EFILA 2019 Annual Conference: The EU and the future of international investment law and arbitration

Description

4th Annual EFILA Conference

The EU and the future of international investment law and arbitration

With the entering into force of the Lisbon Treaty 10 years ago the EU has become a dynamic policy actor in international investment law and arbitration. In particular, within the context of the increasing public concerns against TTIP, BITs and ISDS, the European Commission has been active in “reforming” and “reshaping” the investment law and arbitration landscape, for example with the EU-Singapore and EU-Vietnam FTAs, which contain many “innovative” features such as the investment court system (ICS). Another area in which the increasing influence and interaction between investment law and EU law is particularly visible is the Energy Charter Treaty (ECT).

The 2019 Annual Conference will take stock of these developments by discussing the EU’s external investment policy generally, by focusing specifically on the EU’s approach towards Asia and by analysing the EU’s impact on the ECT. In addition, a high profile key-note speaker will address the Conference.

As was the case in the previous very successful Annual EFILA Conferences, this Conference will again showcase many distinguished and experienced scholars and practitioners in the area of investment law and arbitration. As always, the Conference will be very interactive and allow for sufficient time for discussion between the speakers and the audience.

Click here for the detail draft programme.

Tickets can be purchased here: https://www.eventbrite.co.uk/e/the-eu-and-the-future-of-international-investment-law-and-arbitration-tickets-48123937994

Date And Time

Thu, 31 January 2019

09:00 – 18:00 GMT

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Location

Herbert Smith Freehills London

Exchange House, Primrose St

London

EC2A 2EG

United Kingdom

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UK post-Brexit cannot escape the impact of EU law and of the Court of Justice of the EU  

 

Prof. Dr. Nikos Lavranos, LLM (Secretary General of EFILA)

In recent weeks, the UK has published several papers explaining its aims of leaving the EU and how it intends to shape its future trade relationship with the EU.

One of the aims repeatedly publicly stated by the UK will be “to end the direct jurisdiction of the Court of Justice of the EU (CJEU)” as declared in the UK’s paper on ‘Enforcement and dispute resolution’.

Moreover, in another UK paper on the ‘Future customs arrangements’, the UK stated that the “exit from the EU will provide considerable additional opportunities for UK business through ambitious new trade arrangements and comprehensive trade deals that play to the strengths of the UK economy”. In order to achieve that, the paper argues that “the UK will need an independent trade policy, with the freedom to set for ourselves the terms of our trade with the world”.

In other words, the UK is hoping that by leaving the EU it can escape the impact of EU law and of the Court of Justice of the EU (CJEU).

But is this really possible and realistic?

From the outset, the UK already admitted that EU law and the jurisprudence of the CJEU will continue to play an important role in the domestic legal order of the UK. Indeed, in the ‘Enforcement and dispute resolution’ paper, the UK explicitly admits that the “Repeal Bill will give pre-exit CJEU case law the same binding, or precedent, status in UK courts as decisions of our own Supreme Court to ensure a smooth and orderly exit”.

If that is taken as a starting point and one examines what will happen in the field of trade and investment law before the CJEU until March 2019 when Brexit is envisaged, it becomes crystal clear that the room for manoeuvre for the UK is highly limited.

The CJEU will shape the EU’s future trade and investment law

  1. Achmea case

The first case in line, is the Achmea (formerly known Eureko) case. This case concerns the preliminary ruling questions of the German Supreme Court (Bundesgerichtshof) in which it essentially asks the CJEU to rule whether investor-state dispute settlement (ISDS) proceedings based on an intra-EU BIT are compatible with EU law. Achmea had won an arbitration award of about 20 million EUR against the Slovak Republic, which the Slovak Republic is trying to set aside before German courts. Although, the German courts so far have rejected the efforts of the Slovak Republic, the Bundesgerichtshof decided to put this matter before the CJEU.

On 19 September 2017, Advocate General Wathelet delivered his Opinion in the Achmea case. Interestingly, he opined that intra-EU BITs and ISDS under these BITs are in full conformity with EU law. At the same time, he argued that international arbitral tribunals are to equalized with domestic courts/tribunals of EU Member States. Consequently, arbitral tribunals established on the bases of intra-EU BITs should be allowed to ask preliminary questions to the CJEU, while at the same time they are fully bound by EU law and CJEU jurisprudence.

It remains to be seen whether the CJEU will follow this rather innovative approach. However, if the CJEU were to decide in mid-2018 that arbitration on the basis of intra-EU BITs is incompatible with EU law, this would be the end of the ca. 190 intra-BITs. This would also affect the 10 intra-EU BITs, which the UK currently has with other EU Member States (i.e., with Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia). In this context, it is interesting to note that a UK investor has just brought a case against Poland based on their intra-EU BIT. That may soon not be possible anymore, if this and the other intra-EU BITs are judged by the CJEU to be incompatible with EU law. On the other hand, if the UK is able to maintain its intra-EU BITs after Brexit, it could become an interesting location for foreign investors to structure investments through the UK in order to benefit from them. The additional advantage would be that these BITs are based on the “Dutch gold standard” model BIT and thus provide a significantly higher level of protection that the so-called new general investment treaties such as CETA.

