“For those who see the need for greater ‘order’ in the ‘international order’, the impulse towards constitutionalism offers both an agenda and an opportunity. But whose agenda, and whose opportunity?”01
The ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations haven given rise to intense public debate about the costs and benefits of ad hoc investor-state dispute settlement (ISDS) arbitration. This paper contrasts ISDS in its current ad hoc arbitration format with the European Commission’s (EC) recent proposal for a permanent Investment Court System (ICS) created by the TTIP. It argues that the proposed ICS would not be a flexible, efficient, or reliable dispute settlement mechanism for investor-state disputes.
Part I describes the main features of the EC proposal. Part II discusses the implications of replacing ad hoc arbitral appointments with a bench of permanent judges. It contends that a reasonable apprehension of bias in favour of Contracting States is created by the contemplated appointment process, which also fails to satisfy the requirements of independence. It goes on to question whether “extremely qualified” candidates would seek appointment to the bench, given the low proposed compensation and burdensome restrictions placed upon Judges and Members. Part III considers the costs of introducing a broad appeals body capable of reviewing first instance awards on matters of fact and law. Part IV concludes by considering the costs and risks of creating a new, permanent court that might develop its own institutional interests and agenda.
This paper’s rejection of the EC proposal should not be taken as an apologia for the existing ISDS system, whose perceived and real shortcomings do warrant significant reform. This paper seeks only to highlight the proposal’s flaws and argue that they are sufficiently profound to justify its rejection. The proposed ICS would not only perpetuate many of the problematic features of the ad hoc ISDS system that it purports to resolve, but would also introduce new categories of biases and conflicts of interest. In short, it is an incomplete solution pregnant with its own set of shortcomings.
Part I. The Proposal
The European Commission (EC), the executive body of the European Union (EU), recently set forth a proposal that the TTIP create a permanent Investment Court System (ICS) of publicly appointed judges with exclusive jurisdiction to hear TTIP disputes.02European Commission, Transatlantic Trade and Investment Partnership: Trade in Services, Investment and E-Commerce 17 (2015), http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf. The ICS would replace the existing system of ad hoc ISDS arbitration, which is often characterized as an opaque, “private” system of dispute resolution inherently biased in favour of investors. The EC proposal aims to “transform the [ISDS] system towards one which functions more like traditional courts systems.”03European Commission, Investment in TTIP and Beyond – The Path for Reform 4 (2015) http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.pdf. It envisions a two-tiered, “modern, efficient, transparent and impartial” court with broad powers to review its first-instance awards on factual and legal grounds.04European Commission, supra note 2, art. 29 (explaining that the proposed Appeals Tribunal could hear appeals by either party based on the following broadly defined grounds: “(a) that the Tribunal has erred in the interpretation or application of the applicable law; (b) that the Tribunal has manifestly erred in the appreciation of the facts, including the appreciation of relevant domestic law; or, (c) those provided for in Article 52 of the ICSID Convention, in so far as they are not covered by (a) and (b)”). The EC’s ultimate vision is to extend the proposed court’s mandate to have exclusive competence to hear disputes arising out of all existing and future trade and investment treaties to which the EU is a party.05European Commission, supra note 3, at 4.
The EC proposal envisions a closed list of judges appointed by states for six-year, once-renewable terms. The EU and the US would jointly appoint fifteen judges to serve on its Tribunal of First Instance (TFI) and six members to its Appeals Tribunal (AT) composed of EU citizens, US citizens, and citizens of third countries in equal number. Each TFI and AT case would be heard by a randomly appointed three-judge panel, composed of one judge or member from the US, one from the EU, and a chairperson from a third country. All TFI judges and AT members would be required to have “very high technical and legal qualifications comparable to those required for the members of permanent international courts such as the International Court of Justice.”06Daniel Rosario & Joseph Waldstein, Reading Guide, European Commission Fact Sheet – Reading Guide (Sept. 16, 2015) http://europa.eu/rapid/press-release_MEMO-15-5652_en.pdf. They would be subject to a strict ethical and professional code of conduct, prohibiting them from acting as counsel in ongoing investment disputes and ensuring they have no other conflicts of interest.07Id. (explaining that Article 11 of the proposal describes the ethical standards applicable to judges and the members, and that a proposed Code of Conduct is included in the proposal as Annex II).
