In September 2015 the European Commission issued proposals for reforming the mechanism for resolving state-investor disputes related to an investment treaty: the principle consists of establishing a new jurisdictional system composed of a permanent court whose judges are appointed by the states and endowed with an appeal chamber. It is this new mechanism, called the Investment Court System (ICS) or the multilateral Investment Court (MIC), which was inserted in February 2016 into the trade agreement being negotiated between the European Union and Canada (CETA), replacing the former investor-state dispute settlement mechanism (ISDS).

The adoption of the Investment Court System, provided for in CETA, is currently suspended pending a possible decision by the European Union Court of Justice. Last October, the Walloons obtained a ruling from the European Council that the Belgian federal government could refer the matter to the European Court of Justice on the compatibility of this new system with the European Union’s legal system.

The MIC is generally adopted to address what is refered to as the ‘legitimacy crisis of the ISDS’. a system that was long criticised for its lack of coherence, predictability, and biased arbitrators. This is promised through reforms such as replacing ad hoc arbitrators with permanent judges. All and all, the reforms suggested by the MIC proposal are mere replacements of the type of decision-makers in investor-state disputes. These very reforms raise concerns related to the impartiality of judges similar to those directed towards the ISDS where it is not clear how judges chosen by the British, Egyptian or Russian governments would prove to be impartial in CETA-based disputes, given that the mere difference of nationality is not enough to eliminate the possibility of bias and partiality and vice versa.

This essay will argue that the proposed MIC system will fail to reform the alleged ISDS legitimacy crisis by arguing for the MIC’s failure to resolve the issue of bias and partiality of its would-be judges, as well as arguing that the MIC system will kill the Most Favored Nation (MFN) advantages by creating a system where the state polices the investors dispute resolution options and that the ISDS – flawed as it may be – is effectively presenting guarantees for state sovereignty and investors interests.

The essay will start with the exploration of the issue of partiality and bias of ad-hoc arbitrators, how the issue may persist under the MIC, and how the current ISDS proposes guarantees to the issue. Then, the essay will address how the MFN is an advantage that is essential for investments and related disputes and how it will be obliterated by the lack of solutions of the MIC, and finally, the essay will explain how the ISDS preservation of guarantees for state sovereignty and investors rights. The essay will conclude with a statement on how the ISDS shall remain in force and may not be replaced by the MIC.

The MIC will not be able to solve the issue of arbitrators’ partiality and partiality and bias, even if we replace them with judges.

No safeguards are proposed to avoid the select club of arbitrators that currently decides many investor-state dispute settlements, even though they have been a driving force in the resurgence of arbitration.

According to Jose Zárate (2018), CETA has failed to show that MIC judges would be impartial, independent, and free of political or economic bias “To the contrary, knowing that a state’s past behavior is the best predictor of its future behavior, one could predict that future negotiations of a MIC would be tainted by illegitimate and antidemocratic means”[1]

of investor-state dispute resolution, even though they have been a driving force in the resurgence of investment arbitration.

It is critical to state that the negotiations for CETA are claiming that the pro-investment judges are the best placed to settle these disputes. I, however, strongly disagree as the transparency of these judges is always questioned and the ability of these judges to do the job is always questioned since it is not possible to say that these judges today are too different from other arbitrators. that is to say nothing proves that they are less effective than them. this evident by the lack of any material guarantees to impartiality as depicted in the IBA Guidelines on Conflicts of Interest in International Arbitration.

Moreover, the EU stands for the argument that the establishment of a multilaterally agreed-upon system for investment dispute resolution with a permanent body of judges could provide a significant degree of predictability and coherence. To that end, the EU criticizes the current ISDS framework for its lack of fairness and preservation of the right of public authorities to regulate.

This is a downside for the MIC proposal as, and as viewed by Zárate (2018), this argument along with the ISDS system’s criticism for lack of neutrality and consistency is a mere indicator of the lack of confidence in the arbitral college that explains why the EU’s first step was to use its institutional power to remove the ISDS rulings from private hands to a public body. 

The very claim by the EU made many countries – without any basis – admit that the ISDS framework has deficiencies in its legitimacy, neutrality, transparency, consistency, and costs and that a policy will need to be undertaken soon to try to solve these deficiencies.

One questions arise from the ‘call to reform’ that the EU proposes: Does the replacement of arbitrators by rather specialized judges reflect a certain efficiency?

the answer is simple, All of these elements indicate a strong continuity with the current system rather than an attempt to reform it.

Moreover, the European Union will not let the chance to control the members of the court go into its hands.

In other words, the EU’s proposal would not change the treaties’ asymmetric conditions, such as the provisions that allow developed countries to have control over the members of the court through their appointment and veto, which will endanger their independence and impartiality.

MIC will not be able to provide the MFN advantages.

The MFN clause allows its beneficiary to claim more advantageous treatment, granted by the granting state to a third state, in a treaty.

Its extension to dispute settlement mechanisms cover a new dimension that is related to “unilateral transnational arbitration” – that is, the possibility offered to the investor to unilaterally refer a dispute to the possibility for an investor to unilaterally refer a dispute to an arbitral tribunal based on a BIT.

