Redefining the ‘Centre’: International Economic Law and Grand Strategy in a Multipolar World

by Horia Ciurtin LL.M., Managing Editor of the EFILA Blog*

(Legal) Multipolarity Revisited: What Lies Beyond Westphalia?

This brief introduction to such an ambitious thematic must undoubtedly commence by positing its adherence to the (non-legal) core concept of ‘grand strategy’ and its realist avatars in international economic law. More precisely, it shall be argued that – at a certain level – the normative sphere is instrumentalised by competing nomothetic actors in order to enhance their power position and joint economic security, in a troubled multipolar world.

Thus, following John Mearsheimer’s influential paradigm and his (in)famous 1994 article regarding the false promise of international institutions, it can be affirmed that the “[international] institutions are basically a reflection of distribution of power in the world” and that the most powerful actors in the system “create and shape institutions so that they can maintain their share of world power, or even increase it”. For these reasons, international law and its main agents – international institutions – represent a formalised, but temporary consensus in the clash of competing interests.

However, this side of the story is entirely accurate only for an international arena dominated solely by sovereign state actors. Presently, as the Westphalian international system of autarchic legalities disintegrates, paving the way for a post-sovereign order, a different relation between legal macro-spaces (or, as Carl Schmitt famously called them, Grossräume) seems to emerge. New power blocs are forged from the global economic bellum omnium contra omnes, allowing them to surpass the notion of sovereignty and building stranger ‘empires’ bound together by the cold letter of international treaties which – eventually – develops into a more stable quasi-constitutional internal order.

The European Union, the NAFTA space and the Eurasian Union are just a few examples of this trend. Each of these blocs implies a loss or – at least – a limitation of state sovereignty in several fields, in the quest for attaining the upper hand in a larger global confrontation with other blocs or singular actors. In a certain way, some sovereignty is individually lost so that the sovereigns might increase its projected power in a joint manner, following their grand strategy for hegemony.

In such circumstances, the classical balance of power cannot any longer occur between single states and their shifting alliances, but rather among macro-spaces united in formal legal agreements (later turned into quasi-constitutional orders). Even though, as posited by Mearsheimer and other realists, self-interest and the desire for hegemony might drive sovereigns into such legal constructs, their origin does not account for their further development.

Thus, once roaming the international arena, macro-spaces appear as a new breed of economic ‘predators’, more powerful and more fit for survival than the sovereigns taken separately, factor which convinces such states that a (post)sovereign structural alignment might take them further in the quest for power and hegemony, despite having to share some part of the spoils with the co-victors.

Normative Mimesis: Imperial Weapon or Remedy for Lingering Divisions?

In such a context, can we still refer to a truly international system or just a series of regional sub-orders that economically interact in an episodic manner? Is the international order now also territorially fragmented, in addition to the already decried functional fragmentation?

If once upon an idealist time, ‘autonomous’ normative systems – such as FTAs, BITs, multilateral trade agreements – and the institutions that administrate them were thought to act as gap-filling mechanisms, offering a cohesive and coherent paradigm to an otherwise centrifugal setting, the new global paradigm reveals the original realist tenet.

More precisely, major power brokers – be it soft or traditional – use such instruments for their own strategic goals. While alignment with like-actors is carefully negotiated in a quest for convergence of paradigms and tactics, the relationship with non-aligned or competing actors is defined in different terms, seeking to advocate for rules that would attract the other in one’s own normative realm.

Setting an example, triggers normative mimesis. A ‘centre’ dominates the periphery solely by creating a model. With a model consistent enough, advocated by an actor strong enough (often adversarial), there commences a process of legal emulation and ‘bandwagoning’. The ones left on the margins will try to imitate the centre’s model in order to gain recognition and reflect its power. Once the peripheries and non-aligned actors had been attracted in the ‘gravitational’ area of a hegemonic actor, other hegemons might succumb to the newly created rules. Imitation is the beginning of legal dominion.

However, such a strategic ‘great game’ in the field of international economic law might not have results as cynical as its origins appear to be. The ailing divisions and fragmentation of this system might benefit from mimetic normativism, forcing reluctant actors in one direction or another and opening the path to an ‘imposed’ con vergence, but nonetheless convergence.

Between TPP and TTIP: Where is the ‘Centre’ of the World?

Such realities and tactics is what determined the BIT ‘European gold standard’ to be quasi-universal in the 20th century. It attracted in its sphere of legal influence both the north-American actors, the ‘Third World’, the Communist and post-Communist states. With few exceptions, such a model became the undisputed norm in international investment law. The trend set by EU (EC) member states in their bilateral relations reverberated across the globe, enveloping former colonies and present allies, benefactors and adversaries, richer and poorer states, without limits or tactical setbacks.

However, the first actor to start diverging from the model was undoubtedly the United States. Near the turn of the century, its FTAs and ‘model BITs’ were developed in an innovative way, reflecting a change of options and a new geopolitical framework. Part of another grand strategy, the US new FTAs and model BITs offered an alternative to the classical ‘neat’ European-inspired BIT, advocating a more expansive view upon international trade and investment.

Following this pattern, the US began the negotiation of two ample FTAs (including consistent investment chapters) along its new comprehensive trade and investment policy. Concentrating in ‘crossing’ both oceans, the US crafted a strategy of gaining an intermediary position between its Asian alterity and European kinship, acting both as a bridge and unavoidable toll-house. With this goal in mind, the US acted so as to transform itself into the epicentre of a globalised world that seems to be increasingly multipolar. Thus, in its design, even though the international arena is unavoidable moving towards plurality, the actors need not be of equal rank. Asymmetry reigns even better in a multipolar setting, allowing north America to be the utmost centre among several centres.

