Ensuring Equitable Access to All Stakeholders: Critical Suggestions for the MIC (EFILA Submission to the UNCITRAL WG no. 3 on ISDS Reforms)

EFILA has recently submitted its suggestions to the UNCITRAL Working Group no. 3 on ISDS Reform. The entire document can be found here. An extract can be read below.

The European Federation for Investment Law and Arbitration (EFILA) believes that no discussion about the reform of the investor-State dispute settlement (ISDS) system should occur without taking stock of the interests of all stakeholders. This is particularly true for the proposal for a Multilateral Investment Court (MIC), which is currently being discussed and negotiated in UNCITRAL Working Group III. Without the active participation of all stakeholders (i.e. all potential users of the MIC) – including investors and their legal counsel – any ISDS system will lack legitimacy.

With this in mind, EFILA submits the following, non-exhaustive suggestions for ISDS reform and, in particular, for the MIC proposal:

The Appointment & Selection of MIC Judges: Central to the ISDS system’s ability to effectively resolve disputes between investors and States is the confidence of all stakeholders in their decision-makers. For this reason, EFILA believes that investors should continue to have a direct and indirect say in the choice of their decision-makers. The MIC should:

  1. Let a college of representatives chosen by the investors, as users of the system, participate in choosing candidates for the MIC;
  2. Give all stakeholders a right to strike out a given number of judges assigned to their panel; and
  3. Allow all stakeholders to retain the right to challenge MIC judges on the basis of clearly defined standards before an independent body.

Consistency of MIC Decisions: EFILA agrees that consistency in legal decisions is an important element of any well-functioning dispute resolution system. Consistency, however, must be objective. It cannot be used as a means to “correct” awards that arrive at unwelcome results. Any responses to consistency must respect the rule of law and the equality of the parties.

Accordingly, any final design of the MIC should:

  1. Not allow joint binding interpretations with potentially retroactive effect;
  2. Avoid unnecessarily reducing the material scope of the standards of investment and investor protection; and
  3. Limit exclusions of certain types of investors, investments and sectors to only to the
    extent objectively and reasonably necessary.

Access To Justice For SMEs: Small and medium sized enterprises (SMEs) are an integral part of the global economy. Any proposed reform of the ISDS system cannot disregard SMEs or discourage them from making full use of the ISDS system. The MIC, therefore, must include structural and systemic solutions that effectively ensure access to the system for SMEs. These include:

  1. Adopting cost-efficient rules that promote access to justice by SMEs;
  2. Establishing a process that informs and educates SMEs about the ISDS system and helps them to assess their claims; and
  3. Creating a financial support system for accessibility to the ISDS system for SMEs.

Enforcement of MIC Decisions: The application of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) to MIC decisions (even if just on an interim basis) raises serious potential obstacles to the enforceability of those decisions. Further thought should be given to ensuring that MIC decisions will be enforceable.

These suggestions, EFILA believes, will encourage confidence from all stakeholders in the MIC system and thus make the MIC a fair dispute settlement system for all users.

The entire document can be found here.

The 2015 EFILA Inaugural Lecture: Escaping from Freedom?

We are pleased to offer you the full text of the 2015 EFILA Inaugural Lecture by Sophie Nappert, “Escaping from Freedom? The Dilemma of An Improved ISDS Mechanism“, delivered on 26 November 2015 in London.

In times such as ours, when freedom is often abandoned for security to be gained, Sophie Nappert’s lecture is a vindication of freedom endorsed by law.

Executive Summary

ISDS in its current international arbitration format has attracted criticism. In response, the EU proposal for ISDS in the TTIP consists of a two-tiered court system, comprising an appeal mechanism empowered to review first-instance decisions on both factual and legal grounds and, the EU says, paving the way for a “multilateral investment court”.

The EU proposal envisages that the courts of first instance and appeal be composed of pre-ordained, semi-permanent judges randomly assigned to cases and subject to compliance with a Code of Conduct worded in general terms.

As it stands the EU proposal walks away from the international arbitration format, and consequently the application of the New York Convention.

The Lecture expresses surprise at the EU proposal of a court mechanism given the CJEU’s unambiguous, historical unease with other similar, parallel international court systems, as most recently expressed in its Opinion 2/13 of 18 December 2014 on the draft Accession Agreement to the
European Convention on Human Rights.

The Lecture examines whether, and how, the EU proposal might provide solutions to critical issues presented in two recent cases taken as illustrations – the Awards in the cases of the Yukos shareholders against the Russian Federation, as well as the case of Croatia v Slovenia currently pending in the PCA.

The Lecture remarks that appeal mechanisms are not free from difficulty, not least of which the real risk of inconsistent decisions between the first and appeal instances, due to different, equally valid approaches to a developing area of international law.

The Lecture also notes that the proposed Code of Conduct provides no practical sanctions to deal with instances of arbitrator misconduct such as that featured in the Croatia v Slovenia matter, and expresses surprise that ethical challenges are to be decided by fellow Judges – probably one of the most problematic features of the current ICSID system.

The Lecture proposes a third way, aimed at addressing these concerns, whereby a Committee – stroke – Interpretive Body, informed by the intentions of the TTIP Parties, would take over the development of TTIP jurisprudence in a more linear and consistent manner, with a longer-term view, whilst ad hoc arbitration tribunals in their current form would focus on the settlement of the discrete factual dispute.

Dissociating the settlement of the factual dispute from the broader interpretive exercise would create a repository of the TTIP jurisprudential function, allowing for a more harmonious and authoritative development of TTIP interpretation and law and alleviating the phenomenon of “overreaching” currently burdening ad hoc tribunals – arguably the real source of the criticism aimed at ISDS.

The Committee/Interpretive Body could also more credibly act as decision-maker in ethical challenges than would fellow Judges, provided the Code of Conduct is reviewed to allow for realistic standards and practical sanctions.

This proposed “third way” retains the arbitration features necessary for the application of the New York Convention, and is not inconsistent with the EU’s own proposal, building as it does on Article 13(5) which contemplates an overseeing Committee that would be well-placed to take over the above role.

See the full text of the Lecture here.

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.