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Insight – The EU’s proposed Multilateral Investment Court: a work in progress

 

On 27 February 2017, the European Commission held a stakeholder meeting  in Brusselsin order to exchange views regarding its plans to establish a  Multilateral Investment Court – or MIC. Nikos Lavranos offers his assessment of where the EU stands in its project. In his view, this is still very much work in progress.

 

The EU Commission’s vision for the court

 

The template for the EU-sponsored MIC project is the ‘Investment Court System’ or ICS as it is now contained in CETA and the EU-Vietnam FTA.

In the past months, the Commission has embarked on a roadshow at various international meetings to promote the MIC.

The main elements of the MIC are a permanent, multilateral court with an appeal mechanism, which consists of elected permanent judges. It is transparent and operates on the basis of public law. In short, the MIC must be effective, value-based and deliver legitimacy, so the Commission.

The EU’s trade commissioner Cecilia Malmström stressed that the MIC must also cater for the investor-state disputes which are initiated under the existing 3,400 world-wide BITs. The Commission proposes to achieve this by way of an opt-in treaty, similar to the Mauritius Convention which allows Contracting Parties to make the UNCITRAL Transparency Rules of 2014 applicable to all their existing BITs. This would be a much more efficient way than amending all the 3,400 BITs.

Malmström claimed that her proposal has received positive reactions from many countries and among EU member states. She even claimed that a ‘friends of the MIC’ group could be created by some EU member states in order to bring the proposal a few steps further. Commissioner Malmström is determined to step up her efforts to obtain a critical mass of supporters, which she said would be 12-15 countries, for her proposal. In this context, she referred to a meeting in Durban in May at which many African states would discuss the MIC.

The questions raised during the discussions illustrated the still existing scepticism of NGOs. During the discussion the following issues were repeatedly raised, which deserve some closer reflection.

 

Grey areas

 

  • Exhaustion of local remedies

 

NGOs asked why the Commission does not include the requirement of the exhaustion of local remedies in the investment protection chapters of its FTAs. The Commission’s Colin Brown argued that it does not consider the inclusion of this principle as desirable. Neither CETA nor the EU-Vietnam FTA contain that requirement. However, this may have to be discussed with the other states interested in the MIC.

The principle of exhaustion of local remedies is often applied in order to regulate access to international courts by private parties. For example, a private party cannot – except in very exceptional circumstances – directly go to the European Court of Human Rights, but he or she needs first to run its case through the complete national judicial system. Applying this to the investor-state disputes would mean that in many cases an investor would first have to spend many years and a lot of many before being able to go the MIC. In many cases, the investor would be bankrupt before he would get to the MIC. In other words, the exhaustion of local remedies principle could very often turn into a denial of access to justice.

 

  • Direct effect

 

In the context of national courts, the question was also raised: why does the Commission refuse to grant explicitly direct effect to the FTA provisions? If indeed national courts are the only route for investors to obtain remedies, why not allow them to rely directly on the investment protection provisions contained in the FTAs before national courts? In many cases, this would be the preferred option of an investor and it would make national courts more familiar with the contents of FTAs.

This is not a new issue. Indeed, in the context of the WTO, many scholars and practitioners criticised the fact that the Court of Justice of the EU refused to grant direct effect of WTO law. This has prevented traders from relying before national courts on WTO Appellate Body reports to challenge EU legislation which was found to be incompatible with WTO law.

 

  • ‘Clean hands’ principle

 

Another point, which was repeatedly raised by NGOs, was the inclusion of the so-called ‘clean hands’ principle. Essentially, the clean hands principle means that if a foreign investor has breached any environmental, labour or health care law or rule of the host state, that investor would be prohibited from bringing an investor-state claim against that state.

Brown referred to the fact that CETA already contains enhanced obligations for investors regarding the respect for environment, labour and health and that similar language should be included in the MIC.

Moreover, CETA already contains a provision for throwing out frivolous claims, which could also be used to address this concern.

The clean hands principle prima facie seems to be a reasonable tool to prevent malicious investors from enjoying the benefits of investment treaties, the danger of abuse by the host state is high. If any – even the most minor – breach of a minor rule on environmental protection would result into a complete exclusion from the dispute settlement system, this would open up the door for abuses by the state. States have shown an incredible ability to suddenly find breaches of rule or law of which the investor was not even aware of. Again, this could potentially lead to a denial of access to justice.

 

  • Access to justice for SMEs

 

In this context, the special situation of SMEs and their access to the MIC must be highlighted again. The question is how could the costs be reduced for SMEs in order to ensure accessibility to the MIC for them?

The Commission is considering various options such as fixed fee schedules, sole arbitrator (which is already included in CETA) and a special small claims procedure.

These measures certainly would help SMEs but would seem to be insufficient, in particular due to the fact that the appeal possibilities enables states who lost in the first round to go on appeal even only for strategic reasons of stretching the proceedings and raising the costs for the SMEs. In order to avoid that, it would be useful to include a mechanism which would throw out frivolous appeals by states quickly and which would impose all the costs of such appeals on the states.  

 

  • Selection and qualification of judges

 

Finally, the issue of the selection process and the qualifications of the judges of the MIC was addressed. It was emphasized that currently the ICS proposal in CETA does not contain any provisions relating to the selection process of the judges.

This should be of concern for the users of the system. MIC judges must not only be highly qualified but they also need to be impartial and independent. But the fact that the contracting parties will select behind closed doors any individuals they wish without a transparent and inclusive selection process, opens the door for the selection of pro-state biased judges. In order to avoid that, it would be important that selection process is developed, which also includes the participation of the legal and business community. The CVs of prospective candidates should be made public, oral hearings should take place and an assessment report of each candidate should be published.

 

A work in progress

 

One thing is clear after the stakeholder meeting: a lot of work still needs to be done by the European Commission.

The impact assessment regarding the MIC, which the Commission announced will be made after the public consultation has been finalised, should provide an excellent opportunity to clarify the above mentioned issues.

Probably after the summer break, the Commission will ask the Council for a negotiation mandate to start negotiating with other states regarding the creation of the MIC.

Trade commissioner Malmström is determined to make the MIC happen and thereby enter the history books as the one who changed investment treaty arbitration for good.

However, at this point in time neither the anti-trade NGOs nor the business community is happy with the current proposal. Too many issues have not yet been addressed, or they have been dealt with in a way which is considered inadequate.

Ultimately, the success of the MIC proposal will depend on whether the Commission can bring together a critical mass of countries (in the order of 30-50 states), which would need to include the biggest economies (US, China, Japan, India) as well as be inclusive and cover Latin American, African and Asian countries, that would be ready to create and pay for yet another international court.

At this point in time it is not yet clear what other states actually think about the MIC proposal. Surely, the US is currently not very likely to embrace the MIC. China and Japan are currently negotiating FTAs with the EU and will be confronted with the MIC proposal.

 

Nikos Lavranos is a trade and investment law expert and Secretary General of the European Federation for International Law and Arbitration.

 

 

 

The stakeholder meeting discussed in this text was livestreamed and can be watched here.

 

Views expressed by external contributors to Borderlex are those of their authors only.