TPP. The first of these two agreements – TPP – involved the strategic lines of concentrating on the Asian ‘pivot’ and attracted twelve states from all around the Pacific Rim (both from North/South America, Asia and Australia), in a multilateral effort to create an open economic space. However, everybody seemed (and still seems) to diplomatically ignore the geopolitical elephant in the room: the total absence of China from the negotiations. If this was merely a legal-economic instrument, such a choice and development would have proved incomprehensible.

If, on the other hand, one analysed the situation (geo)politically, it might lead to different conclusions: (a) either this is one initial step of a ‘containment’ strategy directed against China, (b) or the relationship with China is a privileged one, deserving a bilateral approach between two sovereigns of equal calibre.

Nonetheless, even though China is the great absentee in the TPP game, the conclusion of this agreement – with its myriad of typically American exceptions and derogations – sets the scene for any further development of this legal sphere. The TPP example has been set and – with some effort – it will be ratified and come into full force before the US finishes the negotiations with other high-profile ‘centres’ such, representing a ‘living’ precedent that might compel other actors to follow this model or – at least – to make substantial concessions from their previous practice in the FTA/IIA area.

TTIP. As regards the negotiation of the comprehensive agreement with the European Union, the situation proved to be different from the outset. The 28 member states had a single voice in the negotiation (unlike the 11 Pacific states) with the US and their joint economies accounted for a higher power. One EU tactic for reaching an initial negotiation equilibrium was not to approach the US as part of a larger NAFTA space, but rather to take on individually each of the NAFTA states. Therefore, in the TTIP process, asymmetry was less evident and no decisive ‘upper hands’ appeared during the game.

Moreover, the EU itself also managed to have its ‘model’ tested and set out, in the FTA with Singapore and in the finalised agreement with Canada. At the same time, it also began a more ample FTA programme, envisioning a deal with Vietnam, India, South Korea and – eventually – China. Thus, the EU also strives to be the trend-setter in the FTA/IIA area, introducing its own innovations and idiosyncrasies, concentrating upon Asia and the Pacific Rim itself.

In these circumstances, TPP, EUFSTA, CETA proved to be a ‘prologue’ to the much anticipated clash of EU and US during TTIP negotiations, leaving both actors bound to their own models and with less room for manoeuvre. However, what keeps them wired to the endless rounds of negotiations (so far, eleven) is the idea that – once such an agreement reached – it will transform these two ‘centres’ in a formally allied mega-centre that irremediably sets the example for the entire world.

This is the reason for which each actor wishes to see its own model enshrined in TTIP. Once there, it will be the model. And the normative mimesis triggered thereafter will emulate the rules of the hegemon that managed to formalise its legal strategy in such an influential agreement.


 * Horia Ciurtin, Managing Editor, EFILA Blog; Legal Adviser – International Arbitration, Scandic Distilleries S.A; Editor, VERSO Journal [Romania]; Freelance researcher [see SSRN author page].

 

Transnational Court of Investment Arbitration

by Duarte G. Henriques, BCH Advocados*

In the context of the discussions surrounding the Transatlantic Trade and Investment Partnership (TTIP), much criticism has been raised against ISDS (Investor-State Dispute Settlement). We know now that the European Parliament echoed public complaints and voted against the inclusion of an ISDS mechanism in the TTIP. It further recommended to the European Commission that disputes falling under the investment protection framework should be adjudicated by a system similar to state courts, where the decision-makers are appointed from among judges from the US, EU and third countries. Accordingly, the proposal advances the creation of a new court system (Investment Court System) consisting of a Tribunal of First Instance and an Appeal Tribunal.

At the same time, this proposal resonates the suspicions raised regarding the lack of impartiality of some arbitrators and paves the way to the implementation of an adjudication system subject to public scrutiny.

However meritorious it could be, this idea nevertheless forecloses the right of the investor to (at least) participate in the process of selection of the decision-maker, a principle paramount to international arbitration stemming from the distrust of a system where the adjudicator might be swayed by parochial views, not to mention political and economic pressures.

I am still not convinced that an arbitral system is not apt to provide a neutral, impartial and independent means for solving disputes between foreign investors and host states. But I do not look at the current ISDS status quo without some hesitation either, especially if we think of the system instituted by ICSID, its locations positioning and its “ad hoc committee” revision method. The circumstance that the ICSID system operates under the aegis of a banking institution (World Bank) lending money to sovereign states, but at the same time with a level of financial power strong enough to go as far as to impose changes in regulation, and in the economic and political environment of those countries, gives room for criticism concerning its bias in favour of investors. This criticism has led a few nations (Venezuela and Bolivia, for instance) to withdraw from the ICSID Convention, claiming that BITs were made to protect “investments” and not “investors”.

On the other hand, at first glance I do not have to struggle with the idea of waiving the principle of finality of arbitral awards: indeed, why not submit the arbitral decision to a revision similar to the state courts system of appeals? In my country, foreign investors wishing to pursue their claims before the state courts are given the right to appeal against the decision. This right to appeal, however, is subject to limitations: it may be restricted to a single level of appeal (usually the “Court of Appeal”), and it only comprises the revision of the factual findings if the decision contains “egregious” errors of determination. Interpretation and application of the legal rules are subject to full revision.

