the demand for arbitrational services.
This has led to a relatively widespread suspicion that arbitrators have become captured by the corporate community, and have internalised corporate norms, for instance in their understandings of the legitimacy of the claim for ‘regulatory takings’.
For critics of ISDS, this suggests that while formally neutral, the panels are actually more likely to find in favour of the corporate litigant. This is not completely borne out by the evidence which shows states often winning cases, although this proportion does not hold for lesser developed states who are more likely to lose or comprise with an early settlement.
Nevertheless, ISDS retains its potential for corporations to constrain states’ policy changes that are disadvantageous to them, whatever the reason for the policy shift, even if it does not always end that way.
Is Investor State Dispute Resolution un-democratic?
For many environmentalists and others, ISDS is anti-democratic as it allows corporations to try to exact damages for policy changes that in a democracy, have been voted on. However, to some extent, it might be argued that investors, like any other social groups should have a mechanism by which any damages they experience from policy change can be assessed and if necessary, compensated for.
Rather, where the anti-democratic character of ISDS is really located is in the privileged position that it puts investors. Corporations are essentially representatives of a collective interest, that is of the shareholders.
However, other collective representational groups from unions to civil society organisations have no similar legal-like mechanism for holding policy makers to account, nor have access to this specific specialised institution. Moreover, none of these other groups have established an effective right to have their future expectations protected as if it was a property right, as corporations have through the norm of ‘regulatory takings’.
Certainly in the UK, judicial review has been used by organisations like the Good Law Project to try to seek review of adverse policy effects, but this is hardly the same. It is also likely that corporations gain from ISDS – not in its use, but in the chilling effect it may have on some governments, fearful of expensive legal action that may happen if policy adversely impacts corporate expectations.
What ISDS represents is a window on how states have either facilitated, or been forced to facilitate, an expansion of the rights of corporations. It now remains to be seen whether the UK civil service’s relaxed view of ISDS under the new CPTPP is correct.
Critics fear that with the CPTPP, ISDS in the shadows, the UK Government will continue to be less willing to establish environmental protections or maintain current standards on imported foodstuffs that may compromise the profitable activities of large, multinational corporations.