Wednesday, December 9, 2015

What Does The EU's Proposed "Investment Court System" Mean For The Rest Of The World?

On 12 November 2015, the European Commission transmitted its proposal for an Investment Court System (“ICS”) that would replace the investor-State dispute settlement (“ISDS”) mechanisms in its future trade and investment agreements, starting with the Transatlantic Trade and Investment Partnership (“TTIP”) agreement being negotiated with the United States. Although the ICS proposal may, for now, be a matter between the EU and US, it constitutes a major reform initiative that should be of interest to other States and their investors.

What is the European Commission Proposing?

The current ISDS system provides for foreign investors to submit disputes concerning the host States’ treatment of their investments for resolution by international arbitration tribunals. These tribunals are established on an ad hoc basis, typically with each side appointing one arbitrator and the presiding arbitrator appointed by agreement or by an independent institution, such as the International Court of Justice. The decisions of the tribunals are binding, and are generally subject to very limited and decentralized appellate review.

The ICS would follow the World Trade Organization dispute resolution model and consist of two permanent international courts, a first instance Tribunal and an Appeal Tribunal. The judges on each court would be publicly appointed and subject to stricter conflict of interest restrictions than are applied in the ISDS system. The ICS would also differ from ISDS in that the Appeal Tribunal would be the single appellate body and would have a relatively broad scope of review, which would enable it to correct errors and ensure a consistent application of the law.

Why is the European Commission Proposing the ICS?

The European Commission’s proposal is a response to increasing public skepticism of ISDS. Frequently cited concerns are a lack of transparency, conflicts of interests (e.g., with arbitrators who also act as counsel for investors in other disputes), inconsistent judgments, and undue infringement on governments’ right to regulate.

According to the European Commission’s First Vice-President Frans Timmermans:

          “The new Investment Court System will be composed of fully qualified judges, proceedings will be transparent, and cases will be decided on the basis of clear rules. In addition, the Court will be subject to review by a new Appeal Tribunal. With this new system, we protect the governments’ right to regulate, and ensure that investment disputes will be adjudicated in full accordance with the rule of law.”

How Does the ICS Proposal Affect Non-EU States and Investors?

The European Commission has explained that its ICS proposal represents a first step in a broader reform effort aimed at establishing a permanent International Investment Court that would replace the ISDS mechanism in all agreements EU Member States have between one another and with non-EU States.

Non-EU States may share the EU’s concerns about the current ISDS system and support similar reforms. However, any multilateral negotiations for a single International Investment Court will inevitably be difficult and slow. What remains to be seen is how the European Commission will seek to achieve reform on a more incremental basis.

Oman is a party to investment agreements with a number of EU Member States, including Austria, Belgium, Bulgaria, Croatia, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Sweden and the United Kingdom. The European Commission might eventually seek to renegotiate those agreements and, while the negotiations for a free trade agreement between the EU and the Gulf Cooperation Council remain suspended, it might seek an ICS body in that agreement if negotiations resume.

Where the European Commission could achieve reform more quickly is within the EU. Although such a change would be formally limited to intra-EU agreements, it could be significant for investors from outside the EU, who often make their investments in the EU through subsidiary companies domiciled in EU member States, with the Netherlands a particularly popular option. A dispute that previously would have been submitted to an independent arbitral tribunal under the ISDS model might instead be decided by an ICS body consisting of judges appointed by the EU, which may be less appealing to non-EU investors.

States may also be concerned that an ICS negotiated between the EU and US, or within the EU, will become the model for a multilateral court or future regional ICS bodies which they will be asked to sign up to after important questions about the court’s organizational structure, procedures and principles have already been decided.