That being said, a suggestion (and here I underline that the following is a mere suggestion, subject to further development) might be put forward to create an international body for settling investment disputes. Most likely, the idea has already been suggested, but in any case, I will dare to name it as the “Transnational Court of Investment Arbitration”.

Explaining the idea involves speaking about each of its four words.

Firstly, it would be a Court in the sense that it consists of a permanent institutional body with permanent facilities, structured in the same fashion as traditional state courts, and permanently dedicated staff. Arbitrators would be vested with “jus imperii” powers. Witnesses would be subject to criminal prosecution in the case of false statements, disobedience, and similar behaviour. Arbitrators, counsel, parties’ representatives, witnesses, experts, secretaries and other administrative staff would be submitted to a single regulation system, including a Code of Ethics.

Secondly, it would be a body dedicated exclusively to settling disputes between foreign investors and host states. Therefore, it would be an “Investment” Court. Underlying this notion is the consideration of the jurisdictional issue, that is, discovering, inter alia, what kind of legal instrument would afford a protection under this ISDS to the relevant “investments”. As long as an international instrument protecting foreign investments provides for arbitration as a mechanism to solve disputes arising therefrom, the Transnational Court would hold jurisdiction.

Thirdly, however closely this body might resemble a traditional “court”, it would be an institution managing arbitration (and possibly mediation in a two-tiered process). Therefore, parties are allowed to appoint their arbitrators, but also to have a tailor-made proceeding, including waiving of the right to appeal and the setting-up of time schedules, costs, bifurcation, and so on and so forth. Given the particularities of this kind of arbitration – which deals with public interests of the states involved – the right to appeal and public hearings would be set-up by default. Of course, the “traditional” requirements as to the independence, impartiality and neutrality of the adjudicators would apply, and this institution would act as an appointing authority as well (chair and arbitrators not appointed by defaulting parties). Final awards would “circulate” (that is, would be enforceable with no need for prior recognition) within the territory of all jurisdictions adhering to this system and within the geographic perimeter of the New York Convention of 1958.

Lastly, it would be a transnational court, in the sense that would cover all jurisdictions adhering to this system, potentially within the context of a multilateral free-trade agreement. That brings us to the potential to use an existing legal and institutional setting, such as the WTO, and be attached to it at the logistical level. However, it would be more than that. It would have to be a body truly independent from the states adhering to the international convention enacting this system.

Of course, it would be necessary to provide for initial financial funding from contracting states until reaching a “cruising speed” where the system would be financially self-sustained concerning maintenance and administrative costs.

Its state constituency would democratically elect the managing and supervising bodies by “one country one vote”.

Another concern related to the current ISDS system is its geographic accessibility. Currently, investment disputes are managed in Washington (ICSID) or The Hague (PCA), with hearing locations settled in association with arbitral institutions such as the DIS in Germany, the CIETAC in China or the Singapore International Arbitration Centre in Singapore. This concern suggests the notion of spreading a few regional or continental sub-Courts (or Courts of First Instance) across the globe. The distribution would be drawn according to the caseload currently brought by investors against host states. Looking below at the last statistics available at the ICSID website (2015-2), we could think of the following continental or regional Sub-Courts and respective locations: 1) South America, in Chile or Uruguay; 2) Western Europe, in Warsaw or Kiev; 3) Eastern Europe, in Geneva, Paris or London; 4) North America and Central America, in New York or Miami; 5) Africa, in Cairo, Egypt or Abuja, Nigeria; 6) Australasia, in Sydney; 7) Asia, in Beijing or HK.

graph

This system would include what we may call “intra-EU” disputes, that is, disputes between European investors and EU member states.

The first instance level of this system would be topped by a “Superior Court” based on a movable location for a term of 5 to 10 years. Contrary to the “first instance” level, where the decision-makers would be arbitrators chosen by the parties, the jurisdictional body of the Superior Court would consist of the President of the highest Courts of Justice of each contracting state. With the exception of “egregious” determinations of facts, the Superior Court would have jurisdiction on matters of law only, and its decisions would be published.


Duarte G. Henriques, Rua Fialho de Almeida – 32 – 1 E, 1070-129 Lisbon • Portugal, dghenriques@bch.ptwww.bch.pt.

Right to Regulation & Investment Court System: Alternative to ISDS? (Part II) – Mediation in Investor-State Dispute: An Option 

 Pratyush Nath Upreti*, Upreti & Associates

In my previous contribution to the EFILA blog, titled Right to Regulation & Investment Court System: Alternative to ISDS?, I analyzed the debate raised by the ISDS provision in TTIP and how the proposed Investment Court may not be able to solve the issues raised by ISDS. It is important to analyze the reasons behind such a huge cry over ISDS set up in the Trade/Investment Agreement. The European Federation for Investment Law and Arbitration (EFILA) in its paper titled A response to the criticism against ISDS has balanced an analysis on the criticism of ISDS.

It is evident that in recent years, there has been a diversion of opinions, which is painful to investors and also encroaching on the national matters of State. Therefore, the global community has to realize that the present ISDS is not always working effectively and alternatives should be proposed. The European Commission’s proposed ‘Investment Court’ might be a step towards formulating an alternative.  No doubt that the proposal is a good attempt but it still needs to be revised.

Recent Trends of International Investment Agreements

In recent years, more countries have been opting for IIAs to continue their existing co-operation with countries or as a way to find an economic development. According to the United Nations Conference on Trade and Development (UNCTAD), there has been rapid growth of IIA from 1980 till 2014 (see Figure 1.)