In the eyes of Stephan W. Schill (2017)[2], the advent of MFN arbitration under ICSID, for example, has been fostered mainly by a combination of several factors: the existence of a highly dynamic network of BITs the propensity to insert indirect clauses in BITs and the spectacular development of investment litigation.

From my point of view, arbitration, through the MFN clause, follows the same path as unilateral arbitration, which can be said to be one of the manifestations. In this context, a gradual analysis of the context of emergence and the conditions of implementation of unilateral arbitration has led to a particularly significant finding as to the existence of a dependent relationship between the extension of the MFN clause and unilateral arbitration. Meaning that it has been held and recognized the ruling of Mafizini v. Spain[3] that the more favourable conditions of access to unilateral arbitration given in a treaty with one country could be invoked by nationals of other countries whose treaty contains the MFN clause, the more the investors – of both countries – would have trust in the system.

The resurgence of the MFN clause, in the restricted field of ICSID arbitration proceedings, stems from the more general problem of adapting procedural law to the pace of transformation of investor relations. It also stems from a need to unify the rules governing investment matters. Hence, I find it critical to state that thanks to the proliferation of BITs, most of which incorporate “indirect” clauses, the MFN clause contributes to reinforcing the systematic recourse against the State instituted by unilateral arbitration. Like a dwarf perched on the shoulders of a giant, the extension of the MFN clause to the rules of the procedure allows unilateral transnational arbitration to have an additional effect on the expansion of the jurisdiction of arbitral tribunals. Therefore, the tempering of the principle of automatic extension of the MFN clause by some courts is rather welcome.

It should be noted, however, that the solutions of the case in which the principle is not applied should not be interpreted as a denial of its existence or a claim of the failure of the system that allows it to breathe (the ISDS in this case). As its legal basis is proven, the restrictions imposed by the courts deserve to be reconsidered to symmetrically take into account the interests of the parties. All in all, it can be said that modern investment law – to the strengthening of which BITs, regional treaties, and arbitration awards contribute – embodies a trend in the air of the times. The extension of the MFN clause to dispute settlement mechanisms is probably the most current response to the concern for harmonization of the rules governing international investment. A response that will be killed by the black and white of the MIC.

THE ISDS SYSTEM FRAMEWORK BALANCES STATE SOVEREIGNTY AND INVESTORS INTERESTS.

The investor-state dispute settlement mechanism raises multiple questions.

One of which is the question of the hindrance to the sovereignty of the State, and more precisely to its capacity to legislate – because of the pressure that the investor can exert on the host state of the investment – constitutes the most vivid objection to the ISDS mechanism by states. Nevertheless, this “leash” on states is a guarantee to the investors’ rights against entities that will not hesitate to use their upper hand to realize minor or major interests on the account of the investors. It is alleged that ISDS clauses violate the principles of equality of citizens and non-discrimination, given that the mechanism is open only to foreign investors.

This very criticism – considerable as it may be – is a testament to the ISDS system’s capability to balance the investors’ needs and interests against the state sovereignty, putting a blockade on the state’s capability to monopolize a positive law due to being restricted by the rules contained in BITs.

As Sornarajah (2006)[4] believes; if these rules are likely to weaken the legislative or jurisdictional dimension of the receiving State, one of the most critical concerns of states is the fact that, on many occasions, arbitration practice has favored the protection of private operators at the expense of the general interest.

However, I would strongly de-escalate this concern as due to recent developments in case law and treaty provisions, we are now witnessing a rebalancing of the rights and obligations of investors and host countries. Based on this observation and in light of the study of the rules arising from these agreements, this contribution aims to demonstrate that while continuing to offer protection to foreign operators, these bilateral treaties tend to safeguard State sovereignty as well.

Conclusion

As the paper explained, it is clear that issues that the MIC is proposed in order to deal with are matters of enhancement not reformation. Partiality and bias of ad-hoc arbitrators could be enhanced with better selection and appointment guarantees rather than an absolute change of direction. It is also critical that the ISDS remain in force as it guarantees the pinnacle of equality between the investor and the state, the MFN clause. Nevertheless, the ISDS is effectively preserving the rights of both states and investors. Just because states are less possible to emerge victorious from the ISDS, does not mean that the system is entirely flawed beyond usage. Enhancement of the ISDS is a more acceptable and practical solution.

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[1] Legitimacy Concerns of the Proposed Multilateral Investment Court: Is Democracy Possible? José Manuel Alvarez Zárate.

[2] Schill, Stephan W., Maffezini v. Plama: Reflections on the Jurisprudential Schism in the Application of Most-Favored-Nation Clauses to Matters of Dispute Settlement (February 23, 2017). In Meg Kinnear et al (eds), Building International Investment Law: The First 50 Years of ICSID (Alphen aan den Rijn: Wolters Kluwer, 2016) 251-265, Amsterdam Center for International Law No. 2017-11, Amsterdam Law School Research Paper No. 2017-12, Available at SSRN: https://ssrn.com/abstract=2922542

[3] Maffezini v. Spain, ICSID Case No. ARB/97/7

[4] Sornarajah, M. A law for need or a law for greed?: Restoring the lost law in the international law of foreign investment. Int Environ Agreements 6, 329–357 (2006). https://doi.org/10.1007/s10784-006-9016-0