From ISDS to a Permanent Investment Court:
A Politics-based Reform?

*Paolo Quattrocchi

1. Introduction

 

Throughout the past few years, the European Union’s powers in the field of trade agreements have drastically increased, taking over the capacity to negotiate and approve trade agreements from States. This happened with the Lisbon Treaty. But the transfer of such powers to the EU-level has also meant a drastic change in the approach to dispute resolution systems included in such trade agreements. While traditionally free trade agreements included ISDS provisions, agreements currently under negotiation, such as the TTIP, CETA and the EU-Vietnam agreement, have shifted to a new system developed by the European Commission. This new system aims at addressing certain perceived issues with ISDS such as a lack of transparency and an influence by multinationals on the regulatory capacity of States. The following pages shall be an attempt at identifying the innovations brought by the Commission’s proposed dispute resolution mechanism and the way in which such innovations address criticism aimed at ISDS.

 

Functioning of the new system

 

Chapter Eight of the agreement establishes the functioning of the court. It determines that proceedings will be held in front of a Tribunal with the possibility of an appeal in front of an Appellate Tribunal (AT).

 

Before examining in detail the functioning of the system for disputes resolution, should be considered that the agreement aims to reach, as far as possible, an amicably resolution of disputes which may arise.

 

Therefore, as it will be seen better subsequently, the effort to settle amicably a dispute raised up within the Agreement constitutes a requirement for submitting a claim to the Tribunal.

Moreover, should be considered that an amicably resolution “may be agreed at any time, including after the claim has been submitted pursuant to Article 8.23.” (art. 8.19, par. 1, CETA)

 

2. The functioning of the CETA system

 

The requirements for submitting a claim to the Tribunal are laid down in the article 8.22 of the agreement.

 

More specifically, the afore-mentioned article provides that a claim may be submitted by an investor only if the latter:

• “delivers to the respondent, with the submission of a claim, its consent to the settlement of the dispute by the Tribunal in accordance with the procedures set out in this Section” (art. 8.22, par. 1, let a) CETA);
• “allows at least 180 days to elapse from the submission of the request for consultations and, if applicable, at least 90 days to elapse from the submission of the notice requesting a determination of the respondent” (art. 8.22, par. 1, let b) CETA);
• “has fulfilled the requirements of the notice requesting a determination of the respondent” (art. 8.22, par. 1, let c) CETA);
• “has fulfilled the requirements related to the request for consultations” (art. 8.22, par. 1, let d) CETA);
• “does not identify a measure in its claim that was not identified in its request for consultations” (art. 8.22, par. 1, let e) CETA);
• “withdraws or discontinues any existing proceeding before a tribunal or court under domestic or international law with respect to a measure alleged to constitute a breach referred to in its claim” (art. 8.22, par. 1, let f) CETA);
• “waives its right to initiate any claim or proceeding before a tribunal or court under domestic or international law with respect to a measure alleged to constitute a breach referred to in its claim” (art. 8.22, par. 1, let g) CETA).

 

It is worth to underline that, as it emerges from the paragraphs f and g of the disposition under analysis, an investor in order to bring a claim before the Tribunal shall withdraw or discontinue any proceeding eventually started before a domestic or international court.

 

Furthermore, for the same purpose, the investor shall waive its right to initiate a claim before a domestic or international court (in relation to the same alleged breach submitted to the Tribunal).

 

The aim to settle amicably a dispute raised up within the Agreement is demonstrated by the provision which provides that there should be a necessary correspondence between the breach identified in the request for consultations and the subject of the claim submitted to the Tribunal.

 

If the requirements for submitting a claim to the Tribunal established under article 8.22 are met, the investor may then submit a claim to the Tribunal. A claim may be submitted either by an investor or on behalf of an enterprise which it controls and can be submitted following ICSID, ICSID Additional Facility, UNCITRAL or other rules mutually agreed upon by the parties to the dispute. The claimant may also propose that a single Member of the Tribunal hear the claim, in particular if the investor is a small enterprise or if the sum of money at stake is small, cases in which the respondent is encouraged to accept the proposal to reduce costs. Finally, each party shall make final judgments and other relevant information available to the public and shall inform the other party and the Tribunal of any eventual third-party funding.

