Law as part of the problem? Social (in)justice in
Investor State Dispute Settlement
HANNA DOHLE 10547118
DOHLE.H@GMAIL.COM
INTERNATIONAL TRADE AND INVESTMENT LAW INGO VENZKE July 16th 2020 WORD COUNT: 12729
INDEX
1 INTRODUCTION ... 3
2 SOCIAL JUSTICE ... 6
2.1 THEORY ... 6
2.2 SOCIAL JUSTICE IN INTERNATIONAL INVESTMENT LAW ... 7
3 INTRODUCTION TO INVESTOR-STATE DISPUTE SETTLEMENT ... 12
3.1 HISTORY ... 12
3.2 ISDS TODAY - FACTS AND FIGURES ... 15
4 SOCIAL (IN)JUSTICE WITHIN THE FOUNDATION AND SYSTEM OF ISDS ... 16
4.1 DRAFTING TREATIES ... 16
4.2 POSITION OF DEVELOPING COUNTRIES ... 18
4.3 COSTS OF ISDS ... 19
4.4 FOREIGN DIRECT INVESTMENT ... 21
5 SOCIAL JUSTICE AND THE RIGHT TO REGULATE IN ISDS ... 23
5.1 AUTHORITY ... 23
5.1.1 HUMAN RIGHTS LAW IN ISDS ... 24
5.2 THE EFFECT OF AWARDS ON THE RIGHT TO REGULATE ... 25
5.2.1 NON-PECUNIARY MEASURES ... 26
5.2.2 PECUNIARY MEASURES ... 28
5.2.3 REGULATORY CHILL ... 28
5.3 INDIRECT EXPROPRIATION ... 29
6 SOCIAL INJUSTICE THROUGH ISDS PROCEDURES ... 31
6.1 ARBITRATORS AND COUNSELS ... 31
6.2 PROCEDURAL LIMITS ... 33
6.2.1 CAN A STATE “WIN” ISDS PROCEEDINGS? ... 33
6.2.2 DOMESTIC VERSUS FOREIGN INVESTORS ... 33
6.2.3 LACK OF TRANSPARENCY ... 34 7 CONCLUSION ... 35 8 BIBLIOGRAPHY ... 37 8.1 DOCTRINE ... 37 8.2 CASES ... 42 8.3 REPORTS ... 43 8.4 NEWS SOURCES ... 43
1 INTRODUCTION
After years of occurring in relative secrecy, discussions regarding the system of Investor-State Dispute Settlement have moved to the public arena in the last couple of years. The negotiation of comprehensive trade deals like the Comprehensive Economic and Trade Agreement (CETA) and the Transatlantic Trade and Investment Partnership (TTIP) was met with widespread protests, occasionally even specifically focusing on Investor-State Dispute Settlement (ISDS).1 The protests often consisted of factual misconceptions and some
fearmongering due to the simplification of a rather complicated system. However, there are also valid concerns about this procedure in which investors are able to directly sue a state without first accessing domestic remedies. ISDS has been an issue of concern in academia for much longer, and for good reasons. The system was first lauded as the solution to all investors’ concerns that would provide them with access to justice while increasing the Foreign Direct Investment (FDI) in developing states. However, as this thesis demonstrates, ISDS was primarily meant to protect property rather than to be fair to all parties involved. Many developing states were convinced to agree to ISDS clauses because the situation was presented to them as a win-win scenario, but there seems to be a severe imbalance between the wins on the two sides.
This thesis aims to prove that far from all of the promises made by developed countries have come true, and ISDS even has become somewhat of a win-lose scenario. While the investors have received a very beneficial position, developing states have received the shorter end of the stick. The solution to this imbalance is often sought in the effects of ISDS, but the entire foundation of ISDS is potentially socially unjust. Social justice is often considered more relevant to academic fields like sociology, philosophy, and political science, and the legal community in particular tends to think this way. It is often overlooked that the law can be a significant driver of social injustice and is regularly at the heart of the issue. This especially resonates within the system of ISDS.
1 Henry Farrell, 'People Are Freaking Out About The Trans Pacific Partnership’s Investor Dispute Settlement
System. Why Should You Care?' The Washington Post (2015)
<https://www.washingtonpost.com/news/monkey-cage/wp/2015/03/26/people-are-freaking-out-about-the-trans-pacific-partnerships-investor-dispute-settlement-system-why-should-you-care/> accessed 17 June 2020.
The main research question for this thesis is therefore whether and in what ways ISDS causes social injustice. This is explored by first defining social injustice within the broader concept of international economic law, after which the definition is narrowed to the concept within investment law. Reiner Forst’s theory on social justice and how justification lays at the heart of this is the leading theory in the understanding of social justice in this thesis. This theory is followed by a short assessment of how ISDS began in order to clarify the origin of the issues. In Chapter 4, the structural problems within ISDS are assessed followed by an examination of the effect of ISDS on the policy goals of developing states and the procedural limits to ISDS that can cause social injustice. This thesis does not aim to prove that ISDS is without any benefits but rather that the structural problems are significant enough to necessitate a critical re-examination of the future of the system. Since reform proposals for the future of this system warrant the length of another thesis it is chosen to have the assessment of this fall out of the scope of this thesis.
The research question at hand is of a normative character and is answered through an external approach of international economic law. As Ingo Venzke writes, “understanding law as part of the problem does not turn lawyers into social scientists.”2 This idea resonates here because the
assessment of social justice using different theories does not mean that one has strayed to another academic discipline. This kind of assessment is crucial to the quality of international economic law. The focus is on the principles of justice within the system and foundation of ISDS and is inspired by Aarons James’ structural equity approach to social justice within the law.3
In this thesis, ISDS is discussed in the wider context of International Investment Agreements (IIAs), often without focusing on specific Bilateral Investment Treaties (BITs) or comprehensive trade agreements. The ISDS clauses and their applications are often very similar with only different prerequisites. In practice, these prerequisites can often be bypassed by the Most Favored Nation clause in the same IIAs and are therefore not discussed further in this thesis. Additionally, this thesis attempts to demonstrate the issues using the structure of ISDS as a whole and consequently tries not to limit the analysis to only the procedural rules of the
2 Ingo Venzke, International Law And The Spectre Of Inequality (607th edn, University of Amsterdam 2019), p.
22.
3 Aaron James, ‘Global Economic Fairness: Internal Principles’ in Chi Carmody, Frank J Garcia and John
Linarelli (eds), Global Justice and International Economic Law: Opportunities and Prospects (Cambridge University Press 2012), p. 78.
International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL), and other institutions. Specific clauses and incidents of these procedural rules are of course mentioned but are not the main focus of this thesis. Finally, it is important to specify the usage of the terms “developing” and “developed” countries, which are often employed in this thesis. This thesis adheres to the classifications of countries by the United Nations (UN) in a 2019 statistical index, and the term “developing countries” covers both developing countries and transitioning economies.4
4 United Nations, 'World Economic Situation And Prospects 2019: Statistical Index' (2019) http://World Economic Situation and Prospects, p. 169-170.