  1. Micula case

The other case, which will be of significant importance is the Micula case. This case concerns the enforcement of a 250 million USD ICSID award by Swedish investors against Romania. While Romania was ready to pay out the award, the European Commission has prohibited Romania to do so because the payment of the award would – according to the Commission – constitute illegal state aid to the Micula brothers. Romania – being forced to give priority to EU law – has thus stopped paying the award. The Micula’s have brought an annulment case before the CJEU. If the CJEU were to follow the European Commission, this could mean that ICSID awards may not be so easily and automatically enforceable within the EU as they are supposed to be in accordance with the ICSID Convention. In order to avoid such insecurity, which is caused by the Commission for its own policy interests, the UK post-Brexit may become the preferred place to enforce awards against other EU Member States.

  1. The Belgium questions on the compatibility of the Investment Court System (ICS)

Another very recent development concerns the questions, which Belgium has put to the CJEU as regards the compatibility of the Investment Court System (ICS) with EU law. It will be recalled, that Belgium had promised Wallonia to request an Opinion of the CJEU on this matter in return for Wallonia’s agreement to agree on CETA. As is well known, the ICS is already included in CETA and the FTA between the EU and Vietnam. Indeed, the European Parliament has repeatedly stated that it will only accept EU FTAs with the ICS included. However, the EU-Singapore FTA does not yet include the ICS because the negotiations were concluded long before the ICS proposal came out. Due to the position by the European Parliament, the European Commission has no choice but to re-open the negotiations with Singapore. However, it remains to be seen whether Singapore will accept the ICS.

If that is the case and the EU-Singapore FTA, which the UK has signed, would enter into force, it would replace all the BITs between the EU Member States and Singapore. This would also include the UK-Singapore BIT, which dates from the 1970s.

Consequently, if the EU-Singapore FTA would enter into force before the UK leaves the EU, the UK would lose its BIT with Singapore and would also have to leave the EU-Singapore FTA. In other words, the UK would be left with no investment treaty, unless the UK is able to delay the entering into force of the EU-Singapore FTA until after Brexit. In that case, the UK could maintain its BIT with Singapore and would not be affected by the EU-Singapore FTA – whether or not it has to include the ICS.

Either way, the Opinion of the CJEU on the compatibility of the ICS with EU law will be important for the UK post-Brexit.

Firstly, because the UK Government has already publicly admitted that it does not have the capacities to negotiate many new trade agreements on its own. Instead, it will – as far as possible and as far as the third countries agree – copy and paste the EU’s FTA texts.

Secondly, if the CJEU were to conclude that the ICS is compatible with EU law and this Opinion comes out before March 2019, it will also be binding on the UK.

Consequently, the UK may be forced to accept the ICS proposal in CETA, EU-Vietnam FTA and EU-Singapore FTA – whether or not it agrees with it.

In fact, it may very well be that third states will push the UK to copy and paste as much as possible the EU FTAs texts in order to reduce the degree of potential inconsistencies.

In this context, it should also be mentioned that CETA will provisionally enter into force on 21 September 2017, which means it will also be binding on the UK as of that date. Even though the ICS provisions are excluded from the provisional application, once the CJEU gives its green light on the ICS question, the ICS provisions will be applicable also to the UK – if the UK is still member of the EU. But even if these provisions become applicable only post-Brexit, Canada, Vietnam, Singapore and other states such as Australia and New Zealand are very likely to demand the inclusion of the ICS provisions in their new investment treaties with the UK.

The new dispute settlement body for the post-Brexit UK-EU trade relations

Another important and unresolved issue regarding the future relationship between the post-Brexit UK and the EU concerns the issue of who should settle any disputes between the two and their respective citizens and companies?

For the EU the only acceptable and obvious solution would be the CJEU. However, for the UK that would be an unbearable solution because it would prevent it from achieving its stated aim of “ending the direct jurisdiction of the CJEU”.

Arbitration, which the UK had suggested, is probably an untenable solution in light of the recent backlash against arbitration within the EU.

Equally, the International Court of Justice (ICJ) would not be a practical option for the EU.

Consequently, the only possible option seems to be the EFTA court or a new court similar to it. Prima facie, this would be an acceptable compromise for both parties. The UK could argue that this is not an EU court anymore and that it would no longer be under the “direct” jurisdiction of the CJEU. The EU could agree to it because the CJEU has accepted the EFTA court as the only other international court that is allowed to interpret and apply EU law – all be it by being required to copy and paste the CJEU case-law, which means that the CJEU “indirectly” exercises jurisdiction over the EFTA countries. Accordingly, while the EFTA court could be a workable solution, it would at the end of the mean that the CJEU would continue to have an “indirect” but nonetheless significant impact on the domestic courts of the UK, which is not what the Brexiteers promised.

