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.