With the European Union’s Lisbon Treaty, in force since December 2009, foreign direct investment fell under the exclusive competence of the European Union (EU). Since then the three European institutions—the European Commission, the European Council of Ministers and the European Parliament—have been engaged in a vigorous debate over a new legal framework and negotiating positions for the negotiation of investment treaties by the EU. As a part of this process, in May 2012 the Directorate-General for Trade of the European Commission issued a first draft text on investor-state dispute settlement in EU investment treaties.
This note provides an overview and assessment of some of the proposed changes, before examining three issues of interest in more detail: the Commission’s proposed approach to transparency in investor-state dispute settlement, the constitution of tribunals, and the implementation and enforcement of awards.
The Commission’s draft text takes the form of a ‘section’ or chapter of a free trade agreement (FTA) and is meant to be the basis for the EU’s negotiations with Canada, India and Singapore. The draft, which is not public, was revised in early June to reflect the comments provided by EU member states.
With its proposal, the Commission gives a clear signal that it wishes to include investor-state dispute settlement provisions in its negotiations with its current negotiating partners (Canada, India, Singapore) and most likely with future ones as well. The text also indicates that it is trying to grapple with some of the inherent concerns of the system that have crystallized over the past decade. Member states, however, appear divided on the need for the system to evolve. While the tone in a number of comments was generally positive, some members like Germany appear categorically opposed to any modernization and improvement proposed by the Commission. The opposition is difficult to understand because addressing the concerns of the dispute settlement system will be to the benefit of states as well as investors. The only constituency that might be negatively affected by improvements would be the legal industry, consisting of practicing private lawyers and arbitrators, who could have important financial interests in maintaining the status quo. At the same time, even the industry should be concerned about possible backlashes against investor-state arbitration more generally if the system is not fixed.
The investor-state arbitration system proposed by the Commission is based on the existing arbitration rules under the International Centre for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL). The Commission therefore does not establish an entirely new and self-contained system. However, the Commission’s draft does address some of the problems that have arisen under those rules in the investment-treaty arbitration context, and complements the gaps and concerns with additional rules. The draft includes an array of provisions to clarify or innovate current practice through the clarification of the scope of dispute settlement, new detailed rules on mediation, the exclusion of ‘class actions’, fork-in-the-road clauses to avoid multiple claims on the same issue, a special framework on the constitution of the tribunal and conditions for tribunal members, the allocation and setting of costs, the consolidation of claims, and the setting up of a Committee for the Settlement of Investor-State Disputes in charge of implementation and interpretation issues and examining the possibility of an appellate mechanism.
Many of these innovations go in the right direction, though some may require additional detail and could go further. At the same time, the draft also contains some more worrisome aspects relating to the enforcement of awards and the use of retaliatory measures. Finally, the draft addresses EU-specific issues, setting out a framework to determine who will be the respondent when a foreign investor takes action against a measure taken by the EU or one of its member states. This aspect is complemented by another proposal by the Commission for a regulation on the partition of financial responsibility in case of investor arbitration claims against the EU or a member state under EU-negotiated investment chapters and treaties, which was made public in June.
Transparency in investor-state dispute settlement
Following a marked trend, the Commission is incorporating stronger transparency provisions that aim at ensuring access to documents and hearings in the dispute-settlement system. This builds on developments at ICSID, and at UNICTRAL where a working group is currently discussing more robust transparency rules, as well the existing practice of countries such as the United States and Canada that integrate transparency rules into their investment treaties. The draft includes an annex requiring that, subject to some exceptions for protected information, a wide range of documents be made available to the public, ranging from the notice of intent and other submissions by disputing and non-disputing parties and third persons, as well as expert reports and witness statements, and orders, decisions and awards of the tribunal. The Commission has designated the Secretary General of ICSID as the repository of arbitration documents in both ICSID and non-ICSID cases. It is to be expected that the ICSID Secretariat can and will take on this task. The draft does not specify how the information is to be made public.
In its comments on the draft, Germany has expressed a preference to balance transparency against “the rights of investors and States to keep the litigation secret” and that “EU investors expect that their special situation is reflected in the drafting of transparency rules.” Besides being out of sync with recent trends, Germany’s approach would arguably be contrary to citizens’ access to information rights and would undermine the legitimacy of the investor-state arbitration even further. In its draft, the Commission is addressing precisely this governance and legitimacy problem by requiring transparency in dispute settlement, and, as such, it is essential that these rules be included in all future EU agreements.
