EUROPEAN COMMISSION Brussels, 13.9.2017 SWD(2017) 302 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Multilateral reform of investment dispute resolution Accompanying the document Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes

{COM(2017) 493 final}

{SWD(2017) 303 final}



TABLE OF CONTENTS GLOSSARY LIST OF ABBREVIATIONS INTRODUCTION 1.WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? 1.1What is the issue that may require an action, what is the size of the problem 1.2What are the drivers of the problem? 1.3Problem tree 1.4Who is affected by the problem? 1.5How would the problem evolve, all things being equal? 1.6Has any fitness check/retrospective evaluation been carried out of the existing policy framework? 2.WHY SHOULD THE EU ACT? 3.WHAT SHOULD BE ACHIEVED? 3.1General objectives 3.2Specific objectives 4.WHAT ARE THE VARIOUS OPTIONS TO ACHIEVE THE OBJECTIVES? 5.WHAT ARE THE IMPACTS OF THE DIFFERENT POLICY OPTIONS AND WHO WILL BE AFFECTED? 5.1Impacts of policy option 1: Baseline scenario

5.2Impacts of policy option 5 6.HOW DO THE OPTIONS COMPARE? 6.1Positive and negative effects of the policy options 6.2Summary table of the effects of the different policy options 6.3Identification of a preferred policy option 7.HOW WOULD ACTUAL IMPACTS BE MONITORED AND EVALUATED? 7.1Operational objectives 7.2Future monitoring and evaluation ANNEXES Annex 1 Annex 2 Annex 3 Annex 4



GLOSSARY (In alphabetical order) Ad hoc tribunal: A tribunal formed with a purpose of resolving a specific case. Appeal: Tribunal reviewing decisions of the court of the first instance. Code of Conduct: Set of rules governing the behaviour and ethical requirements of adjudicators. Developing countries: Countries that are less developed than developed countries in the context of social and economic indicators.

Fair and equitable treatment (FET): The principle that requires that an investment is treated in a just, unbiased and equitable manner, which is in accordance with the rules. Foreign direct investment (FDI): An investment, which is made by the investor from one country to another country, by which the investor obtains managing control over the investment. Host state: A country in which a foreign investment is made. Investment Court System (ICS): The system for the resolution of investment disputes included in EU trade and investment agreements from 2015 on, which includes the Tribunal of First instance and Appeal Tribunal with permanent tribunal members to be appointed by the EU and its respective FTA or investment treaty partner. Investor-State Dispute Settlement (ISDS): Mechanism to resolve disputes between the foreign investors and host countries. "Loser pays" principle: The principle that provides the unsuccessful party to the dispute to cover all costs of the procedure. Least-developed countries: Countries that are least developed with respect to developed and developing countries in the context of social and economic indicators. Most-favoured nation treatment (MFN) principle: The principle included in international agreements that requires not discriminating between countries. It requires that certain favourable treatment be granted to all the parties to an agreement. National treatment principle: The principle included in international agreements that requires not discriminating between goods, services or investors of domestic and foreign goods and services. It requires granting foreign goods and services with the same treatment as domestic ones. Protection against uncompensated expropriation: The principle that requires a just compensation in return for the expropriation of an investment. Principle of rule of law: The principle that makes sure that all public powers act within the constraints set out by law, in accordance with the values of democracy and fundamental rights, and under the control of independent and impartial courts. Right to fair trial: The right to an independent and impartial tribunal established in accordance with the law. Right to an effective remedy: The right to an effective remedy before an independent tribunal that ensures fair, public hearing within a reasonable period of time when rights are alleged to be violated. Small and Medium-sized Enterprises (SMEs): According to EU legislation, enterprises which, among other criteria, employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. Tribunal of First instance: A tribunal that hears the first arguments and considers all the evidence to be contrasted to an appeal mechanism.



LIST OF ABBREVIATIONS (In alphabetical order)

AB (or WTO AB): Appellate Body of the World Trade Organisation ACWL: Advisory Centre for WTO Law BIT: Bilateral Investment Treaty CETA: Comprehensive Economic and Trade Agreement CJEU: Court of Justice of the European Union ECB: European Central Bank ECT: Energy Charter Treaty ECHR: European Convention of Human Rights ECtHR: European Court of Human Rights FDI: Foreign Direct Investment FTA: Free Trade Agreement GDP: Gross Domestic Product ICC: International Criminal Court

ICJ: International Court of Justice ICS: Investment Court System ICSID: International Convention for the Settlement of Investment Disputes IMF: International Monetary Fund ISDS: Investor-State Dispute Settlement ITLOS: International Tribunal for the Law of the Sea NGO: Non-Governmental Organisation OECD: Organisation for Economic Co-operation and Development PCA: Permanent Court of Arbitration SME: Small and Medium-sized Enterprise TEU: Treaty of the European Union TFEU: Treaty on the Functioning of the European Union TTIP: Transatlantic Trade and Investment Partnership UN: United Nations

UNCITRAL: United Nations Commission on International Trade Law UNCTAD: United Nations Conference on Trade and Development WTO: World Trade Organisation INTRODUCTION In recent years, the inclusion of investor-state dispute settlement (ISDS) in trade and investment agreements has become subject to increased public scrutiny and questioning. This has been the case in the EU with regards to EU agreements with partner countries but also in other parts of the world. In the EU, concerns around ISDS have been voiced particularly in the context of the negotiations of the Comprehensive Economic and Trade Agreement (CETA) with Canada and the Transatlantic Trade and Investment Partnership (TTIP) with the United States, as became clear in the 2014 public consultation organised by the Commission on investment in TTIP. In May 2015, in light of the public consultation, the Commission presented a concept paper "Investment in TTIP and beyond – the path for reform - Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court". The paper set out a two-step approach to reforming the current ad hoc ISDS system. The first step was the inclusion of an institutionalised court system for resolving investment disputes to apply in each future EU level trade and investment agreement (i.e. investment court system). The second step was that the EU should in parallel work towards the establishment of an international investment Court and appellate mechanism with tenured adjudicators. This Court would aim to replace all the bilateral Investment Court Systems (ICSs) included in the EU's trade and investment agreements. It would also provide the EU, EU Member States and partner countries with the possibility to replace the ISDS provisions featuring in their existing investment agreements with access to the multilateral investment Court. Since 2016 the Commission has actively engaged with a large number of partner countries both at technical and political level to further the reform of the ISDS system and to build consensus for the initiative of a permanent multilateral investment Court. In August 2016, the Commission launched an Impact Assessment process to examine the possible options and impacts of a reform of the ISDS system at multilateral level, including through the establishment of a permanent multilateral investment Court. The Impact Assessment is limited to examining options for reforming at multilateral level the dispute settlement system and does not examine the substantive investment protection standards, which are not intended to be addressed by this reform. 1.WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? 1.1 What is the issue that may require an action, what is the size of the problem Since the 1950s, disputes between foreign investors and the host States of their investments are solved through ISDS. The ability to bring such a dispute is created by investment agreements. These are either standalone agreements (Bilateral Investment Treaties – BITs) or investment chapters in Free Trade Agreements (FTAs). According to the United Nations Conference on Trade and Development (UNCTAD) there are 3,328 such agreements in existence internationally. The disputes concern claims that the investor's investment in a country has been treated inconsistently with certain core protection standards included in those agreements, i.e. guaranteeing equal treatment of different foreign investors (most-favoured nation), guaranteeing equal treatment as domestic investors (national treatment), protection against unlawful expropriation and ensuring fair and equitable treatment of investors and investments. The core reason for ISDS proceedings is that it permits the standards of investment protection contained in international investment treaties to be enforced directly by the investor. It does not require an investor to persuade its government to raise the case through diplomatic or other channels at the inter-state level and avoids that a case is politicised through the intervention of the investor's home state. Under the dispute settlement system included in these agreements, investment disputes are adjudicated by an ad hoc tribunal composed according to the rules also used for commercial arbitration, i.e. in general the disputing parties (investor and challenged state) appoint an arbitrator each and they either agree on a third arbitrator to serve as president of the tribunal or he or she is appointed by an appointing authority. These arbitral tribunals are disbanded after the award is issued and future tribunals are not legally bound by decisions of previous ones.

