In response to public criticism of the ad hoc system of arbitration that is currently used to resolve foreign investment disputes, the Brussels-based European Commission (EC) has floated the idea of an international court to hear claims by foreign investors against their host states.

The proposal, mooted in a recent EC 'concept paper', would consolidate responsibility for such disputes in the hands of a small number of international judges. This would take such controversies out of the hands of a rotating cast of hundreds of professors, law firm partners and other part-time adjudicators.

Advertisement

Controversy over the existing flawed system of case-by-case arbitration has dogged transatlantic trade and investment talks between Europe and the US.

Sure, it's nice for foreign investors to have some legal recourse if a host country nationalises an investment, or passes new legislation that destroys the viability of a long-term project. However, critics, including many activist non-governmental organisations in Europe, complain that foreign investors currently enjoy too broad a right to leapfrog over domestic courts whenever they object to their treatment at the hands of a host government.

Critics also dislike that investors get to choose one of the three arbitrators who will hear such legal disputes. There are also long-standing concerns about potential conflicts of interest when lawyers work as arbitrators but moonlight as legal advisors to other parties in the same types of legal disputes.

Of course, the status quo has some fans – including many who work as arbitrators – who stress that arbitration is an improvement over the often corrupt or dysfunctional courts found in many developing countries. However, this argument holds less water when applied to rich countries with well-functioning legal systems.

In a partial effort to assuage critics of arbitration, the EC proposes that any arbitration provisions in a future pact with the US should become more judicialised – including via the creation of a permanent roster of adjudicators. Brussels has yet to say whether it will go further and force adjudicators to refrain from moonlighting as legal advisors while resolving disputes between investors and governments.

Longer term, the EC wants to develop a fully fledged court to hear FDI disputes. However, such a court might need to be packaged as something different in order to pass approval in the US Senate, where talk of any international 'courts' or 'tribunals' sets off alarm bells about sovereignty.

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com an online news service tracking and analysing legal disputes between foreign investors and host governments: http://www.iareporter.com