Creating legal certainty for international investment

There are currently more than 3000 international investment agreements containing Investor-to-State (ISDS) dispute settlement provisions. EU Member States are party to more than 1400 of these agreements. These investment agreements are generally stand-alone Bilateral Investment Treaties but they can also be included in a comprehensive Free Trade Agreement (FTA).

ISDS is a mechanism included in many trade and investment agreements to settle disputes through ad-hoc arbitration panels. Under those agreements, a company from one signatory state investing in another signatory state can argue that certain laws or regulations negatively affect its expected profits or investment potential, and seek compensation in a binding arbitration tribunal.

In recent years, ISDS provisions have been heavily criticised for their lack of transparency, unpredictability, cost and inefficiency. Those multiple issues create legal uncertainty regarding the application of rules on investment protection, which is detrimental to both businesses and States. 

Therefore, the European Commission requested authorisation to initiate negotiations for a Convention establishing a Multilateral Investment Court to replace the current ISDS system. The purpose of this court would be to set up a permanent international body to settle investment disputes between investors and states.

This briefing will first explain why the ISDS system is controversial. It will subsequently outline the EU’s Strategy to replace the ISDS through the Investment Court System and the MIC. Finally, it will present the next steps to be expected following the Commission’s request.  

Criticisms of ISDS

ISDS is a mechanism included in international agreements on investment, which aims to enforce provisions on the protection of investor rights. Under those investment agreements, Parties agree upon a number of rules regarding the treatment of foreign investors established in their country. These rules usually include: non-discrimination, fair treatment, compensation in the event of expropriation, and the free transfer of funds.

If a company from one signatory state investing in another signatory state considers that certain laws are in breach of these investment protection standards, it may seek compensation in ad-hoc arbitration tribunals – also called Investor-State Dispute Settlement (ISDS) mechanisms.

However, ISDS provisions have been heavily criticised in recent years. In particular, the following aspects of ISDS provisions are repeatedly criticised:

  • Opacity: Limited information is made available on the existence of disputes, the procedures followed in arbitration, substantive aspects of the cases as well as the results of the disputes. This can be explained by the fact that most arbitration fora require the parties’ consent to publish information on the disputes.
  • Unpredictability: Since tribunals are established on an ad-hoc basis to hear a specific case, they may interpret investment provisions differently leading to unpredictable outcomes.
  • Risks of Partiality: Even though all ISDS systems require arbitrators to act impartially and independently, arbitrators are often involved in several cases at the same time, including as counsel to investors or as witnesses, which raises the potential for conflicts of interests.
  • Costly: Arbitration costs are often shared by parties and damages have a tendency to be extremely high when a state loses a case. This limits SMEs’ access to the arbitration system as it has been considered that the costs of proceedings are too high for them.
  • Limited Grounds of Appeal: Parties have very limited grounds on which to appeal ISDS decisions; this is mainly allowed when proceedings have not been carried out in accordance with the tribunal’s procedural rules and principles. If any of the parties considers that the arbitration court has misinterpreted investment provisions, it cannot require the establishment of another panel to reassess the case.
  • Inefficiency: ISDS is a bilateral mechanism which needs to be duplicated for each Agreement, including investment provisions.
  • Reduction of states’ right to regulate: States’ decision to adopt legislation on investment would be affected by the threat of arbitration proceedings leading to payment of substantial damages.

For these reasons, the Commission says, it decided to undertake a progressive reform of the ISDS at the EU level. The first step of this reform was taken during the TTIP negotiations through the establishment of a new Investment Court system.  

First step in the reform of ISDS: The Investment Court System

In 2015, the Commission proposed a new Investment Court System (ICS) aiming to replace the ISDS mechanism in all ongoing and future EU investment negotiations, including TTIP. This ICS creates a new permanent body that covers the investment dispute settlement arising from a specific Agreement. The EU has so far managed to include provisions establishing an ICS in its most recent trade agreements with Canada (CETA) and Vietnam.

According to the Commission, this ICS system has been designed with a view to addressing the flaws identified in the ISDS system:

(a)  The ICS would be composed of a first instance tribunal and an appeal tribunal which would be operating on similar principles to the WTO Appellate Body;

(b)  Arbitrators would be randomly appointed to cases and for a strict period of time with a view to limiting conflict of interests;

(c)  This ICS would be a permanent dispute settling body that would enable consistency in its decisions over time;

(d)  Governments’ right to regulate would be enshrined in the provisions of the trade and investment agreements.

