European FlagThe system of investment protection is experiencing radical changes at the level of the European Union (EU). While so far, the protection of foreign investments was guaranteed by bilateral agreements, this is about to change and a unified multilateral system is proposed to be established. How does this initiative influence investor-to-state dispute settlement mechanism (ISDS)?

Current System of the ISDS

Under the current ISDS regime, in case of a breach of investment protection standard included in a bilateral investment treaty, an investor can seek protection against measures of a host state before an arbitral tribunal composed of arbitrators selected by parties to hear the particular case.

Despite the fact that this method of ISDS is included in almost 3,200 bilateral investment treaties worldwide, it is nowadays facing a strong criticism. Lack of neutrality, transparency and legitimacy and, at the same time, unpredictability and expensiveness are the most frequently used arguments of opponents of this system.

And precisely solution of these shortcomings had EU in mind when it presented its proposal to replace the current ad hoc system of ISDS in which tribunals are constituted on case-by-case basis by a permanent investment court.

What Can be Expected?

Transformation of the current ISDS mechanism shall be conducted in two steps.

Firstly, provisions on permanent bilateral investment courts will be included in newly negotiated free trade agreements and later, once a greater consensus is built, these will be replaced by a multilateral investment court. This is considered to be a final destination of the ISDS reform within the EU efforts to create a unified multilateral system of investment protection.

While the first step was already taken when the EU included in its newly negotiated trade agreements with Canada and Vietnam provisions regulating establishment of a bilateral investment court, the second phase has started only recently. On 14-15 December 2016, the Canadian government and the EU hosted a first of a series of intra-governmental discussions aimed on establishment of a permanent multilateral investment court.

Permanent Multilateral Investment Court

Given that only the first meeting on establishment of the multilateral investment court took place, limited information is now available on how this should be organized. However, the EU has suggested that, same as with the bilateral investment courts, also with respect to the multilateral investment court, the inspiration will be taken from domestic and other, already existing international judicial bodies.

The main features of the new multilateral investment court thus should be as follows:

  • Two-tier system – Unlike the current ISDS system, there should be a First Instance Panel, decisions of which could be appealed to an Appellate Panel based on factual, as well as legal reasons.
  •  Permanent judges – Judges will no longer be selected by parties to a dispute; however, the cases will be allocated randomly to judges who are appointed by agreement parties, i.e. states. The judges shall fulfill strong ethical criteria and also new provisions ensuring their impartiality should be implemented. As a result, a double-hat syndrome allowed under the current regime enabling arbitrators in one case to act as counsels in a different one should be limited.
  •  Permanent staff and secretariat of the multilateral investment court.
  •  Strengthened transparency of proceedings.

While many see this initiative as a step forward, especially because it is expected to increase predictability, consistency and impartiality of decisions, it also has its critics. For example, loss of investor’s right to nominate its judge or extension of a time necessary for resolution of a dispute caused by introduction of the Appellate Panel are seen as problematic.

What Is Next?

Given that the talks are at their very beginning, we shall see how they will proceed and whether enough states will express their interest in being part of this project because the multilateral investment court should be set up only once a minimum number of participants is found.

The next informal ministerial meeting is planned to take place on 20 January 2017 at the world Economic Forum in Switzerland. Luckily, and as opposed to highly criticized negotiations of the Transatlantic Trade and Investment Partnership, negotiations on the multilateral investment court should be conducted in public and transparent manner.

We will keep you posted.