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An Investment Court system or an Appeals mechanism? The EU’s 2017 consultation on multilateral reform of ISDS

In May 2014, against the backdrop of vociferous debate about the nature of investor-state dispute settlement (ISDS) and investment protection, the EU launched a consultation on its approach to substantive investment protections and ISDS in the Trans-Atlantic Trade and Investment Partnership (TTIP). Notably, the European Commission’s consultation document focused on the balance between the right to regulate and substantive investment protections. It proposed a number of changes to features of investor-state arbitration. The “core issues” identified by the Commission from the responses appeared to be premised on the continuation of ISDS in a reformed version.

Over the next two years, we watched the Commission develop its thinking: from the appellate mechanism identified as a “core issue” in January 2015; to the embryonic proposal for a permanent investment court in the concept paper in May 2015; and finally the proposed Investment Court System (ICS) set out in the investment chapter for TTIP, sent by the EU to the US in November 2015.

In December 2015, the text of the EU-Vietnam free trade agreement (FTA) included the establishment of a permanent investment tribunal and an appeal tribunal. This was in addition to a commitment upon the parties to enter into negotiations for an international agreement providing for a multilateral investment tribunal in combination with, or separate from, a multilateral appellate mechanism applicable to disputes under that agreement.

Perhaps, then, we should not have been surprised by the emergence of the Comprehensive Economic Trade Agreement (CETA) from “legal scrubbing” in early 2016 with a new ICS, which envisaged the establishment of a permanent tribunal of 15 members (five from the EU, five from Canada and five from other countries) to hear claims by investors. Both the EU and Canada confirmed that working with other trading partners to pursue the establishment of a multilateral investment tribunal was “a project to which the EU and Canada are firmly committed”.

The Commission has asked for responses to a further consultation on the multilateral reform of the ISDS system. There is significant debate about how ISDS can develop in a way that reconciles the criticisms, aims and interests of a spectrum of voices. Further stakeholder engagement is therefore welcome. However, it is clear that the EU’s commitment to the ICS for its own future treaties remains firm. Indeed, the Commission’s introduction to the consultation suggests a determination to pursue wholesale change to the system of resolution of investor-state disputes. It suggests engaging with partners from across the globe to build consensus for a fully-fledged, permanent Multilateral Investment Court in order to develop a coherent, unified and effective policy on investment dispute resolution for all investment treaties.

The Commission’s 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 3,200 investment agreements globally in place. By seeking procedural consistency through a standing body of decision-makers overseeing the investor-state dispute process, the Commission also aims to avoid the unpredictable decision-making and lack of precedent in the current ISDS system.

An Investment Court System or an appeals mechanism?

One of the most important questions in the consultation is Question 28. It asks: “In your view how important is it that the same procedural rules for investment dispute settlement apply in EU Member States’ existing BITs with third countries and in EU level trade and investment agreements with third countries?” This, it appears, seeks to identify whether a problem really exists: does it matter that the EU’s future agreements will refer to the ICS, but member state’s historic bilateral investment treaties (BITs) retain investment arbitration?

It might be assumed that, if the response to Question 28 overwhelmingly suggested that procedural consistency was not important, the EU would simply continue to adopt the ICS in its future agreements and leave the existing system contained in member state BITs untouched. However, as discussed below, given that the consultation raises the prospect of an appellate body that would sit above the existing system in member state BITs, it may not be that clear cut.

One of the most intriguing parts of Question 28 must, however, be one of the possible responses. That is, whether, “It is important for the EU’s credibility that reform of ISDS also applies at the level of EU Member States’ BITs”. This is quite interesting evidence of the Commission’s concern that the absence of a consistent approach at EU and member state level in some way undermines its own position.

Notwithstanding the Commission’s clearly stated objective, its policy approach becomes less straightforward at Question 44. The questionnaire presents the alternative option of a Multilateral Appeal Tribunal which would consider appeals from the decisions of ad hoc investment arbitration tribunals established under the current system. In short, it is implied that the Multilateral Appeal Tribunal would function alongside the system of arbitration as it is now, rather than reformed in any way. Indeed, Question 45 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?”

It seems sensible to assume that this would allow for the ICS (whether established multilaterally or as separate “courts” under different agreements between the EU and third party states) and the investment arbitration system in member states’ BITs to intersect at the appellate level, with decisions from the existing mechanisms in member state BITs and the ICSs all being referred in to the Multilateral Appeal Tribunal. The Multilateral Appeal Tribunal would then apply different substantive standards depending on the text of the investment treaty or agreement under which the dispute arose, in the same way it is assumed that the Multilateral Investment Court would.

A whole new ICS for all existing BITs is a considerably different proposition to the establishment of an appellate body. It is therefore surprising that many of the questions in the latter part of the questionnaire treat these two options as interchangeable from the point of view of the response. It is not necessarily the case that features which are appropriate or advantageous in a multilateral investment court system, from first instance decision-making to appellate level, will also be appropriate or desirable for a Multilateral Appeal Tribunal. There is no ability to clarify the response to individual questions, although participants can submit a position paper to accompany the consultation response.

The responses to the consultation will be significant in terms of the future of the Commission’s objective to establish a multilateral investment court. Moreover, it will be crucial that a constructive and positive response is received from the third party (that is, non-EU) states who are asked to partner with the Commission in developing the multilateral investment court system. Ultimately the Commission’s timing may be unfortunate; the necessary drive for co-operation may be lacking in the current political climate and there are a number of other higher priorities for those involved in the negotiation of trade agreements, at both multilateral and bilateral level. Some states within the International Centre for the Settlement of Investment Disputes (ICSID) regime may consider it easier to work to ameliorate the existing system than to fashion a new one. That is so particularly in light of ICSID’s January 2017 request for suggestions regarding potential amendments to the ICSID rules.

Undoubtedly there is a broad spectrum of views about the suitability, or otherwise, of ad hoc arbitration for the resolution of investor-state disputes. However, one point of general agreement is that improvements could be made. Against this backdrop, it is important that the Commission, as a loud and powerful voice in terms of stakeholders, addresses reform in a comprehensive way and looks at a variety of options. It remains to be seen whether the questionnaire will elucidate clear responses which will assist the Commission in considering its proposals for the future of ISDS. Other than the potential “opt out” of Question 28, it is a very binary approach: a Multilateral Investment Court System or a Multilateral Appeal Tribunal retaining the system of ad hoc arbitration. The questionnaire does not recognise that these two different approaches are not interchangeable. Importantly, the questionnaire does not seek responses on the development of a Multilateral Appeal Tribunal alongside reform of the current system of ad hoc arbitration, and it is not clear from the consultation itself whether this remains an option as far as the Commission is concerned. Clarity in this regard would be helpful in the context of what is an important dialogue surrounding the reform of a significant, multi-faceted and long-established system for the resolution of global investor-state disputes.


Herbert Smith Freehills Hannah Ambrose Vanessa Naish

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