2 SOCIAL JUSTICE
The legal academic community has a tendency to neglect international economic law in its search for solutions to create a more socially just world. It is often forgotten or not realized that international economic law is a key component of the solution, but more than that, it is often the problem. Law is often considered an independent driver and something that is automatically just without the recognition that this law is often created by flawed (international) power structures.
2.1 THEORY
To examine ISDS in the light of social justice, it is first important to understand what social justice is. Social justice is a broad and vague term with a rather normative nature. What justice is and how it is measured differs for almost everyone. As a result, several legal and political philosophers have developed critical theories that have attempted to define the essence of the term using a wide range of approaches and interpretations. These interpretations vary from strict egalitarianism to John Rawls’ alternative distributive principle (the difference principle) with the luck egalitarianism doctrine somewhere in between.5
Rawls is one of the best-known philosophers who describe the meaning of justice. In his theory of social justice, Rawls argues that social justice encompasses a “proper balance” between people’s basic rights and duties and examines this balance using the criteria that no arbitrary distinctions should be made.6 Many later scholars have adhered to this famous theory. However,
this thesis has chosen not to follow this definition but has instead chosen to follow the more recent definition developed by the German philosopher Rainer Forst.7 This definition was
developed and discussed within the context of Forst’s critical theory in transnational (in)justice. For Forst, social justice exists when there is a justification for an imbalance between the conflicting rights and claims of two persons.
Forst’s theory differs from Rawls’ in that Forst maintains that the relevant criteria for measuring the aforementioned balance between the claims of rights and duties of different persons should
5 Julian Lamont and Christi Favor, 'Distributive Justice', The Stanford Encyclopedia of Philosophy (Winter 2017
edn, Metaphysics Research Lab, Stanford University 2017).
6 John Rawls, A Theory Of Justice (rev edn, Oxford University Press 1999), p. 5.
7 Rainer Forst, 'A Critical Theory Of Transnational (In-)Justice: Realistic In The Right Way', The Oxford
not be arbitrary. In Forst’s critical theory, this proper balance is instead measured by its reciprocal and general justifiability.8 Forst finds the roots of social justice in whether the
difference between two claims has a justification and measures this balance by the criteria of reciprocity and generality. Forst defines reciprocity and generality as follows:
That one may not make a claim on others within a context of justice that one is not willing to grant all others (reciprocity of claims); and they mean, furthermore, that the justification of such claims has to be conducted in a normative language that is open to all and is not determined by just one party (for example, by a religious majority) and that no party may impose its own contestable notion of justified needs or interests on others who could reasonably reject it (reciprocity of reasons). Generality means that no one subject to a normative order must be excluded from participation in the justificatory discourse.9
Based on this explanation, Forst’s definition of social justice can be seen as not strictly egalitarian but does encompass some form of equality. As the quotation above indicates, the examination of whether the balance between two claims can be justified in Forst’s theory is threefold and encompasses reciprocity of claims, reciprocity of reasons, and generality. Forst’s theory is constructivist but specifically aims to be both theoretical and realistically applicable in practice.10 In his theory, an imbalance between two claims that cannot be justified
results in the claim from one person or state being subjected to the claim of the other person or state, which results in domination by the latter.
The application of this definition of social justice and its meaning in the light of international investment law are assessed in the next section.
2.2 SOCIAL JUSTICE IN INTERNATIONAL INVESTMENT LAW
To apply the previously mentioned definition of social justice to international investment law, it is first important to examine between whose claims a balance of rights and duties can be struck. In other words, who are the relevant actors who can make such claims within
8 Ibid., p. 454. 9 Ibid., p. 455. 10 Ibid., p. 451.
international investment law? Forst argues that within transnational justice, three dynamics of domination can be distinguished in which the relevant actors for social justice can be found.11
These are domination within states, between states, and beyond states. The relevant actors here are of course states but also individuals and international organizations. Frank Garcia comes to the same conclusion regarding the applicable actors.12 The specifics of these actors are
discussed later in this chapter, but it is important to have these three actors in mind when applying Forst’s theory within international economic and investment law.
As explained earlier, Forst bases his theory of social justice on whether justification exists. The criteria to examine a proper balance between two claims (which is needed for a valid justification) are threefold and consist of reciprocity of claims, reciprocity of reasons, and generality. These criteria are employed throughout this thesis to determine the existence of justification, but they are first discussed further in the context of international investment law. First, reciprocity of claims means that one state or person may not require another state or person to do something that infringes on their rights or duties that that state or person is not willing to do themselves for that state or for other states. This is a very relevant issue within the conclusion of IIAs. Second, reciprocity of reasons entails that that the discussion of the justification of these claims must be discussed in a normative language that everyone it applies to could have a say in. It also specifically includes that one party cannot unilaterally make the determination and impose its will on others. This can be applicable to groups within a state but also between states when concluding IIAs or within the framework of international organizations. The third and final criterion is generality, which means that no one affected by the normative order should be excluded from the possibility of participating in the discussion about the justification. This last criterion is related to the moral idea that every human being (or state) should receive the dignity to be an “equal normative authority” when they are affected.13
As Forst explains, “no one should be subjected to a normative order in which he or she has no standing as a justificatory equal.”14 This does not entail that the opinion of every individual
involved should always be asked but rather that every individual should have a chance for representation when affected, such as through democracy or another form of representation.
11 Ibid., p. 466.
12 Frank Garcia, 'Theories Of Justice And International Economic Law', Research Handbook On Global Justice
And International Economic Law (Edward Elgar 2013), p. 31.
13 Forst (n7), p. 460. 14 Ibid.
The applicability of different actors was briefly discussed earlier and is now discussed further. States are very common actors within international investment law, and Forst sees the state as the most important factor in combatting global injustice.15 However, as both Forst and Garcia
note, this directly poses a significant problem. In the criteria discussed earlier, especially relating to reciprocity, some form of equal standing is required for justification in order for a state not to impose its own will on others (domination). However, as Forst explains, “the more powerful states often use their position to prevent the construction of more emancipatory political structures.” Actors like the US, China, and the EU regularly use their influence, wealth, and (military) power to ensure their demands are met without agreeing to similar demands. Moreover, their prevention of structural changes in this area is especially problematic.
States not only misuse their power to prevent the development of emancipatory power structures in their relationship with other states; this is also an issue in the structures of international organizations and individual states. Forst warns of the systematic issues that may persist in the roots of these structures and cautions against justifications by these flawed structures that may “structurally reproduce the social asymmetries and forms of power that define a given normative order.”16 This is especially considered in Chapter three.
