Investor Statement Dispute Settlement (“ISDS”) is an arbitration process included in many international trade agreements (i.e. NAFTA’s Chapter 11). ISDS allows a foreign business or individual, who has made or is seeking to make an investment in one of the countries that is a Party to such a trade agreement (the “Host Country”), to challenge a measure adopted by the host country if the measure violates investment obligations and detrimentally affects the value of the investment. The independent and binding third-party arbitration available through ISDS is usually described as an alternative to using the domestic courts of the host country. In some cases it may be the best and most direct option available to the investor.
While their authority must be determined on a case-by-case basis, domestic courts are unlikely to make a direct review and determination, or even consider disputes based on a claim that there has been a violation of international investment obligations such as the National Treatment or the Most Favoured Nation Treatment (“MFN”) obligation. National Treatment and MFN obligations are included among the investment obligations in most international trade agreements. MFN requires that foreign investors and their investments receive treatment by the host country that is “no less favourable’ than the treatment it accords, in “like circumstances”, to investors and investments of any non-party. The National Treatment obligation ensures that a host country accords to foreign investors and their investments, treatment that is “no less favourable” than the best treatment it accords to its domestic investors in “like circumstances”. As a result of both the National Treatment and MFN obligations, a foreign investor and its investments in the host country are entitled to the best treatment accorded by that host country to any other investor or investment in like circumstances.
The National Treatment and MFN standards apply only to actions taken by the host country’s government that have an impact on a foreign investor and/or their investment in the host country.The treatment accorded to investors and investments is generally set out in legislation, regulation or administrative action and, in most cases, falls squarely within the host government’s domestic legal authority. Domestic courts usually apply domestic laws to determine whether government action gives rise for a claim for damages and cannot take into consideration obligations from international agreements, such as National Treatment and MFN. Consequently, so long as the host government has acted within its domestic authority, the domestic court would likely have no ability to award damages to an investor even in cases where the host government has clearly violated the National Treatment and MFN obligations. On the other hand, ISDS arbitral tribunals have the authority to determine whether the host country has violated its investment obligations and therefore would likely be the better option for an investor hoping to raise a National Treatment and/or MFN violation.
It is important to note that the investor’s ability to seek damages for violations of National Treatment and MFN obligations by the host government may be broader in the NAFTA than in other international trade agreements because of the broad definition of “investment” applied in the NAFTA. The NAFTA broadly defines the term “investment” to include a wide range of economic interests, except a claim for money under a contract for the sale of good or services or for the extension of credit in connection with a commercial transaction. In addition to an investment including an enterprise, an equity security, debt security, loan to an enterprise, interest in an enterprise and interests arising from the commitment of capital, an investment that benefits from NAFTA includes “real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes.” So long as it is physically located in the territory of the NAFTA Party maintaining the measure at issue, anything ranging from an enterprise, to goods produced by or held by that enterprise, or the goodwill generated by that enterprise can fall under the broad definition of an investment.
ISDS is not the only option available to address government measures that undermine the value of an investment, but it may be the best option available to a business or investor wishing to protect its interests and challenge an alleged violation of the National Treatment and MFN obligations. For this reason, international businesses and individuals who make investments in other countries should know whether ISDS applies to their particular situation, as well as how it applies, so that they are able to make an informed decision as to when to use ISDS and when to resort to the domestic courts to protect their rights.
