ISDS Reform: The Case for a Multilateral Investment Court
1
I. Introduction
One of the essential features of the current international investment law regime is the
investor-state dispute settlement system (ISDS). The ISDS system is the primary means of
settling disputes between private foreign investors and states.1 The system was popularized in
international investment law by the investor-friendly international investment agreements (IIAs)
of the 1990s.2 To date, over a thousand cases have been adjudicated.3 However, the current ISDS
system has been increasingly criticized by civil society groups, non-governmental organizations,
academics, and States themselves, who perceive it as illegitimate and an instrument that restricts
the ability of governments to regulate in the public interest.4 Subsequently, these stakeholders
have proposed various reforms that aim to address the systemic issues of the ISDS system. One
such recommendation, championed by the European Union (EU), has been the creation of an
international investment court.5 This paper will argue that creating a multilateral investment
court (MIC) is the best solution for addressing the systemic issues inherent in international
investment law’s current ISDS system that have caused it to be perceived by many as
illegitimate. To this end, the paper will be broken down into three parts. It will first provide a
breakdown of the current ISDS system and its major systemic issues. Secondly, examine the
EU’s proposal for a (MIC) to solve the problems plaguing the current ISDS system. Lastly, the
paper will provide an analysis of how the MIC can address the systemic issues of the current
ISDS system and provide legitimacy to it.
1
Leila Choukroune & James J. Nedumpara, International Economic Law: Text, Cases and Materials, (Cambridge:
Cambridge University Press, 2022) at 613.
2
Ibid at 611
3
Ibid at 611
4
Maria Laura Marceddu & Peitro Ortolani, “What is Wong with Investment Arbitration? Evidence from A Set of
Behavioural Experiments” (2020) 31:2 Euro J of Int’l L 405 at 408.
5
Supra note 1 at 635
2
II. The Investor-State Dispute Settlement System & Its Systemic Issues
The ISDS system is the principal mechanism within international investment law that
facilitates the settlement of disputes between foreign investors and states.6 ISDS provisions are
critical components of contemporary IIAs and Bilateral Investment Treaties (BITs).7 These
provisions create what has been termed a hybrid system of adjudication, wherein private foreign
investors, who are not considered international legal subjects, can make claims against states that
are found to be non-compliant with an IIA or BIT to which they are a party.8 ISDS provisions
grant these foreign investors the right to recourse to an international tribunal to seek awards for
any damages incurred by actions taken by the state that are non-compliant with their treaty
obligations.9 The most common breaches that foreign investors claim are: (1) fair and equitable
treatment standards violation; (2) indirect expropriation; (3) full protection and security; (4)
expropriation; (5) umbrella clauses; and (6) national treatment.10 Permitting recourse to
international tribunals for disputes between investors and states ensures that foreign investors
receive neutral, independent, and efficient dispute settlement.11 Ensuring that disputes will be
settled fairly and impartially provides a sense of security to investors by minimizing the risk they
incur by partaking in foreign direct investment. Subsequently, IIAs and BITs with ISDS
provisions help to create a financial environment within host states wherein foreign investors are
comfortable making significant long-term investments. Historically, this mechanism has helped
6
Supra note 1 at 613
Stephan W. Schill, “Reforming Investor-State Dispute Settlement: A (Comparative and international)
Constitutional Law Framework” (2017) 20:3 J Int’l Econ L 649 at 649.
8
Ibid at 650
9
Ibid at 650
10
Supra note 1 at 622
11
Ibid at 650
7
3
facilitate foreign direct investment from wealthy individuals in developed states in developing
countries with underdeveloped domestic legal systems.12
However, critics have identified several systemic issues with the current ISDS system,
leading to increasingly vocal calls for reform. One of the key fundamental issues of the current
ISDS system is a lack of legitimacy.13 Legitimacy in this context refers to “why different actors
have a normative belief that a rule or institution ought to be obeyed.”.14 The perceived
illegitimacy of the ISDS system stems from three core concerns: inconsistency of decisionmaking, a lack of independence and impartiality on the part of arbitrators, and a lack of
transparency in arbitration case proceedings. The inconsistency in decision-making in the ISDS
system stems from the impermanent and fragmented nature of the international tribunals
established to adjudicate claims.15 Tribunals that arbitrate ISDS claims are established ad hoc by
an ISDS institution once a foreign investor has registered a claim under one of the approximately
three thousand investment treaties currently in existence.16 In addition to being temporary, ISDS
tribunals are also not bound by the decisions and awards of other ISDS tribunals.17 The
temporariness of tribunals combined with the lack of binding precedent within ISDS arbitration
has led to inconsistent and incorrect interpretations of the provisions of investment treaties
becoming a common occurrence.18 One such example is how the tribunals in two separate cases,
BG Group plc v. Argentina and National Grid plc v. Argentina, arrived at two opposing
12
Supra note 1 at 615
Supra note 3 at 408
14
Lisa Diependaele, Ferdi De Ville & Sigrid Sterckx, “Assessing the Normative Legitimacy of Investment Arbitration:
The EU’s Investment Court System” (2019) 24:1 37 at 44
15
Supra note 3 at 408
16
Julian Arato, Chester Brown, & Federico Ortino. "Parsing and Managing Inconsistency in Investor-State Dispute
Settlement" (2020) 21:2-3 The Journal of World Investment & Trade 336 at 337
17
Ibid at 337
18
Ibid at 338
13
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interpretations of the same full protection and security clause of the United Kingdom-Argentina
BIT.19 This lack of consistency in the ISDS system has resulted in the erosion of trust and faith
to produce quality and coherent decisions, contributing to the overall view of the system as
illegitimate.
