Investor-State Dispute Settlement

Chapter 1 - Introduction

Investor-state dispute settlement (ISDS) is a mechanism that is inserted in investment treaties between states, for the purpose of allowing foreign investors access to international tribunals for any investment disputes that may arise in relation to their investment in the host country. ISDS mechanisms include access to international arbitration for international disputes instead of resort to the national courts of the host states. Hufbauer writes that ISDS procedure by definition “involves investors who are at risk of expropriation and discrimination at the hands of foreign governments” and also that by definition such foreign investors would be major firms who have the capacity and wherewithal to invest in foreign countries. There are only about 5000 multinational companies in the world that control the majority of global trade and affiliated assets. These companies have substantial investments involving trillions of dollars. Accordingly, much is at stake in such investments, which justifies the use of ISDS mechanisms to safeguard the interest of the investors and the risks that they take in their investments. ISDS mechanisms provide a safety net for companies that are investing in foreign countries against arbitrary and unreasonable treatment that leads to disputes with the host country or to arbitrary treatment pursuant to the dispute. The purpose behind inserting ISDS-related clauses in investment treaties is to provide some protection to the foreign investor when disputes arise with the host country. In such situations of dispute, the host country is often in a more advantageous position because the courts and laws in the host country may be inclined to favour it against the foreign investor. Therefore, in the event of disputes between the foreign investor and host countries, the domestic courts and processes of the host countries may not provide adequate protection and recourse to fair resolution of the disputes. National courts can also be used to provide relief and resolutions to disputes between investors and host countries. However, not all countries have effective, competent and honest judicial systems, which could reassure investors that in the event of disputes with host countries, resolution through fair and just means could be sought and achieved. This paves the way for the use of ISDS mechanisms in treaties between two countries. Moreover, laws differ between jurisdictions; and in many instances, the laws of the investors’ state and of the host state may be different. International law is uniformly applicable, and the standards of fair compensation are also higher as compared to most national jurisdictions. Due to these reasons, it is conventionally argued that the protection offered by the ISDS is superior for foreign investors.

Literature on ISDS mechanisms nevertheless suggests that such protection is not provided completely, even under the ISDS mechanism, because of the gaps in the system as it exists today. This research subject is motivated by the recent Qatari crisis caused by the physical and economic blockade of Qatar by the four Middle Eastern states of the Kingdom of Saudi Arabia, the United Arab Emirates, the Kingdom of Bahrain, and Egypt. The concept of ISDS mechanisms gains significance against the backdrop of the Qatar blockade because the blockade led to disruption of business and of investors’ investments, as it involved the air space of Qatar being blocked by the blockading countries. Moreover, the blockade also had an impact on investment activities and projects related to the 2022 FIFA World Cup, to be held in Qatar. Thus, in the wake of the blockade of Qatar, there were commercial claims that arose from the challenges of undertaking contracts in Qatar. Moreover, the blockade led to the ousting of nationals of Qatar, including investors and contractors, from the blockading countries, and vice versa. As investors from Qatar and the blockading countries had invested in each others’ states prior to the blockade, there are therefore investor disputes arising out of the blockade policy which need an appropriate response. Whether this response can be found in the existing arrangements of ISDS (if any) as between the states concerned is one of the subjects of this research. A related subject of inquiry is whether there are flaws or drawbacks in the current ISDS systems, which act as barriers to states adopting these mechanisms, and how these might influence the situation arising out of the Qatar blockade. The Qatar blockade refers to the cessation of diplomatic ties with Qatar and a blockade of air, sea and land routes to Qatar. When the four states declared the blockade against Qatar on 5 June 2017, it included a trade and travel embargo against Qatar. This blockade also had implications for investor state disputes: Qatar and the other four states as part of the Gulf Cooperation Council (GCC) had trade relations and mutual economic investments, which were affected by the blockade. This led to disputes in the form of international investment disputes, which ought to be resolved as per the treaties between the states concerned. Qatar is a signatory to the 1907 Convention for the Pacific Settlement of International Disputes, in line with which members agree to arbitrate or mediate their inter-state disputes. Similarly, the other four states are also parties to treaties that have implications for how investment disputes between states ought to be resolved.

There is a potential for numerous investment-related disputes arising between Qatar and the other Middle Eastern states as there are difficulties anticipated in undertaking contracts in Qatar. Some cases have already been filed for arbitration, by Qatari investors, against Saudi Arabia, the United Arab Emirates, and Bahrain. There are some early indications about the problems that may arise in the resolution of these disputes. Qatari’s beIN sports network has also filed an arbitration case against the Kingdom of Saudi Arabia, contending that it has been unlawfully driven out of the Saudi market. Therefore, the recent events in relation to Qatar and the likelihood of more investor disputes in the region provide a case study, within which the wider issue of ISDS mechanisms and its inadequacies as they exist today can be considered with reference to academic literature on this subject .

The purpose of developing ISDS is to promote investor confidence when investing in foreign countries; such confidence is needed for investors to have some protection against the sovereign or political risks that may be related to such investments in the foreign country. The example of the Middle Eastern crisis caused by the Qatar blockade indicates how investors may be caught off guard when the sovereign nations in which they have invested make decisions that have direct implications for and effects on their investments. ISDS provides confidence to foreign investors that in such situations they can gain access to international tribunals if the host country does not uphold its investment obligations. Literature nevertheless indicates that there are problems and controversies with respect to the application of the ISDS mechanism, which dilute the protection afforded to investors, and which are explored further in this dissertation. This dissertation seeks to explore these problems and controversies through a review of literature on ISDS, and to provide some recommendations for countering them in the light of the Qatar crisis and the investor-state disputes that have arisen due to it.

ISDS Mechanisms: Problems and Controversies, from the Literature

One of the main problems identified in the existing literature is that the use of ISDS poses a challenge to the regulatory activities of the host state; in other words, the host state may find that BITs and ISDS clauses restrict its sovereign activities related to the formulation of environmental policies, energy policies, health policies, and economic policies. What this may lead to is that states either avoid entering into BITs with ISDS clauses, or keep such clauses wide and vague, which makes their effectiveness for the foreign investors compromised in the event of a dispute. Therefore, related to the first problem, is the issue that host states may define or regulate expropriations of foreign investor property in a way that compromises the position of the investors. Another problem is the growing role of arbitrators in the resolution of conflicts arising out of international investment agreements, where arbitrators decide on the difficult and complex legal questions related to ISDS, but have done so in such a way that there is an apparent lack of a uniform application of principles. Therefore, another problem that is associated with the application of ISDS is that arbitral tribunals may add to the confusion around the meaning of clauses in ISDS mechanisms. This is not just a problem for investors but also for the governments involved because they are increasingly exposed to risks associated with unpredictable arbitration practice, which may lead to controversial and unexpected results for them. Against this backdrop of problems in the application of ISDS , there is a demand for improvement of the mechanisms or for a return to local remedies without the involvement of the international tribunals. It is suggested that ISDS is not a necessary component of international investment agreements and if both countries have highly competent, neutral and efficient domestic judicial systems, it may be avoided. However, that would not help a country like Qatar where investors are affected by the acts of blockading states. Nor would this help the blockading states whose nationals would find it difficult to enforce remedies against Qatar. Other suggestions include the drafting of clearer clauses for ISDS, and time-bound appeals mechanisms in BITs. This dissertation will explore these options in the light of the Qatar crisis and the ensuing investment disputes. A brief overview of the Qatar crisis is given below to set the background for the issues discussed more fully later. Continue your exploration of Sector-Specific Pandemic Economic Effects with our related content.

