UNCTAD has a recent paper which discusses options for reform of the investor-state system. Here's one possible path they set out:
3. Limiting investor access to ISDS
This option envisages narrowing down the range of situations in which investors may resort to ISDS. This could be done in numerous ways, including: (i) by reducing the subject-matter scope for ISDS claims; (ii) by restricting the range of investors who qualify to benefit from the treaty, and (iii) by introducing the requirement to exhaust local remedies before resorting to international arbitration. A far-reaching version of this approach would be to abandon ISDS as a means of dispute resolution altogether and returns to State-State arbitration proceedings, as some recent treaties have done.27
Some countries have adopted policies of the first kind, for example, by excluding certain types of claims from the scope of arbitral review.28 In the past, some countries used this approach to limit jurisdiction of arbitral tribunals in a more pronounced way, for example, by allowing ISDS only with respect to expropriation disputes.29
To restrict the range of covered investors, one approach is to include additional requirements in the definition of “investor” and/or to use denial-of-benefits provisions.30 Among other things, this approach can address concerns arising from “nationality planning”/“treaty shopping” by investors and ensure that they have a genuine link to the putative home State.
Requiring investors to exhaust local remedies, or alternatively, to demonstrate the manifest ineffectiveness/bias of domestic courts, would make ISDS an exceptional remedy of last resort. While in general international law, the duty to exhaust local remedies is a mandatory prerequisite for gaining access to international judicial forums,31 most IIAs dispense with this duty.32 Instead, they allow foreign investors to resort directly to international arbitration without first going through the domestic judicial system. Some see this as an important positive feature and argue that reinstating the requirement to exhaust domestic remedies could undermine the effectiveness of ISDS.
These options for limiting investor access to ISDS can help to slow down the proliferation of ISDS proceedings, reduce States’ financial liabilities arising from ISDS awards and save resources. Additional benefits may be derived from these options if they are combined with assistance to strengthen the rule of law and domestic legal/judicial systems. To some extent, this approach would be a return to the earlier system, in which investors could lodge their claims only in the domestic courts of the host State, negotiate arbitration clauses in specific investor-State contracts or apply for diplomatic protection by their home State.
In terms of implementation – like the options described earlier – this alternative does not require coordinated action by a large number of countries and can be put in practice by parties to individual treaties. Implementation is straightforward for future IIAs; past treaties would require amendments, renegotiation or unilateral termination.33 Similar to the “tailored modification” option, however, this alternative results in a piecemeal approach towards reform.
In response to this paper, the TDM journal has a call for papers on this issue: http://www.transnational-dispute-management.com/news.asp?key=490
I'll post some further thoughts on all this later this week.