Investor-State dispute settlement (ISDS) is an important feature of investment treaties.
ISDS, the procedural mechanism through which an investor may claim compensation
for a violation of a substantive investor-protection standard, be it included in a bilateral
investment treaty (BIT) or a trade treaty with investment protections, determines the
robustness of those protections. The traditional mechanism (investment arbitration
between the investor and the host State, modelled on commercial arbitration) has been
under attack for some time now from a range of actors and for a variety of reasons.
Hostility to the traditional model, which has spread from the academic realm to the
political stage, has led to changes in individual treaties and wider reform initiatives.
ISDS reform in treaties
While important changes are afoot,
the vast majority of investment treaties
(some 90 per cent) in force around the
world were concluded before 2012 (old
generation treaties) and have traditional
ISDS provisions. Indeed, the majority
of known ISDS cases have thus far been
based on old generation treaties. The
new generation of treaties concluded
since 2012 (of which there are
approximately 300) have incorporated
many new features, albeit on an
inconsistent basis given the vagaries of
bilateral negotiations and individual
Most of the changes to new treaties
are to substantive provisions, for
example, refined definitions of investor
and investment, circumscribed
fair and equitable treatment (FET)
standard, clarified standard on indirect
expropriation, and promotion of
corporate and social responsibility.
However, there have also been
modifications to ISDS provisions. These
range from omitting ISDS altogether (e.g.
in favor of domestic courts, mediation
or State-to-State dispute settlement),
limiting ISDS to particular types of
treaty breaches, or incorporating
various enhancements to the traditional
model of ISDS such as provisions
bolstering impartiality of arbitrators,
early dismissal opportunity for frivolous
claims, or transparency provisions
opening ISDS proceedings to the public
and third parties.
Reform has also come to some old
generation treaties, in the form of
amendments or wholesale replacement.
For example, in 2018 the Republic of
Korea and the US signed an amendment
to their 2007 treaty. The amendment
includes clarifications on the meaning of
the minimum standard of treatment and
excludes ISDS procedures from the scope
of the most-favored-nation (MFN) clause.
It also forms a joint committee to explore
improvements to the ISDS provision that
meet both countries’ objectives.
In North America, the best known
system for ISDS is set out in Chapter 11
of NAFTA. In 2018, following President
Trump’s election based in part of his
promise to scrap NAFTA, Mexico, Canada
and the US signed a new NAFTA – the
United States-Mexico-Canada Agreement
(USMCA) – after months of intense
negotiations on many substantive issues.
ISDS did not escape the negotiators’
scrutiny. Under the new treaty, which
has yet to be ratified by all the three
countries, Canada would withdraw from
ISDS entirely, leaving ISDS in place only
between the US and Mexico, albeit for a
narrower set of disputes.
What’s new in the EU?
The EU has seen the most vociferous
opposition to ISDS. The European bloc
has also been at the forefront of the most
direct challenge to the traditional model
of ISDS. In recent treaties concluded
by the EU – with Canada (CETA),
Singapore and Vietnam – the traditional
model has been replaced by a so-called
Investment Court System (ICS), whereby
investment disputes may be submitted to
a permanent and institutionalized court
yet to be established. The members of
the court are appointed in advance by the States that are parties to the treaty,
subject to independence and impartiality
requirements. And the court’s decisions
are subject to review by an appellate
body. The EU’s ultimate objective is to
replace the bilateral investment courts
of each treaty by a single Multilateral
Investment Court (MIC). The MIC
envisioned by the EU would be a
permanent international institution to
adjudicate disputes under both existing
and future investment treaties.
Progress towards the MIC is slow,
although some initial steps have been
taken. On March 20, 2018, the Council
of the European Union adopted
negotiating directives authorizing the
European Commission to negotiate a
convention establishing the MIC. The
Commission intends to start negotiations
ISDS has also been challenged within the
European courts. In 2018, in the Achmea
decision, the Court of Justice of the EU
(CJEU) invalidated traditional ISDS in intra-
EU treaties on the basis that the traditional
system incorporated into a treaty between
Member States was incompatible with the
autonomy and supremacy of EU law and
the requirement that EU law be effective.
By contrast, in April 2019, the CJEU sided
with ICS, holding that this new form of
ISDS was compatible with (i) the autonomy
of the EU legal order, (ii) the general
principle of equal treatment, (iii) the
requirement that EU law be effective,
and (iv) the right of access to an
independent and impartial judiciary.
Multilateral reform initiatives
In addition to these changes in
specific jurisdictions, there are reform
initiatives taking place on a number of
fronts, including the OECD, the WTO,
UNCITRAL and ICSID.
UNCITRAL, for example, is overseeing
a State-driven ISDS reform initiative,
through Working Group III (the Group).
The mandate of the Group is the
following: (a) first, identify and consider
concerns regarding investor-State
dispute settlement; (b) second, consider
whether reform was desirable in the light
of any identified concerns; and (c) third,
if the Working Group were to conclude
that reform was desirable, develop any
relevant solutions to be recommended
to the Commission. The Group has
identified concerns that fall into four
- Consistency, coherence, predictability
and correctness of arbitral awards.
- Arbitrators and decision-makers.
- Cost and duration of ISDS cases (with
focus on arbitration proceedings)
- Third party funding.
The Group’s work now turns to identifying
relevant solutions. The Group is following
a three-step workplan for developing
- Delegations submitted solutions to be
developed to UNCITRAL in July 2019.
- The submitted proposals are being
discussed and a project schedule will
be developed at the next session in
October 2019 in Vienna.
- Once the project schedule is created,
the Group will begin to substantively
discuss and develop potential
solutions for recommendation to
States have acknowledged that a
distinction must be maintained
between well-founded concerns, which
are supported by facts and empirical
research, and unfounded concerns,
which are based on perceptions. Further,
States have also acknowledged that
some of the concerns raised with respect
to ISDS can be resolved within the
framework of international investment
treaties, through amendments or
As the leading arbitral institution for ISDS,
ICSID is also focused on reform. While
amendment of the ICSID Convention
itself is not on the table – or not yet
anyway – the ICSID Secretariat has been
busy leading extensive consultations
about the ICSID Arbitration Rules to
- Modernize the rules based on case
- Make the process increasingly time
and cost effective while maintaining
due process and a balance between
investors and States.
- Make the procedure less paperintensive,
with greater use of
technology for transmission of
documents and case procedures.
In March 2019, the ICSID Secretariat
published its second working paper on
proposals for rule amendments, building
on proposals that were originally
published in August 2018.
The jury is out whether these reform
initiatives will achieve meaningful
improvements. At a recent event in
London, a leading practitioner is
reported to have lamented a “collective
failure of imagination” when it comes
to procedural improvements of ISDS.
Nor is it clear that the posited reforms
will appease die-hard opponents of
ISDS, many of whom appear focused on
eliminating ISDS altogether in any of its