 

1. The Tribunal

 

Upon entry into force of the CETA agreement, parties shall appoint fifteen Members to the Tribunal, five from each of the parties and five from third countries. Qualifications for Members of the Tribunal will amount to possessing the requirements for being nominated to judgeship in their respective countries, or being jurists of recognized competence. Judges should also have expertise in public international law and, possibly, in international investment law, trade law and international dispute resolution. Their terms shall be of five years, renewable once. Should a vacancy arise before the end of a term, a replacement shall be nominated for the remainder of said term. A Member of the Tribunal whose term ends may continue serving on cases in progress until a final award is issued. Panels of three Members of the Tribunal, with one member for each of the parties and chaired by a third-country national, will hear cases unless the parties agree to let a third-country national determine the cases. They will be randomly appointed by the President and Vice-President of the Tribunal. The retainer fee paid to the Members of the Tribunal shall be paid by the parties to the dispute.

 

2. The Appellate Tribunal

 

CETA also envisions the creation of an Appellate Tribunal to which awards from the Tribunal may be appealed. The grounds for appeal, established in article 8.28 (2) include errors in the application and interpretation of applicable law, errors in the appreciation of facts and all grounds set out in paragraphs (a) to (e) of article 52 (1) of the ICSID Convention. Article 8.28 (4) establishes that the Members of the Appellate Tribunal shall meet the same requirements as those of the Tribunal. They shall hear cases in panels of three randomly appointed members.

 

Parties have 90 days from a provisional award by the Tribunal to lodge an appeal with the Appellate Tribunal. The award will only be considered final if 90 days have elapsed with no appeal or if the appeal has been rejected or if the Appellate Tribunal has rendered a final award without referring the matter back to the Tribunal.

 

In article 8.29, CETA envisions the establishment of a multilateral investment tribunal with an appellate mechanism to resolve investment disputes. When established, the dispute resolution mechanisms shall be transitioned to the multilateral tribunal which will become, with time, the center of global investment disputes with states.

 

3. Claims manifestly without legal merit or unfunded as a matter of law

 

Article 8.32 provides that if the respondent deems that the claim is manifestly without legal merit he may file an objection no later than 30 days after the constitution of the division of the Tribunal, and in any event before its first session.

 

The respondent shall specify, as precisely as possible, the basis for the objection.

 

When receives the objection in question, the Tribunal shall suspend the proceedings on the merits and establish a schedule for considering such objection.

 

The objection that the claim is manifestly without legal merit shall be without prejudice to the Tribunal’s authority to address other objections as a preliminary question or to the right of the respondent to object, in the course of the proceeding, that a claim lacks legal merit.

 

Article 8.33 provides that no later than the date the Tribunal fixes for the respondent to submit its counter-memorial, the latter may submit an objection that the claim, as a matter of law, is not a claim for which an award in favor of the claimant may be issued by the Tribunal.

 

If the respondent submitted an objection that the claim is manifestly without legal merit, the Tribunal may, taking into account the circumstances of that objection, decline to address the objection that the claim is unfunded as a matter of law.

 

As it is for the objection that the claim is manifestly without legal merit, also for the objection that the claim is “unfunded as a matter of law,” the Tribunal shall suspend the proceedings on the merits and establish a schedule for considering such objection.

 

4. Final award and enforcement of awards

 

Article 8.39 provides that when the Tribunal makes a final award against the respondent, the first may only award, separately or in combination:

• “monetary damages and any applicable interest” (art. 8.39, par. 1, let. a) CETA);
• “restitution of property, in which case the award shall provide that the respondent may pay monetary damages representing the fair market value of the property at the time immediately before the expropriation, or impending expropriation became known, whichever is earlier, and any applicable interest in lieu of restitution” (art. 8.39, par. 1, let. b) CETA).

 

Monetary damages shall not be greater than the loss suffered by the claimant reduced by any prior damages or compensation already provided. Under no circumstance the Tribunal might award punitive damages (art. 8.39, par. 3 and 4 CETA).

 

In general the costs of the proceedings are borne by the unsuccessful disputing party. Exceptionally the costs of the proceedings might be apportioned between the disputing parties if it is deemed reasonable by the Tribunal.

 

In the event that the decision is only partially favourable, the costs shall be adjusted proportionally to the part of the claim favourably received by the Tribunal (art. 8.39, par. 5 CETA).

 

Article 8.41 provides the principle for which a decision issued by the Tribunal shall be binding between disputing parties and recognized by the losing party without delay.

 

For what concerns the applicable law, art. 8.41, par. 4 of the Agreement provides that: “Execution of the award shall be governed by the laws concerning the execution of judgments or awards in force where the execution is sought.”