1

Figure 1: Trends of IIAs (Preliminary data for 2014UNCTAD, IIA database)

The above graph highlights the recent trends of IIAs from 1980-2014. It is expected that IIAs number will increase, but the graph indicates that there has been a decline in the last few years. According to UNCTAD data, in 2004 there were 27 IIAs, out of which 14 were Bilateral Investment treaties (BITs) and 13 were ‘other IIAs’, i.e. economic agreements other than BITs like

Free trade agreements (FTAs), bringing the total number of agreements to 3,268 (2,923 BITs and 345 ‘other IIAs). The total number of IIAs was lower down in 2014 as compared to 2013 where there was a total of 44 IIAs (30 BITs and 14 Other IIAs). The interesting fact is that in 2013 the number of BITs terminated was 148, out of which a new treaty replaced 105, 27 were unilaterally denounced and 16 were terminated by consent.

2

Figure 2: Most Active negotiator of ‘other IIAs’; treaties under negotiation and partners involved. Source: UNCTAD, IIA database.

The above figure emphasizes the number of treaties under negotiation and partner countries involved in a negotiation. At present, the European Union has 28 treaties under negotiation among 70 different countries as partners. Although the data highlights seven countries under negotiation, but at present there are 45 countries and four regional integration organizations that are revising their model IIAs.

The findings of UNCTAD data highlights that the countries’ willingness to enter into agreements and few IIAs are under revision. This implies three things. First, negotiation is getting more complex because of the increase in the number of countries in the negotiation process, as every country has a share of interest. Furthermore, even if a deal is negotiated in the broader package, then also the question of commitment to those issues is very important.

Second, the interrelation between IIAs and domestic concerns comprising ‘social, environmental and public health’ matters makes negotiation more difficult. Ignoring this issue means that negotiation has a severe impact on the development of host countries. Therefore, finding the proper balance may take more time, which makes negotiation slow.

Third, some of the most recent investment disputes might show that IIAs go beyond the protection and promotion issues and leave no flexibility on some issues that allow member countries to peruse their development agenda, according to their needs.

Fourth, the transparency in negotiation deals creates a public nuisance on some contingent issues, diverse opinions on other issues, which may or may not be discussed, would have a negative impact on negotiations and, as a result, it creates negative public opinion.

Fifth, recent claims of investors under the investor-state dispute settlement mechanism have raised concern on such negotiation deals particularly such claims are encroaching upon host state sovereignty and domestic regulation.

The critics fear that the growing frivolous claims brought to ISDS will slowly discourage investors and states to opt for ISDS.  The data shows that the average cost of arbitration is $8 million per party. Therefore, at international level, there is a need to offer an alternative, which balances both the interest of investors and states. Moreover, such an alternative should be acceptable by both the parties.

Investor-State Mediation

In recent years, the relationship between the state and investors is getting salvaged. The development will be fragile when rift exists between the investor and state. Parties – for own benefit – use the increasing diverse opinions of the arbitration tribunals. This will result in negative consequences in global investment regime. The possible way to balance the system is by revising ISDS provisions or adopting investor-state mediation.

The very idea of arbitration, mediation and conciliation is to resolve the dispute. Among the three, arbitration is overwhelmingly accepted for several years. The growing criticism of ISDS has sorrowed relation between investors and the State and should be looked at with immediate concern. Perhaps, the time has come to also use the mediation process in Investor-State Disputes. There has been an attempt to use mediation in Investor-state disputes with success in a limited jurisdiction. However, scholars argue the very nature in which mediation aims to settle a dispute is different from arbitration, making it difficult for acceptance of mediation.

According to Jacqueline Nolan-Haley in her work ‘Mediation: The ‘New Arbitration’ argues that “the morality of mediation lies in the optimum settlement, a settlement in which early party gives up what he values less, in return for what he values more. The morality of arbitration lies in a decision according to the law of contract.”  The author explains this observation, as the nature of mediation is more adversarial than that of arbitration.

Similarly, authors Welsh & Schneider in their work ‘Becoming Investor –State Mediation’ (2012) analyze a very fundamental difference between ‘mediation’ and ‘arbitration’. According to the authors, mediation is an ‘interest-based’ system of negotiation, which looks like a meeting. Whereas, ‘arbitration’ is a ‘right-based’ system which looks like a hearing. The very fundamental concept, which the authors are trying to convey, is that the mediation facilitates parties to arrive to a decision unlike arbitration, which focuses on adjudication.  Also, the authors clear the misnomer attached to ‘mediation’. They identify several models of  ‘mediation’ such as ‘facilitative’, ‘elective’, and ‘understanding-focused’, ‘therapeutic’ ‘Humanistic,’ ‘narrative,’ ‘insightful,’ ‘transformative’ and focus on facilitating the development of understanding and ‘integrative (or interest-based) solutions’.

Among these models, the authors suggest adopting a model which will improve relationships between the parties and able to acknowledge volatile political situations.  In other words, the authors suggest the last model as a suitable model in the context of investment treaties. Also somewhere in their article, the authors touch the possibilities of the role of state officials as potential ‘quasi-mediators’. I tend to disagree on this, particularly in the context of investor-state disputes. The role of state officials as quasi-mediators will further complicate the process and may create a trust-deficit environment. Therefore, it is important to note that the very foundation of the mediation process is ‘trust’.

Mediation in Investment Agreements

The recent studies show that mediation has been used with great success in international commercial law. The critics argue that success of mediation in commercial law cannot be an assurance for success in the international investment regime. However, the recent Investment Agreements such as EU-Canada: Comprehensive Economic and Trade Agreement (CETA) and ASEAN Comprehensive Investment Agreement (ACIA) have incorporated ‘mediation’ in their provisions..

