Investor State Dispute

Investor-State Dispute (ISD, 투자자-국가 소송/投資者國家訴訟) clauses in general international trade treaties grant private investors a right to initiate dispute settlement proceedings against foreign governments in their own right under international law. Ultimately, ISD is settled by an international arbitration tribunal.

Over 2000 Bilateral Investment Treaties (BITs) currently exist and they provide foreign investors with a direct means for redress against states for breaches of breaches of such treaties. A notable example is Chapter 11 of the North American Free Trade Agreement (NAFTA). NAFTA Chapter 11 allows investors of one NAFTA party (Canada, United States or Mexico) to bring claims directly against the government of another NAFTA party before an international panel of arbitrators.

Korea has included the ISD clause in as many as 85 BITs with other countries in order to protect businesses that are making increasing investments abroad these days.

Key words
ISD, FTA, foreign investor, state, dispute, ICSID

At issue
Take an example where a Korean company makes an investment in another country, there can be unexpected risks triggered by unpredictable changes in the country’s local law, or political uncertainties. If the company incurs losses due to unpredictability, it has the right to demand compensation for the losses under the ISD clause.

The investor goes to the International Centre for Settlement of Investment Disputes (ICSID) under the World Bank in Washington, D.C. to file a suit for redress against the wrong-doing host country.

At a glance, ISD is at the neutral zone. However, in Korea, the Anti-KorUS FTA civic groups as well as the politicians in the opposition party which once approved the issue are adamantly opposed to the ISD clause in the KorUS Free Trade Agreement. At the final stage, the controversial ISD issue was reignited as regards the interpretation of provisions of Article 102 of the United States-Korea Free Trade Agreement Implementation Act (H.R. 3080: USIA)

In 2012, it was reported that Lone Star intends to file an ISD suit againt the Korean government claiming that the Korean financial authorities interfered with its sale of the Korea Exchange Bank (KEB) to Hana Financial Group in January 2012. The U.S. equity fund is also asking the National Tax Service to return the taxes it paid after selling KEB. The upcoming case would mark the first time for Korea to become a concerned party since it joined the ICSID in 1967. See the related article on Lone Star.

Pros
ISD is a requisite for all kinds of international investment treaties. Currently the ISD clause is found in about 2,500 international investment-related agreements including 85 deals that Korea has been agreeing to with other countries. It is not a special clause adopted solely for the KorUS FTA at all. It is a clause that provides safeguards for Korean businesses abroad and attracts foreign investors to Korea.

Cons
The opposition group insists that the ISD provision bears high risks of nullifying the country’s crucial public policies. For instance, the ISD could hinder implementation of a series of recently debated legal measures to protect small local merchants and boost co-prosperity between large and small businesses, and even the national health insurance system.

The opponents are worried that when an American private health insurance firm would file a legal complaint against the Korean government, alleging that it cannot operate its business due to Korea’s national health insurance system, the Korean government would have to drop the system in compliance with global free trade standards.

That's why, the oppenents argue, Israel and Australia would not accept the ISD clause in their FTA with other countries to observe National Treatment Principle and to protect their sovereignty and Constitutional rights.