Will EU Investment Tribunal Be Better than #ISDS?

If European officials have their way, we could see several new international courts in the near future.*

The immediate impetus for the proposals is a popular backlash in many European countries against aspects of a proposed trade deal with the U.S. called the Trans-Atlantic Trade and Investment Partnership. The TTIP would include rights for investors to directly sue governments for cash compensation over treaty violations. While similar so-called investor-state dispute settlement (ISDS) rules have been included in over 1,000 European trade deals (many with poorer nations), the prospect of tens of thousands of litigious U.S. investors suing more regulation-friendly European governments has brought the reciprocal nature of these rules into sharper focus.

In response to these fears, European Union officials are proposing to create standing tribunals to hear ISDS cases. A few notable features include:

• A lower court composed of judges with six to 12- year terms. Five would come from the U.S., five from the E.U., and five from other countries. One judge from each nationality group would be randomly assigned to each case that was filed. The chair would come from neither country (i.e. a judge from Japan or a less developed country, etc.). This would replace the current ISDS system, where arbitrators are appointed by investors and states on a case-by-case basis.
• A higher court that would hear appeals from litigants dissatisfied with the decisions of the lower court. The appeal tribunal would have six judges with similar nationality and case assignment rules as the lower court. At present, ISDS rulings are final and un-appealable. Nonetheless, there are some procedures that somewhat resemble appeal. Cases that take place at the World Bank’s arbitration facility can be annulled in certain extreme situations;** cases heard elsewhere can be set aside in national courts. The EU’s proposed appellate body would be able to review a wider range of both legal and severe factual errors by the lower tribunal.***
  

The European Commission is touting these a a “clear break” from the past and a move towards “system comparable to that found in domestic legal systems.” They’ve already incorporated the proposals into a trade deal with Canada called CETA.

How you assess these proposals depends on your metrics. Judicial politics scholars have assessed quality of judicial systems along a number of dimensions: independence, legitimacy, and effectiveness / authority. Let’s take a look at each in turn.

Independence

A system of tenured arbitrators seems more independent at first blush than a system that gives litigants control over who judges them. Indeed, scholars that agree on little else (see here and here) agree that lack of tenure is one of the top ways states can keep international tribunals dependent. For example, when judges on the European Court of Human Rights approach have passed their final reappointment opportunity, they show more willingness to vote against their home country.

But independence is not just a formal quality of how judges are appointed: it is the ability of adjudicators to produce opinions by their own discretion and autonomously from the preferences of other political actors. You could have a system of tenured judges that nonetheless delivered according to the preferences of a group in society. You could also imagine a system of untenured arbitrators that voted their own conscience rather than follow their appointers’ desires. An example of the former would be when hired-for-life U.S. judges systematically favor the “haves” over the “have nots.” An example of the latter might just be ISDS, in the view of some scholars, as ISDS tribunals regularly split the difference between states and investors. As I show in my own research, judges that operate in multi-member tribunals will show varying degrees of independence, and may limit their own preferences in order to reach bargains with one another.

Legitimacy

Legitimacy refers to the subjective belief by stakeholders that the proposed investment court has a right to exercise authority over investment rules – even when they might disagree with specific decisions. Legitimacy can be thought about from the perspective of the general public, states, and investors.

As political scientist Erik Voeten has written, the general public is unlikely to pay close attention to what goes on at faraway courts. If this is true with the EU’s ISDS appeals tribunal, then the problem won’t be legitimacy but ignorance. If the public were to suddenly become interested, perhaps because of a highly salient / controversial case, then the tribunal’s legitimacy would hinge on how trusting citizens were of institutions associated with the tribunal (like the E.U.) or of courts more generally.

Would the proposed investment tribunal be more legitimate in the eyes of states or investors?

Maybe. As Sergio Puig finds, one of the main predictors of getting appointed to an ISDS tribunal is an arbitrator’s connection to other influential arbitrators. That arguably could produces an inward-looking dynamic that limits broad legitimacy. Perhaps a more institutional bench would inspire greater confidence.

But maybe not. In the current system, states and investors get to pick the arbitrators that hear their case. This may give both sides greater confidence that their views will be heard. In contrast, the members of the new ISDS tribunal would not be picked by either litigant, and the chair would not even come from either country.  the deciding vote on an ISDS tribunal would be cast by someone who was not picked by either side, or even a national of either side’s home country. They might make them less legitimate in the eyes of the litigants.

Sometimes too much independence leads to legitimacy problems. For instance, many Caribbean countries used to allow appeals of domestic legal decisions to the Privy Council of the House of Lords in the UK – their erstwhile colonial master. This body is very independent, in that the local population has no control over its members. As Larry Helfer explains, the Privy Council’s imposition of its own anti-death penalty preferences damaged its legitimacy among Caribbean countries that still used the punishment. The countries responded by removing this appeal option and setting up their own regional court of appeals.