A reality check: The UK cannot escape the impact of EU law and the CJEU

The only realistic conclusion from the above is that the UK cannot escape the impact of EU law and of the CJEU – long after it has left the EU. In fact, the next 18 months will be of paramount importance for the UK’s future trade and investment policy.

However, so far it seems that this reality has not yet fully been accepted by the UK Government and its negotiators. But a precondition for successful negotiations is to have a full and realistic understanding of one own’s position and the position of the other party in order to achieve an optimal result. Ignoring the impact which the above-mentioned CJEU decisions will have on the EU’s and UK’s trade and investment policy would be a costly mistake.

Report on the AIA, EFILA and CIArb Event: Updates on EU Law Related Arbitration: A Selection of New, Controversial and Hot Topics

Nikoletta Kallasidou and Michal Mojto, AIA, Brussels

The Arbitration for International Arbitration (AIA), EFILA and the CIArb jointly organised a well-attended event  at the VUB University in Brussels on the 27th of May, bringing two panels of experts to discuss recent developments on EU-related arbitration. Contentious issues such as the Brussels I Bis Regulation, the arbitrability of EU competition claims, state aid, human rights and investment arbitration under BITs/ MITs were raised and discussed. A lively discussion during the Q&A session following each panel, greatly benefiting both the panellists and the audience.

Thoughts on  Brexit – Effects on Investment Arbitration

In light of the upcoming EU referendum due to take place on the 23th of June 2016, Dr. Christophe Guilbert de Bruet, the first speaker of the day, provided a particularly useful insight on potential consequences of a Brexit in the context of investment arbitration. The presentation began with an overview of the Brexit process. Article 50 of the Lisbon Treaty shall be interpreted as requiring both parties to negotiate in good faith as well as obliging the EU to conclude a withdrawal agreement. Dr Christophe highlighted the importance of the negotiation process as a means of mitigating potential adverse effects of the Brexit.

Turning to the options of the UK has upon withdrawal, he  discussed 3 major models. The EEA model prescribes the departure of the United Kingdom of the European Union without, however, depriving it access to the EU Single Market. This outcome is what he described as the ‘least harmful option’ for both  the EU but also the UK itself. Then he discussed the option of adopting a Swiss model of membership, which allows the UK and the EU to enter into bilateral agreements on particular sectors. The last potential outcome of a Brexit is a drastic severance of the UK from the EU without any immediate negotiations for a trade-related agreement, which, he argued, could lead to severe consequences in the context of investment arbitration.

In the next part of his presentation, he  explained the grounds upon which a successful claim could be brought against the United Kingdom in the case of a Brexit. First, he referred to the concept of ‘fair and equitable treatment’ (FET) as the relevant legal standard, which is accorded to investors by most BITs and is the most relied upon standard of protection in investment disputes. The popularity of FET lies in the flexibility and wide-ranging nature,  encompassing fundamental standards, such as good faith,  due process and non-discrimination. Certain key aspects of the FET principle have however been identified in arbitral jurisprudence, which include protection of the legitimate expectations of investors as well as the requirements of transparency and stability.

Focusing on legitimate expectations, he  highlighted the controversy surrounding the concept, which as he pointed out has been inconsistently interpreted by various arbitration tribunals and has been subject to ‘vociferous criticism’. In an attempt to explain how the concept operates in practice, he employed two factual scenarios of potential Investor-State Dispute Settlements. One of them was ‘The Indian Car Manufacturer’ scenario. Under the India – United Kingdom BIT,  ‘investments of investors of each contracting party shall at shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting party.’ Considering that the investment on the part of the Indian manufacturer in the UK was driven by an expectation to access the internal market,  one may effectively contemplate a breach of legitimate expectations, since in a Brexit situation, such access may be severed or impaired. The chances of success of the claim are higher if the relevant investment agreement had specific assurances of access to the EU Single Market in this regard.

In the context of intra-EU BITs, the United Kingdom has some 100 BITs with other states,  12 of which are with other EU countries. While the European Commission, in its amicus curiae submissions, put forward a range of inter-related arguments to support its position that BITS are superseded by and are incompatible with EU Law, the Tribunals have generally noted that the submissions of the Commission are of persuasive force at best and have sometimes stated explicitly that they do not agree with the Commission’s position. However, if the Commission is right, there is an uncertain future ahead for all these BITs of a post-Brexit British State.

Brussels I Regulation

Up next, Dr Assimakis Komninos, Partner at White and Case, sought to address the ruling of the CJEU in CDC v Akzo Nobel et al, a landmark decision regarding questions of jurisdiction under the Brussels I Regulation in the case of cartel damage proceedings. The preliminary ruling procedure was initiated a German Regional Court, which, inter alia asked the CJEU to elaborate on the bearing of jurisdiction and arbitration clauses in the supply contracts on the German court’s jurisdiction, in light of the requirement for effective enforcement of Article 101 TFEU and Article 53 EEA Agreement.

