EFILA Blog’s October Recommendation: Proportionality in Investor-State Arbitration

This month’s recommendation from Oxford University Press: Gebhard Bücheler – Proportionality in Investor-State Arbitration.

The new volume by Gebhard Bücheler:

  • Shows that proportionality is a general principle of law relevant to investor-State arbitration
  • Develops an analytical framework for deciding in which legal settings conflicts between the interests of foreign investors and the public interest ought to be resolved by a proportionality analysis
  • Contains an in-depth analysis of the current and potential role of proportionality in expropriation provisions, the standard of fair and equitable treatment, non-precluded measures clauses (Article XI of the US-Argentina BIT), and the customary international law defense of necessity

While international investment law is one of the most dynamic and thriving fields of international law, it is increasingly criticized for failing to strike a fair balance between private property rights and the public interest. Proportionality is a tool to resolve conflicts between competing rights and interests. This book assesses its current role, its potential, and its limits in investor-State arbitration.

Proportionality is often lauded for reconciling colliding interests. This book identifies three factors arbitrators should consider before engaging in a proportionality analysis: the rule of law, the risk of judicial law-making, and the availability of a value system that guides the proportionality analysis. Apart from making suggestions when arbitrators should apply proportionality and when not to, the book outlines what States can do to recalibrate the balance between private property rights and the public interest if they wish to do so without dismantling the current system of investor-State arbitration.

Proportionality in Investor-State Arbitration considers whether and to what extent the notion of general principles of law within the meaning of Article 38(1)(c) of the ICJ Statute and the concept of systemic integration enshrined in Article 31(3)(c) of the Vienna Convention on the Law of Treaties provides a valid legal foundation for applying proportionality in investor-State arbitration.

Bücheler’s book represents a most welcome voice in the present discourse. It not only contributes to academic clarification of its topic, but is also a guide to the practical application of the proportionality principle. I therefore commend Proportionality in Investor-State Arbitration to scholars, counsel and arbitrators as well as to domestic decision-makers, in particular to treaty negotiators.” – Bruno Simma

EFILA Annual Lecture 2015 – Sophie Nappert

In the wake of the release of the European Commission’s proposal for a new investment chapter in the Transatlantic Trade and Investment Partnership, EFILA is pleased to announce a launch of its Annual Lecture series.

The inaugural Annual Lecture of EFILA entitled: “Escaping from Freedom? The Dilemma of an Improved ISDS Mechanism” will take place on 26 November 2015 from 16.30 until 19.30 at the Brussels Press Club Europe (Rue Froissart 95, 1000 Bruxelles).

The inaugural Annual Lecture of EFILA will be delivered by Sophie Nappert, a highly regarded, experienced arbitrator and peer-nominated Moderator of OGEMID.

As stated by Sophie, the purpose of her speech is not to make the apology of ISDS in its current form, or to sing its eulogy.  Rather than clinging to a model that is showing cracks, she is far more interested in the challenging proposition of making investor-to-State, and most relevantly investor-to-EU, dispute resolution in the 21st century legitimate and authoritative at this fascinating intersection between EU law and international law, whilst remaining loyal to core values common to both the EU and international dispute settlement. For the abstract of Sophie’s lecture please click here.

Please register by sending an email with your name, affiliation and phone number to Ms Senta Marenz, s.marenz@efila.org.

We look forward to welcoming you to the Annual Lecture of EFILA.

Sponsors of the Annual Lecture 2015

The Polish Government’s Standpoint on ISDS Inclusion in the Scope of TTIP

by Pawel Sikora, Kubas Kos Gałkowski

It is beyond any doubts that the ongoing procedure of negotiating Transatlantic Trade and Investment Partnership (TTIP) between the European Union (EU) and the United States of America (US) raises essential controversies among the EU member states societies. However, it is not the first time such controversies occur, as just three years ago a similar confusion has risen in the course of talks over the Anti-Counterfeiting Trade Agreement (ACTA), which has been widely criticized.

