Investor–state dispute settlement

Investor–state dispute settlement (ISDS), or an investment court system (ICS), is a set of rules through which states (sovereign nations) can be sued by foreign investors for certain state actions affecting the foreign direct investments (FDI) of that investor. This most often takes the form of international arbitration between the foreign investor and the state. As of June 2024, over US$113 billion has been paid by states to investors under ISDS, the vast majority of the money going to fossil fuel interests.

ISDS most often is an instrument of public international law, granting private parties (the foreign investors) the right to sue a state in a forum other than that state's domestic courts. Investors are granted this right through international investment agreements between the investor's home state and the host state. Such agreements can be found in bilateral investment treaties (BITs), international trade treaties such as the 2019 United States–Mexico–Canada Agreement, or other treaties like the 1991 Energy Charter Treaty.

To be allowed to bring an investor-state dispute before an arbitral tribunal, both the home state of the investor and the state where the investment was made must have agreed to ISDS, the investor from one state must have an investment in a foreign state and the foreign investor must put forward that the state has violated one or more of the rights granted to the investor under a certain treaty or agreement.

ISDS claims are often brought under the rules of the International Centre for Settlement of Investment Disputes (ICSID) of the World Bank, the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIAC), or the United Nations Commission on International Trade Law (UNCITRAL).

The ISDS system has been criticized for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs, and there have been widespread calls for reform. Since 2015, the European Union has been seeking to create a multilateral investment court to replace investor-state arbitration. Since 2017, multilateral negotiations for reform have been taking place in Working Group III of the United Nations Commission on International Trade Law.