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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Update on the future of ISDS: the discussions within UNCITRAL Working Group III – no apparent consensus to date

After a number of years of public debate in a variety of fora, the discussion of the future development of investor-state dispute settlement (ISDS) has recently moved to the United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL Working Group III (WGIII) has been given a broad mandate to identify concerns regarding ISDS, consider whether reform is desirable and, if so, develop relevant solutions to be recommended to UNCITRAL.

WGIII started its work in the 34th session which took place from 27 November to 1 December 2017. As discussed further below, a number of key points were discussed, including: (i) the duration and costs involved in the procedure; (ii) the allocation of costs; and (iii) transparency. There was also some preliminary consideration of possible developments or changes in relation to the treatment of these issues. The Report of the 34th session indicates that some states advocate a fact-based analysis of ISDS but others note the need to address wider public perceptions of ISDS, as these can raise concerns over the legitimacy of the system.

Bringing the debate about the future of ISDS under the auspices of UNCITRAL, involving high level government representatives from across the world, and also in view of the transparent nature of WGIII’s process, raises the stakes, and perhaps also the prospects, of a more systemic reform. However, whilst the forum has the potential to generate a multilateral plan for ISDS, it is hard to discern any broad consensus at this stage either on the nature of the perceived problems associated with the current system of ad hoc arbitration, or on how those problems may be resolved. This is apparent from the Report and also from the audio recordings (helpfully summarised by IA Reporter, here). The 35th session will take place on April 23 to April 27 2018, following which further clarity on these issues may emerge.

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EU Council publishes Negotiating Directives for Convention establishing a Multilateral Investment Court: no real surprises but a couple of gaps

On 20 March, 2018 the Council of the European Union published negotiating directives dated 1 March 2018 authorizing the European Commission to negotiate a convention establishing a multilateral court for the settlement of investment disputes between investors and states. Whilst the detailed characteristics of the proposed multilateral investment court (the MIC) will be developed during the course of the negotiations, the Negotiating Directives give considerable indication of the EU’s intentions as to the MIC’s features.

The Negotiating Directives have their origin in the Commission’s Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral investment court, published in September 2017.  This included a recommendation that negotiating directives be drawn up and made public immediately after their adoption.  The Commission has since commented that “the EU’s new policy on investment is fundamentally based on transparency” and that publication of the Negotiating Directives allows the EU “to continue to work with like-minded partners around the globe” towards creating a MIC, “knowing that EU citizens are fully informed of [its] negotiating instructions”.

Whilst the EU introduced its intention to move towards a multilateral system in a Concept Paper in 2015 (see our blog post here), the Commission’s Recommendation itself came shortly after UNCITRAL indicated in its 50th Session in July 2017 that UNCITRAL Working Group III would consider possible reform of investor-state dispute settlement.  This work began in the Working Group’s 34th session in November 2017, with its next session due to take place on 23 to 27 April 2018.  It will therefore be seen as no coincidence that the EU has chosen to publish these Negotiating Directives at this stage, and they will set the framework for the participation of the EU and its Member States, as further considered below.  The EU has also submitted a paper to the Working Group in advance of its next session highlighting its concerns over the current system of ISDS.

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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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