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GAR Live Lookback: Frankfurt - is the EU’s investment court proposal fit for purpose?

Sarah Steven

31 May 2018

GAR Live Lookback: Frankfurt - is the EU’s investment court proposal fit for purpose?

GAR Live Frankfurt last year produced one of the standout moments of the whole GAR Live year, 2017, as three speakers argued the pros and cons of the EU’s permanent investment court proposal in an impressively blunt style. Here is a full recap.

Headed “The EU’s permanent investment court proposal – will it be fit for purpose?”, the panel comprised Laurie Achtouk-Spivak, of Cleary Gottleib Steen & Hamilton, Sabine Konrad, of McDermott Will & Emery, and Stephan Schill, a professor at the University of Amsterdam. They were moderated by Patricia Nacimiento of Herbert Smith Freehills.

The EU went public with the proposed standing body in its free trade agreement with Canada – CETA. It is expected it will roll it out in other treaty negotiations, although the ECJ may pose a problem there.

The panel’s brief was simple: help the audience to know what to think of the idea and predict where things may go.

In the course of doing so, they discussed:

  • Does the idea make sense? Will it succeed in meeting the concerns that led to it?
  • Will it give states more control over outcomes – or the opposite?
  • How would the decisions of such a body hook into the current worldwide enforcement mechanisms?
  • Can one change the output of a system by tinkering only the procedural side? Doesn’t much depend on the terms of the underlying treaties and contracts being applied, which can be multifarious? And,
  • Where do things go from here?

The following is an edited transcript of the panel’s discussion. Several threads are woven throughout. They include:

  • Double-hatting – good or evil? There is a notable exchange between Schill, Konrad and the audience on the harm (or not) of double-hatting (the practice of sitting as arbitrator in investment matters while also accepting work as counsel). Konrad suggests that insisting on single hatting will entrench problems with the arbitrator pool – namely that it’s old, white and male. She quotes a leading arbitrator who said he was “more independent than a single hatter because being an arbitrator meant he was losing money”. Schill replies he knows “of enough people from non-developed countries who are single hatters and have great repute [and] lot[s] of younger people, females included, who could make a living with a job on the side other than being counsel in investment treaty arbitration”.
  • Lessons from history. The speakers find parallels for what’s going on with earlier moments in history. Konrad references both “the destruction of the PCA in the late 19th century” and the ‘decline’ of the European Court of Human Rights, as she makes the case against the court.
  • Sovereignty and unintended consequences. The panel discuss whether state parties – in their quest for control – will discover they surrendered that which they value most. The chance to decide the composition of the panel, which under the proposal would be decided “in the back rooms of Brussels” possibly according to “national ratio”.

The conference took place on the 29th June at the Jumeirah Hotel, Frankfurt. It was sponsored by Cleary Gottlieb Steen & Hamilton, Allen & Overy, Accuracy, Baker Botts and Geotext Translations.

This year’s GAR Live Frankfurt is on 12 June. A few tickets still remain. You can view the programme and register here:


Patricia Nacimiento: Good afternoon. Our topic is the EU Permanent Investment Court proposal: will it be fit for purpose? I believe this is a topic that cannot be understood without background. We need to look to the development and historic context. It is re-active; not pro-active. It’s born of a need to react to a certain criticism, rather than out of deep conviction that we need to have something new. So, what is this proposal?

Patricia Nacimiento introduced the speakers.

Since this is a topic where there is a lot to be said, feel free to jump in with comments or questions at any time. As to the context and the historic development of the investment court system, you will recall that in 2013 there was a public backlash against investment arbitration triggered in part by the arbitration clauses in the various BITs. This is why the European Commission decided to consult the public and, in a very short time, it obtained over 150,000 replies. This prompted the German Ministry of Economics to task Professor Krayeski with drafting the EU Model BIT, taking into account the criticisms identified during the consultation process. I will call this the Krayeski Proposal. It foresaw for the first time an investment tribunal which would come together only when an investor brings a claim. It provided a mechanism for establishing the tribunal: a standing panel of three members, to be composed of one member appointed by each contracting party and a third chosen from members appointed jointly by the contracting parties. It also contained provisions on reasonable fees and provided for an appellate body of five members, in this case appointed by the parties and tasked with reviewing appellate requests limited to certain issues. The Krayeski Proposal also provided for an enforcement mechanism, and finally for interpretations by the parties which should be binding on the tribunal.

We then have a further development where this proposal is introduced into negotiations for a BIT in February 2016, the EU-Canada Comprehensive Economic and Trade Agreement (CETA), and let’s not forget the EU-Vietnam FTA. We only hear about CETA but the EU-Vietnam FTA has much the same wording. They include a specific provision, namely anticipating the transition from the bilateral investment court system included in the agreements to a permanent multilateral investment court. Some key features from a substantive point of view: it re-affirms the parties’ right to regulate; it has a closed list of what constitutes a breach of the FET; and it provides for a court. As regard to the rules, an investor may choose ICSID rules, the ICSID additional facilities rules, the UNCITRAL, or any other rules upon agreement of the parties.

There is then a first instance tribunal, composed of members selected from a roster of only 15 members. What is interesting is that these members are prohibited from acting as counsel, party-appointed experts or witnesses in any investment dispute during their term. The CETA joint committee appoints five members for each state party and selects another five members from third states. The tribunal shall hear cases in divisions consisting of three members: again one member should be a national of a member state, one a national of Canada and one a national of a third country. This division should be chaired by the member of the tribunal, who is the national of the third country.