He first summarised the view given by AG Jaaskinen in delivering his Opinion, who argued that national courts were required by EU law not to apply an arbitration clause, or a jurisdiction clause not governed by Article 23 of the Brussels I Regulation, in cases where the implementation of such clause would  have hampered the effectiveness of Article 101 TFEU. This rather restrictive approach, he explained, was not followed by the Court of Justice. In fact, the CJEU refrained from explicitly addressing arbitration. Instead, the Court of Justice invited national courts to ensure that jurisdiction clauses ‘actually bind the parties’. In other words, the CDC judgment made it clear that jurisdiction clauses cover cartel damage disputes insofar the victim has specifically consented thereto.

He  submitted that the Court’s silence with respect to EU jurisdiction clauses to arbitration clauses was rather intentional, since it could have gone further in its findings, but it chose not to, and as such, the status quo of the more favourable reading of arbitration clauses by national courts should not be affected. If anything, he added, national courts may only exercise a certain degree of caution in the presence of cartel damages claims when ruling on the scope of the arbitration clause. However, he concluded, this does not imply that national courts should routinely require the plaintiff’s explicit consent in order to refer the case to arbitration, since this would amount to serious retrogression.

The arbitrability of competition law claims

Jean-Francois Bellis, Managing Partner at Van Bael & Bellis, gave  a presentation focusing on the arbitrability of competition law issues. Bellis began with a reference to the landmark Eco Swiss case which established by implication the doctrine of arbitrability of competition law. The ordre public nature that is attached to antitrust related disputes, Bellis explained, requires national Courts, when reviewing an arbitral award, to consider EU competition law rules and annul the award where they find the award to be contrary to such principles.

However, the standard of review that is required on the part of the national courts when observing EU Competition rules, was left untouched by the Court of Justice, rendering it one of the key areas of discussion in the field of arbitrability. He referred to the two standards of judicial review, namely the minimalist view, where the Courts render any further examination of competition law issues unnecessary if they are satisfied that the arbitrators have investigated and ruled on potential competition law breaches, and the maximalist view, where the courts perform an in-depth review on how the arbitral tribunal addressed competition law issues and are satisfied that the award did not violate public policy.

National law jurisprudence, he noted, reflects an overall hesitancy to exercise anything above an extrinsic control, which dates back to the case of Thales. In the latter, the French Courts ruled that in order to set aside an arbitral award, the violation of public policy in an international arbitration case must be ‘flagrant, effective and concrete’. The Thales standard has since been reaffirmed on multiple occasions by the French courts, in both enforcement and setting-aside proceedings. However, despite the little support for the maximalist approach, Advocate General Wathelet, in his recent opinion issued in Genentech v Hoechst, emphatically rejected the minimalist approach and called for a more detailed review on the part of the MS Courts on the basis that such fundamental public policy rules cannot be placed under the scope of arbitration proceedings.

In his concluding remarks, Bellis welcomed the new approach initiated by AG Wathelet, highlighting that the existence of an infringement to EU competition law may always be scrutinized ex officio, independent of whether the arbitral tribunal dealt with the issue and irrespective of whether the parties raised such question before the Courts. It now remains to be seen to which extent the CJEU would adopt AG’s Wathelet opinion in the future.

Moving further  from the Minimalist – Maximalist Approach: Let’s talk Pragmatism

Founding Partner of EDGE Legal, Dr Damien Geradin, on the other hand, argued that the two approaches, namely the minimalist and maximalist are extreme positions and endorsed a more pragmatic approach. In practice, he asserted, the reviewing process should not be restrained in its ability to review the award in any matter of depth when it is necessary. While in the vast majority of cases the minimalist approach is sufficient for review purposes, he emphasised that on certain occasions it is necessary for an in-depth review of the arbitral award to be implemented.

In support of his view, he referred to the opinion of AG Saggio in Eco Swiss, which highlighted the need to supervise arbitration awards to ensure that they are compatible with EU Competition rules, which are of great interest in the smooth functioning of the common market.

In relation to the means of investigation that can be used by a domestic Court in its review of the award, it was explained that the starting point is looking at the reasoning of the award. In most instances the reasoning of the award will suffice to identify whether the arbitral tribunal failed to detect anti-competitive behaviour which in turn amounted to a public policy breach. However, on situations where such reasoning is flawed, courts may need to go beyond the reasoning award.

