The Comprehensive Economic and Trade Agreement – implemented in an EU/Canada trade deal – introduces a bilateral Investment Court System and will transform it into a Multilateral Investment Tribunal.
By Anna Jermak
Given that foreign investments significantly contribute to a country’s economic prosperity, States have been trying to attract foreign investors by offering them a favourable investment environment. Through proliferating bilateral investment treaties (BITs) and treaties with investment protection – safeguarding foreign investors against unfair or discriminatory treatment by a host State – an international system governing the investor-State relationship was created. The Investor-State Dispute Settlement (ISDS) is at its heart a mechanism for foreign investors to sue a host State for breaches of their rights.
Traditionally, the proceedings took the form of arbitration before ad hoc tribunals. However, due to the shortcomings of the ISDS system, the voices calling for its reform have been heard more and more loudly. The EU’s reform proposal – implemented in the Comprehensive Economic and Trade Agreement (CETA) – is so far the most promising one. It introduces a bilateral Investment Court System (ICS) and commits to ultimately transform it into a Multilateral Investment Tribunal.
Why reform at all?
The current ISDS system’s adaptability to international reality, and its implementation of global legitimacy standards, have been widely questioned for want of reliability, predictability, transparency, and consistency.
The fact the arbitration proceedings do not constitute precedents for later proceedings to rely on, and their decentralisation – that is, the formation of arbitration tribunals ad hoc, separately for each dispute – make it close to impossible for decided cases and interpretations to be consistent. Such legal uncertainty inevitably leads to decreased trust from the parties in the institution of investment arbitration, as the majority’s ‘correct’ interpretation of law or facts is so uncertain. In conjunction with the colossal costs that arbitration proceedings entail, the parties may be overwhelmed by the risk. Economically weak countries pay the highest price for its unpredictability.
Another factor that contributes to low levels of confidence in ISDS has been the absence of an appeal mechanism that would ensure coherent interpretation and application of the law. Widely present in national legal systems (appeal courts) as well as in WTO dispute settlement (the Appellate Body), the review mechanisms serve to not only allow for uniformity of court and tribunal decisions but also to reassure the parties that the decision held is legitimate and must be respected. Without the parties’ confidence, the ISDS is on the verge of collapsing.
Lastly, the fact that disputing parties themselves appoint the arbitrators who resolve their conflict undermines confidence not just in the ISDS system but also in the arbitrators’ independence and impartiality. The parties are certainly inclined to nominate an arbitrator who they believe will decide in their favour. And although arbitrators are expected to follow
the soft-law International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration which require their impartiality and independence, they may still be biased on a conscious or subconscious level.
Thus, even a mere suspicion of an arbitrator’s bias is unsustainable – as Paulsson rightly noticed:
an unfavourable decision is unlikely to be accepted as legitimate if it is perceived to be the product of arbitrariness or bias.Jan Paulsson, ‘Moral Hazard in International Dispute Resolution’ (2010) 25 ICSID Review – Foreign Investment Law Journal 340.
How is CETA’s mechanism different?
The enshrinement of the ICS in EU trade and investment treaties – such as the EU-Vietnam Free Trade Agreement, the EU-Singapore Free Trade Agreement, and CETA – appears to be the answer to these criticisms. Despite neither of the ICS provisions in these agreements being operative, the mere act of replacement of the ISDS system has aroused so much controversy that it led the Court of Justice of the EU to confirm CETA’s ICS’s compatibility with EU law. For the purpose of critiqueing the EU’s ICS proposals, the focus will here be on CETA’s investment provisions.
CETA was signed in 2016, following eight years of negotiations. Its emphasis on the removal of trade barriers between the EU and Canada did not stop it from putting in place remarkable provisions on international investment protection and dispute settlement.
Art. 8.27 of CETA establishes a permanent Tribunal for the resolution of investment claims. It is to be composed of fifteen highly qualified and (as stated in Art. 8.30) fully independent members coming from the EU, Canada, and third countries. Pursuant to Art. 8.28, an Appellate Tribunal, reviewing the first instance Tribunal’s awards, has come into existence. The language allowing it to “uphold, modify or reverse” an award resembles the wording referring to the Appellate Body’s competences in the WTO’s Dispute Settlement Understanding.