Also, mediation features in some Model BITs. For example Article 10.4 of the Thai BIT Model states that:

The disputing parties may at any time agree to good offices, conciliation or mediation. Procedures for good office, conciliation or mediation may begin at any time and may be terminated at any time. Such procedures may continue while the matter is being examined by an arbitral established under this article, unless the disputing parties agree otherwise. Proceedings involving good offices, conciliation and mediation and positions taken by the disputing parties during these proceedings shall be confidential and without prejudice to the rights of disputing investor in any further or other proceedings.

This shows that mediation appears in some Investment Agreements and it is just a matter of time until such practice will gain momentum.

Mediation as an alternative?

There is a diversion of opinion within the scholar’s milieu arguing that arbitration is more favorable than other forms of dispute settlement. However, the recent trends urge us to rethink arbitration and finding beyond the arbitration.  This forum shift has been realized in other international communities, as a result of IBA rules on Mediation developed to encourage good practices of mediation. One of the important features of the IBA rules on mediation gives the liberty to the state to make the mediation process private. This will take away unwanted public opinion.

At the end, I think every modern Investment agreement should include ‘Consultation’ & ‘Mediation’ among the methods for amicable settlement of disputes arising out of International Investment Agreements.  I believe adopting mediation would be a right approach because the process does not abide with a strict interpretation of law unlike in ISDS.

Similarly, the mediation process is a more informal proceeding than ISDS and involvement of a neutral party to the dialogue would give rise to a win-win situation for both parties. Moreover, in the broader sense, the inclusion of mediation in IIAs will make a country less skeptical about consequences of litigating intellectual property rights through regular ISDS mechanism. In other words, the mediation process will help the state to main regulatory rights in the host country.

On the other side, it is important to note that the decision of mediation does not gain force as like of arbitration under the ICSID Convention, making mediation a toothless weapon.  This would be the reason for Europe to opt for ‘Investment Court’ model in spite of reference to mediation in CETA, which is similar to the WTO mediation process for trade dispute settlement.

However, there is a school of thought believing that mediation may create transparency and a proper environment to negotiate between the parties.  But the lack of enforcement of such a decision might make the situation worse.  Therefore, it would not be rational to jump to a conclusion that the ‘mediation’ process will immediately solve the problems raised by ISDS. Moreover, the mediation process is yet to be tested in International Investment Agreements.


Pratyush Nath Upreti – is a Lawyer at Upreti & Associates a Kathmandu based law firm, where he is leading commercial and research department. He holds Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) degree from Maastricht University, Netherlands. He is also an executive member of New IP Lawyers Network, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by   p.upreti@student.maastrichtuniversity.nl

Right to Regulation & Investment Court System: Alternative to ISDS? (Part I)

   by Pratyush Nath Upreti, Upreti & Associates*

Intellectual Property is sexy! Its romantic endeavor with other branches of law makes it appealing for IP scholars. This romance can be seen through the lens of the global Intellectual property regime. In today’s industrialized world, the landscape of the intellectual property is changing. Mostly, all forms of ‘intellectual property’ have raised debate in the trade agreements domain, making it an important aspect of trade negotiation. The open market economy encourages the developed countries to opt for Investment/Trade Agreement such as Free trade agreement (FTA), Bilateral Investment Treaties to attract investors by strengthening IP regimes. It is evident that IP as incentive commodity has turned into assets, trading commodity.

Similarly, the expectation of investors is increasing. Recent cases such as Philip Morris v. Uruguay have revealed the complexity and potential overlap between intellectual property, Investment Law, and Trade Law. The nature of claims raised in such cases has raised serious concerns regarding state’s sovereign right to regulate, which is reflected in the ongoing negotiation of Transatlantic Trade and Investment Partnership (TTIP). The recent public consultation report on investment protection and investor-to-state dispute settlement (ISDS) in the TTIP reveals that the Commission received a total of nearly 15,000 replies and an overwhelming majority showed concern to the inclusion of ISDS in TTIP.

One of the aspects is the EU Right to regulate provisions in the Investment Agreement. The concern raised is that the ISDS would be a potential limitation to the rights of government to regulate on public interest. Earlier September, European Commission published a draft text of the Investment Chapter in the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, propose the ‘Investment Court’, which has generated discussion.

Right to Regulation

According to the report from the Swedish National Board of Trade, the term ‘right to regulate’ is misleading. The report refers right to regulate as ‘to the extent to which the state can legislate and make decisions without running the risk of being found in violation of the treaty and having to pay damages’. It has been an established principle of state sovereign right to regulate on public, health and environment affairs. But the diverse opinions of tribunals and increasing legitimate expectation of Investor has seriously narrowed the state right to regulate.  The very fundamental question is to what extent can investors expectations rise?

In Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA), Eli Lilly a pharmaceutical company invoked investment claims under UNCITRAL rules, on the ground that the patent invalidation by a Canadian Court violated a principle of fair and equitable treatment, including Lilly’s legitimate expectation about the treatment of its investment and Canada’s obligation to refrain from conduct that is arbitrary, unfair, unjust and discriminatory. Further, it was argued that ‘Lily was entitled to reasonably rely on the stability, predictability, and consistency of Canada’s Legal and business framework existing at each stage of the establishment, expansion, and development of Lilly’s Investment.

