The European Commission’s Proposal of an “Investment Court System” for TTIP: Stepping Stone or Stumbling Block for Multilateralizing International Investment Law?

On November 12, 2015, the European Commission submitted to the United States its Official Proposal for the establishment of an “investment court system” in the Transatlantic Trade and Investment Partnership (TTIP) currently under negotiation.[1] The Proposal provides for a two-tiered Tribunal to hear investor-state disputes, consisting of a Tribunal of First Instance and an Appeal Tribunal. For TTIP, the Tribunal is composed of twenty-one members, who are appointed by the European Union and the U.S. rather than by the disputing parties (investor and host state) and are subject to stricter rules on independence and impartiality. Furthermore, the Proposal’s substantive standards of treatment are designed to ensure policy space for states to regulate in the public interest.

As noted in an earlier Insight by Barnali Choudhury,[2] the Proposal represents a historic turning point in international investment law. Departing from a private law conceptualization of investment law, the Proposal promotes the long-called-for “public law approach” to investor-state dispute settlement (ISDS), with rules on transparency, third-party participation, emphasis on the right to regulate, and increased institutionalization.[3] The Proposal serves as a basis for negotiations not only with the U.S., but also with any of the EU’s negotiating partners.[4] An inclusion in TTIP, however, would indicate a tectonic change in the approach of two global actors towards ISDS, bringing back to the diplomatic agenda the serious prospect of a multilateral investment court.

This Insight addresses the extent to which the proposed investment court system, if included in TTIP, could become a model for a global investment court, as is the stated goal of the Commission.[5] Despite its visionary nature, the proposed court system suffers from two structural weaknesses that reduce its suitability as a global model, namely its bilateral set-up and its relationship with domestic courts. This Insight elaborates on those weaknesses and explains the changes that could be introduced in order to transform the investment court system in an important mega-regional agreement, such as TTIP, into a medium for genuine multilateralization of the ISDS regime.

The Bilateral Nature of the TTIP Tribunal

Disputes under international investment agreements (IIAs) are so far settled through arbitration, most importantly under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention)[6] or the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.[7] Unsurprisingly, the decentralized structure of arbitration has resulted in a significant number of inconsistent and incoherent decisions as regards the interpretation of not only similar provisions across different IIAs, but also provisions of the same agreement in relation to virtually identical facts. These inconsistencies have fueled concern about the lack of predictability of international investment law, adding to the sense of a legitimacy crisis of the field.[8]

The creation of a permanent investment court system with respect to a given agreement, such as the TTIP Tribunal, would eliminate inconsistent interpretations of that agreement. But such an approach could not address treaty-overarching inconsistencies—that is, inconsistencies in interpretation or application of corresponding provisions in different treaties. Instead, if permanent investment courts were to proliferate on a bilateral basis as a result of the Commission’s approach, inconsistencies in the approaches of different investment courts to essentially identical issues and treaty provisions are likely to persist. Only the creation of a multilateral investment court would be able to ensure cross-treaty consistency and predictability in international investment law more generally.

How to arrive at the creation of a more centralized, ultimately multilateral investment court system? The traditional pathway would be its negotiation in a multilateral setting, or the reform of existing multilateral structures, such as the International Centre for the Settlement of Investment Disputes (ICSID) system. A third alternative would be to create permanent investment courts in important mega-regionals, such as TTIP, structured so as to morph easily into a multilateral institution with third states simply joining the tribunal’s statute.

Although the Commission’s Proposal foresees the creation of a future multilateral investment court,[9] as presently proposed the establishment of a TTIP Tribunal may create an additional obstacle on the way to a multilateral court, rather than aiding the process of multilateralization. In fact, a tribunal composed of judges who are one-third European and one-third from the U.S. could further cement the bilateral structure of international investment law. The more effectively the TTIP Tribunal functions, the more difficult it will become to replace the status quo later with a multilateral mechanism.

An alternative approach, with a better chance of promoting future multilateralism, would be to ensure from the outset a higher degree of diversity on the bench. For example, judges could be appointed not by the EU and the U.S. as TTIP parties, but by a multilateral body representing the entire international community, such as the UN General Assembly and the UN Security Council (as with the International Court of Justice).[10] Although the TTIP parties would thereby relinquish their appointment powers as an instrument to influence the interpretation of the treaty, the jurisprudence of the Tribunal would still be controlled by those parties through the envisaged TTIP Committee, an inter-governmental body through which the TTIP parties can issue authoritative interpretations of TTIP.

The Relationship between the TTIP Tribunal and National Courts

Another important aspect that a future multilateral investment court must address is the relationship with domestic courts. This is crucial, as core concerns with ISDS arise from the “special” recourse it grants to foreign but not national investors. ISDS is criticized as giving foreign investors the possibility i) to get a second bite at the apple, after having lost in domestic courts; ii) to pursue parallel claims at the domestic and international levels to exert pressure on governments for a favorable settlement; or iii) to circumvent domestic courts completely as the exhaustion of local remedies is often not a condition of accessing ISDS. In all of these cases, ISDS is difficult to reconcile with the idea of democratic equality. At the same time, one must recognize that shortcomings with domestic courts are the principal reason why ISDS was conceived in the first place.