Just to remind, the Polish Government initially had approved ACTA but changed its position under the pressure from the society and non-governmental organizations. The exactly same story is now happening in relation to TTIP and, in particular, the Investor-State Dispute Settlement Mechanism (ISDS). The Polish Government has presented its official position in which it widely supports the negotiations of TTIP and the idea of the inclusion of mechanism of ISDS in the scope of the future agreement. But that does not mean it will eventually happen.

As it is known, the common argumentation raised against TTIP and ISDS is i.e. that upon signing the treaty, the “flood of US investors’ claims” against EU countries may purportedly be expected, that would be heard by international arbitration tribunals instead of domestic courts. Altogether, amongst diverse organizations this may be considered as a forecast of one-sided dispute between the investors and states. However, Poland denotes that is does not have to be so – as it was otherwise in the past. Polish Ministry of Economy argues that the Republic of Poland is a party to over sixty bilateral treaties, including a Treaty with the United States of America concerning business and economic relations signed, entered into on March 21, 1990.

For almost three decades only six claims have been filed under the Treaty by US investors. In only one of these cases investor’s claims were partially allowed (approximately one fifth of the claimed amount has been awarded to the investor). In another two cases, claims were dismissed in whole, and one is still pending. Two cases ended with non-substantive decisions. What we need to keep in mind, is that Poland for many years has been an important direction for US investors. Currently, the value of US direct and indirect investments in Poland is estimated for PLN 25 billion (c.a. USD 6,5 billion). There are over 800 entities with US equity, employing over 200,000 people. This proves that there is no direct dependency between amount of claims and decisions in favor of the investor on existence of bilateral treaties and ISDS mechanism.

The Ministry of Economy validates that the future treaty will also introduce a better balance between the foreign investor rights and the state authorities’ right to regulate. In addition, it will guarantee a higher level of protection against the unreasonable lawsuits than currently existing. The TTIP opponents remain adamant to these arguments; also so called “social resistance” still tends to be strong. Seventy five Polish NGOs have recently teamed up in their struggle against the inclusion of the ISDS mechanism into the future treaty; they consequently keep pressing the officials. We are going to witness whether Polish Government’s stands firm with its current view or surrenders to this pressure. Due to the current situation in Poland, concerning the upcoming parliamentary elections (November 25th) and its outcome, this question is of vast importance.

The Proposed New Investment Court System for TTIP: The Right Way Forward?

by Mirjam van de Hel-Koedoot, NautaDutilh*


On 16 September 2015, the European Commission published a draft text for the investment chapter in the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US. In the Proposal, the European Commission specifically mentions that the Proposal is an internal document of the EU and that it will consult the Member States and discuss the proposal with the European Parliament before presenting a formal text proposal to the US.

Since the beginning of the negotiations, the US and the EU tried to gain public support for TTIP. However, the draft agreement faces considerable opposition in Europe, with opponents fiercely trying to stop the negotiations and execution of TTIP. Part of the opposition focuses on the current provisions on investment protection and Investor-State Dispute Settlement (ISDS), with critics pointing to an alarming trend towards favouring private international multinationals by allowing them to sue states in private arbitration courts for any action that negatively influences their profits. In addition, critics have expressed concerns about a supposed lack of transparency and a lack of independence of arbitrators in investment disputes. In 2014, the European Commission launched a public consultation on the ISDS provisions in TTIP and, after receiving almost 150,000 replies, the results were published on 13 January 2015, showing a ‘huge scepticism against the ISDS instrument’. On 8 July 2015, the European Parliament voted against including ISDS provisions in TTIP, and recommended to the European Commission to have disputes heard by publicly appointed judges.

