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Current investor-state dispute settlement has reached its zenith, but where next?

In recent years, the international arbitration community has witnessed widespread debate about the nature of investor-state dispute settlement (ISDS) mechanism. The oft-cited criticisms of ISDS include:

One could debate the extent to which these criticisms are justified and could be addressed, within the existing framework, through the addition of new features or safeguards (for example, the recently concluded United Nations Mauritius Convention on Transparency for Investor-State Dispute Settlements sought to address the transparency concerns). However, with the EU in the driving seat of ISDS reform, but also because many ISDS users are advocating an overhaul of the system, there is no doubt that the tide has turned and a more pervasive reform is underway. But what might the reformed system look like? Will it solve all of the perceived problems without creating new ones?

The EU’s current policy on ISDS is to build into each EU trade and investment agreement an Investment Court System (ICS). This comes as a result of the 2014 public consultation on the EU’s approach to investment protection and ISDS in the Transatlantic Trade and Investment Partnership (TTIP). The disadvantage of such a system is that, as the network of bilateral treaties concluded between the EU and third countries grows, so will the number of ICSs in existence. The bilateral nature of the instruments also means that there can be variations as between the individual ICSs. Aside from the cost of keeping each ICS in place, it has the potential to add complexity to the existing system as well creating more room for uncertainty and unpredictability, given that each ICS would be operating independently. Presumably cognisant of this, the agreements thus far negotiated by the EU also included a commitment for the establishment of a multilateral tribunal and an appellate body.

To that end, the EU Commission recently completed another public consultation, on the multilateral reform of the ISDS system. The proposals on the table appear to be the creation of either a:

  • Multilateral Investment Court.
  • Multilateral Appeal Tribunal.

It is however important to appreciate that the EU Commission’s vision for reform goes beyond just the treaties that it intends to negotiate, and those between its member states and third states. It is envisaged that third states may be encouraged to opt in to such a new mechanism, through an instrument similar to the Mauritius Treaty.

Starting with the latter of the two proposals (the Multilateral Appeal Tribunal), the idea appears to be to let the current ISDS subsist, but permit appeals against ISDS awards on the grounds of errors of law and manifest errors of fact. Tribunals are to be formed under subsisting investment treaties, which are essentially reduced to first instance tribunals. Aside from the debate on the necessity of a further appeal mechanism (explored later), commentators were quick to point out the incompatibility of such an appeals mechanism within the existing ISDS systems. In particular, the majority of ISDS cases are, at present, heard under the auspices of the International Centre for Settlement of Investment Disputes (ICSID). ICSID is a self-contained system that does not permit appeals against awards; it only provides for their annulment on certain limited grounds within that ISDS system. An amendment to the ICSID Convention, which would be required in order to resolve this incompatibility, does not appear to be likely. It would therefore be surprising if this proposal gained sufficient traction.

The creation of a centralised Multilateral Investment Court (the court), although not a new idea, has better potential to address the criticisms leveled against ISDS (whether justified or not). It also presents a real opportunity to improve efficiencies in ISDS and potentially streamline further legal predictability through a system of precedent in case law, as proposed by the EU Commission in the consultation. The idea that third states should be able to opt into the system is also to be welcome. However, the devil will be in the detail. In particular, the following merit further discussion:

  • The appointment of the court’s adjudicators.
  • The participation of investor claimants in that appointment.
  • The proposal that the architecture of the court also include an appellate instance.

Assuming that, as with the ICS, the desire is to appoint standing (as opposed to ad hoc) panels of adjudicators, particular care needs to be taken to ensure that the system is designed in a way that it attracts candidates of a sufficiently high caliber and possessing the appropriate qualifications and experience. A blanket prohibition on any other activities may lead to the court housing a large pool of under-utilised (but salaried) adjudicators, who are unable to accept any other positions. While an adjudicator should not be allowed to act as counsel, it is difficult to see why he or she should be prohibited from sitting on other ISDS tribunals or pursue academic activities, provided the duty to the court is recognised as paramount and that any conflicts of interests (real or perceived) are avoided. On occasion, even serving judges of the International Court of Justice accept arbitrator appointments in ISDS cases.

In order for the court to gain legitimacy, it is equally important that the adjudicators are drawn from balanced and diverse backgrounds, and that they are neutral and independent of the various state parties. In order to ensure a fair and balanced selection process, one idea may be for an independent commission, composed of all stakeholders, to make the appointments, or at least recommend appropriate candidates. If the court is seen to have a state bias, investors in a sufficiently strong negotiating position will insist on specifically negotiated investment agreements that provide for a neutral resolution of disputes, either before ICSID or some other rules. Other investors will be left to rely on the treaty and whatever new ISDS mechanism it provides for.

While the desire to introduce an appellate level is understandable, the EU Commission’s proposal appears to proceed on the assumption that awards rendered in the current ISDS system are full of legal and factual errors. While the existing system is not perfect, the vast majority of decisions are perfectly adequate. There is a question mark over the extent to which it is desirable to compromise on the speed, cost and, importantly, finality of decisions. In the current ISDS regime, these are subject to the safeguards of due process encapsulated in the annulment procedure, in the case of ICSID awards, and Article V of the New York Convention in case of other awards.

If inconsistent decisions are a concern, a system of precedent (already under consideration) might present a more efficient solution. Another idea that has been floated in connection with the TTIP consultation is for an appellate body to render preliminary rulings on questions of law (resembling the preliminary rulings procedure on questions of EU law at EU level), provided that this would not unduly prolong the proceedings.

However, an appellate mechanism, which allows for questions of fact to be reviewed, requires caution, as the risk of it resulting in re-litigation of the merits is difficult to contain. Such a situation would be highly undesirable from the perspective of costs, efficiency and certainty. It would also be open to abuse by disappointed parties. Indeed a review of facts at an appellate level is rare in national legal orders. It is important to recall that there was little appetite for it when ICSID carried out consultations in respect of a similar proposal in 2004/2005.

Mindful of these and other considerations, the idea of a Multilateral Investment Court would nevertheless appear to be the likely direction of travel. However, it would obviously take some time for a sufficient mass of states to opt into the new regime, even if the court is ultimately the EU’s preferred mechanism. This is particularly so in the current climate, where at least some states are preoccupied with terminating their existing investment protection arrangements or withdrawing from the existing ISDS, rather than with the thought of entering into any new arrangements.

Allen & Overy Lucia Raimanova Peter Plachý

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