In recent years, there has been widespread criticism of the investor-state dispute settlement (ISDS) mechanism. Global concerns regarding the current ISDS system center around perceived shortcomings in legitimacy and transparency.
In many instances, foreign investors have utilized ISDS claims to contest measures implemented by States in the pursuit of public interests, such as policies aimed at advancing social equity, promoting environmental protection, or safeguarding public health.
The partnership began in 1959 when Germany and Pakistan established a trade agreement to promote and safeguard investments between the two nations. Notably, this agreement featured the pioneering use of an Investor-State Dispute Settlement (ISDS) mechanism.
Since then, thousands of similar provisions have been incorporated into investment agreements worldwide, including those involving Tanzania. Many of Tanzania’s existing Investment Agreements include this mechanism. Most notably, all existing Bilateral Investment Treaties that Tanzania has signed contain ISDS.
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Challenges and Call for Reform
The ISDS mechanism is a legal provision found in bilateral or multilateral investment agreements, as well as in the investment protection sections of free trade agreements (FTAs). This provision grants investors the right to engage in international arbitration if they believe that a foreign government, which is a party to the agreement, has violated any of its provisions.
Doubts have been raised about the legitimacy of three individuals, appointed on an ad hoc basis, to assess the validity of states’ actions through ISDS, especially when the dispute involves sensitive public policy issues. The way ISDS operates raises questions about whether these individuals can be considered legitimate enough by the general public.
In addition, even though the transparency of the system has improved since the early 2000s, ISDS proceedings can still be kept fully confidential – if both disputing parties wish – even in cases where the dispute involves matters of public interest.
An additional issue with the investor-state dispute settlement (ISDS) is the existence of contradictions between arbitral awards. Instances of inconsistent findings have been revealed in arbitral decisions that have become public, demonstrating recurring episodes of divergent legal interpretations of identical or similar treaty provisions.
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These inconsistencies also extend to variations in evaluating the merits of cases with similar facts. The lack of uniform interpretations has resulted in uncertainty regarding the meaning of crucial treaty obligations and a lack of predictability in how they will be applied in future cases.
The questions about the independence and impartiality of arbitrators pose a challenge for ISDS. An increasing number of challenges to arbitrators may indicate that disputing parties perceive them as biased or predisposed.
Particular concerns have arisen from a perceived tendency of each disputing party to appoint individuals sympathetic to their case. Arbitrators’ interest in being re-appointed in future cases and their frequent “changing of hats” (serving as arbitrators in some cases and counsel in others) amplify these concerns.
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Concerns regarding the expenses and duration of arbitral procedures have been raised. The current practice of investor-state dispute settlement (ISDS) has cast doubt on the commonly held belief that arbitration provides a fast and cost-effective means of resolving disputes. On average, the overall costs, encompassing legal fees which constitute approximately 82% of the total costs and tribunal expenses, have surpassed $8 million per party per case.
This poses a substantial financial burden for any country, particularly for developing nations like Tanzania. Even in cases where the government emerges victorious, tribunals have generally refrained from ordering the claimant investor to cover the respondent’s costs.
Tanzania has not been exempted from the global concerns surrounding the ISDS system. A few examples include its recent encounters with ISDS cases stemming from its decision to cancel retention mining licenses in 2018. Consequently, investors affected by such decisions have invoked ISDS to claim rights.
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As a result of many controversial cases, civil society groups, international organizations, academics, lawyers and state officials have argued that the arbitration process has hurt public interest and there is a need for reform or should be scrapped altogether.
Therefore, tweaked system versions have been proposed to avoid the most undesired “side effects” of standard ISDS rules. At least 45 countries and four regional blocs are revising or have recently revised their investment model agreements to that effect.
Global Reform Efforts
In 2012, South Africa government started to withdraw from its bilateral investment treaties and amended domestic legislation to make it compatible with BIT-like investor protections while incorporating exceptions where warranted by public interest considerations.
In 2014, Indonesia decided to terminate 67 Bilateral Investment Treaties (BITs) and has also been developing a new model that supposedly reflects a more balanced approach between the country’s right to regulate and foreign investor protection.
In 2015, the European Commission established a new ’Investment Court System’(ICS) to replace the current ISDS mechanism in its trade deals. The ICS has been incorporated in the European Union deals with Canada (CETA) and Vietnam.
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In December 2015, India released a revised model Bilateral Investment Treaty(BIT) which, for instance, requires investors to exhaust domestic remedies (Indian courts) before turning to international arbitration and leaves out “fair and equitable treatment” provisions.
In 2016, members of the Southern African Development Community (SADC); Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland amended the SADC Finance and Investment Protocol that included ISDS provisions.
The amendments eliminate the ISDS mechanism, only state-to-state arbitration remains, and narrow the scope of investors’ rights, including exclusion of “fair and equitable treatment”, limitations to “national treatment” to allow for local preferences, obligation for investors to follow host state domestic law and exception from investment rules for policies enacted to comply with international treaties.
In South America, experts from the Union of South American Nations (UNASUR) have been developing an investment settlement Centre, as an alternative to the World Bank’s ICSID.
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In 2017 states from around the world began to debate at UNCITRAL (United Nations Commission on International Trade Law) about the possible reform of the ISDS system in a way that would address legitimacy concerns and rebalance the system.
As part of these discussions, the EU proposed the creation of a Multilateral Investment Court (MIC), which was slammed by civil society groups, as the MIC would “enshrine, expand, and entrench the current system of corporate privilege in future trade deals.
The Way Forward
The implications of the Investor-State Dispute Settlement mechanism in Tanzania underscore the complexities of balancing investor rights with national interests.
In navigating this path, Tanzania has the opportunity to shape a legal framework that not only attracts foreign investments but also fosters sustainable and inclusive development. Fostering National discussions and potential reforms will play a crucial role in determining the future trajectory of investment in the country.
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As Tanzania evaluates the implications of the ISDS mechanism, a collaborative approach involving government officials, the business community, and civil society is essential. Crafting a nuanced and balanced investment framework that encourages foreign investments while protecting national interests is a shared responsibility. Learning from global best practices and engaging in open dialogues will contribute to a more resilient and investor-friendly environment.
Baraka Thomas is a legal expert. He can be reached at barakathomas50@gmail.com or on X (Twitter) as @BarakaMasubo. The opinions expressed here are the writer’s own views and do not necessarily reflect those of The Chanzo. If you are interested in publishing in this space, please contact our editors at editor@thechanzo.com.
