The EU’s Investment Court System. A possible solution to conflicts of interest in Investment Arbitration.

Elisabeth Talbourdet – King’s College London Dickson Poon School of Law Alumnus (‘16)

The future of the Transatlantic Trade & Investment Partnership (TTIP) is uncertain at best. Although it may never come to an existence, one of the most important novelties introduced by the TTIP, and which seems destined to stay, is its new Investor-State dispute resolution mechanism, the ‘Investment Court System’ (ICS). Indeed, even if not included in the TTIP, the idea of an ICS is present in other investment treaties, such as the Comprehensive Economic and Trade Agreement (CETA) with Canada.[1]

The purpose of the ICS is to discontinue the tradition of using arbitral tribunals to solve Investor-State disputes, the so-called Investor-State Dispute Settlement (ISDS) system. The ISDS system is in place in most bilateral and multilateral treaties and is a substantial protection measure for foreign investors. Indeed, it allows them to bring the host State of their investment before an arbitral tribunal if they consider that their rights under the investment treaty have been violated. This, with the aim of ensuring that their disputes will be solved by a neutral forum (as opposed to domestic courts, seen as biased in principle).[2]

However, the ISDS system is often considered overly favourable to foreign investors to the detriment of States’ interests. In fact, it allows investors to challenge States’ regulations and policies before a ‘private’ court rather than before the domestic systems of dispute resolution.[3] Hence, according to its critics, the ISDS system constitutes a privileged route of redress for private investors barred to the host States’ nationals and with the potential of curtailing the host States’ right to regulate.

On the basis of the concern that eliminating ISDS altogether may have a deterrent effect on foreign investors, in so serving the opposite purpose of a trade and investments agreement[4], the Commission’s ICS aims at reconciling investors’ protection with the State’s right to defend its own interests.[5] This, by creating a ‘hybrid’ system, in the form of a public Court working on the basis of arbitration rules,[6] which moves away from a private-oriented dispute resolution mechanism towards a more ‘State-like’ public system of justice.[7]

The Commission’s ICS is not the first attempt to reconcile public and private interests in Investor-State disputes, although it probably is the one that diverges the most from the traditional ISDS system. For instance, the Iran-US Claims Tribunal established under the “Algiers Declaration”, [8] does not allow investors to nominate the “members of the tribunal” presiding the dispute,[9]despite its procedure still relying on UNCITRAL arbitration rules.[10]

By taking on the challenge of reforming the arbitral system used in its trade and investment agreements, the European Union’s proposal has been under close scrutiny. The same notion that the new Investment Court System constitutes a clear departure from ISDS has been challenged by commentators on a number of grounds.[11]

For the purposes of this post, it is relevant to note that the ICS replaces one of the key features of investment arbitration, that is, the investors’ autonomy to concur in the appointment of the arbitrators (or ‘judges’ to use the wording of the Commission’s proposal)[12] who will hear their dispute. According to the Commission’s proposal in the TTIP negotiations, it would be for the contracting parties (the US and the EU) to do so. However, the question remains, and will be analysed hereinafter, of whether this procedure is merely a continuation of the ISDS system and whether it tackles the issues arising from the private parties’ autonomy to concur in the appointment of the arbitrators.

To this aim, I will therefore look at (1) the issues raised by the principle of the parties’ autonomy in the traditional ISDS; and (2) how the ICS intends to solve them. I will then conclude that, by refuting the parties’ right to appoint some of the arbitrators who will hear their dispute, the Commission does in fact dismiss one of the essential features of arbitration as a mean to solve international investment disputes. However, it will be seen that the new appointment procedure still leaves a number of issues unresolved.

  1. The alleged lack of independence and impartiality of arbitrators in ISDS

The most notable criticism made by anti-ISDS advocates is the alleged lack of independence and impartiality of arbitrators.[13] This issue is rooted in the fact that claimants/investors directly concur in appointing the arbitration panels that will hear their dispute.

This creates a number of drawbacks. First of all, and intuitively, the parties to the dispute will tend to appoint the aribtrators whom they believe to be the most likely to rule in their favour.[14] A more specific issue, which has been under the highest level of attention[15], is the so called ‘double hat’ one, where an individual acts as a counsel in an international investment case and then seats as an arbitrator on another case concerning a similar issue. The problem in this case being that, when acting as an arbitrator, the appointed member of the panel may try to direct the solution of the case towards a resolution which will later be favourable as he/she acts as counsel in another case dealing with a similar issue.

Both in the United-States and in the European Union, political figures and NGOs have criticised this feature of international arbitration. For instance, US Senator Elizabeth Warren argued that ISDS in the Trans-Pacific Partnership would create situations where a “highly paid corporate lawyer would go back and forth between representing corporations one day and sitting in judgment the next”.[16] Although this is a partisan conception of the ‘double-hat’ issue, the notion that investment arbitration is a system regulated by its own actors has been widely spread within civil society and has shed a negative light on ISDS.[17]

The arbitral community has attempted to solve the issue of independence of arbitrators throughout the adoption of a number of procedural measures.