More dense connections to local actors can help build legitimacy. James Cavallaro and Stephanie Brewer find that the Inter-American Court of Human Rights gets more country compliance with its decisions when the public in the affected country is exposed to its cases through local media. More broadly, Yonatan Lupu tells us that both national and international courts track closely their own approval ratings and that of other branches of government before deciding cases.

In short, judges rule more acceptably with they know what constitutes public acceptability.

Effectiveness and Authority

The tension between independence and legitimacy leads to the final metric: effectiveness. This can be thought of either in internal or external terms.

Internally, does the court discharge its case load quickly? This is not a great indicator, since a court could be very efficient in terms of producing written decisions, but completely ignored.

The external effectiveness might be more important: do parties comply? Effectiveness is closely related to the concept of authority. As Karen Alter, Larry Helfer, and Mikael Madsen write

Most ICs acquire formal legal authority—what many call de jure authority—through an act of delegation from states that establishes the courts’ “right to rule” on disputes falling within their jurisdiction… But delegation alone is insufficient. A formally constituted court may receive no cases even if violations of the law are widespread. Or it may issue decisions that the parties ignore or that have no legal or political impact. The core challenge that ICs face, therefore, is transforming formal legal authority into authority in fact, what many label as de facto authority

Unlike legitimacy, authority is not subjective. As Alter et al find in a just released special issue of the journal Law & Contemporary Problems, authority exists on a spectrum. Some courts have no authority, like the East African Court of Justice (which has been largely disregarded by the business interests it was meant to help). A court can have narrow (or intermediate) authority, where only the litigants to a case (or potential litigants) follow the rulings (e.g. the Caribbean Court of Justice). The Andean Tribunal of Justice has more extensive authority, in that it shapes actual business practices by litigants and non-litigants alike. Finally, popular authority exists when the public as a whole accepts bindingness and enforceability of rulings (e.g. the U.S. Supreme Court on a good day).****

By this metric, the new ISDS system will be at least as effective as the old one. Both entail governments giving advance consent to be sued, and neither requires that the host state voluntarily comply. Enforcement happens by victorious investors taking arbitration awards to national courts (often in third countries). In the U.S., judges are instructed to defer to the legal reasoning of arbitrators. And while foreign sovereign assets were once considered immune from attachment in litigation, this has been wittled away in U.S. courts in recent decisions.

Indeed, there’s a chance that the new system could be more authoritative than the current ISDS system, in that its independence and tenure might allow it to promote more uniformity in the case law. This could then allow potential litigants to have greater certainty about whether a claim would be frivolous or not – making better use of scarce resources by not pursuing frivolous or misguided cases.

Conclusion

The E.U. proposal to create a new investment court will be at least as (if not more) authoritative as the current ISDS system. On its face, it will also be more independent. However, more independence and authority may not lead to more legitimacy in the sense that I’ve outlined above. This is based largely on my read of the literature and history of the WTO’s dispute settlement body – on which the E.U.’s proposal is partly based.

Later this week, I’ll take a closer look at the WTO. And after that, I’ll also draw some lessons on how to create a better balance between the goals of enhancing authority, legitimacy, and independence.

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Footnotes

* I use the terms “courts” and “tribunals” (and “judges” and “members of appeal tribunal”) interchangeably.
** The grounds for annulment are contained in ICSID Convention Article 52, and include:

– that the Tribunal was not properly constituted;
– that the Tribunal has manifestly exceeded its powers;
– that there was corruption on the part of a member of the Tribunal;
– that there has been a serious departure from a fundamental rule of procedure;
– that the award has failed to state the reasons on which it is based;

*** The enhanced grounds for appeal in the EU proposal include:

(a) that the Tribunal has erred in the interpretation or application of the applicable

law;

(b) that the Tribunal has manifestly erred in the appreciation of the facts, including

the appreciation of relevant domestic law; or,

(c) those provided for in Article 52 of the ICSID Convention, in so far as they are not

covered by (a) and (b).

In other words, there is a more explicit allowance in the new proposal for revising the legal and factual decisions made by the lower tribunal. However, as legal scholar Christoph Schreurer (unhappily) notes, annulment committees have been able to use the vague language of the ICSID Convention to review legal and factual findings of ISDS tribunals.

**** There’s no easy relationship between independence and authority. A state would comply with a court that always sided with states, since that would imply no behavioral change. It would probably never comply with a court that ruled against it unfairly. In between, evenhandedness might help with states that value evenhandedness domestically, and not with those that don’t.

Relatedly, a system that was totally predictable and evenhanded would never be used, as cases could be easily settled. It would be difficult to definitively ascertain the authority of a court that never ruled, and broad public legitimacy concerns would not even arise. Linking compliance to behavioral change is conceptually tricky, especially in a world where remedies don’t entail policy change.

In short, it’s complicated.

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10:17 am: a few edits made for clarity.