This deals with the fees of the tribunal. They will be paid a monthly retainer, to be determined by the CETA joint committee, and some additional fees and expenses. There’s also an appellate body which will decide on appellate requests, but limited to certain grounds listed in the wording. It is proposed that the tribunal may award monetary damages and interest, and the restitution of property. There is also – and this is something to discuss – the issue of enforcement, which can either have the nature of an ICSID or a New York Convention award.

Where are we now? In the latest development, in October 2016, Canada and the EU agreed on a joint interpretative instrument to work expeditiously towards the creation of the multilateral investment court. In February 2017, there was a meeting between the EC and over 100 stakeholders. There was a great deal of criticism, mainly directed towards the mechanism of the court, but also its substance. We want to hear the views of the panel and the first question is: what is this court and do we need it? We’ll start with Stephan.

Stephan Schill: Before I turn to evaluating that court, it is worth asking what is worth saving about the existing investment protection and investor state dispute settlement system. I think there are two things. One is that it provides minimum standards of protection for foreign investors against illegitimate government interference; the system is not there to shield investors against legitimate public policies. That is the first. The second is that it provides access to a neutral and effective forum for dispute settlement. So, generally, it establishes a rule of law system of protection and dispute settlement for foreign investors where that protection is not provided for adequately at the domestic level. What is not central to preserve is that it is an arbitration system; rather, what is worth preserving is that it is a neutral dispute settlement system.

In evaluating the present system, we should ask if investor state arbitration has fared well in delivering on this rule of law promise. When looking at the outcome of cases, it has. Many of the criticisms we are hearing, particularly from NGOs, but also in the political debate, are probably or plainly false. I do not think the current system curbs legitimate government policy making. But why then all the criticism? It is not so much about the cases, but the system as such. In the eyes of the public – and that’s the perspective we need to adopt when assessing the criticism – this is a system of public law adjudication that does not conform to the standards of public law safeguards that we know from our domestic legal systems. In fact, the system sits squarely with certain ideas of constitutional laws but there are incoherence’s: arbitrators are not as democratically legitimate as judges; there is no effective legislative counterweight; and there is no effective control mechanism in the present system.

What this boils down to is that the public has developed a distrust of arbitrators deciding issues that often touch on public policies. It is a trust issue, and I am sceptical as to whether the arbitration community is capable of re-establishing that trust, not among users, but in the eyes of the general public. It is easy to point to external factors that make our life difficult – the anti-globalisation and anti-capitalism movements, the misguided criticism of NGOs, misinformed press and politicians – but one also has to see that the arbitration community has contributed to creating this mistrust.

In this context, there are two factors that should be pointed out. The first is that criticism of the existing system, which has been around for nearly two decades, has not been taken seriously as a political issue. So, the responses are usually about how the criticism is wrong and critics are misinformed. That is a typically elitist response. Yet, the arbitration community has not realised that the issue is political and that it needs to be addressed politically, rather than just on the facts. The second is that there has been a lack of self-policing in the arbitration community by permitting the emergence of practices that are unsuitable for a proper justice system. Here I refer to practices that are hard to square with the independence of adjudicators. I do not think problematic practices are a widespread issue, but there are black sheep in the community who misuse double-hatting as arbitrator and counsel – and that is the core concern – to commercially exploit their role as arbitrators for their business as counsel. Quite a bit of aggressive marketing is going on in the field by actors trying to incentivise, for instance, investment treaty claims against Brexit by drawing on their expertise as arbitrators. That makes the system look bad in the eyes of the public and that is why I am sceptical that the arbitration community will be able, through the measures taken – professional ethics regulation by a professional body, suggestions to reason awards better, to re-establish trust, and adjudicate independently, impartially and neutrally. 

Patricia Nacimiento: If I understand correctly, you say the system is fine. A court suffices, or the court addresses the needs better, let’s put it this way.

Stephan Schill: I would say there is not really a need for a court; the present system is fine. That is the view of those who practise and of users, with a few exceptions. But there is the general public – and the general public means voters – which has leverage over policies that demand more fundamental changes than the arbitration community is prepared to introduce. So, the court is unnecessary from an informed perspective, but it may be necessary to respond to the wider concerns from a political perspective.

Laurie Achtouk-Spivak: What I would like to point out is that we are in a field that has exploded over the last 15-20 years, even after the first treaty arbitration was around. Stephan and I first met at a Harvard conference in 2006 about international investment law being at a crossroads; we were already debating possible evolutions in terms of the substantive standards. The topic of the following year's conference was “Backlash Against Investment Treaty Arbitration”. You see, it has been under criticism all that time. I also agree that this is related to the wider discontent around globalisation. We can’t fully separate the criticism of investor state dispute settlement from the criticism that globalisation faces.

Traditionally, our international arbitration system – which you have described as a private law adjudication system – was used not only in commercial arbitration, but also interstate arbitration. I don’t think we can see international arbitration as a private law type of system, and I would say that steps have been taken by users to address some of the criticisms you have mentioned, mostly on the transparency front. Players have tried to increase the number of published awards and to allow for the participation of an amicus curiae of third parties. ICSID was originally the driving force and then UNCITRAL came along; there has been this great effort within UNCITRAL to promote new UNCITRAL arbitration rules that append to the transparency rules. There has also been a UN Convention on Transparency, the Mauritius Convention, signed by about 20 states, but only ratified by three so far. At least it’s an effort, and there’s also been a move towards internal policing and internal change. The other question we face is the party appointment of arbitrators: the issue of double-hatting and the like. That’s why we’re seeing the Commission move towards a court system entirely. Is it going to be more efficient than the current decentralised system – because we’re still largely in a bilateral system? We have a few regional multilateral treaties, but we’re mostly looking at over 3,000 BITs; we’re going to have a procedural multilateral system and a substantive bilateral system. How is that going to work and what is the interaction going to be?

