Is it time to say goodbye to ICSID and welcome new systems in Investor-State Dispute Resolution?
The dramatic surge of international investments as part of the post-World War II policy that were adopted by powerful the countries of the time, inevitably, led to Investor-State Dispute Settlement (ISDS) and the adjudication of disputes under the aegis of the International Centre for Settlement of Investment Disputes (ICSID). This mechanism was undoubtedly an effective system at that time. However, by the passing of time, the problematic features of it became noticeable.
The most controversial fact is that the commercial arbitration system has generally inspired this dispute settlement mechanism. Many entities which offer arbitration tribunals for investment cases are originally providing services for the commercial cases and even ICSID, which has been created specifically for investment arbitration, follows some schemes which are aligned with the commercial arbitration characteristic. Confidentiality is one of the most remarkable aspects in this regard. In commercial arbitration, confidentiality is highly essential for the parties. This, however, becomes an issue in investment arbitration cases because of the unique combination of parties in ISDS (Investor as one party and the host state as the other), and the public-private hybrid nature of the disputes involved.
There are other difficulties related to ISDS, such as lengthy procedure of appointing the arbitrators and double hatting. The Working Group III for the Investor-State Dispute Settlement Reform, referring to a study of arbitrators, revealed that double-hatting is particularly acute in the overpowering minority of the current pool of arbitrators, namely, 25 individuals. The statistic hints that there is a glass ceiling for emerging arbitrators, potentially especially so for female arbitrators, who make up only 11% of the pool.
These factors, along with many others, have caused dissatisfaction among countries using ISDS and particularly ICSID. The United States is the best example of removing ISDS from North America Free Trade Agreement (NAFTA) and not including this mechanism in any of its agreements in the future, explicitly US-China BIT and Transatlantic Trade and Investment Partnership (TTIP). Different countries’ reaction toward this disapproval varies; suggesting a modification process on the current system, withdrawal from ICSID - the most crucial investment arbitration institution, and demand for the establishment of an Advisory Centre for International Investment Law (ACIIL), similar to Advisory Centre on WTO.
The EU approach
Following the protests regarding the inclusion of ISDS system in CETA and TTPI agreements, EU has introduced a system based on a Multilateral Investment Court (MIC). EU has recently replaced the ISDS mechanism with Permanent Investment Court System in all of its negotiations. Also, this mechanism has recently mentioned in the EU-Canada (2017) and, EU-Vietnam (2019) trade agreements. The initiatives of MIC have also been mentioned in the negotiations for the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US and in the EU-Singapore Investment Protection Agreement (ESIPA). It is mentioned in these agreements that the MIC provisions would be adopted once it has been established.
Taking advantage of the permanent tribunal with the possibility for either party to appeal against the decision, providing transparency by fully publishing the details of the cases and, preserving the tribunal's independence and arbitrators' impartiality using special procedures are the exemplary features of the MIC.
EU claims that by introducing this new system, it aims to do the same job WTO does in the field of trade, but this time in the investment dispute settlement. To rephrase, by doing so, there would be only one multilateral institution dealing with investment disputes rather than several different possible entities.
Based on the severe dissatisfaction regarding ISDS among countries and, the strong bargaining power of the EU, it can be anticipated that MIC be mentioned in more agreements in the near future. This is a really concerning claim. Right now, WTO is confronted by many criticisms related to its structure, and there are serious concerns regarding its collapse. Therefore, patterning a failed system would be risky. In addition, limiting the arbitration tribunals to only one entity would probably bring along the cases’ time-consuming issue.
Talking of ISDS, the largest proportion of the Energy and Natural Resources disputes are brought to ICSID for arbitration. While the investment arbitration tribunals are not obliged to obey similar previous decisions, arbitrators usually follow the same path that has been chosen in former cases. There is no legal obligation to follow previous case law. However, there is a kind of uniformity in the same cases, especially regarding Energy and Natural Resources cases. Shutting down this existing system and launching a completely new one would lead to a considerable deprivation of all the developments gained by the current system through the years. More importantly, in recent years the Working Group III, has done a remarkable job in identifying and amending the drawbacks of ICSID and it is expected that ISDS will only become better in the future.
While this newly introduced method has many attractive aspects, the EU has to clarify how this multilateral system can cover the main concerns, including the ones mentioned above. A working group has classified the main concerns related to this new system in three categories: (i) consistency, coherence and predictability of ISDS, (ii) factors related to the arbitrators and (iii) factors related to cost and duration of cases. This working group concluded that the reforms suggested by the new system are desirable and such reforms were discussed in two sessions on October 2019 and January 2020. However, the next sessions were postponed until further notice due to the COVID-19 situation.
With an optimistic spirit, we are looking forward to the result of further discussions, which will prove incremental to the shaping of the future of ISDS. It is yet to be seen whether older institutions such as ICSID, or the newly-introduced multilateral systems such as MIC will attract more disputes and be most efficient. What is certain, is that, investors and states now have more than one options, which could push institutions to mend flaws and make changes for the better.
· King R, Dispute Resolution in the Energy Sector: A Practitioner’s Handbook, (Globe Business Publishing Ltd 2012)
· Bjorklund A, ‘Investment Treaty Arbitral Decisions as Jurisprudence Constante’ (2018) 158 UC Davis Legal Studies Research Paper Series 261
· Hallak I, ‘Multilateral investment court: overview of the reform proposal and prospects’ (2020) EU publications
· Kryvoi Y, ‘ICSID Arbitration Reform: Mapping Concerns of Users and How to Address Them’ (2018) British Institute of International and Comparative Law < https://ssrn.com/abstract=3280782 > accessed 23 June 2020
· Sangwan S, ‘Comparison of Major International Arbitral Rules’ (2016)
· Director-General for communication (European Commission), ‘A Multilateral Investment Court’ (2017) EU publications
· Working Group III (Investor-State Dispute Settlement Reform), ‘Possible reform of investor-State dispute settlement (ISDS); Ensuring independence and impartiality on the part of arbitrators and decision makers in ISDS’(UNCITRAL GA, 66th Session, 29 Oct 2018 – 2 Nov 2018)
· IC 1. ICSID World Bank Group, ‘The ICSID Caseload –Statistics,’ Issue 2020-1, (Chart 16, p.20)