REUTERS | Mark Blinch

Could anti-ISDS tendencies generate a revival of commercial arbitration?

Ever since the European Commission and the European Parliament started to get involved with investment protection and investor-state dispute settlement (ISDS), investment treaty arbitration has increasingly come under pressure.

It has been characterised as allowing multinationals to bypass domestic courts by using behind closed-door arbitration and to easily collect millions of dollars from states. In short, ISDS and investment treaty arbitration, which has been the hallmark for effective investment promotion and protection over the past 50 years, has been branded as “dodgy”. It needs to be, if not completely eradicated, at least modified significantly.

The European Commission first started to propose modifications to the classic ISDS system in the draft text of the Free Trade Agreement between the EU and Canada (CETA). These modifications left the main elements of investment treaty arbitration intact, while proposing tighter rules on transparency and on the rules on conflict of interests of arbitrators.

However, it quickly appeared that this was insufficient for the European Parliament to accept the CETA deal. Consequently, the European Commission was forced to come up with a more radical proposal, namely, what it termed an “international court system (ICS)”. The ICS would replace arbitration by a two-tier, semi-permanent quasi-judicial court system. Instead of arbitrators, “judges”, who have been pre-selected by the states only, would decide the cases. Moreover, an Appeal Tribunal would be attached, which would review appeals on both points of facts and law. This radical departure from party-appointed arbitration based on flexible arbitration rules such as ICSID and UNCITRAL, has recently been accepted by Canada in a revised CETA text. A few months before, Vietnam also accepted the ICS proposal in the EU-Vietnam FTA text. The cardinal question now is whether or not the US will follow suit and accept the ICS proposal for the Transatlantic Trade and Investment Partnership (TTIP).

Besides these developments, it is important to note that more states apparently turn away from investment protection. For example, Italy recently terminated the Energy Charter Treaty (ECT), while Poland announced that it is considering the termination of all its 60 bilateral investment treaties (BITs).

Such tendencies increasingly reduce the availability of investment treaty arbitration for investors as a viable dispute resolution mechanism.

Hence, investors (that is, potential claimants) must look for other effective dispute resolution mechanisms. Indeed, commercial arbitration could benefit hugely from the anti-ISDS tendencies described above by offering arbitration for at least those investors/claimants who have invested in a country on the basis of a contract with the state. Commercial arbitration provisions are usually included in those contracts. Such disputes could thus be resolved before arbitration institutions such as the ICC or the LCIA.

In light of the increasing pressure on ISDS, investors should increase their efforts to base their investments as much as possible on the contracts with the state in question, and include commercial arbitration provisions in those contracts.

While this solution is not always available for all investments, commercial arbitration is set for a revival due to the demise of investment treaty arbitration.

EFILA Nikos Lavranos

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