Enforcing state policy

ISDS has not, to any great extent, been used by investors to challenge legislative acts of states. Nor has it been used to annul any laws passed by parliaments.

This was one of the findings in a recent study by law professors at Leiden University and University Halle:

a. Most ISDS claims did not challenge legislative acts. Instead, the claims arose from governmental contract, permit or license.

b. After analyzing all concluded ICSID decisions, the study found that 47% of the disputes were associated with ministries or agencies and 9% (14 cases) resulted from legislative acts. The remaining disputes concerned acts by, among others, local governments and state enterprises.

c. In ISDS cases brought under the North American Free Trade Agreement (NAFTA), all claims which directly challenged legislative acts have failed.

In large majority of cases, investors did not challenge for instance, policies under environmental law, health law or mining law of a country. Rather, investors have sought to enforce specific promises from governments under instruments such as a contract or a permit related to their investment activities.

A contract is a promise. If a party under a contract fails to fulfill the promise thereunder, another party who suffers damage as a result of this non-fulfillment can bring a claim to enforce the promise. The same goes when the non-performing party is a government or a state. This is an inherent element of rule of law.

Case law includes cases where governments for example have explicitly agreed in a contract with an investor that an investment activity shall be conducted in a certain location. This is a promise that investor should be able to rely on. See for example MTD Equity Sdn Bhd and MTD Chile, SA v. Republic of Chile.

ISDS is a mechanism to enforce policy as defined by states in its contractual or treaty undertakings. But it does not define which promise – or policy – governments should extend towards investors. This power rests entirely with the state.