Investor to State Dispute Settlement (ISDS) Mechanisms: A Comparison of Evolving Legal Approaches in Brazilian and Latin American with the European Union

37 Pages Posted: 22 Feb 2018

See all articles by Daniele Bianchi

Daniele Bianchi

University Paris-Sorbonne

Kirstyn Inglis

Vice-Coordinator of the Brazil-C-EU Project co-funded by the Erusmus+ Programme of the European Union, Instituto de Relações Internacionais, Universidade de São Paulo

Date Written: February 18, 2018

Abstract

The reform of ISDS and potential alternatives to it, is a priority for the EU today. Foreign direct investment (FDI) by the European Union in Brazil and Latin America is considerable, and vice versa. Various forms of settling disputes between investors and states are incorporated into agreements carrying FDI.

Classical Investor-to-State Dispute Settlement (ISDS) mechanisms have become increasingly contentious in recent years, and with the growth in the number of ISDS agreements, public fears that investors may gain control of sensitive areas of public policy have grown also (see Section 2). Compared to State-to-State Dispute Settlement (SSDS) mechanisms, investor-to-state dispute settlement mechanisms are criticized for enabling companies and multinationals the potential to undermine a country’s public policy objectives with the threat to national sovereignty that this implies. Justifications for ISDS boil down to states’ provision for protection of investors in order to progress with their development goals. However, the core drivers of globalization are changing rapidly and the rise of countries capable of exponential growth, accentuates the negatives to ISDS, including the lack of democratic accountability of and scrutiny over third country investors, the use of private arbitrators, the secrecy of proceedings and rulings, and no participatory rights for third parties holding a direct interest in the process.

To date, investment protection has been confined to case-specific international agreements, rather than through overarching bilateral agreements. Legally speaking, these agreements span the public international law basis of the treaties and the public law nature of the relationship between the investor and sovereign state concerned, and asymmetry between states in international agreements further complicates multilateral approaches to reforming ISDS. At EU level, Foreign Direct Investment was included in the European Union’s powers under the Common Commercial Policy under the Treaty of Lisbon (ToL) in 2009, but such initiatives when involving ISDS reform remain complex and must respect the EU Member States’ competences. Thus, the entry into force of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada in September 2017 is preliminary: all the EU Member States must ratify it, raising again the spectre of political resistance to its ISDS clause as experienced in 2016, particularly in the Belgium State of Wallonia. The ISDS mechanisms in CETA must respect the delineation between EU and Member State competences established by the Court of Justice of the European Union (CJEU) in May 2017, and Belgium raised important questions for the CJEU in September 2017 on the compatibility of CETA with EU law, even before the preliminary entry into force of CETA (see Section 3.1).

Following EU Commission President Jean Claude Juncker’s State of the Union Address in September 2017, the EU is committed to making ISDS fit for purpose both within the EU 28 Member States but also in the EU’s external relations with third countries. The EU is abiding by its commitment to unprecedented transparency in all its trade and investment actions following the pathway set down by President Juncker. Improved democratic controls over ISDS to improve public trust at home and abroad, will also be an important yardstick. Already the UNCITRAL working group began work in November 2017 on the topic of ISDS reform and the EU has been advocating the Multilateral Investment court to this end.

This contribution focuses on ISDS in EU external relations. Section 3 explores EU policy reform of ISDS – notably proposing a new a permanent, judge-based Multilateral Investment Court (MIC) for investor-state disputes – to set a level playing field at global level for the protection of FDI while also guaranteeing states and society their democratic rights to shape public policy. Section 4 then examines the experience of Latin America, revealing a long-established refusal of any transfer of sovereignty through bilateral agreements regarding ISDS, resorting more to experimental forms of mediation based on the willingness of the state concerned.

Given that investor protection clauses have not been incorporated within the EU-MERCOSUR draft trade agreement, and the consistent refusal of Brazil’s parliament to ratify agreements containing ISDS, would a multi-lateral investment court render ISDS more palatable to Brazil and other ISDS avert countries? Or is there indeed a sufficient critical mass of problem cases to justify the EU’s bazooka approach in the form of the MIC. Is this solution proportionate as well as acceptable democratically and legally speaking, especially given the questions as to the compatibility of the MIC with EU law. While the European Commission can negotiate and ratify agreements containing provisions for the protection of direct foreign investments of third country nationals in the EU (and vice versa), the EU Member States must be involved in the negotiation of clauses on dispute settlement between investors and states, as well as in relation to non-direct foreign investment (‘portfolio’ investments made without any intention to influence the management and control of an undertaking). The Member States’ national constitutional procedures must be respected in the ratification of such clauses in multilateral or bilateral agreements between the European Union and third countries.

All this said, the conclusions consider whether Latin American approaches present a viable alternative that the EU might emulate – even in part – in the modernization of its ISDS system, or whether these approaches present more of a blank cartridge in addressing sovereignty and democracy concerns (see Section 5). Is there any intermediate solution in-between the European legal bazooka and the Latin American blank cartridge?

Keywords: Multilateral Investment Court, Investor-to-State Dispute Settlement, ISDS, Alternatives to ISDS

Suggested Citation

Bianchi, Daniele and Inglis, Kirstyn, Investor to State Dispute Settlement (ISDS) Mechanisms: A Comparison of Evolving Legal Approaches in Brazilian and Latin American with the European Union (February 18, 2018). Available at SSRN: https://ssrn.com/abstract=3125711 or http://dx.doi.org/10.2139/ssrn.3125711

Daniele Bianchi

University Paris-Sorbonne

1 rue Victor Cousin
Paris, IL 75005
France

Kirstyn Inglis (Contact Author)

Vice-Coordinator of the Brazil-C-EU Project co-funded by the Erusmus+ Programme of the European Union, Instituto de Relações Internacionais, Universidade de São Paulo ( email )

Prof. Lucio Martins Rodrigues, Ave.,
by cross 4-5
São Paulo, 05508-020
Brazil

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