As expected, the Proposal introduces the establishment of a new court system (the Investment Court System or ICS), consisting of a Tribunal of First Instance (Investment Tribunal) with 15 jointly appointed judges (five US judges, five EU judges and five judges of third countries) and an Appeal Tribunal with 6 jointly appointed judges (members) (two US judges, two EU judges and two judges of third countries). The judges will be appointed for a six year term.

According to the European Commission, this Proposal will fundamentally transform the current ISDS system, which is characterised by its ad hoc nature with tribunals chosen for each case and the ability of the disputing parties to appoint the arbitrator of their choice. Obviously, the Proposal will be heavily reviewed and debated in the coming months. However, does the proposed Investment Court System indeed constitute an adequate response to the strong objections raised against the current investment arbitration system and, maybe even more importantly, is such a response desirable?

One of the objections against investment arbitration that the Proposal intends to resolve is a supposed lack of independence and impartiality of arbitrators. At first sight, the Proposal does seem to take away a large part of the concerns in this respect. However, a few issues will need further thought.

One of the most far-reaching provisions of the Proposal is Article 11(1), which provides that judges, upon appointment, shall refrain from acting as counsel in any pending or new investment protection dispute under TTIP or under any other agreement or domestic law. Furthermore, disputes under TTIP will be allocated randomly (and unpredictably) between the permanent judges, so disputing parties would have no influence on which of the three judges will be hearing a particular case. A monthly retainer fee will be paid to the judges in order to ensure their availability.

In addition, cases will be decided by divisions of three judges, and the Investment Tribunal will always contain one EU national, one US national and national of a third country, who will act as the chair, further preventing impartiality and/or independence of a judge. It should be noted that, with regard to the Appeal Tribunal, there are only two members that are nationals of a third country, as a result of which they will each chair over approximately 50% of the cases in appeal. In addition, these two members will be, on the basis of a two-year rotation, be President and Vice-President of the Appeal Tribunal, in which role they will, among other things, establish the composition of the panel hearing an appeal. All in all, this places a lot of responsibility on these two individuals and the European Commission may want to reconsider the initial number of, in any event, the members of the Appeal Tribunal.

On a more general, and more important note, the introduction of the Investment Court System will drastically limit the party autonomy, which is an important and fundamental pillar of investment arbitration. It entails that parties to investment treaty disputes are able to select the arbitral tribunal that will adjudicate the dispute, which is normally done by each party nominating an arbitrator of their choice and the third arbitrator being agreed upon jointly by the parties or the party-appointed arbitrators, or selected by an appointing authority. The introduction of the Investment Tribunal (and the Appeal Tribunal), with its permanent judges, takes away this right of a party to influence the appointment of the arbitrators. Furthermore, the ICS system is designed to be pro-State, also in respect of the judges deciding on a case, as the consequence of the new system will be that the claimant (the investor) will not be able to influence the appointment of arbitrators, while the respondents (the US and the Member States of the EU) will eventually jointly appoint the judges and can make sure that they are to their liking. Obviously, the US and the EU will be inclined to appoint judges that are pro-State. Finally, it is unclear who will eventually pay for the new ICS system. In this respect, the question arises why the European Commission did not propose to make use of institutions already in place, such as the International Centre for Settlement of Investment Disputes in Washington (ICSID) or the Permanent Court of Arbitration in The Hague (PCA)

The concerns relating to the independence and impartiality of arbitrators and, more in particular, the concerns about possible conflicts of interest, have further lead to the proposal of a Code of Conduct for the judges (in Annex II to the Proposal). This Code of Conduct contains strict ethical and professional requirements. In particular, judges will have to disclose any interest or relationship that is likely to affect their impartiality. Article 5 expressly provides that judges ‘shall not be influenced by self-interest, outside pressure, political considerations, public clamour, loyalty to a Party or disputing party or fear of criticism’. These extensive and rather elusive qualifications may give rise to a large number of challenges of the judges.