Part II. The Problem of Permanent, Publicly-Appointed Judges
The EC proposal envisions a bench of “extremely qualified,” impartial adjudicators of investment disputes.08Cecilia Malmström, Proposing an Investment Court System,
i. Impartial, Independent Judges?
The EC proposal is an attempt to replicate the structures and processes of national court systems in the ISDS context.09European Commission, supra note 3, at 4 (stating that the proposal would “transform the [ISDS] system towards one which functions more like traditional courts systems”). It is one thing for governments to select and appoint judges to their domestic judiciaries to settle disputes that arise – for the most part – among their citizens. In the ISDS space, however, a state is a respondent party to every dispute. A court system in which respondents, as a class, have the power to appoint all judges, pay their salaries and decide on the renewal of their appointments is one that raises an immediate apprehension of bias.
In a blog post promoting the proposal, EC Commissioner Malmström wrote that randomly assigning judges to cases will “guarantee there is no conflict of interest” since parties “won’t be able to choose which judges hear [their] case.”10Malmström, supra note 7. Yet with each panel guaranteed to include one EU national, one US national and only one third-country national, State Respondents are guaranteed that every panel will include at least one of their five appointees.11European Commission, supra note 5, at arts. 9–10. State parties will in fact have the power to select one of the judges hearing their disputes, albeit in advance of any particular claim.
The contemplated appointment process may disfavour candidates with a history of pro-investor treaty interpretation. The reality of investment arbitration today is that certain arbitrators are repeatedly appointed by states, while others are invariably appointed by investors.12Albert Jan van den Berg, Qualified Investment Arbitrators? A Comment on Arbitrators, in
A further category of potential bias arises on account of the national composition of each three-person panel. One of the most commonly criticized features of the current ad hoc ISDS system is the alleged bias of arbitrators in favour of the party that appoints them. Yet, under the proposed system, there is cause to doubt judges’ ability to abstract their unconscious bias in favour of their home (appointing) State and its claimant investors. In a dispute opposing an American corporation to the government of France, one can easily imagine the American judge being naturally sympathetic to his American compatriots.
Indeed, there exists robust empirical support for the proposition that judges on international courts systematically vote in favour of their home countries. For example, Eric Posner and Jose de Figueiredo’s empirical analysis of International Court of Justice (ICJ) voting patterns found that ICJ judges vote in favour of their home countries roughly 90% of the time.15Eric A. Posner & Miguel F. P. de Figueiredo, Is the International Court of Justice Biased?,
There is also a serious concern for judges’ independence. Despite the EC’s conclusory assertion that members and judges would be wholly independent and free of conflicts of interest,18European Commission, supra note 3, at 2. the ICS proposal would allow government officials or persons who receive an income from the government “but are otherwise independent of the government” to be appointment to the TFI or AT.19European Commission, supra note 2, at art.11(1). Allowing States to appoint their own employees, officials, or consultants as judges undermines the requirement of independence, just as an existing relationship with a government might raise a reasonable apprehension of bias. Supporters of the ICS seek to defend it by drawing a parallel with the World Trade Organization’s Appellate Body. However, the WTO rightly and unambiguously requires Appellate Body members be “unaffiliated with any government.”20World Trade Organization (WTO), Understanding on Rules and Procedures Governing the Settlement of Disputes, 3, available at https://www.wto.org/english/docs_e/legal_e/28-dsu.pdf (last visited Feb. 21, 2017). Unless decision-makers have financial security and security of tenure, it is very difficult, as a matter of principle, to meet the objection of lack of independence and in-built apprehension of bias.
The most problematic is the unilateral discretion Contracting States would enjoy to renew (or not) judges’ six-year terms. 21TTIP trade talks: German judges oppose new investor courts,
The contemplated appointment process falls short of the independence standards applied to international courts and judicial organizations. The Consultative Council of European Judges, for example, calls in its Magna Carta for the independence of judges in all financial and professional respects, and for decisions about their appointment and careers to be unbiased and made in such a manner that guarantees their independence. 23Id. The EC proposal meets neither criteria. Giving state the exclusive power to appoint, compensate and decide on the renewal of the terms of ICS judges creates a system of inherently biased adjudication in which judges have a strong incentive to favour their appointing state or its nationals.
