Investor-State Dispute Settlement (ISDS) mechanism

  • Experts have stressed the need for review and reform of the system of International Investment Agreements (IIA) — including the Investor-State Dispute Settlement (ISDS) mechanism
  • India, along with countries including South Africa, had recently opposed efforts by nations including China, Brazil, Australia and South Korea to begin discussions on a proposal for an investment facilitation agreement at the World Trade Organisation (WTO)-level that reportedly seeks to incorporate provisions including the controversial ISDS mechanism
What is Investor-State Dispute Settlement (ISDS) mechanism?
  • The ISDS mechanism permits companies to drag governments to international arbitration without exhausting the local remedies.
  • It also allows them to claim huge amounts as compensation citing losses they suffered due to reasons, including policy changes.
  • The contentious ISDS mechanism already has been incorporated by investment pact by the EU and Canada.
What is an International Investment Agreement (IIA)?
  • An International Investment Agreement (IIA) is a type of treaty between countries that addresses issues relevant to cross-border investments, usually for the purpose of protection, promotion and liberalization of such investments. Most IIAs cover foreign direct investment (FDI) and portfolio investment, but some exclude the latter.
  • Countries concluding IIAs commit themselves to adhere to specific standards on the treatment of foreign investments within their territory. IIAs further define procedures for the resolution of disputes should these commitments not be met.
  • The most common types of IIAs are Bilateral Investment Treaties (BITs) and Preferential Trade and Investment Agreements (PTIAs). International Taxation Agreements and Double Taxation Treaties (DTTs) are also considered as IIAs, as taxation commonly has an important impact on foreign investment.
  • Countries conclude IIAs primarily for the protection and, indirectly, promotion of foreign investment, and increasingly also for the purpose of liberalization of such investment. IIAs offer companies and individuals from contracting parties increased security and certainty under international law when they invest or set up a business in other countries party to the agreement. The reduction of the investment risk flowing from an IIA is meant to encourage companies and individuals to invest in the country that concluded the IIA
What is India’s position with regard to ISDS?
  • India has rejected such mechanism.
  • It clearly held that only after all local options have been exhausted for settling disputes between a corporate and a government, then the issues can be taken up in international arbitration tribunals.
  • It also held that such provisions could be a part of bilateral agreements but they can’t be allowed in a multilateral agreement.
What is the need of reform?
  • Reforms are necessary because the IIA system currently has a pro-investor bias – with an aim to protect only capital and not labour, indigenous people, migrants, or consumers, all of whom have linkages with investment.
  • Also, the current ISDS mechanism, which is ad hoc, unpredictable and often arbitrary, needs urgent review as the current ISDS regime can be quite costly for host countries.

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