Emerging EU Perspectives on Investor-State Dispute Settlement

EU Centre for Global Affairs

Investor-State dispute settlement (ISDS) is a mechanism that allows nationals of a party to a preferential trade and investment agreement (PTA) to take legal action against the counterparty host state for breaches of that agreement. While the modern construct of ISDS originated in the first bilateral investment treaty, between West Germany and Pakistan in 1959, the mechanism of arbitration between individuals and states emanated out of the Jay Treaty of 1794, an agreement between the transatlantic states of United States and the United Kingdom to settle claims for property damage or seizure throughout the Revolutionary War. As such, both the US and EU member states have a rich history of creatively modernising dispute settlement mechanisms.

While the proposed benefits of the current Transatlantic Trade and Investment Partnership (TTIP) include trade and financial security, the issue of investment protection and ISDS (in particular) has become the main bone of contention in the increasingly heated debate surrounding the TTIP. One unique aspect is the EU’s innovative proposal to establish a permanently constituted tribunal and appellate body that appears to operate similarly to the WTO’s dispute settlement process. The EU’s proposed investment chapter also incorporates a mechanism to establish a multilateral investment tribunal and appellate mechanism.

Will a bilateral ISDS appellate body provide an adequate stepping-stone for a multilateralised system that coherently integrates the current network of over 3,000 investment treaties? Further, will this system abate any fragmentation and conflict of legal norms between trade and investment regimes that result from overlapping disputes?

The proposed mechanism does not have an equivalent in any investment treaty designed so far, on either side of the Atlantic. Alongside this new dispute resolution mechanism, the European Commission has worked on changes that enhance ‘existing EU reforms which have already been included in the EU’s free trade agreements with Canada (CETA) and Singapore – including ethical requirements and disclosure obligations’. The analysis that follows will look first at the international investment court and then at other proposed EU reforms in this context.

To remedy the drawbacks of the current system of investment arbitration, many proposals have been put forward and others have toyed with the creation of a permanent investment court. Such a court was for instance envisaged in the ‘Model bilateral investment treaty with investor-state dispute settlement for industrial countries, giving consideration to the U.S.’ of the German Federal Ministry for Economic Affairs and Energy (hereinafter German proposal). A hybrid institution called a ‘court’ but which in fact resembles more an arbitral tribunal was suggested by France (hereinafter French proposal). An international investment court was also considered as a reform option by UNCTAD in its 2015 World Investment Report.

The investment court is established in Articles 9 and 10 of section 3 of the draft TTIP text. The first of these provisions introduces the Tribunal of First Instance (Tribunal), which will be composed of 15 appointed Judges, five of whom shall be EU member state nationals, five US nationals and five nationals of third countries.

But the European Commission’s proposal goes beyond the establishment of a Tribunal of first instance and introduces further a permanent appeals court, the ‘Appeal Tribunal’. The creation of an appellate mechanism has been previously envisaged, very probably as a remedy to the ICSID Convention’s limited grounds for annulment, although of course in the context of investment arbitration.

The European Commission’s proposal for an international investment court has been finalized and transmitted to the United States. The press release and finalised text are available here.

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