Finally, the mechanism for deciding the validity of challenges to ICS judges’ independence imports one of the most rightly criticized features of current ICSID practice.24Sophia Nappert, Escaping from Freedom? The Dilemma of an Improved ISDS Mechanism, 11 (Nov. 26, 2015), available at http://efila.org/wp-content/uploads/2015/11/Annual_lecture_Sophie_Nappert_full_text.pdf. The proposal sets out that, in instances where a challenged judge refuses to step down, the challenge is to be referred to the President of the AT or TFI, and no appeal or review of the respective Presidents’ decisions would be possible.25European Commission, supra note 2, at arts. 11(2)-4. It is doubtful whether these Presidents would be perceived to have the requisite distance and neutrality to decide on challenges to their own colleague’s independence and impartiality.26Id.
ii. “Extremely Qualified” Judges?
In addition to raising serious concerns about the independence and impartiality of the ICS, the EC proposal would also compromise the quality of decision-making in ISDS cases. The proposal envisions a bench of “extremely qualified” judges drawn from the highest ranks of academia, national or international judiciaries, and former practicing arbitrators.27Daniel Rosario & Joseph Waldstein , supra note 6, at 7. Yet as this section makes clear, the proposal imposes burdensome restrictions that would discourage many “extremely qualified” candidates from seeking appointment to the Court. Moreover, the State-controlled selection process threatens to politicize appointments. By replacing ad hoc tribunals with random appointments from a closed list of 15 judges, the ICS also deprives parties of the benefit of selecting decision-makers whose knowledge and expertise are recognized and possibly tailored to the dispute.
First, the requirement that ICS Judges not act as counsel in ongoing investment disputes would deter many top candidates from being considered. It is acknowledged in this regard that the current ISDS system faces the same issue. Many top practitioners in the field of investment arbitration act as council in addition to occasionally serving as arbitrators, and this practice – quite legitimately – has been severely criticized as allowing individuals to simultaneously wear “double hats,” resulting in arbitrators finding themselves in an “issue conflict.” Candidates under the proposal would be required to have “demonstrated expertise” in public international law and preferably experience in “international investment law, international trade law and the resolution of disputes arising under international investment or international trade agreements.”28Id. This is generally interpreted as referring to a pool of candidates already professionally engaged in investment law disputes.29German Magistrates Association, Opinion on the Establishment of an Investment Tribunal in TTIP – The Proposal from the European Commission: No. 04/16, (Feb. 2016), available at http://ttip2016.eu/files/content/docs/Full%20documents/english_version_deutsche_richterbund_opinion_ics_feb2016.pdf. Yet the value proposition the ICS would offer its potential candidates who are now practicing arbitrators or lawyers is unattractive. It would force them to forgo their practice for six or even twelve years in order to collect a monthly retainer of 2000 euros30This retainer fee is around 1/3 of that of WTO Appellate Body members. Judges would also receive, once assigned to a case, a 3000-euro “sitting fee” per day of hearings. See European Commission, supra note 2, at art. 9; Sophia Nappert, supra note 26, at 16. – for the mere possibility of being randomly assigned to investments disputes that may not even ever arise. The pecuniary burden this implies would narrow the pool of candidates considerably – to include only those essentially immune to financial considerations – and would likely deprive the ICS of the experience and knowledge of many of the world’s top practicing arbitrators.
