I. Introduction

Although the first bilateral investment treaty (BIT) dates from 1959 (Germany-Pakistan BIT), the boom of the International Investment Regime (IIR) coincides with the rise of globalization (1990s). Nowadays it is supported by a network of more than 3,200 international investment agreements (IIA), such as BITs, investment chapters in free trade agreements, and regional or multilateral treaties such as the Energy Charter Treaty. Since the 2000s, the regime is going through a legitimacy crisis. Resistance comes from academics, civil society organizations and States originally from the Global South but nowadays it has spread to different parts of the world.¹

The main criticisms focus on the role of international arbitration tribunals, regulatory chill and the tension between investment protection and public policy space, or more specifically the right to regulate in public interest issues, for instance environmental or human rights protection. A few recent treaties have paved the way to balance foreign investors and States relation. For instance, Morocco-Nigeria BIT includes the right to regulate recognition,² and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership has the option to exclude access to international arbitration based on tobacco control measures³. However, the tension has not been resolved, and it is even more dangerous in health emergencies, such as the COVID-19 crisis.

Therefore, this piece aims to: 1) analyze the evolution of the IIR from its boom to its legitimacy crisis; 2) identify measures adopted by Latin American States that may be susceptible to foreign investors’ claims; 3) propose a roadmap that incorporates vulnerability theory in the reshaping of international investor-state dispute settlement (ISDS) regime for the short and middle-term.

II. Investor-State Dispute Settlement: from Boom to Legitimacy Crisis

ISDS regime is a part of a more complex and greater regime: the IIR, in which the expectations of the members converge around a fundamental principle of investment promotion and protection. Originally, this regime was a US - Europe axis’ creation, as it was built to protect investors’ rights in foreign countries which were conceived as weak or unreliable. Latin American countries entered during the regime boom (1990-2007), when they turned from the Calvo doctrine and the “Tokyo no”.⁴ In this context, neoliberalism acted as a driver, in particular through Washington consensus policies package, supported by the rise of globalization and the west global governance model.⁵ This period is also known as the “era of proliferation” of IIA⁶ or the “neoliberal phase”.⁷

The triumph of the ideas of economic liberalization and free movement of investments, included in the 10 points of Washington consensus constituted a fertile ground for IIAs negotiation. These treaties, in particular BITs, are presented as instruments capable of counterweighing political or noncommercial risks, especially in developing countries, neutralizing changes in national legislation that can affect foreign investments and offering flexible ad hoc dispute settlement mechanisms. Likewise, the failed attempt to sign the Multilateral Agreement on Investment Agreement -promoted by the Organization for Cooperation and Development in 1995- led to the celebration of a greater number of IIAs. States signed more than 3200 agreements:⁸ BITs or other treaties with investment provisions, such as the Energy Charter Treaty (1994), the General Agreement on Trade of Services (1994), the Agreement on Trade-Related Investment Measures (1994).

Academics point out three milestones at the end of the boom of IIR, led the way to the current phase: 1) UNCTAD’s recognition that ISDS may constrain national policy space;⁹ 2) Bolivia’s withdrawal from International Centre for Settlement of Investment Disputes Convention (IC-SID Convention);¹⁰ 3) an unprecedented rise of claims.¹¹ Firstly, there is a turning point at the regime governance; in the “World Investment Report 2003”, the UNCTAD introduces to the debate the impact of investor-State arbitration on national policy space. The report explains that States may limit their regulatory autonomy due to economic globalization and liberalization strategies, but the ISDS mechanism include in IIAs play a deeper role as it constrains national public policy, a sovereign prerogative.¹²

The “re-orientation phase” (2007-Today) is characterized by the struggle between the continuation of the neoliberal phase and the resistance to neoliberalism.¹³ The milestone of this struggle is Bolivia’s withdrawal from the ICSID Convention in 2007, followed by Ecuador (2009-2021¹⁴) and Venezuela (2012). Bolivia and Ecuador also undertook a process of termination of the BITs in force. The three countries are the first dissidents in the regime¹⁵ and the resistance arose motivated by the defense of natural resources after leading cases (Aguas del Tunari v. Bolivia, Chevron v. Ecuador, among others), reinforced by new constitutional provisions.¹⁶