On a more general note, the existence of an Appeal Tribunal takes away another common objection against investment arbitration, which is the absence of the possibility to appeal. According to EU Trade Commissioner Cecilia Malmström, this criticism is caused by the fact that an arbitral tribunal can take a wrong decision and that the impossibility to appeal such decision makes the whole system less predictable. However, on the face of it, the possibility of full-fledged appeal with a permanent tribunal – which is an uncommon feature in investment arbitration – does not in itself enhance the predictability of the system. To the contrary, it will lead to more delays and costs, as it is to be expected that the majority of the losing parties will use the opportunity to appeal.

The second common point of criticism against the current ISDS system is a supposed lack of transparency in investment disputes which, due to their nature, are usually of high public importance. In order to overcome this supposed lack of transparency, the Proposal provides that the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration will be applicable to disputes under TTIP (Article 18 of the Proposal). In addition, the European Commission proposes to enlarge the list of documents which shall be made available to the public, including but not limited to the notice of challenge, the decision on challenge and all documents submitted to and issued by the Appeal Tribunal. Also, the Proposal intents to provide a more transparent regime in case of third party funding, requiring the disputing parties to disclose – to the other party and the tribunal – who is funding their claim. All these provisions will indeed enhance the level of transparency of the proceedings.

Thirdly, investment arbitration receives criticism because of the possibility to conduct parallel proceedings of the same matter before domestic courts and in arbitration. The Proposal expressly prohibits parallel proceedings, allowing the Investment Tribunal to dismiss the claim if parallel proceedings are pending, unless the claimant withdraws such claim before a final judgment has been delivered by the domestic court. The Reading Guide to the Proposal states that this approach tries to encourage the resolution of investor-to-state disputes in domestic courts, while leaving the possibility to access the ICS under TTIP where the treatment in the domestic system falls short of the very basis guarantees provided for in the investment protection provisions.

To conclude, the European Commission introduces a completely new system of investor-state dispute resolution, which drastically differs from the current system of ISDS and does take away at least part of the objections – whether valid or not – that have been raised against ISDS. However, it entirely disregards the advantages of investment arbitration, which has been a tested dispute resolution mechanism for decades, and especially disregards the party autonomy of an (investor) claimant, in taking away its ability to appoint the arbitrator of its choice, where the respondent state does still – albeit indirectly – have such influence. The Proposal apparently also fails to silence the opponents of the ISDS system, who already labelled the changes as being only ‘cosmetic’, ‘renaming ISDS’ or a ‘rebrand’, while still giving foreign investors the possibility to sue states through ‘private courts’.

It is not yet clear whether a final text proposal will be made to the US during the next round of negotiations regarding TTIP, which are scheduled to take place at the end of October and what the response of the US to the Proposal will be. However, the first responses from the US were not very hopeful: the U.S. Chamber of Commerce announced on the day of publication of the Proposal that ‘the proposal is deeply flawed’ and that the US ‘cannot in any way endorse today’s EU proposal as a model’.

Mirjam van de Hel-Koedoot, senior associate at NautaDutilh (mirjam.vandehel-koedoot@nautadutilh.com). A word of thanks to Tetyana Makukha for her assistance in writing this submission.

Is ISDS Superior to Litigation before Domestic Courts? An EU View

by Prof. Marco Bronckers, VVGB Advocaten*

In my view, something important is missing in the current debate on an Investor-State Dispute Settlement Mechanism (ISDS) in the EU’s new and comprehensive trade agreements with Canada (CETA), Singapore, the United States (TTIP), and other countries. In a ‘concept paper’ published last May, the European Commission posits as a fact that domestic courts are not competent to deal with treaty-based claims of foreign investors. This would then explain the need for ISDS or, alternatively, an international investment court. The Commission published details on its plans for such an international court in mid-September.

