This background is essential to explaining to citizens why some of the concerns they have after hearing that ‘ISDS allows big companies to sue governments for lost profits’ are unfounded.
The right to regulate
Chief among the concerns is whether ISDS restricts the right of governments to regulate in the public interest. The answer is no, and yes. Investment treaties and the concept of national treatment assume that governments can and will adopt laws and regulations affecting all businesses in their country. Of course they have the right to regulate.Footnote 5 An investment treaty does oblige them, however, to regulate in a way that does not discriminate based on nationality, to provide the minimum standard of treatment required by international law, to compensate in the event of an expropriation, and to allow transfers of funds to and from the investment. In this sense, all of these treaty commitments restrict the right to regulate. But so does every constitution. Democracy limits the power of government: that is the essence of the rule of law. And only if a foreign investor believes a government has violated one of these treaty pledges can it file a claim using ISDS.
‘Better rights’ for foreign investors
As noted above, the US and EU member state governments believe that the protections they provide in their investment treaties are consistent with their approach to the rule of law, and that the four substantive obligations of the treaty are thus no greater than those provided under domestic law. That the foreign investor has access to the ISDS procedure while a domestic investor does not is inherent to ISDS being an instrument of international law. Domestic investors would not have cause to use international law against their own government. Instead, the investment treaty gives them reciprocal rights—that is, the right to bring the other government to dispute settlement should they make investments there.
Many believe foreign investors should resolve any problems they have with the government through the domestic court system just like everyone else does. This, they say, is especially so where the rule of law is well developed—as it is in the US and Europe. And indeed, foreign investors will generally turn first to local courts—not least because most problems an investor faces will not violate the four treaty obligations noted above. But if the investor feels the action of the other government is so egregious it violates the treaty, it needs another system of enforcement: in the vast majority of legal systems—including that of the US—one cannot enforce international law directly in local courts. This is true no matter how good the domestic legal system is, especially if the problem stems from a law adopted after the treaty, since in most democracies, laws adopted later in time take precedence. This is precisely why governments created the UN-based mechanism of ICSID to enforce international law.
Saying ISDS is not needed for countries with ‘developed’ systems of law also raises moral and ethical questions. Who is to judge whether the legal system of one country is better or worse than that of another’s? Indeed, even posing the question has echoes of colonialism, for it overlooks that treaties are reciprocal, not unilateral. In every treaty the US, Germany or the UK has signed, at least one ‘developed’ country is bound and subject to ISDS by the investors of the other party—whether China, South Korea, Mexico or Jamaica.Footnote 6
While most Americans and Europeans might accept that ISDS could be used to resolve differences caused by a government violating its treaty commitments, some may believe that foreign investors might abuse such ‘vague’ concepts as ‘fair and equitable treatment’ to bring frivolous complaints. Of course, anyone can always bring any complaint to court. But accusing a government of violating a treaty is not a matter that either the foreign investor or the government will take lightly. The government will be upset, to put it mildly, so foreign investors are only likely to bring cases under international law as a matter of last resort. Furthermore, all systems of arbitration have procedures to dispense with unfounded complaints, and indeed a substantial number of cases are dismissed, with tribunals exercising their discretion to apportion legal fees against claimants where they see abuse. Finally, governments can limit the scope for frivolous claims by careful drafting of the substantive obligations. For example, US government lawyers define the term ‘fair and equitable treatment’ as being ‘in accordance with customary international law’, as that gives the government considerable latitude to defend ‘normal’ state actions.
Most people see a government taking a person’s property as wrong, excusable only if done for a public purpose, using due process and with compensation. There are more complicated cases, for instance when the Russian government was found to have illegally used tax measures to force the bankruptcy of Yukos, which it then confiscated and sold to Gazprom and Rozneft (Brauch 2014). But dispute panels can distinguish between valid cases, like that of Yukos, and invalid cases, such as Methanex’s complaint about California’s ban of a fuel-additive, which the panel determined was a science-based decision applied in the public interest.Footnote 7