In response to the complaints against the Investor-State Dispute Settlement System, the negotiators to the proposed EU-U.S. Transatlantic Trade and Investment Partnership (TTIP) have developed an alternative means of investment dispute resolution: the Investment Court System. the idea of an ICS is present in other investment treaties, such as the Comprehensive Economic and Trade Agreement (CETA) with Canada.
As the Trade Commissioner Cecilia Malmström sais on her Press Release1 about the system, “Today marks the end of a long internal process in the EU to develop a modern approach on investment protection and dispute resolution. This approach will allow the EU to take a global role on the path of reform, to create an international court based on public trust.”
This paper aims to analyse both systems, first by going through their meaning and procedures, and then by assessing an examination of the likelihood of the change from one system to the other by carrying out an explanation of both their strengths and flaws in order to reach a conclusion.
FROM THE INVESTOR-STATE DISPUTE SETTLEMENT …
Investor-State Dispute Settlement (ISDS) is a mechanism included in many international investment and trade agreements to ensure that pacts that countries have made to each other so that they can preserve and respect reciprocal investments. That being, investor disputes that in order to be solved, they rely on arbitration rather than domestic public courts.
In these agreements, States have come to terms with various limited rules, called “investment protection standards”, on how to treat foreign investors established in their country. For instance, those clauses could be “not to discriminate but to provide fair treatment”, “to compensate in case of expropriation”, or “to allow the investor to transfer funds freely”. If an investor considers that these primal and fundamental rules have been violated because the new laws or regulations affect negatively its expected gains or its possible investment, with the investment agreements they are provided with the possibility to take legal actions before specialised investment tribunals set up under international rules on arbitration. The Investor-to –State Dispute Settlement is one of them.
International enforcement mechanisms, whose intention is to provide a neutral forum to solve those disputes that arise, are a normal feature of most international agreements. Nevertheless, it is important to point out that these international agreements, as they are based on international law, most often do not form part of the domestic legal system and as a result, they cannot be invoked before domestic courts.
ISDS was originated in the 1960s to shield former colonizers’ property assets from newly independent states. Back then, companies claimed that ISDS was necessary given the fact that the rule of law was lacking in overseas territories, usually former colonies, so they wanted protection against expropriation for goals considered to be in the public interest.
Its procedure is the following: first, the accusing investor and the defendant state, the two parties to the dispute, appoint an arbitrator each, and then both agree on a third one. The three arbitrators meet in an international arbitration tribunal specified in the treaty to conduct hearings. Most cases take place at a tribunal operating under the rules of the United Nations Centre for International Trade Related Arbitration Law, also known as UNCITRAL, or at the International Court for the Settlement of Investment Disputes, called ICSID, at the World Bank.
Regarding those legitimised to begin the process, this system only provides for foreign investing companies to sue States. In other words, neither a State, nor a citizen, nor a domestic investor can initiate an ISDS dispute. In fact, if an investor’s actions fail to respect laws, they can only try to settle the disagreement in a domestic court.
Facts and figures3
UNCTAD data reveals that, until end 2014, there has been a total amount of 608 known ISDS claims, of which 356 cases are concluded. Here, it is important to point out that investors from the EU Member State are the largest users of ISDS, having almost all EU Member States raised issues. As a matter of fact, cases brought by investors from the European Union sum 327, thus accounting for more than 50 % of the cases initiated.
Yet, EU Member States have been challenged most frequently by EU based investors, hence, they have rarely been challenged by investors from outside the EU. In total there have been 29 cases which represent less than 5% of all ISDS cases.
… TO THE INVESTMENT COURT SYSTEM
On the other hand, the Investment Court System (ICS) is a proposal from the European Commission that aims to provide citizen with a process that ensures that investment disputes will be adjudicated in full accordance with the rule of law given the lack of trust in the fairness and impartiality of the old ISDS model.
With the ICS, foreign investors are given the right to challenge EU or Member States acts contrary to the investment treaty provisions. In this regard, the ICS Tribunal might declare an EU measure in conflict with the investment treaty provisions and, in doing so, interpret EU law4.
As the Trade Commissioner, Cecilia Malmström, announced in her press release5, that level of trust that the ISDS model lacks can be built if a transparent and public system is established, just like the domestic courts or the international courts which Europe has so actively promoted since their creation. In this perspective, by introducing this system, major changes will come along. In particular, those would be aspects such as the creation of a permanent Tribunal and the possibility of appealing, fixing the judges fees or making the procedure and the awards public.
Likewise the World Trade Organization’s dispute settlement procedure, the design creates a process of resolution by which parties advance through a series of formalized proceedings. ICS establishes a permanent judicial structure composed of two courts: a Tribunal of First Instance and an Appellate Tribunal.
To begin the procedure, first of all parties must “as far as possible” work in an “amicable resolution” through negotiations or mediation. If an amicable resolution cannot be made, claimants can then “submit a request for consultations” to the respondent. If after six months the misunderstanding remains unsettled, the claimant may then formally proceed to submit the claim to the Tribunal of First Instance.
This Tribunal is designed to work as a permanent TTIP Centric Investment Court, composed of fifteen judges, appointed by a Committee, for a maximum of six-year terms and paid a monthly fee plus a set wage for each day worked. Five of the Tribunal judges must be Americans, five must be Europeans, and five must be from third countries, and in order to become one of those judges, they must “either possess the qualifications required in their respective countries for appointment to judicial office, or be jurists of recognised competence.” The Tribunal will hear cases “in divisions consisting of three Judges”, designated by the President of the Tribunal, one each from the United States, the EU, and a third country. Thus, as in domestic or international tribunals, the disputing parties would not choose their judges, an aleatory system would make the judges stay away from any kind of interference from the parties. Here, it is important to mention that there exists a prohibition to judges also act as legal counsel in the cases.
The Tribunal will apply exclusively to the international provisions. Therefore, where the Tribunal would be required to ascertain the meaning of a provision of a domestic law of a Party, it would have to follow the interpretation made by that Party’s domestic courts. Nevertheless, the meaning given to domestic law by the Tribunal would not be binding on domestic courts so that the autonomy of the EU legal order is fully preserved.
Within 90 days of the final awards, appeal procedures can be initiated and the dispute can be raised to the Appellate Tribunal. The Administrative Structure created to manage the whole system would appoint the members of the appellate tribunal7.
1 Ideas extracted from Section 1 of the Investor-to-State Dispute Settlement (ISDS) Some facts and figures Paper from the European Commission, 2015, in: http://trade.ec.europa.eu/doclib/docs/2015/january/tradoc_153046.pdf
2 Ideas extracted from the Frequently Asked Questions on ISDS in: https://isds.bilaterals.org/?-the-basics-&lang=en
3 Ideas extracted from Section 4 of the Investor-to-State Dispute Settlement (ISDS) Some facts and figures Paper from the European Commission, 2015, in: http://trade.ec.europa.eu/doclib/docs/2015/january/tradoc_153046.pdf
And from the Recent Trends in IIAS and ISDS from the UNCTAD, 2015, in: http://unctad.org/en/PublicationsLibrary/webdiaepcb2015d1_en.pdf
(be careful, number 8 is the same footnote as the third link in the 7th footnote)