Academic journal article Business Law International

Bringing the Home State Back In: The Case for Home State Control in Investor-State Dispute Settlement

Academic journal article Business Law International

Bringing the Home State Back In: The Case for Home State Control in Investor-State Dispute Settlement

Article excerpt

Since the inauguration of President Donald Trump, the United States has withdrawn from the Trans-Pacific Partnership (TPP), started the renegotiation of the North American Free Trade Agreement (NAFTA) and largely abandoned a possible Transatlantic Trade and Investment Partnership (TTIP) with the European Union.1 This policy reversal may have been primarily motivated by a shifttowards protectionism, but the investor-state dispute settlement (ISDS) provisions of these treaties have also been targeted by the Trump administration. Leading Democrats have also identified the ISDS provisions of TPP and TTIP as key grounds for their shared antipathy towards these treaties.2

This debate extends well beyond the borders of the US: ISDS was the main stumbling block to the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). That treaty was only saved after its ISDS provisions were excluded from the treaty's provisional application.3 These provisions will need ratification by individual EU Member States if they are to enter into force.

The increase in global protectionism and the growing hostility to ISDS has prompted two different responses by states seeking to address ISDS critics while at the same time preserving investment protections. The first approach is to elaborate more detailed, carefully balanced substantive standards of investment protection in order to enhance the regulatory autonomy of host states. The second approach focuses on the procedural aspects of ISDS, moving it away from an international commercial arbitration model and towards a model based on permanent tribunals, more akin to adjudication under the World Trade Organization (WTO) treaties.

Both of these approaches to ISDS reform have some merit and serve to address common criticisms of ISDS. However, neither set of reforms addresses the central challenge to the legitimacy of ISDS as it currently exists, namely the perception that it grants distinct rights to foreign investors that extend beyond those of nationals of the host state. Critics of ISDS may exaggerate the risk of 'regulatory chill' or the potential for arbitrator bias, but they are correct to point out that access to the ISDS system is only available to those who satisfy foreign nationality requirements and that international law standards of protection may be greater than those available to nationals under the host state's constitutional or administrative law (in some situations).

These key features of ISDS reflect the fact that international investment law originated in state-to-state disputes and the law of diplomatic protection. Once investment disputes are understood as fundamentally derivative of inter-state disputes, then it is no longer surprising that they are adjudicated outside the host state's courts by applying international standards. However, the current model has effectively 'privatised' the home state's role when investment disputes arise. The authors believe that providing a greater role for home state control of ISDS may emphasise the fundamentally inter-state nature of these disputes and thereby bolster the legitimacy of ISDS, albeit at some cost to investor certainty and predictability in terms of whether its home government will support dispute resolution in a particular situation. The existing provisions dealing with expropriation by taxation measures in NAFTA and other treaties may serve as a model for this type of reform. These provisions require foreign investors to provide home state authorities with notice of treaty claims and to give them the opportunity to resolve these claims jointly with host state authorities prior to recourse to investor-state arbitration.

The discussion below begins by reviewing the current state of investment treaty making and the main approaches to ISDS reform that states have undertaken. We then examine the critique that ISDS grants special rights to foreign investors in light of the history of the law of diplomatic protection and the pre-ISDS international regime. …

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