Qatar is a signatory to the 1907 Convention for the Pacific Settlement of Disputes. This requires state parties to submit their disputes to arbitration or negotiation. In 2017, when the four states instituted the blockade against Qatar, there were projects in Qatar, including those related to the 2022 FIFA World Cup, that were directly affected by the blockade. Indeed, the first commercial claim to have arisen from the events was related to the 2022 FIFA World Cup. More commercial claims are anticipated because the blockade essentially meant that the performance of contracts in Qatar became difficult; and it is expected that investment claims will be filed by Qatari investors against states implementing the blockade, as in the case of beIN Corporation v Saudi Arabia. In this case, the contention of beIN Corporation is that it was driven from the Saudi Arabian market unlawfully. In the light of these developments in the Middle East, the existence of BITs and ISDS mechanisms in this region becomes relevant to understanding how the blockade affects these market arrangements. There are some arrangements that are specific to Middle East region countries: the 1980 Unified Agreement for the Investment of Arab Capital in the Arab States is one such arrangement. Although this agreement is not commonly used as an investment claim instrument, the existence of the agreement and the fact that it is related to investments makes it relevant. Another arrangement is the Organization of Islamic Cooperation (OIC) Agreement, which entered into force in 1988. In Hesham Al-Warraq v. the Republic of Indonesia, the possibility of using the OIC Agreement as an option for investors to bring investment claims was explored and accepted under Article 17, which was held to allow investors to take the claim to arbitration against the host states. The KCI v. Gabon case reconfirmed the applicability of Article 17 to investment arbitration cases. In spite of these decisions, beIN Corporation was filed under the UNCITRAL Arbitration Rules and not under the OIC Treaty. The reason for this is the lack of clarity in the OIC Treaty about the role of the Secretary General of the OIC in appointing an arbitral tribunal when the parties fail to agree on the issue. This was seen in the case of DS Construction v Libya, in which the Secretary-General of the Permanent Court of Arbitration (PCA) appointed an arbitrator on behalf of Libya under the OIC treaty itself. Thus, instead of using the OIC Treaty, the UNCITRAL Arbitration Rules’ Most Favoured Nation (MFN) clause was used to designate an appointing authority. In other words, for giving effect to the existing agreement to arbitrate in the OIC Treaty, another treaty was used, which indicates the lack of clarity in the OIC treaty itself.

A number of Middle Eastern countries have entered into BITs with other countries. However, a common issue with these BITs is the lack of clarity and precision in the clauses; an example is seen with respect to the UAE and Russia BITs, which are not clear on the administrative body that is competent to resolve investment disputes and on the procedures to be applied. This aspect is also evident from the brief discussion above, which indicates how existing arrangements on investor disputes under the OIC Treaty, as well as under the Unified Agreement for the Investment of Arab Capital in the Arab States, have not been able to the provide a clear and consistent approach to the resolution of investment disputes between countries in the Middle East. The Qatar crisis further exposes these limitations in investor dispute resolution structures and mechanisms in the Middle East. Therefore, while it can be expected that the Qatar blockade will lead to an increasing number of investor disputes as contracts become more difficult to execute, it is not clear as to how the existing mechanisms might resolve these disputes.

Chapter 2

The problem of regulatory chill as related to ISDS in the context of Qatar

This chapter discusses the problems and controversies related to ISDS in the context of problems of regulation. ( For ‘regulatory chill’ specifically, see below). Some of the problems identified in the literature are related to the increasing challenge posed to the host state’s regulatory activities, which may be restricted due to the ISDS; thus, the host state may find it difficult to implement environmental, energy, health, and economic policies, due to the current BITs that may restrict such policies. This chapter discusses the problem of regulation in the context of Qatar; and the controversies that are shown in the literature in this context are discussed in this part of the dissertation. First, the chapter discusses the concept of regulatory chill in general; then it discusses the way its implications affect Qatar, and how this makes the issue important to be explored in order to understand the factors that may impede the acceptance of ISDS mechanisms in Qatar and the Middle East.

The host state’s regulatory activities: the problem of ‘regulatory chill’

One of the most common objections to ISDS from the perspective of host states is that of ‘regulatory chill.’ The theory of regulatory chill refers to the argument that once governments become bound by ISDS clauses, they will be hesitant to make any needed changes to their law or policy as these changes may be considered to be affecting the obligations under the international investment agreements. Regulatory chill is thus defined as a situation wherein “a State actor will fail to enact or enforce bona fide regulatory measures because of a perceived or actual threat of investment arbitration.”I other words, governments may become restrained in their approach to policy making because they fear the possible repercussions of these policies in relation to investment disputes. The important point here is that governments may even choose not to enforce established bona fide regulatory policies because of regulatory chill, which is a criticism of ISDS. In other words, the use of ISDS mechanisms may not be preferred by some governments because it may be thought that adopting this mechanism would lead to regulatory chill for the state, and not allow it make domestic law and policies as a matter of sovereign power, because it would be impeded by the effect of the ISDS, and by the possibility of action under it by the investors who are affected by such laws or policies. The proponents of the regulatory chill theory argue that ISDS mechanisms prevent governments from exercising their sovereignty because in order to honour their obligations under the BITs, governments have to restrain their policy activity associated with a number of policy areas, including the environment, health, natural resources, and human rights. The fact that regulatory chill in at least some areas of government policy making is one of the purposes of ISDS is undisputed. Indeed, it is argued that such regulatory chill is desired to prevent governments from making policies that are discriminatory against foreign investors or are protectionist in nature. However, when such regulatory chill comes in the way of bona fide policy making, then there is a concern for the host states that needs to be responded to. Such concerns are at times used to argue against ISDS mechanisms in the BITs. For instance, in 2005, the Sri Lankan Ministry of Foreign Affairs issued a statement opposing ISDS and stating:

“Sri Lanka believes that an expansive interpretation of regulatory measures could circumvent the national policy space hindering the government’s right to regulate, creating a risk of “regulatory chill”, with governments hesitant to undertake legitimate regulatory measures in the public interest for fear of claims for compensation being preferred by investors.”

