The EU Commission (the Commission) has launched a public consultation on the multilateral reform of the investment dispute settlement system. The survey is found here and responses are due by 15 March 2017. The consultation is the next step in furtherance of the Commission's objective to develop a multilateral system for the resolution of international investment disputes and, amongst other things, seeks to explore views on its proposal to develop a permanent multilateral investment court system.

The development of the Commission's position over the last couple of years and the Commission's introduction to the consultation both suggest a determination to pursue wholesale change to the system of resolution of investor-state disputes, rather than a more nuanced approach in evaluating the perceived flaws in the current system under which investor-state disputes are largely resolved by ad hoc arbitration (often under the auspices of ICSID, part of the World Bank). However, notwithstanding its clearly stated objective, the Commission's survey also countenances in the alternative the establishment of a Multilateral Appeal Tribunal which would consider appeals from the decisions of ad hoc investment arbitration tribunals established under the current system.

The responses to the consultation will be significant in terms of the future of the Commission's objective to establish a Multilateral Investment Court. In particular, it will be crucial that a constructive and positive response is received from the third party states who are asked to partner with the Commission in developing the Multilateral Investment Court system. However, it remains to be seen whether the survey will elucidate clear responses which will assist the Commission in considering further its proposals for the future of investor-state dispute settlement: the majority of the survey questions treat as interchangeable the two different approaches (the establishment of a Multilateral Investment Court system and the establishment of a Multilateral Appeal Tribunal) and the survey does not seek responses on the development of a Multilateral Appeal Tribunal alongside reform of the current system of ad hoc arbitration. It is not clear whether this option continues to be considered by the Commission.

The issues and controversies surrounding the resolution of investor-state disputes are complex and any changes to the system pursued by the Commission would ideally be based on clearly expressed views from a range of stakeholders. It is to be hoped therefore that respondents to the survey take the opportunity offered by the Commission to clarify their responses by way of uploading a position paper.

With unprecedented growth in foreign direct investment, issues concerning substantive investment protection and the way in which investor-state disputes are resolved both now and in the future are significant for both states and investors. If you would like to discuss these issues or the Commission's consultation, please contact: Larry Shore, Partner, Dominic Roughton, Partner, Christian Leathley, Partner, Andrew Cannon, Partner, Iain Maxwell, Of Counsel, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact.

The use of arbitration to resolve investor-state disputes has come under increasing scrutiny in recent years, both before and after the Commission's public consultation in 2014. The 2014 consultation focussed on questions related to the EU's proposed approach to investment protection and investor-state dispute resolution in the TTIP (see our blog post here). Subsequent to the report on the 2014 consultation (see our post here), the Commission published a Concept Paper on the future of ISDS in the TTIP and beyond (see our post here). Although non-binding, the Concept Paper set out concrete proposals for reform which included revisions to the dispute resolution system in the TTIP moving away from arbitration and to include a standing body to determine investor-state disputes, as well as an appellate system. Notably, the Concept Paper also proposed the development of a multilateral system for multiple investment agreements involving a single permanent court with tenured judges and an appellate mechanism. The Commission published its paper "Trade for All" in 2015, which stated that the Commission's objective was to engage with partners to build consensus for "a fully-fledged, permanent Multilateral Investment Court".

The focus of the Consultation

The Commission's current consultation focusses on the development of aspects of this Multilateral Investment Court System, including:

  • the importance of features such as:
    • an appellate system to correxct errors of law and manifest errors of fact;
    • full-time adjudicators on fixed remuneration;
    • high ethics standards; and
    • transparency;
  • whether the system should include special assistance to developing countries;
  • whether the system should be limited to investment treaties only;
  • the importance of enforcement of decisions without domestic review; and
  • the sharing of operational costs.

A future role for investment arbitration : multilateral investment court system or ad hoc tribunals with a multilateral appeal tribunal?

Whilst the Commission is committed to the development of a Multilateral Investment Court System, the consultation also suggests that another option to be considered is the establishment of a Multilateral Appeal Tribunal to rule on appeals from the decisions of ad hoc investment tribunals. Indeed, many of the questions in the survey treat these two options as interchangeable from the point of view of the response (for example, "Do you consider that the establishment of a single Multilateral Investment Court or a Multilateral Appeal Tribunal could contribute in a positive way to improving the global investment climate?"). The Commission considers that the questions which focus on issues of overall design and size would be common to the two systems and hence the response sought does not distinguish between one system in the other.

It is implied that the Commission intends that a Multilateral Appeal Tribunal would function alongside the system of arbitration as it is now, rather than reformed in any way. This would be a departure from the Commission's previous approach: for example, before the process of legal scrubbing introduced the new Investment Court system, the CETA text included a reformed version of ad hoc investment arbitration (see our blog post here). Question 45 of the survey asks "Do you consider that establishing a Multilateral Appeal Tribunal (i.e. without a multilateral tribunal at the level of the first instance) would be sufficient to satisfactorily reform the current investment dispute settlement system?". Given the criticisms made of the current system, Question 45 is fundamental in the context of any discussion of a possible Multilateral Appeal Tribunal as an alternative to a Multilateral Investment Court System. With the exception of this one question, the survey essentially presents a binary approach: a Multilateral Investment Court System; or a Multilateral Appeal Tribunal retaining the system of ad hoc arbitration with its perceived flaws. Such an approach could be considered unhelpful in the context of a discussion of future reform of a significant, multi-faceted and long-established system for resolution of investor-state disputes.

The future of substantive protections

The Commission acknowledges that, at this stage, its focus is on the system rather than substantive investment protections, noting that "[w]hile it is clear that full substantial consistency is not within reach until a single set of multilateral substantive investment rules (i.e. investment protection standards) comes into existence, this is not considered a realistic option at the moment". The Commission's current intention is that, even without a consistent set of investment protections, establishment of a multilaterally agreed system for investment dispute resolution could "already confer a significant degree of predictability and coherence" in the context of what it calls "the "spaghetti bowl" of 3200 investment agreements globally in place". This is understood to be a reference to the fact that a permanent body would either adjudicate on the merits of investor-state disputes (if there was a Multilateral Investment Court) or adjudicate on appeals (if there was a Multilateral Appeal Tribunal), even if that body applied different substantive standards depending on the text of the investment treaty or agreement under which the dispute arose. If the Commission achieves its aim in establishing a permanent investment court, a further consideration affecting predictability of its decision making would be whether previous investment arbitration awards would have precedential or persuasive value.

Any attempt to assimilate the standards of substantive protection found in a multitude of different international treaties and agreements (as well as elucidation of those standards in numerous investment arbitration awards) will raise a number of questions, not least whether such an attempt at consistency is even desirable where the levels of protection which may be offered or can be expected may differ depending on the state or states concerned and their level of development.