Umberto Novara<\/strong>, International Trainee at Laborde Law<\/strong><\/a><\/p>\n\n\n\n
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\nLatin American Arbitration Practitioners EU<\/strong>\u00a0(LATAP EU<\/a>) is an association aimed at building a network of practitioners focused on international arbitration and with strong ties to, or experience in, Latin America and based in Europe. On September 2024, LATAP EU organized its second Annual Conference in Paris,\u00a0France, hosted by\u00a0Freshfields.<\/a><\/p>\n\n\n\n
<\/div>\n<\/blockquote>\n\n\n\n<\/div>\n\n\n\nThe ISDS System: Current Challenges and Evolving Criticisms<\/strong><\/h2>\n\n\n\n
Patricio Gran\u00e9 Labat<\/strong><\/a> opened the LATAP EU Second Annual Conference with a thought-provoking keynote speech that critically examined the current state of the Investor-State Dispute Settlement (ISDS) system. Mr Gran\u00e9 explored the systemic deficiencies of ISDS, addressing issues that challenge its efficacy and fairness, while also offering glimpses of potential solutions.<\/p>\n\n\n\n
Mr Gran\u00e9 framed his presentation around a central question: \u201cIs ISDS fit for purpose?\u201d. He acknowledged that while the system has faced criticism for decades, recent developments\u2014such as countries withdrawing from investment agreements\u2014highlight the depth of dissatisfaction with ISDS. He cited the example of Honduras<\/a>\u2019 withdrawal from the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (\u201cICSID Convention\u201d)<\/a> in February 2024 and the broader efforts within the EU to move away from intra-EU bilateral investment treaties (BITs). He also referenced the long-standing discussions about establishing a permanent tribunal with an appeals mechanism, though he contended that such a tribunal is unlikely to materialize any day soon. These developments, he argued, suggest that concerns about ISDS are no longer limited to specific regions or stakeholders but have become part of a broader and more urgent debate.<\/p>\n\n\n\n
One of Mr Gran\u00e9\u2019s key contentions was that ISDS has not fully achieved its primary objective\u2014promoting foreign direct investment. He questioned the assumption that investment agreements play a pivotal role in attracting investment, suggesting that many investors do not rely on these agreements when making investment decisions. Rather, investors tend to turn to these mechanisms only after disputes arise. However, he noted that ISDS has achieved an important secondary objective: promoting legal discipline and stability in host States, particularly in developing economies. The threat of substantial compensation claims has compelled States to act with greater caution and coordination when implementing regulatory measures, indirectly strengthening the rule of law in many regions. Nevertheless, he warned that this benefit comes at a cost, which he categorized into three critical areas:<\/p>\n\n\n\n
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- constraints on sovereign power,<\/li>\n\n\n\n
- the financial and procedural costs of arbitration, and<\/li>\n\n\n\n
- the often excessive compensation sums awarded by tribunals.<\/li>\n<\/ul>\n\n\n\n
<\/div>\n\n\n\nThe Costs of ISDS: Sovereign Constraints, Procedural Burdens, and Excessive Awards<\/strong><\/h2>\n\n\n\n
The most significant of these is the constraint ISDS places on States\u2019 ability to implement legitimate public policy measures, especially in areas like environmental protection and human rights. Mr Gran\u00e9 argued that, while investment agreements were designed to prevent arbitrary State actions, the threat of large compensation claims can deter States from exercising their sovereign powers to implement legitimate regulatory measures, creating a \u201cregulatory chill\u201d that undermines public welfare goals.<\/p>\n\n\n\n
The second category of costs pertains to the conduct of ISDS arbitration itself. The procedural aspects of arbitration are often inefficient and expensive, disproportionately affecting states. Mr Gran\u00e9 cited findings from the British Institute of International and Comparative Law showing that the average cost of arbitration for states is approximately $4.6 million\u2014a significant financial burden, particularly for states that face multiple claims. Additionally, the time public officials spend on these cases could be better used for other pressing public matters. However, he noted that high costs also affect investors, who sometimes pay tens of millions of dollars in legal and expert fees. On this point, Mr Gran\u00e9 criticized the increasing trend of third-party funding in ISDS. While funding allows investors who lack the required resources to pursue claims, it also exacerbates the speculative nature of some disputes. Funders, driven by profit, are incentivized to take risks that investors might not, knowing that a single large payout can cover multiple unsuccessful claims. This speculation distorts the balance of the ISDS system, adding further costs and complications for both states and investors.Eco Oro v. Colombia<\/em>, Declaration on Costs of Philippe Sands KC, 15 July 2024<\/a> he argued that this issue deserves further scrutiny. He also criticized the fact that, in many cases, despite states winning half of the cases, they rarely receive compensation due to tribunals\u2019 reluctance to award costs in favor of states or investors ignoring cost awards.<\/p>\n\n\n\n
