The EU’s proposed reform of ISDS

The European Commission (EC) has proposed the establishment of “a new and transparent system for resolving disputes between investors and states”, citing the need to reform existing investor-state dispute settlement mechanisms (ISDS). The EC claimed ISDS “suffers from a fundamental lack of trust”. We discuss the detail of the EU’s proposal, as well as highlighting potential barriers to its development.

The European Commission (EC) is, in fact, running two parallel proposals in its mission to reform investor-state dispute settlement. First, it aims to establish investment courts – in place of international arbitration tribunals – which would preside over bilateral EU investment agreements currently being negotiated or negotiated in the future. Such provisions are written into the EU-Canada Comprehensive Economic and Trade Agreement (CETA), as well as the EU-Vietnam Free Trade Agreement (EVFTA). Under these agreements, disputes will be referred to permanent tribunals with fixed numbers of members appointed from the EU and Canada/Vietnam, together with members from neutral countries. Members of the tribunal will be paid monthly retainers to ensure availability and will be required to conform to specific standards of independence. Both agreements also contain an appellate mechanism, with an appellate tribunal formed in a similar manner to the lower tribunal.

More significantly, both CETA and EVFTA envisage the formation of a permanent multilateral forum for investor-state dispute resolution. CETA, for example, provides that Canada and the EU “shall pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes” and provides for this new system, once implemented, to have jurisdiction over disputes arising from CETA. This has been described by the EC as the “ultimate aim” and this investor-state court system (ICS) would be open to all countries. In December 2016, the EC and the Canadian Government co-hosted the first talks with government representatives from around the world on the establishment of this multilateral forum. A series of meetings are planned throughout 2017 to further develop the idea.

The ICS proposals can be seen as a response to criticisms (founded or otherwise) of the current ISDS system. Concerns around ISDS include alleged lack of transparency, oversight and due process and a perception that ISDS is weighted in favour of Western companies and states. Critics also cite the potential for conflicts of interest and corruption as tribunals are often formed of individuals whose professional background, critics allege, make their opinions predictable and may make them sympathetic to certain arguments. This plays into the concern that the current system favours foreign investors over states and impedes sovereigns’ rights to legislate and regulate in the interests of their citizens. These perceptions persist, despite not being supported by the empirical evidence. For example, the majority of cases referred to ISDS have been successfully defended by states.

The key elements of the proposed ICS include removing party autonomy as regards who will decide upon the dispute in favour of the permanent appointment of publicly appointed judges (who will be unable to act as counsel on other investor-state disputes) with comparable qualification requirements to those of other permanent international courts such as the International Court of Justice and the WTO Appellate Body.

Proceedings would be transparent, with open hearings and a right of intervention for third parties with an interest in the case. The system would preclude the ability to forum-shop and will tightly define and limit the ability of investors to bring cases to instances such as “discrimination on the basis of gender, race or religion, or nationality, expropriation without compensation, or denial of justice”. Crucially, the proposed system would enshrine and guarantee states’ right to regulate. It could be argued that these proposals, if enacted, would shift the balance of ISDS in favour of states.

The proposal for a permanent-multilateral forum for investor-state dispute settlement is in its infancy, but there will certainly be some key barriers that the EC and its partners will have to clear before it becomes reality. Foremost among these, and perhaps the most obvious, is that in order to have authority to act as the overarching forum for disputes, the proposal will need to be agreed to by a majority of countries around the world. The current system of ISDS is a product of almost 3000 separate bilateral investment treaties together with international trade treaties and international investment agreements. Accordingly, establishing a common international view on the terms of the new ICS proposal is likely to be a difficult and drawn-out process.

In the context of the ongoing TTIP negotiations, for example, the American Bar Association (ABA) produced a report on the ICS proposal in October 2016 which raised a number of fundamental concerns. The ABA’s concerns go to the very nature of the proposed system by asking whether the ICS will be recognized as an arbitral body or as a court; a question that will have significant implications in relation to enforcement of its awards. Whilst the ABA stops short of reaching a definitive conclusion, it highlights that the hybrid nature of the ICS proposal could lead to uncertainty, citing the hypothetical scenario of a successful claimant being faced with the suggestion that the ICS is not an arbitral body and its awards therefore unenforceable under the New York Convention.

This is likely to be even more difficult given the recent ruling of the Court of Justice of the European Union (CJEU) on the EU-Singapore free trade agreement (EUSFTA). The CJEU held that ISDS provisions are not within the EU’s exclusive competence and that the EU cannot negotiate and conclude international investment treaties containing such provisions alone. The recent and well-publicized difficulties in concluding CETA provide an instructive example of the potential pitfalls of obtaining approval from all EU Member States. The Belgian region of Wallonia held up the process by delaying approval; one of its key concerns was the inclusion of ICS provisions. The Walloon parliament was successful in forcing concessions, including that the Belgian federal government would refer the ICS provisions in CETA to the CJEU for a ruling on whether they are compatible with the EU treaties which grant exclusive jurisdiction to the courts of EU member states and, ultimately, the CJEU to preside over challenges relating to EU law. For the moment, CETA is only provisionally applied and the provisions relating to ICS do not form a part of this provisional application. That referral is expected shortly.

Given the possibility that the EC’s proposals could shift the balance of investor-state dispute settlement towards states, governments worldwide will no doubt be lobbied by business interests on these reforms.

There is also a risk that the ICS will simply trade one perceived bias for another. Appointments to a permanent court will no doubt become, or at least be seen to be, political choices, perhaps further shifting the balance of power towards states over investors. This is certainly a dramatic move away from the current system of ISDS, in which the parties (both states and investors) have the ability to choose their arbitrators. The examples set by other similar international institutions demonstrate the difficulty of maintaining the perception of impartiality and competence.

The creation of an international multilateral dispute-resolution forum is a long way off. A more pressing concern for the EC, given the difficulties experienced with CETA, is the immediate future of ICS provisions in bilateral treaties between the EU and individual countries. The CJEU may take as long as two years to reach its decision on the compatibility of ICS with EU treaties, meaning that uncertainty will prevail in the immediate future, both with regard to CETA and to ongoing and future trade negotiations. The inability of the EU to reach agreement should serve as an indicator of the difficulties ahead for the EC in reaching its ‘ultimate aim’ of a permanent multilateral court system to rule on investor-state disputes. Despite criticisms of the current ISDS system, its demise is not imminent.