First, the limited role domestic courts can play in resolving treaty-based claims is not a fact. This is largely the result of a surreptitious, and unfortunate policy choice of the EU institutions and Member States.  Second, even if one assumes that relying on domestic courts could be problematic where treaties are concerned, it makes little sense to allow only foreign investors a better shot at enforcing treaty provisions through some kind of international mechanism. The new generation of bilateral agreements cover multiple subjects, from trade to investment, from environment to labor rights. Accordingly, beyond foreign investors other private stakeholders also have an interest in the correct implementation of these agreements. By denying all these stakeholders the right to rely on treaties the governments are putting a firm brake on the benefits they were hoping to generate.  This contradicts the high expectations governments like to raise about the positive impact of the new bilateral trade agreements on economic growth, environmental protection etc.

In the overwhelming majority of cases referring private stakeholders to state-to-state dispute settlement is not promising. Few cases are taken up by governments for intergovernmental dispute resolution. Such disputes are politicized and governments do not have the resources anyway to deal with many, especially smaller cases.  In addition, intergovernmental dispute resolution by definition does not help private stakeholders who believe their own government is not complying with an international standard; their own government will not bring a case against itself. As a result, if one relies only state-to-state dispute settlement the impact of external benchmarks in bilateral agreements to check government conduct is considerably diluted.

In other words, the EU does not need a mechanism like ISDS in the agreements with the United States, Canada and so on for the same reasons that historically led to the inclusion of ISDS in agreements between developed and developing countries. In the old days, it was felt that foreign investors needed extra protection before committing their capital on a more permanent basis to a developing jurisdiction, which offered uncertain legal protection. Although foreign investors may still face some uncertainties in developed host countries, offering them protection in these more exceptional situations cannot be the driver for including an ISDS-type mechanism in the new comprehensive trade agreements amongst major developed countries.

The main reason to offer a private stakeholder a means to appeal to these bilateral agreements is to ensure that they will be effectively implemented. Yet effective implementation should not only be limited to the investment chapters, but to these agreements more broadly. This then is the principal reason in favour of allowing a broad class of private stakeholders, not just private investors, access to an international ISDS-type mechanism — or preferably access to domestic courts, who are empowered to deal with private treaty-based claims.

Domestic courts offer considerable advantages: access is broadly available, and is more affordable too compared to most international remedies. Furthermore, wherever the trias politica is recognized, domestic courts have a direct role to play in offering checks and balances, also to foreign parties, in respect of other government institutions.  Moreover, it would be rather surprising, in 2015, for anyone to have doubts about the capability of domestic courts to interpret international law.

This is not to say though that in the EU domestic courts can immediately replace ISDS or an international investment court. The EU institutions and the Member States would have to discontinue their campaign to prevent private parties from asserting rights based on bilateral trade agreements before domestic courts. Furthermore, the quality of the judiciary in a substantial number of EU Member States needs to be improved, in terms of independence and efficiency, before it is reasonable to expect that the treaty partners of the EU can have sufficient confidence in its domestic courts (see, e.g., World Economic Forum, Global Competitiveness Report 2014-2015).

Meanwhile, when designing an alternative mechanism for ISDS, the EU and its treaty partners must permit a much broader class of private stakeholders than foreign investors to invoke protection under the new bilateral trade agreements. Furthermore, in order to be effective and fair, such access needs to be affordable for smaller stakeholders too.  This will prove to be a challenging task for governments. Ultimately, domestic courts are best-placed to provide such a remedy. That is why it is advisable to put a time limit on any solution, which is now being considered as an alternative to ISDS.  Within a period of, say, ten years after the entry into force of an agreement like TTIP or CETA, the authorities should reconsider whether domestic courts cannot take over the role that was first assigned to an international tribunal of some kind.

I have developed these points in a longer study, just published: Marco Bronckers, Investor-State Dispute Settlement (ISDS) Superior to Litigation Before Domestic Courts? An EU View on Bilateral Trade Agreements, in 18 Journal of International Economic Law 655-677 (No. 3, 2015).

Prof. Marco Bronckers, VVGB Advocaten, Brussels; Professor of law at the University of Leiden.