The above concerns of the Sri Lankan government relating to a possible regulatory chill if ISDS are adopted are not peculiar to Sri Lanka; and there are instances of countries withdrawing from BITs due to similar concerns. South Africa terminated its existing BITs with Belgium, Luxembourg, Germany, and Switzerland; Indonesia also announced that it would terminate more than 60 BITs with other countries. Both countries have been on record as opposed to continuing their BITs arrangements, due to the problems associated with ISDS mechanisms, particularly related to the perceived interference with the sovereign power of states to make laws and policies. The actions of these states are to some extent responses to the concerns about regulatory chill that may emerge if states become afraid to take bona fide policy measures for fear of expensive arbitration for investors. It is possible that states in the Middle East, including Qatar, Saudi Arabia, Bahrain, and the United Arab Emirates, have hesitated to enter into ISDS arrangements with each other due to the problem associated with regulatory chill. If so, then one of the reasons for impediments for the investors in these states in getting remedies in the wake of the Qatar blockade may be the fear of regulatory chill. The experience of the negotiations on the Transatlantic Trade and Investment Partnership (TTIP) agreement between the European Union and the United States exemplifies the concerns associated with the adoption of ISDS mechanisms, and the recent position of European states against the use of these mechanisms. It also exemplifies the problems that ISDS may present for the regulatory activities of host states and how governments and even civil society members may respond to these problems. The European Union and the United States have negotiated on the TTIP by focussing on alternatives to arbitration, which is one of the common features of ISDS mechanisms. The TTIP example demonstrates the concerns of governments as well as of civil society as to how BITs with ISDS provisions have specifically affected the sovereignty of the state. The research on the responses to the same concerns by the Dutch government and civil society members suggests that some of the major areas of concern relate to the ways in which such arrangements may affect the sovereignty of host states. The TTIP was considered to be a very ambitious trade and investment agreement as two developed economies (United States and Europe) were involved in it; however, the agreement required the states to enter into Free Trade Agreements or BITs, as many European countries did not have such arrangements with the United States. It was thought that while the TTIP could significantly increase trade and investment flows, it was necessary to ensure the protection of investors on both sides. However, the negotiations on the BITs revealed that there were some legitimate questions from governments, private industry, and civil society related to the protection standards and dispute settlement mechanisms involved in the TTIP. The ISDS mechanism in particular raised questions in countries like the Netherlands, with both civil society members and members of the Dutch Parliament questioning the need for ISDS. They argued that the existing legal remedies in the EU and the United States, which were mature, were preferable to the ISDS approach, which could create a “regulatory chill” in health, the environment and natural resources sectors. Questions were also raised with respect to a lack of transparency in the current forms of ISDS mechanisms.

Due to the increasing perceptions of BITs as being restrictive of national governments’ regulatory activities, there has been a shift in how countries approach BITs, with some countries now adopting a more host-state friendly framework. Examples can be seen in Australia, India, and the United States, which have increasingly adopted a more host-state friendly framework. TTIP therefore is not the only recent example of countries showing a preference for systems of resolution of investor and state disputes, which arenot as restrictive of their powers to make laws and policy as ISDS in its current form is perceived to be by many states. While the issue of regulatory chill is relevant to understanding the concerns of host states regarding ISDS, it is also important to note that some regulatory chill is necessary for the protection of investor interests and for increasing the security of trade between nations. Such a ‘chill’ is also a necessary condition of international law itself, because some restrictions on the sovereignty of states are necessary for the mutual trade relations of states. This is also indicated by the following excerpt from the judgment of the Permanent Court of International Justice in The S.S. Wimbledon:

The Court declines to see in the conclusion of any Treaty by which a State undertakes to perform or refrain from performing a particular act an abandonment of its sovereignty. No doubt any convention creating an obligation of this kind places a restriction on the exercise of the sovereign rights of the State, in the sense that it requires them to be exercised in a certain way. But the right of entering into international engagements is an attribute of State sovereignty.

Therefore, the right to enter into BITs and accepting ISDS is a part of the exercise of state sovereignty. By entering into such arrangements, states agree to forego some aspects of their sovereignty, which are necessary to maintain the relations between states with respect to the treaty subject matter. In the case of international trade and commerce, states adopting a discriminatory stance or protectionist attitudes against foreign investors obstruct an increase of international trade. This has a negative impact on economic growth. For that reason states are required to agree to restrict tendencies to make laws and policies that do not balance the need to protect investor interests, in their investments in their territory, with their own state interest in the sovereignty of making law and policy. Therefore, while regulatory chill is not a desirable condition for any state to encounter, some policies do need to be ‘chilled’ for the purpose of creating a more conducive environment for investments, so that economic growth can be achieved. At the same time, the need for states to make bona fide policies is a legitimate concern of host states; and this needs to be responded to, so that states can feel encouraged to enter ISDS arrangements.

The problem of ‘regulatory chill’ in Qatar’s context

In the Middle East, an example of how a balance between investor interests and state sovereignty interests, through the adoption of BITs, can lead to protection of the interests of investors can be seen in the case of Al Jazeera. In this case the dispute between Egypt and Al Jazeera was resolved as per the BIT between Egypt and Qatar, the home state of Al Jazeera. In this case, Egypt’s actions against Al Jazeera included the closure of facilities in Egypt and cancellation of its broadcast licence; there were also some allegations of harassment of its reporters. The arbitral tribunal decided the case in favour of Al Jazeera. Without the BIT having been in place, Al Jazeera would not have been able to get a remedy against the unreasonable expropriation of its investment in Egypt. However, the issue of regulatory chill may be one of the reasons why states in the Middle East, including Qatar, are wary of entering into BITs. One of the factors could be that investors in the Middle East have also used the means of ISDS and BITs to escape responsibility for crimes committed in the countries, specifically by using the ISDS mechanisms to avoid punishment. This may lead to concerns of states that they will not be able to use their laws effectively to monitor the actions of investors and their effects on the laws and policy areas related to human rights, labour, environmental, health and other public law aspects. Nevertheless, Middle Eastern nations have increasingly adopted BITs in order to encourage foreign investors to invest in countries in the region. Therefore, the extent to which Middle Eastern countries are discouraged by the perceived flaws in the ISDS mechanisms cannot be said to be high at this time. In the following subsection, the issue of regulatory chill is now discussed in greater detail, primarily in relation to intellectual property rights, and with specific reference to the Middle East and Qatar.

Intellectual Property Rights Issues in the Middle East and Qatar

Naim writes about the impact of ISDS on the GCC nations from the perspective of intellectual property rights; the principal concern about countries in the GCC is that ISDS clauses may lead to a situation where governments within the GCC may become unable to protect their interests against wealthy corporations, who may sue authorities for compensation over policies that adversely affect them. This has implications especially for intellectual property law in the GCC in the context of regulatory chill, because intellectual property law in GCC nations is underdeveloped. Could ISDS mechanisms lead to a situation where GCC nations may not be able to develop their intellectual property law for fear of being sued by the wealthy foreign firms finding that changes to or developments in current intellectual property laws are adverse to their own interests? That is one of the important questions raised by Naim in the context of GCC countries. With reference to the TTIP discussed above, the fear of the implications of the treaty for the intellectual property law of GCC countries are that they increase the potential for more cases against governments by foreign corporations, where governments are exercising their powers based on domestic sovereignty and rule of law considerations; and this may lead to the fear of regulatory changes even when these are required. Naim also mentions the case of Al Jazeera, which shows the “ripple effects of ISDS as a dispute settlement mechanism.”

