Demystifying Investor-State Dispute Settlement (ISDS)

Investor-State Dispute Settlement, a legal provision in Bilateral Investment Treaties (BITs) or other International Investment Agreements that gives investors a right to call for arbitration with a state, has recently become the centre of controversy in a debate over the Transatlantic Trade and Investment Partnership (TTIP). Critics argue that such a provision is either illegitimate, unnecessary, and/or does not have any positive influence on flows of Foreign Direct Investment (FDI). More radical critics argue that ISDS is a provision that allows big companies to sue governments when they have made democratic choices with negative con- sequences for companies.

This study surveys the recent decade of ISDS activity. It concludes that the number of ISDS cases has continued to grow, and that the growth is concentrated to certain sectors with a high degree of government involvement or political patronage.

– Based on the ISDS data, it is clear that investors in the European Union are by far the most active users of ISDS. EU countries have many more BITs with ISDS than for instance the United States. EU investors represent more than half of the entire complaints filed at inter- national investment tribunals in the past decade.

– ISDS cases are often settled in advance of a ruling. It is a mechanism to facilitate an ordered settlement of a dispute and represents a preference for settlements between the parties rather than tribunal rulings. Twice as many cases that end with a tribunal ruling are won by the state than the investor. The number of known ISDS cases in the past ten years that ended with a tribunal ruling in favour of the investor is no more than 16.

– The typical ISDS case is between a developed-country investor and a developing-country government. There is a correlation between the number of disputes and a legal system’s capacity to facilitate dispute resolution, or the quality of the legal and regulatory regimes. There has been no ISDS case between the United States and an EU-15 country, but a handful of cases between a U.S. investor and the countries that joined the EU in the 2000s.

– Economic research gives support to the argument that investment-protection agreements help to promote FDI. The effect is unlikely to be strong because there are far more important determinants of FDI, such as investment market access.

– The choice of the EU to favour a new collective BIT with the United States or not is likely to have systemic consequences. If EU member states withdraw from their existing BITs, which is the logical conclusion from a good part of the criticism, the consequences are likely to be far stronger. The competitiveness of EU investors in third countries, especially in sectors with high government involvement, is likely to be damaged.