Why the US Should Support the EU Proposal for an “Investment Court System”

  By Joost Pauwelyn*

Michael Froman,  United States Trade Representative

On November 12, 2015, the EU released its final proposal for an Investment Court System (ICS) to be set up under the Transatlantic Trade and Investment Partnership (TTIP), currently under negotiation between the EU and the US.

As compared to the investment chapter in the recently concluded Trans-Pacific Partnership (TPP), to which the US and another 11 countries, but not the EU, are a party, the ICS includes two major innovations: (i) a standing tribunal with fifteen “publicly appointed judges” rather than ad hoc, party-appointed arbitrators, (ii) an appellate mechanism. 

In reactions to an earlier version of the EU’s ICS proposal, US Trade Representative Michael Froman was reported as “wary of the EU proposal”, for two reasons: first, recent investment deals such as TPP already include sufficient safeguards allowing countries the “right to regulate”; second, why should companies get “a second bite of the apple” before an appellate tribunal?

The negative public perception of “old-style” investor-state dispute settlement (ISDS) in and beyond Europe is not limited to substantive disciplines.  A major part relates to who is deciding the disputes.  Confirming the substantive “right to regulate” can therefore not solve the problem.  An appellate tribunal would, indeed, give “a second bite of the apple” to both investors and host states, but so does the current ISDS system, to different extents, be it in the form of an annulment proceeding for cases before the International Centre for Settlement of Investment Disputes (ICSID) or set aside proceedings before domestic courts in non-ICSID disputes.  The idea of an appellate mechanism – which, in the EU proposal, would replace, not complement, ICSID annulment and domestic side aside proceedings (Article 30:1) -- is also supported, albeit not actually implemented, in the US model bilateral investment treaty (2012) as well as TPP.

Who Decides Matters

In a recent study, I compared the pool of adjudicators in ICSID investment disputes to that in World Trade Organization (WTO) trade disputes. The differences are striking. WTO panelists tend to be relatively low-key diplomats from developing countries, with a governmental background, often without a law degree or legal expertise, whereas ICSID arbitrators are likely high-powered, elite private lawyers or legal academics from Western Europe or the United States. In addition, the pool of ICSID arbitrators is an ideologically polarized, closed network with a very small number of individuals attracting most nominations, whereas the universe of WTO panelists is ideologically more homogeneous, with a relatively low reappointment or experience rate and nominations more evenly distributed. Of the 396 individuals who were ICSID arbitrators and 251 appointed as WTO panelists, only 9 overlap.

One of my conclusions is that WTO dispute settlement has been relatively successful not despite it being run by relatively inexperienced trade diplomats appointed by mutual agreement but because it is so run.  Conversely, ISDS is under fire not despite it being run by highly specialized and experienced lawyers part of a closed, elite network but because it is so run.

Public disputes decided by private arbitrators?

Now that dispute settlement under both trade and investment agreements scrutinizes predominantly public laws and regulations as potential breach of treaty commitments (not commercial matters under private or state contracts), it makes sense to bring the historically more private, commercial system of ISDS closer to the more public, treaty-based WTO dispute settlement system (even if the latter is far from perfect and needs its own, less drastic, reform). 

The EU’s ICS proposal does exactly that, without eliminating the right of private action for foreign investors (there is no private standing in the WTO, which is state-to-state only). 

Firstly, the EU proposal does away with party-appointed “private judges” which has led to the polarization described above (with one group of arbitrators consistently appointed by investors, another by host states), in favor of tribunal members appointed by mutual agreement (as in the WTO) for a six-year period, renewable once, with three judges randomly selected to serve on a specific case (both in first instance and on appeal).  ICS members must also “refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment protection dispute” (Article 11), a common occurrence today in ISDS.  Granted, this takes away the right of private investors to appoint “their own arbitrator” in a given dispute.  But EU and US governments, when appointing first instance and appeal tribunal members, know that in some cases they will be defendant, in other disputes siding with claimants.  They can, therefore, be expected to appoint neutral, rather than outspoken pro-investor or pro-state individuals. 

Secondly, the ICS’s appeals mechanism is modeled on the WTO Appellate Body.  It will enhance the legal correctness, consistency and predictability of investment rules and awards, without necessarily lengthening the proceedings or adding costs for investors.  Indeed, the EU proposal includes time limits (so far unheard of in ISDS disputes) for both first instance (18 months) and appeal (6 months) tribunals, reducing the expected total length of proceedings from an average of 6 to 3 years.  In terms of costs, EU and US governments, not investors, would pay the remuneration of first instance and appeal members as well as the cost of secretariat support to the tribunals.  Investors would have to pay for legal representation but if they win, it would be for the host state to bear that cost according to the loser-pays principle. 

Incremental change is good

That the ICS proposal would be limited, at first, to EU-US relations under TTIP is a plus, not, as critics claim, a fatal blow to the proposal.  The ICS proposal will need to go through a testing period. In a bilateral such as TTIP (contrary to the WTO where adjustments require agreement of 161 countries) problems and mistakes can be readily addressed. And once the ICS is tried, tested, and corrected, it can be (gradually) multilateralized, an option explicitly foreseen in the EU proposal (Article 12). Such multilateralization can then also diversify the nationality of first instance and appeal tribunal members (currently, 1/3 EU, 1/3 US and 1/3 third-country nationals).

The EU ICS proposal is not a silver bullet that, in one move, will address all concerns linked to ISDS.  Today’s system of international law emerged organically out of small, incremental and often accidental steps. Unlike the WTO, it operates as a largely self-organizing, decentralized system made up of many interacting players, treaties and components. In such a regime, relatively small tweaks or adaptations, such as the ICS limited at first to TTIP, may have major repercussions. At the same time, if the ICS “mutation” does not stand the test of trial and error, it can be adapted, even discarded, not unlike how some species survive evolutionary biology, others don’t.

Saving the private right of action for investors

To survive in the long run, ISDS needs broad, public support.  This, in turn, requires reform including making ISDS available to SME investors (another key feature of the EU’s ICS proposal, see Articles 3 and 4 on Mediation and Consultations, Article 9.9 on Sole Judges and Article 28.5 on maximum costs to be borne by unsuccessful SME claimants).  The choice, today, is not between the EU ICS proposal and the status quo (or, even less so, a perfectly streamlined multilateral investment court).  It is between something akin to the EU proposal and a slow decline of ISDS in favor of SSDS (state-to-state dispute settlement) or, at least, a major limitation of ISDS to some types of disputes/countries only.

To make things palatable to a US audience, the EU should strip its proposal of any reference to “judges”, “tribunals” and “court” and instead refer to “members”, “panels” and “body” (e.g. “investor-state dispute settlement” with “panels” and an “appellate body” with six “members”), a linguistic nuance that cannot be underestimated and continues to be important in the WTO.  The US, in turn, should carefully examine the EU proposal for what it is: Not a step back for investors, but a balanced reform worth testing that may well be the safest bet to ensure the long term survival of the private right of action for foreign investors against host states.


*Professor of Law, Graduate Institute, Geneva, and Georgetown Law Center, Washington, D.C.