The above cases raised a fundamental question on the scope of application of ‘fair and equitable treatment or reasonable expectation of investment’ under intellectual property investment claims. The investor expectation should not be subjective and not all investor expectations are legitimate. Moreover, the arguments put forward by the claimant in Lilly directly come in conflict with state sovereign right to regulate the domestic Intellectual Property. The investor completely ignores the difference between the pre-existing rights and post-existing rights. Both the pre and post rights have limitation. The right does not arise if a prerequisite is not fulfilled. Similarly, once rights are acquired, they cannot be absolute; they are subject to changes on several grounds.

In practice, fair and equitable treatment and full protection and security are not absolute, there being limitations. Parkerings-Compagniet AS v. Lithuania tribunal analyzed the state sovereign power to regulate lies on higher foot then claims of free and equitable treatment. The Tribunal stated:

 

“It is each state’s undeniable right and privilege to exercise its sovereign legislative power. A state has the tight to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that law will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.”

Similarly, in Chemtura v. Canada, the tribunal upheld the Canadian government’s right to legislate laws based on scientific reviews and dismissed the investor’s claims. However, critics of ISDS have raised that such limitation of state right to regulate may bring regulatory snare. Therefore, Europe is trying to narrow down the scope of provision under the agreement to avoid vague interpretation by a tribunal. The previous agreements such as CETA and EU Singapore FTA, were drafted in a way to have a higher benchmark on the right to regulate.

For example under CETA, Article X.9 clears list down the contents of fair and equitable treatment such as (i) denial of justice in criminal, civil or administrative proceedings (ii) fundamental breach of due process (ii) arbitrary conduct and among others. The closed list avoids unwarranted interpretation by the tribunal, which may affect state right to regulate. Similarly, Article X.11 excludes expropriation claims on compulsory license and exclusively explains that indirect expropriation occurs when measure substantially deprives the investor property right such as (i) right to use (ii) enjoy and dispose of its investment (ii) transfer of title or seizure. In spite of such approach, public outcry on ISDS provisions seems to be a major hurdle for the European Union.  Therefore, to negate such a scenario and create a positive public opinion on TTIP, the Commission has proposed ‘Investment Court’ to address Investor claims.

Investment Court: Coffin for ISDS?

The concept of ‘Investment Court’ has been floating through Commission Draft Text of TTIP, which opens with a disclaimer that the document is solely for internal purpose and the commission will consult with the EU’s Member States and discuss the proposal with the European Parliament before presenting it formally to the United States.  The said EU proposal for an Investment Court is described as ‘over ambitious’ and deprives investors of the traditional possibility to choose their arbitrator. The proposal establishes a two tier court system; Tribunal of First Instance (tribunal) and Appeal Tribunal. The tribunal will follow the existing international arbitration rules of ICSID and UNCITRAL. Similarly, Article 13 allows the tribunal to apply only international law and interpret agreements in accordance with customary rules of interpretation. The provision expressly argues that the tribunal is not obliged by domestic interpretations of the law and the tribunal shall not have jurisdiction to determine the legality of a measure under the domestic law of the disputing party.

One of the criticisms of ISDS was the lack of transparency and maverick arbitrators. The proposed Investment Court has overcome such criticism. According to Article 11 of the proposal, judges of the Tribunal and members of the Appeal Tribunal must be persons whose independence is beyond doubt. Similarly, judges shall not be affiliated with government or organizations and also upon appointment, they shall refrain from acting as counsel in any pending or new investment protection disputes under this or any other agreement or domestic law.  In addition, the party to the dispute may challenge the appointment of the judge if it considers that the judge or member has a conflict of interests.

The very fundamental principle of investment arbitration is the investor’s active role in the appointment of an arbitrator. The proposed draft takes away this privilege of investors. However, the proposed draft gives an opportunity to the United States and the European Union to appoint permanent judges to the Appeal Tribunal and also to the Tribunal of First Instance.

This makes me suspicious regarding the possible political appointment of judges. This is very much possible, considering the worries of EU. Moreover, such pro-state judges will keep in mind to avoid unnecessary interpretation which limits the state’s right to regulation.  I believe that the investors cannot accept such an appointment process as the very fundamental reason for the involvement of investors in the appointment process was to avoid political interference. Therefore, I think the Commission should reconsider the appointment of judges and – if needed – some share should also be given to investor to balance the appointment process.

The proposed draft clearly fills the demand for more transparency in the arbitration process by abiding with the ‘UNCITRAL Transparency Rules’ and lists down documents to be publicly made available upon request. Additionally, it goes beyond and allows disclosure of third party funding to the parties.  This is indeed a very important aspect of the proposed draft.

In the end, I conclude that the proposed Investment Court seems a way to avoid ISDS. Moreover, it looks that proposal aims to gather positive public opinion on TTIP. The major question is even if the proposal of Investment Court System is accepted, then will it be applied retrospectively to all previous several Investment Agreement to which EU is member? If not, then there is always a scope of diverse opinion, which may narrow the state right to regulate. Time will tell whether ‘Investment Court’ is coffin to ISDS or muffin to the EU trade policy.

Let time be the protagonist.


Pratyush Nath Upreti recently completed Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) from Maastricht University, Netherlands.  He is also an active member of New IP Lawyer’s, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by p.upreti@student.maastrichtuniversity.nl

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.

