New Options for Investor Accountability in ISDS

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ISDS emerged in the twentieth century to empower foreign investors to assert legal claims against host states without the intervention of their home state. But this understanding of international investment law (IIL) – investor rights and host state duties – is now a relic of the past. Yet because of their current asymmetrical nature, ISDS and IIL do not effectively regulate investors’ conduct. Various states have made it clear that that asymmetry has to change. One prominent manifestation of this movement for change is the inclusion of investor obligations in (a few) investment treaties. In the quest for investor accountability, this is clearly an important step, but without procedural tools to enforce these obligations, they will only serve as decorative features in investment treaties.

The incumbent challenge for states is to create the requisite procedural tools. There has never been a more opportune to tackle this challenge: as we speak, the reform process for ISDS is ongoing at UNCITRAL Working Group III. To this end, this blog post examines some of the more innovative procedural tools, specifically ‘direct actions by states’ and ‘direct actions by individuals’. But before conducting those examinations, it is worth showing what ‘indirect methods’ states already have at their disposal.

Indirect Methods

Indirect methods hold investors accountable for misconduct or breach of duties but do not entail procedurally distinct claims against the investor through counterclaims or direct claims.

One method involves conditioning access to arbitration on investor conduct. Conditioning such access on compliance with international or national law or non-binding standards creates a powerful incentive for investors to follow them. Most IIAs have defined protected investments as those made in accordance with host state laws. Yet tribunals have overall been unreceptive to claims that illegal investor conduct deprives them of jurisdiction, though tribunals have considered allegations of bribery. A handful of recent IIAs that condition access include the 2016 Iran-Slovakia BIT, the 2016 Morocco-Nigeria BIT, and the Canada-EU Comprehensive Economic and Trade Agreement.    

Looking forward, IIA clauses linking access to ISDS, investor conduct, or duties throughout the life of the investment are promising ways to enforce those obligations. Such clauses could make greater reference to international standards of conduct for investors, soft law, or multi-stakeholder instruments. Yet a broad provision making any violation of national law grounds to deny access to arbitration could allow states to circumvent key IIA protections.  

A second method entails the reduction of damages due to violation of investor duties. Tribunals have at times reduced damages due to an investor’s contributory, including a violation of host country law. Yet the reduction in damages is hardly the norm and is only granted if the investor’s conduct is willful or negligent, and materially significant.

Looking forward, IIAs could specify that various violations of investor duties will result in a reduction of damages – or even excuse liability – for treaty violations. Such a clause could permit the tribunal to hear a case despite such violations but make clear that they would have monetary consequences in terms of the final award. A relatively rare instance incorporating such an approach appears in the Netherlands’ most recent model IIA.

Direct Actions by States

Indirect methods are only useable after an investor has initiated ISDS proceedings. One solution to this problem is to give states the possibility of taking direct actions against investors in ISDS for their breach of investor obligations in investment agreements. Of course, states already have options to take legal actions against misbehaving investors in their own domestic courts. But what we are talking about here is giving states another option, at the international level, to take such actions. Is this excessive investor accountability? 

The answer will depend on who is being asked, but if the question is put to state officials, they will point out that holding foreign investors to account in their local courts is sometimes problematic. For example, consider a situation where an investor had business operations in the host state, but subsequently sold its investment and effectively withdrew from the host state. It later comes to light that, during its time in the host state, the investor was involved in serious investor misconduct. The host state intends to prosecute it. The problem is, however, that the investor has no assets in its territory against which a judgment debt could be enforced, which in turn means that the host state will have to attempt enforcement in the investor’s home state. This option looks to be legally difficult. With an additional option to prosecute the investor at the international level, and with a judgment that can be enforced around the world, this kind of difficulty can be overcome.

Direct actions by states are currently unknown in IIL. Making them a reality first requires infusing investment agreements with investor obligations. Few investment treaties currently contain investor obligations. Unless this changes, treaty-based direct actions are impossible because, to take such an action, the state must identify a breach of an investor obligation. Second, states must amend ISDS clauses to allow them to bring direct actions. A multilateral treaty would make these changes on a broad scale; for example, in the treaty that creates the future ‘Multilateral Investment Court’, certain provisions might be inserted into it to give states the possibility to take direct actions.

This kind of innovation would give states another avenue to access justice against investors when justice cannot be obtained in domestic courts, but it is not a silver bullet for investor accountability. Most particularly, if they did become part of the procedural infrastructure of IIL, there is a risk that states will refuse to use them; for example, if the investor misconduct affects only a small number of victims and the state believes that the investor might take its next major investment elsewhere, it might reason that it is better not to take any action.

Direct Actions by Individuals

Is this simply bad luck for this small number of victims? Not necessarily. A third idea for investor accountability involves direct actions by individuals against investors in ISDS. States and investors may consent to adjudicate legal disputes arising out of an investment when the investor’s conduct directly or indirectly affects the state (or its interests) in violation of an enforceable legal commitment.

A system of individual-led actions may build on any infrastructure to bring direct claims by states, plus the practice to delegate rights to beneficiaries. One alternative would be for states to grant a direct right of action to affected subjects (e.g., individuals and communities) against investors. Here the agreement establishing the delegation could specify the conditions and elaborate on the rights and obligations as well as procedures to avoid abuses. A second alternative is for states to create state rights (as in section 2) and delegate their right of standing to affected subjects. Either way, consent from the investor should be fundamental and could result from the investor’s initiation of a claim, from the application for an investment authorization, from contractual clauses, or in a submission to arbitrate.

We understand that options two and three are ambitious. However, the possibility of direct claims against investors is not excluded by the procedural rules generally applicable for investment disputes (although some issues of enforcement of arbitral awards may arise) and states must explore these mechanisms to hold investors to account.

Making investor accountability a reality will require re-thinking the assumptions and institutional architecture behind ISDS. But these efforts do not involve reinventing the wheel; instead, they can draw on various features of ISDS. The bigger question is a political one: do states want to deploy ISDS as a method of international accountability for investors?

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