Due to an extensive interpretation of the fair and equitable clause, especially in BITs, the number of claims rose dramatically after 2003 and the trend continues until today. About 92% of treaty-based known disputes started during the period 2003 to July 31, 2021.¹⁷ The economic crisis drove to claims and lead the States to a more vulnerable position, as seen in Argentina (2001) and Spain (2008-2014). Measures adopted in order to face the socio-economic crisis in Argentina led to more than 40 disputes and a number one in the respondent States ranking. A similar situation occurred in Spain (number three in the ranking) as a result of the changes introduced, to subsidies in the renewable energy industry after the crisis.¹⁸

ISDS regime is currently under attack and the aforementioned factors fed back the criticisms. In addition to the traditional arguments related to procedural issues (e.g., inconsistent jurisprudence, lack of an appellation mechanism, lack of transparency in procedures, international arbitration tribunal bypassing local courts), one of the deepest arguments against ISDS is that ad hoc tribunals are not established in Constitutional provisions, but they act as external control boards of the legality of State activity or inactivity.¹⁹ Furthermore, the lack of determinacy and coherence in jurisprudential decisions²⁰ also feeds the legitimacy crisis.

Another argument focuses on regulatory chill as a result of claims or the mere threat of a lawsuit,²¹ that is, the State refrains from regulating: it stops legislative discussions or suspends the adoption or the entry into force of new regulations, among others. Pac Rim v. El Salvador case is an example of regulatory chill. Big-scale metal mining ban was approved five months after the award rejected the claims for compensation, in other terms, Pac Rim’s lawsuit -and the dispute itself- operated as a brake to El Salvador’s innovative regulation. It is relevant to point out that regulatory chill may also affect third States, for instance, in 2012, New Zealand government decided to suspend the legislative discussion of the tobacco packaging plan act, because of Philip Morris Asia v. Australia case. The act was finally approved by the Congress after the tribunal dismissed the claim (2015)²² and the act entered into force in March 2018.²³

Therefore, when regulatory chill involves areas of public interest, as environment, human rights or public health, it impacts the construction of regulations that protect human being as a vulnerable subject, in terms of Martha A. Fineman.²⁴ In other words, regulatory chill impacts any set of norms created in order to avert and replicate inequities, preventing responsive State from building resilience. Its main effect lays in the delay, suspension or termination of human related regulation, acting as a brake to human rights progressive realization.

In the light of the above, the current phase in IIR evolution, particularly regarding ISDS, is characterized by the legitimacy crisis.²⁵ For the purpose of this piece, legitimacy can be defined as “a rule or rule-making institution which itself exerts a pull toward compliance on those addressed normatively because those addressed believe that the rule or institution has come into being and operates in accordance with generally accepted principles of right process”.²⁶

Consequently, as Robert Keohane explains, “normatively an institution is legitimate when its practices meet a set of standards that have been stated and defended”²⁷ while sociological legitimacy lays on the acceptance that a practice is “appropriate and worthy of being obeyed by relevant audiences”.²⁸ The coincidence between both concepts is reached when the relevant audiences accept the principles of a given legal system as worthy to be obeyed.

Applying Keohane’s ideas to ISDS regime, resistance builds up to the existing set of norms creating a legitimacy crisis, both normatively and sociologically. As seen before, relevant audiences have rejected the principles of the system when Bolivia, Ecuador and Venezuela withdrew from the ICSID Convention. Such phenomena also take place in the negotiation of agreements that exclude ISDS (e.g., Brazil cooperation and facilitation investment agreement model (CFIA)) or reinforce local remedies (e.g., India BIT model (2016)).²⁹

Although the ISDS regime had cracked as a result of the resistance originally focused on the Global South, nowadays objections are growing in both South and North. In Achmea judgment, the Court of Justice of the European Union (EU) argued that the ISDS mechanism in Netherlands - Slovakia BIT was incompatible with EU Law. Under art. 267 of the Treaty on the Functioning of the EU, an ISDS tribunal has no competence regarding the preliminary reference system. Notwithstanding, an ISDS tribunal should interpret EU Law without legal roots.

Following this reasoning, on 5 May 2020, 23 Member States signed the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union that entered into force on 29 August 2020.³⁰ In addition, for external negotiations the European Union includes an investment court system in bilateral agreements, such as the EU-Canada Comprehensive Economic and Trade Agreement.

III. Covid-19 and ISDS: Towards the Perfect Storm?

Although ISDS is facing a legitimacy crisis, the COVID-19 syndemic disruption and the claim for a more proactive State, even from traditionally neoliberal sectors³¹, may create the perfect storm for ISDS. The term “syndemic” was coined by Singer³² and recovered by Horton³³ for the study of COVID-19 impacts through a multidimensional lens. In this analysis, the concurrence of economic and social factors is as important as the biological causes of the pandemic.