Under Art. 8.29, the contracting parties pledge to pursue, in collaboration with other trading partners, the establishment of a multilateral investment tribunal and a separate appeal body. Upon their creation, the ICS (together with bilateral investment courts established pursuant to the EU’s other free trade agreements) will be replaced by the new single multilateral dispute-settlement mechanism. Any country willing to accept the rules underlying its functioning will be welcome to join it.
Pros and cons
This two-tier system is a move away from the traditional ISDS framework to permanent, transparent, impartial, and independent Tribunals
inspired by the principles of public judicial systems in the EU and its Member States and Canada, as well as international courts such as the International Court of Justice and the European Court of Human Rights.Council of the EU, Joint Interpretative Instrument on the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member
States 27 October 2016, 13541/16.
Indeed, the permanency of the investment Tribunal under the ICS stands in opposition to the ad hoc character of regular arbitration tribunals, providing more consistency and predictability and therefore a more stable investment dispute settlement system overall. The fact that the Tribunal’s members are designated in advance eliminates the danger of biases and conduces to trust. The requirements of absolute independence and impeccable ethical standards from members of the Tribunal are likely to further strengthen the perception of impartiality.
Through the appeal mechanism provided for in the ICS – but absent in the ISDS system – the uniformity of case law and the legitimacy of the first-instance Tribunal are intended to be reinforced.
The cherry on the cake – the envisaged multilateral investment tribunal, represents the EU’s and Canada’s efforts to completely modify the way disputes between States and foreign investors are solved, by means of 1) the adoption of all the aforementioned changes and 2) their subsequent implementation not bilaterally but multilaterally in a truly international framework.
Yet, it must be emphasised that although the majority of CETA’s provisions have been provisionally applied since 2017, the ones on the ICS have not been, and will not be, until all national Parliaments of the EU Member States ratify it. Consequently, the proposed dispute settlement regime can only be analysed on a theoretical basis, without any knowledge of its actual real-life effectiveness or functionality.
Furthermore, some have argued against the introduction of the ICS, claiming it is unnecessary and would better be replaced by less radical adjustments to the current ISDS system. For instance, one could point out that the ability of the parties to appoint their own arbitrators is advantageous to them, as it gives them more control over the arbitration proceedings – a crucial imperative for arbitration. Undoubtedly, the parties’ belief in the legitimacy of disputesettlement proceedings is boosted when they are given an opportunity to choose arbitrators with the exact expertise, experience, and views they look for. However, as long as arbitrators act professionally and treat their job and responsibilities under the IBA Guidelines seriously, the arbitration process should not be undermined.
Another way of ensuring the legitimacy of the proceedings and a lack of bias from arbitrators within the current system has been proposed by an international arbitrator, Neil Kaplan, during his ‘In Conversation with Neil’ online webinars. He suggests, if the parties could appoint arbitrators but the arbitrators did not know which party appointed them, there would be no risk of a lack of arbitrators’ impartiality or independence.
It seems, then, that some of the issues relating to the traditional ISDS system that have been subject to criticism are in fact fixable within that system. Others, however, such as a lack of coherence of decisions and interpretations of tribunals, can only be remedied outside it.
The EU’s ambitious plans on the introduction of bilateral ICS and multilateral investment tribunals surely have the potential permanently to change the landscape of investment dispute settlement. CETA’s provisions on investment dispute resolution aim at remedying the most fiercely criticised aspects of the ISDS system and seem to be offering shrewd solutions to them. Nonetheless, some flaws in the current ISDS regime could potentially be fixed internally, without the need for an ICS-sized revolution. Moreover, the success of a multilateral investment tribunal largely depends on the willingness of third countries to join it.
Anna Jermak is a soon-to-be LLM graduate in International Trade and Investment Law from the University of Amsterdam