Actors can also include individuals. In this thesis, the term “individuals” covers both investors (or investor companies) and members of the general public. As the subsequent chapters indicate, the former have a very special position within investment law. In contrast, the latter has a significantly less beneficial position within investment law and ISDS, leading to issues with the criteria of generality. Every state has groups that are underrepresented in their democracy or other form of governance with various degrees of seriousness and abilities to achieve a form of representation. Garcia explains that this is a significant issue in Central American states, where in the last century multiple governments have consisted of rich political elites with very little representation of the working class.17 However, underrepresented groups
in society also exist in developed states such as the US and the Netherlands. Forst also refers to
15 Ibid., p. 466. 16 Garcia (n12), p. 31. 17 Ibid.
Uma Narayan’s theory of multiple domination, where the domination an individual experiences does not have to be on only one level.18
The last factor that must be discussed here are the rights and duties referred to earlier in the context of a justified balance. The rights and duties in international investment law consist of multiple elements, and it is important to clarify what they consist of. These rights and duties can be seen as a resource that international investment law then distributes. Garcia describes three different ways in which IIAs allocate resources.19
[1] IIAs allocate rights, privileges, and burdens between investors and host countries regarding, for example, the establishment and operation of a foreign investment, minimum standards of treatment, the right to regulate, and dispute settlement. [2] IIAs impact the allocation of rights, privileges and burdens among a range of stakeholders within host countries, including government, domestic capital, foreign capital, producers, consumers, and citizens. [3] Finally, IIAs influence the global allocation of investment capital, a socially produced resource.20
Garcia thus identifies that the allocations of rights, privileges, and burdens between states are also forms of allocation of resources. The allocation of capital, the monetary element, is also an element, but it is far from the sole element. At the same time, acknowledging all these possible different resources that investment law can allocate means realizing that currently, all these resources can potentially be allocated in an unjust way. This is what the rest of this thesis explores, and this is why Garcia states that investment law is inherently about justice.21
It is important to realize that this definition of these resources also includes that for social justice within international economic law, countries are able to pursue legitimate public policy goals in order to protect their inhabitants, through their right to regulate. This can include policy goals to protect health, the environment, or human rights. This is again connected to equality, because more often than not, these goals serve to protect the weaker and underrepresented groups in
18 Uma Narayan, 'Essence Of Culture And A Sense Of History: A Feminist Critique Of Cultural Essentialism'
(1998) 13 Hypatia.
19 Frank Garcia, ‘Investment Treaties are About Justice’ (FDI Perspectives no.185, Columbia Law School 2016),
p. 2.
20 Ibid. 21 Ibid.
society.22 In particular, developing countries have been working on the installment of
regulations with these public policy goals in recent years. When international economic law hampers these efforts, it results in a lack of a justification in the balance of rights within a state and between states, because developed states have often been able to install similar regulations prior to the usage of ISDS.23 James calls this form of social justice “structural equity.”24
22 James (n3), p. 78. 23 Ibid.
3 INTRODUCTION TO INVESTOR-STATE DISPUTE SETTLEMENT
ISDS is a relatively new phenomenon within international investment law. Forst explains that understanding the history is crucial when examining justice.25 This is especially relevant since
systematic injustices are often reproduced through time, and a flawed power structure at the origin of international investment law can result in the continued inclusion of socially unjust structures in new treaties and institutions. This chapter assesses how international investment law and ISDS came to exist in order to develop a sufficient background for understanding the social justice issues in ISDS today. The chapter ends with a brief overview of some facts and figures about ISDS today to outline the current situation for the subsequent chapters.
3.1 HISTORY
Cross-border investment has existed for several centuries. In the 18th century, several states
concluded friendship, commerce, and navigation treaties, which included limited clauses on protection.26 However, the focus was more on the protection of property and thus trade than
that of capital, so investors still had little protection.27 Customary law offered some help, but
states often disputed the existence of a relevant norm. It was especially disputed that under customary law, an international minimum standard for the protection of investors existed. This international minimum standard especially attracted fierce opposition from Latin American states, which developed the Calvo doctrine in response.28 This doctrine entailed that states
would never be obliged to provide better treatment to foreign investors than the treatment afforded to domestic investors.29 Additionally, Latin American states developed the Drago
doctrine, which stated that foreign investors would be allowed no form of force to recover debt.30
Most BITs in the 19th and for most of the 20th century only provided recourse for investors
through state-to-state dispute resolution.31 This practice is called diplomatic protection or
25 Forst (n7), p. 19.
26 Kenneth Vandevelde, 'A Brief History Of International Investment Agreements' (2013) 12 U.C. Davis Journal
of International Law & Policy, p. 159.
27 Ibid.
28 Amos S. Hershey, 'The Calvo And Drago Doctrines' (1907) 1 The American Journal of International Law, p.
26.
29 Ibid. 30 Ibid, p. 29.
espousal. The home state of an investor would be able to take over an investor’s claim and negotiate with the host state or file a claim with the International Court of Justice (ICJ) in cases where the ICJ had jurisdiction. The investor could also try to negotiate a settlement with the host state’s government or file a suit in the domestic courts of the host state.32
The options above generally provided little solace for an investor. For espousal, the investor was dependent on the will of the government in its home state. Governments were not often willing, especially when the claims of an investor involved relatively little money or if the home state was wary of getting involved in a diplomatic conflict with a powerful state. Even when the home state was willing to litigate on behalf of the investor, the chances of winning a case were relatively low.33 Any awards that were won were also won by the home state, and it was
often uncertain whether the investor would receive any of this. Additionally, domestic courts in developing states often had limited independence and could be biased toward the state. In negotiations, the investor was at the mercy of the state’s willingness to enter such negotiations.
As a result, capital-exporting states sought to develop a framework to protect their investors. International investment law was thus developed, which originally sought to protect property in developing countries. The idea behind international investment law was not necessarily that a justified balance should be found that was fair for everyone but that the foreign property needed to be protected and that that would benefit everyone in the end.34 The focus on
protection of property was later changed to a focus on the protection of investments in general.35
While the protection of investments was the foremost goal of investment law, it was a widespread belief that FDI would benefit developing countries as well and that investment law was thus beneficial for everyone. In a speech, President Truman directly linked increased development to foreign investment and saw FDI as the ultimate solution to poverty.36
ISDS was first introduced in the 1960s, but the default solution remained interstate dispute settlement, even in IIAs. The World Bank established the ICSID in 1966. However, it was not
32 Christian Tietje for the Minister for Foreign Trade and Development Cooperation, Ministry of Foreign Affairs,
The Netherlands, 'The Impact Of Investor-State-Dispute Settlement (ISDS) In The Transatlantic Trade And Investment Partnership' (2014), p. 26.
33 Ibid.
34 Andrea Leiter, 'The Silent Impact Of The 1917 Revolutions On International Investment Law: And What It
Tells Us About Reforming The System' (2017) 6 European Society of International Law - ESIL Reflections, p. 2.
