Mark Konstantinidis examines EU initiatives to reform Investor-State Dispute Settlement (ISDS), highlighting that the UK has yet to formulate a coherent post-Brexit ISDS agenda.
Since as early as 2010, the EU has been active in reforming Investor-State Dispute Settlement (ISDS). ISDS is an arbitration mechanism, established by an international treaty, which provides for the settlement of disputes between a foreign investor and a host state. ISDS has been popular with investors, who prefer to avoid traditional courts, as they are often perceived as having pro-state bias. Instead, investment arbitration offers them recourse to efficient and reliable dispute settlement.
In Europe, political pushback against ISDS culminated during the negotiations of the now-abandoned EU-US Transatlantic Trade and Investment Partnership (TTIP), which was due to provide for it. Concerns were two-fold. Firstly, ISDS relies on panels of arbitrators which sit outside national judicial systems. Rule of law criticisms range from the perceived inconsistency of arbitral rulings, to insufficient expertise and ethical requirements to which panels are subject.
Secondly, there are democratic concerns: foreign investors may initiate proceedings against a host state, challenging measures taken in pursuit of environmental protection, public health or enhanced labour standards. The latter concerns were shared by many in the UK, at the time an EU member state, not least due to feared TTIP-derived liability, should the UK government have wanted to restrict private companies’ involvement in the National Health Service.
EU reform response
In this context, the EU has launched a set of reform initiatives. A ruling from the European Court of Justice found that ISDS under bilateral investment treaties (BITs) between EU member states are incompatible with the legal and economic arrangements under EU law and the single market. As a result, 23 EU member states signed an agreement terminating such BITs. Infringement proceedings are pending for those which have not. Intra-EU investment arbitration was thus formally foreclosed.
In the EU’s trade and investment agreements with other international partners (so-called third states), the EU has made a series of innovative proposals. Instead of traditional ISDS, it has sought to establish Investment Court Systems (ICSs).
Each agreement which establishes an ICS provides for a permanent arbitral system, instead of panels being formed ad hoc when a dispute arises. ICS arbitrators can only be appointed subject to independence and expertise criteria. An appeal mechanism is also envisaged, seeking to grant greater consistency to arbitral decisions by reviewing them at a second level. Substantively, panels may not question legitimate regulatory decisions. The above reforms seek to address rule of law and democracy concerns which were prominently expressed in the context of the now-defunct TTIP talks. They are seen as drastic reforms breaking with the traditional ISDS paradigm, though they have not satisfied those arguing for the abolishment of investment arbitration.
The ICS proposal has been included in EU agreements with Canada, Singapore and Vietnam, and has in principle been agreed with Mexico and Chile. It is further being negotiated with countries like Indonesia. Still, ratification challenges have delayed the entering into force of concluded agreements.
The EU has also proposed a more radical reform of the ISDS system. Namely, it has proposed the establishment of a Multilateral Investment Court (MIC), departing from the global arbitration paradigm based on bilateral arrangements. The MIC would draw from ICS reforms, such as the appellate body. It is currently being negotiated on an international level at Working Group III of the United Nations Commission on International Trade Law (UNCITRAL).
Lastly, there are concerns regarding the potential role of ISDS in limiting policy ambitions on climate action. In this regard, the EU has pushed for the modernisation of the Energy Charter Treaty (ECT), with a view to making it compatible with commitments under the Paris Agreement. Nevertheless, some member states have questioned the negotiated modernisations, and notified their withdrawal from the original Treaty. The EU is itself also due to exit the latter for the same reasons.
The Great British pondering
By contrast to the EU’s clear reform ambitions, notwithstanding the challenges encountered, the UK’s position is not as clear: a coherent post-Brexit ISDS agenda has yet to emerge.
Firstly, the UK’s position on the inclusion of ISDS seems ambivalent. This is illustrated in its negotiations with Canada. The UK’s continuity agreement with Canada, concluded in preparation for Brexit, in principle retained the ICS, agreed under the EU-Canada Comprehensive Economic and Trade Agreement pre-Brexit. Retained (‘incorporated’) ICS provisions were never applied, pending a ‘comprehensive review’.
However, the UK’s Strategic Approach document subsequently provided that a future UK-Canada agreement should not contain ISDS. This seems to recognise the controversial nature of investment arbitration, given the trading relationship between the UK and Canada, and would do away with EU-era ISDS arrangements.
Secondly, there are areas in which the UK and EU positions effectively coincide. For instance, for the purposes of the ECT modernisation, both the UK and the EU and its member states negotiated a ‘flexibility mechanism’, whereby protections of existing investments in fossil fuels would be phased out after 10 years from the entry into force of the updated ECT. Future investments in fossil fuels would no longer be protected.
Thirdly, the UK has also reverted back to traditional ISDS for the purposes of its accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Some enhanced protections to its right to regulate may be expected, while no ISDS is expected to enter into force with regards to Australia and New Zealand. The position with regards to other CPTPP parties is less clear. In any event, ISDS under the CPTPP does not share the EU’s aspirations of institutional reform in line with the ICS model.
Conclusion
The UK participates in discussions at the UNCITRAL Working Group III, but has avoided taking a prominent stance on ISDS reform. In light of its record in its post-Brexit trade and investment agreements, the ISDS agreement under the CPTPP appears as a sui generis concession, in light of the UK government’s recent geopolitical priorities.
Nevertheless, a crystallisation of a consistent domestic position on ISDS would be welcomed by international partners, policy-makers and investors. Due to the EU’s role as the driving force behind ISDS reform, including in multilateral negotiations, the UK may benefit from a more systematic engagement with the Commission and influential member states in order to ensure that core interests are accommodated.
By Mark Konstantinidis, PhD candidate and Visiting Lecturer, Centre of European Law, King’s College London.