Since the first months of 2020, States have taken measures that extended their policy scope to face the health emergency and address the increased vulnerability. During the current phase, this kind of measures still entail the risk that the State could be sued by foreign investors if they consider that an IIA has been violated. According to UNCTAD “Investment policy responses to the COVID-19 pandemic” report, the aforementioned risk may occur because existing IIAs were signed during the “proliferation era” or before, at a moment when States were less concerned for public health or environmental protection.³⁴

Even though more modern treaties may include provisions that protect the right to regulate,³⁵ expansive interpretations made by arbitral tribunals could constrain their capacity to exercise their sovereign. Moreover, due to fragmentation of International Law, ISDS is usually the arena of the tension between self-contained regimes: International Investment Law on one side and International Human Rights Law or International Environmental Law on the other side. The ISDS regime has a history of disputes regarding international regimes’ collision.

Latin America and the Caribbean, a region that accumulates 27.5% of the claims,³⁶ provides some examples related to human rights and environmental protection: 1) Philip Morris v. Uruguay, for tobacco control measures (public health); 2) Aguas del Tunari v. Bolivia, for the nationalization of the potable water and sanitation service in Cochabamba in order to guarantee affordability (human right to water); 3) Renco v. Peru related to ambient air quality standards (environmental protection);³⁷ 4) Infinito Gold v. Costa Rica regarding the environmental impact assessment for the gold mining project “Crucitas” (environmental protection); 5) Eco Oro v. Colombia, linked to the protection of the Paramo of Santurban, the main source of fresh water in the country (environmental protection and human right to water).

Based on that experience, which measures adopted to reduce COVID-19 biological, social and economic impacts, in order to reduce vulnerability can be challenged using ISDS? Latin America and the Caribbean, the most sued region in the world, provides relevant examples. In April 2020, Peruvian Congress passed an act³⁸ that suspended toll payments during the health emergency. A few weeks later, the Embassies of Canada, Australia, France and Colombia³⁹ in Lima⁴⁰ expressed their concern about the investments of their national companies, and one of the road infrastructures concessionaires-initiated pre-arbitration stage (CIAR Global, 2020). On 25 August 2020, the Constitutional Tribunal declared the unconstitutionality of the law because it violated article 62 of the Constitution, according to which contractual terms cannot be modified by laws.⁴¹ Is this just another case of unconstitutionality or is it also an undercover example of regulatory chill?

However, the first arbitration challenge to COVID-19 measures took place in Chile. On January 2021, the French corporations Groupe ADP International and Vinci Airports, which have 45 and 40% of stalks in Nuevo Pudahuel Airport consortium (Santiago)⁴² initiated the six-month coolingoff period under Chile-France BIT (art. 8) before ICSID arbitration. The investors questioned the rejection of the Ministry of Public Works to extend their contract in order to compensate economic losses caused by the pandemic: their incomes decreased 90% and Chile lost 19 routes, 630 weekly frequencies, 70% of passenger during 2020.⁴³

On August 13, 2021, the foreign investors registered a request for the institution of arbitration proceedings before ICSID, under Chile-France BIT. According to UNCTAD Policy Investment Hub, the amount of compensation claimed is 455 million of dollars. The tribunal, constituted on 25 March 2022, is composed by Claus Von Wobeser (President), Stephan Schill (appointed by the claimants) and Mónica Pinto (appointed by the respondent). The resolution of the dispute is pending.

In addition, new national laws regarding COVID-19 vaccines deserve special attention. Argentina,⁴⁴ Peru⁴⁵ and Paraguay⁴⁶ enacted laws that established the power of the Administration to sign contracts with laboratories that include arbitration or judicial jurisdiction abroad in case of controversies. For that reason, transnational corporations are able to obtain a contractual waiver of immunity from jurisdiction.⁴⁷ These contractual provisions reinforce the network of more than 3200 IIAs that challenged sovereign acts in public interest areas.

Finally, the ISDS tribunal could interpret State measures for facing COVID-19 effects as an example of necessity (Resolution AG/56/83, article 25), thus the wrongfulness of an act precludes. In other terms, the State acts that deliberately and voluntary try to safeguard an essential interest (the health of its population) against a severe and imminent peril (the COVID-19 syndemic). Such behavior cannot seriously affect an essential interest of the State, other States, or the international community as recipients of the obligation. In the hypothesis under analysis, the violation of an IIA does not seem to affect any essential interests.

