As states continue exploring options for the reform of Investor-State Dispute Settlement, the EU’s proposal to establish a Multilateral Investment Court faces an uncertain legal and political landscape.
Investor–State Dispute Settlement (ISDS) continues to be subjected to criticism, controversy, and an avalanche of proposals for reform. Envisaged as an instrument for protecting foreign investments, depoliticising investment dispute settlement, and ultimately encouraging investment flows, it has had mixed results in practice. A drastic increase in the number of investment claims – at the rate of more than 50 per year since 2011 to nearly 1400 known investment treaty arbitrations today, accompanied by a high cost of proceedings and mega awards, has prompted different policy responses by states. These span from modifying the current system, to introducing a new dispute settlement model, or abandoning ISDS altogether.
In Australia, in 2022 the current Labor government decided not to include ISDS in new trade agreements. However, ISDS has been gaining a fresh traction with four claims brought under earlier trade agreements by Zeph Investments, a Singapore-based company ultimately owned and controlled by Clive Palmer. While minimal details have been shared publicly, three of these claims relate to the refusal of a mining lease for the proposed Galilee Coal Mine in Queensland. These cases form part of a growing body of claims by fossil fuels investors against state measures concerning climate change and decarbonisation, which have sparked a renewed push against ISDS. At the same time, the proponents of ISDS have argued that investment protections are needed to secure private investment for projects supporting energy transition.
Looking for a feasible compromise, states have been participating in the multilateral reform of ISDS taking place under the auspices of the UN Commission for International Trade Law (UNCITRAL) since 2017. The EU has been one of the key proponents in this reform, seeking to overhaul the problems of the current system through the establishment of a new international court specialised for the settlement of investment disputes.
Europe and its ISDS debate
Much like Australia, which faced its first ISDS controversy with Philip Morris’ claim challenging plain cigarette packaging legislation in 2012, European States have also been subjected to high-profile cases concerning state regulatory measures. Unlike Australia, the number of ISDS cases in Europe has been incomparably higher, largely due to a more expansive network of EU Member States’ investment treaties and in particular, their participation in the Energy Charter Treaty – the world’s most litigated investment treaty, from which the EU and many Member States have recently withdrawn.
Many of these cases involved so-called “intra-EU” claims—those of EU investors against other EU Member States. In 2018, the Court of Justice of the EU ruled that arbitration clauses in investment treaties between EU Member States, which form the basis of intra-EU claims, are contrary to EU law. While this has not stopped intra-EU investors from continuing to seek redress before international investment tribunals, leading to more legal uncertainty regarding the enforceability of these awards, it effectively signalled the end of ISDS within the EU. The political debate around desirability of ISDS between EU Member States has thus been resolved on a legal ground.
At the same time, under its bilateral trade and investment agreements with non-EU States (Canada, Vietnam, Singapore, Chile, Mexico), the EU has negotiated an Investment Court System—a semi-permanent dispute resolution mechanism—as a replacement for traditional ISDS model based on ad hoc arbitration. Since the solution with many bilateral standing tribunals seems impractical and costly, the ultimate goal of the EU is to establish one standing mechanism at the international level—a Multilateral Investment Court (MIC)—the proposal that the EU successfully introduced as one of the reform options in the UNCITRAL.
Would a court resolve ISDS problems?
The EU has presented its proposal as the only option that systematically addresses all ISDS concerns identified by the UNCITRAL. The key element of the MIC are judges who would be appointed on a semi-permanent basis, significantly departing from the current ISDS practice where disputing parties appoint arbitrators deciding their case. While this might address concerns regarding independence of arbitrators, who are often perceived as pro-investor, it has raised new concerns about states’ political influence over judges.
The EU proposal also envisages a second-tier mechanism, which seeks to ensure more consistency between decisions, and with the transparency offered by a court, alongside more accountability within the system, in line with the EU’s vision of the rule of law. However, the core issues regarding the functionality of the proposed EU court remain unclear, including its jurisdiction, the enforceability of its decisions and the financing of the new international institution.
In many aspects, the fundamental premise of the reform, focusing only on the dispute settlement mechanism is flawed, since the main state concerns relate to substantive issues regarding the standards of protection for foreign investors and the impact of the system on sovereign rights of States to regulate in the interest of their citizens. As these are more politically charged issues, they are outside of the reform scope and only sporadically discussed in the UNCITRAL. Accordingly, many do not see the merit in establishing a new international institution that might not be able to address the core legal concerns of the current system.
Is the time right for a new international court?
In addition to legal questions, the EU’s proposal faces a precarious political landscape. For different reasons, the MIC largely remains an unwanted court for a range of stakeholders, both within and outside the EU. While the EU has a united stance with the Member States in the UNCITRAL, none of the EU trade and investment agreements introducing a court system have yet been ratified by the Member States. In addition, investment arbitration still features in new bilateral investment treaties concluded by EU Member States, so even the EU’s own approach has been more pragmatic than coherent.
In the UNCITRAL, many States have expressed scepticism about the MIC, including the US, China and Russia. Developing states are more interested in solutions which can deliver tangible benefits for them, such as an advisory centre. Even those states that have bilaterally accepted a court system in an agreement with the EU (only five so far) have not strongly advocated for the EU’s MIC in the UNCITRAL. The current geopolitical environment is hostile to the existing international institutions (e.g. WTO), which makes creating new ones even more complex. For the EU proposal to succeed in the UNCITRAL, it will require consensus of its members.
Nevertheless, the considerations of different aspects of the MIC have permeated formal and informal deliberations in the UNCITRAL, in parallel with other reform options, and without the discussion on the MIC’s general desirability ever taking place. The Code of Conduct for Judges has been adopted, alongside the similar code for arbitrators, and deliberations on the draft Statute of the court are ongoing. The advantage of the EU’s proposal is that it seeks to work alongside other options, including the traditional arbitration model. However, given the number of Member States’ treaties (over 1400), the impact of the court might be more profound.
While reform deliberations continue, the EU’s strategy of using the UNCITRAL as a vehicle to promote its own vision of the ISDS reform persists, as does the uncertainty about its success.
Dr Ivana Damjanovic is a Senior Lecturer at the Canberra Law School and a Visiting Research Fellow at the ANU Centre for European Studies. Her book “The European Union and International Investment Law Reform: Between Aspirations and Reality” was published by Cambridge University Press.
This research is part of the EU Research and Education Network on Foreign Policy Issues: Values and Democracy, 101127854 – ERASMUS-JMO-2023-NETWORKS-HEI-NON-EU-VAL-DEM, co-funded by the EU Erasmus+ Programme. The views expressed are solely those of the author and are independent of sources providing support.
This article is published under a Creative Commons License and may be republished with attribution.