 

Relation with EU law

 

Issues arising under EU law are numerous and might well trigger a number of judgments by the Court of Justice.

 

Chiefly, in this case, this means that a Member State runs the risk of contrasts with the ECJ in case of an unfavorable award issued under CETA provisions, when this award was deemed to run counter the Member State’s obligations under European Union law².

 

More specifically, the risk is that the ECJ might consider an award that requires a State to take measures contrary to EU “public policy”[1] invalid.

 

In particular, hypothetically, a Member State could be forced to pay a compensation awarded by virtue of an award issued under CETA provisions but, in the meantime, the same compensation could be seen by the ECJ as State aid, prohibited by EU law.

 

It should be borne in mind in this regard that, according to established European case-law, the application of the EU Treaties does not affect the duty of a Member State to respect a prior agreement and to perform its obligations thereunder.[2]

 

On this point, for what concerns the obligations of a Member State deriving from an agreement signed after the entry into force of an EU Treaty, it is unclear whether the Court of Justice will prioritize respect of European provisions on State aid or of obligations deriving from the agreement in question.

 

In the absence of relevant case-law, it is deemed that any possible decisions handed down by the Court of Justice on this respect will be lead by a “political” approach, aiming to ensure a correct balance between provisions in conflict.

 

For what concerns the issue of whether a Member State or the EU shall be the respondent in a case, article 8.21 of the CETA proposal establishes that an investor shall refer a claim to the European Union to allow for a determination of the respondent to take place. Such determination, which will take place within 50 days from the moment in which the request is lodged, will be binding on the Tribunal and will establish whether the EU or a Member State will be considered responsible for the measure in question. This strategy is not new, and has already been presented to the Secretariat of the Energy Charter in 1998.[3]

 

Transparency and corruption

 

Ethics and transparency

 

Article 8.30 establishes the ethics of the Members of the Tribunal. It establishes that members ought to be independent and ought to comply with conflicts of interest regulations.

 

More specifically, the independence of the members of the tribunal involves that they shall not be affiliated with any government and shall not take instructions from any organization, or government with regard to matters related to the dispute.

 

Members shall also refrain from acting as counsel or experts in any other commercial dispute.

 

If a disputing party considers that a Member of the Tribunal has a conflict of interest, within 15 days of the date on which the composition of the division of the Tribunal has been communicated to the disputing party, it must sent to the President of the International Court of Justice a notice of challenge to the appointment (art. 8.30, par. 2 CETA).

 

If the challenged Member of the Tribunal has elected not to resign from the division within 15 days from the date of the notice of challenge, the President of the International Court of Justice, after hearing the disputing parties, shall issue a decision on the matter in question within 45 days of receipt of the notice of challenge (art. 8.30, par. 3 CETA).

 

Furthermore, article 8.36 addresses certain issues which concern transparency. In particular, it determines that UNCITRAL Transparency Rules shall apply and that final awards delivered by the panels and most documents presented by claimant and defendant shall be made public. It also determines that hearings, unless necessitating privacy, will be open to the public.

 

This reformed system was developed in response to strong criticism towards ISDS mechanisms, mostly about concerns that ISDS influences the regulatory r of states, the fact that awards may be conflicting, a generalized conflict of interests of arbitrators and, importantly, an absolute lack of transparency of the whole process. An analysis of such criticism has been produced by the European Federation for Investment Law and Arbitration (EFILA).[4]

 

a.         Consultations and mediation

 

In order to encourage informal settlements, the agreement prioritizes amicable solutions to disputes and establishes, to this effect, consultations. Consultations ought to take place in Ottawa, Brussels or the capital of a Member State, depending on the defendant whose measure is challenged and have to take place within 60 days of the submission of the request for consultations. They also have very precise limitations as they have to be requested within three years after the date in which the investor acquired knowledge of the measure or suffered losses because of it or within two years after a claim under the law of a Party has been ceased and, in any case, not later than 10 years after the date in which the investor acquired knowledge or should have acquired knowledge either of the breach or of damages.

 

The request for consultations submitted by an investor to the other Party shall indicate:

• “the name and address of the investor and, if such request is submitted on behalf of a locally established enterprise, the name, address and place of incorporation of the locally established enterprise” (art. 8.19, par. 4, let. a) CETA);
• “if there is more than one investor, the name and address of each investor and, if there is more than one locally established enterprise, the name, address and place of incorporation of each locally established enterprise” (art. 8.19, par. 4, let. b) CETA);
• the provisions of CETA “alleged to have been breached” (art. 8.19, par. 4, let. c) CETA);
• “the legal and the factual basis for the claim, including the measures at issue” (art. 8.19, par. 4, let. d) CETA);
• “the relief sought and the estimated amount of damages claimed” (art. 8.19, par. 4, let. d) CETA).

