A new dawn

Could the creation of a permanent investment court be a new dawn for Investor State Dispute Settlement?

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A NEW DAWN – Could the creation of a permanent investment court be a new dawn for Investor State Dispute Settlement?

19/01/2023

Balancing the interests of investors with the regulatory freedom of sovereign States is no easy task and the current system of Investor State Dispute Settlement (ISDS) is facing pressure to change. One proposal for reform is the creation of a permanent investment court to adjudicate claims instead of referring them to arbitration. The proposal has been greeted with scepticism from arbitration practitioners but is this misplaced? Could the creation of a permanent investment court be a new dawn for ISDS?

The EU’s Proposal for a Multilateral Investment Court

The legal, political and commercial significance of international investment law cannot be overstated.  Instruments of public international law govern foreign direct investment and the resolution of disputes between foreign investors and sovereign States.

Until now, the creation of a permanent investment court has been a theoretical prospect, seemingly with little chance of being realised. However, that is shifting. Under sustained lobbying from a coalition of academics, trade unions and NGOs, who have (in the face of facts to the contrary) successfully presented the investment arbitration system as being biased towards global corporations, the EU has been at the forefront of the drive to reform ISDS.

The legal, political and commercial significance of international investment law cannot be overstated

In parallel with the termination of intra-EU investment treaties, it has proposed the setting up of a multilateral investment court (MIC). Composed of a first instance court and an appeal body, the MIC would adjudicate claims brought under investment treaties that Member States have decided to assign to its authority. The EU-Canada Comprehensive Economic Trade Agreement and the EU-Vietnam Free Trade Agreement refer to the establishment of a MIC and the EU now includes similar provisions in all its negotiations involving investment.

Drivers for reform

There are three main criticisms of the current system of ISDS through arbitration:

  • Conflicts of interest of arbitrators;
  • Inconsistency in the case law; and
  • The cost and duration of investment arbitration.

These criticisms are controversial, with many practitioners highly sceptical about the extent to which they really represent problems to be addressed. That said, ISDS is an expensive process (studies[1] show that investors spend an average of US$6.4m on a case and a respondent State spends US$4.7m).

Whether or not the criticisms have merit, the MIC suggested by the EU would:

  • Replace arbitrators chosen by the parties with tenured adjudicators chosen and remunerated on a permanent basis by the Member States and assisted by a dedicated secretariat. Adjudicators would be obliged to adhere to a strict code of conduct.
  • Introduce a two-tier system comprising a first instance tribunal and an appeal tribunal. Both tribunals would work transparently, and the introduction of an appellate body would eliminate inconsistency and facilitate the evolution of a binding body of case law.
  • Define simplified rules of operation for less complex cases and introducing expedited procedures. Limiting the length of proceedings, both at first instance and appellate level, with extensions only permitted in exceptional cases.

If the court is to be funded by external investors, how will the integrity of the court system be maintained against the power of the purse?

The challenges of a MIC

Critics have argued that ISDS through arbitration was designed to de-politicise investment disputes and the creation of a permanent investment court, where Member States control the appointment of the judges, gives States too much control over the composition of the court and risks re-politicising the process.

Another major challenge is money. The creation of a permanent court staffed by full time judges and a secretariat will require financing. Is it realistic to expect the parties to bear the full cost of the fees of a MIC and, if so, will this make the process any cheaper than investment arbitration? If the court is to be funded by external investors, how will the integrity of the court system be maintained against the power of the purse?

The benefits of a MIC

States who might view the MIC as a more sympathetic forum should be careful what they wish for. The creation of a MIC could offer very real benefits to investors, particularly to small and medium sized enterprises, which currently find it very hard to make use of investment arbitration on account of the high cost and lengthy timelines in these cases. Most foreign investors, who feel their investments have been mistreated by public authorities in the host state, never bring an arbitration under an investment treaty.

The creation of a coherent court structure offers the opportunity to re-define the process. A permanent court would allow judges to limit the length of proceedings. The introduction of simplified procedures for less complex claims could make proceedings quicker and cheaper. A two-tier court system, with an appellate tribunal creating a system of precedent, could improve consistency of decision-making and predictability of outcome.

If the EU’s MIC is set up in good faith, and in particular if its judges are of a high quality, the EU’s reforms could lead to more, not fewer, cases being brought against EU Member States.

CONCLUSION

Academics, trade unions and NGOs have successfully encouraged the EU to unwind the investment arbitration system in Europe. But there is a chance that the reforms will end up favouring a new population of claimants, aggrieved at perceived mistreatment of their investments at the hands of public authorities and agencies.


[1] BIICL and Allen & Overy 2021 Empirical Study: Costs, Damages and Duration in Investor-State Arbitration

MEET THE AUTHORS

1 Article

George Burn

Partner and Co-Leader, International Arbitration, London
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Victoria Clark

Knowledge Counsel, London