35 Ibid. 36 Ibid., p. 3.
until the 1990s that ISDS became commonly included in BITs.37 Before this, arbitration was
already included in private contracts (not treaties), especially surrounding large oil deals.38
ICSID was no judicial or arbitration facility itself but provided institutional and procedural support to ad hoc tribunals. UNCITRAL developed a similar model. This was all done under the pretext that ISDS would increase FDI and that FDI would lead to increased development. However, this was never the main goal of these institutions; the focus was on protecting capital from capital-exporting countries. As Kate Miles explains, the goal of the initiators was “to maintain the level of investor protection that had been built up during the colonial area.”39 Many
of the capital-exporting states had been colonizers, and in colonial times they had been able to extensively protect their investors. Miles states that these colonial structures have been reproduced in ISDS, which is similar to the issues with structural injustice reproduced by original flawed power structures that Forst discusses.
Overall, the advantages for states and investors when employing ISDS were clear. Capital was protected and the process became depoliticized, ensuring that a state could avoid diplomatic confrontation. David Gaukrodger and Kathryn Gordon write that from this perspective, the change to ISDS could “be viewed as a progressive institutional innovation inasmuch as it helped to reduce sources of international tension and recourse to military force.”40 Investors were
provided with a mechanism through which they could independently enforce substantive rights.41 It allowed them to maintain ownership themselves and to circumvent possibly biased
domestic courts. Unlike other mechanisms in other parts of international law, ISDS does not require that domestic remedies be exhausted. Finally, ISDS allowed investors to potentially acquire extremely large monetary awards, which were directly awarded to them.42
Currently, the legal basis for ISDS is scattered and decentralized. Due to the lack of multilateral treaties, the substantive provisions can vary per BIT, of which there are now almost 3,000. The
37 Julia Calvert, 'Civil Society And Investor–State Dispute Settlement: Assessing The Social Dimensions Of
Investment Disputes In Latin America' (2017) 23 New Political Economy, p. 48.
38 Brooke Guven, 'PPPs And ISDS: A Risky Combination'
<https://investmentpolicy.unctad.org/blogs/65/ppps-and-isds-a-risky-combination> accessed 10 July 2020.
39 Kate Miles, The Origins Of International Investment Law: Empire, Environment And The Safeguarding Of
Capital (Cambridge University Press 2013), p. 88.
40 David Gaukrodger and Kathryn Gordon, 'Investor-State Dispute Settlement: A Scoping Paper For The
Investment Policy Community' (OECD Publishing 2012), p. 9.
41 Tietje (n32), p. 22.
existence of international conventions like ICSID provides limited help, because they only consist of procedural provisions.
3.2 ISDS TODAY - FACTS AND FIGURES In the last 30 years, the number of cases in which investors chose to resort to ISDS grew exponentially. In 1996, 38 cases were registered at ICSID. By 2019, 745 known cases had been registered at ICSID.43 The Transnational
Institute (TNI) reported that 151 known cases in 2009/2010 involved investors demanding an
award of over 100 million US dollars.44 There Figure 1. Most frequent respondent states in 1987–
is a significant discrepancy between the states 2018 (number of known cases).45
the investors in ISDS proceedings originate from and the respondent states. This is clearly demonstrated by Figures 1 and 2, which were prepared by United Nations Conference on Trade and Development (UNCTAD) in their 2019 report on ISDS cases.46 The same report
found that in 2018, only 29 of at least 50 ISDS decisions were made public.47 Out of these 29,
almost 70% were decided in favor of the investor. Figure 2. Most frequent home states of claimants in It is interesting to note that the balance is more 1987–2018 (number of known cases).48
equal when considering decisions on the basis of jurisdiction, but when the decision is made on the merits of the case, investors win significantly more often.49
43 The ICSID Caseload – Statistics (Issue 2020-1), https://icsid.worldbank.org/en/Documents/resources/The
%20ICSID%20Caseload%20Statistics%202020-1%20Edition-ENG.pdf
44 Pia Eberhardt and Cecilia Olivet, Profiting From Injustice: How Law Firms, Arbitrators And Financiers Are
Fuelling An Investment Arbitration Boom (Corporate Europe Observatory and the Transnational Institute 2012), p. 7.
45 UNCTAD, 'Fact Sheet On Investor–State Dispute Settlement Cases In 2018' (2019), p. 2-3. 46 Ibid.
47 Ibid., p. 4. 48 Ibid, p. 2-3. 49 Ibid., p. 5.
4 SOCIAL (IN)JUSTICE WITHIN THE FOUNDATION AND SYSTEM OF
ISDS
4.1 DRAFTING TREATIES
When discussing the legitimacy of public authority within international investment law, Joana Mendes and Ingo Venzke elucidate that the question of public authority is not only how substantive balances within the law are struck but moreover who has the authority to do so.50
This question is applicable on many levels, but especially when drafting an IIA. While in theory all countries are sovereign and equal on the international stage, the reality is often different. Rich and powerful states have a completely different level of bargaining power than developing states do.51 Many of the BITs drafted earlier in the last century have significant traces of
colonialism that clearly demonstrate an unequal bargaining power between two countries.52
This is especially visible in BITs drafted in those times between European states such as Germany, the United Kingdom, or the Netherlands and Central African countries.53 However,
this is not only an issue of the past; Howard Mann wrote at the beginning of this century that he sees the new IIAs as the new form of colonialism in which developing states are bound to rules in favor of rich states and rich investors from these states.54
Garcia explains that when concluding trade and investment agreements, the role and depth of consent of states must be taken very seriously. Both states should completely understand what they are agreeing to, the agreement must be completely voluntary, and the agreement should focus on providing gains for both states involved. Garcia goes on to explain that “[w]ithout consent, agreements structuring economic exchange will be a form of oppression, or worse, predation, which cause systemic disadvantages to certain players.”55 However, even when there
is consent, structural power imbalances can result in an unjust situation. Skidmore and Smith describe how the United States has used its unparalleled bargaining power to restrict the
50Joana Mendes and Ingo Venzke, 'Introducing The Idea Of Relative Authority' in In J. Mendes & I. Venzke
(Eds.), Allocating Authority: Who Should Do What in European and International Law? (Hart Publishing 2018), p.1.
51 Garcia (n12), p. 31. 52 Ibid., p. 41
53 Ibid.
54 Howard Mann, 'International Investment Agreements: Building The New Colonialism?', Proceedings of the
Annual Meeting (Cambridge University Press on behalf of the American Society of International Law 2003), p. 248.
opportunities of states in Latin America and to protect the United States’ economic access to these countries.56 The effects of these restrictions are massive and severely hamper the
economic development of these countries.
This consent is not only an issue between two states. To properly understand the depth of the consent, it is also important to realize whether the authorities of a country properly represent their people.57 This is an important question for every state. It cannot be automatically assumed
that in states like the US all groups are properly represented, let alone in states with a severe lack of democracy.58 For proper consent it is not necessary or possible for every group in a
society to be satisfied with the agreement, but there must be some form of representation available to these groups. In states where the government consists of a very elite layer of society and where the needs of the rest of society are barely taken into account, proper consent to these agreements cannot truly exist.