If we’re looking at a system that will be more consistent and harmonised, can we achieve it with 3,000 different BITs? Do we really think this tribunal will be able to interpret in a consistent and uniform manner standards that are very different? To think that every BIT is the same is wrong; there’s been a real evolution in treaty making. One of the things we have seen is a gradual evolution towards some reassertion of state control. Over the years we have seen how states have tried to amend the substantive protections provided under the treaties by making them more balanced, but also by having procedural mechanisms to reassert state control. I would say the court system is the last step in that evolution.

To give a few examples of what that looks like in CETA. The investment court system is one aspect of a more balanced, neutral and, some would say, pro-state model for an investment treaty. There are stricter jurisdictional requirements, with the requirement of substantial business activity for the investor to qualify as a protected investor: this is to avoid treaty shopping. You also have a multiplication of procedural pre-requisites before you can initiate an investor state arbitration: detailed notice of dispute; mandatory consultation; a statute of limitation. Those are the tools that states have used in their treaties to multiply the hurdles before you can start an arbitration. There has also been a series of provisions to limit frivolous claims, such the early dismissal of claims that are manifestly without legal merit, which is a new type of provision. You also have provisions that allow for cost shifting, which may deter frivolous claims.

But the clearest tool to reassert control on the part of states has been the insertion of a mechanism for interstate binding interpretation; that mechanism is within CETA. It allows the parties to adopt a binding interpretation of a treaty standard that will then bind tribunals. By doing this, you can increase state control over the system. Certainly, the last drop is the investment court system where you remove party appointment from the method of constitution. Largely what it’s trying to mirror is a WTO type of dispute settlement body. It really sounds like it. It is not clear, however, that the new system will fulfil the goal of depolarising the system between pro-state/pro-investor; and whether the original goal of investor state dispute settlement – which was depoliticisation of the dispute – will also be preserved. One must weigh with caution the upside of promoting the investment court system, which has a lot of practical difficulties, with the disadvantages of undermining the credibility of the existing investor state arbitration system. There is a real disconnect, as Stephan pointed out, between perception of the system and the reality, because the reality is that currently about half of cases are decided in favour of the investor, and about half in favour of the respondent states. Thank you.

Patricia Nacimiento: Thank you. Sabine?

Sabine Konrad: There are few in this audience who are not German, so what you see today as the EU Commission proposal, the so-called Malmström-Gabriel draft, this is the destruction of the PCA as mandatory state-state dispute resolution mechanism in the late 19th century re-enacted; same arguments, same tactics, hopefully not the same results. The destruction of the PCA as a mandatory state arbitral mechanism, which was promoted not only by Czar Nicholaus but also Bertha von Suttner and the peace movement, eventually led to World War I. On this unhappy note, what happened? There was a widespread mainly NGO driven, mainly I would say in the largest sense leftist movement against investment arbitration which some people dubbed as “the defence of the state’s right to peaceful expropriation”. The proponents of this “state needs to be protected against investors” saw Germany as a useful playing field in the light of the ICSID case filed against it. Now combine with that the rather deeply rooted anti-Americanism in intellectual circles in this country, it made Germany ideal for their campaign. The attack on investment arbitration in Germany is not per se an attack on investment arbitration. That was not what got 250,000 people to take to the streets in Berlin. It was anti-Americanism and anti-globalism. The first “picture child” of the anti-TTIP movement was the chlorine chicken. This chicken was an invention of the northern German chicken industry, that wanted to promote its, Salmonella-rich chicken against the US’ ‘healthier - because it was chlorinated - chicken meat. When the chicken had finally died they were looking for another scapegoat. The more promising one would have been regulatory cooperation but that was apparently too academic to rouse public opinion. Instead they used the case against Germany as well as the Philip Morris cases to give a name and a face to what they wanted to attack. There was this famous article in the Zeit magazine. It had 1930s style caricatures of representatives of Vattenfall, Philip Morris and Deutsche Bank sitting in a deep cellar like mafia hitmen, with money changing hands as illustration for investment arbitration. This article was preceded by another one that attacked Professor Böckstiegel personally.

The main reaction of the arbitral community: “I don’t want to have anything to with that.  This is dangerous”. Indeed, it is dangerous to speak out against it. The only death threats that I have ever gotten in my life were after a Handelsblatt article on TTIP. Then when 250,000 people took to the streets, the politicians felt that they needed to do something, and they came up with this idea in an attempt to appease the public. But it created a chimera, which not only throws rule of law but also state sovereignty out of the window, and on a more basic level it just doesn’t work. For example, the rules for who gets picked as arbitrators - no offence to Stephan, who would be able to get an arbitral appointment on the free market - is geared to people who would never, ever, ever, otherwise get near an investment treaty case even if their life depended on it. But these people hope that by accepting an appointment to this 15-person panel for €2,000 a month, they could get a foot in the door.

Laurie when you said “re-assert state control” through the new court, I think that is wrong. Look at it. Five judges and arbitrators from the 28, soon to be 27-member states, of the EU. So, Germany gets sued. Who is the judge? The Polish, the Spanish, the Maltese, or the Irish arbitrator? Germany would lose its right to appoint its own arbitrator, its power to intervene in the proceedings, the right to have a democratically legitimised arbitrator. This is gone because of the court. Today, if Germany appoints an arbitrator in a normal ICSID or UNCITRAL arbitration, that person is appointed by a ministry which serves under a chancellor that was elected by parliament, which itself was elected by the electorate. Now the five judges will be determined in the back rooms of Brussels under a national ratio: “well you got this seat, maybe you got this seat”. Maybe the small member states should get one, maybe the big ones. Moreover, the European proposal means less Europe and fewer Europeans in investment treaty arbitration. Today in investment arbitration you often have panels in arbitrations involving a European state and a European investor that are 100% European. That European influence would be drastically reduced because the five neutrals (the presidents) need to be non-Europeans. Brexit might actually mitigate this effect and make the ICS system a bit more functionable. After Brexit we can have five English arbitrators as neutrals, five English arbitrators. That is a great step forward otherwise the neutrals would’ve been Americans or Swiss. 

