REUTERS | Victor Fraile

Has the time come for the establishment of a permanent investment court? The ‘ayes’ have it

Against the background of the on-going negotiations between the EU and the US on the Transatlantic Trade and Investment Partnership (TTIP), which include proposals for an “investment court”, the investor-state dispute settlement (ISDS) mechanism offered by investment treaty arbitration has, once again, been pushed into the spotlight. The critics target what are seen as fundamental flaws in the current system: inconsistent and unpredictable decisions, pro-investor bias to the detriment of (often developing) states, and unwarranted domination by lawyers. The proponents argue that the system is still in its infancy but has been effective and is responding to criticism, and should be given more time to come into its own. It was within this context that Allen & Overy hosted a debate on the question, “Has the time come for the establishment of a permanent investment court?” on 14 January 2016. Jeffrey Sullivan, a partner in Allen & Overy’s International Arbitration group, moderated the debate, with the ‘ayes’ represented by Philippe Sands QC (Matrix Chambers) and Sophie Lamb (Debevoise & Plimpton). Ali Malek QC (3 Verulam Buildings) and Stephen Fietta (Fietta) spoke on behalf of the ‘nays’. It should be noted that speakers were assigned their roles and, as such, the positions adopted do not necessarily represent their personal views.

Legitimacy and public support

One of the key concerns with the current system of ad hoc arbitration was the perceived lack of legitimacy and public support. An article by Nobel prize-winning economist Joseph E. Stiglitz in the New York Times, in which he questioned the investor-state arbitration provisions in the recently-concluded Trans-Pacific Partnership, was cited as just one example of the critical press on this subject. It was noted that ISDS is not a private system of justice which should be conducted behind closed doors but one which often involves issues of public interest as well as public funds. In defence of the current system, the supporters pointed to the newly-adopted UNCITRAL rules on transparency in ISDS, also emphasising that in certain cases, it is the parties themselves (including the respondent state) that want confidentiality.

Pointing to the example of Brazil, a country with no BITs in force, and yet one which attracts the most foreign investment in South America, the critics questioned whether the system as it currently stands was necessary at all. An indication was made towards the available alternatives to ISDS, citing the example of former Yukos investors getting a judgment against Russia in the European Court of Human Rights. The ‘ayes’ suggested that the fact an investment is covered by a BIT is at best fortuitous, and rarely represents strategic investor planning. They further observed that the preoccupation with the current ISDS system and the abandonment thereof was stopping us from evaluating other kinds of dispute settlement.

The role of lawyers

In the popular criticism of ISDS, lawyers are seen as one of the root causes of political illegitimacy, by encouraging a system which seems to profit only them. The ‘ayes’ suggested that the large fees relating to investment treaty cases have no relation to the quality or complexity of work undertaken and that the current system was a goose laying golden eggs for lawyers and arbitrators to make money. The problem of ‘double-hatting’ (that many lawyers act both as counsel and arbitrator) led to sometimes deciding an issue as arbitrator in one case while arguing the same point in another case. Critics of the ISDS said the system was based on perverse incentives for arbitrators.

Speaking for the ISDS mechanism, the ‘nays’ urged lawyers not to be shamed for the fees they charge for these cases, which are enormously complicated legally, as well as factually. Under a new system, costs were unlikely to be lower. They similarly doubted whether the appointment of professors of public international law or retired national court judges as arbitrators, instead of practitioners, would assist, noting also that there are many other systems (including the English High Court) which see practising lawyers sitting as judges. The current three-arbitrator system was considered to be inherently balanced by avoiding the risk of bias through a neutral presiding arbitrator. The ISDS proponents urged lawyers to dispel the myths and misinformation widely reported in popular press. They noted that while inaccurate articles castigating the ISDS system continue to proliferate, there are very few balanced pieces, explaining the benefits of the system.

Uncertainty of outcome

Another strand picked up by both sides was that predicting the outcome of some ISDS cases is almost impossible, with those in favour of a permanent court being established referring to it as a “lottery”. This is often alleged to have created many inconsistent decisions; for instance the oft-cited CME and Lauder cases against the Czech Republic, where the same facts led to different decisions by the two arbitral tribunals. The supporters of the current system pointed out that inconsistency takes place in courts as well, and is not unique to investment arbitration. Moreover, there are relatively few examples other than CME/Lauder and that is not a good enough reason to overthrow the ISDS mechanism.

Diversity

The current system was stated to be unsatisfactory regarding diversity as well, with tribunals being unrepresentative both in terms of geographical diversity and gender. Although 25% of parties and cases involve African states, less than 1% of arbitrators appointed in ISDS cases come from Africa. The number of women appointed to tribunals is also low and 75% of cases where a woman has been appointed involve the same two prominent arbitrators.

The new system

The proponents of the court system suggested that the focus of the debate should be on the substance of the system and not its form. Any new system must enhance legitimacy by being open and public in all respects, and bringing a degree of certainty. The World Trade Organization’s dispute settlement system, established in 1994, which evolved out of the ineffective procedures under the General Agreement on Tariffs and Trade (GATT), was provided as an example of a successful reform. On the other side, the supporters of the ISDS doubted the conceptualisation of the new system, arguing that it would be based on states’ inclination to control the system, meaning that all judges would be appointed by the state. This would remove any control from the investors and diminish the same legitimacy that the proponents of the court system were keen to preserve. They reiterated that the current system is responding to legitimate criticisms over diversity and transparency and should be allowed time to change from within.

Conclusion

While both sides came to the debate from very different perspectives, the gap between them was in fact narrower than it appeared. Both sides accepted there were flaws in the system and that change is desirable, meaning that the real question was whether reform should come from within the current model or with its overthrow in favour of a new system. The majority of the audience, initially in favour of the current ISDS system, was swayed by the conclusion of the debate that the time has come for wholesale reform and the founding of some sort of standing court to hear investment disputes. It remains to be seen whether the proponents of the court system will similarly manage to persuade the wider arbitration community. Nevertheless, perhaps more importantly, it appears that at least some of those negotiating the new generation of treaties, like the TTIP, are already persuaded.

Allen & Overy Shreya Aren (draft)

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