Update on the European Commission’s drive for investment courts

The European Commission has emerged as one of the biggest drivers for reform of investor-state dispute settlement (ISDS). Arguing that the current ISDS system lacks legitimacy, consistency and transparency, the EU has taken a two-pronged approach in its push for reform. First, it has sought to replace traditional investor-state arbitration with a system of standing investment courts when negotiating new trade agreements. Second, and in parallel, it has led the charge for the creation of a permanent multilateral investment court with the vision of reshaping ISDS on a global scale.

Negotiation of investment protection agreements

The EU’s goal of introducing a system of standing investment courts into new trade agreements has met with limited success. Vietnam agreed in principle to include an investment court in the EU-Vietnam Free Trade Agreement, although the details of the court have yet to be announced. Landmark provisions were included in the Comprehensive Economic Trade Agreement with Canada (CETA).

By contrast, President Obama’s administration resisted the inclusion of an investment court in the negotiations for the now-defunct Transatlantic Trade and Investment Partnership (TTIP) and it is hard to imagine President Trump’s administration being much friendlier, given his rhetoric on the North American Free Trade Agreement (NAFTA). Meanwhile, despite the EU announcing the death of investor-state arbitration in their 1 July 2017 fact sheet on the EU-Japan trade agreement negotiations, the agreement in principle (announced some days later) excluded investment protection from its scope entirely, as the EU and Japan had failed to reach agreement on this issue, with Japan reportedly unwilling to agree the EU’s proposed investment court system.

Moreover, CETA’s investment protection provisions nearly scuppered the whole deal. The Belgian region of Wallonia, which has an effective veto over Belgium’s consent to trade agreements, only gave its consent at the eleventh hour and on the condition that Belgium seek an opinion from the Court of Justice of the European Union (ECJ) on the compatibility of the treaty’s proposed investment court system with European law. Belgium duly referred the issue to the ECJ on 6 September 2017. While CETA provisionally entered into force on 21 September 2017, the treaty’s ratification in Belgium (and the entry into force of its investment chapter) is contingent on a positive answer from the ECJ. In this context, commentators have suggested that a negative answer by the ECJ may not only spell the end of CETA’s investment chapter, it may well put an end to the EU’s dream of a standing European investment court.

Establishment of a multilateral investment court

On 13 September 2017, the EU formally recommended the opening of negotiations for a convention establishing a multilateral court for the settlement of investment disputes. In this context, the EU set out its vision of a court that is “permanent, independent and legitimate” with binding precedents, a built-in appeal mechanism and provisions for third party interventions from interested environmental or labour organisations, among others. In line with concerns over transparency, the EU’s proposal emphasised:

“… stringent requirements on ethics and impartiality, non-renewable appointments, full time employment of adjudicators and independent mechanisms for appointment”.

The EU’s recommendation follows an agreement by the United Nations Commission on International Trade Law (UNCITRAL) in July 2017 to establish a working group to consider multilateral reform of ISDS, including the possibility of establishing a multilateral investment court.

While the Commission’s recommendation is likely to start the process of negotiation, the road ahead is far from clear as there is neither consensus internationally nor within the EU as to the desirability of ISDS reform or what form any changes should take. The lack of an international consensus on the future of ISDS was underscored by the debate surrounding the UNCITRAL working group, where it was reported that the United States and Japan were strongly opposed to the mandate while the EU, Canada and others were strongly in favour. This divide was also recognised in a June 2017 report from the European Parliamentary Research Service on the proposed investment court. The report noted that in the EU’s drive towards a multilateral investment court it “has run into opposition from other countries, notably the USA and Japan”, while “[v]arious other countries have recently also begun to turn away from international investment treaties with ISDS mechanisms.”

While impossible to predict whether the drive for an investment court system will ultimately succeed, the sheer number of developments in recent months highlights the uncertain road ahead and the importance of arbitration practitioners paying attention as the matters develop.

Kirkland & Ellis Philipp Kurek Noah Stewart-Ornstein

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