Possible Reforms of ISDS: Some Considerations on the ICS in CETA

1. Introduction

Investor-State Dispute Settlement (‘ISDS’) is a system in international law whereby foreign investors can initiate arbitration proceedings against host states. ISDS mechanisms have become ubiquitous in international investment and trade agreements, in particular bilateral investment treaties.

The reform of ISDS has been subject to extensive discussion in the EU since 2015, when the European Commission responded to the outcome of the public consultation for the inclusion of ISDS in the Transatlantic Trade and Investment Partnership (‘TTIP’) by proposing its replacement with a court-like system, the Investment Court System (‘ICS’). This system is now included in the Comprehensive Economic and Trade Agreement (‘CETA’) with Canada, amongst others. The new EU investor-state dispute settlement mechanism offers some possible solutions to the problems traditionally connected to ISDS.

This post will first provide an overview of the CETA’s ICS. It then analyses some benefits and disadvantages of this new form of ISDS compared to traditional arbitration mechanisms.

2. Analysis on the Inclusion of Investment Chapters in Multilateral Trade Agreements

2.1 The International Court System in CETA

CETA is an agreement between the EU and Canada signed on 30 October 2016. The scope of the agreement is very broad: in addition to provisions on investment protection and liberalisation, it regulates market access for goods, technical barriers to trade, subsidies, trade in services, financial services, telecommunications, competition, government procurement, intellectual property, and so on.

As a result of the 2015 Commission strategy reform of ISDS, CETA aims to discontinue the tradition of using ad hoc arbitration mechanisms in investor-state disputes in favour of a more court-like body. The declared aim of the EU in carrying out this reform is to have a “fairer” and more transparent ISDS.

The ICS is found in Section F (Chapter 8) of CETA. It includes numerous innovations in terms of substantive standards of protection for investors and procedural mechanisms of protection, such as requirements for the submission of a claim to the Tribunal, rules on third-party funding, the establishment of an appellate tribunal, the ethics of arbitrators, the transparency of proceedings, information sharing, the status of non-disputing parties and enforcement.

2.2 Pros and Cons

The interesting issues with ISDS that the ICS intends to tackle are, among others, (i) increasing transparency, (ii) and enhancing precedent. However, the mechanism has been criticised for several reasons, including (i) being a clone of the WTO and (ii) the appropriateness of calling the ICS a ‘court’.

2.2.1 Pros

(i) Increasing transparency

One of the main criticisms of the traditional ad hoc arbitration is that parties normally control confidentiality and transparency of the proceedings, even when such proceedings concern matters of public interest. Parties must normally give express consent for public access to the hearings, parties’ submissions and award. The issue was tackled already by the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration in 2014. These rules aim to increase transparency and accountability of treaty-based investor-State arbitration. They require, among others, the openness of submissions, including the opening of hearings to the public. These public proceedings illustrate the state’s accountability to its citizens and its regulatory role in dealing with disputes of public concern, such as environmental or health regulations and tax. The public deserves to have considerable transparency when it comes to matters that might affect them. In this regard, the ICS thus needs increasing transparency in two ways. Besides an opening up the hearing, the ICS system should include a detailed publication of information of its decision as well as its preparatory work and reasons of decision. In addition, the participation of third parties , such as NGOs, business and consumer groups and trade unions, should become more common, because it guarantees transparency in legal proceedings.

(ii) Enhancing precedent

Despite the fact that the substantive content of many investment protection rules is similar, there is no rule of precedent in investment arbitration.

At first, this does not seem to be a problem: each award should be unique because arbitrators should exercise their discretion and deliver an independent decision without any intervention. However, according to some authors, the lack of uniformity leads to inconsistent decisions and unpredictable results for foreign investors and host States.

The ICS intends to tackle the issue by creating an appellate mechanism. If the second tribunal believes that there might be some mistakes in the first award, it would give the tribunal an opportunity to amend its decision and enhance the stability of decisions in the future. Furthermore, both parties may appeal a decision on the grounds of errors in the application/interpretation of applicable law and manifest errors in the appreciation of the facts within ninety days of the delivery of the award. Then, the appellate body has a power to uphold, modify or reverse the award.

2.2.2 Cons

(i) Being a clone of the WTO

Some critics describe the ICS as a clone of the World Trade Organisation Dispute Settlement Body. The ICS consists of sections relating to the structure of tribunal, the appointment of judges, procedures of consultation, submission of claims, appeal, enforcement and damages, which are similar to the WTO DSU rules. In addition, the content of most international investment treaties, in which ICS mechanisms might be included, is quite similar to the WTO regulatory framework. Thus, the instructional framework and substantive rules do seem similar.

However, the ICS does not apply all WTO rules word by word. There are three main differences between WTO and ICS rules: objectives, parties and remedies. Regarding objectives, the WTO has a uniform and common set of rules, the Understanding on Rules and Procedures Governing the Settlement of Disputes, which applies equally among all member states aiming to promote fair trade. The ICS, on the other hand, depends on a specific BIT between two states. The nature of parties in the legal proceedings is also different. In the WTO, the disputing parties are States. In ICS, on the other hand, there is a dispute between the host State and foreign investor, with the latter calling on the State to protect its private interests. Lastly, the remedies as an outcome of the proceedings are different. A disputing party in the WTO proceedings aims for the legal compliance of WTO agreements while a foreign investor in the ICS aims for compensation from damages. Thus, the EU is not necessarily creating a replica WTO-like body.

(ii) Arbitration vs court

While the ICS, in its current state, is still merely a judicialised form of arbitration, the European Commission has announced its intention to transform the ICS into a full court in the future. However, some authors argue that having an investment ‘court’ has a number of disadvantages. Reinisch, for instance, mentions that the term ‘court’ is likely to initiate opposition from negotiating partners like the United States, who traditionally are uncomfortable with the idea of a supranational dispute settlement body. If the ICS were to receive the status of an internal court, it could affect the rules of public international law on the relationship between domestic courts and international bodies.

3. Conclusion

This blog post has discussed the recent developments in investor-state arbitration in the EU. It is clear that while the ICS approach has many advantages, there are still significant challenges remaining. In particular, the position of ICS in the wider context of international trade law and public international law is still very much up in the air. The debate on the exact nature of ICS will no doubt continue for quite some time.

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