Another issue with the drafting of IIAs is who has access to the negotiations of the agreements. The negotiations are generally a rather opaque and secretive process. It is a common complaint from civil society groups that they are unable to join in any part of the drafting process and are thus unable to exert any influence over the agreement.59 This connects directly back to the
underrepresentation of several societal groups addressed above. Civil society commonly aims to specifically protect these groups, and their lack of inclusion is one of the reasons for the underrepresentation of the needs of these groups in IIAs.
However, it is not only a question of who is not included in the negotiations and the drafting but also of who is included. During the (ultimately failed) negotiation of the Free Trade Area of the Americas Agreement, a trade agreement that also included a chapter on investment, more than 500 corporate representatives (lobbyists) for the US alone had security clearance and access to the documents and the building where the negotiations took place.60 It is not absurd
to assume that if the Agreement had been concluded, the presence of these corporate lobbyists
56 Thomas E Skidmore, Peter H Smith and James Naylor Green, Modern Latin America (8th edn, Oxford Univ
Pr 2014), p. 6.
57 Garcia (n12), p. 31. 58 Ibid.
59 Calvert (n37), p. 50.
60 Maude Berlow, 'Free Trade Area Of The Americas And The Threat To Social Programs, Environmental
Sustainability And Social Justice In Canada And The Americas,' [2001] Institute for Agriculture and Trade Policy, p. 3.
would have had a substantive effect on the benefits for corporate America. This unequal position in the conception of these treaties resulted in a socially unjust balance, especially for underrepresented groups and developing countries.
4.2 POSITION OF DEVELOPING COUNTRIES
The previous section introduced the often less-than-beneficial position of developing countries. The political theory of path dependency can also be applicable to the systematic problems with IIAs and ISDS specifically.61 This theory explains that the institutional paths laid out for
developing countries are often determined by the past.62 Developed countries have generally
followed a similar path in the past, but in a different time period. Developing countries then commonly have no choice but to follow this path even though the path may now be much more restrictive than it was for the developing countries, and it may be far from the best path for developing countries to take.63 This path dependency is aggravated by the unequal position of
developing states in the drafting of the agreements.
This unequal position is often prevalent in the conclusion of IIAs. Developing countries are strongly encouraged by the developed nations to enter into these agreements by promises of high levels of FDI originating from the developed nations. The developing countries often have no choice but to accept ISDS clauses that in practice are only used to their disadvantage.64 A
2019 report by UNCTAD shows that the majority of new cases were brought against developing countries and that almost all the investors originated from developed countries.65 It is not
surprising that a report by the Dutch Ministry of Affairs is relatively mitigating and nonchalant about the negative effects of ISDS, especially since it goes on to state that Dutch investors are responsible for 10% of all worldwide ISDS claims.66 The UNCTAD report also notes that the
US, the Netherlands, and the UK are also home to the investors with the highest demands for awards.67 As discussed later, states cannot win ISDS proceedings; they can only not lose. The
fact that cases where an investor originating from a developing country begins ISDS
61 Taylor St. John, The Rise Of Investor-State Arbitration: Politics, Law, And Unintended Consequences
(Oxford University Press 2018), p. 38
62 Paul Pierson, 'Increasing Returns, Path Dependence, And The Study Of Politics' (2000) 94 American Political
Science Review, p. 252.
63 Ibid.
64 Peter Drahos and John Braithwaite, Information Feudalism: Who Owns The Knowledge Economy (Earthscan
Publications 2002), p. 71.
65 UNCTAD, 'Fact Sheet On Investor–State Dispute Settlement Cases In 2018' (2019), p. 1. 66 Tietje (n32), p. 38.
proceedings against a developed state are very rare clearly demonstrates which states benefit from including ISDS clauses in agreements. Without proper justification, a severe disbalance in the allocation of resources, resulting in a socially unjust situation.
4.3 COSTS OF ISDS
ISDS was founded on the premise that it would make dispute settlement accessible to investors. At that time, the accessibility issue was based on the fact that investors were dependent on their home state to take up their claim in state-to-state settlement. Today, new issues of accessibility of ISDS have come to exist, mostly due to the high costs associated with the process.
The costs of litigation currently amount to $5 million on average per party.68 Approximately
16% of these costs are the costs of the ad hoc tribunal, 2% are fees for the institutional costs of institutions like ICSID and UNCITRAL, and the rest are legal costs.69 The latter are discussed
further in Chapter 6, but parties commonly have to pay their own legal costs. The tribunal costs are distributed in the tribunal in the end judgment, which often results in an equal split between the parties.70 As a result of the high costs, it is unlikely for an investor to initiate proceedings
when damages are “only” a couple of million dollars. At the same time, individuals and smaller enterprises can often not afford such costs, making the accessibility of ISDS proceedings doubtful. As a result, small enterprises and individuals instigate only 22% of known proceedings.71 It is possible to receive third-party funding to cover the costs of these
proceedings, but this generally only happens if there is a significant chance the investor might be awarded a high monetary award from the proceedings and the investor will often have to partly lose control over the strategy in the proceedings.
The high costs are not only an obstacle for investors. The high arbitration costs can also put a significant burden on developing states. It is not uncommon for developing states to have little ISDS arbitrational experience and limited in-house departments dedicated to the matter and for large investors to have resources several times greater.72 The larger firms with the most
arbitrational experience typically work for investors and for developed states, mostly because
68 Lise Johnson and Lisa Sachs, 'The Outsized Costs Of Investor–State Dispute Settlement' (2016) 16 Academy
of International Business Insights, p. 12.
69 Gaukrodger et al. (n40), p. 19. 70 Ibid.
71 Tietje (n32), p. 38.
their services are unaffordable for developing states.73 If a developing state does decides to fully
defend itself in fear of having to pay a high award, the costs can be enormous. The Philippine government has been reported to have spent almost $60 million in defending itself against Fraport, a German company.74 Even though Fraport lost both cases, the tribunal did not defer
any of the Philippines’ costs to Fraport. While imaginary examples are subjective and of little use, the examples in a report by the TNI do comprise a striking image: the same amount could have been used to pay 12,500 one-year teacher salaries or vaccinate almost 4 million children.75
In theory, third-party funding is also available to states. However, since states are unable to bring counterclaims, this is almost never profitable for a third party.76 Additionally, the state
would have to give up some of the control over the case and its planned strategy.77
Not only can the costs of arbitration be high for states, but also awards in ISDS almost always consist of pecuniary remedies. The awards won by investors can be substantive and can comprise a heavy burden for developing states. As stated earlier, The TNI reports that by 2009/2010, 151 cases involved investors demanding an award of over 100 million US dollars.78
The Swedish Energy company Vattenfall filed a claim against the German government for nearly €5 billion in damages.79 Even for a developed state like Germany, that is a very high cost
to bear. Recent research shows that Ecuador currently has several pending claims against it with a total amount of possible awards of over $13 billion.80 If all investors receive their demanded
awards, the total amount would constitute over 8% of Ecuador’s national Gross Domestic Product (GDP).81 Moreover, this $13 billion only includes public cases, and most cases and
outcomes of ISDS are not disclosed to the public.82 The arbitration costs are also not included,
and it was disclosed that Ecuador spent $156 million dollars on legal fees between 2003 and
73 Eberhardt et al. (n44), p. 20.
74 Diana Rosert, 'The Stakes Are High: A Review Of The Financial Costs Of Investment Treaty Arbitration' (The
International Institute for Sustainable Development 2014), p. 8.
