The proposal of a mechanism for investors to sue foreign governments is one of the more contentious aspects of the on-going EU-US trade talks. But as Dr Nicolette Butler argues, the benefits of neutrality and de-politicisation in dispute resolution should not be hastily discounted.

As the latest round of EU-US trade talks rumble into their final day, the possible inclusion of investor-state dispute settlement (ISDS), regulating foreign investment, has attracted plenty of global media attention.

The aim of the Transatlantic Trade and Investment Partnership (TTIP) talks is to remove trade barriers in a wide range of sectors and make trade in goods and services between the EU and US easier. But where problems occur, a specific mechanism for investors to settle disputes is being proposed.

Investor-state dispute settlement (ISDS) effectively enables aggrieved foreign investors from one state to ‘sue’ (through arbitration) the government of the investment host state in the event that their investment is negatively affected somehow; for example if the host state government nationalises the investor’s business, thereby expropriating their assets.

The idea that a foreign investor should be able to effectively ‘sue’ a sovereign government in this way has led to a heated debate about the inclusion of such a dispute settlement mechanism in the TTIP agreement.

Interestingly, ISDS is not a new phenomenon; it has been the international investment dispute settlement mechanism of choice since the Second World War. It was initially embraced due to investor’s concerns that arising disputes would not be treated fairly by the national courts of the investment host state. It was thought to provide a neutral forum that would be quicker and cheaper than litigation, and furthermore, de-politicise the dispute.

Critics of the potential inclusion of ISDS in TTIP argue that the national courts of the negotiating states (and the EU) are well equipped to deal with investment disputes, and that therefore ISDS is simply not required.

They argue that ISDS is only necessary where the investment host states have under-developed judiciaries and potential problems with corruption and bias; often such states will be developing nations. Coincidentally, such developing nations are often sued by foreign investors from more developed nations (60-70% of new cases are against developing nations and initiated by investors from developed nations).

It almost seems as if the United States and the EU are willing to accept the benefits of ISDS when their citizens invest abroad in potentially uncertain climates. But now that there may be a real risk of being the sued, they are less willing to commit to ISDS.

Nonetheless, the refusal to include ISDS in the TTIP agreement might be to throw out the baby with the bathwater. The benefits of neutrality of investment arbitration and de-politicisation of the dispute should not be hastily discounted.

Furthermore, the direct access to international arbitration may be an important factor when investors are deciding where to invest; so ISDS may be a mechanism to promote and attract foreign investment.

Foreign investment is thought to be advantageous because it creates jobs, infrastructure and development. In light of this, the negotiating parties might wish to make a few simple modifications to ISDS in order to make it more attractive and acceptable as a dispute settlement mechanism.

Investment experts have put forward a number of proposals for reform of ISDS the system. Concerns about the substantive correctness of decisions reached by ISDS tribunals might be alleviated with the inclusion of an appellate review mechanism.

Apprehension about the balance of protection between the investor’s interest and the state’s right to regulate might be remedied with the use of a general exceptions clause. Such a clause might enable the state to justify its regulatory action by reference to the protection of a range of legitimate interests including: human rights; the environment; health; compliance with other international legal obligations; and culture/history.

Other modifications might include the use of joint commissions in ISDS procedure. Often, in international investment disputes, technical expertise (which the arbitrator may not possess) is required to be able to decide the case in the appropriate manner.

Using joint commissions would involve delegating interpretative power to experts with the required technical knowledge and understanding.Ultimately it would lead to a more satisfactory and legitimate tribunal decision.

It remains to be seen whether (and in what form) ISDS is to be included in the final TTIP agreement.

But what is certain is that the hyperbolic treatment of the issue in the global media is not particularly helpful. With some fine-tuning, ISDS could work well in the agreement.