Investor State Dispute Settlement Mechanism & Its Impact On Domestic Rule Of Law Of The Host States

The present research is conducted by a Greek student studying in China and thus from a westerner's point of view aiming to answer the question whether or not the ISDS mechanism strengthens the rule of law and consequently provides suggestions on how the ISDS mechanism could improve the rule of law in host states.Since 2012,there has been an intense on-going international debate on the pros and cons of the ISDS mechanism especially with regard to the rule of law.Opponents of the ISDS argue that International Investment agreements undermine the rule of law by not having clear terms in their agreements,followed by inconsistent decisions and investor treaty shopping.On the other hand,supporters of the ISDS claim that the mechanism is necessary to promote and increase investments in developing countries.We believe that the core issue of the aforementioned debate is going back to the rule of law and the impact of the IIAs and ISDS on the local institutions and on the improvement of governance in developing and developed countries.A second set of issues,is the potential of a regulatory chill,where the IIAs and ISDS awards could potentially affect the government's ability to regulate given the fear of being sued and of ending up paying to the foreign investor a huge amount of compensation for breaching obligations under investment treaties.The present research provides suggestions for creating a balance between protecting the overseas investors in foreign territories while preserving the government's prerogative of adopting regulations for public interest.We first analyze the origins of the ISDS mechanism and then focus on the possible implications of the mechanism could have on the rule of law.Through a detailed analysis of the historical evolution of the investment arbitration we find that the ICSID Convention aimed to create a mechanism that will first,solve issues that diplomatic protection and the jurisdiction of "often biased" national courts of the host state couldn't solve and second a mechanism that would be a forum for conflict resolution in a framework that carefully balances the interests and requirements of all the parties involved,and attempts in particular to 'depoliticize' the settlement of investment disputes.In addition,through recent data analysis,on the ISDS mechanism,we conclude that a)the growth in the conclusion of IIAs give rise to investment arbitration;b)the ICSID tribunal is considered to be the leading tribunal to resolve investment treaty disputes and c)it is unclear among economic and legal research circles,whether investment arbitration(ISDS)has a positive effect on FDI and to what extent it promotes the rule of law in host states.Given the strong impact that IIAs and ICSID Convention have on the ISDS mechanism,we analyze the jurisdictional limits of investment arbitration,such as investor(rationae personae-active legitimation),state(passive legitimation)and investment(rationae materiae)to get a deeper and clear understanding of the way that the ISDS mechanism works.The decision on jurisdiction that the investment tribunal provides is a rather complicated unique process to define whether the claimant is an investor according to the definitions provided by the“at the time" applicable law,whether the respondent State is responsible for the actions of its organs and therefore also liable,and also whether the dispute arose from an investment as defined in the applicable law.If the answer to all the above three questions is positive then the tribunal accepts the case and consequently proceeds to the substantial issues of the cases with the ultimate goal to provide an award on the merits of the case.In our quest to define the aforementioned jurisdictional requirements we find that these requirements can have further implications to the rule of law.In detail,while researching the definition of investor under the ICSID Convention,IIAs(BITs&MITs),ICSID cases and arbitral awards,we find that the investor's nationality requirement can give rise to the phenomenon of treaty shopping by allowing the foreign investor to "guide" his way through the treaties and manage to gain the benefits from the international investment arbitration provisions.In order to better grasp the phenomenon we analyze the recent Philip Morris Asia Limited v.Commonwealth of Australia case where the claimant tried through corporate restructuring to bring a claim against Australia,under the Commonwealth Australia-Hong Kong BIT.The ISDS tribunal decided in its award on jurisdiction that the dispute was reasonably foreseeable and thus the commencement of arbitration by PM Asia constituted an abuse of rights.The ISDS tribunal proved to the international community with its award on jurisdiction that it abides by the rule of law and will not tolerate treaty shopping practices by multinational corporations that are trying to manipulate international investment provisions with the ultimate goal to attack host states public policies.In addition while examining the extent of state's responsibility inside the state mechanism in relation with provinces and municipalities,subdivisions and agencies,state owned entities,we find that the judicial practice of SOEs does not always provide an award that contains clear distinction between the three criteria of attribution(structure,function,and control criteria).This kind of behavior not only can disappoint the legitimate expectations of the community of States and investors towards the certainty of the rule of law,but also cannot provide helpful guidance to other tribunals that have to deal with new arbitral decisions.With regard to this issue