The EC proposal also risks politicizing appointments to the Court. The bargaining and horse-trading that would have to occur for 29 EU countries to set forth five European judges could subordinate concern for the quality of appointees to the unrelated political agendas of Member States. A valuable parallel exists in the 2012 amendment to the ICC arbitration rules that granted the institution more flexibility in selecting arbitrators. By facilitating direct appointments by the ICC Court and sidestepping selection processes that involved lists established by national committees, it sought to bypass the politics and national interests that contribute to establishing these kinds of lists.31Athina Fouchard Papaefstratiou, TTIP: The French Proposal for a Permanent Court for Investment Arbitration,
Moreover, there is no evidence to support the assertion that, under the current system, arbitrators in investment disputes lack the requisite expertise. Eminent academics, ICJ judges, and members of the WTO Appellate Body, who are eligible ICS judges, are frequently appointed to ad hoc ISDS arbitrations. While the system is often criticised for repeatedly appointing members from a select “club” of elite arbitrators, this practice ensures that those sitting on tribunals have the utmost qualifications and experience.32Gabrielle Kaufmann-Kohler, In Search of Transparency and Consistency: ICSID Reform Proposal, 2
Part III. Broad Appeals on Matters of Facts and Law
The introduction of an AT seems premised on the EC’s willingness to sacrifice the finality of arbitral awards for a greater degree of consistency and of legal certainty.33Debra P. Steger, Enhancing the Legitimacy of International Investment Law by Establishing an Appellate Mechanism, in
Fundamentally, there is considerable academic support for the position that investment arbitrations may be by nature ill-suited to broad appeals on matters of fact and law. As Jan Paulsson has argued, the open-ended formulation of many applicable norms and the fact-intensive nature of investment awards make inconsistencies in the case law physiological – and particularly unbefitting to broad appelate review of matters of fact and law.35Id. at 246–47, 241, 253. In her address to the European Federation of Investment Law and Arbitration, Sophie Nappert similarly emphasized that “[a]n appeal court may arrive at a conclusion that is at complete odds with that of the court of first instance not because the appreciation of the court of first instance was necessarily wrong per se, but because the appeal court sees things differently – much like different investment tribunals interpret the same or similar wording differently.”36Sophia Nappert, supra note 26, at p.16. A parallel can be drawn with the ICSID annulment committee decisions, which do not seem overall to have produced a clearly more consistent or persuasive legal analysis than those of ICSID tribunals.37Charles Brower & Charles Rosenberg, The Death of the Two-Headed Nightingale: Why the Paulsson—van den Berg Presumption that Party-Appointed Arbitrators are Untrustworthy is Wrongheaded, 6
The measure of deference, if any, that ATs would be required to give to TFIs’ findings of fact remains unclear. The proposal would allow the AT to consider appeals in cases of “manifest error in the appreciation of the facts,”38European Commission, supra note 3, at art. 29(1). and to “modify or reverse the legal findings and conclusions in the provisional award in whole or in part.”39Id. Investment arbitration cases are often “mammoth arbitrations,” involving thousands of exhibits and years of proceedings. Unless significant deference is given to decisions of TFIs’ findings of fact, the system’s processes will become lengthier and more costly.
Part IV. Creating a Centralized, Permanent Institution
This paper now turns to broader implications of replacing ad hoc tribunals with a centralized, permanent institution. First, this section discusses whether the binding statements of interpretation contemplated in the proposal are a realistic tool for Contracting States. Second, it explores reasons why centralization can be precarious: in light of the detailed flaws in the EC proposal, if investors or states see the ICS leaning one way or another, they risk losing confidence in the entire, permanent system. It concludes by highlighting the risks of replacing an ad hoc system with a standing supranational judicial institution, particularly given the EC’s long-term vision for the ICS to become a global permanent investment court.
By giving States the power to jointly issue binding statements of interpretation regarding the TTIP’s investment protections and ICS provisions,40European Commission, supra note 3, at art. 13(5). the EC’s stated objective is to give governments, not Judges or arbitrators, ultimate control over treaty interpretation. Yet this rests on the assumption that it is logistically viable for all TTIP Contracting States to unanimously agree on a single binding interpretation of a provision or obligation. Particularly in areas of overlapping EU and EU Member State competence, all 29 EU countries would need to unanimously accept a given interpretation – any of which risks serving the interests of some States more than, if not to the detriment of, those of others.
