What is ISDS?

Investor-state dispute settlement (ISDS) is an arbitration mechanism used to ensure that investments and commitments made by individual companies in foreign countries are not subject to arbitrary discrimination.16 The traditional ISDS mechanism, which mirrors commercial arbitration, allows private investors to launch “disputes against the Contracting State that hosts the investment before an international tribunal”. The objectives of states when creating ISDS mechanisms was to protect companies investing outside the country of origin, to resolve investment disputes without generating stateto-state friction, and to indicate to any future investors that the rule of law would be adhered to.17 Overall, the ISDS was created to assist in the prevention of discrimination by countries towards foreign investors.18 In recent years this mechanism has been subject to severe criticism.19

TTIP and the perfect storm for ISDS

Criticisms of ISDS came to the fore when it was understood that the mechanism would be included in the Transatlantic Trade and Investment Partnership (TTIP), a free trade agreement (FTA) between the EU and the US. The public criticism of TTIP negotiations led the to the implementation of a new transparency policy in negotiations and a proposal to move away from ISDS to a permanent Investment Court System (ICS).20

The ICS was proposed as a replacement for the existing ISDS mechanisms in all FTAs and to be included in all EU bilateral trade agreements, including TTIP. Thus in December 2015 the EU-Vietnam FTA was concluded incorporating both a chapter on investment protection and the ICS.21 In February 2016, it was announced that the Comprehensive Economic and Trade Agreement (CETA), the FTA between the EU and Canada, would be amended to include a new and improved ICS, not unlike the mechanism in the Vietnam Agreement and in the TTIP proposal.22 This is of significance as the CETA text was “already finalised and in the process of legal revision” at the time of these changes.23

CETA was one of the first agreements negotiated by the EU to contain a full investment chapter, incorporating provisions on ISDS. 24 CETA is the first significant FTA to replace the old ISDS system with the new ICS.25 And in promoting the idea of a new approach to investor protection both the EU and Canada are both working in the international arena to have the idea accepted multilaterally.

The initial idea was that the new ICS would be: public, not based on temporary tribunals, have professional and independent judges, and work transparently. CETA introduces a number of reforms to investment protection such as “a code of conduct for – and ensures government control over – the choice of arbitrators, enhances the transparency of ISDS proceedings, bans frivolous claims and foresees the creation of an appellate mechanism”.26

How the Commission moved away from ISDS

In 2014 the European Commission launched a public consultation on ISDS. This consultation covered twelve issues involving both the investment dispute settlement provisions and investment protection of the EU's text proposal for TTIP. “Specifically on the investment dispute settlement part, comments were sought on: (1) Transparency in ISDS, multiple claims and relationship with domestic courts; (2) Arbitrator ethics; (3) Conduct and qualifications of arbitrators; (4) Reducing the risk of frivolous and unfounded cases; (5) Guidance by the parties on the interpretation of the agreement; and (6) Appellate mechanism and consistency of rulings. In addition, a final question allowed for general views and for submission of position papers”. 27

The consultation methods included an open online public consultation of 12 weeks, a stakeholder conference around December 2016/January 2017, as well as academic conferences and seminars: Investment Treaty Dialogue in Paris organised by the OECD in October 2016 to discus the establishment of a MIC, and other events being planned/considered. Additionally, many stakeholders specifically noted the establishment of a permanent MIC as the optimal solution to consider when reforming “the global investment dispute settlement system covered by EU external trade and investment agreements”, unlike the reforms assumed at bilateral FTAs level.28

The compatibility of an ICS system with EU law

The EU Court of Justice has not yet ruled on the compatibility of an on ICS system with EU law. The Belgian federal government was asked to inquire more into the compatibility of ICS and EU treaties, on behalf of the Walloon parliament, through the use of Article 218(11) TFEU, and request the CJEU’s opinion on the matter.29 The resolution on the 25th of April 201630 listed what Wallonia believed were the key problems with ICS in the CETA. The Belgian federal government sought the Opinion of the ECJ on the compatibility of the ICSs investment chapter of CETA. The main concern being in relation to “claims by individuals regarding a question of EU law.”

Previously, the ECJ found in Opinion 1/09 (2011),31 that “the introduction of a European patent litigation system would be incompatible with Union law.” The German Association of Judges has argued that the reasoning given in Opinion 1/09 could also be applicable to the creation of an ICS. An Investment Court, similar to that of a European Patent Court, is supposedly altering “the legal remedies and procedures created to review the legality of acts of the institutions”.32 It is important to recall that Article 267 TFEU was central to the ECJ’s reasoning that Treaties apply to individuals, not just Member States.33

Both the European Patent Court and Investment court sit outside “the institutional and judicial framework of the EU”. Additionally, they both purport to alter “the legal remedies and procedures created to review the legality of acts of the institutions” and would hinder national courts in each Member State of applying and interpreting EU law. A condition for the creation of the European Patent Court was that it is required to accommodate the ECJs objections, through the creation of a specialised patent court that accepts EU law as priority and “applies EU law in its entirety”. It should be kept in consideration that the German Association of Judges opinion, primarily examines the European aspects in the creation of an ICS, and neglects to take the European companies concerns into consideration, regarding domestic courts (in for example the US).34

The fundamental purpose of ICS in CETA was to “enable investors to challenge both EU acts and decisions as well as national acts involving EU law”, inevitably leaving ICS tribunals with the responsibility of interpreting and giving meaning to EU law.35 Controversially, the ECJ clarified in Opinion 2/13,36 that it has the exclusive power to ensure uniform interpretation and give definitive interpretations of EU law across Europe. As the ICS in CETA would not require the ECJ’s interpretations it may be considered in conflict with the ‘exclusive powers’ of EU law. In a similar manner to human rights law, ICS would also infringe the EU courts powers to rule over questions concerning EU law.37 Looking at both Opinion 2/13 and Opinion 1/09, it is questionable as to whether an ICS can be established within an EU agreement, and if so, to what extent.