we urge the ISDS tribunals to provide more clarity when producing their awards in order a)to serve as a useful tool for governments when drafting IIAs and b)to guide arbitral tribunals on the way to resolve similar disputes in the future,supporting the collectivization phenomenon of ICSID dispute settlement mechanism under which through the creation of considerable body of precedents can represent an addition to international customary law.While analyzing the definition of investment under the ICSID Convention,the ICSID and non ICSID cases and BITs,the notion of pre-establishment rights lead us to find that their presence in a treaty can give rise to the substantive issues of national and most favored nation treatment on the interpretation of the IIA at hand.We further examine the significance of the inclusion of these rights in the future China-USA BIT and we conclud that while the rest of the world is focusing on protecting the domestic markets,China has gradually but firmly shaped an outward-looking economic strategy and under the Xi-led leadership is currently pursuing a high-standard BIT with its key trading partners to improve the international governance structure and promote development and international economic cooperation in Asia and beyond.After analyzing the origins and the elements of the ISDS mechanism and getting a clear idea of the ISDS mechanism,we proceed to the analysis of the thesis main question:whether or not the ISDS mechanism strengthens the rule of law of host-states.ISDS is a complex mechanism that refers to two different things,first the ISDS awards and second the ISDS system as whole.Because of that reason we study the impact that ISDS mechanism has on the rule of law from two perspectives:first,we explore the rule of law controversies surrounding ISDS awards and analyze the ISDS awards controversial attacks on public interest policies,second,we analyzed the legitimacy crisis that the ISDS system is undergoing as a whole and focus on the crisis of the constitutional value of the rule of law inside the system.Through analyzing TTIP and the four controversial investment tribunal award cases that challenged environmental and national public health policies,and created-heated discussions on whether the ISDS awards abide by the rule of law,we focus on confirming whether or not they a)limit the government's right to regulate,b)promote governmental regulatory chill and c)threaten government's sovereign immunity when claiming remedies for breach of investment treaties.In regard to the above matters,our research concludes the following:(a)Treaty commitments in IIAs restrict government's right to regulate,similar to the restrictions that constitution poses to the government's right to regulate.When the ISDS tribunals discover that the host state violated treaty commitments,they cannot reverse national legislation,they can only award damages for the party seeking relief,providing in that way an "extra layer" of prevention to unlawful governmental acts but nothing less or more.Also we find that arbitral awards on provisional measures of non-pecuniary nature are not binding according to the ICSID articles wording in connection with the ICSID commentary,thus it is the parties fault to consider them binding;(b)In terms of the argument that ISDS promotes regulatory chill we find that empirical evidence on regulatory chill is lacking.Most researchers have come to the conclusion that they cannot provide statistical analysis of regulatory chill,because a policy change or a political change can be based on a lot of different independent variables and pinpointing ISDS as the main reason for the change it is almost impossible;(c)In addition,we find that data suggests when an award is granted in favor of the foreign investor,he is awarded by ISDS tribunals only a fraction(10%)of the compensation initially claimed for State's violation of treaty commitments and it is therefore questionable whether the foreign investor actually wins.Accusations that the ISDS awards limit the government's right to regulate,promote governmental regulatory chill and threaten government's sovereign immunity when claiming remedies for breach of investment treaties are clear misconceptions without legitimate grounds.We analyze in details the Philip Morris Brands Sarl v.Oriental Republic of Uruguay case,because it is the very first award on merits that the legal community is given on the ISDS tribunal perspective on national public health regulations when they are challenged by multinational corporations.The Philip Morris v.Uruguay award is very important for two reasons:first,because the award stated that tobacco companies when investing should not expect to avoid onerous regulations but their legitimate expectations should be progressively more stringent regulation,due to international concern for tobacco use and second,because the award accepted that adopting measures to follow the World Health organization guidelines is a reasonable action,therefore a state(and especially a developing state)should introduce stricter regulation to protect public health,following international guidelines,without having the fear of a possible investor-state claim.We conclude that one award cannot certainly eliminate the fears of ISDS breaching sovereign immunity but the example of the Uruguay case that is about a tobacco company against a developing state can serve as a possible reference or signal case(precedent)for future similar disputes,that can be the foundation of an international framework that will promote the international investment rule of law.Even though our findings regarding the ISDS awards can strengthening the rule of law of host states were quite optimistic,we find that a