NAFTA provides a useful illustration of the logistical challenges to coordination on interpretive questions in investment treaty contexts. NAFTA’s drafters included provisions allowing for similar binding statements of interpretation, which have painstakingly come to fruition only once since it was ratified 24 years ago.41North American Free Trade Agreement (“NAFTA”), arts. 1131(2), 2001(1) & 2(c). See also Lise Johnson & Merim Razbaeva, State Control over Interpretation of Investment Treaties, 5, 11 (2014), available at
http://ccsi.columbia.edu/files/2014/04/State_control_over_treaty_interpretation_FINAL-April-5_2014.pdf. Similarly, Ch. 11 of NAFTA contains an ISDS provision contemplating a 45-judge roster; it was signed in 1992, and its three member countries have yet to agree on that roster’s composition. The EC proposal begs the question of how its 29 signatories will succeed at the correspondingly more difficult task of agreeing on such statements or on the composition of its roster of judges. To assume that such miracles of diplomatic coordination would routinely occur seems, at best, startlingly naïve. If, as is likely, these unanimous binding statements of interpretation never actually occur, the power of treaty interpretation will be left solely in the hands of the newly-created ICS.
Such centralization can be precarious. If the ICS, at any time, is seen to resolutely lean in favour of States or investors, parties risk losing confidence in the entire, permanent system. This is not the case for investment tribunals under the current ISDS system, whose ad hoc nature acts as a de facto check on the power and influence of individual tribunals.
One might also question the wisdom of the EU’s ultimate vision for a global permanent investment court charged with overseeing the world’s $2.64 trillion in foreign direct investments.42International Monetary Fund Investment Division, FDI in Figures – OECD International Direct Investment Database, 4, available at https://www.oecd.org/daf/inv/FDI%20in%20figures.pdf (last visited Feb. 21, 2017). A permanent, multilateral ICS would develop its own interests, objectives and institutional dynamics that threaten to coopt those of the governments that created it. As Joseph Weiler argued in “The Transformation of Europe,” the European Court of Justice in Luxembourg illustrates that permanent, inter-supra/national judicial institutions can develop political agendas that have far-reaching influence in shaping entire polities.43Eric Stein, Lawyers, Judges, and the Making of a Transnational Constitution, 75
Many of the critiques leveled against the existing practice of ISDS are legitimate and point to a need for system reform. However, the ICS proposal is a move of rushed political appeasement that provides incomplete solutions and introduces a number of additional dysfunctions. The public outcry to which the EC proposal responds is largely grounded in misconceptions and inaccurate information, and driven in Europe by political factions fundamentally skeptical of freer trade. The temptation is indeed great, for political reasons, to gravitate to familiar, court-like structures; yet the model of national judiciaries – with their standing judicial appointments, broad appeals mechanisms, and permanent institutional infrastructure – is ill-suited to the ISDS arena.
We mustn’t be blind to the potential of an incrementally reformed ad hoc ISDS. As Sophie Nappert observed in the concluding remarks of the annual address to the EFILA,“[i]n many ways, we must apply a denial of justice standard to ISDS – before we rush to declare that it is futile or deficient, it must be given a chance to perform.”44Sophia Nappert, supra note 26, at 19. If given that chance and appropriate incremental reform, ad hoc ISDS has the potential to be the most equitable, flexible, and efficient means of resolving investor-state disputes. However, the ad hoc ISDS system must be given the opportunity to mature for it to deliver this promise.