The exception of state of necessity⁴⁸ was invoked by Argentina in disputes related to the 2001 economic crisis. The argument was acceptable in LG&E and Continental cases, but not in Enron, CMS and Sempra cases. Therefore, it is pertinent to remember that the decision regarding the legality or illegality of the measures will be up to the arbitrators. At the end of the day, the risk of inconsistency in jurisprudence contributes to the ISDS legitimacy crisis.

IV. The Future of ISDS: a Roadmap

During the COVID-19 era, the number of disputes remained the same as in previous years. In this sense, Echaide affirms that the claims could result in a lack of financing in the short and medium term, this could lead to a deterioration in human rights policies which will increase inequality.⁴⁹ Thus, is it possible to protect national policy space and human rights at the same time? Fineman’s vulnerability theory provides an interesting approach to answer the question.

First of all, “by changing the legal subject to the inherently vulnerable human, [vulnerability theory] provides distinct ontological grounds for this affirmative public responsibility”.⁵⁰ This approach requests a State that is responsive to human needs and the reconfiguration of current legal structures based on the prioritization of individual liberty at the expense of human basic characteristics: dependency and vulnerability.⁵¹ Focusing on vulnerability and need, this approach detaches from the traditional concept of legal subject based on rationality and liberty.⁵² The traditional legal lens can lead to realistic resulted, but human need can only be apprehended with institutions’ assistance.⁵³ Therefore, the State is responsible “for ensuring the proper functioning of markets (and thus, providing equal opportunity or real freedom)”, in terms of Fineman.⁵⁴

Vulnerability paradigm focuses on the existence of a State that guarantees access and opportunities to human beings as vulnerable and dependent subjects,⁵⁵ so the State cannot be limited or conditioned by markets. Law behaves as an ordering mechanism of society and shapes existing relationships. Law is what makes it possible to address vulnerability and prevent inequities; and it is an essential instrument to achieve an adequate balance in economic relations (inter and intra-States). Spite of the fact that critics may considerer this approach as excessively paternalist,⁵⁶ it may still be an “useful construct around which to structure social welfare policy”⁵⁷ in order to define the “particular concern that a policy seeks to address”.⁵⁸

Focusing on ISDS regime, it was built to protect investors’ rights in foreign legal systems which were conceived as weak or unreliable. However, this set of rights creates relations (connecting foreign investors, States and local communities) and conflicts, which “may concern not only states’ right to regulate or distributive tensions but also recognition claims and the social embeddedness of rights”.⁵⁹ Ünüvar and Küçüksu also point out, “International Investment Law does not concern itself with the broader cultural, social and even macroeconomic factors applicable to an arbitral dispute beyond using them as voluntary counter-balancing considerations vis-à-vis foreign investment protection”.⁶⁰

Thus, the protection of public health, human rights or the environment -as global public values- has been challenged in different disputes.⁶¹ Additionally, in a recent publication, the International Monetary Fund recognizes that ISDS regime protects “fossil fuel investments... or alternatively expose authorities to legal action for breach of that protection when seeking to adopt regulatory measures to curtail fossil fuel activity”.⁶²

According to the characteristics of ISDS regime, in order to protect human beings as vulnerable subjects, it is necessary to strengthen national policy space, that is, the set of policies that a State can adopt in areas of public decision. Its core is the right to regulate, and particularly in IIR, it “denotes the legal right that exceptionally allows the host state to regulate in derogation of the international commitments it has undertaken by means of an investment agreement without incurring a duty to compensate”.⁶³

By strengthening public policy space, and especially the right to regulate, public budgets would not be compromised in arbitrations and regulatory chill may not be an option during a syndemic.

In a globalized world, any significant change at the international level will necessarily require cooperation between States.⁶⁴ The role of States is crucial to promote different options that could pave the way for deeper long-term actions for reshaping ISDS regime. For the short and middleterm several options are on the table, thus, the roadmap should include: 1) a moratorium on pending ISDS disputes and a restriction on future claims related to COVID-19 measures; 2) introduction of counterclaims as a general rule in ISDS regime; 3) an explicit reference in the IIAs to regulate within their national framework; 4) an explicit exclusion of protected areas or policies.

The first option, in times of COVID-19 syndemic, is imperative. In order to allocate greater budgetary resources to combat the crisis, States need to take steps towards a moratorium on pending ISDS disputes, as well as a restriction on future claims related to health, social and economic measures taken to tackle the spread of the virus, as proposed by the academia⁶⁵ and more than 600 civil society organizations.⁶⁶ Although both proposals can be considered temporary or intermediate, since they do not solve the core problem, they are still relevant. A generalized moratorium would prevent eventual rejection to requests of suspension on a case-by-case basis, as happened in Orlandini v. Bolivia (procedural order number 7) and Glencore v. Bolivia (procedural order number 11).