The last point on this intro, and this is the happiest note of my talk: this may all be an academic discussion. Hail to the ECJ that protects its jurisdiction and doesn’t want an international court above it. So out of self-interest they may say that for CETA you need a mixed agreement, everybody needs to ratify, so there are high hopes that not only the disgruntled NGOs, who hate the new court system as much as they hate arbitration will stop the treaty. However, this time the international law community will stand side by side with them saying “stop CETA”. Thank you very much.

Patricia Nacimiento: Thank you. If I understand the three panellists, they all agree on one issue: that this is a political response. I think you agree that the current system more or less works for the users. This may be, Stephan, what you call an elitist answer, but I’m wondering ... this is a legal issue. Investors and states have serious legal issues. Is it not the case that what we have here is a political answer to a legal question that has been very hastily put together to satisfy the public? I don’t mean this as an elite answer, but from a democratic point of view. We can follow the issues. We can see that this is deeply rooted in a democratic system. Changing this to appease some voices, even if they’re loud voices: does this not create a problem rather than solve it?

Anindya Basarkod: I’m a master’s candidate in International Dispute Settlement in Geneva. I have a question about two related issues. One regards the appointment of the arbitrators in a permanent court. We are taking the investor out of the equation because state parties to the treaty will essentially be the members of the court. Don’t you think that would create a backlash in that investors may not want to go for a permanent court arbitration, but choose UNCITRAL or something else? Secondly, there’s been a backlash regarding the independence of arbitrators. There was a study three years ago by Sergio Puig who found that the same arbitrators are being appointed multiple times. What’s to say it’s not the same people who will be appointed or nominated to this permanent court of investment? This thing of double-hatting will reduce the number of available arbitrators further.

Patricia Nacimiento: Sabine, do you want to answer?

Sabine Konrad: Thank you very much for the question. Prohibiting double hatting means more old white men. Actually, I’m not the first one, and maybe I’m not the right person to make that statement, because I am obviously not an old white man. The first time I heard that problem pointed out was by an ICJ judge. He said “well, for five years, for ten years you may not have an issue because you have enough old white men, but if you want to have the next generation, if you want to have more diversity, if you want to have people from developing countries, if you want to have more women, you need double hatting because you are not going find somebody in her late 40s or early 50s who can live from being an arbitrator alone”. Even if you are in a privileged western situation, this holds true. Imagine the young practitioner from Laos, from India, from Brazil, from African nations, those people need to make their mark and they need to work as counsel in order to be able to get their first appointment as arbitrator. And they need to continue to work as counsel to sustain themselves until they may be able to live from acting solely as arbitrator. Without double-hatting, you would have either only the old men, or you would have professors. Incidentally, I have had the worst experience with arbitrators that were single hatters because they did not know what their decisions meant for the parties in terms of their consequences. That includes a number of the frequent flyers amongst single hatters. A new academic approach to arbitral procedure may look fantastic on paper but may add 500k, or even a million, in additional costs because it is unworkable. In that situation, you really need the double-hatter, the practitioners on the tribunal, who will say: "Hang on, Mr President, this would make a very nice article, but do you know what it’s doing to the parties? Don’t do it!" Also, Stephan raised a point about the black sheep, I think the biggest number of black sheep is amongst the single hatters, if you look at the number of the most challenged arbitrators one name in particular will stand out. That person has only ever acted as an arbitrator, I would say that 95% of the cases are party appointments and of those party appointments are 100% by states.

Such people you will not find amongst the double hatters, in particular, if they practice as counsel and they act both for states and investors. That kind of double-hatting is a great balancing factor and a great sanity check for actually getting a really neutral arbitrator. About 10 years ago, there was a debate between Emmanuel Gaillard and Gilbert Guillaume about double-hatters being more independent than single hatters because being an arbitrator for a partner in a law firm means losing money. Today I can say that this is correct. Because I have that same issue when I register a case as investment treaty or other arbitrator. My firm doesn’t think it is profitable, so it’s discouraged. Therefore, if a double-hatter acts as arbitrator you can be absolute sure we are not deciding in one way or another to get the next appointment.

Stephan Schill: With all due respect, that’s the answer you get from a double-hatter!

Sabine Konrad: And female.

Stephan Schill: The new system needs to work on how judges in this new court are appointed. Who chooses them? How is quality assured? Who has a voice in the choice? These are all questions that can be developed in such a way that satisfies the public, the political system and the investor community. Because it would be a dilemma for both contracting parties and investors if the court ended up either pro-state or pro-investor. The contracting parties have both offensive and defensive interests in that they have to protect their investors abroad as well as ensure that they have sufficient policy space to regulate at home. That balance of interests calls for appointing neutral and truly independent people. If I look at other international courts and tribunals, there are examples where the quality of judges is satisfactory. I am confident that with the right discussions and procedures, we can have a system of people who are single-hatters and who operate in an entirely satisfactory manner for all parties involved. I know of enough people from non-developed countries who are single-hatters and have great repute in the system. I can also think of a lot of younger people, females included, who could make a living with such a job on the side, by doing something other than being counsel in investment treaty arbitration.

