What is ISDS?

Friday 7 August 2015

Authors: Ian Gault and Andy Glenie

​​​​​​One of ​the main talking-points in relation to the ongoing negotiation of the Trans-Pacific Partnership Agreement (TPP) has been the inclusion in the TPP of provision for investor-state dispute settlement (ISDS).

ISDS clauses are commonplace in international trade agreements (known in New Zealand as free trade agreements or closer economic partnerships). New Zealand has already brought into force a number of agreements containing ISDS clauses, with parties including:

  • Singapore;1

  • Thailand;2

  • China;3

  • ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam);4

  • Malaysia;5 and

  • Taiwan.6

Those agreements provide that each state must accord certain basic protections to the investors of another state. Those protections vary but typically include:

  • national treatment (foreign investors are entitled to treatment that is no less favourable than that accorded to domestic investors);

  • ‘most favoured nation’ status (foreign investors are entitled to treatment that is no less favourable than that accorded to investors from any other foreign state, usually under another trade agreement);

  • freedom from expropriation (the state may not nationalise or expropriate the property of a foreign investor without paying compensation); and

  • fair and equitable treatment (a broad standard incorporating notions of due process, legitimate expectation, and access to justice).

If a state breaches those standards, a foreign investor can take action to protect its investment. The precise options open to the foreign investor vary, but most ISDS clauses provide for the dispute to be resolved by a neutral arbitral panel pursuant to agreed procedural rules. As in any civil dispute, the panel may award damages to compensate the foreign investor (but not punish the state), or restitution.

Presently, the TPP talks involve twelve countries (Brunei, Chile, New Zealand, Singapore, USA, Australia, Peru, Vietnam, Malaysia, Mexico, Canada and Japan). If a deal is reached, TPP has the potential to significantly increase the ISDS-based protections offered to both foreign and New Zealand investors in the Pacific area. The detail of the TPP agreement is currently confidential, but in March 2015 Wikileaks released a recent draft of the investment chapter. That draft suggests that the TPP parties were contemplating an ISDS clause containing the key protections referred to above, backed up by modern arbitration provisions.

If you would like to discuss New Zealand’s existing ISDS arrangements or the possible implications of the TPP for your business, please contact us.​


1 Agreement between New Zealand and Singapore on a Closer Economic Partnership (in force 1 January 2011), article 34.

2 New Zealand-Thailand Closer Economic Partnership Agreement (in force 1 July 2005), article 9.16(2).

3 Free Trade Agreement between the Government of New Zealand and the Government of the People’s Republic of China (in force 1 October 2008), articles 152 - 158.

4 ASEAN – Australia – New Zealand Free Trade Area (in force 1 January 2010), articles 18 – 28 of chapter 11.

5 New Zealand – Malaysia Free Trade Agreement (in force 1 August 2010), articles 10.19 - 10.29.

6 Agreement between New Zealand and the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu on Economic Cooperation (in force 1 December 2013), articles 18 – 28 of chapter12.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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  • Ian Gault

    Partner and Deputy Chair Auckland
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