Originally from World Arbitration and Mediation Review (WAMR)

ABSTRACT

This article analyzes the role played by Investor-state dispute settlement (“ISDS”) in the effort undertaken by States toward fulfilling their climate change pledges.  More broadly, the analysis offered here, explores the question of whether ISDS supports or rather obstructs the fight against climate change.  The current ISDS system is often criticized for unduly favoring investors to the point of hindering the States’ ability to regulate.  Environmental law is an area where this tension reveals itself more prominently than others. Especially since States have begun to adopt new regulations to comport with international commitments to minimize the effects of climate change, those regulatory actions will most likely impact existing investments and the claims that arise in connection with the relationship between foreign investors and host States.  As this article reveals, the tension is not as dramatic or negative as it appears on the surface, and the answer is not that both systems are inherently incompatible.  This article is developed in five sections.  Section II will offer an overview of the climate-related arbitration landscape. Section III will focus on the perceived concerns about ISDS as a barrier to climate action. Section IV will focus on the ways in which ISDS can help advance States’ climate change action goals and the reasons to believe that ISDS is moving towards a homogenization of both worlds in that regard.  Section V will briefly discuss some of the challenges that lie ahead in the context of the ISDS reform, before the article’s conclusion.

I.   INTRODUCTION

Investor-state dispute settlement (“ISDS”) is a mechanism that allows foreign investors to bring claims against host States for breaches of international investment agreements (“IIAs”)—frequently Bilateral Investment Treaties (“BITs”)—whereby States vow to protect foreign investments.   It is believed that more foreign direct investment (“FDI”) will flow into host States when investors are offered certain standards of protection from illegal expropriations, unfair treatment and discriminatory treatment.  Conversely, States’ economic development receives a boost.   A central element of IIAs is the fair and equitable treatment (“FET”) standard. This is the most invoked standard in investment arbitration.  Arbitral tribunals have interpreted the FET standard broadly. FET is deemed violated when a State acts in a non-transparent manner, rising to the level of the denial of justice, and in a manner that is arbitrary or discriminatory, and/or in bad faith.  In addition, due to its evolving nature, many tribunals identify the protection of “legitimate expectations” as a key element of the FET standard.  It has been held that “an investor cannot have a legitimate expectation that existing rules will not be modified.”  Nevertheless, many arbitral tribunals have acknowledged that particular—i.e., drastic, unreasonable, unpredictable—alterations to a national legal framework of the host state on which the investor relied at the time of making its investment, may entitle the investor to the protection of its legitimate expectations under the FET standard.