Despite these improvements, this ICS only covers disputes arising from the interpretation of a specific bilateral agreement. Therefore, the need to duplicate a new ICS for each new agreement remains an issue.

For this reason, the Commission only considered the ICS system as a transitional step in its reform of the ISDS system. In parallel to this, the Commission started working on setting up a permanent international investment court from 2015 which materialised into a Proposal in September 2017.  

Towards a Multilateral Investment Court

The Commission came forward with a Recommendation for a Council Decision on the establishment of a Multilateral Investment Court on 13 September 2017, as part of the trade package presented by Commission President Jean-Claude Juncker during his State of the Union speech.

In its Recommendation, the Commission requested the Council to grant it a mandate to negotiate a Convention with third countries aiming to establish a Multilateral Investment Court to replace the ISDS system and the ICS.

The Annex to the Recommendation outlines the objectives to be reached in the negotiations for a Convention to establish a MIC, including on the process of the negotiations, the structure of this MIC and its international dimension.

In particular, the Recommendation provided that the Conventions would aim to allow the EU, its Member States and third countries to submit disputes arising under all investment agreements to which they are or will be a party to the jurisdiction of the Multilateral Investment Court. In the case of multilateral agreements, the Convention would allow two or more Parties to such an agreement to agree to submit disputes under the multilateral agreement to the jurisdiction of the multilateral court.

In addition, this MIC would be designed to address the criticism of the ISDS system. For this purpose, the Recommendation specifies that the MIC should be composed of a tribunal of first instance and an appeal tribunal. This appeal tribunal would have the competence to review the decisions issued by the tribunal of first instance on the grounds of errors of law or in the appreciation of facts. In addition, the appeal tribunal would have the power to send back cases to the tribunal of first instance for the completion of the proceedings in light of the findings of the appeal tribunal.

The Commission recommended including multiple requirements aiming to guarantee the independence of the court and thus to limit risks of partiality or conflict of interest. For this purpose, Members of the court should be appointed through an objective and transparent process and for a fixed, long and non-renewable period of time. In addition, they should receive a permanent remuneration and enjoy security of tenure, as well as “all necessary guarantees of independence”. Further, rules on ethics and challenge mechanisms would be included in the Convention.

The Commission also recommended that fixed costs of the court should be borne by the Contracting Parties to the Convention with a view to ensuring that SMEs and natural persons can access it. In this regard, it indicated that the distribution of such costs among the Contracting Parties should be decided on an equitable basis by taking into account the Parties' level of economic development, the number of agreements covered per Party and the Parties' respective volumes of international investment flows or stocks.

Further, the Commission proposes that proceedings before the Multilateral Investment Court should be conducted in a transparent manner. This would include the possibility of submitting third-party interventions, similar to or using the rules and standards provided for within the UNCITRAL Rules on Transparency for treaty-based investor-state arbitration.

Finally, the Commission does not exclude the possibility of relying on the secretarial support of an existing international organisation or integrating it into the structure of any such organisation at a later stage. 

Next steps

Member States represented in the Council will decide whether to grant the Commission a mandate for negotiating a Convention establishing a multilateral court for the settlement of investment disputes. They may also decide to amend the objectives to be reached in the negotiations.

Should the Member States decide to grant a mandate to the Commission, the Commission could enter into negotiations with third countries. These negotiations could be conducted within the framework of the United Nations Commission on International Trade law (UNCITRAL).

Canada already expressed its support for the creation of a MIC in December 2016. Moreover, the new FTAs with Canada (CETA) and Vietnam already include a provision ensuring their support for the establishment of a MIC.

However, the new EU-Singapore FTA is not as ambitious in this regard since it does not include any provision referring to a MIC. Other ongoing trade negotiations, with India for example, are expected to include a section on investment dispute settlement but it is unclear which type of mechanism would be agreed on. 

In addition, Japan is opposed to the establishment of an ICS, which currently impedes the conclusion of negotiations for an EU-Japan Economic Partnership Agreement. This also means that Japan’s support for a MIC would be questionable. If such resistance came from other states as well, particularly those as significant in international investment as Japan, any plans for a MIC might become difficult. It could lead to a situation in which different systems of investment dispute settlement would be in place at the same time.  

Additional facts