The case of Eli Lilly v Canada indicates the potential issues for GCC nations related to the use of ISDS mechanisms in the context of intellectual property rights. The case involved proceedings against the Canadian law on drug patents, wherein the claimant alleged that the patent invalidation by the Canadian government based on this law undermined the company’s future profits. Naim writes that there are three issues or potential threats that are highlighted by the Eli Lilly case for GCC countries. GCC countries have as yet not developed their intellectual property law to a great extent, and therefore there is a lack of expertise and knowledge on how to deal with ISDS in the specific context of intellectual property disputes. More importantly, there is a potential impact on the abilities of states to determine their own patent standards after ISDS mechanisms become binding on them, as any potential changes to intellectual property law in GCC states after that point may become the basis for suits against the government by foreign corporations. In other words, there is a threat of regulatory chill with respect to the development of intellectual property law in GCC states. At this time, as Naim points out, “Although there is a general acceptance of intellectual property rights in the GCC and each GCC state is TRIPS (Trade-Related Aspects of Intellectual Property Rights ) compliant” there is an absence of internal frameworks within the GCC countries that are transparent and publicly accepted. The regulation of intellectual property rights and the extent to which this can be done by states that have accepted ISDS is a matter of some academic attention. Prior to the popularisation of the BITs, international law on intellectual property was largely determined under the aegis of the World Intellectual Property Organization (WIPO), and then the World Trade Organization (WTO). The use of BITs and free trade agreements led to the reconceptualization of intellectual property law and rights, with intellectual property rights becoming transformed into assets, due to the commitments made by states in ISDS mechanisms. The problem with this approach, however, (especially for GCC states like Qatar that do not have intellectual property law as developed as in North American and European states), is that the shift towards BITs and ISDS mechanisms has led to a loss of authority for states to regulate their intellectual property laws, in ways that can balance intellectual property rights with other societal interests; states may, for example, be required to limit intellectual property rights in the larger interests of concerns over public health. However, the application of ISDS may prevent the state from taking such regulatory steps lest there is an adverse impact on a foreign investor, or the state becomes liable to pay compensation in subsequent claims by investors if such changes to the law are made. As this presents a justified concern for a state that has sovereign interests in regulating intellectual property law, it has been argued that there is a need to reconceptualise ISDS so that the arbitral tribunals are required to consider the localisation of the intellectual property law in the host state, and whether this would lead to an obligation on the part of the state to protect the rights of the foreign investor.

In Eli Lilly v Canada, Canada was able to prevail over the foreign investor only because it was able to establish that there was no radical change in its intellectual property law, and that the relevant law had actually evolved over time; and it also showed that even prior law included the requirement that evidence on utility must predate the filing of the application. This points out a significant concern that GCC nations may take note of. Canada’s success against the foreign investor was based on the state of development of its own intellectual property law, and the established fact that the doctrine that was being challenged by the investor was not a radical change to the law. However, in GCC countries the state of intellectual property law is not similarly developed. Any new developments to intellectual property law in GCC countries might well be deemed as radical changes. This would mean that ISDS mechanisms present greater concern for GCC nations, whose laws on intellectual property are not so well developed, than they might to countries like Canada that can establish no radical change to have taken place to their (better developed) laws since the ISDS came into force. Therefore, there is an understandably greater concern about regulatory chill for countries like Qatar with respect to their intellectual property laws. Indeed, the very emphasis on national law in the Lilly case is problematic, because it concerns the state of the law, and whether changes are radical enough to warrant compensation for investors. For countries like Qatar and other GCC nations, this opens them more to problems of regulatory chill, because the state of their laws may not be well developed at the time of the ISDS, and any further development of them may be stymied by the potential threat of investor disputes. This is also taken up by Dreyfuss and Frankel, who write that instead of adopting a “clear rule by acknowledging that patents are contestable throughout their terms; that because they are, at best, probabilistic rights, patent holders cannot harbor robust expectations of validity”, the arbitral tribunal chose to examine the “Canadian law in incredible detail to determine whether the changes were—as Lilly claimed—dramatic, or incremental and evolutionary”; and that as there was considerable evidence of the prior use of the promise doctrine, the tribunal chose to find for Canada. The consequences of what would have happened if such considerable evidence of the earlier use of the doctrine had not been found in Canada would be a matter of concern for countries like Qatar, where intellectual property law is not as developed; and consequently it would be difficult for the government to establish evidence of the operation of the law. If similar cases arise in GCC nations, it can be expected that changes in intellectual property law are bound to be seen as radical, simply because the national laws are not so well developed at this time. In other words, there is a serious and potential issue of regulatory chill for GCC countries with respect to the development of intellectual property law.

Middle East concerns about ISDS mechanisms in the context of regulatory chill - summarised

Looking more widely, it cannot be denied that there are serious legal implications from the Qatar blockade for the investors involved. The Qatar blockade affects a wide variety of contracts on goods and services contracts between merchants in Qatar and their counterparts in the blockading countries. The WTO is also relevant to the disputes between the parties involved in the Qatar blockade, as the WTO treaties include the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and Trade-Related Aspects of Intellectual Property Rights (TRIPS). Qatar has filed cases against the blockading states before the WTO. If there were BITs between the states, then the investors could have taken other measures as per the ISDS. However, there are few BITs between the states concerned. If Middle Eastern nations like Qatar are to accept ISDS mechanisms, they need to give attention to the many implications of the problem of regulatory chill. Indeed, this may be one of the issues why some countries may be wary of accepting ISDS mechanisms in the first place. More discussion on this follows in the next chapter, where the dissertation explores the dilemma for governments related to ISDS mechanisms.

Chapter 3

ISDS, Regulatory Chill, and the Dilemma for Governments

For governments that are involved in International Investment Agreements (IIAs), the dilemma is that while ISDS has emerged as a key element of international investment protection, it is also proving to be increasingly risky. The risks for the government are related to the risk of being sued by foreign investors; and the risks involved in the subsequent unpredictable arbitration practice, which may lead to controversial and unexpected results for the governments. Domestic laws and complex domestic legal issues are also exposed to examination by international arbitrators. Some countries have already taken steps to counter these risks. For instance, Canada and the US preserve their domestic regulatory space by clarifying treaty provisions, introducing exception clauses and limiting access to ISDS. Some countries, like Australia, are already looking to exclude ISDS from their IIAs. In these ways, these countries try to safeguard their domestic laws against the operation of the IIAs. In the previous chapter, we saw that the problem of regulatory chill is a significant issue for countries in general and for Middle East countries in particular, having less developed laws (like intellectual property laws). Governments are unable to take regulatory action for fear of being sued by foreign investors; and in this way they are unable to develop their laws as per their sovereign right. This creates a dilemma for governments, because entering into IIAs may be crucial for economic development, while the same instruments may become impediments for regulatory development due to regulatory chill. This chapter of the dissertation will explore the ways in which governments, particularly the governments of Qatar and the blockading states, are now responding to this dilemma. The literature on ISDS in these countries is explored in this chapter to understand whether they have ISDS mechanisms in place, especially with regard to each other, that can be used by investors to resolve the disputes arising out of the blockade of Qatar. Previous sections have already revealed how the Qatar blockade led to certain conflicts and disputes because the blockade affected existing investments made by the investors of the countries concerned. The dissertation now explores the specific ISDS mechanisms that exist in the countries affected, and if no such ISDS mechanisms exist, what the reasons are for this, and whether these reasons are related to the specific drawbacks of the ISDS mechanisms that place the governments in a dilemma.

A dilemma for governments arising out of ISDS mechanisms: The new EU approach

As governments become more wary of the ISDS mechanisms due to the perceived problems with the system, including regulatory chill that is a major aspect of research studied in this dissertation, some governments are opting for different ways of responding to the dilemma of whether or not to adopt ISDS mechanisms; and if they are adopted, in what form these mechanisms are to be implemented. A notable shift away from the traditional ISDS structure has been seen in the European Union, where ISDS has come to be seen more critically. This position can be seen in the following statement by EU Commissioner Malmström in her blog post on May 5, 2015:

My assessment of the traditional ISDS system has been clear – it is not fit for purpose in the 21st century. I want the rule of law, not the rule of lawyers. I want to ensure fair treatment for EU investors abroad, but not at the expense of governments’ right to regulate. Our new approach ensures that a state can never be forced to change legislation, only to pay fair compensation in cases where the investor is deemed to have been treated unfairly (suffered discrimination or expropriation, for example).

