Breaking free: Strategies for governments on terminating investment treaties and removing ISDS provisions

CCSI | October 2024

Breaking free: Strategies for governments on terminating investment treaties and removing ISDS provisions

by Ladan Mehranvar, with Martin Dietrich Brauch

Executive Summary

As we enter the second half of 2024, the need for a fundamental transformation of the global
investment and policy landscape is indisputable. Only ambitious, truly systemic changes can
achieve the Sustainable Development Goals of ending extreme poverty, increasing social
inclusion, reducing inequality, promoting the environmental sustainability of food systems,
ecosystems, and biodiversity, and urgently shifting towards sustainable energy sources.
The transition towards a more sustainable and equitable legal and economic global
governance system involves moving away from industries and practices that harm the
environment, such as fossil fuel extraction and use, and towards renewable energy sources.
It also involves fostering sustainable practices that respect and uphold the rights, needs, and
priorities of individuals, local communities, and Indigenous Peoples,1 as well as respecting
governments’ sovereign right to regulate in the public interest.

Progress, unfortunately, often clashes with a deeply entrenched status quo. One significant
obstacle facing international investment law and policymakers is the investment treaty
regime, which consists primarily of a network of bilateral investment treaties (BITs),
multilateral investment treaties (MITs), and investment chapters in free trade agreements
(FTAs). These international investment agreements (IIAs or investment treaties) dictate the
treatment of foreign investment and foreign investors by host States. They contain a broad
set of substantive provisions safeguarding investors and their investments, along with a
powerful investor-State dispute settlement (ISDS) mechanism that allows foreign investors
to seek recourse through international arbitration in order to enforce treaty obligations.
Many concerns about IIAs and the ISDS mechanism stem from the extensive substantive
and procedural privileges granted to foreign investors. The ISDS mechanism, which is also
found in national investment laws and increasingly in investor-State contracts, allows
foreign investors to challenge legitimate regulatory measures taken by governments to
achieve more equitable economic growth, address the climate crisis, respond to a global
pandemic, or otherwise serve the public interest, if those measures negatively impact the
investor’s bottom line.

In this way, these treaties and their dispute settlement mechanism enable investors to
impose crippling financial penalties on States that attempt to prioritize the public interest
over the financial interests of particular investors. Equally significant, the mere threat of such
liabilities exerts a profound chilling effect on governments, deterring them from pursuing
more ambitious and progressive climate, economic, and sustainable development policies.
The myriad challenges posed by this regime are not only a barrier to achieving the
Sustainable Development Goals, but also the economic, social, and environmental
objectives of States domestically, including the rights and interests of other stakeholders
within those States.2 These challenges have created momentum for the reassessment of
the investment treaty regime.3

For many States, progress requires finding a way to extricate themselves from the investment
treaty regime. In fact, exiting the regime has drawn significant attention in the past decade
or so. By the end of 2023, the total number of effective IIA terminations reached at least
585.4 About 30% of these terminated treaties, however, have been replaced by new treaties,
and roughly 35% are related to the intra-European Union (EU) BIT termination process
(discussed below in 6.2.1). While these numbers may not suggest fundamental changes in
the global legal infrastructure of the regime, the discourse has clearly shifted.

Many in the investment arbitration community acknowledge the system’s flaws and
generally support moderate reforms, such as those proposed by the United Nations
Commission on International Trade Law (UNCITRAL)5 and the Organisation for Economic
Co-operation and Development (OECD).6 Unfortunately, these proposals fail to address the
substantive issues of these investment treaties, the inherent bias of the ISDS mechanism,
and the system’s most critical flaw, namely that there is no conclusive evidence that the
treaties effectively promote investment flows, let alone sustainable investment flows.7
In this report, we present three practical approaches governments can consider in the near
term to address their current stock of IIAs with ISDS:

1. Terminating BITs, ideally with an agreement to neutralize the sunset clause.
2. Amending FTAs to remove the investment chapters, ideally with an agreement to
neutralize the sunset clause, where applicable.
3. Amending BITs and FTAs to remove the ISDS provisions or to withdraw advance
consent to ISDS.

This report is designed to provide policymakers with a comprehensive understanding of
the various approaches available to their governments for mitigating the adverse effects
of IIAs and ISDS, highlighting the advantages and disadvantages of each. These policy
approaches can be implemented unilaterally, bilaterally, or multilaterally, depending on
the instrument and the specific context of the State. They should not be viewed as anti-
investment, anti-foreigner, or anti-international law. Rather, they reflect a conscientious
effort to govern effectively and fairly, ensuring that investment treaties and their dispute
settlement mechanism achieve their intended goals, produce legitimate decisions respected
by all countries (even those that lose cases), and do not undermine regional and national
economic cooperation and sustainable development objectives.8

The various approaches, including the options available for implementing those approaches,
are detailed in Section 2 of this report.

The most effective option available for implementing the policy approaches presented is
a comprehensive multilateral agreement that would take effect among mutually-agreeing
States. Section 3 provides more detail on this, including a draft Multilateral Agreement,
which is included in the Annex.

The overhaul of the investment treaty regime can be complemented by amending or
renegotiating national investment laws and investor-State contracts, respectively, that
include substantive protections and procedural rights for foreign investors similar to those
in IIAs, which may no longer align with the State’s development objectives. This is explained
in Section 4 of this report.

In addition, States might consider withdrawing from the Convention on the Settlement of
Investment Disputes Between States and Nationals of Other States (ICSID Convention), a
legal and institutional framework for resolving investor-State disputes and enforcing ICSID
awards, established under the auspices of the World Bank Group. This is discussed in greater
detail in Section 5 of this report.

Finally, Section 6 presents examples of exit and reform strategies that various States and
regional blocks have adopted over the past decade with respect to their investment treaties.

Read the report (pdf)

source: CCSI