In the Media
Inter-American Dialogue's Latin America Advisor

Why Has Dispute Resolution Become Such a Hot Topic?

Investor-state dispute settlement (ISDS) mechanisms are included in many free trade agreements, prompting diverse reaction. What does history suggest about these mechanisms?

"ISDS mechanisms are a form of investment protection that, at their best, reduce risks across borders and enhance the rule of law and development," says Jonathan C. Hamilton, partner and head of Latin American arbitration at White & Case. "Critics often forget the untamed world and political solutions that came before in Latin America and beyond.

The demise of democratic rule in Peru in the 1960s, for instance, derived in part from an investment dispute over oil fields. But since the 1990s, Peru has become one of the most reliable, and successful, sovereigns in using investor-state mechanisms for both contract and treaty disputes.

There are now largely reliable procedures in place for the resolution of such disputes including at the World Bank's International Centre for the Settlement of Investment Disputes (ICSID). We now have almost two decades of results of cases involving Latin American states at ICSID, and they reveal relatively balanced results, with roughly one-third of cases reflecting dismissal in favor of states, one-third reflecting some success for investors and one-third resulting in settlement or discontinuance.

The loudest critics of ICSID notably are those states with the worst records derived from their questionable conduct; and there is a general correlation between negative ICSID outcomes and less favorable rule of law and stability ranking. It is simultaneously important that the system has evolved procedurally to take into account today's multipolar world by increasingly providing for greater transparency and, where relevant, comments by third parties.

Some of the latest treaties are also refining the substantive scope of sovereign rights and obligations. Viewed in historical context, continued reform is a more reliable path than revolution for sovereigns, investors and the aims of investment, development and the rule of law."