The second option is to introduce counterclaims as a general rule in ISDS regime.⁶⁷ Counterclaims constitute an instance to enforce human rights and defend the sovereignty, by justifying the measures taken in valid exercise of it. It also gives the State the possibility of requesting compensation for the damages caused by foreign investors. This way, ISDS architecture could turn against foreign investors⁶⁸ and reduce the number of claims. This option could be introduced as part of rules of arbitration modernization.

The two following options involve substantive changes to existing or new agreements. Vulnerability theory calls for public institutions to assist individuals in the process of building resilience. To do so, States require having sufficient regulatory space. The recognition of the right to regulate is not an innovation in the system; in fact, one of the most common ways for its incorporation is its enunciation within the preamble of the agreements, seeking to balance the system with general references or in matters of non-economic interest.⁶⁹ For instance, some CFIAs have this provision, but these agreements exclude investor-State dispute settlement mechanisms from their articles.

Unlike CFIAs, the Morocco-Nigeria BIT includes ISDS mechanisms. Its preamble reaffirms the right to regulate and adopt domestic measures in relation to investments in order to achieve its public policy objectives. Additionally, under the heading “investments and environment” (article 13), it expressly recognizes the right to act with discretion in relation to regulation, compliance, investigation, prosecution and decision-making regarding to environmental issues. The importance of this provision stems from the recognition that the protection of the environment can be a priority over foreign investment with a wide discretionary margin.⁷⁰

It is important to point out that the claim for enlarging the national policy space has different shades in the Global South and the Global North. Michelle Ratton Sanchez Badin and Fabio Morosini argue that, in the North, the debate emphasizes on “correcting negative externalities, illustrated by health, safety and environmental exceptions”, while in some countries in the South, it follows constitutional principles.⁷¹ For example, the domestic policy goals in equitable access to South Africa’s mining resources, especially to expand opportunities for historically disadvantaged groups during the apartheid, lead to Piero Foresti case.⁷² Although the parties agreed to settle the arbitration, it provided a catalyst for the termination of ten BITs and the review of investment law.⁷³

Finally, a deeper option relies on the exclusion of a list of protected areas or policies from ISDS. As a consequence, these areas should not be susceptible of foreign investors’ claims. This new State-market balance does not mean that States should follow a trend of less international regulation in order to create a kind of “containment barrier” for the impacts of International Law into policy space.

Deregulating under the liberal logic of laissez faire - laissez passer does not seem to be the way. This statement can generate the false idea that the areas governed by the logic of the market, nowadays, have a concise or weak regulation. It is not the case. For instance, International Trade Law may be the most regulated area in International Law: general rules on trade in goods, general rules on trade in services, exceptions to the rules, differential and more favorable treatment, specific rules on technical barriers, subsidies, safeguards, among others. At the end of the day, the core of the problem does not lie in having more or fewer rules, but in having better rules, that is, rules that do not constrain national policy space as a channel to reduce vulnerability.

V. Conclusions

During the eighties and the nineties, ISDS has its boom with the proliferation of IIA and international credibility. The global golden age started to crack at the beginning of the first decade of XXI century through dissident voices in the Global South, particularly South America in relation to constitutional provisions and environment and human rights-related disputes. During the last years, the contestation arrives to the Global North, in terms of policy space protection. Therefore, nowadays ISDS regime is facing a legitimacy crisis that is reinforced with the COVID-19 crisis.

This piece argues that COVID-19 crisis may lead States to the perfect storm as a result of the expansion of their regulatory capacity in order to tackle the syndemic. Therefore, vulnerability theory contributes to reshape IIR, and prioritize human being as a vulnerable subject and the responsive State. From more superficial actions to deeper changes, four options should be part of a short and middle-term roadmap: 1) a moratorium on pending ISDS disputes and a restriction on future claims related to COVID-19 measures; 2) the introduction of counterclaims as a general rule in ISDS regime; 3) an explicit reference to right to regulate in IIAs; 4) an explicit exclusion of protected areas or policies.

International Law is a powerful instrument to approach vulnerabilities, to protect policy space and, in terms of the United Nations Secretary-General, Antonio Guterres, to build a “fair globalization”.⁷⁴ But International Law is also a powerful instrument to deep vulnerabilities, to constrain policy space and build an unfair globalization. The States, and their leaders, have the power to choose which path to follow.