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ISDS, CETA and ICS: Hopeful perspectives for small and medium-sized companies or only for deep pockets?

05-12-2016

Introduction

Investor-State Dispute Settlement (ISDS) concerns all arbitrational proceedings between investors and States. Often held behind closed doors and adjudicated by party-appointed and highly-paid experts, these cases are often criticized for costliness, inefficiency and lack of transparency and moral standards. Moreover, States are often challenged for legitimate policy choices, pressuring them to adopt more flexible and pro-business legislation.

The recently concluded negotiations between the EU and Canada on the Comprehensive Economic and Trade Agreement (CETA) have resulted in a 1600-page document, removing customs duties, ending limitations on access to public contracts, liberalizing services, along with many more measures to enhance free trade between the European Union and Canada. It also regulates investor-State dispute settlement in a way totally different from the general ISDS procedures. In the following article, we will have a quick look at the new regime.

From the outset, it is clear that CETA constitutes a clear break with the past, on two levels:

-          The right of governments to regulate is explicitly confirmed and defined in detail.

-          The creation of an independent, transparent and impartial investment court system.

Institutional Architecture

CETA includes the creation of a permanent multilateral investment court, Investment Court System (ICS) consisting of 15 judges appointed equally between the EU, Canada and third country nationals. The judges must be qualified for judicial office in their respective countries, or, as CETA adds, “be jurists of recognised competence”. They must present expertise in public international law and, in particular, in international trade dispute resolution. The judges shall be independent and should declare any conflict of interest. If a party considers that such a conflict exists, the President of the International Court of Justice shall decide upon the issue. Judges hearing a case are randomly appointed and the third-country national is the president of that division of the Tribunal.

Costs

OECD research[1] showed that the average cost of a ‘traditional’ ISDS procedure amounts to 8 million USD/+-7 million EUR, with some cases even exceeding 30 million USD/+-27 million EUR, such as the Acablat judgement, solely ruling on the matter of jurisdiction (!).[2] Most of these costs -82%- were incurred for legal fees. It goes without saying that excessive costs impede access to justice for smaller companies. Just over 20% of claimants are individuals or small multinational enterprises. Exorbitant costs have led to the increased popularity of third-party funding, where potentially lucrative claims are transferred to a third party in exchange of a commission on the success fee.

The CETA ICS system also shows small displays of affection towards small claimants. Although a case is normally heard by three judges, one-judge proceedings are possible upon request of a claimant which is a small or medium-sized enterprise or when the compensation or damages claimed are relatively low. Obviously this has an impact on the retainer fees to be paid by the parties. The exact amount of the retainer fee will be decided by the CETA Joint Committee but the European Commission has proposed 2.000 EUR/ +- 3.300 USD per month for the Permanent Tribunal judges. This amount is raised to 7.000 EUR/ +-7.800 USD for Appeals Tribunal members. Other fees and expenses are borne by the unsuccessful party. These include the wages of the judges which are set at 3.000 USD/+-2.600 EUR per day in accordance with ICSID rules[3]. Some argue that this creates financial incentive for judges to drag out cases as long as possible. It may be hoped that the professional and ethical qualifications of the judges will counter this risk. Overall, it is safe to say that proceedings under ICS will be significantly cheaper than standard ISDS proceedings, but still expensive for small companies.

Conclusion

With the adoption of CETA’s ICS, a powerful alternative forum opens to investors in Canada and the European Union. To a certain extent, ICS deals with the excessive costs often linked to investor-state dispute settlements. Critics argue ISDS only benefits large multinational corporations. While it is true that a majority of recipients of damages are (very) large companies, this cannot be simply equated with a pro-multinational bias. It results from the nature of ISDS proceedings that small claimants or small claims are not often entertained as doing so wouldn’t be cost-efficient or the claim can be heard by a domestic court. While CETA goes through some effort to open up the court to smaller claims, it is doubtful that this will herald the fundamental change that could benefit thousands of small and medium-sized companies in the EU and Canada.     



[1] GAUKRODGER, D. and GORDON, K. (2012), “Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community”, OECD Working Papers on International Investment, 2012/03, OECD Publishing. http://dx.doi.org/10.1787/5k46b1r85j6f-en

[2] Abaclat v. Republic of Argentina, Decision on Jurisdiction and Admissibility, ICSID (4 August 2011).

[3] Rules elaborated by the International Centre for Settlement of Investment Disputes 1818 H Street, N.W. Washington, D.C. 20433, U.S.A., created under the Washington convention of 18 March 1965 on the Settlement of Investment Disputes between States and Nationals of other States https://icsid.worldbank.org/apps/ICSIDWEB/icsiddocs/Documents/ICSID%20Convention%20English.pdf