EU Council publishes Negotiating Directives for Convention establishing a Multilateral Investment Court: no real surprises but a couple of gaps

On 20 March, 2018 the Council of the European Union published negotiating directives dated 1 March 2018 authorizing the European Commission to negotiate a convention establishing a multilateral court for the settlement of investment disputes between investors and states. Whilst the detailed characteristics of the proposed multilateral investment court (the MIC) will be developed during the course of the negotiations, the Negotiating Directives give considerable indication of the EU's intentions as to the MIC's features.

The Negotiating Directives have their origin in the Commission's Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral investment court, published in September 2017.  This included a recommendation that negotiating directives be drawn up and made public immediately after their adoption.  The Commission has since commented that "the EU's new policy on investment is fundamentally based on transparency" and that publication of the Negotiating Directives allows the EU "to continue to work with like-minded partners around the globe" towards creating a MIC, "knowing that EU citizens are fully informed of [its] negotiating instructions".

Whilst the EU introduced its intention to move towards a multilateral system in a Concept Paper in 2015 (see our blog post here), the Commission's Recommendation itself came shortly after UNCITRAL indicated in its 50th Session in July 2017 that UNCITRAL Working Group III would consider possible reform of investor-state dispute settlement.  This work began in the Working Group's 34th session in November 2017, with its next session due to take place on 23 to 27 April 2018.  It will therefore be seen as no coincidence that the EU has chosen to publish these negotiating directives at this stage, and they will set the framework for the participation of the EU and its Member States, as further considered below.  The EU has also submitted a paper to the Working Group in advance of its next session highlighting its concerns over the current system of ISDS.

Key features

The EU's intention is that the establishment of the MIC will answer perceived criticisms of investor-state arbitration. The key features described in the Negotiating Directives are:

(i) A two-tiered system comprising tenured judges: stringent requirements as to quality and ethics

The MIC will comprise a tribunal of first instance and an appeal tribunal. Members of both tribunals will be subject to stringent requirements and significant emphasis is placed on the need for members of the MIC to be both suitably qualified and independent.  There will be a code of conduct and challenge mechanisms included in the Convention. The members of the MIC will be permanently tenured for a "fixed, long and non-renewable period".

The MIC appointment process and number of members are both yet to be explored. The Negotiating Directives note that the method of appointment should take into account the expected size of the MIC and the need to ensure both effectiveness and efficiency.  It is recognised that this may entail appointment of a member by each contracting state to the Convention or may replicate the methods of appointment used by other international courts, such as the ICJ or the ICC. The Negotiating Directives indicate the importance of "regional balance and gender representation" although it is not yet clear how these are to be achieved.

(ii) An appellate mechanism: appeals on error of law or "manifest errors in the appreciation of facts", or, as appropriate "serious procedural shortcomings"

The Negotiating Directives propose that the appeal tribunal will have competence to review decisions issued by the tribunal of first instance on the grounds of errors of law, manifest errors in the appreciation of facts and, as appropriate, serious procedural shortcomings.  The appeal tribunal may resolve the proceedings in the light of its findings, and should have the power, when appropriate, to send back cases to the tribunal of first instance.

Introduction of a broad appellate jurisdiction will represent a significant departure from both the more limited review offered by the annulment process under the ICSID Convention and the potential for review of an arbitral award under most domestic arbitration laws.  Notably, an appeal on the facts is largely not recognised in arbitral systems. The Negotiating Directives do not indicate the policy behind the introduction of the appeal mechanism: whether it is to give legitimacy to the system, to ensure correctness or to encourage consistency, or indeed all three. One challenge for the drive towards consistency will be the fact that the MIC will be considering differently worded provisions included in different agreements, concluded in different circumstances, and applied to different facts.

(iii) Procedural safeguards against "frivolous claims" and other procedural aspects

The EU has previously indicated that any revised system for resolution of investor-state disputes should include a provision allowing the tribunal to deal expeditiously with "frivolous claims" – which are those which are manifestly lacking in legal merit (see, for example, the EU Commission's 2015 Concept Paper: "Investment in TTIP and beyond – the path for reform").  The Negotiating Directives acknowledge that such a provision should be included in the Convention. Precedent for provisions allowing the expeditious despatch of frivolous claims can be found in the current system of ISDS: ICSID Rule 41(5) provides an expedited process for a tribunal to dismiss claims manifestly lacking legal merit.

The Negotiating Directives also provide that other procedural aspects should be considered, including amicable dispute resolution mechanisms, and provisions dealing with both parallel claims and joint interpretations by the contracting states as to the provisions of the agreement under which an investor's claim is brought.

(iv) Transparency

The Negotiating Directives indicate that the resolution of investor-state disputes by the MIC should be "transparent, including the possibility of submitting third party interventions, similar to or utilising the rules and standards provided for within the UNCITRAL Rules on Transparency for treaty-based investor-state arbitration".  The reference to the UNCITRAL Transparency Rules is, of course, unsurprising given the context in which those Rules have been developed.  What will be interesting is to see whether the EU's negotiating position goes beyond the scope of the UNCITRAL Transparency Rules, recalling that the final text of the CETA provides for broader transparency than is required by the Rules (see CETA, Article 8.36).

