American Bar Association Publishes Opinion on Investment Court System
On 14 October 2016, the Investment Treaty Working Group of the American Bar Association (ABA) published a report (the Report) on the European proposal for an Investment Court System.
As most of you know, the proposal for an Investment Court System emanates from the European Union and aims at replacing the traditional Investor-State Dispute Settlement mechanisms (ISDS). The Investment Court System finds its roots in a public consultation initiated by the European Commission on ISDS in the context of the negotiations for the Transatlantic Trade and Investment Partnership (TTIP). At the time, the European Commission received nearly 150,000 responses, an overwhelming majority of which opposed the traditional ISDS mechanisms that were being contemplated during the TTIP negotiations. Most criticisms viewed the traditional ISDS mechanisms as a threat to democracy, to public policy, to public finance and to the sovereign’s right to regulate. Many also expressed concerns on the independence and impartiality of arbitrators.
In response to those criticisms, the European Commission formulated, in September 2015, a concrete proposal for a new Investment Court System.
While the European Union is currently working on the implementation of the Investment Court System and has recently launched a public consultation on the topic (responses are due by 15 March 2017), I thought it interesting to discuss the views that the ABA expressed on this new international court system.
In light of the treaties currently embracing or contemplating the new Investment Court System (i.e. TTIP (to the extent that it is ever signed); the EU-Canada Comprehensive Economic and Trade Agreement (CETA); and the EU-Vietnam Free Trade Agreement), the Report addresses key issues with respect to (among other things) the composition of the Court, the enforcement of its awards, and its adherence to procedural rules.
Issues regarding the composition of the Investment Court
The Investment Court System envisages the creation of both a Tribunal of First Instance and an Appeal Tribunal composed of judges whose number varies according to the investment treaty or free trade agreement at issue (for instance CETA provides that the tribunal will comprise of 15 judges, while the EU-Vietnam FTA provides for 9 judges). In addition, the provisions of the treaty or FTA at issue should also contain rules on the background and professional qualifications that potential judges should meet.
The Report notes, however that meeting these requirements does not in itself ensure that a judge will have the requisite background to decide an investment case, which may well touch on issues of regulatory or constitutional law. The Report also laments that, unlike the Rome Statute creating International Criminal Court, no specific provision is foreseen to ensure the diversity of the Investment Court’s composition with respect to region of origin, ethnicity or gender.
The Report also criticizes the fact that the judges will be appointed (and re-appointed) to the Investment Court by state parties through a “Committee” that meets in non-public sessions. According to the ABA, these factors raise concerns regarding a potential judicial bias in favour of state parties over individual investors. The Report consequently recommends that a more transparent and consultative process be used and that the Court require judges to be independent of any treaty party. It notes, however, that limiting judges to one term would be the only way to ensure that a judge remains free from any possible reappointment pressures from state parties.
The Report also highlights that the Investment Court tribunals hear cases in panels of three judges appointed rotationally by the President of the Tribunal so as to ensure a random and unpredictable composition. Each panel comprises a national of an EU Member State, a national of the other treaty party, and a national of a third country who acts as its chair. This system of pre-selection represents a major shift from the prior ISDS practice of convening ad-hoc panels. It also explicitly departs from the WTO dispute settlement process (where the disputing parties select the members of their panels based on proposals put forward by the WTO Secretariat), as the Investment Court System does not offer the opportunity for the parties to raise concerns about members of a particular panel before the adjudicative process begins. Given that the WTO process of pre-selection has reduced the number of potential panelist challenges, the Report suggests that a similar consultative step should also be adopted by the Investment Court System in order to reduce the likelihood of parties bringing challenges later in the proceedings.
Issues regarding the enforcement of the decisions rendered by the Investment Court
The Report points out that an important issue regarding the Investment Court System concerns the question of whether the Investment Court should be seen as an arbitral body (in which case the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards applies to the enforcement of the awards rendered by the Investment Court) or whether the Investment Court is a court whose judgments will need to be recognised and enforced before domestic courts.
In this regard, the Report suggests curing this uncertainty by clarifying “specifically and unequivocally” the nature of the Investment Court, as well as the basis upon which awards issued through this mechanism may nonetheless be enforced as ICSID awards.
Issues regarding procedural rules
On the issue of procedural rules, the Report asserts that the TTIP, CETA and EU-Vietnam FTA’s procedural provisions tend to favour the governmental party to a dispute over the private one. The Report highlights that those treaties do not include many of the basic procedural provisions governing the daily operations of the tribunals, such as its ability to consider parallel proceedings or ex-parte motions, or to issue interim decisions and recommendations. Furthermore, those treaties do not address how the tribunals should handle evidentiary matters.
Importantly, the Report notes that the Investment Court proposal omits to designate a place of arbitration. This omission is particularly problematic as this information is crucial for the enforcement of the Investment Court’s decisions.
In view of those uncertainties, the Report recommends that the Investment Court adopt a standardized approach regarding all such procedural rules.
Overall, the Report acknowledges the substantial effect that the Investment Court System would have on adjudicating investment treaty disputes. The Report nevertheless asserts that the current provisions are incomplete “inchoate and often, incoherent“, and would benefit from the inclusion of additional rules and guidelines in order (i) to avoid the perception of bias; (ii) to increase transparency; and (iii) to ensure the application of the rule of law. Consequently, the Report concludes that unless steps are taken to address these concerns, the abandonment of the arbitration system in favour of the Investment Court System is to be avoided.