More specifically, he  asserted that where the competition issues relevant to the dispute have been treated by the arbitral tribunal, the reviewing court should rely on the elements of fact that have been submitted to the tribunal without being necessarily bound by the legal characterization of these facts by the tribunal when it has reasons to  believe that it is incorrect. Yet, the reviewing court in principle should only require from the parties to submit factual elements that were not submitted to the tribunal or to produce testimonies in exceptional circumstances when the reviewing court has strong suspicions that the award may condone serious violations of competition law, such as for instance the existence of cartel, which would create a grave prejudice to the interests protected  by competition law. Hence, he  concluded that dismissing the minimalist – maximalist approach altogether and opting for a pragmatic approach, would enable a fair balance to be stricken between the finality of the award, a principle that sits at the core of international arbitration, and the need for domestic courts to ensure that the award does not amount to a serious breach of EU competition law, which is one of the main tools to protect free, undistorted trade within the EU internal market.

The new Investment Court System

Zena Prodromou, Associate in White and Case, followed up next, aiming to shed light on the European Commission’s radical proposal for a new Investment Court System for use in TTIP and future EU trade and investment negotiations. Prodromou opened her speech with some facts and figures on the TTIP and emphasised how the TTIP agreement is intended to enhance the EU-US partnership in the context of trade and investment. Subsequently, she explained that following the inclusion of ‘foreign direct investment’ as part of the common commercial policy under the Lisbon Treaty, the European Commission now negotiates on the basis of the mandates/negotiate directives given by the European Governments with various negotiating rounds. This negotiation, however, is no easy task, since, considering its material scope and the monumental size of economic relations.

Turning to the issue of dispute settlement between investors and states, which has been the most contentious point in the negotiations, she presented the latest proposal of the European Commission which seeks to replace the investor-state dispute mechanism and address scepticism against the ICS instrument. The new system comprises of standing tribunals at two instances: a Tribunal of First Instance, with 15 judges appointed jointly by the EU and the US governments, with 5 appointees each from among EU nationals, US nationals and third party nationals, and a Permanent Appeal Tribunal with 6 members jointly appointed for a six year term.

In terms of the interplay of the new Investment Protection System with domestic law, Prodromou highlighted the strict application of international law, since the Investment Courts would apply exclusively to the provisions of TTIP and would only be allowed to consider a domestic law of each Party taken into account as a matter of fact.  Where the Tribunal would be required to ascertain the meaning of a provision of a domestic law of a Party it would have to follow the interpretation made by that Party’s domestic courts.

Prodromou concluded by observing that the Commission’s proposal sought to address a sense of public distrust towards investment protection. The proposed changes to the ISDS, however, in essence touch upon the very fundamental elements and traits of arbitral proceedings. It is less clear whether, following this, we would be still talking about investment protection granted through arbitration or rather through a new dispute resolution mechanism.

The event was concluded by Dr. Nikos Lavranos, Secretary General of the European Federation for investment Law and Arbitration (EFILA). The animating and controversial topics continued to be discussed in the reception following the event, and all participants left with some new perspectives.

Brexit: Implications for the EU Reform of Investor-State Dispute Settlement

Sophie Nappert, 3 Verulam Buildings

Nikos Lavranos, EFILA

“Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.”

Investor-state dispute settlement (ISDS) is an international arbitration mechanism that allows an investor from one country to bring arbitral proceedings directly against the state in which it has invested, provided that the investor’s home country and the host country of the investment have so agreed by treaty (see box ISDSbelow). ISDS is currently found in most modern international trade and investment agreements.

In the period since the entry into force of the Treaty of Lisbon, conferring on the EU exclusive competence over foreign direct investment in the European space, the European Parliament and the trade ministers of key member states, such as Germany, France and the Netherlands, have perceived that ISDS presents a number of shortcomings. These concerns were crystallised in the responses to a public consultation on the Transatlantic Trade and Investment Partnership (TTIP), currently being negotiated between the EU and the US (see Transatlantic Trade and Investment Partnership (TTIP): tracker).

ISDS

Investor-state dispute settlement (ISDS) is a dispute resolution mechanism modelled on international arbitration, allowing an investor from one country to bring arbitral proceedings directly against the country in which it has invested, pursuant to the provisions of a treaty between the investor’s home state and the state hosting the investment.

ISDS provisions are contained in most modern international agreements including free trade agreements, bilateral investment treaties and multilateral investment agreements. If an investor from one country (the “home state”) invests in another country (the “host state”), both of which have agreed to ISDS, and the host state violates the rights granted to the investor under the international agreement between the home state and the host state (such as the right not to have property expropriated without prompt, adequate and effective compensation), then that investor may take the host state to international arbitration rather than sue in the domestic courts of the host state.

As a result, the European Commission has now tabled a proposal for a new dispute settlement system, the international court system (ICS), to be used in the EU’s future trade and investment treaties and, in the Commission’s words, “paving the way for a multilateral investment court” (see Legal update, European Commission proposes Investment Court System for EU trade agreements).

Instead of investor-state disputes being determined by an arbitral tribunal appointed by the parties, the Commission’s proposal is to create a judicial, two-tiered body consisting of a Tribunal of First Instance and an Appellate Tribunal. Party-appointed arbitrators would be replaced with “judges” unilaterally pre-selected by the state parties. As a result, the resolution of investor-state disputes by way a one-shot final arbitral award will be replaced with a two-instance procedure allowing for appeals on points of both fact and law.

