• Investor-state dispute settlement provisions creating a new financial business


    Ben D. Kritz

    WHEN they were originally developed, investor-state dispute settlement (ISDS) provisions in bilateral investment treaties, free trade agreements and various forms of public-private partnership projects were thought to be a measure of protection for both parties. It turns out they are a lucrative investment in their own right as well.

    In general, ISDS allows foreign corporations to seek arbitration against host governments for losses or reductions in expected profitability of investments caused by policy or regulatory changes.

    With an ISDS mechanism, a corporation with a dispute against a government would not be at the mercy of that country’s legal system, and the country likewise would not be compelled to subject itself to courts in the corporation’s home country. The process would be fair and objective, and resolve investor-state disputes much more quickly than conventional legal processes.

    There have been several examples of ISDS cases in recent years here in the Philippines, such as the dispute between the government and Piatco over the fair compensation for the expropriation of Terminal 3 at NAIA, the case brought by Belgian marine engineering firm BDZ over former President BS Aquino 3rd’s arbitrary cancellation of the Laguna Lake dredging project, and cases brought against the government by Manila Water and Maynilad over its rejection of water rate increases. The government has a mixed record in ISDS cases; it won against Piatco (but lost when the Supreme Court here ordered the government to pay the company), lost against BDZ, and had a partial victory against the water concessionaires.

    That being the case, the Philippines has come onto foreign investors’ radars for a rather dubious reason: The country is seen as a mark for ISDS cases; in other words, if a foreign company invests here and has to later invoke ISDS provisions, the chances of success for the company are about even. Some countries are more vulnerable, but putting the Philippines’ other attractive investment attributes with a 50-50 chance of recovery through ISDS if things go wrong makes betting on the odds that things will go wrong a good gamble.

    The gamble is so attractive that it has encouraged the creation of an entirely new financial industry. The International Council for Commercial Arbitration estimates that about 60 percent of companies considering ISDS claims seek third party financing before pursuing them. A financing firm – usually a hedge fund or a private equity firm, will finance the ISDS case as a third party, usually providing technical assistance in the form of a litigation package that advises the company bringing the arbitration suit on everything from what treaties to exploit to which law firms to hire and which arbitrators to nominate.

    The advantage for the company is that it reduces litigation costs to the company, and under the rules that apply to the main arbitration centers in the world, the International Center for Settlement of Investment Disputes (ICSID) in Washington, DC, and the International Court of Arbitration of the International Chamber of Commerce in Singapore (ICC-ICA), most corporations do not need to declare third-party funding for ISDS cases.

    This dubious new business is expanding as well, because in an increasing number of investment deals, bondholders of investing companies can also resort to ISDS provisions if their returns are not what they expect. Thus, countries are potentially liable for not only the amount (plus any added damages and costs) involved in a disputed investment, but for the amount of debt financing connected with it.

    It is entirely possible, therefore, that many of the companies investing in the Philippines during the current administration, in turn, have investors who are putting their money into these companies solely because of the likelihood of success in any future ISDS case. Because of the somewhat volatile nature of the current administration, which has at times proposed imposing martial law or other forms of emergency control, has already thrown the local barangay elections into disarray, and is pushing for changes to the Constitution and a switch to a federal form of government—all of which are “policy or regulatory changes” of a significant nature that are usually legitimately covered under ISDS provisions—the likelihood of ISDS cases being initiated has increased.

    All of that could lead to a couple of weird and unfavorable outcomes for the Philippines. If the Duterte regime makes headway in regularizing policy and processes, thus reducing the chances that disputes covered by ISDS would arise, investment may actually decline for a time. On the other hand, persistent uncertainty may increase the number of ISDS complaints being raised, costing Filipino taxpayers millions in litigation expenses for each one.



    Please follow our commenting guidelines.

    Comments are closed.