References [ + ]
|02.||↵||European Commission, Transatlantic Trade and Investment Partnership: Trade in Services, Investment and E-Commerce 17 (2015), http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf.|
|03.||↵||European Commission, Investment in TTIP and Beyond – The Path for Reform 4 (2015) http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.pdf.|
|04.||↵||European Commission, supra note 2, art. 29 (explaining that the proposed Appeals Tribunal could hear appeals by either party based on the following broadly defined grounds: “(a) that the Tribunal has erred in the interpretation or application of the applicable law; (b) that the Tribunal has manifestly erred in the appreciation of the facts, including the appreciation of relevant domestic law; or, (c) those provided for in Article 52 of the ICSID Convention, in so far as they are not covered by (a) and (b)”).|
|05.||↵||European Commission, supra note 3, at 4.|
|06.||↵||Daniel Rosario & Joseph Waldstein, Reading Guide, European Commission Fact Sheet – Reading Guide (Sept. 16, 2015) http://europa.eu/rapid/press-release_MEMO-15-5652_en.pdf.|
|07.||↵||Id. (explaining that Article 11 of the proposal describes the ethical standards applicable to judges and the members, and that a proposed Code of Conduct is included in the proposal as Annex II).|
|08.||↵||Cecilia Malmström, Proposing an Investment Court System, |
|09.||↵||European Commission, supra note 3, at 4 (stating that the proposal would “transform the [ISDS] system towards one which functions more like traditional courts systems”).|
|10.||↵||Malmström, supra note 7.|
|11.||↵||European Commission, supra note 5, at arts. 9–10.|
|12.||↵||Albert Jan van den Berg, Qualified Investment Arbitrators? A Comment on Arbitrators, in |
|13.||↵||European Federation for Investment Law and Arbitration, Task Force Paper Regarding the Proposed International Court System (ICS), (Draft 2016) http://efila.org/wp-content/uploads/2016/02/EFILA_TASK_FORCE_on_ICS_proposal_1-2-2016.pdf.|
|14.||↵||Hans Von Der Burchard, EU Faces Tough Sell on TTIP Compromise, |
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|17.||↵||Id. at 3.|
|18.||↵||European Commission, supra note 3, at 2.|
|19.||↵||European Commission, supra note 2, at art.11(1).|
|20.||↵||World Trade Organization (WTO), Understanding on Rules and Procedures Governing the Settlement of Disputes, 3, available at https://www.wto.org/english/docs_e/legal_e/28-dsu.pdf (last visited Feb. 21, 2017).|
|21.||↵||TTIP trade talks: German judges oppose new investor courts, |
|24.||↵||Sophia Nappert, Escaping from Freedom? The Dilemma of an Improved ISDS Mechanism, 11 (Nov. 26, 2015), available at http://efila.org/wp-content/uploads/2015/11/Annual_lecture_Sophie_Nappert_full_text.pdf.|
|25.||↵||European Commission, supra note 2, at arts. 11(2)-4.|
|27.||↵||Daniel Rosario & Joseph Waldstein , supra note 6, at 7.|
|29.||↵||German Magistrates Association, Opinion on the Establishment of an Investment Tribunal in TTIP – The Proposal from the European Commission: No. 04/16, (Feb. 2016), available at http://ttip2016.eu/files/content/docs/Full%20documents/english_version_deutsche_richterbund_opinion_ics_feb2016.pdf.|
|30.||↵||This retainer fee is around 1/3 of that of WTO Appellate Body members. Judges would also receive, once assigned to a case, a 3000-euro “sitting fee” per day of hearings. See European Commission, supra note 2, at art. 9; Sophia Nappert, supra note 26, at 16.|
|31.||↵||Athina Fouchard Papaefstratiou, TTIP: The French Proposal for a Permanent Court for Investment Arbitration, |
|32.||↵||Gabrielle Kaufmann-Kohler, In Search of Transparency and Consistency: ICSID Reform Proposal, 2 |
|33.||↵||Debra P. Steger, Enhancing the Legitimacy of International Investment Law by Establishing an Appellate Mechanism, in |
|34.||↵||Jan Paulsson, Avoiding Unintended Consequences, in |
|35.||↵||Id. at 246–47, 241, 253.|
|36.||↵||Sophia Nappert, supra note 26, at p.16.|
|37.||↵||Charles Brower & Charles Rosenberg, The Death of the Two-Headed Nightingale: Why the Paulsson—van den Berg Presumption that Party-Appointed Arbitrators are Untrustworthy is Wrongheaded, 6 |
|38.||↵||European Commission, supra note 3, at art. 29(1).|
|40.||↵||European Commission, supra note 3, at art. 13(5).|
|41.||↵||North American Free Trade Agreement (“NAFTA”), arts. 1131(2), 2001(1) & 2(c). See also Lise Johnson & Merim Razbaeva, State Control over Interpretation of Investment Treaties, 5, 11 (2014), available at|
|42.||↵||International Monetary Fund Investment Division, FDI in Figures – OECD International Direct Investment Database, 4, available at https://www.oecd.org/daf/inv/FDI%20in%20figures.pdf (last visited Feb. 21, 2017).|
|43.||↵||Eric Stein, Lawyers, Judges, and the Making of a Transnational Constitution, 75 |
|44.||↵||Sophia Nappert, supra note 26, at 19.|