There has been vociferous public debate around the inclusion of investor-state dispute settlement (ISDS) provisions in international investment treaties over the past few years. The increasing level of public awareness of, and opposition to ISDS provisions, has been reflected in the rising number of “anti-ISDS” groups and governmental policies around the world.
One of the primary reasons for this opposition to ISDS is its potential to cause “regulatory chill”. This is the theory that states may be discouraged from enacting legislation that is in the public interest due to the risk of exposing themselves, and their taxpayers, to liability under an investment treaty. The result is that states may enact less, or less extensive, legislation in the public interest, ultimately harming public welfare.
This blog does not intend to add to the extensive literature on both sides of the debate as to whether ISDS provisions do in fact cause regulatory chill. Instead, this blog posits that this objection on the basis of regulatory chill encompasses two separate debates:
- Whether the traditional form of ISDS provisions causes regulatory chill.
- Whether all forms of ISDS provisions in themselves cause regulatory chill. I explain below how this question is, in reality, used as a proxy for the normative and political question of whether states should enter into investment treaties.
Constructive dialogue is impossible if each side is debating a different question. Accordingly, it is necessary to tease out these separate debates in order for each side to engage meaningfully with the other. This blog thus attempts to lay the groundwork for a more constructive debate, which moves the discussion beyond the simplistic black-and-white positions of pro or anti-ISDS.
Debate one: whether the traditional form of ISDS provisions cause regulatory chill
ISDS provisions traditionally provide for final and binding arbitration by a tribunal constituted under the ICSID Convention or ad hoc procedural rules such as the UNCITRAL Rules. However, they come in many shapes and sizes. Those engaged in this debate must address the question of whether the traditional form of ISDS causes regulatory chill, and whether this effect is reduced, or removed, in alternative forms of ISDS.
These alternative forms may include providing for a two-tier investment court system to resolve disputes, with arbitrators chosen from amongst a pool of individuals pre-selected by states, as in the European Union’s proposed Investment Protection Agreement with Singapore and recent Comprehensive Economic and Trade Agreement with Canada. They may also move away from the system of party-appointed arbitrators entirely, as in the Netherlands’ new draft model bilateral investment treaty (BIT). ISDS provisions may also be tailored to suit states’ political expediencies, such as in the exclusion of tobacco control measures from ISDS provisions in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
A secondary question will be where the appropriate balance lies between the potential for such ISDS provisions to cause regulatory chill, and the benefits to public welfare that are obtained from encouraging inbound investment and protecting outbound investors.
Debate two: whether ISDS provisions in themselves cause regulatory chill
This is the more hotly-debated issue.
On first appearance, this debate appears to centre upon whether ISDS provisions in themselves cause regulatory chill. However, it is worth recalling that ISDS is, by its nature, merely a mechanism by which investors can enforce states’ obligations under investment treaties. They have the effect of transforming what would otherwise be mere statements of intent into enforceable investment treaties. Set out this way, it becomes apparent that concerns about regulatory chill actually arise from states agreeing to accept certain obligations under investment treaties, and the investor’s ability to seek reparation from the state if those obligations are breached. In other words, the concerns stem from states agreeing to enforceable obligations under investment treaties, not the existence of ISDS provisions themselves.
To achieve their aim of providing investors with certainty, investment treaty obligations must necessarily be enforceable. Thus, the true debate revolves around whether states should agree on investment treaties in the first place, and whether doing so discourages states from regulating in the public interest. This underlying objection to investment treaties, and potentially globalisation more broadly, appears to underlie the turbulent protests against ISDS provisions in relation to the Transatlantic Trade and Investment Partnership (TTIP) and North American Free Trade Agreement (NAFTA), and reflects an increasing sentiment of anti-globalisation around the world.
Accordingly, the focus on ISDS provisions by both sides of the divide is misguided and fails to address the core concerns driving the debate. It would be in all parties’ interests to acknowledge the true locus of the debate and recognise that objectors to ISDS provisions may have a shifting target in mind; the real target may be much larger, and the stakes much higher.