As Commissioner Malmström says, there is a belief that the ISDS mechanisms have lost their utility and these are no longer relevant to the purpose. She also mentions the government’s right to regulate, which is one of the main areas of concern with regard to the use of the ISDS mechanisms, discussed in the context of regulatory chill in the previous chapter. Commissioner Malmström’s statement on governments’ right to regulate is important, and can help understand the reasons for there being a dilemma for governments in how they respond to international investment. As mentioned above, governments want to ensure that their investors are protected in foreign jurisdictions, which requires them to offer similar protections to foreign investors in their own jurisdictions. However, the dilemma is that while such protections are necessary, there is also a concern that such protections weaken the right for governments to regulate. The new approach signalled by the European Union may be understood against the background of the weaknesses or the criticisms of the ISDS mechanisms discussed in the previous chapter. That chapter explained the predominant areas of concern with respect to the ISDS system and how these concerns have a direct impact on states’ sovereignty, with respect to their power to make legislation on the environment, business regulation, and other matters. The European Union has proposed that instead of a traditional ISDS structure with arbitration, the TTIP should contain a two-tiered court system, which would make first instance decisions on both factual and legal grounds, and then with an appeal mechanism to review first-instance decisions. This is a proposal for the establishment of a multilateral investment court by the European Union. In this proposed format, the European Union is taking exception to the established international arbitration format as well as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). Arbitration has led to the development of important concepts in international investment disputes in a haphazard way, as noted in the previous chapter. However, on the other side arbitration is also credited for giving enforceable decisions which lead to more stability in the law, as the decisions of the arbitration can be expected to be enforced and to give more protection to international investors. Due to this perception, some scholars continue to support arbitration as the principal means of resolving international investment disputes, and to recall the reasons why states adopted this method for addressing international investment disputes. This is noted as below:

Years and years ago, arbitral tribunals replaced the industrial States’ ’gunboat diplomacy‘ for the settlement of international investment disputes. Today, the settlement of investment disputes by way of arbitration itself is under fire. First within the EU, and then on the other side of the Atlantic, non- governmental organizations, the media, and subsequently also politicians opposed the inclusion of investment arbitration mechanisms in the Transatlantic Trade and Investment Partnership [‘TTIP‘] and the EU-Canada Comprehensive Economic and Trade Agreement [‘CETA‘]. A fear of undemocratic decision-making, a ‘pro-investor bias’ influencing the conduct of the proceedings behind closed doors, and the alleged phenomenon of a ‘regulatory chill’ are driving the debates. Decisions regarding the balancing of public interest against the interests of private companies, the critics demanded, should not take place before ‘private’ tribunals – and in particular not behind closed doors. The reasons for which States have established this dispute settlement mechanism were either disregarded or ignored.

It is argued that states should continue to use arbitration as the chief method for resolving disputes related to international investments because there were specific reasons why this method was preferred earlier, and these reasons are still relevant today. The problems with adoption of ISDS mechanisms, like ‘undemocratic decision-making, a ‘pro-investor bias’ influencing the conduct of the proceedings behind closed doors, and the alleged phenomenon of a ‘regulatory chill’ are driving the debates’, are undoubtedly real issues and need to be addressed. However, these problems are not reasons for states to neglect the resolution of disputes through arbitration, as argued above. The issue of regulatory chill can be addressed by including clauses in IIAs that allow states to make laws and policies that are reasonable under their sovereign powers without attracting suits from investors. A refusal to enter into IIAs and submit a dispute to arbitration is not the best solution to tackle regulatory chill, despite the dilemma faced by governments when they seek to use arbitration as a mechanism under ISDS to resolve international investment disputes. It has been argued that arbitration offers the best possible mechanism for resolving such disputes and that the fear of regulatory chill should not come in the way of states adopting such mechanisms in IIAs. One of the reasons for this is that the parties to the dispute are states on one side and individuals (investors) on the other. In effect, disputes related to international investments pit the individual, who is a foreign investor, against a state. If the individual is left to the means of resolution offered only by the state in which the dispute arose, his position is obviously weakened in relation to that of the state. In order to strengthen this asymmetrical position, the system of arbitration has been used historically, so that there is a balance between the two parties. Moreover, through arbitration as a method for dispute resolution, peace between the host state and the individual’s state is also ensured. This is explained as below:

The current system of investor-state arbitration does not only serve the purpose of overcoming the consequences of inter- state conflicts. It also provides a permanent protection, substantively and procedurally, under international law for investors against state actions that directly result in harm to the investor. Investment arbitration, as often recalled, ’depoliticizes‘ a dispute by removing it from the inter- state and political level to the level of the real disputing parties. It contributes to the peaceful settlement of disputes by preventing commercial disputes from rising to the sphere of inter-state crises.

Therefore, the use of arbitration for settling international investment disputes is accepted in the literature as having a number of advantages, due to which some scholars continue to advocate the use of this system even though there are some problems related to the system itself. The benefit of arbitration, it is said, is that it strengthens the rights of individuals in their claims against a state without requiring a dependence of the individuals on their own home state. Two important elements of the dilemma can be noted to summarise this section. The first relates to the right of governments to regulate, which is perceived to be compromised by the use of ISDS mechanisms, as these may lead to regulatory chill in the states. The second point relates to the criticism of arbitration as a method for resolving disputes. Both these issues are now salient in the way the European Union is responding to international investment dispute resolution: by proposing to allow states to change laws as they see fit (to respond to regulatory chill) as long as individual investors are compensated for their loss; and in proposing the use of a multilateral court system rather than arbitration for the resolution of disputes. Therefore, it can be said that there are some changes in the traditional approach. The next section of this chapter will discuss how and why Middle Eastern countries like Qatar and the blockading states are adopting ISDS mechanisms.