Arbitrators are remunerated by the disputing parties on the basis of a fee per day worked. The arbitration rules, i.e. the procedural rules to adjudicate investment disputes, are incorporated by reference into the investment agreements. The most frequently used arbitration rules are the Arbitration Rules under the International Convention for the Settlement of Investment Disputes (ICSID Convention) or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL), although other rules may also apply. Except where arbitration is conducted pursuant to more recent treaties, proceedings are confidential unless the disputing parties agree to make information on the dispute publicly available. Awards issued by ISDS tribunals are final and cannot be appealed on the grounds of errors of law or misinterpretation of the facts. They can only, at the request of either disputing party, be cancelled (technically, "annulled" or "set-aside") in full or in part, under very limited procedural grounds. The enforcement of ISDS awards is governed either by the ICSID Convention or the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and relevant domestic implementing legislation. According to UNCTAD, as of 1 January 2017, there have been a total of 767 known ISDS cases based on international investment treaties. 259 of them are currently pending, whereas 495 have been concluded. Figure 1: Known ISDS proceedings from international investment agreements. Source: UNCTAD (2017). UNCTAD figures show that more than one third of ISDS proceedings were concluded in favour of the state (36.4%), while slightly more than one fourth found in favour of the investor (26.7%). Almost another fourth (24.4%) were settled between the parties. Figure 2: Concluded ISDS proceedings. Source: UNCTAD (2017). ICSID data from April 2017 indicate that 58% of the total of cases administered under the ICSID Convention involved investors from an EU Member State, while 17% involved an EU Member State. Spain, Hungary and Romania have been most often involved as respondents (29, 13 and 13 disputes respectively as of April 2017). Figure 3: Geographic distribution of all cases registered under the ICSID Convention and Additional Facility Rules, by State Party involved. Source: ICSID (2017). In recent years ISDS has become subject to increased public scrutiny and questioning, in the EU and other parts of the world. In the EU, concerns have been voiced particularly in the context of the negotiations of the EU-United States (US) and EU-Canada trade and investment agreements, as was made evident in the 2014 public consultation carried on investment in the TTIP. A core concern by the public is the perceived limitation in terms of legitimacy of the existing system to deal with issues that concern acts of public authorities. Other concerns relate to the current ISDS system's deficiency in predictability and interpretative consistency of case-law, lack of possibility of review of decisions, lack of transparency and costs of the proceedings. To address these limitations, the EU's approach since 2015 has been to institutionalise the system for the resolution of investment related disputes in EU trade and investment agreements, through the inclusion of the ICS. The main feature of the ICS as proposed in EU negotiations is the establishment of a Tribunal of First Instance and an Appeal Tribunal with permanent tribunal members to be appointed by the EU and its respective FTA or investment treaty partner. Members are required to have qualifications similar to the judges of the International Court of Justice (ICJ). Cases are allocated to them on a random basis. Tribunal members are bound by a strict code of conduct that requires them to disclose any personal or professional relation that could impede or be perceived as impeding their independence and they cannot act as counsel in other investment cases. Tribunal members jointly appointed by the Contracting Parties to an EU agreement are paid a monthly retainer fee in order to secure highly qualified individuals and their availability on short notice. They are also paid a daily fee per day actually worked. The costs of the monthly retainer fees and the daily fees for the Appellate Tribunal members are to be shared by the Parties to the agreement (i.e. the EU and its trade and/or investment treaty partner). Procedures are subject to the UNCITRAL Rules on Transparency, meaning that hearings, documents and findings relating to the disputes are made public. In this light, the initiative to engage on a multilateral reform of investment dispute settlement aims at addressing problems arising in the context of two situations: 1.ISDS: The traditional problems affecting ISDS continue to exist, inasmuch as this system is foreseen in the vast majority of the 3328 investment treaties. EU Member States have concluded 1384 of such treaties with third countries. The EU itself is party to one such agreement, the Energy Charter Treaty (ECT). These traditional problems relate to legitimacy, consistency and predictability, lack of possibility of review, transparency and high costs for users. 2.Coexistence of ISDS and ICS: The introduction of an ICS in each EU trade and investment agreement addresses a number of important problems of ISDS notably legitimacy, lack of review and transparency, but it raises other issues, notably concerning predictability and consistency of decisions across different EU agreements, use of EU resources and costs for the EU budget.

1. Problems arising from ISDS a) Lack of legitimacy and safeguards for independence Independence, efficiency and quality are the main elements of an effective justice system. The ISDS arbitration system has been criticised for lacking sufficient legitimacy, a perception based on concerns as to the effectiveness of the independence of arbitrators from disputing parties. Criticism along these lines was submitted by a large number of stakeholders from different backgrounds through the public consultation. ISDS is based on the mechanisms of dispute resolution used in the field of arbitration, where disputes arise between private entities over a particular set of reciprocal contract-based obligations. As a result, ISDS differs significantly from traditional judicial systems, in particular as regards the safeguards to guarantee judicial independence. For one, disputes under ISDS are decided by arbitrators, i.e. individuals not holding judicial office appointed for a specific dispute. The system is funded by users, i.e. the parties to a dispute pay for the costs of the arbitration tribunal. Arbitrators are chosen by the disputing parties and decide only that specific case. ISDS tribunals are disbanded (i.e. dissolved) after issuing the award, meaning that arbitrators serving in these tribunals necessarily have other professional occupations. However, ISDS tribunals are not comparable to one-off arbitration since ISDS tribunals are interpreting treaties which first, bear a great deal of similarity and second, need to be applied again and again. Partly for this reason and partly because it is applied to solve disputes between an individual and a state, the use of ISDS has been broadly criticised. In addition, there is a perception held by some that arbitrators may unduly favour investors in order to create future opportunities to serve as arbitrators rather than applying strictly the law in any particular case. Such criticism was submitted by stakeholders in the context of the 2014 public consultation as well as in the consultation for this Impact Assessment. On the other hand, certain arbitrators are considered to be state-friendly and so are almost continually appointed by states. The importance of having a dispute settlement system in place that not only functions in an impartial manner but is perceived to be devoid of any undue interest becomes even more crucial due to the possible impact these cases may have on public budgets and public actions (to the extent that actions are inconsistent with the substantive rules of investment protection laid down in the agreements). b) Lack of consistency and predictability of case-law The ISDS system provides for decisions of tribunals that are composed on an ad hoc basis and dissolved after they have issued an award. There is no coordination between tribunals and therefore no formal possibility to align the interpretations of substantive rules of investment protection, although almost all of the 3328 treaties contain identical or very similar standards of protection. These include non-discrimination (national treatment and most-favoured nation (MFN) principles), protection against unlawful expropriation (i.e. compensation) and Fair and Equitable Treatment (FET). Although the provisions on these standards are not worded in exactly the same way across agreements (there are differences, for example, to the standard US approach), the basic function of the standards is the same across agreements. Indeed, the fact that a majority of these treaties are bilateral and their provisions must be read in light of each agreement's context and negotiating parties' intention, does not mean that there is no margin for a significant degree of consistency to be achieved across agreements. An interpretation of a key standard, for example national treatment, can form the core of an interpretation of that standard as included in multiple agreements which is then adjusted, as appropriate, to take account of variations in drafting or context of other agreements which use similar or identical terms. In ISDS there is no compelling incentive or requirement for the different tribunals to, when interpreting standards in a given treaty, be informed by past interpretations of those standards in the same or other agreements where it may be very similarly if not identically worded. ISDS arbitrators have therefore no mandate or incentive (for example through being reversed by an appeal mechanism) to build a coherent body of investment case law. The lack of consistency of the case-law leads to limited predictability, which affects legal certainty and expectations for all actors (states, investors and other interested parties). In particular, it deprives stakeholders of the ability to rely on previous interpretations to calibrate their actions and anticipate the outcome of potential disputes. It means that certain arguments can be repeated time and again in the hope that a new tribunal will take them up, wasting time and resources. In the stakeholder consultation, the lack of consistency was regarded as problematic especially by academics. The lack of consistency affects the interpretation and application of standards under the same agreement in different disputes; and standards contained in different agreements where the standard may be identically or very similarly worded. Conflicting decisions on the same investment treaty provisions are as a consequence not uncommon. A striking example are the ISDS cases brought under the Argentina-US BIT by US investors against Argentina in relation to very similar factual situations and measures adopted in the context of Argentina’s financial crisis (2000-2002). While one tribunal (LG&E) accepted Argentina’s plea of necessity justifying the breach of the obligations, another tribunal (CMS) found that the conditions for accepting the defence of necessity were not met. This meant that damages were payable in one case but not the other, although both cases were brought under the same treaty and based on the same facts. c) Lack of possibility of review The current ISDS rules only provide for a limited review of tribunal awards. Awards can only be annulled, in part or in full, or set aside on very limited procedural grounds (such as corruption on the part of a tribunal member, errors in the constitution of the tribunal, manifest exceeded powers or breaches by the tribunal of fundamental procedural rules). Conversely, ISDS awards cannot be reviewed on the grounds that decisions are legally incorrect or seriously factually flawed. This lack of legal review is problematic in cases where awards may be inaccurate from the perspective of the interpretation and/or application of the law and as regards manifest errors of fact (e.g. flawed fact finding, illogical or irrational examination of evidence). It is problematic not only from a systemic point of view (it has a negative impact on the quality of the overall system by impacting consistency) but also on specific cases (that may be decided according to fundamentally wrong interpretations or based on a manifestly erroneous assessment of facts). Indeed, the possibility of review was considered important by a large number of stakeholders in the context of the public consultation. d) High costs ISDS proceedings are costly both for investors and states, which poses a problem of access to the system and availability of legal remedies. This was highlighted by stakeholders representing medium and smaller investors in the stakeholder meeting and reiterated in the online public consultation.

