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New Model of Investor-State Dispute Settlement under the EU Approach
Author: Olesia Kryvetska
Source: Ukrainian Journal of Business Law, October 2020
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In 2014, the European Commission concluded its negotiations with the Government of Canada in respect of the Comprehensive Economic and Trade Agreement (“the CETA”) that contains a separate Investment Chapter and is known as a first treaty to implement a new EU’s approach to resolution of the investor state disputes, referred to as the Investment Court System (“the ICS”)[1]. The ICS implies a set of procedural and substantive rules that provide for establishment of a permanent dispute settlement institution comprising of the Tribunal of First Instance and the Appeal Tribunal.

Following the CETA, the ICS was further enshrined in the EU – Singapore Investment Protection Agreement (“the EU-Singapore IPA”) and has been in focus of the completed or ongoing negotiations between the EU, on one hand, and Vietnam, Mexico and Chile, on the other. The new EU’s approach also lays down fundamentals for creation of the multilateral investment court; the idea has been launched by the EU within the UNCITRAL Working Party III.

The new model is presented by its authors as an alternative to current ISDS framework based on an ad hoc arbitration. Many commentators consider the ICS as a tool to combat the fragmentation of the international investment arbitration and address certain concerns raised in respect of the impartiality and independency of the arbitrators.

This article offers an overview of the key features and novelties the EU’s approach brings forth to resolution of the investor-state disputes.

 

Initiation of the dispute

By analogy with the WTO dispute settlement system, the investment-related dispute under the ICS model starts from the request for consultations to be lodges by the complainant on its own behalf or on behalf of a locally established company. The consultations, which shall not exceed 3 months, comprise a compulsory stage. If the consultations do not result in the dispute settlement, the next step for the complainant is to deliver a notice of intent to submit a claim. When such a notice is made to the European Union, it triggers the proper respondent determination, dependent on the competence level pertaining to the treatment which is claimed as a violation.  Finally, the complainant is entitled to submit the claim to the Tribunal not earlier than 3 months from the date of the notice of intent delivered.

 

Administrative and Organizational Framework

Appointment of the arbitrators. One of the main institutional novelties of the EU’s model is an idea of the permanent composition of the Tribunal and appointment of its members by the Contracting States, rather than the disputing parties. The latter is considered by the EU as a major achievement towards enhancement of the arbitrators’ impartiality. Under the EU-Singapore IPA, the Tribunal shall comprise six Members of whom two each shall be nominated by the EU and the other Contracting State, and remaining two members shall be a third-country nationals jointly nominated by both Contracting States.[2] The appointing authority is the IPA Committee consisting of representatives of both Contracting Statutes. Interestingly, the CETA provides for the Tribunal to be composed of 15 Members[3], while the number were reduced to six in the EU-Singapore and other EU’s agreements containing the ICS provisions. The same rules apply to the composition and functioning of the Appeal Tribunal.

Hearing the case. Each case would be heard by a division being composed of three members who have to be appointed with due regard to the national diversity and on the rotation basis. Nevertheless, the disputing parties may agree that a case be heard by a sole Member who shall be selected by the President of the Tribunal and may not be a national of any Contracting State. The ICS encourages the respondents to give “a sympathetic consideration” to a sole arbitrator request that are filed by a small or medium-sized enterprise or the compensation or damages claimed are relatively low.[4]

The Members of the Tribunal and the Appeal Tribunal are appointed for an 8-year term. In order to ensure continuity of dispute settlement process, an arbitrator may continue to serve on a division until the closure of the proceeding even after his or her term expires

Financial aspects. Remuneration of arbitrators implies another important novelty the new EU’s ISDS approach suggests. The EU-Singapore IPA provides for the creation of a permanent account from which the retainer fees for the Members of the Tribunal/Appeal Tribunal and the daily fees for the President or Vice-President of the Tribunal will be paid equally by both Contracting States (not the disputing parties). The account  will be managed by the Secretariat of ICSID.

 

Scope of Appellate Review and the Appeal procedure

Upon results of hearing the case the Tribunal issues a provisional award which shall be issued, as a general rule, within 18 months of the date of submission of the claim, unless this period extended for a good reason.

Dependent on whether the disputing parties recourse to the appeal mechanism, the Tribunal’s provisional award becomes final (i) if not appealed be either party within 90 days from the date of its issuance, or (ii) if the Appeal Tribunal dismisses the appeal.[5] The appeal proceeding shall last for 180 days, the period may be extended to up to 270 days provided that due written notice and due explanation are given to the disputing parties.

The grounds for appeal are:

  1. Tribunal’s error in the interpretation or application of the applicable law;
  2. Tribunal’s manifest error in the appreciation of the facts, including the appreciation of relevant domestic law; or,
  3. the grounds for the award annulment provided in paras. (a) – (e) of Article 52 of the ICSID Convention.

Upon result of the appeal proceeding, the Appeal Tribunal can uphold, reverse or modify the provisional award of the Tribunal.[6] The wording resembles the language of Article 17.13 of the WTO Dispute Settlement Understanding that sets forth the grounds for appeal in the international trade disputes. However, unlike the CETA, the EU-Singapore IPA prescribes a detailed appeal procedure that allows to draw differences between the ICS and WTO dispute settlement system.