ISDS mechanisms in Qatar and the blockading countries

Although there are a number of reasons why ISDS has come to be criticised in recent times and even to be rejected in its current form by countries, including by the EU as reflected in the TTIP negotiations, there are a number of countries in the Middle East that have concluded BITs. Within the GCC membership itself, there are more than 285 BITs. For instance, between 2012 and 2018, the UAE concluded 12 BITs, bringing the total number of BITs to which it was then a signatory to 57. The Middle Eastern region has also seen an increase in the use of BITs such as the ‘Unified Agreement of the Investment of Arab Capital in the Arab States’ and the ‘Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of Islamic Cooperation’. What can be said with reference to these developments is that in their desire to improve the investment environment in these countries, the Middle Eastern region may be seeing a greater acceptance of BITs as well as ISDS mechanisms. This is despite the concerns related to regulatory chill due to such ISDS mechanisms. Qatar has entered into BITs with many countries for the purpose of international investment. For instance, in 2017, Qatar signed a BIT with Argentina and became one of the first countries with whom Argentina signed a BIT after 15 years of not signing such agreements with other countries. The Argentina and Qatar BIT does not display any special issues with regard to the traditional way of formulating a BIT. Indeed, it resembles earlier BITs signed by Qatar, and which are based on BITs that have traditional clauses. Thus there are provisions related to “expropriation, compensation for losses, transfers, subrogation, denial of benefits, entry and sojourn of personnel and state–state dispute settlement.” This is significant, because contrary to showing that Qatar was wary of signing BITs containing traditional provisions, that usually states have been thought to have problems with, Qatar was comfortable signing a BIT which contains such clauses. It is also important to note that Argentina, which had been a critic of the International Centre for Settlement of Investment Disputes (ICSID), has not had any objection to including a clause in the Argentina-Qatar BIT which gives jurisdiction to the ICSID. Thus the ISDS mechanisms under the BIT provides for “[a]ny juridical dispute under the provisions of this Treaty, arising directly from an investment” (Article 14, para. 1) to have a short period for allowing amicable settlement of disputes; and where disputes cannot be settled amicably it allows submission of the dispute to a competent court of the host state, or the mechanisms provided for in the ICSID Convention, or to “an ad hoc tribunal administered by the Permanent Court of Arbitration” (PCA) (Article 14, para. 2). Thus, apart from the option of ICSID, there is also an option to take the dispute to the PCA as an alternative to ICSID. This development indicates that Qatar is agreeable to entering into BITs, and also to adopting ISDS mechanisms for the resolution of disputes that may arise out of investment treaties.

Regarding the BIT between Argentina and Qatar, a notable development is that it includes a clause that demands compliance with the laws of the host state, with Article 11 stating that “[t]he Contracting Parties acknowledge that investors and their investments shall comply with the laws of the host Contracting Party with respect to the management and operation of an investment.” This may be said to be a response to the dilemma that governments often face in adopting BITs, where it may be thought that such adoption weakens the effectiveness of the domestic laws of the host states and with too much power being given to investors to take the host state to an arbitral tribunal if changes are made to the laws that negatively affect their investment. This is an example of what a state can do to ensure protection against regulatory chill, while also adopting ISDS and arbitration mechanisms for resolving international disputes. Another important innovation of this BIT is that the agreement provides that “the dispute may be submitted,” to the ISDS mechanism, without specifying who can submit the dispute, meaning therefore that not just the investor concerned, but also the state may take the dispute to the relevant forum for resolution. Reading this, along with the provision in Article 11 regarding compliance with the laws of the host state, could mean that arbitration proceedings against foreign investors can also be initiated by the host state if investors do not comply with its laws. This might also be a response to growing dissatisfaction with the way BITs and ISDS interact with the sovereign powers of the host states, as discussed in the previous chapter. Qatar has already taken some steps for the adoption of ISDS mechanisms. In 2019, Qatar’s International Court and Dispute Resolution Center (QICDRC) entered into a pact with the World Bank for the purpose of collaboration on dispute resolution in international investment cases. The QICDRC has also made an agreement with the International Center for Settlement of Investment Disputes (ICSID) for the purpose of international investment dispute settlement. Importantly, Qatar has been a member of ICSID since 2011, and is therefore like other states in the Middle East and North Africa that are adopting ICSID membership for the purpose of international investment dispute resolution. The agreement between QICDRC and ICSID is also an important step in the direction of making Qatar a centre for international investment dispute resolution, as this will allow Qatar to conduct arbitration proceedings along with the ICSID at their own centres, as well as collaborate with each other for any disputes arising out of investment agreements. This recent development is noteworthy because it indicates that rather than simply being disillusioned by ISDS mechanisms for the reasons discussed in the previous chapter, Qatar is demonstrating a willingness to adopt these mechanisms and also a desire to improve the enforcement of judicial decisions at the international level and to adopt international best practices in arbitration and dispute resolution.

Growing international business possibilities in the Middle East and North Africa region may possibly be a reason why Middle Eastern nations like Qatar are adopting ISDS mechanisms for dispute resolution, despite the perceived flaws in the system. Other countries in the Middle East have also entered into BITs or have ISDS agreements in place. This is not surprising if the Middle Eastern tradition of peaceful dispute resolution and arbitration is considered. Arbitration is thought to have much acceptance in Middle Eastern culture and Islamic law, as there is a historical emphasis on the resolution of disputes through the mediation of an elder or sheikh. In recent times, Saudi Arabian courts have regularly upheld arbitration clauses and recognised foreign arbitral awards. A new Saudi Centre for Commercial Arbitration (SCCA) has also been established, and the 2012 Arbitration Law has been enacted to bring Saudi law more into line with international arbitration law. These developments indicate that there are significant changes being made to the laws in the Saudi Arabian kingdom towards greater acceptance of international arbitration as a process for dispute resolution on international investments. Increasing trade between the Middle East and other economies necessitates the establishment of arrangements for the resolution of trade disputes. This is also relevant to the EU-USA arrangements to harmonise global trade, resulting from which the Gulf nations may not have the opportunity to deal with European and American economies independently from each other. ISDS has come to have increased acceptance in Middle Eastern nations; one of the first GCC cases involving ISDS was also from Qatar, where the broadcaster Al Jazeera relied on the ISDS included in a 1999 investment treaty between Egypt and Qatar. As discussed above, in the context of regulatory chill, Al Jazeera initiated an arbitration case against Egypt on a breach of the bilateral trade agreement with Qatar by Egypt concerning the harassment and imprisonment of its journalists. Despite the degree of acceptance of ISDS mechanisms in the GCC states, there are certain areas of concern that are specific to the GCC nations and not relevant to most other countries. This is explained as “lack of expertise and knowledge of how to deal with ISDS’s, identifying Islamic sources through which ISDS can be Sharia-compliant and what impact it has on the states’ abilities to determine their own patent standards.” The need for Sharia-compliant laws means that the ISDS mechanisms should be compliant with the Sharia and should not contain principles that are contrary to the Sharia. Therefore, apart from the concerns that other states may have about ISDS, GCC countries would also have other concerns, including intellectual property issues. These concerns may be relevant to understanding why certain GCC countries may not be signing BITs or accepting the regime of the ISDS mechanisms.

For GCC nations like Kuwait, Saudi Arabia, Bahrain, etc, the problem that may also posed by ISDS mechanisms and an acceptance of the international arbitration regime is that investor-state arbitration does involve questions related to public law, as the disputes between the investor and the state may involve questions about the scope and limits of the regulatory powers of the host state. States within the GCC may not be comfortable with such questions being raised in international fora, where arbitrators can consider limits of emergency powers, regulatory oversight over public utility companies and the tariffs they charge, and the protection of cultural property, to name a few such areas. The use of international fora and possibly non-Arab arbitrators to delve into such questions of public law may not be acceptable, and it provides a dilemma for Middle Eastern nations and limits the acceptance of such methods in the region. The solution to this problem may lie in the GCC countries having a permanent international investment dispute body for themselves, under a GCC treaty. This may help them to limit the scope of non-Arab decision makers in international investment disputes among these countries, at least between themselves. In the context of the Qatar blockade of 2017, where the disputing parties were more likely to be from the relevant GCC nations, such a mechanism would have been useful in providing relief to the investors who were caught in the middle, and whose investments were affected by the blockade. Another problem that is specific to the GCC nations, and affects them in the context of ISDS mechanisms, is that of the level of intellectual property protection in GCC countries. According to research, the current intellectual property system in the GCC is not adequate to protect investors and firms. At the same time, there are limitations on the development of an innovative approach to intellectual property rights while also ensuring that these are Sharia-compliant. The GCC nations have established the GCC patent office for the granting of patents, but it has been found to be ill equipped to cope with the number of patents filed. The acceptance of BITs as well as of ISDS mechanisms has improved in the Middle East over a period of time. This is evident by the number of the BITs that have been signed in this region in the recent past. However, this begs a question: are the investors affected by the Qatar blockade being given the benefit of these mechanisms? In this context, the problem is that while BITs has been increasingly accepted in the Middle East, the overreliance on oil and gas exports to countries outside the GCC area has meant that the GCC nations do not have strong investment ties between themselves, thereby restricting BITs in general. As a consequence, some investors affected by the Qatar blockade may not be able to get relief under the investment dispute mechanisms other than through the possible measures offered under the GCC.