According to the Organisation for Economic Co-operation and Development (OECD), the costs of an ISDS dispute amount on average to USD 8 million. The largest cost component is the expense incurred by each party (investor and state) for its own legal counsel and experts (about 82% of the overall cost of an ISDS case). Arbitrator fees average about 16% of costs and institutional costs payable to organisations that administer the arbitration and provide secretariat generally amount to about 2% of the costs. An OECD survey carried out between 2006 and 2011 of 100 ISDS cases indicates that almost a quarter (22%) of the claimants were either individuals or very small corporations with limited foreign operations (one or two foreign projects). Almost half the cases (48%) were brought by medium and large enterprises, varying in size from several hundred employees to tens of thousands of employees, while only 8% of these were large multinational companies. In 30 % of the cases there was little or no public information on the type of claimant. Data on potential claimants who did not bring claims due to excessive costs is not available. It is possible that micro-enterprises are practically deprived from this dispute resolution route, given the average costs. e) Lack of transparency ISDS cases are adjudicated on the basis of strict confidentiality criteria, in accordance with the tradition of commercial arbitration to protect the confidentiality of information. Although the various sets of arbitration rules provide for varied degrees of transparency in different aspects of the proceedings, these do not necessarily involve full disclosure of key elements such as the identity of the parties, submissions or awards. Despite a significant increase in the transparency of ISDS in recent years and concerted action at international level, with some countries including requirements in their treaties and others putting it into practice, this is not systematic. Submissions and awards are not necessarily made public nor hearings opened to the public. Concerns related to insufficient transparency in ISDS were consistently voiced by civil society groups and academia in the public consultation. This uneven level of transparency contrasts with the publication of judgments and decisions of most national and international courts, which are mostly promptly accessible online. 2. Problems remaining under ICS or arising where ISDS and ICS coexist The ICS to be included in all EU trade and investment agreements addresses to a significant extent important shortcomings identified with the ISDS system, notably as regards the system's legitimacy and independence, consistency and predictability of case-law within each EU agreement, possibility of review and transparency. Nevertheless, there are certain limits to what can be achieved through reforms at bilateral level as regards predictability across agreements, costs for the EU budget and administrative burden for the EU. This was expressly highlighted by stakeholders in the 2014 public consultation on investment dispute settlement in the TTIP. Stakeholders argued that the many concerns expressed in the EU and other parts of the world on the legitimacy and independence of the investment dispute settlement system would be more effectively addressed through a multilateral reform than through bilateral reforms. a) Limited consistency and predictability of case-law The ICS addresses the issue of a lack of consistency and predictability of case-law in relation to substantive standards contained in a given agreement, given that standards will be interpreted by a permanent body even if in different disputes. However, the same or very similar substantive rules across agreements will continue to be interpreted by different bodies without any incentive to be informed by previous decisions. In these cases, the risk of disparate interpretation of the same or very similar substantive rules remains. b) Costs Disputes under the ICS are funded by a mix of the Parties to the trade and/or investment agreement (i.e. the EU and its treaty partner) and users. Under the ICS, the disputing parties are still required to cover the legal fees (which make for the highest part of dispute-related costs) and some of the costs of management of the dispute (i.e. certain daily fees of tribunal members). Nevertheless, the cost of legal fees should be lower than under ISDS as legal counsel will not have to spend time anymore choosing an arbitrator and the increase in legal certainty should decrease the costs of legal advice (i.e. there will be less temptation to make arguments which had been clearly rejected by e.g. the Appeal Tribunal). The inclusion of an ICS in each EU agreement has implications for the EU budget. It is estimated that each ICS, if active with one case before the First Instance Tribunal and one case under Appeal, would cost around EUR 800,000 per Contracting Party per year. Calculations are based on permanent judges and members of the Tribunal of First Instance and of the Appeal Tribunal being part-time and remunerated on the basis of retainer fees and fees for day actually worked. In some EU trade and investment agreements (e.g. EU-Viet Nam FTA), it has been decided that the division of costs amongst the EU and its treaty partner will take account of the development level of the Parties, which in practice may mean that the EU would bear a significant amount of the costs. c) Use of financial and human resources The ICS approach foresees a multiplication through the inclusion in many agreements of institutional mechanisms that need to be managed and funded. The more ICSs are included in EU agreements, the more complex the management will be for the Commission services, which will have to bear the administrative burden in terms of time, workforce and financial resources. 1.2 What are the drivers of the problem? A number of issues have been identified as the main drivers that would need to be addressed in order to solve the problems outlined above. Below are the drivers that lead to each problem:

Lack of legitimacy and safeguards for independence in ISDS ·ISDS is based on the mechanisms of dispute resolution used in the field of commercial dispute resolution as opposed to a judicial system; and does not provide for the safeguards for independence found in public international law tribunals or in domestic courts dealing with public law matters. The more specific drivers below emanate from this general one. ·ISDS procedures utilise different sets of arbitration rules, which gives leeway for investors to choose the most advantageous one on which to bring a case. ·Arbitrators deciding on ISDS disputes are not judges in the traditional sense, meaning that they are not backed by a state or an international institution. This has implications for their perceived independence and associated legitimacy. ·ISDS cases are decided by tribunals constituted on an ad hoc basis and are disbanded after issuing the award. ·Arbitrators serving in ISDS tribunals necessarily have other professional occupations and nothing prevents them from acting as counsel for investors and states in other ISDS disputes where the same issues may arise. ·ISDS arbitrators are appointed by the parties to the dispute, paid by those parties and therefore may have a professional interest in reappointment in future cases, which impacts on the perception that they are impartial. This point is widely raised by stakeholders as of particular concern. Lack of predictability and consistency of case-law ·Although substantive standards of investment protection are contained in multiple agreements with a high degree of commonality, if not identity, there is no systemic coordination of ISDS cases, tribunals and decisions, consideration of precedent etc. ·The various existing sets of arbitration rules that may govern ISDS procedures do not guarantee substantive standards be interpreted by arbitrators in a consistent and predictable fashion. ·The inherently bilateral nature of ICS implies that predictability and consistency of case-law, where applicable, will be limited, i.e. within the limits of each ICS. Lack of possibility of review in ISDS ·ISDS does not provide for mechanisms for correcting legal and factual errors, such as an appeal, while stakeholders consider such mechanisms important. ·ISDS awards can only be annulled on very limited procedural grounds, such as corruption, errors in the composition of the tribunal or breaches of fundamental procedural rules. High costs ·In ISDS proceedings, fees of arbitrators and institutions are exclusively borne by the disputing parties. ·As highlighted in the stakeholder consultation, ISDS does not provide for avenues for Small and Medium-sized Enterprises (SMEs) not to have to face such important expenditures and is likely to pose significant problems of access to justice, in particular for small investors. ·The bilateral nature of ICS means that states Party to each trade and/or investment agreement must cover a substantial part of the costs of the ICS. This is especially significant for the EU, which may have to cover parts of the costs appertaining to its treaty partner in the event that it is a developing country. Lack of transparency in ISDS ·The recently developed transparency rules for ISDS cases are not yet in application to many existing treaties meaning that awards are not made available in a systematic manner, submissions are only provided in a sporadic way and hearings are mostly not public.

Administrative burden of ICS for the EU or the Commission ·Multiple ICSs trigger high costs and a significant administrative burden (in terms of workforce, time and financial resources) for the Commission. 1.3 Problem tree 1.4 Who is affected by the problem? The problems previously described affect a number of actors that play a role in the settlement of investment disputes. The main affected stakeholders are: a) Investors and businesses When involved in an ISDS case, investors can be faced with a number of shortcomings of ISDS, specifically: ·Potential reputational damage in case the investor brings a dispute resulting from the generalised perceived lack of legitimacy of ISDS; ·Inability to get useful guidance from previous interpretations of the same substantive standard as a result of the lack of predictability and consistency of case-law in ISDS, costs resulting from this; ·Risk of receiving an award that may be legally incorrect and inability to have it reviewed due to the lack of possibility to appeal; ·Where an award is annulled in full, the situation is equivalent to that prior to launching the dispute, i.e. the investor has to restart the dispute, with the consequent important monetary losses and wasted time for the investor; ·Costs associated in appointing arbitrators (higher legal fees as a result of having to spend time on this issue); ·Particularly if the business is an SME, significant accessibility problems to ISDS, notably high costs, which may effectively deprive from access to ISDS. This group of stakeholders consistently flagged this circumstance in the consultation. In the event that the dispute arises under ICS, these problems are significantly overcome, as highlighted above. These problems affect both EU investors when launching a case against a third state and foreign investors that may be launching a case against the EU or an EU Member State. b) General public In relation to disputes brought under ISDS, the general public (both in the EU and in third countries) may be negatively affected by:

·Public mistrust in ISDS; ·Taxpayers' money may have to be paid to investors as a result of a legally incorrect award, given that it cannot be appealed; ·Lack of information on how disputes involving important societal values are decided, due to the lack of transparency in ISDS proceedings. Civil society platforms actively voiced these points in the consultation. In the event that the dispute arises under ICS, these problems are addressed, as highlighted above. c) States (including the EU Member States and third countries) and the EU The EU and its Member States, as well as third countries, are affected by the problems at stake similarly to investors. In the event that they are challenged by a foreign investor and find themselves involved in ISDS procedures, they are affected by: ·Damage resulting from the generalised public mistrust in ISDS; ·Inability to get useful guidance from previous interpretations of the same substantive standards due to lack of predictability and interpretative consistency. This may affect states during ISDS proceedings but also in the normal operation of their BITs; ·As a result of the lack of appeal and very limited grounds of annulment, risk that they will have to enforce and abide by legally incorrect awards (i.e. possibly pay significant sums of taxpayers' money as compensation); ·Inability to provide to the public information on a case that may involve issues of public policy, where confidentiality rules prevent publication. ·High fees for legal counsel including as a result of lengthy procedural steps such as choosing arbitrators and inability to rely on previous interpretations. These problems do not arise in the event of a dispute under the ICS. Nevertheless, the issue of interpretative consistency is not completely solved under ICS, which limits predictability to cases under the same agreement to which the ICS applies. d) The arbitrator community Under ISDS, individuals currently acting as arbitrators (e.g. arbitrators, practising lawyers, retired adjudicators and law professors) benefit from the professional opportunities of being appointed arbitrators in ISDS tribunals for claims brought under the many existing investment agreements. Under the ICS, some of such individuals may experience a loss of professional opportunities, since the strict requirements to be appointed and conditions applicable to act as judge or member of an ICS will render some of them ineligible. e) Existing arbitration centres Under ISDS, there are a number of arbitration centres that handle investment disputes, such as ICSID, the International Chamber of Commerce, the Stockholm Chamber of Commerce, the Permanent Court of Arbitration or the London Court of International Arbitration. Under the ICS, these centres may no longer have such a prominent role to play, inasmuch they will not in principle have a role in the administering of disputes or at least it is unlikely that all of them would and therefore may, over time and depending on the uptake of ICS, lose income.

