ISDS and States’ Ability to Deal with Financial Crisis

This article reports on the results of an empirical study focused on ‘carve outs’ with respect to financial regulation in bilateral investment treaties (BITs) and free trade agreements (FTAs) entered into during the five-year period between 2015 and 2019. It did so by analysing the eighty-five BITs and FTAs signed in the period 2015 to 2019 inclusive, which were available in English in the UNCTAD Investment Policy hub, identifying three primary types of carve outs. We define carve outs as clauses which either provide an exception or defence to investor-state dispute settlement (ISDS) claims in certain circumstances or exempt altogether particular conduct by a state from the scope of ISDS, in order to protect state sovereignty. The article explores the likely effectiveness of those carve outs in protecting state sovereignty and minimizing ISDS claims against states arising out of regulatory measures taken to protect national economies in the event of crisis. The inclusion of appropriate carve outs is likely to support perceptions of the legitimacy of ISDS in BITs and FTAs. The article considers some earlier cases of ISDS relating to financial regulation and considers the impact that some of the more modern carve outs might have had on those scenarios. The article concludes with recommendations for model clauses and approaches in BITs and FTAs.