For instance, several sets of rules on arbitral proceedings have been elaborated by the international arbitration community, the most prominent being the IBA Guidelines on Conflicts of Interest (reviewed in 2014).[18] However these guidelines, although widely recognised and supported by the arbitration community, are not legally binding and do not provide any enforcement mechanism. Thus, they can only be applied as “soft law” and lack efficacy.[19]

Also, a number of procedural safeguards exist to challenge procedures where an arbitrator is suspected of bias.[20] For instance, the domestic law of the arbitral tribunal’s seat can be used as a mean to contravene an award rendered by a partial arbitrator. Indeed, it can be referred to as a ground to annul or to refuse the enforcement of the award, due to the arbitrator’s lack of impartiality.[21] However, this safeguard is not useful as it intervenes too late and forces the parties to go through the arbitral procedure with a conflicted arbitrator before hoping to have the sentence annulled by a domestic tribunal.

  1. The appointment of pre-selected judges in the Investment Court System

In an attempt to tackle the issue of arbitrators’ appointment, the European Union, in sub-section 4 of the ICS proposal, the Commission made the ground-breaking suggestion that arbitrators should be selected from a list set out by the European Union and the United States within judges having tenure in office.

As a stepping-stone, the text refers to ‘judges’ to press the notion that they would not fall under the same qualification and criteria as arbitrators in ISDS.

Article 9 paragraph 2 of the TTIP’s Investment Chapter then states that a Committee would appoint fifteen Judges to the Tribunal, and thus completely deviate from the principle of parties’ autonomy. Under this new Court, three judges chosen from a list set out by the European Union and the United States would rule over the case. Furthermore, Article 9 paragraph 7 of the TTIP’s Investment Chapter states that “the composition of the divisions is random and unpredictable”,[22] to ensure that the parties to the dispute will have absolutely no control over the procedure. Additionally, in order to tackle the “double hat” issue, the proposal for the Investment Court System imposes strict selection criteria such as possessing the “qualifications required in their respective countries for appointment to judicial office or be jurist of recognized competence”.[23]

The European Union’s proposal has also put in place another significant safeguard to protect the tribunal’s impartiality, in the form of a Code of Conduct, binding upon the Court. When implementing these ethical guidelines, the Investment Court System is merely reaffirming the requirements of fairness, diligence and impartiality on the judges that have been used as the standards of conduct in ISDS. The novelty lies however in the binding nature of these obligations, which are transformed from soft law to enforceable measures. Indeed, Members of the Tribunal are bound by the Code of Conduct provided for in Annex II.[24]

These new rules on the selection of the Court’s judges seem to effectively deprive the claimant investor of the power of influencing the selection of the judges seating on the Court and tackle the double hat issue.

However, the qualification criteria suggested by the Commission can be criticised, as former judges from the United States and EU Member States’ domestic legal system may not have the necessary expertise in international investment law to consider the questions of law that will arise under multilateral international investment agreements.

Also, even if the ‘judges’ are seating randomly in each case, they would still have been chosen either by the EU or by the US when creating the list of pre-appointed judges. Hence, the alleged “pro-investor” bias of ISDS arbitral tribunal could then turn, or be understood as turning, into a “pro-State” bias under the Investment Court System. In so still failing to provide a neutral forum for the resolution of conflicts in international investment law.[25]

  1. Abandoning the principle of parties’ autonomy and the ISDS system altogether

In conclusion, the rules on the appointment of judges in the ICS seem to constitute a considerable step towards the establishment of an international investment Court. Indeed, private parties’ autonomy to appoint arbitrators was traditionally a keystone of the arbitral procedure. Therefore, this new process of selection does constitute a crucial difference from the current ISDS system.

The question remains open of whether curtailing tout court the investors’ ability to appoint the arbitration panel was necessary or whether more nuanced measures would have been sufficient. Another issue to keep into account is whether, in the end, such measure may anyways put into question the ability of the ICS to provide a neutral forum. In fact, it arguably creates a risk that the ICS could be perceived as a pro-State dispute resolution mechanism, with the mentioned possible consequence of hindering the flows of investments to and from the EU.

A definitive response to these considerations is not straight-forward. It seems to who is writing that, although more stringent impartiality requirements – such as a binding Code of Conduct – were necessary to correct the weaknesses of ISDS, the European Union’s proposal for a “Court-like” dispute resolution mechanism constitutes more a response to the political pressure of anti-ISDS advocates.[26]

The irony is, as Sophie Nappert highlights,[27] that article 5 of the Code of Conduct requires that judges must not be influenced by “outside pressure, political consideration, public clamour, or fear of criticism”.[28]

 

[1] European Parliament Briefing, “EU-Canada Comprehensive Economic Trade Agreement, (January 2016)

[2]Alvarez, Gloria Maria; Blasikiewicz Blazej; van Hoolwerff Tabe; Koutouzi Keoplatra; Lavranos Nikos; Mitsi Mary; Spiteri-Gonzi Emm; Verdegay Mena; Adrian & Willinski Piotr. ‘A Response to the Criticism against ISDS by EFILA’. Journal of International Arbitration 33, no. 1, (2016), p. 28