75 Eberhardt et al. (n44), p. 15.
76 Frank Garcia and others, 'Reforming International Investment Law: Opportunities, Challenges, Paradigms'
(2018) 59 Boston College Law Review, p. 2900.
77 Ibid.
78 Eberhardt et al. (n44) p. 7.
79 Pietje Vervest and Timothé Feodoroff, 'Licensed To Grab: How International Investment Rules Undermine
Agrarian Justice' (Transnational Institute 2015).
80 Tim R Samples, 'Winning And Losing In Investor-State Dispute Settlement' (2019) 56 American Business
Law Journal, p. 148.
81 According to World Bank, Ecuador’s GDP in 2019 was $108 billion
,https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=EC>
2013 alone.83 In the Abaclat v. Argentina case, Argentina settled for $1.35 billion and spent an
additional $12 million on legal fees.84
4.4 FOREIGN DIRECT INVESTMENT
Since the promise of increased levels of FDI is often the reason developing countries conclude IIAs, it is useful to briefly evaluate the merits of this statement. After a 10-year inquiry, Lise Johnson and Lisa Sachs concluded that there is no strong evidence that IIAs or ISDS substantially impact FDI flows.85 Jason Yackee also carried out extensive research on the matter
and concluded that “BITs spur investment only irregularly, inconsistently, and with generally unassuming impact.”86 One of the possible reasons for this is that the scope of BITs may not be
sufficiently applicable to many investors. The protection against expropriation is one of the core elements of BITs but is often of limited concern to the average investor.87 Additionally,
Yackee found that most investors were not necessarily aware of the protection BITs and ISDS afford them and thus do not see them as a factor in their investment decision.88 Johnson and
Sachs also note that the lack of BITs or the exclusion of ISDS provisions in BITs between two states does not seem to hamper FDIs and even that “[s]ome of the largest cross-border investment flows take place in the absence of treaties.”89
At the same time, even if there is an increase of FDI, it is not necessarily beneficial to the receiving state. An increased level of FDI overall is not a useful measure for positive impact, as it is rather the contribution of FDI to the national development that is relevant.90 It is not rare
for the benefits of FDI to barely contribute to national development and only end up helping a select group, whether rightfully or through corruption. 91 At the same time, some investments
can cause much harm to the environment and society, especially in cases of natural resource mining.92
83 Ibid., p. 152.
84 Ibid., Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5 [2014]. 85 Johnson et al. (n68), p. 10.
86 Jason Webb Yackee, 'Do Bilateral Investment Treaties Promote Foreign Direct Investment - Some Hints from
Alternative Evidence' (2011) 51 Virginia Journal of International Law, p. 434.
87 Ibid.
88 Ibid., p. 427.
89 Johnson et al. (n68), p. 10.
90 Emma Aisbett and others, Rethinking International Investment Governance: Principles For The 21St Century
(Columbia Center of Sustainable Development 2018), p. 51.
91 Ibid., p. 3. 92 Ibid.
The fact that there can be substantive negative effects of FDI certainly does not mean this is always the case. FDI can assist in the development of a country, especially through employment opportunities, improvement to infrastructure, and tax revenue for the state. However, it is important to realize that the positive effects are not a given and vary by case. The grounds on which developing states are induced to sign treaties with ISDS clauses are therefore uncertain. The concept on which ISDS was founded, namely equal investment flows, is therefore flawed. Instead of creating an equal balance between developing states and developed states, the imbalance seems to be even greater than before, and there does not seem to be a valid justification for this. The unequal positions of the states results in a flawed reciprocity of claims and reasons, and developing states seem to have prioritized their needs over the needs of the developing states.
5 SOCIAL JUSTICE AND THE RIGHT TO REGULATE IN ISDS
As explained in the second chapter, the definition of social justice employed in this thesis is based on whether a justification of a difference in the balance between two claims of rights and duties exists. This balance is assessed using the criteria of reciprocity of claims, reciprocity of reasons, and generality. Garcia’s definition of rights and duties allocated in IIA also includes the right to regulate. This right includes the possibility to pursue legitimate policy goals. ISDS has been known to influence this right to regulate in several ways, which is the topic of this chapter. The chapter begins with a short assessment of authority followed by a discussion of how awards and the definition of expropriation can influence a state’s right to regulate.
5.1 AUTHORITY
The rest of this chapter serves to demonstrate how ISDS affects the right to regulate. However, it is important to first briefly examine the authority issues that surround ISDS and investment law. Hampering the right to regulate is intrusive and results in issues with domination and public authority. The issue with investment law is that it is very decentralized and lacks an overarching institution, and the grounds for public authority are therefore uncertain. As previously stated, this lack of an overarching institution has led to domination of developing states by developed states.
An additional complicating factor for the grounds of public authority is the uncertainty of the position of investment law and ISDS within international law. Not even all scholars agree that investment law is public international law.93 Armin von Bogdandy et al. explain that “the
exercise of international public authority is the adoption of an act that affects the freedom of others in pursuance of a common interest.”94 Since this is often the case, as is elaborated on
later, ISDS involves the exercise of international public authority. This poses legitimacy issues, because the decisions of ISDS tribunals can affect people not involved in that arbitration but lack a proper overarching public law framework. Stephan Schill argues that investment law has become public law but that ISDS has not yet become part of public law arbitration.95 He
93 Stephan Schill, 'The Public Law Paradigm In International Investment Law'
<https://www.ejiltalk.org/the-public-law-paradigm-in-international-investment-law/> accessed 5 July 2020.
94 Armin von Bogdandy, Matthias Goldmann and Ingo Venzke, 'From Public International To International
Public Law: Translating World Public Opinion Into International Public Authority' (2017) 28 European Journal of International Law, p. 117.
proposes that ISDS should be brought within this framework to remedy the legitimacy issues it poses. Von Bogdandy et al. seem to agree, because their solution to salvage the mistrust of individuals in the international public authority is to give ISDS a legal framework within the public law approach.96 Either way, the severe effect ISDS currently has on policy issues without
a proper public law framework poses generality issues in the justification, because in its current format there is a limited possibility for individuals and states to be equal normative authorities.
