Explanatory Memorandum to COM(2022)38 - EU position in the International Centre for Settlement of Investment Disputes (ICSID) - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)38 - EU position in the International Centre for Settlement of Investment Disputes (ICSID). |
|---|---|
| source | COM(2022)38  |
| date | 09-02-2022 |
1. Subject matter of the proposal
This proposal concerns the decision establishing the position to be taken on behalf of the European Union within the Administrative Council of the International Centre for Settlement of Investment Disputes (ICSID) in connection with the envisaged adoption of the amended ICSID rules. 1 The adoption will produce legal effects on the European Union’s treaty practice in the field of investment dispute settlement.
2. Context of the proposal
2.1.The Particular Interest of the European Union in ICSID
Currently 155 States are contracting states of ICSID, among which 26 are Member States of the Union. The European Union is not a member of ICSID itself. However, the European Union has incorporated the ICSID Arbitration Rules and Additional Facility Arbitration Rules in all of its trade and investment agreements that include rules on investment protection. 2 Pursuant to such agreements, the ICSID rules can apply in investment disputes initiated by EU investors against third countries, by non-EU investors against EU Member States or, following the proposed amendments, in disputes brought against the Union under the ICSID Additional Facility Arbitration Rules. Thus, the Union has a particular interest in the reform of ICSID rules.
2.2.ICSID
ICSID is an institution that is part of the World Bank Group. It is an independent and depoliticised dispute-settlement institution. The objectives of ICSID are:
(a)providing a dispute settlement mechanism for investor-State disputes by conciliation, arbitration or fact-finding,
(b)administering these disputes, and
(c)promoting international investment by providing confidence in the dispute resolution process.
The ICSID dispute settlement mechanism is available to investor-State disputes and to State-State disputes under investment treaties and trade agreements, under domestic investment laws and pursuant to investment contracts concluded between States and foreign investors. ICSID also acts as an administrative registry.
2.3.The envisaged acts of ICSID
The Secretariat of ICSID initiated a consultation process on the reform of the Centre’s Rules in 2018. Throughout the years 2018-2021, intensive discussions took place between the Secretariat and ICSID member states based on five successive drafts of revised rules. The European Union, represented by the European Commission, has actively participated in the consultation process, coordinated the positions of the EU Member States and repeatedly submitted written comments on the draft texts on behalf of the EU and its Member States. As a result of this process, the following amendments and new texts, producing legal effect on the European Union’s treaty practice, will be put to a vote of the Administrative Council by written procedure scheduled to close on 21 March 2022:
Contents
- 2.3.1. Amendments to the ICSID Convention Proceedings
- 2.3.2. Amendments to the Additional Facility Proceedings
- 2.3.3. Amendments to the ICSID Fact-Finding Proceedings
- 2.3.4. Proposal of new ICSID Mediation Rules
- 4.1.1.Principles
- 4.1.2.Application to the present case
- 4.2.1.Principles
- 4.2.2.Application to the present case
The amendments include amendments to the ICSID Administrative and Financial Regulations, the ICSID Institution Rules, the ICSID Arbitration Rules and the ICSID Conciliation Rules.
Among the main substantive changes are a new requirement to include a description of the ownership and control of the investment within the request for arbitration or conciliation, an obligation to disclose third-party funding, enhanced rules regarding the disqualification of arbitrators, the costs of the proceedings, early dismissals of unfounded claims, bifurcation of proceedings, as well as revised timelines. A new provision addresses explicitly requests for security for costs. The transparency of proceedings has been enhanced as far as possible without requiring an amendment of the ICSID Convention. A new set of rules for expedited arbitration proceedings are also proposed.
The amendments include changes to the ICSID Additional Facility Rules, the ICSID Additional Facility Administrative and Financial Regulations, the ICSID Additional Facility Arbitration Rules and the ICSID Additional Facility Conciliation Rules.
The possible scope of application of the Additional Facility Rules is extended to investment disputes in which neither the respondent nor the State of the claimant are ICSID Contracting Parties, as well as to disputes involving Regional Economic Integration Organisations. In addition, most of the changes made to the ICSID Arbitration and Conciliation Rules are also reflected in the revised ICSID Additional Facility Rules, with slightly more ambitious provisions on transparency.
Changes concern the ICSID Fact-Finding Rules, as well as the ICSID Fact-Finding Administrative and Financial Regulations. A set of updated stand-alone fact-finding rules are proposed through which disputing parties can jointly request a fact-finding Committee to conduct a specific fact-finding proceeding.
