Investor-state dispute settlement (ISDS) has suffered extensive criticism recently, with phrases such as ‘secret trade courts’ and ‘closed door judicial proceedings’ used widely in the popular press. It is not difficult to understand the negative sentiment that exists both in the arbitration community and in the wider public consciousness toward the shortcomings of the ISDS process. The notion that, through a judicial proceeding that is isolated from any public scrutiny, a sovereign state can be required to pay private foreign companies as a result of exercising that state’s basic regulatory functions is understandably unsettling to voters and taxpayers the world over. However, is this an accurate characterisation of the ISDS process?

There is no question that there are legitimate concerns over the outcomes of disputes in ISDS. Cases such as the Metalclad and Tecmed disputes against Mexico are prime examples of the apprehension over the power of private companies in investment arbitration. In both of those cases, private companies from the US and Spain respectively invested in building landfills in Mexico. These landfills were designed and intended to accept toxic waste. The risk that toxic waste contamination from the sites would directly impact the local environment and threaten the health of the communities near the sites was high. There was public outcry from the local communities which led the local government to refuse the operating permits that were required. The investors, who had initially been granted permission by the Mexican federal government to develop their landfills, brought claims in investment arbitration under the North American Free Trade Agreement (NAFTA) for being prevented from opening the sites.

Oct-Dec 2018 issue

Chartered Institute of Arbitrators