Goodbye arbitration: unilateral mechanism under pressure

In presenting the World Investment Report 2025 in mid-June in Geneva, Rebeca Grynspan, Secretary-General of United Nations Trade and Development (UNCTAD) said that many investment protection agreements are very old and therefore do not include provisions on climate change and the environment. Countries often want to do the right thing with respect to sustainability, but they are often taken to court because they go against investment agreements and rules that were established many years ago.

She further stated that UNCTAD is helping countries to renegotiate those agreements so that they can arrive at win-win policies with the private sector, but that there are often contradictions between today’s interests and what was signed 30 years ago. A new form of agreement is needed in order to bring private and public interests together, she said.

The UN leader was referring to claims filed with arbitral tribunals under the Investor-State Dispute Settlement (ISDS) mechanism. They are often cases relating to fossil fuels, such as that of Azienda Elettrica Ticinese (AET), a public company in the Canton of Ticino that challenged Germany over its decision to close the coal-fired power plant in Lunen. It is seeking compensation of 85.5 million euros plus interest. The case is based on the Energy Charter Treaty adopted in the 1990s and which protects foreign investments in fuels, including fossil fuels, and is thus delaying the energy transition.

52 cases by Swiss investors

To date, 52 known cases have been filed by Swiss multinationals against third countries, almost invariably in the Global South. They include four cases brought by Glencore against Colombia relating to the Cerrejón and Prodeco coal mines and also a port. Two have been decided in favour of the investor – which gets 19 million USD and 9 million USD in compensation – and two are still pending.

These lawsuits are based on the Switzerland-Colombia Investment Protection Agreement (IPA) signed in 2006 and currently being updated by both countries, at the request of Colombia. The aim is to negotiate an agreement that is more balanced in favour of the host country – in this case Colombia.

UNCTAD takes note of some interesting developments in IPAs negotiated since 2020. The most relevant, at least from the standpoint of Alliance Sud, is that almost half of them exclude the Investor-State Dispute Settlement (ISDS) mechanism. Cases in point are the Brazil-India IPA and that between the United Arab Emirates and Australia. In many instances this controversial mechanism is replaced by a State-State dispute settlement mechanism and/or by amicable dispute settlement arrangements such as conciliation and mediation.

Better safeguarding the right to regulate

To avoid arriving at dispute settlements of any kind, the most recent agreements better safeguard right to introduce regulations in the public interest. To that end, they limit drastically or define more precisely the clauses most often invoked before the courts.

These include "fair and equitable treatment” (FET), under which foreign companies can arbitrarily bring claims of discrimination; "indirect expropriation", often invoked when the host country enacts new laws to protect public health or the environment, and which could cause investors to lose money; and the "umbrella clause", under which it is possible to consider altogether unrelated obligations as protected under the treaty.

Those were the main clauses invoked by Philip Morris in its case against Uruguay, when that Latin American country had introduced anti-tobacco legislation in line with the recommendations of the World Health Organisation (WHO), but deemed excessive by the investor. Its arguments were dismissed by the arbitrators, who ruled in favour of Uruguay. That was in 2010, following an intense international campaign – also conducted in Switzerland by Alliance Sud and its South American partners.

Still virtually no obligations on investors

Such a case would probably be dismissed more quickly under the new agreements, but is still possible. And this will remain so for as long as investment agreements continue to exist and confer almost exclusively rights, but no obligations on investors.

The fact is that despite being somewhat more balanced, only 10 per cent of the new agreements include any such obligations, for example, to fight corruption, promote transparent governance, protect the environment, trade union rights and local communities, as well as facilitate taxation. Among them, UNCTAD singles out the 2022 agreement between Switzerland and Indonesia.

Another problem is that almost all the agreements concluded since 2020 continue to encompass all investments while failing to impose any requirement for sustainability or positive impacts on the host country and its people.

To conclude, although there have been some improvements over the past 4-5 years, there is still much ground to cover. The latest data available indicates that Switzerland is currently (re)negotiating IPAs with 10 countries, including Colombia, India, Mexico and Vietnam. This is the opportunity to conclude agreements that are more balanced in favour of the host countries and to dispense with the ISDS.

But Switzerland is not taking that path. The IPA with Chile, on which negotiations were just concluded, still contains the ISDS. A foreign investor can therefore file a claim against the host country, but the reverse is not possible, for example, if the company pollutes land and rivers and displaces population groups. 

A controversial treaty that Switzerland does not plan to denounce

The Energy Charter Treaty (ECT) is a multilateral agreement concluded in the 1990s. It protects investors against State intervention in the energy sector and guarantees them access to private arbitration tribunals. No other treaty has facilitated as many claims brought by investors against States as the ECT.

Just a few years ago, all EU member countries, the European Union and some countries of Eastern Europe, Western and Central Asia and also Japan were members of the treaty. In the wake of an inadequate ECT reform process, some countries decided to withdraw from it, including Germany, France, Poland, Luxembourg, Slovenia, Spain, Portugal, the Netherlands, the United Kingdom and the EU as a whole. Italy had already pulled out. There is a sunset clause allowing for an action to be brought 20 years after withdrawal. This could nonetheless be considerably mitigated by an additional agreement declaring the clause null and void between parties that withdraw.

Unlike its European neighbours, Switzerland has not left the ECT and has no intention of doing so. Investors regularly use Swiss subsidiaries to file arbitration claims under the ECT: altogether nine compensation claims have been lodged from Switzerland, all against EU member countries and the EU itself. These include Nord Stream 2 SA, which is suing the EU before an arbitral tribunal for compensation possibly as much as eight billion euros, over its rules governing natural gas pipelines.

In late 2024, Switzerland approved a modernised version of the ECT, which indeed allows for better regulation in the public interest and expressly mentions the Paris Climate Agreement, but which is not enough. It is to be submitted to Parliament in the near future and will also be subject to a consultation procedure. Alliance Sud urges Switzerland to reject this new version and leave the ECT.