The concern over the impartiality and independence of ISDS arbitrators stems from the
constitution and establishment of the tribunals themselves. The format of ISDS tribunals is
primarily left to the parties to the dispute. In International Centre for the Settlement of
Investment Disputes (ICSID) cases, parties determine the number of arbitrators that will
adjudicate the claim, how they will be appointed, and depending on the limitations of the
investment treaty at issue, the applicable legal regime.20 This system has led critics to argue that
the private arbitrators that compose ISDS tribunals lack independence and impartiality. They
posit that a systemic bias jeopardizes the neutrality of arbitrators to advantage foreign investors
over states, with little consideration for public interests.21 This is because the arbitrator in ISDS
cases are typically chosen from a small pool of lawyers educated in private law and subsequently
adjudicate the cases from a private law perspective, wherein both parties to a dispute are equal,
ignoring the important distinction that states represent the key interests of the general public.22
Private arbitrators are also economically incentivized to decide in favour of foreign investors in
ISDS cases, as their workloads depend upon investors continuing to file claims against host
States.23 Arbitrators deciding in favour of foreign investors thus helps alleviate any
unwillingness on their part to not file for arbitration in future investment disputes and ensures
19
Ibid at 346
Supra note 1 at 618-621
21
Thomas Dietz, Marius Dotzauer & Edward S. Cohen, “The Legitimacy Crisis of Investor-State Arbitration and the
New EU Investment Court System” (2019) 26:4 Review of International Political Economy 749 at 756
22
Ibid at 756
23
Ibid at 756
20
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their continued work. The systemic bias and economic incentives that lead ISDS arbitrators to
favour foreign investors in cases have created the perception that these individuals are not
impartial or independent adjudicators and that the ISDS system itself is illegitimate.
A lack of transparency in the proceedings of cases is a significant contributor to the
perception that the ISDS system is illegitimate. Throughout most of the history of the current
ISDS regime, claims have been adjudicated with very little public oversight and transparency.24
This is attributed to the private commercial arbitration roots of ISDS, where parties to a dispute
have significant financial interests in keeping the proceedings, decisions, and arbitration awards
confidential.25 However, when it comes to ISDS, this becomes problematic, as arbitration cases
can often impact the ability of a State to regulate important public goods. NGOs and other civil
society actors have strongly advocated for more transparent ISDS proceedings. This advocacy
has resulted in numerous attempts at reforms over the years. Notably, the 2014 United Nations
Commission on International Trade Law Rules on Transparency in Treaty-Based Investor-State
Arbitration (UNCITRAL Transparency Rules) was created to provide guidelines for the
publication of documents by ISDS tribunals.26 The recent United Nations Convention on
Transparency in Treaty-Based Investor-State Arbitration (Mauritius Convention) of 2017 sought
to secure State consent to apply the UNCITRAL Transparency Rules in their future ISDS
proceedings.27 However, this has only had a marginal impact. Since 2016, only 40% of the
eighty known investment treaty arbitrations concluded are publicly available.28 As a result,
24
Ibid at 757
Ibid at 757
26
Supra note 1 at 628
27
Supra note 1 at 628
28
Federico Ortino, “ISIS and Its Transformation” (2023) 26 J of Int’l Econ L 177 at 184
25
6
critics still point to the lack of transparency in ISDS proceedings as one of the primary reasons
the system lacks legitimacy.