(v) Costs and access to the system by developing and least developed countries

The Negotiating Directives do not provide any indication of the level of the costs involved in setting up and maintaining a permanent investment court but do anticipate some of the questions concerning how such costs may be borne.  In principle, the costs relating to the MIC will be borne by the contracting states to the Convention, with the possibility of some contribution by the disputing parties through court fees which should not be linked to remuneration of the members of the first instance and appeal tribunals.  The Negotiating Directives provide that the distribution of costs between the contracting parties "should be decided on an equitable basis which shall take into account various factors, including the Parties' level of economic development."  Whilst the policy behind such approach is clear, it may not be appealing to those economically well-developed states against which few, if any, claims have been brought and whose investors have, historically, had little recourse to ISDS.

The Negotiating Directives also provide that the EU "should strive to ensure that support can be made available to ensure that developing and least developed countries can operate effectively in the investment dispute settlement regime. Such an initiative may form part of the process of establishing a multilateral investment court or may be conducted separately".

(vi) Future development of the MIC

Whilst the EU's proposal envisages a multilateral court, it is clear that it may take a number of years to achieve this ambition.  Therefore, the Negotiating Directives provide that the Convention must "include the necessary flexibilities to adapt to an evolving membership, as well as to possible evolutions in the nature of agreements that could be submitted to the jurisdiction of the court."

The Negotiating Directives indicate that the MIC may rely on the secretarial support of an existing international organisation, and that it may be integrated into the structure of such an organisation at a later stage. No international organisations are named in the Negotiating Directives but the Permanent Court of Arbitration based in the Hague, or the International Centre for the Settlement of Investor-State Disputes (the ICSID) are the most obvious options.  Both of these organisations have been included in the investment chapters of the EU's recent FTAs. The PCA and ICSID Secretariat are included in the EU-Vietnam FTA as providing secretarial support for the tribunal and appeal tribunal to be established to resolve investor-state disputes under that agreement, with a final decision as to which organisation is to perform the role to be made during the "legal scrubbing" process. The ICSID Secretariat is designated in the CETA as providing support for the investment tribunal established under the CETA.

Investment disputes under which agreements will be determined by the MIC?

The EU intends that the Convention will be drafted in a way in which it can become a party, and that agreements to which the EU is or will become a party will fall within the jurisdiction of the MIC. However, the EU has broader ambitions for the Convention. It is intended that agreements between the EU's Member States and third countries may be brought under the jurisdiction of the MIC, that the jurisdiction of the MIC may be extended to any bilateral agreement where the contracting states to that agreement have so agreed; and that the Convention should allow two or more Parties to a multilateral agreement to agree to submit disputes to the MIC. The Negotiating Directives also indicate that "[i]t should be explored whether the Convention could also be utilised if only the respondent state is Party to the Convention".

Clarity awaited on enforcement

The Negotiating Directives provide that “[d]ecisions of the multilateral court should benefit from an effective international enforcement regime.” This is clearly a fundamental aspect of the MIC, not only for investors but also for states which may benefit from a costs award in their favour, or may succeed in bringing a counter-claim.

However, there is as yet no indication as to how effective enforcement will be achieved.  Consideration of possible mechanisms is beyond the scope of the Negotiating Directives and will depend very much on how the MIC eventually develops. It is possible to envisage that a self-contained enforcement mechanism could be developed, or that the awards are designed to fall under the ICSID or New York Convention regimes, but the EU's intention in this regard is not yet clear.

The role of UNCITRAL

The Negotiating Directives explain that negotiations will be conducted under the auspices of the United Nations Commission on International Trade Law (UNCITRAL).

UNCITRAL Working Group III has already begun its consideration of Investor-State Dispute Settlement (ISDS) – the report of the first session is available here. The 35^th session of UNCITRAL Working Group III takes place on 23 to 25 April 2018. In advance of the 35^th session, the EU has made a detailed submission on investor-state dispute resolution which can be found here. This gives further indication of the EU's concerns in relation to investor state arbitration and its philosophy in relation to the future of ISDS.

Comment

The publication of the Negotiating Directives by the Council confirms the commitment of the EU and, in particular, the Member States' governments, to the development of the MIC. It will be seen as a clear statement by the EU right at the outset of the UNCITRAL deliberations of how far its thinking has progressed in this area. The content remains consistent with the EU's previous pronouncements on the future of ISDS and does not introduce any significant new aspects.  However, a number of significant issues remain to be tackled such as whether the decisions of the MIC will be able to be effectively enforced under existing enforcement regimes, a matter which will be key to ensuring the success of any proposal.

For further information, please contact Andrew Cannon, Partner, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.