 

It is worth to stress that the request for consultations shall be filled out in order to “allow the respondent to effectively engage in consultations and to prepare its defence” (art. 8.19, par. 5 CETA).

 

The request for consultations shall be sent to the European Union if the alleged breach is attributed to the same (or to a Member State of the European Union).

 

Parties may also decide to have recourse to mediation by jointly appointing a mediator of asking the Secretary-General of ICSID to appoint a mediator.

 

The recourse to mediation cannot cause any prejudice to the legal position or rights of the disputing parties (art. 8.20, par. 4 CETA).

 

They should endeavor to reach an agreement within 60 days from the appointment of a mediator and they may decide to terminate mediation by transmitting a letter both to the mediator and to the other party.

 

The term to request consultations and the term to submit a claim, respectively provided by article 8.19, par. 6 and article 8.19, par. 8, shall not apply from the date on which the disputing parties agreed to have recourse to mediation to the date on which either disputing party decides to terminate the mediation (8.20, par. 5 CETA).

 

b.         Criticism to ISDS

 

Firstly, it is alleged that the presence of ISDS mechanisms in trade agreements negatively influences the capacity of states to exercise its regulatory powers. Generally, this was caused by fear of weak legal systems which would not have been able to grant a foreign investor a fair hearing.

 

Secondly, it would seem that arbitration panels interpret, it seems law in different manners resulting in conflicting arbitral awards. This is the case both because applicable rules are not always exactly the same and applying precedent is impeded by the fact that certain ISDS judgments are kept confidential by the parties, making it difficult for arbitrators to refer to them and for a coherent body of precedent to emerge.

 

Thirdly, criticism derives from the fact that awards are often secret. Given the large discretion granted to parties under ISDS mechanisms, both investors and states may well decide to keep proceedings and judgments confidential. Investors may be pushed by their desire to keep corporate practices secret while states would not want to disclose judgments that are not in their favor.

 

Finally, some claim that arbitrators cannot be neutral as they have a personal financial interest in the survival of the arbitration system itself, therefore making them inherently likely to prefer results that will encourage more corporations to pursue arbitration, attracted by the favorable results. There would be, therefore, an inherent conflict of interests for arbitrators arbitrating ISDS disputes.[5]

 

C.        Commentary and outstanding issues

 

While the new system has been developed with the purpose of solving certain issues with ISDS, new critiques have arisen about the new permanent tribunal system. First is the fact that parties may not freely choose their arbitrators, which was previously a pillar of ISDS. This may lead to fear that states will nominate judges that will favor them. This might be compensated, however, by the fact that states may nominate judges that are generally pro-business, since their own enterprises will be judges as well, therefore resulting in fairer hearings for everyone.

 

Another issue concerns the enforcement of awards outside of the parties to the agreement, however this seems to have been dealt with by article 8.41 (5) which claims that awards under CETA will qualify as arbitral awards under the New York Convention.

 

Furthermore, criticism has been addressed at the fact that the pool of potential judges is limited and does not have any provisions for what requires diversity of any kind. The fact that judges may not consult or qualify as experts in other disputes disqualifies practicing lawyers, further limiting potential judges.

 

Finally, the grounds for appeal are worded so broadly that it seems realistic that appeals will systematically be lodged. Furthermore, the fact that the Appellate Tribunal may review questions of fact and not only of law makes the time limits for an appeal judgment envisioned by CETA seem unrealistic.

 

3. Conclusions

 

Strong criticism against ISDS has brought the European Union to advocate for a permanent investment tribunal which is being included in investment treaties negotiated by the EU. This innovative structure has the aim of safeguarding the power to regulate issues such as health or the environment while also improving transparency, reducing conflicts of interest and allowing for appeals.

 

The mechanism would also allow for a reduction of costs of frivolous claims, by allowing the Tribunal to dismiss claims that have previously been filed either at the Tribunal or elsewhere. Similarly, the final cost to parties is reduced as the Tribunal will apply the principle that costs follow the event.

 

Generally, it would seem that the system proposed by the European Union brings significant developments to the field of investor-state disputes, but the long-term impact on such disputes will only become apparent with time.

 

*Partner, Nctm Law Firm