The basics


What is investor-state dispute settlement (ISDS)?

ISDS is a mechanism included in many trade and investment agreements to settle disputes. Settling these investor disputes relies on arbitration rather than public courts. Under agreements which include ISDS mechanisms, a company from one signatory state investing in another signatory state can argue that new laws or regulations could negatively affect its expected profits or investment potential, and seek compensation in a binding arbitration tribunal. Corporations typically seek compensation which may amount to millions or billions of US dollars.

The system only provides for foreign companies to sue states, not the other way around.

How does it work?

Each party to the dispute (the accusing investor and the defendant state) appoints an arbitrator. Both of them agree on a third one. The three arbitrators meet in an international arbitration tribunal to conduct hearings. Which tribunal is used is specified in the treaty. The hearings and their results are usually kept private.

Where do ISDS disputes take place?

Most cases take place at a tribunal operating under the rules of the United Nations Centre for International Trade Related Arbitration Law (UNCITRAL) or at the International Court for the Settlement of Investment Disputes (ICSID) at the World Bank.

Why is ISDS included in trade agreements?

ISDS was created in the 1960s to protect former colonizers’ property assets from newly independent states. Companies argued that ISDS was needed because the rule of law was lacking in overseas territories, usually former colonies. They wanted protection against expropriation – that is to say, the taking of their private property by the government for a purpose deemed to be in the interest of the public. Today, investors and some states claim that domestic justice systems such as courts lack independence. In reality, ISDS is a powerful legal tool for corporations to achieve policy objectives that suit their interests around the world.

Why is ISDS so problematic?

In effect, ISDS creates a parallel business-friendly judicial system exclusively for transnational corporations. The power rests upon for-profit arbitrators who come from the corporate sector and face unverifiable conflicts of interest. They have no sovereign legitimacy and are not accountable to the public. The decisions they make can be inconsistent between one another and cannot be appealed.

Can transnational corporations sue a state, if a law in the public interest would hamper their investment?

Yes, under ISDS they can. Because of some treaties’ vague provisions such as “fair and equitable treatment” or “indirect expropriation”, which give significant legal leverage to investors, corporations could claim that a law affects their profits or investment potential. These provisions pave the way for all kinds of interpretations that go in the investor’s favour to the detriment of states and citizens.

How are compensations to investors calculated?

In the recent years, the most widespread method has been discounted cash flow (DCF). This method is commonly used in financial practice to estimate the value of a business in the future. DCF predicts operating costs, capital expenditures, taxes, production, sales and prices, etc. over the life of the project, which could be 20, 30 years or longer. As George Kahale III, a leading lawyer and arbitrator, said: “No one has that kind of crystal ball. The only thing that is virtually certain is that those assumptions will turn out to be wrong.” DCF is linked to the inflation of compensations awarded to investors, and has been used to justify valuations which reach beyond the ‘fanciful’ to ‘wonderland proportions’. For example, in the Al-Kharafi vs. Libya case, the investor was awarded nearly a billion dollars for a tourism project that never got started, even though they had only invested five million dollars.

Is public money used to pay ISDS disputes?

Yes. The funds come from public budgets and therefore, in most countries, from taxpayers. Further, there is no limit as to the costs and duration of a case, which can last for several years and in which legal fees amount up to an average US$ 8 million. 37% of cost awards in favour of states are not paid by investors. The number of ISDS cases has also greatly increased over the past couple of decades. There are over 600 known disputes in addition to the undisclosed ones.

Can states or citizens initiate an ISDS dispute, if an investor failed to act responsibly or lawfully?

No, they cannot. Only a foreign investor can initiate ISDS disputes. If an investor’s actions fail to respect laws and standards, they must be tried in a domestic court.

Can foreign small and medium enterprises initiate an ISDS dispute?

In theory, they can. However, because of the huge legal fees involved, few of them could afford such costs. ISDS is first and foremost a system for the most powerful.

Can domestic investors initiate an ISDS dispute?

No, they cannot. ISDS is a privilege for foreign investors only, which raises the question of equal access to justice.

Who wins most: investor or states?

37% of ISDS decisions have found in favour of the state, 25% in favour of the investor and 28% have been settled. The remaining cases have been discontinued or led to no damages being awarded (UNCTAD, 2015).

