Behind Closed Doors: Investigating the System for Settling Investor-State Disputes

The little-known but powerful Investor-State Dispute Settlement (ISDS) system sees high-stakes cases between companies and nation-states. Image: Shutterstock

The fall of apartheid in South Africa was one of the biggest global news stories of the 20th century. Yet, after the government introduced new Black Economic Empowerment policies to redress past injustices, a group of European mining investors was able to successfully challenge them under the radar.

They brought the country to an obscure branch of the World Bank that oversees “investor-state disputes,” demanding hundreds of millions of dollars in compensation for impacts on their businesses. In the end, they effectively gained exemptions to the policies to which they had objected and they had to share much less of their power with historically disadvantaged individuals. This case, and its conclusion, received almost no media and public attention at the time.

The little-known but powerful international Investor-State Dispute Settlement (ISDS) system is not transparent. Normal court reporting is not possible because few documents are released. Cases are typically deliberated behind closed doors.

Matt Kennard and I began investigating this system almost a decade ago. It’s a big part of our new book, “Silent Coup: How Corporations Overthrew Democracy,” which goes in-depth into several cases, including the one against South Africa. Officially, those investors lost their claims; they were dismissed by the tribunal. So unpacking what really happened, and what was gained and lost, required multiple sources and an investigative approach.

How the ISDS System Works

As of August 2023, almost 1,000 cases against states around the world had been filed at the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) in Washington, DC. This is the premier, but not only, venue for such disputes. Others include those in London and The Hague.

Most cases have been filed under international trade and investment agreements (bilateral deals between pairs of states, or multilateral ones such as the North American Free Trade Agreement or NAFTA) that have ISDS provisions. Other cases have been brought based on contracts and even national laws, including provisions that give foreign investors the “right” to bypass local courts.

These cases are typically judged by trios of professional arbitrators. They often take years to resolve and cost millions in legal and other fees. What’s called the New York Convention requires states to enforce decisions of these tribunals; if you refuse to pay, your assets around the world can be seized.

Why Investigative Journalists Should Care

These disputes affect huge numbers of taxpayers, voters, and citizens globally — usually without their knowledge.

Millions, if not billions, of dollars can be at stake — to be paid with public funds that could be spent elsewhere. Honduras is currently facing an $11 billion claim, a figure equivalent to roughly two-thirds of its current national budget.

That case is over Honduras’s decision to overturn a law that enabled the creation of controversial special economic zones and “private cities.” Other cases have involved investors challenging environmental protections, minimum wage legislation, and taxes that companies don’t want to pay.

With so much money at stake, cottage industries have emerged around this system, including so-called “third-party funders,” which invest in companies’ claims in exchange for cuts of eventual awards. Though sometimes companies have been clear that payouts aren’t their preferred outcome.

Take the example of El Salvador, which was hit with a multi-million dollar claim from a mining company that failed to get the permits it needed to dig. That company’s own communications expressed what it really wanted was access to the country’s gold, and “a negotiated outcome to the permitting impasse.”

Just the threat of a case may also be enough to affect government decision-making. It’s what some law firms claim is a major advantage of this system: how the prospect of such a case can be a “bargaining tool” in negotiating with governments, or give “leverage in the event of a dispute.”

The book jacket of “Silent Coup.” Image: Screenshot

For decades, these disputes predominantly involved investors based in wealthy states challenging governments in developing countries. Now, however, this system affects countries in every region of the world, thanks to a global proliferation of bilateral and multilateral trade and investment deals.

The World Bank says the existence of the ISDS system increases investors’ confidence and thus rates of international investment and development, but such claims are heavily contested. A 2018 study from Columbia University’s Center on Sustainable Investment, for instance, concluded that “the expected benefits have not clearly materialized, whereas the costs have been unexpectedly high” – including undermining the very ability of states to govern.

How to Start Investigating

While this is not a transparent system, there is some data; there are some documents; and there are details that can be gained from insider sources, other disclosures, and by triangulating other information.

Data

ICSID has an online case database with records categorized and filterable by case status, country challenged, economic sector involved, and what treaty or other legal document the investor claims was breached.

The UN Conference on Trade and Development (UNCTAD) also has an online database for ISDS cases (including those registered at places other than that World Bank branch). Helpfully, it includes case summaries in plain language. For example, its record for a case filed against Italy in 2017 describes it as: “Claims arising out of the decision in February 2016 by the Ministry of Economic Development not to award the claimants a production concession… following the Government’s re-introduction of a general ban on oil and gas exploration and production activity within the 12-mile limit of the coastline.”