1.5 How would the problem evolve, all things being equal? The current EU policy of including in each EU trade and investment or investment agreement a bilateral ICS already constitutes a very significant step to provide an alternative form of dispute resolution as compared to ISDS. However, this policy alone fails to fully address the problems arising from ISDS as included in the nearly 1,400 BITs concluded by Member States and the Energy Charter Treaty (ECT), although it does to the extent that the Member State agreements are gradually replaced by EU level agreements. In addition, the ICS itself presents certain limitations that would accentuate in the mid to long term, when the EU will likely have to operate a significant number of ICSs (around 20 are currently potentially envisaged). This is likely to lead to a number of operational challenges, in particular in terms of costs and administrative complexity. Each active ICS with one case before the First Instance Tribunal and one case under Appeal per year is expected to cost under EUR 800,000 per Contracting Party per year. Clearly, the more ICSs are in place, the more significant the budgetary implications for the EU will be. Administering numerous ICSs will create administrative burden as human resources within the Commission will be needed to manage the functioning of the ICS. In addition, a multiplication of ICSs would impact the interpretative consistency sought with the institutionalisation of ICS. Each ICS will create its individual cluster of interpretative consistency. While this does not appear to be overly problematic if only a few ICSs exist, inasmuch as judges/members can reasonably stay abreast of developments in other ICSs, this would become impossible if bilateral ICSs start to multiply. The ICS approach does not provide for an immediate phase-out of ISDS and its related problems, inasmuch as the numerous EU Member State BITs with unreformed ISDS provisions and the ECT would only be progressively replaced by EU agreements with an ICS. Moreover, Member States can obtain EU authorisation to conclude new BITs with ISDS and therefore be sued under such mechanism. To improve the investor-state dispute resolution in these BITs, when authorising Member States to negotiate, the Commission already requires that the prospective BIT embodies the principles of the ICS to the largest possible extent and that it includes a reference to the multilateral reform of investment dispute resolution. In this progressive replacement of ISDS with ICS, the problems related to ISDS would progressively disappear as the problems arising from the multiplication of ICS (limited overall predictability, higher costs for the EU budget and higher administrative burden) would increase. Lastly, this process of progressive replacement would likely take decades of negotiation and, at this point in time, no guarantee that all Member State BITs would be eventually covered by an ICS. 1.6 Has any fitness check/retrospective evaluation been carried out of the existing policy framework? The ICS has been introduced only recently (the first agreement including it which has been approved by the European Parliament is the CETA between the European Union and Canada) and it is not yet in force, therefore no evaluation has yet taken place. ISDS is included in bilateral agreements concluded by Member States and in the ECT. The ECT is subject to periodical review under Article 34.7 of the ECT which provides that the functioning of the ECT be subject to regular review (of not more than five years) by its political body (i.e. the Charter Conference). This review must be conducted in light of the extent to which the provisions of the ECT and its Protocols have been implemented. As Contracting Parties to the ECT, the EU and the Member States are shaping and actively participating in these reviews. The most recent review process has been ongoing since 2014 and focuses on core areas of the ECT, including investment promotion and protection and dispute settlement. The draft conclusions of such review find inter alia that further discussions including within other fora are needed. Discussions on the scope of the next review (to take place in 2019) will be held in 2018. In this sense, modernisation of the investment protection part of the ECT (including dispute settlement) remains an EU priority (although the preferred vector for dispute settlement remains the project described in this Impact Assessment). 2.WHY SHOULD THE EU ACT? Article 207 of the Treaty on the Functioning of the European Union (TFEU) foresees that foreign direct investment (FDI) is part of the EU's common commercial policy. In accordance with point (e) of Article 3(1) of the TFEU, the EU has exclusive competence with respect to the common commercial policy. This exclusive competence includes the possibility to negotiate and conclude international agreements covering FDI. According to Article 5(3) of the Treaty of the European Union (TEU), the subsidiarity principle does not apply to areas of exclusive EU competence. The Court of Justice of the EU (CJEU) ruled in its Opinion 2/15 regarding the EU-Singapore FTA that the Union has exclusive competence with regard to all matters covered by the agreement but that the competences over portfolio investment and ISDS are shared between the EU and its Member States. The impact of this ruling on this initiative is not significant, since the Commission has from the beginning expected that any multilateral reform of investment dispute settlement would need to be subscribed by Member States in addition to the EU, not least so that all BITs concluded by Member States can be brought into the reform too. In its Opinion 2/13 concerning the accession of the EU to the European Convention on Human Rights (ECHR), the CJEU confirmed its consistent case-law that an international agreement providing for the creation of a court responsible for the interpretation of its provisions is not, in principle, incompatible with EU law. However, such a court should not have an adverse effect on the autonomy of the EU legal order or negatively impact the level of protection of fundamental rights within the EU. In this respect, the standards provided by the Charter of Fundamental Rights are an important source against which to measure the effectiveness of the reforms envisaged in this initiative. It should be noted in passing that the multilateral reform scenario would significantly differ from the accession of the EU to the ECHR. Considering that currently tribunals in EU agreements only apply international law (i.e. the investment agreements) but not EU law, the reformed framework would not interpret EU law, but only be allowed to use it as matter of fact in its judgements. The autonomy of EU law would therefore remain unaffected. A multilateral reform of investment dispute settlement could not be carried out at the Member State level for the basic reason that it would not achieve coverage of all existing investment treaties, leaving out all agreements concluded by the EU. Member States do not have competence for all the matters that would be dealt with in this initiative. The matters are either of the exclusive or shared competence of the European Union. In line with the principle of proportionality, all reasonable policy options are presented below in order to assess the likely effectiveness of such policy action. 3.WHAT SHOULD BE ACHIEVED?

3.1 General objectives With the entry into force of the Lisbon Treaty in 2009, foreign direct investment became part of the common commercial policy. As regards non-direct investment, Treaty provisions on free movement of capital apply also to capital movements between Member States and third countries. With the Lisbon Treaty, the Charter of Fundamental Rights of the European Union became fully part of the EU treaties. As established by Article 205 of the TFEU, the common commercial policy also serves the more general objectives of the EU’s External Action as described in Article 21 of the TEU. Article 21(1) of the TEU specifies that, in the exercise of its external action, the EU is to be guided by the principles and objectives that inspired its own creation, including "democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and international law". Article 21(2) of the TEU envisages a number of objectives that the EU is to pursue through "a high degree of cooperation in all fields of international relations". The most relevant objectives in relation to this initiative include: "(e) encourage the integration of all countries into the world economy, including through the progressive abolition of restrictions on international trade; […] and (h) promote an international system based on stronger multilateral cooperation and good global governance". Taking stock of the trade policy developments in the years that followed, especially the EU negotiations in the context of the TTIP, the Commission Communication "Trade for all" from October 2015 sets out that the Commission will in parallel with its bilateral efforts "engage with partners to build consensus for a fully-fledged, permanent International Investment Court". At the public release on 12 November 2015 of the EU's proposed text for TTIP on investment protection and investment dispute settlement, the Commission stated that the "Commission will start work, together with other countries, on setting up a permanent International Investment Court. […] The objective is to, over time, replace all investment dispute resolution mechanisms in EU agreements, in EU Member States’ agreements with third countries, and trade and investment treaties concluded between non-EU countries, with the International Investment Court. This would lead to the full replacement of the "old ISDS” mechanism with a modern, efficient, transparent and impartial system for international investment dispute resolution". The more recent Commission Reflection Paper on Harnessing Globalisation from May 2017 also contains an explicit reference when stating that "[t]he EU will also continue its efforts to establish fair rules for the protection of international investments while allowing governments to pursue their legitimate policy objectives. Disputes should no longer be decided by arbitrators under the so-called investor-state dispute settlement. This is why the Commission has proposed a multilateral investment court that would create a fair and transparent mechanism; this is being discussed with our partners". On the occasion of the adoption by the Council of the decision authorising the signature of CETA, the Council stated that "the Council supports the European Commission's efforts to work towards the establishment of a multilateral investment court, which will replace the bilateral system established by CETA, once established, and according to the procedure foreseen in CETA". Moreover, action by the EU at international level cannot compromise the level of protection of fundamental rights in the EU. This initiative is intended to create an additional remedy under international law for enforcing the obligations imposed upon States by international agreements. It is therefore without prejudice to the existing rights of foreign investors under domestic EU law and the laws of the Member States or to the remedies for enforcing such domestic law rights. Nevertheless, when assessing this initiative it is useful to evaluate the various options in the light of the objectives and principles foreseen in the EU Charter of Fundamental Rights, including in particular Article 47 of the Charter. 3.2 Specific objectives More specifically, this initiative aims at bringing coherence to the EU's policy in investment dispute resolution, to align it with the EU's global approach in other areas of international dispute settlement favouring multilateral solutions. The objective is to set up a framework for investment dispute resolution that is: ·Permanent, independent and that enjoys the recognition of authority and legitimacy of citizens. ·Predictable, delivering consistent case-law in its functioning, ensuring that the interpretation of substantive standards is consistent. ·Allowing for an appeal of decisions in order to correct legal and factual errors. ·Transparent, in line with the fundamental expectations from citizens that justice is a public good. ·Efficient, in that it satisfies the needs of involved stakeholders through an effective use of financial and human resources. 4.WHAT ARE THE VARIOUS OPTIONS TO ACHIEVE THE OBJECTIVES? In the Inception Impact Assessment published on 1 August 2016, six options were identified to multilaterally reform the system of investment dispute settlement (options 1-6). Two additional options (numbered options 7 and 8) were suggested by stakeholders in the context of the public consultation and the stakeholder meeting of 27 February 2017.