Manfred Ungemach: I am active in the arbitration field, but not in investment court arbitration – thus have no professional stake myself – but I have closely followed the debate. Dr Konrad, your statement was very clear, but I would like to challenge your argument that the opposition against investment arbitration in Germany is driven foremost by anti-Americanism rather than by scepticism regarding investment arbitration a such. I think it sells short the core fear of opponents in Germany: that the public is losing democratic control, the fear that we in Germany can no longer decide on the rules and standards that apply to all industrial activity in Germany.

The original idea behind investment dispute resolution was to protect Western companies, like General Electric, Siemens and others, in countries with no independent justice system. Now, such arbitration is used also between European companies and countries. For example, a Swedish company is currently litigating against the political decision to phase out nuclear power plants in Germany, in which it is a stakeholder, not in front of German courts, but based on investment treaties, and all this without public participation. In contrast, German companies suffering from this political decision merely are protected by German law and have to file their claims in German courts. This different treatment raises concern of the German people, as they believe in the Courts to decide without any bias also against the German government.

Underlying all this is a general notion which has to be addressed. When you consider the political developments over the last decade, with right or left-wing parties gaining power in European countries, furthering nationalist concepts which in the end are not so different from the “We will make America Great Again” ideas of the US president, you have to be very careful to label all this as “anti-Americanism”. It’s one thing to look at who is taking decisions, but the other aspect which isn’t addressed are the substantive issues of national and international decision-making. For example: to what extent is the public willing to replace national rules and decisions regarding environmental standards by international of foreign standards? That is the basis of the US treaty debate. There’s a lot of discontent and I agree, Ms Konrad, it won’t be resolved either by the EU proposal or the current system. The problem is: to which extent are national democracies, if at all, willing to accept foreign or international standards, rather than national rules? Currently, there are more centrifugal forces, particularly in Western democracies, rather than a willingness to trust and rely on international bodies.

Patricia Nacimiento: Thank you. Moving on to technical details, let’s look at enforcement and the appointment of arbitrators. How does it work? I mentioned before that there is a joint interpretative instrument on the CETA, item 6F, which states that cases will be heard by three randomly selected members. From a practitioner’s point of view, that might be a surprising statement. Sabine, is this how you nominate arbitrators?

Sabine Konrad:  The secret about appointing an arbitrator is that you take the ICSID list, cut into little bits of paper and then, you get the three-year old son of an associate to pick a piece. This is really how it is done as you know but it is a well-guarded secret. No seriously, a random selection is not going to work. Mr Ungemach asked about taking away state sovereignty from the democratically elected sovereign. That’s exactly the problem with the ICS. We would be taking the decision on the arbitrator away from the respondent state. So, this would be a further step into creating the EU as a state which, you know, dogmatically, from a constitutional law point of view and from a public international point of view would be anathema. On a more practical level it means that you are getting probably the least qualified of the five, you have no idea what the EU’s rationale was to appoint this person to the panel. Perhaps they thought he was pro-state or pro-investor, or that this person is actually an expert on say, pharmaceuticals, except that the dispute is now about renewable energy or something else.

Moreover, that standing courts can have very negative side effects that can be seen from the example of the European Court of Human Rights. The European Court of Human Rights was a victim of its success in two ways. First, it became a permanent court in 1998. If you compare the quality of the decisions, in terms of how protective they are of human rights but also on the quality of the reasoning, there is a very strong decline.  Second, it became a victim of its own success because more and more states signed on to the European Convention of Human Rights which is a very good thing. However, the result is also that those states who have traditionally held very high standards of human rights protections are now in the minority in the chambers of the European Court of Human Rights. You have now majorities of states who have lower human rights standards. Compare that to the investment court. There will be five judges from the now 28 or in the future 27 EU member states. Now, just by mathematical standards how high is your chance that you will get an arbitrator from France or the Netherlands?

Laurie Achtouk-Spivak: On the question of whether the system will be more or less polarised, the current concern is that party appointment really fosters a pro-investor vs pro-state type of profile. This has been increased by the publication of awards where you know in advance who decided what. Of course, when you select arbitrators you do not select them randomly; you look at their profile, considering the case you are dealing with and discuss it with your client. The proposed system is trying to get rid of that. On the other hand, will it ensure the system remains balanced? I don’t know. I don’t fully agree that states will be disadvantaged because their national state is not represented on the panel. Why? Because there is a commonality of interests among states: states are in favour of a strict interpretation of their treaty; of their consent to the substantive protections. The original thinking was that, because you are in a bilateral, reciprocal relationship, you’re balanced because you want to protect your investors abroad and you also want to protect your interests as a potential defendant. But what we see more gradually is states being concerned more about being on the defendant’s side; and, if you accept that there is commonality of interests, the fact that all the judges or members of the tribunal were originally nominated by states could raise concern. We are usually given the example of the WTO, but the WTO is an interstate mechanism; there are different interests because the states are against each other.

We are also given the example of the Iran-US Claims Tribunal, which is a permanent arbitral body with three arbitrators nominated by the US, three by Iran and three by the six other member states. There again, because it’s a specific type of dispute, there is a diversity of interest between Iran and the US. The only other example is the one Sabine mentioned, the ECHR, which is under mounting criticism for being more political than it used to be. So, we should indeed be concerned about whether we would be losing party appointment in this new system.

