19 September 2015

By John Hendy QC

After months of consultations and heated debates, EU Trade Commissioner Cecilia Malmström will present, on 16 September, the Commission’s blueprint for a new dispute settlement mechanism called Investment Court System (ICS) to be part of the Transatlantic Trade and Investment Partnership (TTIP) agreement with the US.

The ICS is meant to replace the currently used Investor-to-state dispute settlement (ISDS) mechanism that has been heavily criticised by politicians from several member states, including Germany, France and Austria as well as business organisations and civil society groups.

Under the blueprint that has been kept in strict secrecy, disputes between companies and states would be settled by 3 judges drawn from a roster of 15 pre-established by the EU and the US, this website has learned. The judges will not be allowed to act as lawyers (e.g. preparing the investor’s claims) in other ICS cases.

The proposal will provide for the establishment of a bilateral appellate body consisting of 6 judges – a solution strongly supported by the European Parliament, business organisations as well as civil society groups. Their qualifications would need to be similar to those possessed by judges who work for the WTO Appellate Body or the International Court of Justice. The appellate mechanism will, inter alia, review decisions as regards errors of law and manifest errors in the assessment of facts, and ensure consistency in the interpretation of TTIP.

In order to address the general public’s concerns about the potential threat the dispute settlement system poses to governments’ rights to regulate in the public interest, the European Commission will propose to include in the TTIP text a full article that would make clear that governments are free to pursue public policy objectives and they can choose the level of protection that they deem appropriate.

On the relationship between domestic legal systems and the ICS, the Commission will force investors to choose between the two from the outset. Investors will have to withdraw from any domestic proceedings they have started before submitting a claim to the ICS and they will not be allowed to go back to a domestic court after losing the ICS case (the so-called no U-turn rule). In addition, the so-called “treaty shopping” will be forbidden under the new rules, this is a practice of some organisations that choose most favourable dispute settlement treaties to sue governments, e.g. Philip Morris Asia (PMA) brought proceedings against the Australian government with regard to plain-packaging under the 1993 Agreement between Australia and Hong Kong.

Next steps

The Commission’s blueprint will be transferred tomorrow to member states and the European Parliament for further discussion, a trade press official told this website. “A legal proposal will follow suit,” he added, without going into details.

Background

Investor-state dispute settlement (ISDS) is a legal mechanism that grants an investor the right to use dispute settlement proceedings against a foreign government. It first appeared in a bilateral investment (BIT) agreement between Germany and Pakistan in 1959, and since then over 3,400 BITs, most of them including ISDS have entered into force around the world. EU member states have 1,228 BITs with third countries. There are also 211 active BITs signed between EU member states. The number of treaties per EU country varies significantly, with Germany currently being a signatory to 129 BITs and Ireland being party to none. ISDS is associated with arbitration under the rules of ICSID (International Centre for Settlement of Investment Disputes of the World Bank), but in fact it often takes place under the auspices of international arbitral tribunals governed by different rules or institutions.

Investor-state dispute settlement (ISDS) is a legal mechanism that grants an investor the right to use dispute settlement proceedings against a foreign government. It first appeared in a bilateral investment (BIT) agreement between Germany and Pakistan in 1959, and since then over 3,400 BITs, most of them including ISDS have entered into force around the world. EU member states have 1,228 BITs with third countries. There are also 211 active BITs signed between EU member states. The number of treaties per EU country varies significantly, with Germany currently being a signatory to 129 BITs and Ireland being party to none. ISDS is associated with arbitration under the rules of ICSID (International Centre for Settlement of Investment Disputes of the World Bank), but in fact it often takes place under the auspices of international arbitral tribunals governed by different rules or institutions.