In Dispute: global investment court draws closer

For several years, the European Commission (EC) has advocated the creation of a global court that would resolve legal disputes between foreign investors and their host countries. However, the discussions surrounding this idea are now heating up.

In December, representatives of more than 40 countries convened at the World Trade Organization’s Geneva headquarters to debate the commission’s pet project. More recently, trade ministers sat down in Davos at the annual meeting of the World Economic Forum to continue the discussion.

The EC believes that a court – with full-time salaried judges who sit for fixed terms – would be a vast improvement on the current widespread use of arbitration to resolve FDI disputes.

Taken to the limits

While arbitration can be a more investor-friendly alternative than host-country courts, especially in some less-developed regions, the overall system of arbitration has long been criticised for its limitations.

Currently, when foreign investors allege that they have suffered an expropriation or a breach of written promises on the part of host-state authorities, each resulting arbitration is handled anew by a panel of three lawyers. This means that the outcomes of cases can vary widely depending upon who sits on a particular tribunal.

Different tribunals hearing essentially identical cases may result in widely divergent rulings, making it harder for investors and governments to understand the meaning and scope of international treaties that apply to foreign investment.

In principle, a court of salaried, full-time judges could address some of the concerns about the coherence of FDI dispute settlement.

Moreover, a move towards a permanent roster of judges would take quasi-judicial functions out of the hands of big multinational law firms, who currently provide many of the arbitrators used to resolve FDI disputes. There have long been concerns that private sector lawyers with their own rosters of investor clients may not be 'disinterested' enough to resolve disputes between particular investors and sovereign states.

Mixed reception

Although there is growing talk of a global investment court, in practice, the EC faces an uphill climb to persuade governments that they should toss out arbitration, a method of dispute resolution that may have worked perfectly adequately for the handful of disputes experienced by any given country.

Some governments – particularly smaller ones, such as Vietnam, which seek broader free trade agreements with Europe – have embraced the idea of a court. But others appear more circumspect.

For instance, it is unclear whether China or the US will come around. Indeed, any global ‘court’ that requires the approval of the US Senate would seem unlikely to pass muster in the Trump era of economic nationalism and 'America first' rhetoric. (Even if a court would not have significantly greater powers than the arbitration tribunals that currently fly under the political radar, the ‘global court’ nomenclature would be a political lightning rod nonetheless.)

While some governments are not enthusiastic about the idea of an international investment court, the EU does not have the luxury of pressing the snooze button. For the past several years, ordinary citizens and non-governmental organisations have been vocal in expressing concerns about the prospect of ‘unaccountable’ arbitrators passing judgment on the sovereign actions of governments.

So do not be surprised if the EC pushes ahead with the idea with whatever countries are willing to embrace a court in the short term, leaving other countries to sit things out on the sidelines. Already there is talk of late adopters being permitted to join the court at a time of their choosing.

But if efforts to roll out a global FDI court proceed on a piecemeal basis, its footprint may be limited. After all, there are literally thousands of bilateral treaties for the protection of FDI, an overwhelming majority of which will continue to offer arbitration as the method of resolving disputes.

Special rights

Many critics in Europe and elsewhere fret not only about the arbitration provisions of those treaties, but also the extensive array of special rights and protections conferred on foreign investors in these thousands of existing treaties.

Thus, the major unanswered question about any European investment court initiative is whether – even if successfully launched on a limited basis – it will be successful enough to placate critics of the current legal status quo.

What may be needed, ultimately, is a multilateral treaty that provides not only a new method of resolving FDI disputes, but which also rethinks the various legal rights that are granted to foreign investors. There is a growing social science debate about whether ‘special’ legal protections limited to foreign investors are helpful or harmful to the rule of law in host countries. Thus, in future, there could be more innovative treaties that try to improve governance and the rule of law, including domestic courts and institutions, so that all economic actors, foreign and domestic, can benefit.

A global court could one day sit atop this architecture, but it might need to be used less if disputes could be resolved credibly and effectively at a more local level.

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com, an electronic news and analysis service focused on FDI dispute settlement.