On the other practical issue, the most important will be interaction at the enforcement level. As Patricia explained, if you don’t have an enforcement regime with the new court system, for the awards or decisions rendered you will need to rely on either the ICSID Convention or the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The question is: how does that interaction currently work? If we look at ICSID, this is the more problematic one. As you know, the parties in CETA have agreed to an appellate mechanism so we’re looking at a system with a tribunal, some kind of first instance tribunal and then an appellate review, which goes beyond the grounds you typically find under the ICSID Convention. It includes errors in the application of law and manifest errors in the appreciation of facts. The question is: how does this interact with Article 53 of the ICSID Convention, which provides that the award shall be binding on the parties and not subject to appeal or any other remedies, except those provided for in the Convention? We have heard from professors that it’s fine because Article 41 of the Vienna Convention on the Law of Treaties allows for inter se agreements; when you have a multilateral treaty, some parties to the multilateral convention can agree on an inter se agreement. Well, there are a lot of conditions that need to be met for an inter se agreement to be valid between these parties, and one is that the modification in question does not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole. I think there is a real issue as to whether inserting an appellate mechanism into a Convention, one of the goals of which is to promote the finality of awards, actually works. The debate is quite live. Even if you accept this is an inter se agreement, what happens to the parties that have not opted into the investment court system, but are in the ICSID Convention? Will they recognise this as an ICSID award or will they have to apply the New York Convention to this opt-in mechanism because they are not part of ICSID. That’s a real concern.

In terms of the New York Convention, there has also been discussion as to whether the awards will qualify. The New York Convention doesn’t define the term “award”; what it tells us is that the term award includes not only awards made by arbitrators appointed for each case, but also those by permanent arbitral bodies to which the parties have submitted. This is the hook that proponents of the system use to say, “well, this new court system would qualify as a permanent arbitral body.” Whether this is true or not depends on your definition of arbitral body, right? Does it depend on party appointments or does it depend on consent? If it depends on both, then you have a problem; if it’s only a consensual mechanism, then you’re fine. Some US courts have, for example, recognised and enforced IUSCT decisions under the New York Convention, using that hook. So, there may be more room for interplay between the systems that is satisfactory, at least more than under the ICSID Convention.

Patricia Nacimiento: Stephan?

Stephan Schill: I agree that there are a lot of technical problems, many concerning enforcement. What the EU counts on is that states will not problematise that; they may enforce an ICS award that comes in the form of an ICSID award. Not because there is an obligation to do so under the ICSID Convention, but because they autonomously enforce the system. That is a risk the EU is taking, but a risk one can find responses to and, if one finds enforcement problems, one can develop a solution then as well. I think one should work on finding solutions to these problems, but to take them as a fundamental no-go towards even establishing or thinking about such a court is not the right response. I think it has technical problems, but I do not think they are intractable or unsurmountable obstacles.

On the previous debate, I wanted to say that the better comparison with the investment court system is the WTO appellate system, at least with respect to CETA. There is a fundamental commonality and interest. The EU is not only concerned about its policy space, it has a fundamental interest in protecting its investors in Canada, as does Canada in the EU. In the end, one wants to find middle grounds, and I am pretty sure one will manage to create a system that protects investments and policy space at the same time. Just as we find those systems in other domestic legal systems: constitutions that protect the right of property find that balance in an acceptable manner; human rights systems find that balance in an acceptable manner. I do not see why it should be different with an investment court system.

Sabine Konrad: I beg to differ because just look at CETA. The FET provision makes CETA the first treaty I have ever seen in my life that condones arbitrary conduct. It says only “manifestly arbitrary” conduct of a state is impermissible. Arbitrary conduct, we know from ELSI is not a violation of "a" rule of law, but a violation of "the" rule of law. Moreover it allows discrimination on the basis of race, religion and gender to the extent that such discrimination is not “targeted”, i.e. it would suffice to allegedly regulate for an alibi public purpose in order not to infringe CETA. We have spoken to the EU about that before CETA was finalised, even during the early drafting stages. Many members of the arbitral community came out and we demonstrated with examples of regulation which would discriminate against Muslim and Jewish members of the community in the area of investment, and that would be disguisable under public purposes. The answer of the EU was “Canada, the US, they would never ever discriminate against Muslims.” I have to say that the examples we used were far less far reaching and far less direct than what we’ve been seeing during the last months and what we are seeing as the subject of the recent decision of the US Supreme Court. Thank you.

Stephan Schill: First of all, CETA does not condone this type of discrimination or arbitrary conduct; it says you need to address it in a different forum. Second, we need to see, once these provisions are in place, how the notion of “manifestly arbitrary conduct” is interpreted in practice. A lot of domestic courts, including the German Constitutional Court, have a very wide understanding of what can be “manifest”. Some conduct is manifestly arbitrary that you only find to be arbitrary after thinking about it in a very hard and time-consuming manner. I think the state differential provisions in CETA will be applied in a manner that finds that balance, and that depends on having the right people on the court who apply the provisions of CETA in a balanced fashion.

Sabine Konrad: Aren’t you proposing that the judges/arbitrators go beyond the wording? Isn’t that exactly what we heard states were trying to avoid by providing a catalogue of defined case groups?

Stephan Schill:  I mean any legal wording is vague. Instead of the debate now moving from what is FET, it moves to what is arbitrary and what is manifestly arbitrary. Under the new system, the specific thing is that state parties have a way to counteract the decisions of the dispute settlement body that they disagree with; so, in case the court is either too far-reaching or too restrictive, they can step in. That is just the type of balance we are going to see. I think that’s the interaction we should see between courts and the legislator in a separation of powers framework.

Patricia Nacimiento: There was a question in the back.

Audience member: I would not consider enforcement a “technical issue” in a system of investment protection. We should get the priorities right in understanding which are the essential elements for an international investment system. One of the key elements of the success of ICSID system is the easy enforceability of awards worldwide. The political approach to the new system, in my eyes, lacks the minimum level of professionalism that I, as a citizen, would like to see. There is probably a shared social responsibility on lawyers, who have for too long not exercised self-criticism or who have abused some of the rules, but it is clear, as Dr Nacimiento stated before, that we are getting a political answer to issues that are both political and legal. To have a political reaction, without an in-depth analysis of the legal issues, is only going to produce a bad result. It’s not that lawyers in a certain community are being protective out of self-interest – that may be the case and we are all biased – and it doesn’t have to be arbitration; it can be another system. But not getting the priorities right can only lead to bad results and enforcement is one of the main pillars for an international system to work.