The ICS proposal constitutes a strong push towards the institutionalisation and judicialisation of investor-state dispute settlement and is inspired by the WTO (World Trade Organisation) dispute settlement model applicable to state-to-state trade disputes. The important hallmarks of arbitration such as flexibility, finality and party autonomy will be essentially erased (see box ICS proposal: the concerns).

The EU’s seismic shift on its ISDS policy coincides with the UK’s consideration of its future as a member of the EU. If Brexit comes to pass, there will be legal repercussions on a number of levels as regards the UK’s trade and investment commitments at international law, and the protections currently enjoyed by UK investors abroad, including the ability to enforce arbitration awards worldwide pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). This is uncharted territory in many respects, and the opacity surrounding the progress of the current negotiations on the TTIP with the US adds to the uncertainty and lack of clarity.

ICS proposal: the concerns

While ISDS has been tested for decades and is a known quantity, it remains to be seen whether the benefits claimed by the proponents of the ICS will actually materialise. The EU’s proposal assumes that the ICS will not be declared by the Court of Justice of the European Union to be incompatible with EU law, as the CJEU has done consistently for other international tribunals, latterly the European Court of Human Rights).

For example, critics of ISDS claim that it has failed to take proper account of other relevant policy areas such as human rights, environmental law, intellectual property law and the “regulatory policy space” of states generally. The current ICS proposal does not specifically address those issues, and thus on its face provides little more credibility and legitimacy than does ISDS.

Another example concerns the qualifications required by the “judges” and the process of their selection by the contracting parties.

The proposal states that the only qualifications required of ICS “judges” for appointment to the Tribunal of First Instance is that they should be qualified for judicial office or a “recognised jurist”. For the Appeal Tribunal, the requirements are of qualification for the highest judicial office or being a “recognised jurist”. Interestingly, while the ICS proposal insists on expertise in public international law for its judges, expertise in investment law is deemed merely to be “desirable”. There is no requirement that (any of) the judges should demonstrate expertise in the policy areas that have fired up public debate and the anti-ISDS sentiment, such as human rights or environmental law.

The ICS proposal leaves the judge selection process entirely to the contracting parties. No transparency, public hearing or consultation with users or investors is currently envisaged. In addition, the “judges” are to be paid by the contracting parties and can be re-appointed by them. The anti-ISDS debate at the root of the ICS proposal claimed that the party selection and payment of arbitrators cast doubt as to the independence and impartiality of those arbitrators. The ICS proposal is open to precisely the same criticism.

Moreover, ISDS has been recognised as providing flexibility and a dispute resolution process which engages both parties, the state and the investor, on an equal footing. By contrast, the ICS replaces this flexibility with a fixed set of rules, removing any participation from the investor claimant regarding for example the choice of arbitration rules and the selection of arbitrators.

These points highlight some of the concerns which call for further reflection and analysis regarding whether the ICS proposal is the improvement on the arbitration-modelled ISDS claimed by its proponents.

We set out below some of the potential implications, at both macro- and micro-levels.

Macro-level implications

The first macro-level issue is that Scotland and Northern Ireland have indicated that they may not wish to remain part of the UK post-Brexit. The prospect of a fragmented Britain (no longer the UK) raises the question of whether the EU or the US would consider it worthwhile to negotiate a trade and investment agreement with a dismembered Britain. It also raises the question of what leverage Britain in its new incarnation would have in such treaty negotiations, as opposed to that which it now enjoys as part of the EU.

Another question is Brexit’s potential impact on the existing 100 or so bilateral investment treaties (BITs) that the UK has with individual EU member states (intra-EU BITs), as well as with third states. A post-Brexit British state might be able to keep all these BITs containing the classic ISDS provisions assuming that its respective state counterparties agreed.

In this scenario, Britain would avoid the untested ICS proposal and its potential shortcomings, and become an interesting safe harbour for foreign investors who may find it attractive to structure their investments through it, thereby avoiding the current insecurity created by the ISDS reforms. If it considers it necessary and useful, post-Brexit Britain could seek to negotiate BITs with the EU (as a single entity), as well as those countries with which the EU has either signed or is negotiating trade and investment agreements, namely Canada, China, the US, Singapore and Vietnam.

The question arises, however, whether Britain, which currently appears to favour retaining ISDS over the ICS, would be able to impose ISDS provisions on potential counterparties given the EU’s push for the ICS to apply to future trade and investment treaties, and the willingness of at least some of the countries on this list to accept ICS.

Britain’s ability to do this is likely to be affected by which dispute settlement system ends up being included in the TTIP. If the ICS comes to feature in the TTIP, ISDS in its current, arbitration-based form faces an uncertain future.

One important aspect of post-Brexit Britain retaining ISDS in its arbitration form rests on the question whether Britain in its new incarnation has the ability to remain a party to the New York Convention, to which over 150 states are parties, and which is a significant part of the protection afforded to investors by ISDS.

