Government of Canada
Ref. Ares(2017)601489 - 02/02/2017
Ref. Ares(2017)1963547 - 13/04/2017
13 January 2017
The case for creating a multilateral investment dispute settlement mechanism
1. Promoting and retaining international investment is key for sustained economic
growth. International investment rules have an important role to play and access to
international dispute settlement for enforcing such rules has significantly contributed
to the peaceful settlement of investment disputes over the last decades.
2. The continued relevance for countries and businesses of investment rules and efficient
investment dispute settlement is confirmed by the steady increase in the number of
international investment treaties and investment chapters included in bilateral and
regional trade agreements. To this date there exist over 3200 international investment
treaties and the number of investment disputes has increased commensurate with the
tremendous growth in international investment flows.
3. At the same time, the last years have seen growing scrutiny and questioning of
investor-state dispute settlement (ISDS) and search of balance in investment protection
rules by policy makers and the public alike. Contrary to other areas of international
economic relations where multilateral rules have gradually been put in place,
international investment law has mostly developed through bilateral negotiations.
4. Many economies around the world have engaged in a reflection process about their
policies in this area. In particular the backlash in certain parts of the world following a
number of high profile ISDS cases has prompted discussions on the adequateness of
this particular system of dispute settlement. The discussions have focussed on the fact
that these cases have involved challenges to public policy in sensitive areas such as
health, safety or the environment and therefore are different from traditional
commercial arbitration. For some economies, ISDS has become one of the main
stumbling blocks for the successful conclusion and implementation of new trade and
investment agreements and has contributed to growing scepticism regarding the
benefits of such agreements more generally.
5. Ideally, the international investment regime should provide investors and governments
with one coherent set of rules, including an effective dispute settlement and
enforcement mechanism, which is legitimate and accepted by citizens, business and
policy-makers. It seems, however, that such an all-encompassing reform project may
be difficult to achieve in the short or medium term.
6. What seems more easily within reach, and what would already constitute an important
step in increasing the legitimacy and acceptance of the international investment
regime, would be a multilateral reform of the investment dispute settlement system.
The idea of creating a more institutionalised and accountable multilateral investment
dispute settlement mechanism is gaining increased interest and momentum. We
believe this can and should be achieved within the next years, showing that consensual
initiatives are possible in times where bilateral or regional trade agreements are
increasingly put into question. This would be combined with continued efforts with
respect to substantive reform of investment rules and other efforts related to
investment facilitation and promotion of sustainable investment.
Government of Canada
13 January 2017
Why engage in further reforms of investment dispute settlement?
7. While there seems to be consensus on the importance of promoting and regulating
international investment, as well as on the need to ensure effective enforcement of
agreed rules, the way in which investment disputes are currently adjudicated has
become subject to increased criticism.
8. Although arguably some of the criticism directed against ISDS builds on fear and not
on facts, the perceived lack of legitimacy of a dispute settlement system is a problem
in itself. As it has been put by Lord Chief Justice Gordon Hewart
as early as in 1924,
it "is of fundamental importance that justice should not only be done, but should
manifestly and undoubtedly be seen to be done." When citizens lose their trust in the
way in which justice is administrated, something must be done to restore their
9. Why is there growing unease and distrust in the current system of ISDS? The dispute
resolution mechanisms for investment disputes have been based on mechanisms
stemming from the field of commercial arbitration. Such mechanisms are commonly
used for resolving commercial disputes between private entities over a particular set of
reciprocal obligations (contract-based arbitration). The outcomes of such proceedings
do normally not have any implications other than for the parties to the dispute. In that
context, elements such as confidentiality of proceedings and the appointment of ad doc
arbitrators best suited for the particular dispute, have not been questioned.
10. The vast majority of ISDS claims are however about the correct interpretation and
application of international agreements under public international law that regulate the
obligations of governments towards a multitude of foreign investors. The outcome of
the disputes can have important impacts on public budgets and cases often challenge
public policy decisions of governments. Guaranteeing that justice is not just done, but
seen to be done is crucial in this context when it comes to explaining the system and
individual cases to legislators and the public.
11. Allowing the disputing parties to individually choose their adjudicators
so as to best
serve their individual interests in a particular case creates doubts about the objectivity
and the systemic impacts of the current approach to ISDS. The polarisation of many
frequent ISDS arbitrators (i.e. arbitrators are considered as being either 'pro-investor'
or 'pro-state') is a symptom of this approach that contributes to raising concerns about
the objectivity of the system.
12. Similar considerations apply to the question of the remuneration of the
. Whereas the administration of justice is considered a public good in
most domestic and international judicial systems (and hence financed by
governments), the disputing parties themselves pay the remuneration of the
adjudicators in the current ISDS system. This raises concerns about the risk that
financial incentives may have an impact on the decision making processes. A system
of remuneration on a case-by-case basis also creates risks of conflicts of interest that
may result from other professional activities that, by necessity, are pursued in parallel
by the adjudicators.
