The ISDS imbroglio

While accountability for their misdeeds may currently be in short supply, there is no lack of rights and benefits enjoyed by corporations operating abroad. For example, companies can sue their host countries for lost profits in secretive tribunals established under the investor-state dispute settlement (ISDS) mechanism – a system where the state is put on the back foot and the public interest takes a backseat.

Lean Ka-Min

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CONSIDER the following scenario: A planned hazardous waste management facility faces opposition from the local community because it is to be built on a geological faultline across from a dam near an environmental reserve, in a region already contaminated with arsenic from past mining activity. Construction continues anyway but the company concerned is eventually denied authorisation to operate the plant on public interest grounds. The aggrieved firm hauls the government before an international tribunal and is duly awarded over $40 million to be shelled out by taxpayers as compensation for expected future profits from the waste facility.

While this may seem like something out of a corporate executive’s feverishly scrawled wishlist, it is precisely what happened after Spanish firm Abengoa was in 2009 denied a licence to operate a waste treatment plant on the environmentally fragile site in Zimapan, Mexico. Invoking rights under a bilateral investment treaty (BIT) between Spain and Mexico, Abengoa sued the Mexican government before a World Bank–based panel, which ruled that the licence denial constituted an indirect expropriation of the company’s investment and breached the ‘minimum standard of treatment’ to which it was entitled.

The Spain-Mexico BIT is one of at least 3,000 active bilateral and multilateral treaties worldwide which provide for ‘investor-state dispute settlement’ (ISDS), allowing a foreign investor (which could be a company or an individual) to sue the host-country government for alleged violations of the treaty’s investment protection provisions. The case is heard by an international arbitration tribunal, usually without the investor being required to have recourse to domestic courts or other domestic remedies beforehand.

These international investment agreements (IIAs) have their roots in the immediate postcolonial era after World War II, as former colonial powers pushed to safeguard their companies’ interests in newly independent states in the Global South. Since then, more and more developing countries have signed on to IIAs under pressure from Northern governments and institutions and swayed by the promise that such accords would deliver increased inflows of investment and, with it, economic development.

In return for the ‘privilege’ of playing host to foreign investors, states are typically obliged under IIAs to grant these investors ‘fair and equitable treatment’ as well as protect them against ‘discrimination’ and direct and indirect expropriation. All these standards will of course need to be upheld, and this is where ISDS enters the picture.

The ISDS process commences when an investor claiming a treaty violation sends a notice of arbitration to the host state. Most ISDS cases are heard under the aegis of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID); other fora include the Permanent Court of Arbitration (PCA) based in The Hague and the London Court of International Arbitration (LCIA). The arbitration tribunal is composed of three members: usually one member each is appointed by the investor and the state, while the tribunal president is jointly selected by both parties. The tribunal proceedings are normally conducted behind closed doors and can take years before a final decision is handed down.

From the outset, however, the entire system is stacked against the state party. In the first place, only investors can file treaty-based ISDS cases against states and not vice versa; thus, the state is always put on the back foot. Meanwhile, third parties – such as local communities that may be adversely affected by the investment project concerned – have little opportunity to make their voice heard, as the tribunals frequently reject or restrict third-party amicus briefs.

Furthermore, in considering the governmental action at issue, ISDS tribunals primarily use the relevant IIA’s (investor-friendly) provisions as the yardstick. Thus, the fact that an action is consistent with domestic or other international laws (e.g., human rights and environmental treaties) is generally not deemed a defence against liability under the IIA. Likewise, an investor that has contravened domestic and other international law can still go on to win the ISDS case.

For example, American company Occidental Petroleum sued the Ecuadoran government under the Ecuador-US BIT in 2006 after the latter terminated its oil concession. Occidental had sold 40% of its production rights to another firm without government consent, thereby violating both its concession contract – which stated that an unapproved sale would invite termination – and Ecuador’s hydrocarbons law, which set out the government’s right to vet companies exploring for oil in the country. While the ISDS tribunal acknowledged that Occidental had broken the law and that the government’s response was lawful, it nevertheless ordered Ecuador to pay the company an eye-watering $2.3 billion (subsequently reduced to $1.4 billion) for breaching the ‘fair and equitable treatment’ commitment under the BIT.