Option 1 Baseline scenario Under the baseline scenario, the EU would continue to pursue its current policy of negotiating ICS in its bilateral trade and investment or investment agreements, while ISDS would continue to exist insofar as the treaties that utilise it have not been phased out by an EU agreement featuring ICS. While the problems related to ISDS would gradually decrease as the new agreements with the ICS will be concluded hence replacing existing MS BITs, the problems arising from the multiplication of ICS (limited overall predictability, higher costs for the EU budget and higher administrative burden) would increase. The ICS only applies to future EU agreements. It does not address the ISDS problems that persist with regards to the 3,328 existing investment treaties worldwide, the vast majority of which contain traditional ISDS provisions. This is particularly problematic for the EU, considering that treaties between EU Member States and third countries alone account for 1,384 of those existing treaties, although these will be very gradually replaced. In addition, the EU itself is party to the ECT which also contains traditional ISDS. No significant evolution of either the ECT or Member States’ existing BITs is expected in the short term, certainly as regards the objectives being examined in this assessment in the timeline envisaged under this initiative. Option 2 Renegotiation of EU Member States' BITs and the ECT to include an ICS Under this policy option, the EU and its Member States would seek to renegotiate Member States' BITs with each relevant third country and the ECT in order to align the dispute settlement provisions therein with the ICS policy pursued at the EU level. Most notably, the reformed provisions would address ad hoc party appointments by conferring some degree of permanency to the dispute settlement system and detaching the appointment of adjudicators from the disputing parties. Such reformed provisions would also feature an appeal instance and include rules on transparency of proceedings. This option is considered overly burdensome in terms of time and resources, as well as extremely complex and disproportionate to its likely use per BIT, as was highlighted by a majority of stakeholders in the public consultation. Moreover, since negotiations would need to be conducted individually with each partner country, there is a high risk that partner countries would use the opportunity to reopen negotiations on aspects of BITs other than dispute settlement. Additionally, it cannot be excluded that the outcome of such negotiations would be different across BITs to the detriment of the overall system's coherence and predictability. This option is therefore considered not feasible and not analysed in further detail. Option 3 Reform of international arbitration rules Option 3 would consist of reforming the several sets of arbitration rules that normally govern ISDS, e.g. rules of ICSID, of UNCITRAL or of the PCA in order to bring these rules in line with the principles of ICS, namely permanency, detachment of adjudicators from disputing parties and allowing an appeal. However, this option would present a number of shortcomings. First, since there is no common institutional framework for the procedural aspects of ISDS, it would in effect mean renegotiating several sets of arbitration rules, some used predominantly for the adjudication of commercial and not investment disputes. Renegotiating each set of rules would also be extremely complex. There are several reasons why reforming an existing forum so that it acts as multilateral court does not seem optimal. The main reason relates to the fact that ISDS operates under different rules, so reforming one institution or set of arbitration rules does not address litigation under another institution or arbitration rules. Moreover, some of these bodies already have an established jurisdiction (i.e. they apply certain established rules) that would require unanimity of their membership to amend. For instance, adding an appeal mechanism to the ICSID Convention (the main forum for ISDS cases) would most likely require the consent of all current 159 members to the ICSID Convention. This initiative is not considered feasible at the time of writing. There are also reasons of perception and therefore closely linked to legitimacy at stake. For example, some of the organisations active in this field are closely associated with business interests. Due to the complexity explained above, this option is not considered realistic and therefore it is discarded. Its impacts are not further analysed. Option 4 Establishment of a multilateral appeal instance This option envisages the creation of a permanent multilateral appeal instance competent to hear appeals based on errors of law and fact (i.e. presumably manifest errors in the appreciation of the facts). The multilateral appeal tribunal would hear appeals of decisions issued by ad hoc ISDS arbitral tribunals as well as by Tribunals of First Instance under the ICS. This option would therefore leave ISDS and ICS in place but add the possibility to appeal disputes arising from BITs and investment agreements. This option would address a number of the problems examined presently. It would address the issue of limited legitimacy and independence by aligning the adjudicators' regime with that under the ICS (adjudicators would be permanent and subject to a strict ethical code of conduct including a regime of incompatibilities). A permanent multilateral Appeal instance would bring some degree of predictability and consistency of case-law as regards the interpretation of substantive standards, although it would be limited to the cases or aspects of cases that were appealed. The establishment of a permanent Appeal Tribunal would contribute to ensuring that decisions be legally correct. The issues of costs and transparency of proceedings could also be aligned with the principles of the ICS. However, leaving ISDS in place for the first instance would make it extremely difficult to remand cases after revision by the Appeal Tribunal, since the ad hoc ISDS tribunal would already have been disbanded and its individuals would be engaged in other activities. Nor would it be feasible for the Appeal Tribunal to issue the award itself since this would frequently involve an examination of the facts, which would delay proceedings and often amount to a relitigation of the original proceedings. In the WTO dispute settlement system, divisions of the permanent Appellate Body only examine issues of law and do not have the possibility to remand cases to the ad hoc panel. This is an issue of concern to the EU in the WTO. The EU has made proposals to change the system. Second, and most fundamentally, this option would not address the problems at first instance. An Appeal Tribunal would only address issues which were actually appealed, but it would leave out all other concerns relating to legitimacy, consistency and predictability, costs and transparency related to the first instance tribunals. A majority of respondents to the public consultation acknowledged the potential benefits of setting up an appeal instance, although they also indicated that a permanent appeal without a permanent first instance would not suffice to address all the problems at stake.

For these reasons, this option is not further analysed. Option 5 Establishment of a multilateral investment court This option foresees that the EU works with other interested third countries toward the creation of a permanent multilateral investment court. This court would be composed of a Tribunal of First Instance and an Appeal Instance, and would adjudicate claims brought under investment treaties that countries have decided to assign to the authority of the Court. The Court would deal with the agreements (both existing and future ones) between the two countries when both countries have ratified the agreement establishing the multilateral investment court and both countries have agreed that the bilateral investment agreement between them should be subject to the multilateral court. The Appeal Instance would hear appeals of the decisions of the First Instance Tribunal. Both instances would be staffed by tenured adjudicators remunerated on a permanent basis and should have a secretariat to support their daily work. The precise design, functioning and technicalities of several aspects of the Court would depend on the multilateral negotiations. The likely impact of these sub-options is analysed in Chapter 5 and the preferred sub-options, as they will be reflected in the mandate, are identified in Chapter 6. The features of the Court that present more than one possible sub-options include: ·Composition of the Court: oNumber of adjudicators: linked to number of Contracting Parties or to volume of cases; oTerms of mandate: long or short and renewable or non-renewable; oEmployment status of adjudicators: full-time or part-time; oAdjudicators' qualifications: experience-based or knowledge-based; oAdjudicators' ethical requirements: precluding any other professional activity or only those related to investment dispute settlement; ·Procedural aspects: oAppointment of adjudicators: by the Contracting Parties, by a separate body or by an independent body; oCase allocation: random or according to disputing party's choice; oScope of appeal: allowing for a certain review of the facts; ·Institutional aspects: oSecretariat: creation anew or relying on an existing organisation; oMechanism to be part of the Court: through and opt-in or re-negotiating each treaty; oSupport to SMEs: yes or no;