Chapter 4

Possible responses to improve ISDS

Some measures have been and are being suggested to counter the controversies and risks associated with ISDS. It is suggested that ISDS is not a necessary component of IIAs, and if both countries have highly competent, neutral and efficient domestic judicial systems, then ISDS may be avoided. It is also suggested that instead of there being broad provisions in the IIAs, countries may choose to specifically clarify the provisions at the outset; provisions related to indirect expropriation and fair and equitable treatment are especially prone to ambiguity and thus need to be clarified. Finally, it is suggested that an appeals mechanism could be created in the BITs, so that in a time-Franckbound manner appeals may be decided. It is separately argued that because the purpose of investment treaties is to encourage economic development by providing foreign investors with protection related to their investments, the role of investment treaty arbitration should be to provide meaningful remedies in the event of breach of protection. Providing investors with monetary compensation through arbitral awards is usually the most effective way to restore them to the financial position prior to the breach. Therefore, one of the methods to improve the functioning of the ISDS mechanisms through international arbitration is to provide enhanced protections for investors through monetary compensation clauses in the agreement itself.

Institutional reform

One of the arguments made with reference to the changes needed to the ISDS mechanisms or structures is of aiming to reform the system from within. This has been explained as institutional reform that is premised on the need to restrict investor-state arbitration and the discretion of arbitrators in interpreting legal rules and principles. The starting point of this argument is the problem of investor-state arbitration, which is one of the core aspects of the ISDS mechanism, and the problems that are associated with it. The first such problem is the vagueness of the governing treaty standards, and the presence of lenient control mechanisms that result in arbitral decision-making that is not focused, and allows arbitrators to concern themselves with domestic public policy choices and to favour investment over non-investment concerns. The second problem is the increasing lack of predictability in arbitral tribunal decision- making, due to increasing numbers of conflicting and inconsistent interpretations. The third problem is the concept that dispute settlement under investment treaties is a party-owned process, which renders those who are not parties to it voiceless and unable to participate. This is particularly related to the private nature of the arbitration process, as compared to the public nature of the adjudication process involved in litigation. The argument for institutional reform is based on the need to address all three of these problems so that the ISDS mechanism can be improved. This is also essential in a response to the regulatory chill problem, because one of the concerns of governments is that the vague or broad terms in the ISDS, and the broad powers given to the tribunals to interpret such terms, pose a threat to their own sovereign powers to make law and regulation. Institutional reform of the arbitral tribunals will be useful in providing a response to such criticism; the basis for this argument is explained as follows, and is relevant to the adoption and application of ISDS in the Middle East or in GCC countries:

These points [the three problems associated with international arbitration] concern legitimacy as policy space, legitimacy as coherence, and legitimacy as participation. They all relate to the central question: how to ensure that investment arbitration does not harm the public interest and governments’ space for manoeuvre in regulating foreign investment. The legitimacy concerns arise above all because investment tribunals do not simply function like Montesquieuan bouches de la loi that passively apply pre-existing rules to the facts of individual cases, but that contribute significantly to making international investment law and act as a mechanism of global governance. Investor-state arbitration affects the lives of individuals and hence requires justification, not only in relation to the parties but to all those affected by investment arbitration’s governance activity.

Reforming international investment law

The UNCTAD has stated that any improvements to the ISDS system should be simultaneously undertaken with the progressive development of substantive international investment law, because ISDS is concerned with the application of law. On the other hand, it is argued elsewhere that no amount of change to international investment law will correct the problems associated with international investment arbitration unless the institution of arbitration is reformed from within. This is because reforms will not really have an effect on the discretion of the arbitrators, as the function of adjudication of any kind, including arbitration, essentially involves discretion. Even if international investment law is reformed to ensure that precise applicable standards are drafted, there is bound to be some discretion involved with the interpretation of such standards. The following discussion explains this:

The right to be treated fairly and equitably may be concretized to mean a prohibition of arbitrary treatment, or the concept of indirect expropriation to mean that except for special circumstances no compensation is due for general regulation. But this merely moves the discretion arbitrators have, like any adjudicatory institution, whether domestic or international, in applying general norms to individual cases to another issue (e.g., to arbitrariness instead of open-ended fair and equitableness; to the meaning of special circumstances instead of the broad concept of indirect expropriation).

It may, however, be suggested that the above argument, for allowing arbitration as an institution to reform itself instead of reforming investment dispute law, suffers from the same drawback as arbitration: that is a lack of consistency and too much discretion given to the arbitrators. Therefore, in the view of this researcher, the argument for changing the institution from within will not be persuasive unless investment law itself is changed. There is a need for a new framework of international investment dispute law so that states, like the states in the GCC, are confident in adopting ISDS mechanisms, and also that their adoption of such mechanisms does not run counter to their interests. The latter development would just erode the trust that such countries may have for ISDS mechanisms, and make these unviable and unacceptable over a period of time. This would then run counter to the stated purpose of ISDS mechanisms aiming to encourage economic development. It can thus be expected that without such mechanisms in place, investors will be wary of investing in GCC countries. Chapter 2, on regulatory chill, has particularly noted the problems of chill for countries like Qatar, which is compounded by the fact that arbitrators take on themselves vast powers of interpretation of IIA clauses. Reformation of the law itself is required to create reasonable boundaries between the regulatory powers of the states and the powers of the arbitrators to interpret clauses. This would be with an emphasis on defining these clauses better in international investment law itself, allowing states to accept these definitions at the outset when entering into ISDS mechanisms, and knowing how such clauses are likely to be interpreted. This is instead of being unsure about how an arbitral tribunal may interpret these provisions later. A possible response to the problem of regulatory chill in the context of Middle Eastern countries is that there could be preconditions for access of investors to ISDS, so that the foreign investor can only claim protection under the treaty if it has not violated domestic or international obligations and laws, and therefore has ‘clean hands’ in approaching the forum for ISDS. In this way, there could be a precondition for foreign investors’ ability to use ISDS on the basis of established respect for the host State’s laws. Therefore it is recommended that such clauses be a part of the ISDS, so that protection of the investors’ interests does not lead to investors avoiding justified penalties for actions that are in breach or violation of the domestic law of the host state.