Stephan Schill:  I did not mean to say that enforcement as such was a technical issue, but that the problems with enforcement now being seen are of a technical nature. If you look at the relationship between Canada and the EU, I am not sure that it matters if, even in the worst possible scenario, these awards will not be enforceable outside those two countries. Most Canadian assets that you can enforce against are likely to be in Canada and most European assets that an investor might want to enforce into are likely located in Europe. Even on the worst possible reading, I am not sure that enforcement is such a big issue. Second, on the political issue, any decision on the creation and design of dispute settlement mechanisms, whether it is the investment court system or arbitration under existing investment treaties, has been a political question. The system we have has come into being because of political decisions. Yes, it was a different politics that influenced those decisions, but that is what we live with. In my view, there is no way around adapting to new political realities, if one wants to preserve the idea that there is some minimum protection for foreign investors against illegitimate government conduct; that there is some neutral forum that hears those disputes. If one does not find a political answer to the political problems we are having with investor state dispute settlement, we may end up with a system that is far worse than the investment court system; that we go back to either interstate systems or domestic courts, both of which is not necessarily in anybody’s interest.

Patricia Nacimiento: Any other questions or comments please.

Oliver Krammerer: It’s more a question than a comment because I have no experience with investment arbitration. My understanding is that the criticism is mainly about procedural aspects, like the appointment of arbitrators, but doesn’t it really depend in the end on the contracts under the underlying treaty? I have a construction background. As an arbitrator in construction disputes there can be the situation where I have to decide against the claimant contractor. I can feel sorry for the contractor because he just went into a bad bargain; took a high risk because he wanted the contract. However, I still have to decide the dispute in accordance with the contract. Isn’t this the real issue – the underlying contract under the treaty – and not so much who you appoint as an arbitrator?

Laurie Achtouk-Spivak: I think you’re right. What I was trying to explain earlier is that having a procedural fix to the system is only one side of the solution. If you don’t have a multilateral agreement, technically speaking this one tribunal would still need to interpret different treaties. And these different treaties, just like your contracts, have different standards. It’s not the case that every BIT is the same. The older generation of investment treaties are quite different from the new ones. The procedural side is only one side of the story.

Sabine Konrad: You’re absolutely right. When I used to go out and talk about CETA, the points I would pick are the destruction of fair and equitable treatment, the condoning of discrimination, the “oh let’s actually put a legitimate expectation back into expropriation where they were 100 years ago before we narrowed expropriation”. Those are things that I raised with the commission first and foremost, because if you are given a choice having a good functioning treaty and a bad procedural mechanism, that is an easier situation to live with than with a bad substantive treaty and a good dispute resolution mechanism. Having good arbitrators, they can only rescue so much. However, at the moment, what is being proposed is the perfect storm. A bad substantive treaty with very low protections and a bad, non-functioning procedural system, which is intrinsically biased towards the state and geared at making the process longer and more costly. It would mean that it would be still affordable for big multinationals of this world, but not any longer affordable for the small and medium companies

Patricia Nacimiento: Any further question or comment?

Audience member: Wouldn’t multinationals have the negotiating power to agree on arbitration, whereas the small and medium-sized company would be stuck with an investment court?

Sabine Konrad: Absolutely correct. You have had concession agreements providing for arbitration long before you had investment treaty arbitration. Actually ICSID was invented for the concession agreements for the big international company having a civil law contract with a state and agreeing to arbitration. ICSID was supposed to be the forum, the new specialised forum for that.  t took about 10 to 20 years after ICSID entered into force for the first investment treaties to add on investor state arbitration. Yes, a big company, a well-advised company will find mechanisms. First, it can negotiate better contracts.  Second, maybe if the EU goes south on treaties they structure through Hong Kong, through Singapore and perhaps in the future through China to get sufficient protections. Invest through a PRC subsidiary. Also, when the proverbial hits the fan if the big multinational goes to the foreign office in their home state and says, “big problem, help”, the chance of a foreign minister may want to intervene or at least is more inclined to intervene than for a smaller medium sized company with 20, 30 maybe 2,000 people.  Having said that you know even in today’s world, diplomatic protection is becoming anathema and states are very more much more cowardly than they were even 20, 30 years ago with supporting their own companies, big and small. Therefore, also the big ones will need to invest, to save arbitration. But they have better other chances even without investment protection, having other mechanisms, having better lawyers, even using the internal system of the host state or having investment insurance. The smaller or medium ones will have foregone insurance because of costs. Moreover, for a multinational, if they lose four hundred million, five hundred million that is a big dent in the budget, but it will not kill the company. This is different with a smaller medium sized company which may make 80% of its turnover abroad with its foreign subsidiaries. I have seen these cases. For them losing the investment, not having the money to do investment arbitration may be the death knell for the company for good.

Patricia Nacimiento: There was a question?

Audience member: I wonder if you are discussing the right topic. There is a contradiction between democratic decisions, which want to be totally free without any consequence, and lawful protection. Without Vattenfall, this would not be an issue in Germany because, as long as we could go against underdeveloped, third world countries who expropriated, that was not a problem from the western perspective with state investor arbitration. Now, for the first time, western companies are defendants. The system is no longer accepted as a method of dispute resolution and, therefore, I think how we do it is not a technicality. There is a real political interest to preserve the liberty to do whatever the political body wants to do.