Under the ISDS mechanism, states never win. At best, they simply avoid losing and are let off with all or a part of legal fees, which is a huge sum already. States can also settle the dispute with the investor and pay a part of the demanded sum and/or withdraw the measure targeted by the corporation. And if the arbitrators fully accept the investor’s claim, the sum the state has to pay can be huge.

What if a state chose not to pay?

It would face great political, legal and economic pressure. The state’s goods and assets abroad could also be seized. For instance, in the Slovakia vs. Achmea dispute, €22 million was awarded to Achmea (a Dutch insurance company) following the state’s decision to reverse the privatization of the health system enacted by the previous government. As Slovakia was reluctant to pay, a Luxembourg court ordered the seizure of €29.5 million in assets owned by the eastern European state in local banks.

Is a more just ISDS system possible?

By its very nature, ISDS cannot be reformed. The entire approach favours corporations at the expense of the state. Provisions such as “fair and equitable treatment”, “indirect expropriation” or “legitimate expectations” give disproportionate rights to corporations. These ambiguous provisions cannot remain the legal basis for suing states. Further, reforms would entrench the bypassing of national law and courts. There cannot be a parallel judicial system for transnational corporations only


Arbitration tribunal: In ISDS proceedings, a panel of three corporate lawyers who examine evidence brought forward in a dispute and decide on the outcome. Investor-state disputes are not decided by independent judges with secure tenure, a fixed salary and who are assigned to cases fairly. Rather, rulings come from for-profit arbitrators who are paid per case or by the hour, with a clear incentive to decide in favour of the one party that can bring claims in the future: the investor.

Expropriation: The taking of property without consent. Investment treaties and trade agreements distinguish between direct and indirect expropriation. Nationalization is a typical form of direct expropriation and is compensated for if investor protections are in place. Indirect expropriation is a vaguer concept. In reality, any law or regulatory measure that lowers a foreign investor’s expected profits can be challenged as an indirect expropriation. Tribunals have interpreted legitimate health, environmental and other public safeguards in this way, ordering states to pay compensation.

Fair and equitable treatment (FET): A provision found in trade and investment agreements which ensures that companies’ investments are treated fairly and equitably. This potentially catch-all clause is the most dangerous for the public interest. Investors use this provision most often and successfully when attacking public interest measures. In three-quarters of cases won by US investors, tribunals found an FET violation.

ICSID: The International Centre for Settlement of Investment Disputes of the World Bank, located in Washington. It is used in most ISDS disputes as the arbitration tribunal.

Investment: Generally speaking, an investment is an allocation of capital that is expected to generate a profit. Investment treaties tend to list what type of assets is protected under their terms. These go from ownership of companies to intellectual property rights.

Legitimate expectations: Arbitration tribunals have interpreted the FET concept as protecting investors’ “legitimate expectations” even if the term is not part of some existing treaties, such as NAFTA. They have also considered it as creating a right to a stable regulatory context, binding governments to not alter laws, regulations or other measures, even in light of new knowledge or democratic votes.

Most favoured nation (MFN): MFN is a clause used in many investment treaties to ensure that “more advantageous” privileges granted to investors under third party agreements are made available to all signatories of a given treaty’s signatories. Arbitrators have used MFN provisions like a “magic wand” that allows investors in ISDS proceedings to “import” more favourable rights from other treaties signed by the host state. This multiplies the risks of successful attacks against public policy.

National treatment: This principle in many investment agreements holds that foreign investors have to be treated at least as favourably as domestic ones. This has been interpreted, in ISDS proceedings, as a prohibition of any measure that de facto disadvantages or could somehow disadvantage foreign investors, even if it was not its purpose.

Sunset clause, also known as “zombie clause”: This means that when an agreement is terminated, investors can still bring claims for a defined period of time for in relation to investments made before the termination. This allows the corporation super rights to live on after the rest of the agreement is dead.

Treaty shopping: The practice of multinational transnational corporation to take advantage of more favourable trade agreements available in certain countries. For instance, a company is headquartered in country A that does not have a trade agreement (or has a less favourable one) with country B where the company operates its business. The company can establish a subsidiary in country C that has signed a trade agreement (or a more favourable one) with country B in order to take full advantage of the agreement’s provisions.

UNCITRAL: The United Nations Commission on International Trade Law was established “to promote the progressive harmonization and unification of international trade law”. The UNCITRAL arbitration rules can be selected by parties to govern the conduct of an arbitration tribunal intended to resolve an ISDS dispute.

Sources: CETA: Trading away democracy (2014), UNCTAD (2015),