Improving international arbitration

Some important recommendations are made by Stone and Grisel on how current systems of international arbitration can be improved. One of their important suggestions is to increase transparency and accountability. In the context of increasing the attractiveness of ISDS for Middle East countries, a particularly valuable suggestion is that there should be increased public accountability when the international investment dispute “(a) involves the distribution of an important public good, (b) is likely to have a substantive impact on third parties, or (c) involves ‘public policy’—domestic or transnational/international.” The linking of public good and public policy may be important in the Middle Eastern context because it can also be linked to concerns for Sharia compliance, and in addition the problem of regulatory chill may be reduced. Another important suggestion that can improve the system of international arbitration significantly is to ensure that when tribunals do develop general principles of law, they do so “more transparently, and deploy them more consistently.” The current Qatar blockade shows the problems that can arise when countries have not created ISDS mechanisms through IIAs with each other. Many investors in Kuwait and the four blockading countries can be expected to have problems due to their investments being affected by the blockade. Yet, as the research discussed has indicated, the avenues that are open to these investors for a resolution of their dispute with the country concerned are limited. This raises the need for more adoption of ISDS mechanisms between these countries. However, for that to happen, there is a need to improve the current ISDS structures and processes to make them more viable for the countries accepting them.

Chapter 5 - Conclusion

The Qatar blockade has had implications for investor state disputes, as Qatar and the other four states are part of the GCC and have trade relations and mutual economic investments, which were affected by the blockade. However, apart from the Qatari beIN sports network case, few investment disputes have gone to arbitration forums to be resolved. At the same time there are reasonable expectations that there could be more disputes arising out of the blockade, particularly related to 2022 FIFA World Cup projects. Qatar and the blockading states all are signatories to relevant treaties, like the 1907 Convention for the Pacific Settlement of International Disputes, in line with which members agree to arbitrate or mediate their inter-state disputes. Some cases have already been filed for arbitration by Qatari investors against Saudi Arabia, the United Arab Emirates, and Bahrain; and there are some early indications about the problems that may arise in the resolution of these disputes. The purpose behind the idea of inserting ISDS clauses in investment treaties is to provide some protection to foreign investors and to dilute the more advantageous position of host countries with respect to courts and laws, by providing the foreign investor with a more neutral forum for resolving disputes with the host countries. The ISDS system also provides a level field for foreign investors, between countries that have mature legal systems and those that do not. As international law is uniformly applicable and the standards of fair compensation are also higher as compared to most national jurisdictions, the ISDS mechanism came to be highly regarded by foreign investors, thus increasing its appeal for countries that are seeking foreign investment. At the same time, the Qatar blockade has revealed that not many ISDS mechanisms exist between the relevant states, which increases the uncertainty for investors caught in the situation and creates doubts as to whether these investors will be able to resolve the disputes. This research found that one of the most common objections to ISDS from the perspective of host states is that of ‘regulatory chill,’ which relates to the restraints on signatories to BITs in regard to their domestic policy making, because they fear the possible repercussions of these policies in investment disputes. The important point here is that governments may even choose not to enforce bona fide regulatory policies because of regulatory chill, which is where the principal criticism of the ISDS comes from. Due to increasing perceptions of BITs being restrictive of national governments’ regulatory activities, there has been a shift in how countries approach BITs, with some countries now adopting a more host-state friendly framework. With regard to the GCC states, this research indicates that while most GCC states show greater acceptance of ISDS mechanisms, some, like Qatar in the recently concluded Qatar-Argentine BIT, do not only want to give effect to traditional concepts of ISDS but are also looking at alternative solutions to problems of regulatory chill. In the BIT between Argentina and Qatar, a significant development is that it includes a clause that demands compliance with the laws of the host state within Article 11, which may be seen as a response to the dilemma that governments often face in adopting BITs. This is where it may be thought that such adoption weakens the effectiveness of the domestic laws of the host states, with much power being given to investors to take the host state to an arbitral tribunal if any changes are made to laws that go on to negatively affect their investment.

Although there are a number of reasons why ISDS has come to be criticised in recent times, and even be rejected in its current form by some countries, this research shows that a number of countries in the Middle East have concluded BITs. Unfortunately for the investors caught in the Qatar blockade, GCC states do not have adequate protections for each other because most of the trade in this region relates to oil and gas exports; and so while there are a number of BITs between GCC and non GCC states, there is a paucity of similar arrangements between members of the GCC. It can nevertheless be said that there is potential for ISDS in the Middle Eastern region because countries in this region have proved themselves to be amenable to arbitration, and they have a history of dispute resolution with peaceful means like arbitration. Moreover, as these countries become more inclined to receiving foreign investment, they can improve the investment environment in their countries through greater acceptance of BITs as well as ISDS mechanisms. Recent developments in the region, like the regular upholding of arbitration clauses and recognition of foreign arbitral awards in Saudi Arabian courts, and the establishment of certain mechanisms in the GCC countries, are positive signs of a growing significance of ISDS mechanisms for these countries. At the same time, there are concerns about the ISDS mechanism in nations like Kuwait, Saudi Arabia, and Bahrain. These are related to the effect on public law, the scope and limits of the regulatory powers of the host state, a lack of understanding and expertise in the Middle East regarding international investment law, and the need for mechanisms to be Sharia-compliant. Therefore, in the context of GCC states, there may be a need to consider the ways in which the ISDS mechanism can be made more attractive in the light of their concerns. A solution could be to have a Multilateral Investment Treaty (MIT) between the nations in this region, which can take into account such relevant factors and include provisions that are more acceptable to them. The TTIP example can be used here to illustrate the fact that it is possible to negotiate on mechanisms that are not necessarily tied to the traditional concepts of ISDS and are more aligned with an emphasis on state sovereignty as opposed to investor protection alone. The issue of regulatory chill is a significant potential problem for countries like Qatar, whose laws are as yet not well developed. This study revealed that one of the areas where regulatory chill may pose a major challenge to Qatar is in the development of intellectual property law. There are also other such laws and policy areas that may be affected due to regulatory chill. Keeping that in mind, it is a relevant point that Qatar needs to consider how its entering into ISDS will influence its future development of law and regulation. One option is that Qatar should put clauses into its future ISDS arrangements similar to the one in the Qatar-Argentina ISDS, which protects domestic laws and ensures that regulation of the country is not unduly affected by ISDS. Similar clauses are now also seen in the TTIP. Such clauses can be included in all IIAs to ensure that the development of the laws of the country is not affected by the ISDS and the fear of arbitration in the case of the development of new laws. Countries around the world are now resorting to such mechanisms to protect their sovereign right to make law and regulation. This can also be done by Qatar and other countries in the Middle East.

On a final note, the ISDS mechanisms are at present the best possible way to balance the interests of investors with the sovereign interests of the state. It is possible to find ways to improve the mechanism structure and make it more attractive to states. This can be done by reforming international investment law as recommended by the UNCTAD; and by negotiating on provisions in BITs that are clear and leave little room for arbitrators to give loose and subjective interpretations to the clauses. Moreover, states’ sovereign interests in law and policy making can also be protected within reasonable limits, so that they do not face a dilemma with respect to adopting ISDS mechanisms. With appropriate changes, the ISDS regime can be made to respond to the concerns of both investors and states. As the Qatar blockade shows, there is a need for appropriate mechanisms to protect the interests of investors. In this situation, most investors are not protected because the states involved do not have adequate protections for investors in place with respect to each other. Only certain investors, like BeIn Corporation, have managed to place their disputes before arbitral tribunals. This shows the need for appropriate wider mechanisms that can respond to uncertain investment environments, as currently in the case of the Qatar crisis.

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