The international investor-state dispute settlement (ISDS) system that has blossomed over the last century is now under the microscope. Concerns about the legitimacy, coherence and predictability of tribunal decisions have led to calls for ISDS to be replaced by standing ’investment courts’.
For those involved in cross-border energy-related commerce, this proposal is not merely academic. The European Union (EU), for example, is a vocal proponent of an investment court and is phasing out intra-EU bilateral investment treaties (BIT). At the same time, a growing number of EU states – including Germany, France, Spain and Denmark – have announced their intention to exit the Energy Charter Treaty (ECT), which provides for investment treaty arbitration.
This article discusses the issue arising from the proposal to establish an investment court in the context of cross-border energy disputes and examines whether the leading proposal can address those issues.
Concerns with ISDS
Questions over the adequacy of ISDS are not new. In the early 2000s, a string of awards made against Argentina following the Argentinian debt crisis prompted critiques from scholars and states, primarily in the Global South. More recently, states in the Global North responding to investment treaty claims have increasingly voiced misgivings with the current ISDS system. Since 1999, more than 200 investment treaty claims have been brought against EU member states, with more than 40 of those claims brought against Spain alone in respect investments in renewable energy.
EU courts have expressed reservations about the ISDS system. In Slovak Republic v Achmea BV (Case C-284/16), the Court of Justice of the EU (CJEU) found the ISDS clause in the Netherlands-Slovakia BIT was incompatible with EU law as it impaired the CJEU’s exclusive jurisdiction to interpret EU law. Subsequently, in Republic of Moldova v Komstroy LLC (Case C-741/19), the CJEU held that the ECT did not apply to intra-EU disputes. Most recently, in Republic of Poland v PL Holdings Sàrl (Case C-109/20), the CJEU extended the prohibition in Achmea to an ad hoc arbitration agreement between an investor and a state.
Against this backdrop, several bodies have initiated reviews of the ISDS system, including the European Commission and the United Nations Commission on International Trade Law (UNCITRAL). The work of the UNCITRAL Working Group III (Working Group) is particularly enlightening as the Working Group is comprised of all 70 UNCITRAL members and has received submissions from the EU. Three key concerns have emerged:
- A lack of consistency, coherence, predictability and correctness of arbitral decisions.
- A lack of impartiality of arbitrators and decision-makers.
- The costs and duration of ISDS proceedings.
The Working Group is currently considering proposals to address these issues, including whether to replaced ISDS with a standing Multilateral Investment Court (MIC).
The proposed solution: a Multilateral Investment Court
In its proposal, the EU envisions the ‘establishment of a standing mechanism for the settlement of international investment disputes’ with two tiers of tribunals staffed by full-time, salaried adjudicators.
The first tier of the MIC would comprise a first-instance tribunal to conduct fact-finding and apply relevant law like existing arbitral tribunals. The second tier would be an appellate tribunal, to hear appeals on errors of law or ‘egregious’ factual errors. Suitably qualified MIC adjudicators would be appointed by state parties and be randomly assigned to cases.
Considering the proposal
An MIC may relieve some concerns with ISDS, in particular ensuring ongoing access to ISDS for cross-border energy disputes. There are a number of practical hurdles to an MIC and much remains to be clarified.
Perhaps the largest of these hurdles is political will. For a truly global MIC to emerge, a critical mass of states would have to commit to move from the current ISDS system to MIC. This would likely require a new international convention that is widely adhered to and the amendment or replacement of hundreds of existing international investment agreements.
The EU considers that an MIC with permanent, full-time adjudicators and an appellate system would enhance the predictability and consistency of decisions in investor-state disputes. The development of ‘continuous collegiality’ between MIC adjudicators could conceivably create a more reliable, shared approach, but it is unclear whether the decisions of an MIC would have precedential value, which is a key factor in addressing the concern of consistency across awards.
The proposed MIC would also require adjudicators to have qualifications ‘comparable to adjudicators in other international courts’ such as the International Court of Justice. However, the International Centre for the Settlement of Investment Disputes (ICSID), which is one of the fora for the current ISDS system, already requires members of the ICSID Panel of Arbitrators to have a recognised competence in law, particularly international investment law and public international law and ‘recognized competence … in commerce’.
A panel of full-time adjudicators who are unable to act as counsel in other matters during the term of their appointment to the MIC would reduce incidences of ‘double-hatting’. In addition to reducing the ethical issues that double-hatting can raise, this may enhance user perceptions of adjudicators’ impartiality. However, the appointment of adjudicators by states leaves the MIC open to criticism of ‘court packing’ (i.e., that only adjudicators sympathetic to host states are appointed), and even criticism of politicisation by states, a claim that has on occasion beset the appointment processes for the International Criminal Court, the International Court of Justice and the World Trade Organization.
Most importantly, it is unclear whether a MIC judgment would qualify as an arbitral award for enforcement purposes. A foundational element of arbitration is party autonomy to appoint decision-makers, and the EU’s proposal does not appear to contemplate that parties would select their tribunal members. It is not evident that the governing law for the MIC procedure would be domestic law. This raises the question as to whether an MIC decision could be said to be ‘made in the territory of a State’ for the purposes of the New York Convention (Convention). ‘The Convention allows an award creditor to enforce a foreign arbitral award in more than 172 states, whereas the scope for enforcing a foreign court judgment is far more limited, and often depends on the domestic rules at the place of enforcement. The utility of an MIC for states and investors alike would be greatly reduced if MIC decisions do not qualify as arbitral awards for enforcement purposes.
If these issues can be resolved, and if the political will exists, an MIC may address concerns about ISDS. In the meantime, the rapidly changing network of investment protection treaties with ISDS provisions, combined with supply chains and investment pathways adapting to the energy transition, make for an increasingly uncertain legal landscape.
With thanks to Madison Colangelo.