Study shows Investment tribunals make governments pay foreign investors for democratic reforms
April 29, 2019: An academic study by Jonathon Bonnitcha and Zoe Williams has systematically analysed Investor-state dispute Settlement (ISDS) cases in which foreign Investors have successfully argued that they should be compensated for new laws or policies resulting from changes of government or other democratic pressures.
The study found that tribunals often “regard the influence of broad interest groups over executive decision-making processes as inherently illegitimate” and characterise state conduct as “political” in order to discredit the conduct in question. Tribunals fail to distinguish between cases where there was actual discrimination against particular companies and cases in which elected governments were implementing new laws or policies that applied to all companies in response to community concerns.
Such decisions force governments to pay tens of millions in compensation because they implemented laws or policies about environmental damage or indigenous land rights. Tribunal decisions forced the Canadian government to compensate the US Bilcon company because it was refused a license for a quarry in an environmentally sensitive area and the Peruvian government to compensate the Canadian Bear Creek mining company for termination of a license because it failed to obtain informed consent from Indigenous land owners.
The authors argue that it is “entirely appropriate for democratic legislatures to take public opinion into account, or for executive agencies to seek input from those affected by their decisions,” and that “certain forms of political responsiveness are both normal and desirable in democratic societies.”
They conclude that tribunal decisions against such laws or policies “mean that foreign investors benefit at the expense of the host state and broad interest groups.”
They also conclude that such decisions “may well have a wider impact on the way that states resolve potential investment disputes that never reach arbitration. Tribunals’ distrust of politics may discourage host states from responding to domestic constituents’ demands.” In other cases, ISDS can have a freezing effect on democratic change.
This study provides more extensive evidence in support of long-held concerns by AFTINET and other community groups that ISDS threatens democratic processes. If there is a change of government at the coming elections, a new government could face ISDS cases against measures to address climate change, new industrial laws or regulation in response to the banking Royal Commission. Labor and other opposition parties can only avoid this by excluding ISDS from all existing and future trade and investment agreements.