5.1.1 HUMAN RIGHTS LAW IN ISDS
One of the most problematic matters with tribunals impeding in the right to regulate without ISDS being in the framework of public international law is their disregard of other international law disciplines, most notably international human rights law. One of the most striking illustrative examples is the SAUR International SA v. Republic of Argentina ICSID case. The tribunal’s decision on jurisdiction and liability states,
[T]he public administration, which has special powers to ensure its enjoyment because of the sovereignty of the fundamental right to water; the exercise of these powers, however, should not take place in an absolute manner but, on the contrary, must be combined with respect for the rights and guarantees granted to the foreign investor under the APRI.97
Essentially, the tribunal did not find the Argentinian citizens’ human right to water to be of higher importance than an investor’s rights under the BIT and found that the protection of human rights was not an absolute right of the state.98 The tribunal disregarded the fact that the
right to water is of fundamental importance to all citizens of a state and especially affects the weaker groups in society. In this case, the tribunal ultimately awarded SAUR International $136 million.
The neglect of international human rights is not uncommon in ISDS proceedings. In 2012, the government of Zimbabwe raised the UN Declaration on the Rights of Indigenous Peoples in
96 Von Bogdandy et al. (n94), p. 145.
97 SAUR International SA v. Republic of Argentina, ICSID Case ARB/04/4, Decision on Jurisdiction and
Liability [2012], para. 331. Translated from French.
98 Johannes Hendrik Fahner and Matthew Happold, 'The Human Rights Defence In International Investment
Arbitration: Exploring The Limits Of Systemic Integration' (2019) 68 International and Comparative Law Quarterly, p. 755.
their defense, to which the tribunal responded that this “was not part of the tribunal’s mandate under either the ICSID convention or the applicable BITs.”99 Bruno Simma noted that “giving
adequate consideration to economic and social rights is the exception rather than the rule in investor-state arbitration” and proposed that international environmental and human rights law should be considered more in ISDS.100 Most arbitrators strongly rejected this plea.101 At the
same time, the incorporation of other public law disciplines (such as human rights law or environmental law) into the current form of ISDS could prove to be as problematic as not incorporating them. ISDS arbitrators often have limited public law background, resulting in the question whether it is desired that arbitrators without sufficient background knowledge of the discipline issue rulings specifically regarding human rights law matters.
5.2 THE EFFECT OF AWARDS ON THE RIGHT TO REGULATE
ISDS awards, at least under the UNCITRAL and ICSID rules, cannot be appealed. ICSID has an annulment procedure, but this is only applied in exceptional circumstances. Even the highest court of a country or a supranational court is unable to overturn an ISDS ruling. As a result, foreign investors can challenge any governmental measure undertaken, and ISDS tribunals might impose high awards. This means that ISDS tribunals have the final say in assessing the validity of a public policy measure, which allows the tribunals to significantly encroach on the sovereignty of a state. As Maude Berlow warned the Canadian government during the negotiation of the (failed) Free Trade Area of the Americas Agreement (FTAA), “governments have to be prepared to pay dearly for the right to protect the ecological, human and animal health concerns within their mandate.”102 Thomas Faunce posed a similar warning to the
Australian government regarding the inclusion of ISDS in future agreements.103
Since there is no overarching framework that establishes rules for all ISDS proceedings, this section mostly focuses on the possibilities within ICSID and UNICTRAL. Most importantly, only investors can win an award in ISDS. Most investor-won ISDS cases result in pecuniary measures against the state. Earlier, this thesis discussed how these pecuniary awards can go up to billions of dollars. However, it is rather ill-defined whether ISDS proceedings can also
99 Bernhard Von Pezold and others v. Zimbabwe, ICSID Case ARB/10/15 [2012], paras. 58-59. 100 Sebastian Perry, 'Arbitrators And Human Rights' [2011] Global Arbitration Review, p. 201. 101 Ibid.
102 Berlow (n560, p. 23.
103 Thomas Faunce, 'Australia's Embrace Of Investor State Dispute Settlement: A Challenge To The Social
impose non-pecuniary awards, and if so, what kind of non-pecuniary awards are allowed. ICSID does not clarify anywhere in the convention in any explicit terms what forms an award can take. Both pecuniary and non-pecuniary awards can have direct and indirect effects on the legislation that a state has installed in order to pursue public policy goals. First, the effects of non-pecuniary awards on the public policy goals are assessed.
5.2.1 NON-PECUNIARY MEASURES
Article 54(1) of the ICSID convention, combined with the travaux préparatoires, is perceived by some authors to mean that both pecuniary and non-pecuniary awards are allowed.104
However, Christoph Schreuer does not read this article the same way but rather comes to the same conclusion through the travaux préparatoires.105 What these non-pecuniary measures can
entail remains undetermined. Art. 47 of the ICSID convention concerns provisional measures and can be found in the chapter on arbitration rather than the chapter on awards. From the article’s place within the convention, it can be concluded that the drafters did not mean to include the recommendation of provisional measures as a form of awards. Schreuer also writes based on the travaux préparatoires that the drafters explicitly meant to ensure that these recommendations are only recommendations and should never be perceived as binding. However, as a report from The Organization for Economic Co-operation and Development (OECD) noted, in practice, ICSID tribunals have decided that their recommendation of provisional measures has a binding effect on the parties involved.106 In the ICSID case Micula
v Romania, the tribunal stated the following:
Under the ICSID Convention, a tribunal has the power to order pecuniary or nonpecuniary remedies, including restitution, i.e., re-establishing the situation which existed before a wrongful act was committed. As Respondent itself admits, restitution is, in theory, a remedy that is available under the ICSID Convention (Tr. p. 56). That admission essentially disposes of the objection as an objection to jurisdiction and admissibility. The fact that restitution is a rarely ordered remedy is not relevant at this stage of the proceedings. Similarly, and contrary to Respondent’s argument, the fact that such a remedy
104 Michelle Bradfield and J.C. Thomas, 'Non-Pecuniary Remedies: A Missed Opportunity?' (2015) 30 ICSID
Review, p. 640.
105 Gaukrodger et al. (n40), p. 29. 106 Ibid.
might not be enforceable pursuant to Article 54 of the ICSID Convention should not preclude a tribunal from ordering it. Remedies and enforcement are two distinct concepts.107
Tribunals made similar rulings in Maffezini v. Spain and City Oriente v. Ecuador.108 Tribunals
thus see non-pecuniary awards in the form of restitution as a legitimate form of award. The tribunal later partly based its argument on the International Law Committee Articles on State Responsibility.109 As a result, tribunals have in some cases taken it upon themselves to force a
state to amend its regulations and laws, albeit without sufficient enforcement mechanisms. In legal doctrine, the legitimacy of this has been doubted, and no consensus in the legal doctrine exists regarding whether restitution by a tribunal is permitted.110 Due to the independent
structure of ISDS tribunals, this has had little effect. However, this continued use of restitution by tribunals poses several legitimacy questions, especially when assessing the generality criteria for justification. There is no possibility for representation for the people affected by the interference in a state’s right to regulate through restitution. Again, as explained earlier, not every separate individual should have the chance to have a say, but through some form of representation everyone should have an equal standing, which is lacking here and this thus fails to meet the criteria of generality. Since ISDS has taken it upon itself to issue binding provisional measures that severely intrude on a state’s right to regulate without the chance for proper representation of everyone involved, serious social justice issues exist here.
