Investor - State Dispute Settlement: A Reality Check - Working Paper

October 29, 2014

Investor - State Dispute Settlement (ISDS), a provision in Bilateral Investment Treaties (BITs) and other international investment agreements that allows investors to enter arbitration with states over treaty breaches, has become controversial in the United States and our negotiating partners. Critics, including some governments, have argued that ISDS is unnecessary while others insist it is illegitimate as public policy.

This report is an empirical review of ISDS, based on the record of disputes under existing investment treaties. The key findings are as follows:

• Over 90 percent of the nearly 2400 BITs in force have operated without a single investor claim of a treaty breach.
• There has been an increase in the number of disputes filed in the past ten years. Overall, the rise in disputes has been proportional to the rise in outward foreign capital stock. There are more disputes, but there are also more investors and more capital invested abroad.
• Investors from large capital - exporting economies are active users of ISDS. European countries are a party to over 1200 BITs and account for 47 percent of global FDI stock; in the past decade European investors have filed more than half of investment arbitration claims. Similarly, the United States is responsible for 24 percent of outward FDI stock; U.S. investors have filed 22 percent of ISDS claims.
• Many disputes arise in economic sectors characterized by high levels of state intervention. About 40 percent of filed ISDS claims are in oil, gas, mining, a nd power generation sectors which often feature prominent state involvement.
• Disputes are also most frequent in states with weak legal institutions. Argentina (53 claims) and Venezuela (36 claims) are the leading respondent states.
• About a third of IS DS cases are settled in advance of a ruling. For disputes which end in an arbitral decision, states win about twice as often as investors. When investors do prevail, awards are a small fraction of the initial claim — on average, less than ten cents on the dollar.

Investors generally recognize that ISDS is expensive and time - consuming, on par with complex civil litigation. While arbitration offers neutrality and finality, investors are typically aware of the low likelihood of prevailing and the risk that fi ling a claim presents to their future operations.

Many of the criticisms of ISDS are overblown. Some claim that ISDS gives investors “special rights,” yet most treaty protections are identical to universal civil rights accorded most citizens. Further, critics exaggerate the notion that investors “sue to overturn regulations;” BITs explicitly limit awards to monetary damages. Finally, conflating ISDS with “big corporations” ignores the fact that the majority of U.S. investors who have filed investment arbitration claims are firms with fewer than 500 employees.

Treaty-based investment protection represents a major advance in the fair treatment of aliens and the peaceful resolution of disputes. Given the alternatives, withdrawing from investment treaties — th e logical conclusion of the critics’ position — would likely have negative consequences for economic growth and the rule of law.