Legally and politically important
Not cleared from scrutiny; further information requested
Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes
(39047), 12131/17 + ADDs 1–3, COM(17) 493
16.1A perceived lack of independence, consistency and transparency in the investor-state dispute settlement (ISDS) arrangements included in free trade agreements has led in recent years to greater public scrutiny and voicing of concerns. This was seen most recently in the opposition expressed, particularly by NGOs and trades unions, to ISDS provisions in the EU’s trade agreement with Canada (CETA) and previously, during the EU’s negotiations with the United States (TTIP). These concerns are also shared at a political level, as evidenced in the opposition of Belgium’s Walloon regional government to the CETA deal, which delayed and almost derailed CETA in late 2016.
16.2The Commission subsequently instituted what is now implied to have been a stop-gap measure: an investment court system (ICS) for each of its new FTAs—beginning with Vietnam and Canada. However the Commission now believes that ICS—which although it establishes permanent and more independent arbitral mechanisms is nonetheless a bilateral mechanism—fails to deal with the need to maintain consistency of case law and will also become a financial and human resource drain on the EU as the number of individual investment courts established under each new FTA multiplies.
16.3The Commission seeks to respond to these concerns by putting forward a proposal for the opening of negotiations under UN auspices for a multilateral investment court. The EU, Member States, third countries and regional economic integration organisations that are party to international trade and investment agreements would all be potential contracting parties.
16.4The Commission has published proposed negotiating mandates for Council consideration and approval. These set out its preferred options for the establishment of a multilateral investment court. The court is intended to be permanent and independent. Its adjudicators would be appointed ideally by an independent body, need to meet high professional and ethical standards, and be appointed for a long, non-renewable fixed term so as to safeguard their independence.
16.5The court would consist of a tribunal of first instance and an appeal tribunal, which would be supported ideally by a dedicated secretariat created for that purpose; although the Commission has left open the possibility that an existing organisation could support the court.
16.6Running costs of the court would be met by the contracting parties, and the Commission estimates that the share apportioned to the EU and Member States would be around €5.4 million (£4.97 million). This compares favourably with the option of maintaining the status quo of ISDS and individual investment courts under each of the EU’s new FTAs, which comes to a cost of around €9 million (£8.23 million).
16.7The Minister of State for Trade Policy and Minister for London (Greg Hands) indicates the Government’s support for:
“the principle of ensuring investor-state arbitration delivers fair dispute outcomes, is transparent and maintains high ethical standards.”
16.8The Minister adds that the Government will wish to consider whether the proposed new mechanism improves the existing investment dispute settlement framework and does so in a cost effective manner.
16.9The Commission’s initiative is of clear interest to the UK, given public and political views on the perceived deficiencies of the current investor-state dispute settlement mechanisms, which are seen as privileging foreign investors over domestic investors, possibly discouraging governments from legislating in the public interest, and certainly lacking in transparency or consistency in delivering judgments.
16.10The Commission’s proposal marks the start of what will undoubtedly be a long multilateral process, and there are at present many unknown elements, not least of which is the likely level of interest among the EU’s current and future trade partners. The extent of interest and uptake by third countries will be of crucial importance in determining the likelihood of success of this initiative.
16.11The Government rightly states that UN-led negotiations on the proposal—assuming the UN agrees to host the talks—will take a number of years. As the UK seeks to establish an independent trade policy following its withdrawal from the EU, this proposal has clear relevance for our future trade policy.
16.12We retain the proposal under scrutiny and ask the Government:
16.13We look forward to the Government’s responses to our questions and to updates on the progress of discussions in Council.
Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes: (39047), + ADDs 1–3, COM(17) 493.
16.14Investor-state dispute settlement mechanisms have been a standard feature of bilateral investment treaties and free trade agreements (FTAs) since the 1950s. According to UN figures cited by the Commission in its explanatory memorandum, there are 3328 international investment agreements containing ISDS provisions, currently in force.
16.15ISDS enables international investors to enforce claims directly against governments without having to go through their own governments. The rationale for this is that it avoids the politicisation of a case through the intervention of the investor’s home state, or requiring the investor to have to persuade its own government of the merits of the case before it can be raised with the government of the country where the investment is located.
16.16Grounds for claims by international investors typically relate to lack of equal treatment of foreign investors compared to domestic investors, unlawful expropriation, and failure to ensure fair and equitable treatment of investors and investments.
16.17ISDS provisions set out in investment and trade agreements specify that disputes between international investors and governments are adjudicated by an ad hoc tribunal established according to commercial arbitration rules. There is a choice of arbitration rules that may be applied, but the Commission states that most investment agreements choose one of the following sets of rules: those under the International Convention for the Settlement of Investment Disputes or those under the United Nations Commission on International Trade Law (UNCITRAL).
16.18The Commission cites UN statistics which show that as of January 2017, there have been a total of 767 known ISDS cases based on international investment treaties. Of these, 495 have been concluded, while the remainder are pending. However, these figures cannot be viewed as entirely reliable, since there is no legal obligation on the parties to disclose the launch of proceedings, and it is believed that many investors may prefer not to make such information public.
16.19The traditional ISDS system has come under increased public scrutiny in recent years, particularly during EU negotiations with the United States on the Transatlantic Trade and Investment Partnership, and then during EU negotiations with Canada on the Comprehensive Economic and Trade Agreement.
16.20The Commission notes that public concerns focus around the following areas:
16.21In 2015 the Commission responded to these concerns by developing a new system—the Investment Court System—which has replaced ISDS in the EU’s new trade and investment agreements. This is currently in effect only in the EU’s trade agreements with Canada and Vietnam.