A new set of ICSID Mediation Rules and relevant Administrative and Financial Regulations are proposed in reply to requests by States and investors to provide greater capacity for mediation. The mediation rules have a broad scope of application and can, upon consent, apply to any mediation proceedings relating to an investment that involve a State or a Regional Economic Integration Organization
3. Position to be taken on the Union's behalf
The amendments the Administrative Council of ICSID will be called to vote upon address some of the identified shortcomings of the current system of investor-state dispute settlement. It must be noted that in parallel to the ICSID reform process, the European Union and its Member States are pursuing the creation of a permanent multilateral investment court that would replace the current system of investment arbitration by a permanent mechanism. Work on the creation of a multilateral investment court is currently taking place within the United Nations Commission on International Trade law (UNCITRAL) and is expected to be concluded in 2026. In view of the European Union, only a permanent investment court will address sufficiently and comprehensively all the problems resulting from the current system of ad hoc investment arbitration. However, until the establishment of a multilateral court, the current system of investment arbitration will continue to apply and any improvements to its rules should be welcomed. The Council should therefore support the proposed amendments to the ICSID Rules.
4. Legal basis
4.1.Procedural legal basis
Article 218(9) of the Treaty on the Functioning of the European Union (TFEU) provides as follows: ‘The Council, on a proposal from the Commission or the High Representative of the Union for Foreign Affairs and Security Policy, shall adopt a decision suspending application of an agreement and establishing the positions to be adopted on the Union’s behalf in a body set up by an agreement, when that body is called upon to adopt acts having legal effects, with the exception of acts supplementing or amending the institutional framework of the agreement.’
First, Article 218(9) TFEU requires a body set up by an international agreement that has the power to establish rules or adopt decisions in the context of that agreement. The wording ‘in a body set up by an agreement’ indicates that the ‘provision concerns the positions to be adopted on behalf of the European Union in the context of its participation, through its institutions or, as the case may be, through its Member States acting jointly in its interests, in the adoption of such acts within the international body concerned’. 3
Article 218(9) TFEU applies regardless of whether the European Union is a member of the body or a party to the agreement. 4 The Court of Justice has stated that ‘[w]here an area of law falls within a competence of the European Union […] the fact that the European Union did not take part in the international agreement in question does not prevent it from exercising that competence by establishing, through its institutions, a position to be adopted on its behalf in the body set up by that agreement, in particular through the Member States which are party to that agreement acting jointly in its interest.’ 5
The envisaged acts amending the ICSID rules fulfil these principles.
First, the ICSID Administrative Council, the body voting on the amendments, is a body set up by an agreement, in line with Article 218(9) TFEU. The current Article 7 of the ICSID Convention and Regulation 7 of the ICISD Administrative & Financial Regulations express the Administrative Council’s role in, inter alia, amending the ICSID rules. The Administrative Council has the power to establish rules or adopt decisions in the context of the ICSID agreements. The Administrative Council is not acting independently of the parties but through its Contracting States (see Article 4 i ICSID Convention).
Second, the envisaged acts are ‘acts having legal effects’, in accordance with Article 218(9) TFEU. The ICSID dispute settlement mechanism is applicable in the European Union’s and its Member States’ international investment protection agreements. 6 In particular, after adoption of the amendments, the ICSID Additional Facility Rules will potentially become applicable in disputes initiated against the European Union in which measures adopted by the Union are the subject of the dispute and in which the Union would act as the respondent. Thus, the amendments of the ICSID Rules have legal effects on the functioning and application of international agreements concluded by the Union and on the conduct of legal proceedings to which the Union would be a party.
In summary, the Commission requests the Council to adopt the Union’s position with regard to the envisaged acts so that the Member States which are Contracting Parties to the ICSID Convention, acting jointly in the interest of the Union, may express the Union’s position within the Administrative Council of ICSID. The procedural legal basis for the proposed decision is Article 218(9) TFEU.
4.2.Substantive legal basis
Primarily, the substantive legal basis for a decision under Article 218(9) TFEU depends on the objective and content of the envisaged act in respect of which a position is taken on the European Union’s behalf. ‘It is settled case-law that the choice of the legal basis for a Community measure must rest on objective factors amenable to judicial review, which include in particular the aim and the content of the measure’ 7 .
The main objective of the envisaged acts relates to updating and amending the existing ICSID rules, i.e. the reform of investment dispute-settlement rules used by the European Union and its Member States in several EU agreements.
Pursuant to Article 207 TFEU, foreign direct investment is part of the European Union’s common commercial policy. The EU’s and EU Member State’s international agreements that refer to the ICSID rules provide protection for foreign direct investment and have been adopted (or authorised in the case of EU Member States’ investment agreements 8 ) on the basis of Article 207 TFEU. According to the Court of Justice of the European Union, foreign direct investment falls within the exclusive competences of the Union, while foreign non-direct investment and investment dispute settlement falls within a competence which is shared between the Union and its Member States 9 .
The substantive legal basis for the proposed decision should therefore be the first subparagraph of Article 207 i TFEU.
4.3.Conclusion
In conclusion, the legal basis of the proposed decision should be the first subparagraph of Article 207 i TFEU in conjunction with 218(9) TFEU.
5. Publication of the envisaged act
In view of the public interest in the reform of investor-state dispute settlement and in line with the Union’s commitment to transparency, it is appropriate to publish the Council Decision after the completion of the voting procedure within the Administrative Council of ICSID on 21 March 2022.