The third category of costs relates to the size of awards granted by tribunals. Mr Gran\u00e9 pointed to the dramatic increase in the size of ISDS awards over the past two decades. A recent study by UNCTAD found that the average award size has increased tenfold, from $25 million in the 1990s to $256 million today. These awards are often based on older-generation international investment agreements that do not adequately define compensation rules, allowing for speculative models that project future profits far into the future, leading to inflated claims and, in many cases, excessive compensation. Mr Gran\u00e9 suggested that reforms to limit speculative claims are urgently needed, citing recent treaties like the 2021 Colombia-Spain BIT, which seeks to address this issue by tying compensation to more realistic economic projections.<\/p>\n\n\n\n
Additionally, Mr. Gran\u00e9 raised concerns about the duration of the proceedings and the costs related to document production, arguing that tribunals often tolerate \u201cfishing expeditions\u201d, which unnecessarily inflate legal costs.<\/p>\n\n\n\n
<\/div>\n\n\n\nTowards Fairer Agreements: Bridging Asymmetries in ISDS<\/strong><\/h2>\n\n\n\n
Beyond procedural issues, Mr Gran\u00e9 also addressed substantive concerns within the ISDS system, particularly the asymmetry between the rights and obligations of states and investors. Investment treaties, as they currently stand, primarily impose obligations on states and grant rights to investors. This one-sided nature of the agreements has led to growing dissatisfaction among states, who perceive the system as unfairly skewed in favor of investors. Mr Gran\u00e9 highlighted ongoing efforts by organizations like UNIDROIT and the ICC to develop international investment contracts that would impose obligations on both states and investors, including commitments to respect environmental, social, and governance (ESG) standards and human rights.<\/p>\n\n\n\n
<\/div>\n\n\n\nA Path Forward: The Need for Further Appreciation of Public International Law Principles<\/strong><\/h2>\n\n\n\n
Finally, Mr Gran\u00e9 returned to the topic of regulatory powers, emphasizing the importance of the police powers doctrine\u2014a principle of public international law that allows states to regulate in the public interest without liability for compensation. He argued that this doctrine has not received sufficient recognition in ISDS jurisprudence. States, tribunals, and investors need to develop a greater appreciation for the role of public international law in shaping investment arbitration. By recognizing the legitimacy of state regulatory powers, particularly in areas such as environmental protection and public health, the ISDS system can be rebalanced to better reflect the rights and responsibilities of both states and investors. He pointed to cases such as Philip Morris v. Uruguay<\/em><\/a> and recent cases against Colombia, (e.g<\/em> Eco Oro v. Colombia<\/em><\/a>; Red Eagle Exploration v. Colombia<\/em><\/a>) where tribunals recognized the legitimacy of state actions aimed at protecting public health and the environment.<\/p>\n\n\n\n
In conclusion, Mr Gran\u00e9 offered a cautiously optimistic view of ISDS\u2019s future. While acknowledging its many flaws and inefficiencies, he argued that these problems are not insurmountable. Rather than requiring a wholesale overhaul, the system can be reformed through the actions of diligent, disciplined tribunals and counsel committed to upholding the integrity of the process. However, this will require a deeper understanding and appreciation for the principles of public international law that underpin the system.<\/p>\n\n\n\n
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\n\n\n\nABOUT THE AUTHOR<\/strong><\/p>\n\n\n\n
Umberto Novara<\/strong> is a trainee at Laborde Law<\/strong><\/a>, focusing on international arbitration and public international law. Prior to joining Laborde Law, he trained with prominent international arbitration practices in Paris and Geneva, gaining experience in arbitrations conducted under the ICC<\/a>, PCA<\/a>, and ICSID<\/a> rules. Umberto holds a law degree from the University of Turin in Italy, where he remains actively involved in several academic projects. During his studies, he spent a semester at Funda\u00e7\u00e3o Getulio Vargas in S\u00e3o Paulo, Brazil and obtained a Certificate in Transnational Legal Studies from Georgetown University of Washington, D.C.<\/p>\n\n\n\n
\n\n\n\n* This report has been approved by all the conference speakers.<\/em> <\/p>\n\n\n\n
**The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.<\/em><\/em><\/p>\n\n\n\n
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