Constitution of tribunals
On the constitution of the tribunal the Commission follows an approach in which the disputing parties each appoint one arbitrator and the chairperson is appointed by agreement. The Commission complements this traditional approach with the creation of a roster of “at least 15 individuals” to serve as arbitrators in investment disputes involving the EU or EU member states under the EU treaty. It is specified that each Party to the treaty is to propose at least five individuals to serve as arbitrators and also select at least five individuals “who are not nationals of either Party to act as chairperson of the tribunals.”
The elaboration of a treaty-specific list approach is an improvement in that it provides some indication for the parties to the treaty as to who will be interpreting and implementing the treaty because it is from that list that the Secretary General of ICSID will appoint the arbitrators in case the disputing parties have not appointed their arbitrator or cannot agree on the chairperson. Yet, the Commission could have gone further by moving away from party-appointments altogether in favour of a system of appointment through a designated authority or a type of lottery system, along the lines of the one used in the WTO Appellate Body. This could have set the stage for establishing an institutionalized system of tenured panelists in the future.
The draft does set out a number of qualifications to ensure independence and avoid conflicts of interest of arbitrators, including that the individuals: (i) have specialised knowledge of international law, in particular international public law and international investment law; (ii) be independent, serve in their individual capacities and not take instructions from any organisation or government with regard to matters related to the dispute, or be affiliated with the government of any Party or any disputing party; and (iii) comply with a code of conduct, which is included in an annex to the draft. The code builds on the International Bar Association’s Guidelines on Conflicts of Interests in International Arbitration and contains unequivocal language requiring arbitrators to be impartial, independent and free of any conflict of interest. The code also tightens and clarifies the rules to avoid conflicts of interest of arbitrators in the UNCITRAL, ICSID and other processes, and sets out the common standard of an “appearance of bias or impropriety.” One important example of conflict arises where arbitrators serve as counsel in other investment arbitrations at the same time. A growing number of arbitrators have declared they will no longer act as counsel in investment arbitration cases due to the conflicts of interest this creates. For purposes of clarity, it would have been useful for the Commission to expressly state that arbitrators may not concurrently act as counsel in other investment arbitrations.
Enforcement of awards
The draft contains a number of problematic elements as to the enforcement of awards. For example, it provides that “[e]ach Party shall enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that Party.” This article has the consequence of rendering awards enforceable like a final judgment of a court of the State Party where the award is to be enforced, an approach accepted in the ICSID Convention. But the ICSID Convention provides the disputing parties with the opportunity to resort to an annulment process. The ICSID annulment process, although heavily criticized for a host of reasons, allows parties to seek correction of awards in certain limited instances. As long as the EU treaty itself does not provide for a review process, the recognition and enforcement of a non-ICSID award should be subject to the well-established framework set out in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been signed by 146 states. Under the New York Convention, an arbitration award issued in any other state can generally be freely enforced in any other contracting state but is nevertheless subject to certain limited defenses, such as, issues of procedure (including regarding the composition of the tribunal), or if the award contains matters beyond the scope of the arbitration, or enforcement would be contrary to public policy.
Also related to the enforcement of awards, the draft provides that where a Party has failed to comply with a final award, the other Party may suspend obligations under the FTA, proportionately to the non-compliance, until there is compliance. How this relates to the international trading system is unclear and could raise a host of complications. Moreover, it reverses the primary rationale of the investor-state system, which is that investment disputes should not be turned into diplomatic or state-state disputes, but be left exclusively to the investor to resolve with the host state.
The Commission’s draft on investor-state dispute settlement incorporates a number of important elements to improve investor-state dispute settlement, long overdue. Notably, it enhances transparency in the process and improves the independence requirements for arbitrators. While the Commission could have been more bold and innovative in some areas, the draft does provide the institutional basis for additional improvements to be made in the near future. A key task now is to gain consensus among the member states and European Parliament on the need for change.
Author: Nathalie Bernasconi-Osterwalder is a senior international lawyer and heads the Investment Program of the International Institute on Sustainable Development (IISD).