It is incumbent on lawyers to help shape a replacement for the much-criticised investor-to-state dispute settlement mechanism.

The next step in settling the European debate over how to deal with trade disputes between investors and governments within the framework of free-trade agreements was announced this week.

The European Commission has proposed a new Investment Court System, which will replace the much-criticised investor-to-state dispute settlement mechanism (ISDS).  

As I have written before, this is a defeat for lawyers, and in particular arbitration lawyers, whose perceived failures in dealing with such disputes to date have led to the latest announcement. The trade commissioner, Cecilia Malmström, specifically said ‘the old, traditional form of dispute resolution suffers from a fundamental lack of trust’.

The new court system will be composed of a first-instance tribunal and an appeal tribunal. Judgments will be made by publicly appointed judges with qualifications comparable to those required for the members of bodies such as the International Court of Justice and the World Trade Organisation Appellate Body.

The new appeal tribunal will operate on similar principles to the WTO Appellate Body. The ability of investors to take a case before the tribunal will be precisely defined and limited to cases such as targeted discrimination on the base of gender, race or religion, or nationality, expropriation without compensation, or denial of justice.

And, finally, to appease the complaints of NGOs, governments’ rights to regulate will be guaranteed in the provisions of future trade and investment agreements.

The words ‘public’ or ‘open’ are scattered throughout the announcement, like a priest sprinkling holy water. This is an attempt to escape from the alleged failures of the past. And I say ‘alleged’ because arbitration lawyers themselves argue that the current system works well, and that the new framework will be much more expensive. I have participated in several exchanges with arbitration lawyers, and they are exercised about the criticisms made, saying that these are commonly (and wrongly) made about all arbitrations.

The commission will now begin discussions with the Council and the European Parliament. The parliament has already expressed its disgust with the present system.

In its resolution of 8 July 2015, it stated that it wanted ‘to replace the ISDS system with a new system for resolving disputes between investors and states which is subject to democratic principles and scrutiny, where potential cases are treated in a transparent manner by publicly appointed, independent professional judges in public hearings and which includes an appellate mechanism, where consistency of judicial decisions is ensured, the jurisdiction of courts of the EU and of the member states is respected, and where private interests cannot undermine public policy objectives’.

If the three institutions agree, which seems likely, the text will be presented as an EU proposal in the ongoing EU-US trade talks (Transatlantic Trade and Investment Partnership, or TTIP), and also in future trade negotiations.

It will not end there. In parallel with TTIP, the commission will start work with third countries on setting up the new court. It hopes that over time the court will replace all investment dispute resolution mechanisms provided in EU agreements, EU member states’ agreements with third countries, and indeed in trade and investment treaties concluded between non-EU countries.

There is a detailed text regarding the establishment of the court for TTIP purposes. There we learn that there will be five EU judges, five US judges, and five from third countries in the first-instance tribunal. There is a code of ethics for judges annexed as well, highlighting values such as independence, impartiality and disclosure of interests, all aimed at perceived past wrongdoings.

The following sentence from draft article 11, which is a substantive article devoted entirely to the ethics expected of judges, has similar origins: ‘upon appointment, they shall refrain from acting as counsel in any pending or new investment protection dispute under this or any other agreement or domestic law’.

So far, arbitration lawyers have failed to persuade anyone influential in the EU of the rightness of their case. Now that a new text has been presented, it is incumbent on lawyers and others to study it, and in particular the ethical code, and contribute to the best possible new system.

Jonathan Goldsmith is a consultant and former secretary-general at the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs