What happened to Investor-State Dispute Settlement? It has been a turbulent few years for Investor-State arbitration, and yet the question remains : what future for ISDS in the European Union?
Two years after the suspension of the controversial Transatlantic Trade and Investment Partnership (TTIP), the European Union is preparing for new trade negotiations with the US.
Initially, many voiced fierce opposition to the TTIP due to the Investor-State Dispute Settlement (ISDS) clause. This mechanism allows foreign investors to approach international tribunals directly without exhausting local remedies available in the host States.
To this day though, ISDS is still the “most toxic acronym in Europe“. In fact, on January 15, 2019, the 28 European Union (EU) member states declared that they will terminate all intra-European bilateral investment treaties (BITs) no later than December 6, 2019.
A BIT is a a trade agreement that governs direct foreign investments by investors from one country to another. It provides that disputes between a state and an investor should be submitted to arbitration.
In other words, this is the latest action that has altered the status of traditional ISDS mechanisms. So what is the future of ISDS?
I. Arbitration in the European Union, a turbulent relationship
A. An exclusion of arbitration
If most of the EU Member States have ratified the New York Convention, thus recognizing and enforcing foreign arbitral awards, arbitration has always been excluded from the scope of the Brussels I Regulation, which dictates the rules used to determine jurisdiction in cases with links to more than one country.
Overall, the relationship between EU law and arbitration has always been turbulent, in part due to the lack of ultimate control by the European Court of Justice (ECJ) over arbitration: especially, the ECJ or Court of Justice of the European Union (CJEU) is concerned with preserving the uniformity and consistency of EU law and ensuring the final authority of the European Court of Justice when it comes to EU law issues.
However, the autonomy of EU law is a recurring concern for the ECJ. In fact, this was the reason why the Court of Justice rejected the EU’s accession to the European Convention of Human Rights, by fear that the European Court of Human Rights might issue judgment which would touch on EU law and thus impacting the ECJ.
Then, on March 2018, the ECJ rendered a decision in Slovak Republic v. Achmea B.V. (Case C-284/16) (Achmea case) whereas the Court found that arbitration in the application of international agreements or treaties concluded between Member States is an infringement of EU law.
In this case, the Court found that, by concluding a BIT, the Netherlands and Slovakia had established a mechanism for settling investment disputes which was not capable of ensuring the proper application and full effectiveness of EU law. Following the decision, twenty-two Member States declared on January 2019 that arbitral tribunals have no jurisdiction to decide investor claims based on intra-EU bilateral investment treaties.
This demonstrates that the debate is still open regarding arbitration clauses contained in multilateral agreements. Ultimately, the focus is on the inapplicability of ISDS.
B. ISDS: the bone of contention?
Beyond arbitration in general, it is then ISDS that is at the origins of the discord: while ISDS provisions vary from BITs and investment chapters of trade agreements, it generally means that a Foreign investor can sue a host governments in an international tribunal for various actions taken by those governments. (e.g. expropriation, nationality-based discrimination, treatments that fall below a “minimum standard”, etc).
Critics offer a rhetoric about how ISDS systems undermine national sovereignty and prevent necessary regulations. The Vattenfall case it often quoted: this company first turned to the ICSID in 2012 with a claim against Germany for €4.7bn ($5.4 billion) for lost profit caused by Germany’s decision to phase out nuclear power stations. Despite the Achmea case referenced above, the Tribunal in Vattenfall AB and others v. Federal Republic of Germany issued a decision on August 31, 2018, whereas the Tribunal asserted its jurisdiction over the case.
This case illustrates the fear that that foreign investors could undermine decisions by governments by filing suits in private courts. This, however, is a mis-characterisation of the rule: investors can sue when their rights have been violated and in general ISDS has helped in spreading the rule of law. Nevertheless, the damage is done and the EU seems to be moving on.
II. What future for ISDS, the path toward reforms
A. A drastic move: the EU proposal for am Investment Court System (ICS)
For the EU, it is clear that “there can be no return to the old-style Investor to State Dispute Settlement System” (ISDS). In particular, the European Commission (EC) has claimed that ISDS “suffers from a fundamental lack of trust.”
At the same time, the United Nations Commission on International Trade Law (“UNCITRAL“) has also been considering the possible reform of ISDS. Especially, the UNCITRAL Working Group III (“WGIII“) found that a reform was welcome in three areas, namely (1) inconsistency and incorrectness of arbitral rulings; (2) concerns about arbitrators and decision-makers; and (3) the cost and duration of ISDS.
The EU approach is more drastic tough, and took the form of a proposal for a new permanent, multilateral mechanism to settlement investment disputes, namely, the EU suggested an international Investment Court System (ICS) composed of a Tribunal of First Instance an an Appeal Tribunal. A further step was reached on January 29, 2019, when the ECJ rendered Opinion 1/17, which concluded that an Investment Court System would be compatible with the EU Treaties and the EU Charter of Fundamental Rights.
In particular, the Advocate General Bot stated, “what is at issue here is the definition of a model which is consistent with the structural principles of the EU legal order and which, at the same time, may be applied in all commercial agreements between the European Union and third States” (§86).
This proposal created fundamental concerns: as the American Bar Association (ABA) reports, the issue is whether the ICS will be recognized as an arbitral body or as a court; and whether the proposal will be agreed to by a majority of countries around the world.
B. What's next?
The main problem with ISC, is that it does not resolve whether traditional ISDS mechanisms, which are provided for in older agreements (including the Energy Charter Treaty), are compatible with EU law. In other words, Opinion 1/17 essentially calls into doubt whether traditional ISDS mechanisms are compatible with EU law.
To this question, there is still some uncertainty. In future trade negotiation though, the US will likely reject the EU proposal for an ICS, it is not clear, then, how ISDS could become a part of the TTIP.
On its side, the US seems quite comfortable with ISDS, after all, Washington has never lost a case. It is interesting to note that TransCanada challenged the US rejection of the Keystone XL pipeline in a NAFTA Chapter 11 lawsuit. Although the case caught a break under the new Trump Administration, this would be a strong case against the US and it is to be seen whether the US will rethink about their participation in the ISDS system.
Finally, future sessions of the WGIII will take place, but agreeing on a reform will take time. If everyone agrees on the idea, diverging views on the design of reforms remain.
Conclusion
The lessons from the Achmea judgment and of Opinion 1/17 is that ISDS would be acceptable as long as a set of conditions are met.
First, the EU could require adjudicators to take into account the “level of protection of the public interest”. However, arbitration tribunals are already mindful of the States’ right to regulate.
Secondly, it is clear that the applicable law in International Investment Agreements should be international. If domestic law were to play a part, it would present a direct conflict with the autonomy of EU law.
However, it is quite difficult to predict the return of an old-style ISDS. As the EU-Japan negotiations already showed: ISDS will likely not be a part of any treaty at all. But despite criticisms of the current ISDS system, its downfall is not imminent.
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