The tension between effective dispute settlement and democratic equality requires a delicate balancing act that the Commission’s Proposal for an investment court system tackles, without however, fully resolving it. In order to provide an effective means to settle investor-state disputes, the Proposal allows direct access to the TTIP Tribunal without prior recourse to local remedies. At the same time, the Proposal restricts the jurisdictional reach of the TTIP Tribunal by excluding litigation before it while proceedings in domestic courts are pending or if domestic remedies have been exhausted.[11] This approach is designed to prevent investors from getting a second bite at the apple or using parallel proceedings to impose pressure on governments.

However, the Commission’s underlying idea of “mutual exclusiveness” of national courts and the TTIP Tribunal may not be workable in practice. As the TTIP Tribunal is limited to certain remedies (primarily compensation) and to reviewing the host state’s conduct under international rather than domestic law,[12] investors may need to turn to domestic courts to have the measure reviewed under domestic law and to enjoy the full set of remedies, in particular restitution of the status quo ante.[13] These differences in remedies and applicable law require investor-claimants to make difficult choices between the protection under domestic law and the protection under international law.

The requirement to make such choices weakens the authority of domestic law and domestic courts, as well as that of international law and the TTIP Tribunal, and hinders the mutual integration of both legal orders and dispute settlement mechanisms. In particular, in countries with weak courts, the Commission’s Proposal may lead to the de facto exclusion of domestic courts in settling disputes with foreign investors. In the long run, such a system could undermine the authority and democratic legitimacy of domestic courts, creating few incentives for reform. It also deprives the host state of an opportunity to correct arbitrary, discriminatory, or otherwise illegitimate government conduct affecting foreign investors, thereby avoiding international responsibility and costly damages.

Unexplored alternatives could both strengthen the role of domestic courts in settling investor-state disputes and ensure government compliance with international law.[14] These alternatives would entail relinquishing the strictly dualistic conception of the Commission’s Proposal and instead adopting novel means of integrating national and international law and dispute settlement on foreign investment. National courts could be included, for example, as a mandatory first instance to settle investor-state disputes and to examine the compliance of host state conduct with domestic and international law,[15] without excluding subsequent access to the TTIP Tribunal. In order to ensure that the domestic first-instance court is an effective means to settle investment disputes, a higher (appeals or supreme) court could be designated in each state to exercise this function.

The TTIP Tribunal, in turn, could be construed as an international appeals facility that ensures that the first-instance court correctly applied the legal standards laid down to protect foreign investors under international law. This approach would ensure that domestic courts are involved in settling investor-state disputes and would put the international level in an effective position to implement international investment protection standards. The TTIP Tribunal could—similar to the Court of Justice of the European Union—be further integrated with the national level through the establishment of preliminary reference procedures, through which rulings on the interpretation of international (investment) law could be requested by the first-instance courts.[16]

Such an integrated system would make it possible to include national courts in the control of government conduct and ensure compliance with both national and international law. This technique would both increase the overall democratic legitimacy of the ISDS system and create incentives for national courts to settle claims by investors in a fair, equitable, and effective manner.

Keeping Alternatives to an Investment Court System Open

The Commission’s Proposal provides an important impetus towards constitutional reform of international investment law. Still, the Proposal may face opposition across the Atlantic, as the U.S. is usually hesitant to create international courts. Instead of a court, the U.S.-led Trans-Pacific Partnership (TPP),[17] which was concluded in October 2015 after long negotiations, contains a public law reformed version of investor-state arbitration that stresses the right to regulate, transparency of proceedings, third-party participation, and tighter control of arbitrators. In order to avoid a failure of TTIP on the narrow issue of ISDS, the EU may need to keep an open mind towards a public law reformed ISDS system as included in TPP or in the EU-Singapore free trade agreement, if the U.S. does not accept the proposed TTIP Tribunal. Moreover, a failure of TTIP would mean that unreformed ISDS persists under existing IIAs between the U.S. and some EU members.[18]

In any event, it seems that a truly multilateral investment court system, as ultimately envisaged by the Commission, would require more fundamental reform than presently suggested for TTIP. Indeed, unless the Commission’s proposed investment court is better designed to transform into a multilateral body in the future and integrate with national courts, a TTIP Tribunal may unwittingly create a stumbling block to genuine multilateralization.

About the Author: Stephan W. Schill, an ASIL member, is Professor of International and Economic Law and Governance at the Faculty of Law of the University of Amsterdam and Editor-in-Chief of The Journal of World Investment & Trade.