oSupport to Developing Countries: yes or no; ·Financial aspects: oAllocation of costs among Contracting Parties: according to level of development or equally; and oMixed financing (i.e. user fees): yes or no. The fact that many aspects of the functioning of the Court would still need to be negotiated would allow room to discuss different views from interested countries within the common goal of creating a permanent multilateral court in line with certain broader requirements. These multilateral discussions should be carried out in a transparent and inclusive manner. Moreover, this option would allow building on the appetite that has been detected internationally to reform investment dispute settlement multilaterally. It would be limited to negotiating a common dispute settlement framework, without going as far as trying to agree on multilateral substantive provisions (which as explained below is deemed politically unrealistic at this point in time). Indeed, the various informal exploratory discussions held in this regard have evidenced that there is considerable interest in engaging in potential discussions. Stakeholders appear to largely agree with the principles of setting up a multilateral investment court, although questions remain in relation to specific details. This option and its relevant sub-options are further analysed in Chapter 5. Option 6 Negotiation of multilateral substantive investment rules Under this policy option, the EU would seek to negotiate multilateral substantive rules on investment protection as a wider framework for the negotiation of corresponding multilateral dispute settlement provisions. An attempt was made in the 1990s to start negotiations for a Multilateral Agreement on Investment within the OECD which ultimately failed. Despite the failure of this specific initiative, the Commission has continued to support the ultimate goal of agreeing on multilaterally-backed substantive investment protection rules and, in this vein, it has striven to negotiate clearer and more precise substantive investment rules in the EU’s most recent investment treaties. However, although potentially desirable, it is not politically feasible at this moment in time to engage in multilateral negotiations for substantive investment protection rules. There is currently insufficient appetite across countries to re-start such negotiations, in part because countries do not agree on the broad parameters of what such a discussion should encompass. Also, nothing suggests that there is a willingness to leave legal approaches behind in favour of a unified approach to substantive investment standards. The Commission agrees that reaching multilaterally-agreed investment substantive rules would be desirable but believes that it is not a realistic goal in the short term, hence the current project should proceed but be designed to potentially align with any such future multilateral substantive investment rules. Therefore, this is not considered a feasible option to embark on at this moment and is not analysed further in this impact assessment. Option 7 Improving ISDS in bilateral EU investment agreements and the ECT Several stakeholders have suggested that, instead of engaging in a radical reform of investment dispute settlement through a multilateral approach, the EU reforms the system of investment dispute resolution in its bilateral investment treaties by undertaking reforms that go beyond the current ICS policy. Stakeholders have largely referred to the following features as desirable in such a reform: ·Introduction of more stringent ethical requirements for arbitrators in order to prevent possible conflicts of interest and overall address their neutrality and the system's legitimacy. ·Possibility for interested stakeholders to meaningfully intervene in ISDS proceedings. ·Introduction of the necessary flexibilities so that the fees system in ISDS is not prohibitive for SMEs.

·Extension of the type of remedies available under ISDS to introduce the possibility of non-pecuniary remedies, including mandating a change in the host State's legislation. ·Exhaustion of domestic remedies (i.e. obligation to seek redress at the host state's courts) as a pre-requirement to file an ISDS dispute. However, this option includes points that are not part of the EU's or Member States' traditional approach in investment, such as exhaustion of domestic remedies. Similarly, investment policy makers have consistently rejected the idea of non-pecuniary remedies as being too intrusive on the right to regulate. In addition, this option is based on a bilateral approach and would require the EU to re-negotiate the agreements where an ICS has been included and that it seeks to negotiate a further reformed system in future negotiations. It would therefore require large resources and still not guarantee a uniform outcome to all such negotiations. For these reasons, this option is discarded and not further analysed in the assessment. Option 8 Making national courts competent to decide on investment disputes Under this option, stakeholders propose that ISDS be phased-out and that disputes between foreign investors and host states be decided by the domestic courts of the host state. This would be equivalent to giving so-called direct effect to investment provisions in international trade and investment or investment agreements. This option has been proposed by stakeholders that regard ISDS as a system that grants an additional avenue to foreign investors, while the same is not available for national investors. It was also voiced at the meeting of 27 February 2017. A variation of this option, also proposed by certain stakeholders in the context of the meeting, would be to implement a tailored approach depending on the trading partner. In other words, recourse to domestic courts would apply in host states that are considered to provide sufficient guarantees regarding their judicial systems. In those states that fail to give satisfactory guarantees, a parallel ISDS system would be in place. This option needs to be distinguished from the scenario of disputes between EU investors and Member States arising from intra-EU investment treaties, which the Commission considers incompatible with EU law. In those circumstances, national courts and eventually resort to the CJEU based on EU law are considered an appropriate forum for conflict resolution. Making national courts competent to hear investment disputes arising from treaties with third countries would run counter to the main purpose of international dispute settlement systems (e.g. ICJ, WTO dispute settlement system and International Tribunal for the Law of the Sea (ITLOS)), which is to provide an international and neutral forum for the resolution of cross-border disputes. This builds on the assumption that a potential for bias exists where a foreign investor seeks redress in a domestic court of a partner country, especially against the government of that country. For this reason, international systems (i.e. different from national fora) for the resolution of disputes are considered necessary. International investment agreements are of course based on the principle of reciprocity – the idea is that both countries consider it desirable that their nationals, when operating in a third country, are afforded the opportunity to be heard by international tribunals and be protected under international law. Furthermore, the option of giving direct effect (i.e. to allow the rules to be invoked in domestic courts) in EU treaties has been examined and rejected by the EU Institutions because, amongst other things, to be effective it requires that the other countries concerned also grant direct effect, which many countries do not do. Moreover, putting this proposal into practice would require either removing all existing treaties and hence dismantling the existing system, or requiring that all such treaties be directly effective which is against the constitutional practices of a significant number of states. For these reasons, this option is not considered a feasible avenue and is not further analysed. 5.WHAT ARE THE IMPACTS OF THE DIFFERENT POLICY OPTIONS AND WHO WILL BE AFFECTED? This chapter analyses the impact of the baseline scenario (option 1, i.e. no policy change) and of option 5. Other options were discarded for the reasons explained in the previous chapter. The assessment is based on the analysis of the Commission services, input from the stakeholder consultations and research on existing multilateral dispute settlement systems. It must be noted that the analysis of option 5 is to a large extent a projection, inasmuch as the final outcome would depend on multilateral negotiations. The analysis of the two options follows the same structure. First, the key features of each option are analysed with respect to the achievement of the objectives as laid down in Chapter 3 and their impacts. The analysis of key features is conducted through the following main categories: (1) Composition of tribunals, (2) Procedural aspects, (3) Institutional aspects, and (4) Financial aspects. Where key features under option 5 present sub-options subject to negotiation, the analysis is carried out for each sub-option. Then, the overall impacts of the option are analysed. 5.1 Impacts of policy option 1: Baseline scenario This option requires no policy change. Under the baseline scenario, the EU would continue to negotiate ICSs in its bilateral trade and investment or investment agreements, while ISDS would continue to exist insofar as the treaties that utilise it have not been phased out. These two regimes would therefore continue to coexist, which was considered problematic by a large number of stakeholders from different groups. 5.1.1 Composition of tribunals

Where ISDS applies ISDS does not bring any permanency to the system of investment dispute resolution, inasmuch as disputes are decided by ad hoc tribunals that are disbanded after issuing the award. Moreover, independence of adjudicators is perceived as not being guaranteed sufficiently to ensure the continued legitimacy of the system since they are appointed by the disputing parties, which in turn does not contribute to improving the system's legitimacy. In the public consultation, certain stakeholders from academia argued that ISDS puts the claimant into an undue advantageous position vis-à-vis the responding state (due to party-appointment and the ensuing possibility of conflicts of interest). Non-Governmental Organisations (NGOs), trade unions and consumer associations raised similar concerns. The lack of security of tenure and the party-appointment mechanism are perceived to have a negative impact on the right to a fair trial and effective remedy because such features do not ensure the confidence of all stakeholders in the system. Where ICS applies The ICS contributes significantly to permanency in investment dispute resolution, since disputes are decided by judges sitting in a permanent First Instance Tribunal and Appeal Tribunal. The ICS significantly improves the legitimacy of the system, thanks to mechanisms that safeguard adjudicators' independence, such as removing the ability of disputing parties to appoint tribunal members and random allocation of cases, high qualification criteria and strict ethical rules. Predictability and consistency of case-law are achieved albeit only within the specific agreement, since the First Instance Tribunal and Appeal mechanism are integral part of each ICS. In terms of efficiency, however, the multiplication of ICSs in bilateral agreements would require significant human and financial resources to manage. In the public consultation, stakeholders from the legal and business sector as well as certain NGOs agreed that the ICS leaves room for improvement in terms of efficiency. Introducing tenure and permanency has a positive impact on the right to a fair trial and an effective remedy and contributes to the global objective of supporting the principle of rule of law. 5.1.2 Procedural aspects Where ISDS applies There is no appeal mechanism under ISDS, hence the objective to allow for an appeal cannot be achieved under ISDS. This was perceived as a disadvantage by a number of stakeholders in the public consultation, including certain trade unions. Although narrow grounds of annulment are available, this cannot be considered as comparable to an appeal. Enforcement of arbitral decisions is therefore due (subject to the specificities of the applicable regime, whether the ICSID Convention or the New York Convention) regardless of any possible legal or factual errors. This does not bring legitimacy to the system. Predictability and consistency of case-law are not achieved since arbitrators are not bound by previous decisions and there is no systemic requirement to take account of them. The lack of uniform coverage of binding transparency rules (since enhanced requirements have only been adopted by some countries) only makes the system more opaque and inaccessible to citizens. Poor transparency was recognised as problematic by various groups of stakeholders, especially NGOs, consumer associations and trade unions, but also certain representatives of the business community. The absence of an appeal and the limited transparency in the traditional ISDS system have a negative impact on the right to a fair trial and effective remedy. Where ICS applies The existence of an appeal instance brings predictability and consistency of case-law within given bilateral agreements. The appeal allows to prevent that any legally incorrect decision be enforced. Under the ICS, decisions are enforced under the same terms as under ISDS. This is done by referencing the relevant existing rules (e.g. ICSID Convention or New York Convention) in the underlying FTA. Transparency is achieved through important disclosure requirements embodied in the UNCITRAL Rules on Transparency. Introducing an appeal instance and providing for transparency rules has a positive impact on the right to a fair trial and effective remedy and contributes to the global objective of supporting the principle of rule of law. 5.1.3 Institutional aspects Where ISDS applies

