Foreign Privilege: What’s So Controversial About Investor—State Dispute Settlement

Foreign Privilege: What’s So Controversial About Investor—State Dispute Settlement

By Ryan Miao

Investor-State Dispute Settlement (“ISDS”) has always been a controversial issue in international law discussions. This is partially due to a fundamental feature of ISDS is that it only applies to foreign entities and not domestic investors. ISDS represents a notion of “foreign privilege” – the essential characteristic and premise of the law that it only protects foreign investors.[1] The idea of foreign privilege, however, is in direct conflict with the basic notion of, or a cornerstone of the rule of law, equality before the law.[2] Some justification has been given with regard to such foreign privilege on diplomatic grounds such that the law of diplomatic protection and the minimum standard for the treatment of foreigners, which is still part of customary international law.[3]

ISDS is also troubling in the fact that it is usually a complete substitute for domestic laws. In practice, ISDS creates a parallel judicial remedial system where foreign investors can obtain adjudication in a neutral forum, outside the host country. More complicated issues arise when foreign investors are usually multinational big conglomerates, while local investors might be mom-and-pop shops, yet the host country is giving the big player preferential treatment in judicial remedial regimes. Accordingly, the problem is not necessarily that foreign investors are given a direct advantage over national competitors as much as that the system more generally favors foreign investment over local economic activity and neglects legal conditions for domestic business and entrepreneurial spirit – the grassroots.[4]

Arguably ISDS affords foreign investors a huge advantage over domestic businesses. An example of this includes a Japanese contractor Obayashi submitted a non-treaty-based arbitration against the Vietnamese Government based on an ISDS claim.[5] The remarkable point of this case was that Obayashi warned the Vietnamese Government they would file a treaty-based claim under Japan-Vietnam Bilateral Investment Treaty (“BIT”) if they found that the settlement result was not justifiable.[6] The mere threat to commence an ISDS proceeding resulted in a faster and more favorable settlement against the Vietnamese government. Such preferential treatment would be unimaginable for local businesses.

ISDS was usually settled through diplomatic channels behind closed doors – or at least they were in the past.[7] Now, as international trade expands, international trade disputes have a greater impact on citizens’ daily lives, and in response to this growing demand for transparency, efforts have been made to make the dispute settlement process more transparent.[8] Among others, the World Trade Organization (“WTO”) dispute settlement system has contributed significantly to making the settlement process more public.[9] Facing increased criticism of ISDS, some countries, such as Bolivia, Ecuador, Venezuela and South Africa, have totally or partially moved away from ISDS regimes, but a large majority of countries have taken steps towards correcting the inherent unfairness of the current ISDS regimes.[10]

China has experimented with some innovations in ISDS reforms. The basic goal of China’s ISDS reforms is that enforcement mechanisms should be effective and efficient, striking a proper balance between investors’ protection and governments’ right to regulate, without any inherent pro-investor or pro-state bias.[11] Some innovation on ISDS regimes includes the newly proposed China-Africa Joint Arbitration Centre (“CAJAC”) which would provide arbitration, mediation, and conciliation services that bypass the jurisdiction of local courts, local arbitration institution, and other international arbitration institution.[12] The new CAJAC ISDS mechanisms would unify and harmonize China and African countries’ 34 BITs.[13]

There is likely still a long way to go for international ISDS reforms. Inherent fairness consideration, as well as differential standards and treatments of ISDS mechanisms, will continue to be controversial and pose uncertainties for both foreign investors and governmental authorities.

[1] Ivar Alvik, The Justification of Privilege in International Investment Law: Preferential Treatment of Foreign Investors as a Problem of Legitimacy, 31 The European J. Int’l L. 289, 290 (2020).

[2] Id. at 290.

[3] Id. at 291.

[4] Id. at 295.

[5] Nguyen Manh Dzung, International Investment Dispute Resolution in Vietnam: Opportunities and Challenges, 18 J. World Inv. & Trade 918, 929 (2017).

[6] Id.

[7] Yuka Fukunaga, Transparency in International Trade and Investment Dispute Settlement 30 (Junji Nakagawa ed., 2013).

[8] Id.

[9] Id.

[10] Rodrigo Polanco, Return of the Home State to Investor-State Disputes 50 (2018).

[11] Tong Qi, China, The EU and International Investment Law 123 (Yuwen Li et al. eds., 2020).

[12] Huiping Chen, China, The EU and International Investment Law 102 (Yuwen Li et al. eds., 2020).

[13] Huiping Chen, Sino-African BITs Practice: A New Legal Paradigm? 9 Soochow L. J. 59–98.