Documents

Many documents will be produced during these cases, including initial notifications of investors’ claims, arguments and information presented by both sides, and tribunal judgments. ICSID’s case database and records sometimes include links to some of these documents, but often not many. In the above-mentioned case against Italy, for instance, ICSID’s records include only one linked document — the final award issued by the tribunal. New rules adopted in 2022 opened the door slightly to disclosure of more documents, according to an article in Eye on Global Transparency. ICSID now sends updates on cases (sign up here).The existence of third-party funding arrangements must now be disclosed, but only to the parties and to the tribunal.

There are other sources, however, including the Investment Treaty Arbitration Law (italaw) website, which is managed by academics who study these cases. It can be a good way to discover more details on cases. For example, its page on the aforementioned case against Italy includes six files, including press releases from the claimants and intermediary judgments and opinions from the arbitrators.

Relevant documents are also often produced before and after these cases. For instance, when we looked at a case filed against Germany over a controversial coal-fired power plant in Hamburg, a crucial document was a legal analysis of water permits granted before and after the ISDS dispute. This showed how the case had effectively weakened environmental regulations that were initially applied to its permit.

Insider Sources

People who know a lot about these cases include sources at the World Bank’s ICSID branch; investors and corporations that file these cases, and their lawyers; (some) government officials and their defense teams; and others watching and seeking to also benefit from disputes. Several subscription publications cover ISDs closely, the Global Arbitration Review and International Arbitration Review, with headlines only visible to non-subscribers, but still worth looking at.

Case records and documents will list the names of the lawyers who worked on them. They will know details about the dispute’s proceedings — but may also know more about the context and any other related negotiations.

When we looked at the case against South Africa mentioned earlier, for instance, it was the investors’ lawyers who explained to us how the dispute resulted in an exemption to the Black Economic Empowerment policies their clients challenged. This was a key piece of information since the exemption wasn’t mentioned in any case documents — it was only agreed to in parallel negotiations outside of the formal tribunal process.

Corporate Communications

Companies may also publish communications about these cases on their websites, or in newsletters, webinars, and social media posts. Sometimes these are directed to their own investors, and can include revealing details.

In the previously cited case against Italy, for example, the company’s communications disclosed that all of its costs had “been funded on a non-recourse (no win, no fee) basis from a specialist arbitration funder.” This means the company didn’t even have to pay to launch its case — and that there is another entity, this “specialist funder,” with a financial stake in the dispute and likely with information about it.

Timelines

Timelines can help understand what has happened in specific cases — and what documents and discussions may have been produced or held at different steps. They can also help understand the public interest issues at stake.

That production concession case against Italy, for instance, can be traced back to large protests against the company’s proposed fossil fuels project off the coast in Abruzzo. Tens of thousands of people had taken to the streets to oppose it, and, in part, they prompted Italy’s refusal to approve the plan.

Of note: Italy had already officially withdrawn from the Energy Charter Treaty that the company claimed was breached, before the case was filed. But the claim was still possible because that treaty includes a “sunset clause” under which its rules remain in force, even after withdrawal, for 20 years.

Transnational Cases — Cross-Border Collaboration

These cases by definition have transnational elements, and thus require global perspectives and sources to fully investigate them. A case against one country can also have international consequences if it, for instance, inspires other similar challenges against other states.

Any sector of the economy that has foreign investment in it — from manufacturing to healthcare and other services — could be affected by this ISDS system and challenges through it, too often without the public knowing.

Taxpayers should know how much of their money has gone to companies through this system. Voters should know how much power it has over actions (or inactions) by their governments. But it has largely operated in the shadows. We need investigative journalists to expose the full extent of the ISDS system’s effects on our democracies.

Additional Resources

What Washington is Doing in Your Country: A Tipsheet for Investigating US Influence Around the World

GIJN Resource Center: Researching Corporations and Their Owners

GIJN Resource Center: Covering the Extractive Industries

Claire Provost is an investigative journalist and co-author of “Silent Coup: How Corporations Overthrew Democracy,” with Matt Kennard (Bloomsbury, 2023). She co-founded the new nonprofit Institute for Journalism and Social Change. She was previously head of global investigations at openDemocracy; a data journalist at the Guardian, and a fellow at the Centre for Investigative Journalism.