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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 importance. This is especially true with respect to small economies considering negotiating a BIT or IIA with the EU.

Small economies in the special situation of considering accession to the EU, are facing the dilemma of whether to terminate or renegotiate their current BITs (both with EU Members States and with others), and to apply the standards of EU law and policy, or to maintain their own policies. While adoption of and adherence to EU ISDS policy may entail significant costs, requiring the state to renegotiate, terminate or adopt certain new provisions, it would be necessary for future accession.

This memorandum examines the different models and makes observations and recommendations regarding the needs of small economies with respect to recent developments, with the following conclusions and recommendations.

The problems with Model A (the current ISDS system) are generally already known, making the status quo option the one with the lowest uncertainty regarding legal and functional implications. It is, however, in the interest of small economies to adapt to the current system through specific changes (using regional cooperation or joint interpretive statements), such as the inclusion of exhaustion of domestic remedies requirements. Small economies should be particularly selective and cautious in signing and ratifying new BITs/IIAs with ISDS, both in terms of partners and in terms of content.

There are also advantages to consider within the other Models:

Model B (ICS), in theory, this is a greatly improved Model of ISDS. However, it is still developing, and its benefits are yet to be proven. In addition, Model B offers an incentive for EU accession, but is probably not directly relevant for small economies not within the EU or without an IIA with the EU. This model might be more relevant to a regional bloc, or a regional economic union, like the EU.

Model C (MIC), is currently a hypothetical model that is therefore difficult to effectively evaluate. Therefore,we recommend that small economies wait until this model develops, before adapting their ISDS policies thereto.

Model D (state to state dispute resolution) will require renegotiation of existing agreements and is therefore not advantageous for a state seeking EU accession. The mechanism is also impacted by political considerations, potentially influencing legitimacy amongst other states. However, it might be beneficial as states are less likely to challenge certain types of regulatory measures of other states, in comparison to investors.

Model E (The use of domestic regulation) could be advantageous for a small economy as it has certain benefits (e.g., domestic courts will be more familiar domestic issues and needs; ISDS expenses would be reduced). Even so, this system has only been adopted by non-small economies, like South Africa. Because of that it is uncertain what would be the implications of adoption of this model by small economies, in terms of investor confidence, for example.

As for specific points relating to EU candidate states, this memorandum finds that it will be beneficial for a small economy that is seeking EU accession, to harmonize their ISDS mechanism with EU investment protection policy. In order to do so, it is recommended that they chose a model along the lines of Model A, or, if possible, Model B, as they are most similar to the EU agenda.

More specific recommendations: If possible, small economies should add exhaustion of domestic measures as a condition for the initiation of ISDS. Small economies, where possible, should consider forming or joining regional or sub-regional economic alliances through which preferred ISDS methods and IIAs can be promoted.

The full memo can be read here.

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