III. Investor-State Dispute Settlement Reform – A Multilateral Investment Court
The perceived illegitimacy of the current ISDS system has led critics to propose various
reforms. Chief among them is the EU proposal to create a new multilateral investment court
(MIC) to replace the existing system of ad hoc tribunals.29 The EU’s decision to pursue reform
came after it received results from a large-scale public consultation on ISDS, and the
Transatlantic Trade and Partnership Agreement indicated widespread dissatisfaction with the
current system in 2015.30 In 2018, the Council of the European Union mandated that the
European Commission negotiate a MIC. 31 The proposed MIC would be a permanent
international adjudicative body established by treaty, with the mandate to settle disputes between
foreign investors and States regarding the violation of obligations under international investment
treaties.32 The MIC would have jurisdiction over claims arising under investment treaties where
the claimant and respondent voluntarily agreed to its jurisdiction.33
Marc Bungenberg and August Reinsich have outlined a very detailed institutional design
of the MIC in their work From Bilateral Arbitral Tribunals and Investment Courts to
Multilateral Investment Court Options Regarding the Institutions of Investor-State Dispute
Settlement. The MIC would be a two-tiered court composed of a court of first instance and a
29
Ondrej Svoboda, “EU Reform Agenda in Defence of the Judicialization of international Economic Law” (2020)
25:2 European Foreign Affairs Review 177 at 188
30
Ibid at 189
31
Council of the European Union, Negotiating Directive for a Convention Establishing a Multilateral Court for the
Settlement of Investment Disputes, EU, 12981/17 ADD 1 DCL 1, (2018) at 1
32
Supra note 28 at 188
33
Ibid at 4
7
separate appellate court.34 The court would fully incorporate the UNCITRAL Transparency Rules
and the Mauritius Convention into its procedural rules.35 This would mean that all procedural
documents of the court would be published and accessible to the public so long as they do not
disclose business secrets or the security interests of parties.36 In addition, all court hearings
would be open to the public and accessible to third parties who wish to make amicus curiae
briefs in cases where significant public interests are at stake.37 Member States of the organization
would constitute a plenary body responsible for electing and appointing judges and establishing
the court's procedural rules.38 The judges appointed to the court would need to be highly
competent in international public and private law, employed full-time and available to adjudicate
claims permanently.39 The court would have chambers with a predetermined number of judges
assigned cases by a President of the Court.40 Judges of the appellate body would also have
jurisdiction to determine if decisions by judges in the MIC court of first instance were biased.41
All decisions of the court would be final and binding upon both parties.42 In addition, the MIC
would establish a Secretariat to support the judges, administer proper court procedures, and
publish the proceedings undertaken by the court.43
34
Marc Bungenberg & August Reinisch, From Bilateral Arbitral Tribunals and Investment Courts to a Multilateral
Investment Court Options Regarding the Institutions of Investor-State Dispute Settlement, 2nd ed., (Berlin: Springer
Nature, 2020) at 21
35
Ibid at 5
36
Ibid at 5
37
Ibid at 5
38
Ibid at 4
39
Ibid at 44-45
40
Ibid at 59
41
Ibid at 56
42
Ibid at 155
43
Ibid at 4
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IV. How a MIC Would Address the legitimacy Issues of the Current ISDS System
Creating a MIC to replace the current ISDS system would address the systemic issues of
inconsistency, impartiality and transparency that have led to the system’s perception as
illegitimate. A MIC would address inconsistency issues in the adjudication of ISDS cases in a
few ways. First and foremost, the permanent nature of the court would allow for the uniform
application of procedural rules to each ISDS case, creating a universal standard that parties to a
dispute can expect. This would starkly contrast with the fragmented current ISDS system, where
ad hoc tribunals are composed of a varying number of arbitrators and different sets of procedural
rules. Secondly, the MIC appellate body would ensure that hotly contested court decisions are reexamined to ensure that it is consistent with MIC case law. The current ISDS system broadly
does not allow for appeals and only permits States to make counterclaims.44 Thirdly, while the
MIC would not formally institute the principle of stare decisis, de facto precedents would be
adopted through the interpretation of particular provisions of investment agreements in MIC
decisions.45 This would be similar to the system of soft precedent utilized by the ICSID, wherein
past decisions create a body of lex specialis that have persuasiveness in current ISDS cases.46
The primary distinction between the MIC and ISCID soft precedent systems is that eventually,
the MIC would have more cases to reference because they would all be published by the
organization and accessible by judges. Lastly, the employment of judges full-time would result
in increased competency and expertise in adjudicating ISDS decisions. Instead of relying on
individual arbitrators with little experience in adjudicating ISDS cases and primarily working as
professors or lawyers for multinational corporations, the MIC judges’ only job will be
44
Supra note 1 at 622
Ibid at 109
46
Supra note 1 at 622
45
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adjudicating claims. All these factors should contribute to an overall increase in the consistency
in the adjudication of ISDS cases and an enhanced perception of the ISDS regime.