legitimacy crisis exists principally concerning the ISDS as a system and not the outcome of individual awards rendered by ISDS.It can be summed-up as the tension among ISDS's public governance functions and its structural set-up as a private dispute settlement mechanism that settles private disputes following the model of commercial arbitration.As a result ISDS system comes as a challenge to the core constitutional value of "rule of law".In order to confirm whether the ISDS promotes the constitutional value of the rule of law,we create a core definition of constitutional rule of law and apply it to ISDS mechanism.The results of the application aren't optimistic due to the fact that we cannot use a single definition of the constitutional value of the rule of law in an international dispute settlement mechanism because the concept of domestic rule of law is understood differently among different legal orders.Even though,it has been suggested that the creation of comparative and international constitutional framework can provide a solution to the diverse environment of the constitutional value of the rule of law and can help reform the ISDS,yet,we believe that this suggestion cannot produce immediate results that the ISDS system's legitimacy crisis desperately needs.The present research believes that only through the application of the Solange method(that has been used successfully inside the European Union and has regulated the vertical jurisdictional relationship between two supreme courts belonging in two different legal orders,one national and one European)the Investment Arbitration can give immediate results on strengthening the rule of law of host states.In order to support our idea we design a theoretical model to test the application of the Solange argument in fictitious ISDS case and we conclude that the Solange method,when applied in ISDS,can protect the constitutional value of the rule of law,on condition that the ISDS tribunals adopt a catalogue of fundamental rights of protection,(conditional Solange)and allow the national supreme or constitutional courts to examine whether ISDS awards are in line,when necessary with fundamental constitutional rights.In that way we believe the Solange method can serve as a measure of the level of protection that ISDS awards provide and release ISDS from the legitimacy crisis that is undergoing.We further address the debate of whether the ISDS can improve the domestic dispute settlement mechanism and we support that if certain reforms in ISDS are implemented,then the answer should be positive.A healthy domestic dispute settlement can contribute to the improvement of domestic rule of law;consequently,an improved rule of law is the vehicle of economic development(FDI),therefore,we can conclude that ISDS by improving domestic dispute settlement,could through the improvement of the domestic rule of law to indirectly,also promote FDI.Our suggestions towards reforming the ISDS mechanism in order to strengthen the rule of law of hots states can be summarized as follows:1)Adoption of a fundamental rights catalogue by the ISDS tribunals to make possible for the Solange method to be applied;2)International green frameworks agreements to address the regulatory policy gap regarding the future of existing,non-green investments inside the host states and urge the latter governments to provide subsidies for the non-green investments to become green ones;3)Governments in the domestic level to implement policies of dispute prevention programs to provide foreign investors with an early and alternative way to resolve the dispute within the domestic judicial institutions by domestic judges and promote ISDS as the last resort of resolving the investor state dispute and not the first;4)ISDS tribunals to offer more clarity in their awards that can serve as a useful tool when drafting IIAs;5)IIAs to include significant safeguards(such as include provisions that affirm a government's right to regulate,eliminate forum shopping,increase transparency,and provide a stricter interpretation of international treaties)to limit the scope of ISDS and give more space to host governments to regulate in the public interest.Inspired by the uniqueness and success of the One Belt One Road visionary initiative,we introduce the environment of the Chinese BITs in the OBOR area and examine the ability of Chinese SOEs as investors inside OBOR to use the ISDS mechanism to resolve investment disputes.We find that China in the OBOR area is using first generation BITs that limits the ISDS provision to the amount of compensation to be paid in case of expropriation.If China considers to renegotiate existing BITs or replace them with new ones,it should also consider adding an ISDS clause in the future BITs due to the fact that China's bargaining power is gradually increasing.Also China can consider joining the Energy Charter Treaty,as a solution to solve Chinese investor's problem of limited protection of their energy related investment in the OBOR area.For states that have terminated BITs with China along OBOR,we suggested that China should also consider to terminate the treaty retroactively.We stress the importance of a China-EU BIT(the OBOR area includes five European countries)that will reciprocally allow market access and possibly contain revised investor-state dispute settlement system(ISDS)to protect legitimate government regulation in areas such as public health and the environment.Analyzing,the ICSID case of the Chinese SOE,BUGG against the state of Yemen(part of the OBOR states)we find that this case provides important points of guidance on the capacity of PRC SOEs to bring claims against foreign states under the ICSID Convention and under first generation BITs.