16.22The ICS model seeks to respond to the above concerns by establishing under each new EU FTA or investment treaty a tribunal of first instance together with an appeal tribunal, comprising permanent tribunal members. The tribunal members would be appointed by the EU and its respective trade partners, and are required to hold qualifications similar to judges of the International Court of Justice. Cases are allocated on a random basis, and tribunal members are bound by a code of conduct requiring them to disclose interests that could impede or be perceived as impeding their independence. They are also barred from acting as legal counsel in other investment cases. ICS proceedings are made public, and are subject to multilateral rules on transparency.
16.23The Commission finds that while the ICS model responds to some of the concerns over ISDS, other issues remain, and new concerns relating to the viability of ICS have emerged.
16.24A major issue is that ISDS remains in force for the “vast majority” of the 3323 worldwide investment treaties in force, of which EU Member States are parties to 1384. This means that concerns relating to independence, legitimacy, consistency and predictability, lack of possibility of review, transparency and high user costs will continue to be an issue.
16.25The introduction of ICS into all new EU investment treaties and FTAs brings its own challenges. The most fundamental of these is that ICS is a bilateral mechanism, with individual tribunals to be established under each FTA or investment agreement.
16.26Claims brought under ICS under a given agreement will be addressed in a consistent manner by the permanent body established under that agreement. However, there is no link between the investment courts established under other agreements. This means, according to the Commission, that:
“the same or very similar substantive rules across agreements will continue to be interpreted by different bodies without any incentive to be informed by previous decisions.”
16.27The other main concern with the viability of ICS is the question of costs for the EU budget. The Commission estimates that each ICS, if active with one case before the first instance tribunal and one case under appeal, would cost around €800,000 (£735,784). In addition, in the EU-Vietnam FTA, it was decided that the division of costs would take into account the development level of the parties, which in practice could mean that the EU would bear a significant proportion of ICS costs for agreements with other developing country trade partners.
16.28The ICS approach is based on a multiplicity of permanent tribunals that will each need to be managed and funded. The Commission notes:
“The more ICSs are included in EU agreements, the more complex the management will be for the Commission services, which will have to bear the administrative burden in terms of time, workforce and financial resources.”
16.29The Commission seeks to respond to these concerns by seeking a Council decision to open negotiations with third countries to establish a multilateral investment court. The initiative seeks to establish a framework with the following features:
16.30The Commission carried out an online public consultation between December 2016 and March 2017. The majority of the 193 responses to the Commission’s questionnaire were from trade unions, NGOs or business associations.
16.31The impact assessment notes that:
“the consultation showed overall broad support for a multilateral reform of investment dispute settlement as described in this initiative although questions remain, especially on its technical aspects.”
16.32The Commission carried out further consultations through a stakeholder meeting in February 2017 hosted by Trade Commissioner Cecilia Malmström, participation in academic events, and targeted consultations with business organisations, trade unions, national associations and NGOs, particularly those focusing on sustainable development and environment protection.
16.33Discussions have also taken place with third countries, including through the co-hosting with Canada of an expert meeting on the subject in December 2016.
16.34The Commission states that:
“the main purpose of these exchanges has been to provide information on the ongoing Commission work and to hold exploratory talks with a view to testing their potential interest on the matter. These countries showed from moderate to considerable degrees of interest and willingness to engage.”
16.35In line with Commission President Juncker’s recent commitment to make public all negotiating directives proposed by the Council, an annex to the proposed Decision contains draft negotiating directives.
16.36The main features of these are:
16.37The impact assessment suggests that, based on the preferred options for the establishment of the court as set out in the draft negotiating mandates, the EU and Member States would pay approximately €5.4 million (£4.97 million) per year towards its operation. This estimate is based on an assumption of 45 contracting parties (the EU, its Member States, and 16 third countries) and 14 permanent adjudicators.
16.38The Minister of State for Trade Policy and Minister for London (Greg Hands), in an Explanatory Memorandum dated 5 October 2017, indicates that:
“The UK supports the principle of ensuring investor-state arbitration delivers fair dispute outcomes, is transparent and maintains high ethical standards.”
16.39The Minister adds that the Government
“will therefore want to examine the details of this draft proposal carefully as they are discussed in Council to ensure that any new mechanism improves the existing investment dispute settlement framework and does so in a cost effective manner.”
16.40The Court of Justice of the European Union confirmed in Opinion 2/15 on the EU-Singapore FTA that the EU and Member States exercise shared competence with respect to investor-state dispute settlement in foreign direct investment and non-direct investment.
16.41The Explanatory Memorandum notes that this is the first time since that opinion that the Commission has sought to exercise competence for ISDS, and goes on to state:
“The Commission considers that the participation of the EU in the proposed Convention is necessary to bring within its scope of application disputes arising under those agreements where the EU could be a respondent. On this basis, the Government agrees that EU action would be appropriate.”
16.42The Explanatory Memorandum states that initial Council discussions on the proposed Decision will begin in late November. The Commission hopes to have the Decision adopted by the end of the year. However, given that discussions with third countries are at an early stage, the Government expects that multilateral negotiations will “take a number of years before agreement is reached”.
87 €1 = £0.91973 or £1 = €1.08728 as at 1 September 2017.
89 For instance, most arbitral awards are enforced through the 1966 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States () or the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards ().
90 However, this would exclude or disputes between members of the .
28 November 2017