Creating a MIC would also address the issue of impartiality within the current ISDS
system and improve its perceived legitimacy. The impartiality issues of the current ISDS system
primarily stem from the systemic bias and economic incentives that lead arbitrators to favour
foreign investors in ISDS cases.47 The MIC would address both of these issues. The systemic
bias of arbitrators stemming from their backgrounds in international private law would be
addressed through the court requiring judges to be highly proficient in public international law,
specifically trade law and international private law.48 This should result in adjudicators of ISDS
cases taking better account of the impact that decisions may have on the public policies and
interests of States. A heightened awareness of the many stakeholders implicated when a State is a
party to an ISDS hearing should improve the perception of the court’s impartiality amongst
NGOs and other civil society groups who have been critical of it in the past. In addition, the
ability of the appellate court of the MIC to determine if judges in the court of first instance were
biased in making their decisions creates an additional safeguard to ensure that ISDS decisions are
impartial. The issue of economic incentives for ISDS arbitrators would be addressed by the fulltime employment of judges by the MIC. Whereas in the old ISDS system, arbitrators would rely
on foreign investors for a continuous workload, MIC judges would be retained and paid by the
court.49 This would remove any incentive for them to be favourable to foreign investors when
deciding ISDS cases. In sum, the qualification requirements of the court, full-time judges, and
47
Supra note 20 at 756
Ibid at 45
49
Ibid at 52
48
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the ability of the appellate body to determine if first-instance court decisions are biased would
address the issues of impartiality and enhance its legitimacy.
Lastly, creating a MIC would address the current ISDS system’s issues with transparency
and increase its perceived legitimacy internationally. Criticisms of the current ISDS system not
being transparent stemmed primarily from tribunals’ failure to publish their proceedings or
permit non-disputing parties to observe or participate in them.50 This issue would almost entirely
be addressed by the procedural rules instituted by the MIC. The MIC’s full incorporation of the
UNCITRAL Transparency Rules and the Mauritius Convention would ensure that every court
proceeding would be published, except in instances where such disclosure would harm the
essential business or security interests of one of the parties to the dispute.51 In addition, it would
require that all MIC hearings be open to the public and that third parties interested in particular
cases be allowed to deliver statements to the court.52 While the ICSID has sought to increase
transparency through the increased publishing of arbitration proceedings, it has only seen
incremental progress.53 The procedural rules of the MIC system would provide full transparency
of the court’s proceedings and allow concerned stakeholders to participate in cases wherein the
public interests could be engaged. It is then safe to say that the institution of a MIC would result
in the increased transparency and legitimacy of the ISDS system.
V. Conclusion
In conclusion, creating a MIC is the best solution for addressing the systemic issues
inherent in the current ISDS system that have caused it to be seen as illegitimate. The ISDS
50
Supra note 20 at 757
Ibid at 5
52
Ibid at 5
53
Supra note 27 at 184
51
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system has been criticized broadly for being illegitimate due to its inconsistent interpretation of
the law and decision-making, the lack of impartiality by arbitrators, and its lack of transparency
in allowing public access to hearings and the proceedings of ISDS arbitration tribunals. The
institution of a MIC broadly addresses each of these issues and provides a renewed sense of
legitimacy to the ISDS system. The inconsistency of the current system would be addressed by
the permanent nature of the MIC, its appellate body, soft precedent system, and full-time judges.
Issues of the impartiality of arbitrators would be solved through the full-time employment of
judges, higher standards for the qualification of adjudicators for ISDS cases, and the ability of
the appellate court of the MIC to determine if first-instance courts were biased in their decisions.
Lastly, full implementation of the UNCITRAL Transparency Rules and the Mauritius Convention
would drastically increase the transparency of the ISDS system and permit stakeholders to
participate in hearings in which public interests are engaged. In short, transitioning from the
current ad hoc tribunal ISDS system to the EU’s proposed MIC system would legitimize an
extremely controversial legal regime. While incremental reforms through new and novel treaty
provisions may be more palatable to most State parties, only large-scale institutional changes,
such as the establishment of a MIC, will be able to address the systemic issues that have created
the ISDS system’s perceived illegitimacy.
12
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