Dismissal of the appeal. Along with the appeal dismissal upon result of the full-fledged proceeding, the ISC also provides for expedited dismissal[7] of the appeal that is manifestly unfounded. However, neither CETA, nor the EU-Singapore explain what the “manifestly unfounded” appeal stands for. One may interpret that this provision refers to the formal deficiencies, but the agreements do not set up any clear requirements as a benchmark to assess whether the notice of appeal meets specific formal formalities. Hence, due to the lack of certainty, the Appeal Tribunal will be assigned with elaboration of its own criteria for the manifestly unfounded appeal. This, in turn, may give rise to abuse of the expedited dismissal, that would diminish advantages of the appellate review the ICS is seeking for. A possible solution to mitigate the risk would be an inclusion of the relevant criteria in the rules of the Appeal Tribunal to be approved by the IPA Committee.[8]  

Legal consequences of the appeal well founded. Remand mechanism. If the Appeal Tribunal fins the appeal well founded, it may either modify or reverse the legal findings and conclusion of the provisional award in whole or in part. If this is the case, the Appeal Tribunal shall refer the matter back to the Tribunal, specifying precisely how it has modified or reversed the relevant findings and conclusions of the Tribunal.[9] The findings and conclusions of the Appeal Tribunal are binding to the Tribunal when the latter revises its award accordingly after hearing with the disputing parties.

Therefore, the new EU’s agreements lay down a remand mechanism enabling the Appeal Tribunal to additionally asses both legal matters and factual circumstance of the case and send it back to the Tribunal for fixing the errors committed. This is what makes difference when comparing the appeal procedures under the International Court System and the WTO Dispute Settlement Understanding. The latter does not provide for the remand mechanism. In such a situation the WTO Appellate Body is extremely limited in its capacity to complete the legal analysis on the claims not addressed in the report appealed due to the judicial economy exercised by the Panel. In practice, the WTO Appellate Body has often found it impossible to complete the legal analysis given the insufficient factual findings on the panel report, or lack of the undisputed facts in the panel record.[10]

In opposite, the remand mechanism under the EU – Singapore IPA allows to avoid the situations when important legal matters of the dispute are left unresolved. In our opinion, the authors of the EU-Singapore IPA viewed the appellate mechanism as a tool for verification and validation of the Tribunal’s award, rather merely a review mechanism. This is what distinguished the ICS from the WTO dispute system and the 2004 ICSID Appellate Facility.[11]

 

Comments and conclusions

The ICS launched by the EU is the most successful effort so far, to implement an idea of the appellate review in the investor-state disputes. Some scholars and practitioners consider the appellate review as a considerable improvement due to its potential to strengthen coherency of the outcomes ISDS proceedings[12] and avoid the situation when the tribunals commit manifest errors of legal analysis.[13] However, the new EU’s model does not offer any mechanism of the award enforcement by merely referring to the existing instruments such as the ICSID Convention and the New-York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This is one of the most sensitive areas some commentators highlight to question the efficiency of the ICS in future.[14]

In any case, the new International Court System launched by the EU and its trading partners, while combining features of both ad hoc arbitration and the WTO dispute settlement system, comprises a sui generis system that indeed may further serve as an alternative to the current mechanism of the investor-state dispute settlement in future.



[1] A Multilateral Investment Court: press-release of the European Commission. URL: http://trade.ec.europa.eu/doclib/docs/2017/september/tradoc_156042.pdf.

[2] Art. 3.9.2. of the EU-Singapore IPA.

[3] Art. 8.27.2 of the CETA.

[4] Art. 3.9.9. pf the EU-Singapore IPA.

[5] Article 3.18.4 of the EU-Singapore IPA.

[6] Article 8.28.2 of the CETA; Article 3.19.3 of the EU-Singapore IPA.

[7] Article 3.19.12 of the EU-Singapore IPA

[8] See, for example, Article 3.13.3 of the EU-Singapore IPA.

[9] Article 3.19.3 of the EU-Singapore IPA.

[10] Peter Van den Bossche, Werner Zdouc, The Law and Policy of the WTO: Texts, Cases and Materials, 3rd edition, Cambridge University Press, 2013, page 242-243, footnote 483.

[11] Possible Feature of an ICSID Appeal Facility, Annex to Possible Improvement of the Framework for the ICSID Arbitration: Working Paper of the ICSID Secretariat Discusion Paper (October 22, 2004)/ ICSID Secretariat. URL: https://icsid.worldbank.org/Documents/resources/Possible%20Improvements%20 of%20the%20Framework%20of%20ICSID%20Arbitration.pdf

[12] Reinisch A. The European Union and investor-state dispute settlement: from investor-state arbitration to a permanent investment court’. Investor-State Arbitration Series, Paper No 2: Centre for International Governance Innovation (CIGI). Ontario, 2016, p. 21.

[13] Voitovich, S.A. International Investment Law in the Arbitration Process. Kyiv: Юридичний світ, 2019, p. 81

[14] See, Olesia V. Kryvetska, Multiple Proceedings in Investor-State Disputes (PhD dissertation). URL: http://scc.univ.kiev.ua/upload/iblock/412/dis_Kryvetska_O_V.pdf.

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