Occidental’s conduct here bears the less-than-distinguished hallmarks of corporate chutzpah, recalling the classic example of a man who kills his parents and then pleads for mercy before the court on the grounds that he is an orphan. At the same time, the tortuous reasoning and interpretations employed by the panel in arriving at its decision in this case bring into focus the role of the arbitrators. The majority of ISDS cases draw from a small pool of arbitrators, most of whom are private lawyers who specialise in investment disputes. Some of these lawyers also ‘double-hat’, serving as arbitrator in one case and as counsel in another. There have been instances in which a lawyer representing one party argues their position by referring to a decision that was made by them as the arbitrator in a previous case. More generally, concerns over impartiality may arise in light of the fact that these arbitrators and lawyers earn handsome fees for their services and thus have an interest in the perpetuation of the ISDS system – a system where treaty-based cases are initiated only by the investor and whose use therefore depends on its continued attractiveness to investors.

No wonder, then, that the Nobel-winning economist Joseph Stiglitz has remarked about ISDS: ‘If there ever was a one-sided dispute resolution mechanism that violates basic principles, this is it.’

One-sided or no, the system has already awarded $113.87 billion in payouts to investors, excluding the sums agreed in settlements reached outside the tribunal process. The average award amount has also shot up over time, rising over tenfold from $25 million in the 1994–2003 period to $256 million in 2014–2023, data from United Nations development agency UNCTAD reveals. By the end of 2023, damages of over $100 million had been awarded in more than a quarter of ISDS cases won by investors; one in 20 cases resulted in an award larger than $1 billion.

Such amounts are especially burdensome for cash-strapped governments in the Global South, depriving them of resources to fund essential public services, yet it is developing countries that are the most targeted by ISDS suits. In contrast, the vast majority of investor claimants come from high-income nations; no treaty-based ISDS case has ever been launched by an investor from a low-income country.

According to Columbia University’s Center on Sustainable Investment (CCSI), ISDS tribunal rulings cannot be ‘appealed’ as such, unlike in domestic court systems, and are highly enforceable. If the government doesn’t pay up, its assets almost anywhere in the world can be seized by the investor, such as by freezing bank accounts and confiscating state aircraft or ships. And even if the investor doesn’t win the case, the state party still ‘loses’, usually finding itself saddled with a hefty legal bill and having to pay its share of the arbitration costs.

With such enormous sums at stake, other quarters want in on the action too. If you as a non-investor do not have standing to file a potentially lucrative ISDS suit, then the next best thing, so the logic goes, is to find and fund an investor who does. The increasingly widespread practice of third-party litigation funding sees a funder covering an investor’s legal costs to initiate a case in return for a share in any monetary awards. Concern has surfaced that this could give rise to more ‘marginal’ or frivolous claims and unduly increase the amounts sought by investors, but third-party ISDS funding remains almost wholly unregulated.

There is certainly no shortage of ISDS cases where governments and communities have had to pay a heavy price – monetary or otherwise – for standing in the way of investors’ profit pursuit. Egypt was ordered in 2018 to fork out over $2 billion to the Spanish gas company Union Fenosa after it began prioritising domestic gas supplies for its own populace. After refusing to award a mining licence to the Tethyan Copper company, Pakistan was deemed liable for billions of dollars in damages. To avoid paying the huge amount, the government eventually greenlit the mining project, which had been stridently opposed by local communities. The plight of such communities caught between ecologically harmful investments and financially ruinous ISDS payouts is summed up by Aura Robles, an indigenous person affected by a controversial coalmine in Colombia: ‘I can’t grasp how the person that is hurting you can then come and demand millions of dollars.’