A BIT-By-BIT Understanding of the EU’s Present & Future Investment Agreements

by Emma Spiteri-Gonzi*

Anyone with an interest in European investment and trade will undoubtedly have heard of the EU-US TTIP or, to use its full name, the Transatlantic Trade and Investment Partnership. Naturally, this makes sense as the US is the EU’s top trading partner and a trade agreement of this significance would unquestionably make headlines. The reality, however, is slightly different and the TTIP has made headlines for all the wrong reasons. One of these is the controversy generated from its investment chapter, more specifically its investor state dispute settlement provisions (ISDS). The aim of this piece is to shift focus away from this arduous debate and instead take a glance at the whole of the EU’s trade policy agenda.

Amidst the controversy of the TTIP negotiations the EU has already concluded a free trade agreement (FTA) with South Korea. The final text of the EU-Singapore FTA was also agreed upon, along with five Economic Partnership Agreements (EPAs) with Cote d’Ivoire, Cameroon, the Southern African Development Community, Ghana and the East African Community. These new generation EU investment agreements form part of an ambitious trade agenda by way of the EU’s Common Commercial Policy (CCP), Articles 206 and 207 of the Treaty on the Functioning of the European Union (TFEU), which call for the ‘harmonious development of world trade’ and ‘the progressive abolition of restrictions on foreign direct investment’. Prior to the CCP EU Member States entered into their own investment agreements with third countries. The first bilateral investment treaty was the German-Pakistan BIT, a bit ironic given the heated opposition to TTIP from that member state.  After the German-Pakistan BIT individual member states concluded around 1200 bilateral investment treaties. The Commission is now tasked with finding a consensus approach to trade agreements amongst member States.

For a moment, let’s ignore the hyperbolic headlines (e.g. ‘Trojan TTIP’) and review instead what these new generation agreements will mean for us. The Commission has said that if the EU was to complete all its current free trade talks tomorrow, it could add 2.2% to the EU’s GDP or €275 billion. This is equivalent to adding a country as big as Austria or Denmark to the EU economy. The agreements will cover goods, services, intellectual property and the procurement by government agencies of goods and services for a public function. Furthermore, these agreements will set out provisions on regulatory coordination and cooperation to facilitate trade in the covered areas, as well as establish rules to govern what qualifies as an investment and who qualifies for protection as an investor. They will contain commitments on customs duty reduction, access to services markets, and also consolidate and regulate technical barriers to trade (TBT) such as technical regulations relating to labeling or marking requirements.

The EU is also undergoing treaty negotiations with its second and third largest trading partners, China and the ASEAN [1] countries respectively. Chinese EU trade negotiations have reached their seventh round, with the eighth round scheduled to take place in Brussels at the end of November 2015. Also underway are negotiations for a FTA with JAPAN. Negotiations with Japan, the EU’s second biggest trading partner in Asia, are in their twelfth round, though as yet no agreement on an investment chapter has been reached. A Deep and Comprehensive Free Trade Agreement (DCFTA) with Morocco has entered the fourth round of negotiations. And, with recent or coming regime change in India, Burma and Argentina those countries are destined to move up the ladder on the EU’s trade negotiation agenda.

With Canada, the EU’s twelfth most important trading partner, the EU has concluded a Comprehensive Economic Trade Agreement (CETA). This agreement’s investment chapter is the investment chapter on which the TTIP’s investment chapter was modeled. Yet, the CETA managed to reach final form without attracting the scrutiny of TTIP critics. The EU has also entered into a DCFTA with Moldova and Georgia, which began to apply provisionally from September 2014. The EU-Ukraine DCFTA was completed and provisional application will begin once it has been ratified.

With the proliferation of present and pipeline new generation EU investment agreements, do critics use time wisely merely focusing on the TTIP and tarnishing ISDS? We stand to miss the forest for the trees. Europeans ought not lose focus on the end goal, the creation of favourable investment climate and the economic rewards that come with it.


[1] The EU is currently negotiating with three Association of Southeast Asian Nations (ASEAN) countries Malaysia, Vietnam and Thailand.


* Emma Spiteri Gonzi, Legal Counsel- Nemea Bank Plc.

ISDS in TPP and TTIP Negotiations – Lessons for the EU

by Prof. Loukas Mistelis, QMUL*

The Transatlantic Trade and Investment Partnership (TTIP) and, in particular, its Investor-State Dispute Settlement provisions (ISDS) have been the focal point of an intense and polarising debate within the EU. Opponents of TTIP, on the one hand, reject the very idea of a new multilateral trade and investment agreement and see this as a threat to democracy and unconditional surrender to global commercial interests, a development that fully undermines sustainable development and growth. Proponents of TTIP, on the other hand, argue that globalisation of trade is a fact and a developmental process so that the focus should now be on better treaty making; they suggest that globalisation empowers consumers and new multilateral agreements can effectively promote a social and human rights agenda.

In relation to ISDS (or what it used to be called Investment Treaty Arbitration) the attack is even more aggressive. While the negotiating parties consider whether TTIP should offer the opportunity to an investor to sue in arbitration a state signatory to the agreement (since the state is deemed – by virtue of the signature of the treaty and the relevant provisions of the treaty – to have consented to such arbitration), a number of NGOs and a good part of the press, including several well-established newspapers left-of-centre argue that ISDS is a threat to national sovereignty and a vehicle for further privatisation of justice for the benefit of few very wealthy arbitration lawyers and arbitrators. It is also suggested that ISDS cases are designed for the benefit of investors. This, however, is not corroborated by facts.

The EU itself, in its discussion of ISDS (pp. 7-8) summarised that:

  • 37% (132 cases) had been decided in favour of the State, with all claims dismissed either on jurisdictional grounds or on the merits;
  • 28% (101 cases) had been settled;
  • 25% (87 cases) were found in favour of the investor, with monetary compensation awarded;
  • 8% (29 cases) had been discontinued for reasons other than settlement or for unknown reasons;
  • 2% (7 cases) had found in favour of the investor, yet no monetary compensation had been awarded.