II – Multilateral Investment Court

Objective and Purpose

The main objective of the MIC is to set up a permanent body that decides on investment disputes.38 The idea is that the MIC would have a first instance tribunal, an appeal tribunal, a permanent body, tenured highly qualified judges adhering to ethical standards, rule on disputes arising under future and existing investment treaties, transparency, only apply where an investment treaty already explicitly allows an investor to bring a dispute against a State, prevent disputing parties from choosing which judges ruled on their case, would not create new possibilities for an investor to bring a dispute against a state, provide for effective enforcement of its decisions, and be open to all interested countries to join.39All of which are similar to the goals and desires of the creation of an ICS, as outlined in the section above.

The MIC would build on the EUs approach to its bilateral FTAs and is argued to be a considerable departure from ISDS mechanisms – based on ad hoc commercial arbitration. Similar to the approach used in the FTAs, the crucial features of domestic and international courts are brought to investment adjudication.40 The MIC would move away from the ad hoc system, and create a “permanent body to decide investment disputes”. Additionally, “it would adjudicate disputes under future and existing investment treaties”. On a EU level, it would replace the bilateral ICSs incorporated in the recent agreements such as CETA and Vietnam, or discussions in TTIP. It is too early to determine exactly what the MIC would look like, but the plan is to model it based on domestic and international courts and tribunals like the WTO dispute settlement (composing of first instance and an appeal instance).41

Although the MIC is in the early stages of development, if examined alongside the ICS, similarities can be seen. The ICS was able to recognise the flaws of ISDS and increase transparency. It was flawed in that there was the suspicion that it favoured investor claims, negative awards for small Member States, lack of independent tribunal members, and it was unclear regarding compatibility between EU treaties and an ICS.42 Comparing this commentary with the Consultation strategy, 43 the MIC can be argued to be a continuation of the ICS, used to address the setbacks that arose in relation to the ICS. Examining the objectives of each mechanism above, both have the same goals, but are different. The ICS arose due to the scepticism of the ISDS, however the ICS failed to convince relevant stakeholders, such as European producers, SMEs and business associations that it was an effective alternative to ISDS.The issue arising from the ICS was not that it was working towards change, but rather that those changes did not meet their objective, leading stakeholders to continue to be hesitant about the reform of investment dispute settlement mechanisms.44 Marketing investment dispute reform as MIC detaches the stigma associated with the previous attempts to reform the ISDS.

Evaluations

Studies done by the United Nations Conference on Trade and Development (UNCTAD) and the International Centre for Settlement of Investment Disputes (ICSID) have examined ISDS cases, concluding that on average States were significantly more successful than investors.45 As Trade Commissioner Malmström has commented, “What has clearly come out of the debate is that the old, traditional form of dispute resolution suffers from a fundamental lack of trust. However, EU investors are the most frequent users of the existing model, which individual EU countries have developed over time. This means that Europe must take the responsibility to reform and modernise it. We must take the global lead on the path to reform.” The purpose of negotiating and continually entering discussion about investment dispute reform is to regain trust with the domestic and international courts, which can only be done through strengthening transparency.46

The MIC would therefore replace the bilateral ICSs that have been incorporated into EU trade and investment agreements. The EU now includes similar provisions (as in CETA and Vietnam) in all its investment negotiations, and is trying to reform investment dispute resolution.47 However, as most existing agreements do not contain innovations and improvements, the MIC has the potential to replace the dispute settlement provisions included in those older agreements.48 The EU commission does not expect social or environmental impacts, as the MIC proposal does not change the substantive obligations set out in those FTAs.49

It is understood that it is necessary for the multilateral court to become a legal entity under international law, however it is unclear and too soon to determine whether it would be integrated into an existing international organisation or it would be a standalone body. If it were to be assimilated with an international organisation, members views of the body being considered would need to be taken into account, in addition to their existing projected workload, vocation, and other activities.50

Consultation on the EU proposal

HAS THE EU LAUNCHED A CONSULTATION? IF SO you do not say so

In order to develop the MIC, there has been significant consultation and debate. The purpose of the Consultation Strategy is to provide and discuss with all relevant stakeholders about the various options as well as the environmental, social, and economic impacts that could occur from the establishment of a MIC. The following key stakeholder categories and main areas of interest have been identified: investors/companies by type or sector, business organisations and public authorities at local or EU level, trade unions, individuals active in the arbitrator community, arbitration centres that handle investment disputes, academia, and individual interests.51

In regards to interests of parties from outside the EU, many countries are reflecting and engaging in conversation about their approaches to investment protection and ISDS, as the issues of investment dispute resolution and global reform gain momentum. Important FTA partners have shown interest in the possible establishment of a MIC, i.e. Canada, who has publicly declared support for this mechanism.52

In order to establish a MIC, negotiation and conclusion of an international agreement is required. The Commission would act, in accordance with Article 218 of the Treaty, on the basis of Council authorisation in order to negotiate an agreement on behalf of the EU, on the basis of negotiating directives issued by the Council. An impact assessment would be required to be carried out, as any recommendation for authorisation to the Commission is a significant EU policy initiative, and will be carried out in mid-2017.53 In other words, the jury is still out on whether the MIC will get the support of the EU member states let alone the international community.