Since non-pecuniary awards are relatively rare compared to pecuniary awards, relatively limited research has been done on their effects. However, since some tribunals have taken it upon themselves to dispense awards in the form of restitution, it is not difficult to understand the effects this may have on a state’s public policy goals. Due to the fact that a tribunal is functus
officio after an award has been rendered, restitution awards are very limitedly enforceable.111
However, developing states often participate in BITs and ISDS due to the promise of increased
107 Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v.
Romania, ICSID Case No. ARB/05/20 [2013] Final award, para. 166.
108 Maffezini v. Spain, ICSID Case No. ARB/06/2 1[1999] Decision on Request for Provisional Measures, para
9. City Oriente Ltd v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador) (Ecuadoran), ICSID case No. ARB/06/21 [2007] Decision on Provisional Measures, para. 52.
109 Micula v Romania (n101), para 1309.
110 Ylli Dautaj, 'The Binding Nature Of Provisional “Recommendations” In ICSID Arbitration'
<http://arbitrationblog.kluwerarbitration.com/2018/06/27/binding-nature-provisional-recommendations-icsid-arbitration/?doing_wp_cron=1594730036.6229460239410400390625> accessed 7 July 2020.
FDI flows. If they would disobey the ruling of ISDS tribunals, their participation could be perceived as meaningless, and developing states could likely be forced to oblige with the restitution for this reason.
5.2.2 PECUNIARY MEASURES
At first glance, pecuniary measures do not seem to influence public policy. After all, they do not impose any mandatory changes to public policy. However, the extreme costs associated with awards can deter a state from maintaining a regulation. Additionally, they can scare a state away from imposing future regulations. Marco Bronckers describes the implementation of ISDS as severely limiting state policy, which results in reluctance “to introduce regulations (for instance, environmental restrictions) that could expose them to challenges and financial claims of foreign private parties.”112
Public policy goals frequently aim to protect the environment, human health, and human rights. Legislation on these matters is often needed to protect the weaker and underrepresented groups in a society.113 Developed states have often installed many measures on these subjects prior to
their accession to treaties with ISDS clauses. Developing states have more recently installed similar regulations, often encouraged by the international community.114 As a result, a
regulation may be completely valid in the Netherlands but may simultaneously be challenged by a Dutch investor in Ecuador with a corresponding high award. This results in a severe imbalance between developing and developed states resulting in a lack of reciprocation of claims and reasons between the two parties when agreeing to ISDS.
5.2.3 REGULATORY CHILL
One of the main issues with awards rendered by ISDS is that they may lead to regulatory chill. Kyla Tienhaara defines regulatory chill as “governments [that] will fail to regulate in the public interest in a timely and effective manner because of concerns about ISDS.”115 Regulatory chill
can occur in different forms. First, it is possible for a state to anticipate possible ISDS cases and decide in advance not to install regulation in order to avoid the possible payment of awards.116
112 Marco Bronckers, 'Is Investor–State Dispute Settlement (ISDS) Superior To Litigation Before Domestic
Courts? An EU View On Bilateral Trade Agreements' (2015) 18 Journal of International Economic Law, p. 656.
113 Drahos et al. (n64), p. 72. 114 Ibid.
115 Kyla Tienhaara, 'Regulatory Chill In A Warming World: The Threat To Climate Policy Posed By
Investor-State Dispute Settlement' (2017) 7 Transnational Environmental Law, p. 232.
This is called anticipatory chill, and the severity of its occurrence is effectively impossible to properly research.117 Second, it is possible for a state to pause or change its regulations after it
has become aware that a specific regulation is at risk of ISDS. This is called specific response chill.118 Finally, precedential chill can occur when a measure is changed as the result of ISDS
and in fear of subsequent other ISDS proceedings regarding the same regulation.119
It is complicated to measure the exact effects and level of occurrence of regulatory chill, because it is dependent on subjective matters and because ISDS proceedings are often not made public. However, it is interesting to note the difference in the conclusions of research that has been conducted. The Dutch Ministry of Foreign Affairs concluded that the risks of regulatory chill are severely overstated.120 The TNI came to a different conclusion, stating that “the mere
threat of an investor-state dispute can have a cooling effect on governments’ willingness to regulate, with corporations using the threat of legal action to kill off legislation that hampers their ‘right to profit.’”121 When the research is compared, it becomes clear that the Dutch
Ministry of Foreign Affairs investigated the risks for the Netherlands, whereas the TNI investigated the risks for developing countries. It is very clear that the risks for regulatory chill associated with ISDS have very different results in developed and developing countries. This means that there is an unjustified difference in the reciprocity of reasons needed for justification between developed and developing countries, and a socially unjust situation exists.
5.3 INDIRECT EXPROPRIATION
One of the main substantive issues is that public policy regulations that hinder the business of a foreign investor are often viewed as an “indirect expropriation,” which is a rather vague clause that is relatively standard in BITs. Rudolf Dolzer even calls the definition of indirect expropriation possibly the most challenging issue within international investment law.122 While
direct expropriation is a relatively clear concept that involves a state directly taking the title of a company, indirect expropriation is much more ill-defined, covers more situations, and occurs more often than direct expropriation. In indirect expropriation, the legal title of a company is
117 Eckhard Janeba, 'Regulatory Chill And The Effect Of Investor State Dispute Settlements' (2019) 27 Review
of International Economics, p. 1173.
118 Tietje (n32), p. 41. 119 Ibid.
120 Ibid., p. 92.
121 Vervest et al. (n79), p. 5.
122 Rudolf Dolzer, 'Indirect Expropriations: New Developments? Article Of The Colloquium On Regulatory
not taken, but the effects are similar to an expropriation. The Dutch model BIT defines indirect expropriation as follows:
Indirect expropriation occurs if a measure or a series of measures of a Contracting Party has an effect equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure.123
Installing an environmental measure to protect a state’s environment can thus be seen as an indirect expropriation if it results in a deprivation of an investor’s investment. Most BITs include a clause that allows indirect expropriation as a result of legitimate public policy, but this still poses two problems that endanger social justice.124 A tribunal gets the final say if a
government’s objective is a legitimate public policy objective, and the government still has to pay the investor the market value amount to compensate the investor’s loss.125
123 Art. 12(3) Dutch Model BIT 2019
124 Ying Zhu, 'Do Clarified Indirect Expropriation Clauses In International Investment Treaties Preserve
Environmental Regulatory Space?' (2019) 60 Harvard International Law Journal, p. 382.
125 OECD, '"Indirect Expropriation" And The "Right To Regulate" In International Investment Law' (OECD