Micro-level implications

At a micro-level, the international investment agreements (IIAs) that have recently been agreed by the EU and its relevant trading partners, but are still awaiting signature or ratification (namely, CETA (the Comprehensive Economic and Trade Agreement with Canada), the EU-Singapore Free Trade Agreement (FTA) and the EU-Vietnam FTA), would have to be amended to reflect Brexit.

Whether these trading partners would consider it attractive to negotiate new deals with Britain is an open question. The time and effort involved in the negotiation and conclusion of IIAs is not to be underestimated. The intervening period would be marked by legal uncertainty, to the detriment of UK investors abroad and Britain’s economy.

Another question is whether Brexit would have any impact on the ongoing TTIP negotiations, in particular with regard to the EU’s internal process of consulting with member states in adopting certain negotiating positions. Prime Minister David Cameron is said to be in favour of closing the TTIP as soon as possible because he considers it to have the potential of delivering huge benefits for the UK. At the same time, he appears generally untroubled by the anti-ISDS debate currently raging in many other EU member states.

A real and potentially significant impact

In conclusion, Brexit’s impact on the EU’s trade and investment policy would be real, as would its impact on post-Brexit Britain’s geo-political clout in the trade and investment arena. In contrast, it might offer interesting advantages, for both the UK as a host state and for investors who perceive the EU’s current investment policy as counter-productive. These advantages, however, are likely only to be felt after a significant period of uncertainty whilst post-Brexit Britain finds its footing, and in the short term are outweighed by that uncertainty.

Finally, the prospect of Brexit might cause the European Commission, the European Parliament and other member states to re-think the scope of their proposed “reforms” of investment treaties and ISDS.


Sophie Nappert is an arbitrator in independent practice at 3 Verulam Buildings, and Nikos Lavranos is Secretary General at EFILA.

The Shortcomings of the Proposal for an “International Court System” (ICS)

by Dr. Nikos Lavranos LLM, Secretary General of EFILA*

During 2015 it became clear that the European Commission was under mounting pressure from the European Parliament (EP), Trade Ministers of several EU Member States, anti-ISDS NGOs and the media to propose more “reforms” of the investor-State dispute settlement (ISDS) system that is contained in CETA and envisaged to be included in TTIP as well.

EFILA decided to establish a Task Force – consisting also of non-EFILA members – to analyse the final proposal for a so-called “International Court System” (ICS), which the European Commission formally adopted on 12 November 2015 and transmitted it to the US as a basis for further negotiations within the context of the TTIP negotiations.

During the debate in the European Parliament and among several Trade Ministers of EU Member States one key issue pointing towards a “solution” and which was continuously repeated was the creation of a permanent investment court consisting of publicly appointed judges. It was argued that in contrast to the current system of ad hoc arbitration consisting of party-appointed arbitrators, which has been characterized as “private”, behind closed doors dispute resolution, which biased towards the investor, a permanent investment court with judges would ensure fairer and better adjudication of investment disputes. Another related key issue, which was considered important for a “solution” was the creation of an appeal mechanism. Again the rather simplified characterization that ISDS disputes have no appeal possibility and are completely beyond the control of national courts, was used as a justification for the need of an appeal mechanism.

The European Commission had to incorporate these points otherwise a ratification of TTIP by the EP and the Member States would seem rather illusory. Having had significant experience as a disputing party in the WTO, which happens to include the Appellate Body as a permanent (quasi)judicial body, it was a small step for the European Commission to copy and paste many of the WTO dispute settlement elements into its ICS proposal.

The structure of the 60-pages EFILA Task Force analysis is as follows:

Chapter 1 analyses not only the ICS proposal as such, but also the process that preceded the proposal. This is important in order to understand the political context in which this proposal is embedded. It critiques certain aspects of the ICS proposal and raises a number of issues which the Task Force considers should be addressed in developing the ICS proposal further.

Chapter 2 provides an extensive overview of the already existing forms of appeal and annulment of investment awards. It also highlights the reform efforts in this regard by the PCA and the ICSID Secretariat. This overview provides a detailed picture of the status quo (including both the mechanisms and methods of operation), from which the ICS proposal departs. This analysis also draws critical attention to features or elements of the current system of ISDS which could be addressed in developing the ICS proposal.

Chapter 3 turns towards the WTO dispute settlement system by first explaining the features of the appeal system and then by examining to what extent this system could successfully be transplanted into the ICS and the limitations in so-doing.

Finally, Chapter 4 wraps up this analysis by providing some general conclusions as to matters which require consideration by the Contracting Parties in developing the ICS proposal further. In particular, the issues highlighted concern the methods of selection of the judges (and the implications of a move towards a system whereby the Respondent maintains, but the Claimant is deprived of, a role), the size of the pool of candidates for the two-tiered system, the relationship between the ICS and the CJEU and how the ICS will operate in the wider context of resolution of investor-state disputes under other instruments.