Even just the prospect of facing a big-money lawsuit can be enough to spook a government, deterring it from taking an action or adopting a policy that is in the public interest. Casualties could include environmental laws, public health policies, regulation of public services, measures to curb tax dodging, and intellectual property policies. For instance, the Colombian government in 2016 backed out of issuing a compulsory licence to break Novartis’s patent monopoly on the life-saving leukaemia drug Glivec after the Swiss pharmaceutical giant threatened to drag the country to international arbitration. The licensing plan, by permitting production of generic versions of the medicine, would have brought prices down substantially and resulted in annual savings of an estimated $15 million for Colombia’s public health budget.

Stung by its costly experience with the Occidental and other ISDS cases, Ecuador expressly prohibited international arbitration in its 2008 Constitution. It subsequently withdrew from ICSID in 2009 and, by 2017, had terminated all its BITs, in line with the recommendations of CAITISA, a commission of government officials, academics, lawyers and civil society groups which had undertaken an audit of these treaties. CAITISA president Cecilia Olivet said at the time, ‘We hope other governments will learn from Ecuador’s example and review their own investment agreements to find out if they are truly beneficial to their citizens.’ The people of Ecuador themselves are on board with this approach, resoundingly reaffirming the constitutional proscription of ISDS in an April 2024 referendum.

Nor are IIAs necessarily favourites among rich countries either. Both the European Union and the United Kingdom withdrew from the Energy Charter Treaty – which, among other things, bestows ISDS rights to fossil fuel companies – in 2024. Worldwide, according to the Global ISDS Tracker website, more investment treaties have been terminated since 2017 than new ones concluded.

It is not difficult to see why there is a growing rethink of these agreements. CCSI finds ‘[e]mpirical evidence … does not show that

[IIAs] actually stimulate new investments, let alone demonstrate whether those investments in fact benefit host (or home) countries’. Instead, buttressed by the enforcement muscle of the ISDS system, investment treaties have come to be branded as ‘weapons of legal destruction’ by no less an insider than the investment lawyer George Kahale III.

It is thus high time to be freed from the destructive dictates imposed by these neocolonial holdovers. In their place should come a recognition – with the domestic and international laws and instruments to match – that any investor rights must be balanced with responsibilities, and that laying the welcome mat for investors doesn’t mean they can then trample all over the development aspirations of their host states.              

Lean Ka-Min is editor of Third World Resurgence.

References

Columbia Center on Sustainable Investment, ‘Primer on International Investment Treaties and Investor-State Dispute Settlement’, updated as of January 2022, https://ccsi.columbia.edu/content/primer-international-investment-treaties-and-investor-state-dispute-settlement

Corporate Europe Observatory, Transnational Institute and Friends of the Earth Europe/International, ‘How Big Pharma Sabotaged the Struggle for Affordable Cancer Treatment: Novartis vs Colombia’, 2019, https://10isdsstories.org/wp-content/uploads/2019/06/Novartis-vs-Colombia.pdf

‘Ecuador denounces its remaining 16 BITs and publishes CAITISA audit report’, Investment Treaty News, 12 June 2017, https://www.iisd.org/itn/2017/06/12/ecuador-denounces-its-remaining-16-bits-and-publishes-caitisa-audit-report/

Global ISDS Tracker, https://www.globalisdstracker.org/

Iza Camarillo, ‘The Worst of the Worst: Egregious Corporate Attacks on Public Interest Policies’, Public Citizen’s Global Trade Watch, 2024, https://gtwaction.org/wp-content/uploads/2024/11/Egregious-ISDS-Cases-Web.pdf

Iza Camarillo and Sarah Stevens, ‘The Scramble for Africa Continues: Impacts of Investor-State Dispute Settlement on African Countries’, Public Citizen, January 2024, https://www.citizen.org/wp-content/uploads/The-Scramble-for-Africa-Continues.pdf

Julian Mathews, ‘Colombia’s Cerrejón Mine Dispute Tests the Limits of Sovereignty’, Truthdig, 22 January 2024, https://www.truthdig.com/articles/theyll-close-the-mine-but-it-will-cost-you/

UNCTAD, ‘Compensation and Damages in Investor-State Dispute Settlement Proceedings’, IIA Issues Note, September 2024, https://unctad.org/system/files/official-document/diaepcbinf2024d3_en.pdf

*Third World Resurgence No. 362, 2025/1, pp 24-26