[3]Ibid, p.22

[4]Ibid, pp. 34-35

[5]The impact of investment agreements on foreign direct investment is much discussed. Among the studies that seem to confirm the existence of a link between the conclusion of investment agreements and investment flows, see Investment Treaty Working Group of the International Arbitration Committee, American Bar Association Section on International Law, “Investment Treaty Working Group: Task Force Report on the Investment Court System Proposal”, (October 14, 2016), p.17

[6]Article 18 §1 of the European Commission Proposal, “Investment: Transatlantic Trade and Investment Partnership: Trade in Services, Investments and E-Commerce” made public November 12, 2015

[7] Céline Levesque, “The European Union Commission Proposal for the Creation of an “Investment Court System-The Q and A that the Commission Won’t Be Issuing”, Kluwer Arbitration Blog, (April 6, 2016) p.4

[8] The tribunal was established under the “Algiers Declaration” where both the United States and Iran committed to solve the political crisis they were facing at that time (1981). [Include a proper reference to the treaty]

[9] The nine members of the tribunal were nominated by the respective governments: three by Iran three by the United States, and three other members nominated by the six government appointed members. See: https://www.iusct.net/Pages/Public/A-About.aspx

[10] Céline Levesque, “The European Union Commission Proposal for the Creation of an “Investment Court System-The Q and A that the Commission Won’t Be Issuing”, Kluwer Arbitration Blog, (April 6, 2016) p. 3

[11]Maria Beatrice Deli & Maria Laura Marceddu, “Is the European Commission Issuing a Dismissal Letter to Arbitrators”, Kluwer Arbitration Blog, (October 19, 2015), pp. 4-5

[12] Article 9, §2 of the European Commission Proposal, “Investment: Transatlantic Trade and Investment Partnership: Trade in Services, Investments and E-Commerce” made public November 12, 2015

[13] Luis Miguel Velarde Saffer and Amir Ardelan Farhadi, “ISDS In The TPP: Is The Recent Uproar In The US Merited? – Part I”, (November 4, 2016) p. 3

[14]Investment Treaty Working Group of the International Arbitration Committee, American Bar Association Section on International Law, “Investment Treaty Working Group: Task Force Report on the Investment Court System Proposal”, (October 14, 2016), pp. 53-56

[15]Cass Civ 1ère, 16 décembre 2015, pourvoi n°14-26.279; Cour d’Appel de Paris, 09 septembre 2010, n°09/16182- Affaire dite « Consorts Allaire »

[16] Senator Elizabeth Warren, “The Trans-Pacific Partnership clause everyone should oppose”, Opinions in The Washington Post (February 25, 2015).

[17] Luis Miguel Velarde Saffer and Amir ArdelanFarhadi, “ISDS In The TPP: Is The Recent Uproar In The US Merited? – Part I”, (November 4, 2016) p. 3

[18] IBA Guidelines on Conflict of Interest in International Arbitration adopted by resolution of the IBA Council on Thursday 23 October 2014, International Bar Association.

[19]M. De Boisséson, “La « Soft Law » dans l’arbitrage”, Les Cahiers de l’Arbitrage, 2014, Vol. 3, p. 520.

[20] Alvarez, Gloria Maria; BlasikiewiczBlazej; van HoolwerffTabe; KoutouziKeoplatra; Lavranos Nikos; Mitsi Mary; Spiteri-GonziEmm; Verdegay Mena; Adrian &Willinski Piotr. ‘A Response to the Criticism against ISDS by EFILA’. Journal of International Arbitration 33, no. 1, (2016), p. 15-17

[21] Popular locations for seats such as Stockholm or Paris are subject to domestic laws which uphold the necessity for arbitrators to fully disclose any information that may affect their independence or impartiality (Article 1456 al 2. of the French Civil Procedure Code)

[22] Article 9, §7 of the European Commission Proposal, “Investment: Transatlantic Trade and Investment Partnership: Trade in Services, Investments and E-Commerce” made public November 12, 2015

[23] Article 9, §4 of the European Commission Proposal, “Investment: Transatlantic Trade and Investment Partnership: Trade in Services, Investments and E-Commerce” made public November 12, 2015

[24]Maria Beatrice Deli & Maria Laura Marceddu, “Is the European Commission Issuing a Dismissal Letter to Arbitrators”, Kluwer Arbitration Blog, (October 19, 2015), pp. 4-5

[25] Alvarez, Gloria Maria; BlasikiewiczBlazej; van HoolwerffTabe; KoutouziKeoplatra; Lavranos Nikos; Mitsi Mary; Spiteri-GonziEmm; Verdegay Mena; Adrian &Willinski Piotr. ‘A Response to the Criticism against ISDS by EFILA’. Journal of International Arbitration 33, no. 1, (2016), pp. 35-

[26]Annex II, Code of Conduct, Article 5 of the European Commission Proposal, “Investment: Transatlantic Trade and Investment Partnership: Trade in Services, Investments and E-Commerce” made public November 12, 2015

[27] Sophie Nappert, “Escaping From Freedom? The Dilemma of an Improved ISDS Mechanism”, The 2015 EFILA Inaugural Lecture -Transcript, (November 26, 2015)

[28]Ibid, p.11

 

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