Government of Canada
13 January 2017
13. The ad hoc nature of the current system of different ISDS tribunals constituted for
each individual case also brings problematic systemic implications
. The vast
majority of the existing investment treaties are based on identical concepts (national
treatment, most-favoured nation treatment, protection against expropriation, fair and
equitable treatment) often with identical or very similar wording. The interpretation of
investment rules in a particular dispute may have an impact on the interpretation of
that rule or of similar rules in other agreements. It is therefore important that the rules
are interpreted correctly by arbitrators not chosen by parties to a specific dispute.
Conflicting rulings on identical or on very similar treaty provisions should also be
14. This lack of coherence and predictability is clearly problematic when long-term treaty
obligations of States are at stake. It creates uncertainty for governmental policy
making and for investors. A more permanent dispute settlement structure could
address these problems by gradually building up a coherent body of case-law.
15. The absence of appeal
against ISDS decisions is also a ground for concern. Existing
international instruments in the field of investment arbitration only provide for very
limited grounds of "appeal" of arbitral awards which do not include the possibility to
review the correctness of arbitral decisions. This means ISDS decisions can be legally
wrong, but cannot be corrected. This is difficult to explain to constituents. This may
be less problematic in the field of private contract-based arbitration where reaching a
quick decision may outweigh systemic and societal interests. The absence of an appeal
becomes however problematic when the governments' long-term treaty obligations are
at stake and public policy choices are challenged.
16. Complementing the investment dispute resolution system with the checks and balances
known from other judicial systems in the field of public or international law would
improve the legal quality of decisions. It would also rebuild trust in the system (and,
consequently, improve the recognition and implementation of its decisions). At the
same time, a standing review mechanism (such as in the form of an appellate tribunal)
would contribute to building-up a more coherent case-law with the benefit of increased
predictability and coherence for the users of the system.
Why a multilateral reform is preferable to a bilateral approach?
17. Gradual reform of the current system of ISDS has already started as part of on-going
bilateral, regional or plurilateral investment treaty negotiations. However,
renegotiating over 3200 bilateral investment treaties
in force worldwide one by one
would be too time consuming, and would inevitably result in continued fragmentation
of the system.
18. The most promising and effective way is for interested governments to agree on a
multilateral framework for resolving investment disputes that would be open to
adherence by all interested countries, and which could then also be applied to existing
investment treaties. Similar approaches have already been pursued for improving the
transparency of ISDS proceedings (Mauritius Convention negotiated under the
auspices of UNCITRAL) or for updating the multitude of existing double-taxation
treaties (Multilateral Convention to Implement Tax Treaty Related Measures
negotiated under the auspices of the OECD).
Government of Canada
13 January 2017
19. The same approach could be pursued for reforming ISDS. The result could be the
creation of a new fully inclusive multilateral investment dispute settlement
mechanism, with all necessary guarantees of legitimacy, legal correctness,
transparency, predictability and efficiency. Criticism relating to the legitimacy of
ISDS has not been limited to a few countries; rather it has arisen in both developing
and developed economies. A multilateral response is therefore necessary.
20. Creating a genuine multilateral investment dispute settlement mechanism would also
be the only way to ensure more consistency and predictability
in the interpretation
of identical or similar investment rules across different investment agreements. The
more agreements would be subject to the jurisdiction of the new mechanism, the more
coherence could be built up in the interpretation of their respective provisions, thus
improving the legal certainty and predictability of the international investment regime
across different regions of the world.
21. Bringing as many treaties as possible (and their related dispute settlement proceedings)
together under one procedural roof would also result in efficiency gains, with
expected beneficial impacts on costs
. A broad coverage of treaties and of actual or
potential disputes will also make it easier to move towards more permanent structures
(such as full-time employed adjudicators).
22. Finally and most importantly, addressing the reform of ISDS multilaterally is the only
way of guaranteeing a fully inclusive approach
that takes into account the positions
and experiences of all countries with a view of building a truly global consensus on the
best possible regime for the resolution of international investment disputes. It would
prevent further fragmentation of investment dispute resolution rules by offering a
unique, transparent and predictable framework with resulting gains in terms of
efficiency, coherence and institutional legitimacy.
23. Whilst a multilateral reform of the substantive standards is difficult to envisage at this
moment in time, the process could also lead to discussion of further reforms of the
international investment regime, beyond the question of dispute settlement, if
governments so decide. Working on procedural issues should not preclude at the
appropriate moment work on the substantive issues and the final result of any process
on procedure should leave room for any future substantive rules to use the multilateral
dispute settlement mechanism.
Questions for discussion:
1. Do Ministers agree that the current system of investment arbitration is in need of
2. Do Ministers share the view that a multilateral process would be the most inclusive
and effective way to pursue such reform?
3. Do Ministers have other, alternative suggestions for reforming the system of
investment dispute resolution, or for increasing coherence internationally on
investment policy more broadly?