Apr 13, 2015 - 11:00am

13 Myths about Investor-State Arbitration

Senior Vice President for International Policy

Senior Vice President, International Regulatory Affairs

In recent weeks, opponents of new trade and investment agreements — and the Trade Promotion Authority (TPA) legislation that makes new trade pacts possible — have warned darkly about a provision in these agreements known as Investor-State Dispute Settlement (ISDS). Unfortunately, the debate so far has generated more heat than light.

To safeguard international investments, countries enter into bilateral investment treaties (BITs). The United States also includes these safeguards for investments in our trade agreements. They ensure international investors are not subject to discrimination, are treated fairly and are compensated in the event of expropriation.

Inevitably, investment disputes arise from time to time. That’s why these agreements have long provided for neutral arbiters to enforce the basic rights of investors under a process known as ISDS.

What’s the reality behind the recent attacks on ISDS? (See here for a longer, somewhat more detailed version.)

Myth 1: ISDS is a novel and exotic way to settle investment disputes.

Fact: ISDS is neither new nor exotic. Provisions for international arbitration for the settlement of investment disputes have been included in approximately 3,000 investment treaties signed by scores of countries over the past four decades.

Myth 2: ISDS allows corporations to overturn laws and regulations.

Fact: Arbitrators in ISDS disputes have no power to overturn laws or regulations. On the contrary, they are charged with upholding the same kind of rule of law protections that appear in the U.S. Constitution. In the event a government breaches its obligations under an investment treaty, the only recourse arbitrators can provide is to require compensation.

Myth 3: ISDS heightens the taxpayer’s jeopardy in investment disputes.

Fact: If the United States were to engage in discriminatory or unfair actions against foreign investors, an arbitral panel might require compensation. However, of the 22 ISDS cases brought against the United States over the past 30 years, the United States has never lost a case. Foreign investors in the United States are far more likely to seek redress via U.S. domestic courts because they provide significantly stronger protections.

Myth 4: ISDS isn’t necessary because domestic courts can handle investment disputes.

Fact: Foreign investors in the United States usually have good reasons to take their disputes to U.S. courts and not to ISDS. However, domestic law in other countries at times provides inadequate protections for U.S investments; for instance, it often fails to bar discrimination against foreign investors on the basis of their nationality. This important national treatment obligation, which is a hallmark of investment agreements, would be meaningless without an enforcement mechanism such as ISDS. 

Myth 5: Use of ISDS is exploding.

Fact: Few disputes are brought to arbitration under ISDS. According to the United Nations Conference on Trade and Development (UNCTAD), a total of 512 investor-state disputes were filed between 1987 and 2012. Considering that international investments worldwide are valued at more than $25 trillion, that’s a very small number of disputes over a 25-year period. Susan Franck of the Washington and Lee University School of Law found that the ISDS provisions of 97% of all BITs have never even been used.

Myth 6: ISDS gives investors the whip hand.

Fact: Under ISDS, investors usually lose. One-third of disputes end in a settlement, and governments win twice as often as investors in cases that go to arbitration. Even when an investor prevails, the compensation awarded tends to be a small fraction of the amount originally sought.

Myth 7: ISDS limits governments’ ability to regulate.

Fact: ISDS does not limit the ability of governments to issue regulations to protect public health, the environment, and worker and consumer safety. Rather, investment treaties ensure foreign investors are not subject to discrimination, are treated fairly and are compensated in the event of expropriation.

Myth 8: ISDS confers special rights for corporations.

Fact: There is nothing “special” about ensuring fair treatment of cross-border investment under international law. Moreover, since 2004, the U.S. Model BIT has expressly stated that investment agreements do not create greater rights for foreign investors than those enjoyed by domestic investors.

Myth 9: ISDS undermines sovereignty.

Fact: Investment treaties are an expression of sovereignty, not a limitation on it. Governments always retain the right to impose nondiscriminatory measures to protect public health, the environment, and worker and consumer safety, and ISDS panels cannot overturn those regulations.

Myth 10: ISDS lets multinational corporations sue governments anytime they fail to make a profit.

Fact: Investment agreements and ISDS uphold standards of fairness, not profits. If a government breaches obligations it has undertaken in an investment agreement, an arbitration panel may award compensation for harm to investments.

Myth 11: ISDS is just for big business.

Fact: Most ISDS cases are not brought by big companies. The Organization for Economic Cooperation and Development (OECD) has found that only 8% of all ISDS claims were brought by multinational corporations. Rather, the companies that bring ISDS cases tend to be small businesses seeking protection against discrimination and other unfair practices.

Myth 12: Arbitration under ISDS is conducted in secret tribunals.

Fact: There is nothing secret about investor-state arbitration. Proceedings are open and documents are available to the public under rules established in U.S. investment treaties. Interested parties such as environmental organizations and public interest groups can and do file amicus submissions.

Myth 13: Pending ISDS cases promise shocking outcomes.

Fact: The arguments of anti-ISDS activists tend to rely on hypothetical scenarios or cases that have been initiated but not yet decided. By contrast, the real-world record shows that when a government has acted in a nondiscriminatory manner and affords investors due process, it always wins.

About the Authors

About the Author

Senior Vice President for International Policy

Murphy directs the U.S. Chamber’s advocacy relating to international trade and investment policy.

About the Author

Senior Vice President, International Regulatory Affairs

Sean Heather is Senior Vice President for International Regulatory Affairs