ISDS is essentially an ad hoc system designed to solve specific disputes and therefore with no objective of permanency whatsoever. A number of fora administering the applicable procedural rules provide secretarial support to the resolution of specific disputes, notably ICSID the Stockholm Chamber of Commerce, the International Chamber of Commerce and the Permanent Court of Arbitration (PCA). With small variations across organisations, these platforms provide for logistical, administrative and a certain amount of legal support throughout proceedings. The lack of permanency and fragmentation does not contribute to predictable and consistent case-law. These features do not contribute to the legitimacy of ISDS. In addition, ISDS does not provide for any mechanisms of financial or legal assistance to SMEs to ensure access to effective justice for all investors, as was pointed out by certain business stakeholders in the public consultation. Similarly, no assistance is foreseen for developing countries in the event that they are challenged through ISDS. By failing to provide special assistance or support to SMEs and developing countries, the ISDS system does not address the issue of effective access to justice of these entities. Where ICS applies The ICSID Secretariat provides secretarial support to the ICS included in the agreements with Canada and is intended to do so also for Viet Nam and further agreements. It will manage the payments to judges, provide for logistic support and act as repository for disputes. Having one forum act as secretariat for several ICSs is a significant contribution in terms of efficient use of resources. ICS makes the system more accessible for SMEs. In particular, it includes (i) a specific provision on voluntary mediation to solve the dispute amicably before the first formal steps of dispute settlement; (ii) procedural deadlines intended to make proceedings faster and less costly; (iii) in certain cases, the possibility to submit claims to a sole judge; and (iv) limits to the costs the SME will be required to cover in case it loses a case or an appeal. In relation to developing countries, the sharing of costs of the ICS is dependent on the Parties' respective level of economic development. This is for instance the case under the EU-Viet Nam FTA. By introducing special provisions or mechanisms of support for SMEs and developing countries, ICS moves towards establishing mechanisms to ensure the effective access to justice of these entities. 5.1.4 Financial aspects Where ISDS applies In general, under ISDS, costs borne by States are those related to their status as respondent in a given dispute, i.e. the arbitrator’s fees, the fees of the arbitration institution handling the dispute, the costs of experts and the costs for legal counsel. In some cases, arbitral tribunals have ruled that each disputing party should bear its own costs while others have applied the principle that “costs follow the event”, making the losing party bear all or part of the costs of the proceeding and attorney fees. ISDS cases' costs are high. Research by the OECD indicates that the average legal and arbitration costs for a claimant are around USD 8 million. These high costs can result in discouraging smaller investors from bringing cases they might otherwise have brought successfully, meaning they will not be compensated for illegal actions. Annex 4 includes an estimation of the cost of those ISDS mechanisms that would remain in place for the EU and EU Member States because they would not be replaced in the short term by ICS mechanisms in EU agreements with third countries. The calculation includes only tribunal and institutional costs (i.e. not the legal fees) and does not take into account the allocation of costs decided by the tribunal in the individual cases. Conversely, the cost is assumed to be borne equally by the disputing parties. On this basis, it is estimated that the EU and Member States would continue to spend an average of around EUR 70,000 per year per ISDS case. Where ICS applies In the scenario where the ICS is inactive (i.e. there are no cases pending before it), its costs are equally allocated between the two Contracting Parties. Consequently, the costs borne by the EU would amount in general to half of the costs of an inactive ICS, although the EU may cover a larger proportion in case its treaty partner is a developing country. The cost of an inactive ICS would amount to around EUR 400,000 per Contracting Party per year. The sharing of costs of the ICS has in some cases been made dependent on the Parties' respective level of economic development, as is the case under e.g. the EU-Vietnam FTA. The ICS is partly funded (in particular the appeal instance) by the Parties to the agreement, which diminishes the risk that costs discourage users from bringing cases. Where the ICS is active, the EU proposal in the TTIP negotiations makes a distinction between costs that are borne equally by the Contracting Parties and costs that are allocated by the tribunal among the disputing parties. The tribunal will be able to order that all or part of the costs which fall to the respondent as a disputing party be borne by the unsuccessful disputing party according to the "loser pays principle". To estimate the costs when ICS is active, an assumption of one case before the first instance tribunal and one case under appeal was made. This resulted in estimated costs of around EUR 800,000 per Contracting Party per year. There is an issue of efficiency (i.e. financial and administrative burden) where several ICSs coexist. This was flagged by legal practitioners and business representatives in the context of the public consultation, where they suggested that bringing all ICSs under a single institution would reduce costs for the EU and Member States.

5.1.5 Overall impacts of policy option 1 Where ISDS continues to apply, none of the specific objectives of the multilateral reform initiative are met. The ICS addresses the specific objectives of multilateral reform to some extent, i.e. permanency, enhanced legitimacy and transparency and possibility of review of awards through an appeal instance. This policy option, covering both ISDS and ICS, contributes only partially to the general objectives of this initiative, i.e. supporting the principle of rule of law (in the sense of designing a legitimate system to hear public law disputes) and promoting an international system based on stronger multilateral cooperation and good global governance. In relation to the former, ISDS lacks the necessary tools to ensure effective application of the principles emanating from public law disputes (i.e. the rule of law), including inter alia fully independent and impartial courts and effective review ensuring the legitimacy of the system is upheld. Disputes are decided by arbitrators appointed by and paid for by the disputing parties, there is no appellate instance and therefore no real possibility to have decisions reviewed. Comparatively, the rule of law and its main principles are duly protected under the ICS, where disputes are decided by judges appointed on a permanent basis without any role for the disputing parties. The ICS includes an Appeal Tribunal to ensure that any errors in decisions issued by the First Instance are reviewed. Therefore, under the baseline scenario the optimal approach to public law adjudication (i.e. the rule of law) is unevenly projected. The ICS constitutes an important improvement from the system that results from ISDS. However, the risk of fragmentation between the different ICS remains. Where no policy action is taken, the costs derived from the continued coexistence of ISDS and ICS will have a considerable impact on the EU budget (for the ICS) and on EU Member States budgets (for the remaining ISDS mechanisms). Whilst the costs of these mechanisms are significantly driven by the number of actual cases, it is estimated based on an assumption of two cases per ICS and on an average over recent years (1997 to 2015) of ISDS cases that the impact on the EU and EU Member States budget of policy option 1 would amount to around EUR 9 million. In addition, the baseline scenario will require high human and financial resources to manage an increasing number of ICS with limited coordination across them. As the reform being analysed here is the reform of the procedural elements of the dispute settlement system, not a reform of the substantive provisions, no further impacts (e.g. environmental and social impacts) are expected. It is only with regard to the substantive provisions that one can have a debate on such potential impacts. 5.2 Impacts of policy option 5 This option foresees that the EU works with other interested third countries toward the creation and establishment of a permanent multilateral investment court. As stated in Chapter 4, there are a number of features that present sub-options to be discussed in future multilateral negotiations. In contrast, there are other features that form an inherent part of the policy option and for which there are no alternatives. These include the permanent nature and remuneration of adjudicators and the existence of an Appeal Tribunal. Both types of features, including their sub-options when relevant are analysed in this chapter. 5.2.1 Composition of the court Number of adjudicators of the first level tribunal and appeal tribunal The Court would be composed of a First Instance Tribunal and an Appeal Tribunal. The first level Tribunal would examine the legal submissions and evidence, conduct an analysis and render a decision, while the Appeal Tribunal would hear cases on appeal. As highlighted in the problem definition the establishment of an appeal mechanism is necessary to ensure legal correctness of decisions to the benefit of both governments and investors. Moreover, an appeal instance would promote consistency of case-law, in turn enhancing predictability. The majority of responses to the public consultation were in favour of setting up an Appeal. It was supported in particular by NGOs and part of the business sector. Concerning the number of adjudicators under the two tribunals, two main alternatives are available: (I)Number linked to the number of Contracting Parties; or (II)Number linked to the volume of cases.