The conclusions of the Task Force report can be summarized as follows:

  1. The paper concludes that the ICS proposal is, first and foremost, a bold move to appease the EP and the public opinion in many EU Member States, which are critical against TTIP generally, and in particular against including any type of ISDS. The ICS proposal attempts to make the inclusion of an investor-state dispute settlement mechanism in TTIP politically acceptable, while at the same time trying to address the perceived shortcomings of the existing ISDS.
  1. The paper notes that – in contrast to the public perception – mechanisms for limited review of investment arbitration awards are already in place, such as the ICSID annulment mechanism and the setting aside procedure for non-ICSID awards by national courts. These mechanisms – while not perfect – provide useful corrective tools.
  1. The analysis of the WTO dispute settlement mechanism illustrates that caution should be exercised in simply transplanting it to investor-state disputes. The reason is that WTO law is structurally different from investment law, serves different purposes and has different users.
  1. Generally, it can be concluded that the ICS proposal clearly breaks with the current party-appointed, ad-hoc ISDS as provided for in practically all BITs and FTAs. The main result is that it deprives claimants of any role in the appointment of the judges, while giving the respondent States the exclusive authority to do so, albeit in advance of a particular case. The appointment of the judges by the Contracting Parties raises several problems, which the ICS proposal does not sufficiently address.
  1. The pre-selection of the TFI and AT judges by the Contracting Parties carries the inherent risk of selecting “pro-State” individuals, in particular since they are paid by the States (or rather their tax payers) alone. Apart from this danger, it remains doubtful whether a sufficient number of appropriately qualified individuals with the necessary expertise can be found. This is particularly true since many professionals currently working in arbitration may be excluded on the basis that they could be considered to be biased. The pool of TFI and AT judges would seem to be limited to academics, (former) judges and (former) Governmental officials. That might not be sufficient to guarantee the practical experience and expertise needed and/or independence from the State.
  1. The standard of impartiality and independence of the judges is highly subjective, and their independence on a practical level is not assured by the proposed text. Also, the system of challenging TFI judges and AT members can be further criticised for envisaging that the presiding judge will decide the challenge against one of his own colleagues on the bench, rather a decision being made by an independent outside authority.
  1. The system of determination of Respondent (in the case of the EU or Member States), in particular the binding nature of that determination, which is done by the EU and its Member States alone, creates significant disadvantages for the claimant and does not allow the ICS tribunals to correct any wrong determinations. This could result in cases being effectively thrown out because of a wrong determination of the Respondent.
  1. Since the ICSID Convention is not applicable to the EU, the recognition and enforcement of

ICS decisions remains limited to the EU and the US. The proposal also fails to clarify the difficulties elated to the New York Convention 1958.

  1. The ICS proposal does not address the difficult legal situation between the CJEU and other international courts and tribunals. There is no reason to believe that the CJEU would be more positive towards the ICS as compared to its outright rejection of the European Court of Human Rights when it comes to the potential interpretation or application of EU law. Also, the CJEU’s consistent rejection of any direct effect of WTO AB panel reports – even those that have been approved by the DSB and after the implementation deadline has lapsed – raises doubts as to the legal effects of ICS decisions within the European legal order.
  1. In sum, the suggested creation of a two-tier (semi)permanent court system would give the Contracting Parties a significantly stronger role in the whole dispute settlement process – potentially at the expense of both the investor/claimant and the authority of the ICS. In particular, the appeal possibility carries the risk of burdening small and medium investors by increasing the potential length of the proceedings and costs.
  1. While the US position towards the ICS proposal remains unclear for the time being, it also remains unclear how the ICS proposal could be multilateralized. Indeed, the perceived shortcomings of the current ISDS system is based on the fact that more than 3,000 BITs/FTAs are in place, which have been concluded by practically all countries in the world. The ICS proposal – limited to TTIP and perhaps extended to CETA – does not change that. The way the UNCITRAL Transparency Rules of 2014 are incrementally applied by way of an opt-in system established by a separate international treaty could be a possible way forward.
  1. As the TTIP negotiations between the US and the EU are now focusing on the ICS proposal, this is a perfect moment to further improve the proposal by addressing the matters identified in this analysis.
  1. Finally, the US and the EU should also consider whether it would not be more preferable to modify and improve existing systems, such as turning the ICSID annulment procedure into a full appeal mechanism.

This in-depth analysis is very timely and arguably one of the first ones following the formal adoption of the ICS proposal by the European Commission last November.

The EFILA Task Force paper raises many issues and provides some answers, but certainly leaves many problems untouched. At the EFILA Annual Conference which will take place on 5 February in Paris, the last panel will specifically discuss this report. All members of the investment arbitration community are welcome to (still) register for the conference or to submit their constructive comments to Dr. Nikos Lavranos, LLM, Secretary General of EFILA, at: n.lavranos@efila.org