Investor-State Dispute Settlement (ISDS) provisions in international trade and investment agreements – long abused by opportunists with means – are slowly being rejected by cautious governments.
Developing country governments need to be much more wary of ISDS and its implications, and should urgently withdraw from existing commitments. They should expunge ISDS clauses in existing trade and investment agreements and exclude them from new ones.
ISDS ripe for abuse
ISDS allows a foreign investor to sue a ‘host’ government for compensation by claiming new laws, regulations and policies adversely affect expected profits, even if changed in the public interest. It involves binding arbitration without going to court.
ISDS provisions are included in many free trade agreements (FTAs) and bilateral investment treaties (BITs). These were invoked in 84% of cases before the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID), the most used arbitration forum. Investment contracts and national investment laws are also invoked.
ISDS decisions are made by commercial ‘for-profit’ arbitrators prone to conflicts of interest. Foreign investors can thus seek compensation amounting to billions of dollars via a parallel legal system favouring them.
ISDS provisions in such agreements enable foreign investors to sue governments for billions of dollars in compensation by claiming changes in national law or policy will reduce profits for their investments.
Neocolonial ISDS
During the colonial era, imperial authorities often used concession contracts to grant private companies exclusive rights to extract resources, such as minerals and crops, or conduct other economic operations, including building infrastructure and operating utilities.
Investments were protected by (colonial) law, and sometimes by investment contracts after independence. Companies might negotiate contracts with governments to get better terms. A tenth of the claims before the ICSID involved such contracts.
Thus, ISDS perpetuates a colonial pattern of privileging the interests of foreign capital. The World Bank’s Foreign Investment Advisory Service (FIAS) has long promoted including ISDS in domestic investment laws. Thirty of the 65 countries it advised enacted new laws providing for such arbitration.
Investment treaty arbitration started as a post-colonial innovation to protect the assets of former colonial powers from newly independent states. Investment arbitration rules deliberately privilege foreign investment over national law.
ISDS abused, biased and corrupt
ISDS encourages abuse and corruption. As legal fees and arbitration awards tend to be very significant for developing countries, when invoked, ISDS has a chilling effect intimidating host governments, often forcing them to concede or compromise regardless of the merits of the claims.
Nigeria was ordered to pay US$11 billion to a British Virgin Islands company, Process & Industrial Developments (P&ID). P&ID had used ISDS to claim compensation from Nigeria for allegedly breaking gas supply and processing contract.
When P&ID initiated ISDS proceedings in August 2012, it had not even bought a site for the gas supply facility. Yet, it claimed to be ready to fulfil its contractual obligations.
Six years later, in November 2023, the English High Court ruled the contract in dispute was obtained fraudulently via secretive practices allowed by ISDS. The Court also ruled P&ID had bribed Nigerian officials, including its legal team then, to get the contract.
Presiding English High Court Judge Knowles expressed “puzzlement over how the [ISDS] Tribunal failed to notice the serious irregularities” despite various “red flags” of fraud noted by others.
Elsewhere, Pacific Rim Mining Corp, a Canadian company, had proposed a massive gold mine in El Salvador using water-intensive cyanide ore processing. Later, it claimed the government had violated its domestic investment law by not issuing a permit for the mine.
The ICSID ultimately rejected the company’s claim, ordering it to pay two-thirds of the US$12 million El Salvador had spent on legal fees. But the company has refused to pay.
Wake-up call ‘down under’
The Australian Fair Trade and Investment Network (AFTINET) advocacy group has updated its brief supporting its call for the urgent review and removal of ISDS clauses in the country’s existing foreign trade and investment agreements.
AFTINET has specifically urged the Australian Joint Standing Committee on Treaties (JSCOT) to review and amend the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA).
The Australian Labor Party government, elected in May 2022, pledged not to include ISDS in new trade agreements, and to review such provisions in current agreements. Its brief focuses on ISDS provisions used by Australian mining billionaire Clive Palmer to sue Canberra.
Registering his Zeph Investments in Singapore, Palmer has used AANZFTA ISDS provisions to get compensation from Australia in two matters. The first is his application for an iron ore mining lease in Western Australia.
The second is against the authorities’ refusal of coal mining permits in Queensland for environmental reasons. Palmer has also made a third claim invoking the Singapore-Australia FTA, bringing his total claims to nearly A$410 billion.
Despite the government’s policy against ISDS, the provision was not reviewed in the amended AANZFTA. AFTINET is urging Canberra to urgently remove its exposure to ISDS cases as Palmer’s actions have made this all the more urgent.
ISDS abuses recognised
The Palmer case has increased concerns about ISDS, especially the abuse of lack of transparency. Arbitration processes are typically closed-door, preventing public, including forensic scrutiny of business transactions and practices.
AFTINET notes “excessive” ISDS claims have been growing, while Judge Knowles noted the “severe abuses” of ISDS in the Nigeria v. P&ID case “driven by greed”.
The huge compensations sought and awarded have encouraged even more “long-shot, speculative ISDS claims”. Such claims are typically based on “loose” book-keeping and dubious projections and other calculations, easily falsified by well-paid accomplices.
While the Australian government pledges no new ISDS commitments, but also wants to get rid of earlier ones, much more vulnerable developing country governments seem quite oblivious of the huge risks they are exposing their countries to!
Jomo Kwame Sundaram is a prominent Malaysian economist. He is senior adviser at the Khazanah Research Institute, visiting fellow at the Initiative for Policy Dialogue, Columbia University, and adjunct professor at the International Islamic University.
