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Investor state dispute settlement (ISDS): Background

There has been much concern over the chilling effect these international trade agreements have on human rights policy since they allow investors to bring claims against states in ISDS when a governmental measure negatively impacts the value of the investment, or the investor feels they were treated unfairly.  These claims can arise when, for example, a state legislates to protect public health, such as banning pollutants, or to improve labour standards. 

The UN Guiding Principles on Business and Human Rights note that “the terms of international investment agreements may constrain States from fully implementing new human rights legislation, or put them at risk of binding international arbitration if they do so.”  In June 2015, various UN Rapporteurs on human rights issued a statement about their concern over the adverse impact of investment agreements on human rights.  They noted that the experience of ISDS “demonstrates that the regulatory function of many States and their ability to legislate in the public interest have been put at risk.”

States do not want to be the recipients of investor claims. It is expensive and may deter future investment.  The outcomes of these claims are unpredictable.  This leads to the situation whereby decisions of governments to regulate for human rights are influenced by threat of an investor claim.  A striking example was when the Swedish nuclear company, Vattenfall, took a case against Germany for pollution measures, and the German government settled and agreed to lower pollution controls rather than continue with ISDS.  There are several factors that contribute to the regulatory chill of human rights policy.

No doctrine of precedence

There is no doctrine of precedence in ISDS.  Arbitrators do not have to rely on previous cases when making their decision.  This leads to inconsistent outcomes on cases with similar facts, and uncertainty of what conduct investment agreements requires of States.  This may lead states to avoid regulations that could be a possible claim under ISDS.

Limited human rights defences

Human rights and public policy considerations are generally regarded as outside the scope of investment arbitration.  ISDS claims are treated primarily as commercial disputes.  This is problematic when the governmental action at issue was carried out to protect a public interest.  If the tribunal declares that it does not have jurisdiction to hear human rights law, then this limits the government’s the ability to defend its actions.

Lack of public policy expertiseplain cigarette packaging

The denial of jurisdiction to address human rights is linked to issue that the arbitrators sitting on these tribunals are often inexperienced in human rights or environmental law.  Parties may choose arbitrators in cases but the World Bank’s International Centre for Settlement of Investment Disputes, for example, requires that arbitrators have competence in fields of law, commerce, industry and finance.  Arbitrators who have the necessary level of expertise in these areas may not be well versed in public policy and be able to determine whether a government has acted appropriately in an area that affects human rights.

Lack of transparency & civil society participation in arbitration

The lack of transparency is another issue that limits the protection of human rights.  People affected by an issue of public interest are not guaranteed the opportunity to monitor the arbitration.  Most of the time, consent of both parties is needed for the award to be made public.  There is no way of knowing the number of claims, their details and implications.  The lack of public oversight is particularly troublesome when considering that decisions made against the government require rewards out of the state’s tax revenue.


Find out more about these issues on the LSE Investment & Human Rights Learning Hub