In other words in 73% of the cases the state prevailed or settled the cases while in only one in four cases (25%) a damages award was rendered.

In relation to EU Member States the data is even more compelling:

  • In 44% of the cases, all claims were dismissed or jurisdiction was declined;
  • In 36% of the cases, the dispute was settled or otherwise discontinued;
  • In 20% of the cases, the dispute led to an award upholding claims in part or in full.

In 80% of the cases involving an EU Member State as a respondent the state prevailed or settled the matter while only in one in five cases a damages award was rendered.

It is noteworthy that the arbitration community as well as the business community have not been particularly vocal or proactive in this debate, save for a few specialist conferences. It has also been rather impossible to bring together a wider and open public debate despite several efforts of EFILA and other organisations to engage in constructive discussions with NGOs.

In the recently published report of the US-EU TTIP Negotiations, which took place in Washington, D.C and Miami in October 2015, there is no reference to ISDS. This is particularly interesting given that the EU through Commissioner Malmstrom published on 16 September 2015 a comprehensive proposal for a permanent Investment Court System. I suspect that the EU Commission proposal was published too late to be tabled for and discussed during the October negotiations. From the EU press release one can draw the conclusion that the EU Commission is confident that it had addressed various concerns voiced by parts of the press and NGOs. It will be significant to see the reactions of Member States and the EU Parliament. See, for example, the brief report which indicates that the UK government appears to favour a traditional ISDS mechanism but also note that this is not the official UK government response.

This post does not address the merits and disadvantages of a permanent investment court but addresses the question of negotiation strategy and policy. The investment court system proposal was discussed in another EFILA Blog post on 14 October 2015. It perhaps useful to add here merely that the reaction of the USTR Ambassador Froman to the EU suggestion was lukewarm.

While the EU was authorised by the Member States in 2013 to conduct the TTIP negotiations it seems that the negotiations will take some time to conclude. The US presidential elections in 2016 will slow down the negotiations at least until mid or late 2017. A conclusion of TTIP will not be on the agenda for a few years to come.

This is in stark contrast with the conclusion of the Trans-Pacific Partnership (TPP text) which the US accelerated and recently completed. TPP has been signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US in Atlanta a few days ago. The TPP negotiations started in 2008 and it took good seven years to conclude.

The text of TPP will be scrutinised by the EU negotiators, the EU Commission and the Member States. It would suffice to say here that TPP is largely a typical US Trade and Investment Agreement with some variations from previous texts and that ISDS is included. It contains substantive protections found in many investment agreements and essentially mirrors the provisions found in the 2012 US Model BIT. As such TPP differs from the EU-Canada Comprehensive Economic Trade Agreement (CETA) and the EU-Singapore Free Trade Agreement.  For example, it grants minimum standard of treatment in accordance with customary international law. It is also reported that TPP includes a code of conduct (code of ethics for arbitrators) while at the same time more power is conferred upon arbitrators to dismiss summarily frivolous claims. There is also an exclusion for tobacco companies from using ISDS, further enhancing and strengthening the regulatory space of states.

The key conclusion to draw from the ISDS provisions in TPP is undoubtedly a strong and unequivocal endorsement of the current practice of private arbitration of investment disputes (traditional ISDS) where the focus has moved to substantive protection rules rather than arbitration as a method. In this respect TPP dispelled ISDS myths and focused on facts.

In light of the recently concluded TPP it is tactically unhelpful that the EU has published an alternative ISDS Model at this stage of negotiations. One could easily argue that the TPP model for ISDS is “state of art”, widely accepted by a number of developed economies such as Canada, the US, Australia, Japan and Singapore (in fact 40% of the world’s GDP) and that the EU should also operate in a similar system, increasing multilateralism rather than introducing further fragmentation of international investment law. It is also expected that both the EU and the US take a central role in promoting free trade and investment promotion and protection and it would be awkward, to say the least, to have different standards of investment promotion and protection depending on who the counterpart is. The introduction of “formal” discrimination could have negative impact of the global role of the EU as a preferred trading partner of developing countries.

Tactically a very early announcement of the EU basis of negotiation on ISDS in TTIP looks very much like a game theory faux pas. Or it may well be a very shrewd tactic. Any draft which is proposed to merely satisfy domestic or regional needed of the proposing side can be used by the other side to the proposing side’s detriment if the need for a quid pro quo settlement arises. Alternatively it may a tactic to silence the opponents of ISDS by proposing something that can easily be rejected so that both sides would, for example, be satisfied with a permanent investment appellate body while retaining private arbitration at first instance. In such a case the EU could argue that they fought hard for a permanent two-instance investment court and the permanent appellate body is a great success.

Rejecting private arbitration while the statistics are clear that most cases are in favour of states rather than investors and while it is also widely accepted that we should not be depriving investors the access to arbitration (or ISDS) seems to parochial rather than modern and protectionist rather than liberal. The attention should move to improving ISDS and private arbitration by drafting clearer treaties, better procedural rules and enforceable codes of conduct. Polarising the debate does not allow space for regulatory nuances nor does it help to create a convergent if not harmonised investment protection and promotion regime.


* Prof. Loukas Mistelis, Clive M. Schmitthoff Professor of Transnational Commercial Law and Arbitration, Queen Mary University of London, School of Law.

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.