The EU’s Reform Proposal for the International Trade Dispute Resolution

Andrea Cofelice
Research Fellow at the Centre for Studies on Federalism, Torino, Italy

In the current debate on the decay of commercial multilateralism, attention has mainly focused on the crisis of the WTO regulatory authority. Less explored, but equally evident, is the crisis that hit international trade dispute settlement mechanisms. This is true both for state-state disputes, used by governments to challenge other governments’ trade policies, and for investor-state dispute settlement (ISDS) cases, involving private investors submitting complaints against governments, usually for alleged abuses, discriminations or arbitrary expropriations.

Most state-state disputes are managed within the WTO, whose members can turn to a Dispute settlement body, which is organized in panels (a sort of first degree chambers) and in an appellate body, to challenge other states’ application or interpretation of trade rules. This body, composed of a permanent staff of judges, lawyers and other officials, issues binding decisions for states.

Although this dispute settlement mechanism is generally considered as one of the WTO’s greatest achievements, since it fostered trade rules institutionalization and helped to reduce the threat of trade wars, its authority has often been questioned by the most influential members of the Organization, who fear the risk of erosion of their national sovereignty. The USA, in particular, after ignoring a series of unfavourable decisions, since 2016 has been blocking the appointment of new judges to the appellate body, which is currently reduced to the minimum functioning threshold (i.e. three members, instead of the seven envisaged). During this year, the mandate of two out of the three judges still in office will expire: if they are not replaced, the appellate body will de facto cease to function, putting into question the whole WTO dispute resolution system.

Despite the urgent need for a revitalization of this mechanism, the debate within the WTO on possible reforms has focused merely on procedural aspects, such as an increase in the number of panel experts, digitization of documents, adoption of majority voting (instead of unanimity) by the appellate body, etc. To date, systemic reform proposals have been formulated exclusively by civil society groups^[i].

On the other hand, there are no permanent courts to deal with ISDS. Generally, investor-state matters are referred to ad hoc panels of independent arbitrators, whose composition is defined in each case by the appellants themselves (these panels are usually composed of legal experts, professors, lawyers, former judges, etc.). The details on the kind of conflicts that can be referred to ad hoc arbitration panels are set out in individual trade or investment agreements: currently, there are some 2,500 treaties with investment dispute provisions in force around the world.

Over time, however, this system has both come under increasing criticism by the international public opinion, and become one of the main hurdles in the negotiations on major regional and trans-regional trade agreements, such as the North American Free Trade Agreement, the Trans-Pacific Partnership or the (proposed) Transatlantic Trade and Investment Partnership between the EU and US.

What are, then, the main problems with the current ISDS system? An intergovernmental working group set up in 2017 by the United Nations Commission on International Trade Law (UNCITRAL) has identified three key issues.

1) Lack of consistency, coherence, predictability and correctness of arbitral decisions: different ISDS panels too often tend to adopt divergent and unjustifiably inconsistent interpretations of both general principles of international law and individual provisions set out in trade or investment agreements.

2) Concerns pertaining to arbitrators’ selection mechanisms and qualifications, with particular reference to the lack of independence and impartiality of decision-makers, as well as to the inadequacy, lack of effectiveness and transparency of the disclosure and challenge mechanisms available under many existing treaties and arbitration rules.

3) Excessive costs and duration of ISDS cases.

The EU, acting within the UNCITRAL working group, acknowledged that these issues have a systemic nature: “Costs are increased when the interpretation of the law is unstable, because different ad hoc tribunals may always potentially come up with divergent interpretations […], which is in turn linked to the concerns with the methods of arbitrator appointments which is in turn linked to the concerns with arbitrators’ independence and impartiality”^[ii]. Therefore, these critical aspects cannot be effectively tackled and resolved by simply relying on ad hoc interventions; by contrast, a structural reform of the entire ISDS system is necessary.

On the basis of these premises, last April the EU officially proposed the setting up of a standing mechanism (i.e. a court) for the settlement of investor-state disputes^[iii]. In a nutshell, the proposal provides for the court to be structured in: a) a panel of mediators, with the task of encouraging the amicable settlements of disputes; b) a first instance chamber, composed of full-time appointed judges, selected on the basis of rigorous ethical qualifications and guarantees of independence (as is the case for other existing international courts); c) an appellate body, to hear appeals against the first instance chamber on the grounds of errors of law or manifest errors in the appreciation of the facts.

Furthermore, in order to guarantee legal certainty and their effective enforcement, ISDS court’s decisions should not be open to appeal at domestic level or through other international mechanisms, since the proposed court would already feature an appeal mechanism. This aspect, coupled with the absence of any reference to the protection of universally recognized fundamental rights, perhaps represents the main problematic feature of the EU proposal, which is otherwise widely acceptable. Indeed, adjudicating investor-state disputes in “clinical isolation” from international human rights law would imply, for the future court, the risk of adopting decisions (unappealable, on the side) in potential conflict with international and EU law concerning, for instance, work safety, environmental protection, food security, etc. In order to avoid potential conflicts and increase the chances for court’s decisions to be accepted (and consequently enforced), it would be at least appropriate that the appellate body could examine the compliance of the first instance chamber’s decisions with the main UN and ILO conventions on human rights.

Beyond this specific aspect, the EU reform proposal of the ISDS system, which is under discussion by the UNCITRAL working group, is certainly appreciable, since it enhances the predictability and coherence of arbitral decisions, and helps removing most of the serious ethical concerns characterizing the current dispute settlement system. The hope is that the proactive role played by the EU in this context may mark the start of a broader political strategy, aimed at relaunching and strengthening institutional trade multilateralism, including the WTO regulatory authority.

[i] See, for instance: Levi L. (2017), Governing Globalization and the Role of the World Trade Organization, Centre for Studies on Federalism Research Paper, February 2017.

[ii] Doc. A/CN.9/WG.III/WP.159/Add.1, para. 10.

[iii] UNCITRAL Working Group III, Possible reform of investor-State dispute settlement (ISDS). Submission from the European Union and its Member States, Doc. A/CN.9/WG.III/WP.159/Add.1, April 2019.