Progress towards a Multilateral Investment Court? EU-momentum building and divisions in UNCITRAL Working Group III

In the past few years, discontent about Investor-State Dispute Settlement (ISDS, a recognised shorthand for ad hoc arbitration of investor-state disputes) has been fomenting in various parts of the world but nowhere more so than within the EU. The European Commission’s focus on ISDS has been so intense that far-reaching reform has been portrayed by many as inevitable. The Commission’s proposal is for the development of a multilateral investment court system (MIC). The proposal is ambitious, but may not be realistic or achievable. Last year, the ISDS debate moved into the auspices of UNCITRAL Working Group III (WGIII). It is recognised in the report of the 35th session of WGIII[1] that this “constitute[s] a unique opportunity to make meaningful reforms in the field”. Certainly the involvement of high level government representatives from across the world and the transparent nature of WGIII’s process suggest this forum provides the conditions for systemic reform. However, the features of the WG III process expose the Commission’s plans to global scrutiny at a relatively early stage in their development, potentially before the Commission has managed to gain significant support for wholesale change. One of the EU delegation, in its capacity as an observer, noted in the 34th session[2] that the EU was “confident that UNCITRAL is a forum where a solution can be found” even where the delegates start from different positions. The question will be whether the conclusion of the deliberations will lead to the reform that the Commission wants.

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Is there an inherent tension between the EU’s investment court system and the EU legal order?

As discussed in our previous blog posts here and here, the EU has introduced a new system to resolve disputes arising between investors and states which may herald the beginning of a move away from the traditional use of investor-state arbitration. In a recent article contributed to the Law Societies' Joint Brussels Office Newsletter, Vanessa Naish and Hannah Ambrose consider whether the EU's proposed multilateral investment court system is compatible (either practically or legally) with EU law. 

For more information, please contact Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.

Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112

EU launches consultation on multilateral reform of the investor-state dispute resolution system

The EU Commission (the Commission) has launched a public consultation on the multilateral reform of the investment dispute settlement system.  The survey is found here and responses are due by 15 March 2017.  The consultation is the next step in furtherance of the Commission's objective to develop a multilateral system for the resolution of international investment disputes and, amongst other things, seeks to explore views on its proposal to develop a permanent multilateral investment court system.

The development of the Commission's position over the last couple of years and the Commission's introduction to the consultation both suggest a determination to pursue wholesale change to the system of resolution of investor-state disputes, rather than a more nuanced approach in evaluating the perceived flaws in the current system under which investor-state disputes are largely resolved by ad hoc arbitration (often under the auspices of ICSID, part of the World Bank).  However, notwithstanding its clearly stated objective, the Commission's survey also countenances in the alternative the establishment of a Multilateral Appeal Tribunal which would consider appeals from the decisions of ad hoc investment arbitration tribunals established under the current system. 

The responses to the consultation will be significant in terms of the future of the Commission's objective to establish a Multilateral Investment Court. In particular, it will be crucial that a constructive and positive response is received from the third party states who are asked to partner with the Commission in developing the Multilateral Investment Court system.  However, it remains to be seen whether the survey will elucidate clear responses which will assist the Commission in considering further its proposals for the future of investor-state dispute settlement: the majority of the survey questions treat as interchangeable the two different approaches (the establishment of a Multilateral Investment Court system and the establishment of a Multilateral Appeal Tribunal) and the survey does not seek responses on the development of a Multilateral Appeal Tribunal alongside reform of the current system of ad hoc arbitration.  It is not clear whether this option continues to be considered by the Commission.

The issues and controversies surrounding the resolution of investor-state disputes are complex and any changes to the system pursued by the Commission would ideally be based on clearly expressed views from a range of stakeholders.  It is to be hoped therefore that respondents to the survey take the opportunity offered by the Commission to clarify their responses by way of uploading a position paper. 

With unprecedented growth in foreign direct investment, issues concerning substantive investment protection and the way in which investor-state disputes are resolved both now and in the future are significant for both states and investors.  If you would like to discuss these issues or the Commission's consultation, please contact: Larry Shore, Partner, Dominic Roughton, Partner, Christian Leathley, Partner, Andrew Cannon, Partner, Iain Maxwell, Of Counsel, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact. 

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TTIP: 12th Round of Negotiations concludes, investment protection remains high on the agenda; plus newly published CETA text includes EU’s Investment Court System proposal

The 12th Round of Negotiation of the TTIP, which concluded last week in Brussels, provided the first opportunity for the negotiating parties to discuss the EU's proposed Investment Chapter. The EU's formal proposal for the Investment Chapter, which is discussed here, includes a two-tiered Investment Court System (ICS) for resolution of investor-state disputes.

As noted in our blog post here, it is no by means a foregone conclusion that the US will depart from the form of investor-state dispute settlement (ISDS) envisaged in its 2012 Model BIT and included in the recently concluded Trans-Pacific Partnership Agreement (the TPP).  The EU's Chief Negotiator has confirmed that the negotiators are "working on the basis of textual proposals from both sides", and identifying areas of convergence.  However, the method of resolving investor-state disputes has become such a controversial issue in Europe – including in the European Parliament – that the EU may find it difficult to retreat too far from its ICS proposal should the US decide to oppose it. 

Whilst the EU and US are likely to find some degree of common ground in terms of the desire on both sides to protect the right to regulate, ISDS may not be the only area of divergence.  For example, in the US Model BIT, it is confirmed that the concept of fair and equitable treatment does not require treatment in addition to or beyond that which is required by the customary international law minimum standard.  This language is replicated in the Investment Chapter of the TPP. In contrast, the EU's proposed text avoids linking the concept of Fair and Equitable Treatment to the customary international law minimum standard by limiting fair and equitable treatment to a closed list of types of behaviour.

The EU and US have stated that they aim to conclude negotiations by the end of 2016 and have planned two further negotiating rounds before the summer break.  Whilst the 12th Round has formally concluded, negotiators will reportedly remain in contact to progress matters with a view to producing a draft text by July in which only the most sensitive issues are subject to further negotiation.

In a further significant development published today, the EU and Canada have released the revised text of the Comprehensive Economic and Trade Agreement (CETA) – which was concluded in August 2014 – following the completion of a legal review process which has resulted in modification of the text of the Investment Chapter.  The revised CETA Investment Chapter will be continued in more detail in a later blog post. The most notable amendment is the removal of the previous text providing for investor-state arbitration. This has been replaced with the inclusion of a two-tier ICS, replicating the EU's TTIP proposal, and following the recent conclusion of similar provisions in the EU-Vietnam FTA.  The apparent acceptance by Canada of this new form of investor-state dispute resolution may assist the EU in its negotiations with the US on this point.

For more information, please contact Larry Shore, Partner, Isabelle Michou, Partner, Christian Leathley, Partner, Andrew Cannon, Partner, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Isabelle Michou
Isabelle Michou
Partner
+33 1 53 57 74 04
Laurence Shore
Laurence Shore
Partner
+1 917 542 7807
Christian Leathley
Christian Leathley
Partner
+1 917 542 7812
Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585