The EU’s Proposal for an Investment Court System: The ABA Investment Treaty Working Group Weighs In

By Preeti Bhagnani and Jade Harry, Associates at White & Case, New York

On October 14, 2016, the American Bar Association (”ABA”) Investment Treaty Working Group published a draft Discussion Paper on the EU’s proposal for a permanent Investment Court System (“ICS” or “Investment Court”) to replace ad hoc investor-state dispute settlement (“ISDS”).  The ICS forms part of the EU’s proposal for the Transpacific Trade and Investment Partnership (“TTIP”) currently under negotiation between the EU and the USA and is part of the EU-Canada Comprehensive Economic and Trade Agreement (“CETA”) and the EU-Vietnam Free Trade Agreement (“EU-Vietnam FTA”).
The objective of the Working Group is not to take a position on the debate over the criticisms or merits of the ISDS system but to contribute to the discussion and understanding about the ICS and the investment treaty system.  To this end, the Discussion Paper considers whether the ICS achieves the EU’s policy objectives of creating a “neutral, effective, legally predictable and coherent investment dispute settlement system” and identifies certain areas where the EU’s proposal could be enhanced to achieve these stated objectives.  This post highlights certain observations and recommendations identified in the Discussion Paper.

Concerns about Independence and Impartiality: A major objective of the EU’s proposal was to address concerns regarding arbitrator conflicts of interest under the ISDS system.  The Investment Court rules remove a majority of conflicts of interest that arbitrators under the current ISDS system may have (e.g., to secure re-appointment and to make decisions favorable to the clients that they continue to represent as counsel in other disputes).  To this end, the European Commission Draft Text of the TTIP (“TTIP Draft Text”) is clear that judicial candidates for the Tribunal of First Instance (“TFI”) and the Appellate Tribunal cannot be “affiliated with the government.”  However, the TTIP Draft Text also notes that government officials or persons who receive income from the government are not necessarily “affiliated with the government.”  In practice, the fact that the treaty parties exclusively appoint judges, renew their terms and pay their salaries raises concerns that judges may be perceived as “pro-State.”  The Discussion Paper urges drafters to modify the proposed approach of permitting re-appointment of judges and provide instead that judges will be appointed for non-renewable terms.

Uncertainty over Appeal Tribunal’s Powers: For appeals to the Appellate Tribunal, the TTIP Draft Text adopts the grounds for annulment of awards in the ICSID Convention, as well as two additional grounds: error of law and manifest errors of fact.  The “manifest error” language standard raises questions about the establishment of a predictable standard of review as it is not clear whether the Appellate Tribunal would perform a de novo review or be limited to confirming a reasonable appreciation of the facts by the TFI.  There is also uncertainty over the power of the Appellate Tribunal to make its own findings of fact or to remand the case to the TFI to make any necessary factual determinations.  The Discussion Paper recommends that the Appellate Tribunal be granted explicit authority to remand a case to the original panel or to a new panel of the TFI.

Uncertainty over Applicable Procedural Rules: Another area of concern is the lack of clarity over the procedural rules that would govern claims before the Investment Court.  The TTIP Draft Text (Section 3, Article 6) appears to allow the Committee, the Tribunal of First Instance, or the Appeal Tribunal to modify the rules under which a claim is submitted to the Investment Court.  Specifically, the TTIP Draft Text states that “[t]he rules on dispute settlement . . . shall apply to the rules set out in this Chapter, as supplemented by any rules adopted by the [ … ] Committee, by the Tribunal or by the Appeal Tribunal.”  If such modifications would be applicable to pending claims, this raises significant fairness and due process concerns.

Enforceability of Awards: A key goal of the EU proposal is to produce awards that can be enforced under the New York Convention or the ICSID Convention.  While Investment Court awards will likely be enforceable in the territory of the member states that signed the treaty under which the dispute was considered, there are serious doubts about whether they would be enforceable in third party states under the New York Convention or the ICSID Convention because arguably they would be judicial decisions and not arbitral awards.  Given the importance of enforcement to the overall success of the Investment Court, the Discussion Paper recommends that the state parties to a treaty establishing the Investment Court unequivocally clarify the status of the Investment Court; specifically, whether it is a “court” rendering judicial decisions or an arbitral body rendering arbitral awards.  Treaty parties may also wish to clarify the basis on which Investment Court awards may be enforced as ICSID awards despite having been rendered by a process different from that contemplated under the ICSID Convention.

Challenges of Multilateralization: The EU’s proposal envisions the eventual creation of a permanent multilateral investment court.  It appears that efforts in this direction are being pursued in parallel with the establishment of the bilateral courts envisaged under CETA, the EU-Vietnam FTA and any other FTAs that the EU may conclude, although this initiative remains in its nascent stages.  Both the CETA and the EU-Vietnam FTA include provisions anticipating a transition from the bilateral system included in the FTA to a permanent Multilateral Investment Court.  The Discussion Paper notes that preparatory work for a multilateral court could be undertaken with, e.g., the joint support of the OECD and UNCTAD (organizations with a track record of programs in investor protection and ISDS form).  Key challenges include designing an appointments process that is not dominated by certain states and developing transitional arrangements pending the complete transfer of jurisdiction from the various bilateral Investment Courts to a multilateral institution.

Judicial Diversity: The EU proposal does not explicitly require the EU to consider equitable geographical representation, a fair representation of female and male judges, or other factors to improve diversity in its selection of judges.  The Discussion Paper notes that the absence of such a requirement in the EU proposal is something of a missed opportunity to guarantee diversity in the composition of the Investment Court.

The Discussion Paper concludes that the ICS dispute resolution procedures appear inchoate in several respects and that further consideration and elucidation of the procedures is required if the EU’s aspiration of replacing ISDS with a “neutral, effective, legally predictable and coherent investment dispute settlement system” is to be achieved.

*The opinions expressed in this blog post are those of the authors and are not necessarily those of White & Case LLP.