Sabine Konrad: Thank you very much for pointing it out that the public sentiment is actually a xenophobic, anti-globalisation and colonialist sentiment, which is utterly despicable. I think your intervention characterises the attacks on investment arbitration very well, thank you very much.

Patricia Nacimiento: We have to move on to the last question but, before we do, I think I ought to summarise the debate. There are surprising agreements regarding what is called technicalities and all the panellists agree there are real problems in enforcement. I would side with the comment from the audience that it’s not just a technicality, but an elementary part of the whole system. It’s like building a house; some essential elements have not been properly considered. Everyone also seems to agree that a lot of what we are seeing here is driven by political issues. We now come to the last topic and I understand that our time is short. I would be really interested in hearing from the panellists what they think will happen in the next two to five years.

Laurie Achtouk-Spivak: The proposal for this investment court system is driven by the European Commission on one end and Canada on the other, and whether these actors will have the leadership capacity to convince other states to embrace that system is a question that remains to be answered. I just don’t know, to be honest. If you look at the number of intra-EU BITs that have been terminated, it’s not that many. So, are states ready to move away from investor state arbitration? It remains to be seen. The leadership capacity of both Canada and the EU on this topic is impaired because of the recent US elections, and the fact that there’s no desire anymore to pursue the TTIP negotiations in which this system was supposed to be inserted. That may also potentially harm the process.

One solution that has been mentioned by the Commission is that instead of going the whole way to the investment court system, go only for the appellate version; you keep the investor state arbitration, and just have a harmonised appellate body. Whether this would deal with the fundamental issues we have talked about in terms of harmonisation, neutrality and independence – and those would apply equally to an appellate mechanism – is not clear. I would also echo what Sabine said, which is that if you are looking at only a procedural mechanism but haven’t amended your investment treaties and haven’t moved to the more pro-state approach, there’s a real question as to whether you are actually reasserting control. You are probably losing some, because having a permanent adjudicating body out there deciding foreign disputes with foreign investors is yet another step than having one of arbitral tribunals. Certainly, countries like the United States, but others also would think twice about going this way. So, the outlook for this proposal is rather mixed and I am not sure it will succeed. What I will take away from Stephan’s intervention in the meantime is that, as practitioners, we have to take the perception problem seriously and to address it within the system. ICSID is now undergoing another series of amendments to its arbitration rules to try to address these concerns. It is a real issue because we want the system to be more efficient and more fair, particularly with regard to double-hatting if that’s a problem, although there is obviously a debate there. We should try to address it for the system to survive, and to increase its credibility and legitimacy for the wider public.

Patricia Nacimiento: Sabine?

Sabine Konrad: Two years, five years perspective, I think nothing will happen in the next two to five years. Hopefully CETA will just somehow die a slow and silent death. The mob will move on, will find other topics. Hopefully in five years everybody will have regained their senses, so we can start talking again about a free trade agreement with US and Canada that it’s “worth its meat”. It will probably be bilateral, we will see a resurge - hopefully - of bilateralism probably led by England, I think it’s a tremendous chance for the United Kingdom that after having left the EU to establish itself as an investment hub in Europe, and I wish the Brits all the best of luck.

Patricia Nacimiento: Stephan?

Stephan Schill:  Short to medium perspective? The good news is that investor state arbitration won’t die. It will continue, based on contract, based on old treaties and based on treaties with countries that want to stick to the old system. What will change in the medium term is that we are going to have some form of investment court system. If I look at the major actors, the EU has turned its back on investor state arbitration. The US has completely withdrawn from a leadership role in global governance, but I think that Trump will continue to go for investor state arbitration. If he does, I am not sure that it is an argument for others to do the same. Brazil favours mediation and interstate dispute settlement; India wants to limit investor state arbitration and move back to domestic courts; and many other countries, such as South Africa and Ecuador, who are withdrawing from the investment treaty system, realise they need to offer some sort of alternative to their domestic courts but do not want this to be investor state arbitration. So, there’s a lot of global interest in establishing a new system and I think that the decision by the Court of Justice of the European Union in May 2017 with respect to the Singapore FTA will actually strengthen the Union. The decision taken in Brussels, I guess, will be to go for EU-only agreements that leave out investor state arbitration against member states, but include ICS against the EU – which is something the Commission has wanted all along. I see Europe strengthened by that decision.

I think international negotiations will crucially depend on the outcome of the EU-China negotiations. China has been very unprincipled so far and not made any value-founded statements on what its vision is of the investor state dispute settlement system of the future. They are pretty pragmatic and, with the right arguments, could veer towards an investment court system. What I think is most likely is that we will see a process at UNCITRAL, starting with discussions on how to reform the system and on how to use the Mauritius Convention approach as an opt-in for a more permanent investment court. Whether that would be a two-tiered court system or only an appellate mechanism – which I think is more attractive – is still open, but if UNCITRAL takes up that topic there will be some outcome, just as there was with the issue of transparency in investment arbitration, which resulted in the Mauritius Convention. Then it will be a slow gradual process that will take 10, 15 or 20 years in which states will have to vote on whether they prefer that permanent system over an arbitration system. So, in the five-year run, no fundamental change, but I do not think the debate about a permanent court will go away.

Patricia Nacimiento: Thank you, we have to close the session now, so I want to thank the panellists and the audience for a very good discussion.

GAR Live Frankfurt 2017 took place on 29 June at the Jumeirah Hotel, Frankfurt. It was sponsored by Cleary Gottlieb Steen & Hamilton, Allen & Overy, Accuracy, Baker Botts and Geotext Translations.

The next GAR Live Frankfurt will take place on 12th June 2018. Registration is now open and is complimentary for in-house counsel and government representatives.

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