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Small Economies and Models of Investor-State Dispute Settlement: Interests and Constraints in the Sh

Executive Summary

(The full memo can be read here)

Under the current system of Investor-State Dispute Settlement (ISDS), many International Investment Agreements (IIAs) allow foreign investors to file arbitration claims against states. Under these proceedings, foreign natural or legal persons can file a direct claim against a state within whose territory they operate for the violation of certain standards of treatment, as stipulated in the applicable instrument.

ISDS, which is based mainly on ad hoc international arbitration, has come under increasing scrutiny and criticism over the past decade due to, among other things, its high costs, lack of transparency, concerns about the independence and impartiality of the adjudicators of these claims and their qualifications, and limited grounds and applications of review mechanisms. As a result, many states and relevant stake-holders have proposed, adopted, or intend to implement in the future, various changes to the regime, including reforms on a broad scale.

This memorandum seeks to identify, analyze and assess the range of options available to small economies facing the current wave of changes in the investment dispute settlement system. The memorandum provides a general characterization of the constraints of small economies, and distinguishes between states in the EU, states considering accession to the EU and others. The memorandum identifies five possible models, and then offers recommendations that consider the specific characteristics and needs of small economies. A summary of the key points of the paper is provided as follows.

The five models for investment dispute resolution examined are: Model A - the existing ISDS arbitration system; Model B - replacement of arbitration by an Investor Court System (ICS); Model C - the establishment of a Multilateral Investment Court (MIC); Model D -state to state dispute resolution; and Model E - domestic regulation. Notably, these models are not necessarily mutually exclusive, but will be dealt with separately.

The models are all examined in the light of five parameters that are important for a system of ISDS, in particular for small economies: (1) transparency of the system and its accessibility to states and the public, which are important to mitigate the disadvantage of small economies due to lack of resources; (2) Consistency of the decisions of the bodies settling disputes; (3) The cost and duration of proceedings. (4) The extent to which adjudicators are independent and bound by unified ethical standards. (5) The existence of mechanisms for reviewing decisions.

Considering more specific categories of states, EU Member States are currently required to terminate their intra-EU BITs and adopt EU standards. Regarding extra-EU BITs of Member States, these may require amendment (or termination), if they include ISDS provisions that contradict EU law. Thus, many EU Member State BITs are currently facing renegotiation, making EU proposals for reform (primarily the ICS and prospective MIC) of key importan