(i) This sub-option is often used in international courts to ensure that there is at least one adjudicator from each Contracting Party. However, it means that less suitable candidates may become adjudicators (since origin may be prioritised over qualifications or competences). In addition, the number of adjudicators appointed might be too high unless there is a corresponding number of cases. Such a scenario risks leading to inefficiencies. (ii) This sub-option would be more in line with the objective of efficiency. Considering that the number of Contracting Parties to the multilateral Court is unknown but would be expected to grow over time, the number of adjudicators should be flexible enough to adapt to the workload. This is the approach favoured by most recently established international courts (such as the International Criminal Court (ICC) and ITLOS). In fact, most responses to the public consultation argued that the number of adjudicators should be tailored to the number of cases. In terms of impacts, the estimated cost for the (fixed) remuneration of one adjudicator is around EUR 285,000 per year on the basis of the average annual remuneration level of judges in international courts and tribunals. It is impossible to be certain at the time of writing on the number of adjudicators but on the basis of a reasonable estimate (nine adjudicators at First Instance, five on appeal) the remuneration of adjudicators under the multilateral court is estimated to cost almost EUR 4 million per year (i.e. around EUR 2.5 million for the First Instance plus around EUR 1.5 million for the Appeal Tribunal). Regarding the number of adjudicators, it is likely that this figure would be lower if it were tailored to the effective workload, which would result in overall lower costs for the EU and indeed all participants. This sub-option would be more advantageous for the EU budget as well for the budgets of Member States (see details about cost estimation in Annex 4). Regarding the achievement of other objectives, there is no difference between the two sub-options. Besides financial costs, there are no other (economic, social or environmental) impacts on any of the two sub-options. Tailoring the number of adjudicators in the First Instance and Appeal tribunals to the volume of cases would therefore appear to be the most efficient option although this would of course depend on the outcome of negotiations and of the future Court's overall structure. Terms of mandate Adjudicators should be appointed for a fixed period of time (i.e. permanent) as opposed to ad hoc (i.e. on a case-by case basis, as is the case under the current system). Indeed, permanent appointments (and remuneration) for a certain period of time would address the concerns regarding impartiality and independence of investment dispute resolution. Academics stressed the importance of independence and impartiality of adjudicators through a secure tenure and fixed salaries. Adjudicators appointed on a permanent basis would ensure that legal proceedings around investment follow procedures that are in line with Article 6 of the ECHR and Article 47 of the Charter of Fundamental Rights, according to which "everyone is entitled to a fair hearing by an independent and impartial tribunal previously established by law". Various sub-options are possible regarding adjudicators' terms of mandate. Two main alternatives appear available: (I)Long and non-renewable mandate; (II)Long or short mandate renewable (once). (i) A long and non-renewable mandate, where adjudicators cannot be reappointed, would be most consistent with the goal of independence, inasmuch as adjudicators would carry out their functions knowing that, regardless of their decisions, they will not be re-appointed. Long mandates would lead to fewer appointment procedures (i.e. happening less often) and the associated administrative burdens. (ii) Whether longer or shorter, renewable mandates allow the Parties to dispose of ineffective adjudicators after the end of their first mandate and to ensure that particularly effective or experienced ones serve for a longer period (i.e. for a second term). Certain stakeholders from the business sector expressed scepticism for renewable mandates, which they believe may cause bias in adjudicators' decision making. Indeed, this option would be less in line with the objective of the furtherance of the independence of the adjudicative system because adjudicators may act guided by their desire to be re-appointed. Opting for a long and non-renewable mandate would be the best guarantee for independence of adjudicators in line with the right to an effective remedy before an independent tribunal. This option would also imply a lower administrative burden for the appointing authorities. Subject to the outcome of negotiations and of the overall structure of the future Court, it is therefore the preferred option. Employment status and remuneration of adjudicators Two broad alternatives are available in terms of status and remuneration of adjudicators:

(I)Adjudicators could work full-time, be employed by the Court and receive a fixed salary; or (II)Adjudicators could work part-time, be self-employed and receive monthly or daily fees for service. (i) Full-time adjudicators with secure tenure and fixed remuneration would not be exposed to conflict of interests, hence enhancing their independence and impartiality. For these reasons this option received the most support among respondents to the public consultation, in particular from NGOs. Legal practitioners and academics were also in favour of full-time adjudicators. However, legal practitioners raised concerns that full-time adjudicators could be under-utilised yet unable to accept any other position in case that would be prohibited. On the other hand, this option might be relatively costly, require higher administrative resources and not be the most efficient if only a few cases are submitted to the Court. It is estimated that a full-time adjudicator, employed by the Court and receiving a fixed salary would cost, around EUR 285,000 per year (see Annex 4). (ii) This second option complies less with the objective of independence and impartiality of the system given that the adjudicators could be exposed to conflicts of interests because of their other occupations. Possible conflicts of interest would therefore have to be managed through the ethics regime in the code of conduct. A number of respondents to the public consultation were of the opinion that part-time adjudicators would ensure expertise in the particular matter under dispute (e.g. energy). However, in reality most disputes (whether in the investment field or trade more generally) are not decided by specialists in the particular sector but by generalist arbitrators and panellists. Moreover, adjudicators could rely upon experts provided by the parties or appointed by the Tribunal to analyse any given matter. Compared to full-time adjudicators, part-time self-employed adjudicators would be less costly (and may be more efficient when only few cases are submitted to the Court, which can be the situation in particular at the beginning of the functioning of the Court). In this sense, a number of stakeholders submitted that adjudicators should be part-time at the beginning, when the Court would have fewer cases to decide on, and become full-time and employed by the Court once the workload so demanded. This approach, which has been used in other courts (such as the European Court of Human Rights – ECtHR), might help ensure that high quality individuals be attracted to sit on the Court. However, part-time self-employed adjudicators would not be the preferred approach, since it would address the issues of conflicts and of legitimacy to a lesser extent. Regarding the achievement of other objectives, in particular permanence, transparency, predictability and consistency there are no differences between the two options. There are no economic, social and environmental impacts of the two options besides the costs related to the remuneration of adjudicators. However, the option of permanent adjudicators is more consistent with the right to an effective remedy before an independent tribunal (Article 6 ECHR and Article 47 of the Charter). Despite the higher costs and administrative burden, the option that adjudicators be employed by the Court, receive a fixed salary and be entitled to benefits (e.g. health insurance and pensions) is the preferred option because it brings a higher level of independence and impartiality. However, the option that adjudicators be part-time before becoming full-time should not be excluded provided that possible conflicts of interest are effectively managed through the code of conduct. Qualifications Adjudicators would have to meet high qualification criteria to sit on the Court in order to ensure the quality of justice. This was supported by an overwhelming majority of respondents to the public consultation, who stressed the relevance of high qualification requirements for the future development of the Court, its case-law and reputation. Two approaches seem possible regarding the qualification criteria: (I)Criteria defined in broader terms; or (II)Expertise in more specific areas required. (i) Most existing international courts require qualifications identical or very similar to those required for the ICJ, the Statue of which states that "[t]he Court shall be composed of a body of […] judges, […], who possess the qualifications required in their respective countries for appointment to the highest judicial offices, or are jurisconsults of recognized competence in international law". Broadly defined criteria would ensure a consistent approach to dispute resolution across cases and contribute to predictability of case-law. A majority of stakeholders supported this sub-option and representatives of the business community in particular indicated that adjudicators should be highly qualified in areas of public law such as investment law, constitutional law and economic matters. (ii) Qualification requirements could also be formulated in more specific terms, for instance, requiring that adjudicators have expertise in trade law, intellectual property and economics, experience in arbitration and mediation, background in the field of human rights, environmental, social and health law as well as domestic law. However, this approach risks excluding good candidates from the Court. NGOs and consumer associations argued that adjudicators should have expertise in specific areas of law, while certain business stakeholders expressed concerns that overly high qualifications could politicise procedures. High qualification criteria are necessary to ensure legitimacy and independence of adjudicators, as well as consistency and predictability in the functioning of the Court. They are also essential to ensure that the right to a fair hearing is effectively observed. Neither of these options will produce any environmental impacts. These options would also not produce any economic impacts. However, overly strict requirements would have negative social impacts on a reduced group of persons, i.e. the pool of candidates who would otherwise be eligible. Defining qualification criteria according to broader terms would appear preferable, although the most important criterion for the functioning of the system is having highly effective adjudicators. Ethics

Like international and domestic courts, the multilateral Court would need to function on the basis of certain ethical rules to ensure the independence of its adjudicators and prevent conflicts of interest. International courts have similar approaches to ethical requirements based on those of the ICJ, which stipulates that “[t]he Court shall be composed of a body of independent judges, elected regardless of their nationality from among persons of high moral character [...]”. The independence requirement (i.e. that adjudicators not be affected by other government branches) is part of all models of international courts and should certainly be included in a potential multilateral investment Court. Impartiality (i.e. that adjudicators treat all parties equally and not be biased) is also deemed key. Inclusion of these two requirements is supported by a majority of responses to the public consultation. Some stakeholders, especially from academia and the legal sector, also raised the possibility that adjudicators be removed in case of breach of their obligations of independence. There are different sub-options with regards to the regime of incompatibilities of adjudicators, in other words whether they should be precluded to exercise: (I)Any other professional activity; or (II)Only legal activities related to other investment disputes. (i) A broad regime of incompatibilities encompassing any professional activity would be fully aligned with the objective of independence and impartiality of adjudicators, although it may be less efficient in that it may discourage good candidates from taking office particularly at the beginning of the operation of the Court. A number of academics and NGOs were specifically in favour of this sub-option. (ii) Under the second sub-option, adjudicators would only be precluded from exercising certain activities carrying a high risk of bias (such as having a role in other investment disputes). This approach would achieve less satisfactory results in terms of independence and impartiality of adjudicators, inasmuch as it might expose them to potential conflicts of interest. It would however be efficient, in that it would not risk discouraging good candidates (although the question of encouragement would derive also from other factors). Most respondents from the business sector went even further and supported that adjudicators should be able to work as professional lawyers and academics, which would bring in valuable knowledge and competencies. However, allowing adjudicators to work as lawyers would expose them to undue conflicts, as was submitted by a number of NGOs and consumer associations. Certain respondents from universities believed that adjudicators shou