Reforming the investor-state dispute settlement mechanism and the host state’s right to regulate: a critical assessment

Abstract

This paper aims at understanding the relationship between the investor-state dispute settlement (ISDS) mechanism and the host states’ right to regulate. Fragmented into over 3300 bilateral investment treaties (BITs), international investment law is being increasingly challenged by states who believe that the regime is imbalanced. This can be seen from the decision of various states to either opt out of bilateral investment treaties or to reform the existing treaties. This paper would analyze the several connotations that the term right to regulate possesses and then attempt to see whether the present ISDS mechanism poses threat to host state’s regulatory power. Right to regulate for the purpose of this paper means the right of states to deviate from their investment commitments for public purposes such as health, environment, sustainable development, corporate social responsibility, without incurring the duty to compensate. It is stated by various authors that the investment regime has led to a situation of regulatory chill. Regulatory chill is understood to be a situation where governments do not enact or enforce legitimate regulatory measures due to concern about ISDS. The paper argues that though the present system imposes limitations on the host state’s right to regulate, it cannot be said to have created a chilling effect. It is further discussed that the ambiguity of the ISDS procedure leads to a situation where both states and investors are unclear about the outcome of a dispute. This lack of clarity creates uncertainty whenever a dispute is brought before an arbitral tribunal. It is argued that procedural reforms to the ISDS mechanism could be one way to remedy this situation. Making the system more transparent, forming a clear standard of review, and establishing a permanent arbitration forum or creating an appellate mechanism are some of the ways which could help in striking a balance between investment protection and protecting the host states’ right to regulate.