The present and future of the investor-state dispute settlement paradigm

Abstract

While the World Trade Organization (WTO) system remains faithful to the long-standing traditional paradigm of state-to-state dispute resolution, dispute resolution mechanisms in the area of international investment are undergoing a radical change. Traditionally, the paradigm of 'diplomatic protection' has served as a basis for the settlement of investment disputes among states. In earlier commercial agreements, including the Friendship, Commerce, and Navigation Treaties (FCNs) concluded from 1940s to 1960s, the resolution of international investment disputes took the form of state-to-state dispute resolution. This paradigm shifted in the 1970s when direct investor claims, modelled on treaties that European countries had been putting forward since 1959, were allowed under a series of bilateral investment treaties initiated by the United States. This shift has been reflected in subsequent efforts to reach a multilateral agreement on investment (MAI) and in many free trade agreements (FTAs). Also, in the area of international human rights law, it is an increasing trend to allow an individual to have direct recourse to international human rights protection bodies, such as the Human Rights Committee established under the International Covenant on Civil and Political Rights, after the exhaustion of domestic remedies. The allowance of direct claims has helped to make up for the typical shortcomings of the diplomatic protection mechanism where, the espousing state has frequently exercised excessive discretion in deciding whether to advance claims due to considerations of a political nature, unrelated to the particular case, so that this mechanism can increase international friction. On the other hand, the strong point of diplomatic protection has been its capacity to screen out frivolous or dishonest claims by individuals. The question whether various international dispute settlement mechanisms may eventually converge into an effective system based on a direct claim procedure is a vexing one. It is uncertain whether the model of investor-state dispute settlement (ISDS) can play a pioneering role in this ongoing process. Any pertinent answers to such questions require a thorough comparison of the benefits and drawbacks of such a development. Lessons from the experiences under the ISDS system and its modification efforts should be fully taken into account so the newly emerging dispute resolution system will not lead to tension between nations in an area where precedent is scant, but the need is great. © Oxford University Press 2007, all rights reserved.