The European Union’s reform of international investment law: still (un)feasible and relevant?
As states enter what is supposed to be the final phase of the multilateral Investor−State Dispute Settlement reform, the EU’s proposal to establish a Multilateral Investment Court continues to be debated as one of the “systemic” reform options. Yet, its realisation remains uncertain and its relevance in a new geopolitical context even more questionable.
Investor−State Dispute Settlement (ISDS) continues to be subjected to criticism, controversy and reform. Envisaged as an instrument for protecting foreign investments, depoliticising investment dispute settlement, and ultimately encouraging investment flows, it has had mixed results in practice. A drastic increase in the number of investment claims – at the rate of more than 50 per year since 2011 to over 1460 known investment treaty arbitrations today, accompanied by a high cost of proceedings and mega awards, has prompted different policy responses by states. These span from modifying the current system, to introducing a new dispute settlement model, or abandoning ISDS altogether.
Looking for a feasible compromise, states have been participating in the multilateral reform of ISDS taking place under the auspices of the UN Commission for International Trade Law (UNCITRAL) since 2017. The EU has been one of the key proponents in this reform, seeking to overhaul the problems of the current system through the establishment of a new international court specialised for the settlement of investment disputes.
Europe and its ISDS debate
EU Member States have been subjected to a large number of ISDS cases, including high-profile disputes challenging state regulatory measures, due to an expansive network of investment treaties concluded by EU Member States and, in particular, their participation in the Energy Charter Treaty – the world’s most litigated investment treaty, from which the EU withdrew in 2025, after significant political pressure. Moreover, following the coordinated withdrawal by the EU and a number of its Member States, the EU has taken the position that its 16 Member States cannot remain parties to the ECT independently of the Union.
A significant number of cases involved so-called “intra-EU” claims – those of EU investors against other EU Member States. In 2018, the Court of Justice of the EU ruled that arbitration clauses in investment treaties between EU Member States, which form the basis of intra-EU claims, are contrary to EU law. While this has not stopped intra-EU investors from continuing to seek redress before international investment tribunals, leading to more legal uncertainty regarding the enforceability of these awards, it effectively signalled the end of ISDS within the EU. The political debate around desirability of ISDS between EU Member States has thus been resolved on a legal ground.
At the same time, under its bilateral trade and investment agreements with non-EU States (Canada, Vietnam, Singapore, Chile, Mexico), the EU has negotiated an Investment Court System – a semi-permanent dispute resolution mechanism, as a replacement for traditional ISDS model based on ad hoc arbitration. Since the solution with many bilateral standing tribunals seems impractical and costly, the ultimate goal of the EU is to establish one standing mechanism at the international level, a Multilateral Investment Court (MIC) – the proposal that the EU successfully introduced as one of the reform options in the UNCITRAL.
Would a court resolve ISDS problems?
The EU has presented its proposal as the only option that systematically addresses all ISDS concerns identified by the UNCITRAL. The key element of the MIC is judges who would be appointed on a semi-permanent basis, significantly departing from the current ISDS practice where disputing parties appoint arbitrators deciding their case. While this might address concerns regarding independence of arbitrators, who are often perceived as pro-investor, it has raised new concerns about states’ political influence over judges. As the contours of the EU proposal become more concrete in the draft statute of a permanent tribunal, core issues regarding its functionality (e.g. financing, the scope of jurisdiction, enforcement of decisions) still remain unresolved.
The second key element of the EU’s proposal is the endorsement of a second-tier mechanism, which is intended to ensure greater consistency between decisions and, alongside transparency offered by a court, enhance the accountability of the system. While the EU’s proposal has sought to operate alongside other reform options, including the traditional arbitration model (for example, the Code of Conduct for Judges has been adopted alongside a similar code for arbitrators), the proposed permanent appellate tribunal presents further challenges for the operation of the MIC.
The appellate tribunal would function as a separate institution with its own statute and, subject to further negotiations, would likely have jurisdiction over decisions rendered by both the MIC and traditional arbitral tribunals. While such a mechanism has potential to ensure consistency across the system, an independent appellate institution would also diminish one of the MIC’s potential advantages – the possibility of developing a distinct jurisprudence. Ultimately, this calls into question the added value of the MIC, which without this point of differentiation, risks only adding to the fragmentation and institutional complexity of the current regime.
How realistic is the new court?
With incremental progress over the years and rather humble deliverables to date, it has become clear that the fundamental premise of the multilateral ISDS reform, focusing only on the dispute settlement mechanism, is flawed.
The main concerns of most states relate to substantive issues regarding the standards of protection for foreign investors and the impact of the system on states’ sovereign right to regulate. As these are more politically charged issues, they are outside of the reform scope and only sporadically discussed in the UNCITRAL. Accordingly, many do not see the merit in establishing a new international institution that might not be able to address the core legal concerns of the current system.
Quite astonishingly, different aspects of the MIC have permeated formal and informal deliberations in the UNCITRAL, in parallel with other reform options, without any discussion of the MIC’s general desirability ever taking place. However, the EU’s proposal faces a precarious political landscape and, for different reasons, the MIC largely remains an unwanted court for a range of stakeholders, both within and outside the EU.
While the EU has a united stance with the Member States in the UNCITRAL, none of the EU trade and investment agreements introducing a court system have yet been ratified by the Member States, including CETA, the first agreement to incorporate such a system. In addition, traditional arbitration model still features in new bilateral investment treaties concluded by EU Member States, so even the EU’s own approach has been more pragmatic than coherent.
In the UNCITRAL, many States have expressed scepticism about the MIC, including the US, China and Russia. Developing states are more interested in solutions which can deliver tangible benefits for them, such as an Advisory Centre. Even those states that have bilaterally accepted a court system in an agreement with the EU (only five so far) have not strongly advocated for the EU’s MIC in the UNCITRAL.
Is the time right for a new international court?
In its essence, the EU’s proposal for a MIC is an expression of the EU’s vision of the rule of law. It was conceived at the time when the EU’s trade and investment policy was primarily concerned with promoting EU values. The MIC is normative in endorsing multilateralism, public scrutiny and judicial independence, thus seeking to address concerns of EU stakeholders at the time, including transparency, accountability and more broadly, legitimacy of the system.
Since then, the geopolitical context has changed considerably. States, including the EU and its Member States, are increasingly concerned with economic security, diversification, resilience and access to critical resources. They therefore seek instruments which can respond to these immediate concerns, and more flexibility to respond to rapidly changing geopolitical and economic environment. While investment remains at the core of these efforts, ISDS is no longer seen as the central instrument in this evolving policy landscape.
The EU treaty practice also reflects this shift from ISDS to investment governance and facilitation. The EU has introduced new types of investment agreements that do not include ISDS (e.g. Sustainable Investment Facilitation Agreement with Angola), while also promoting new non-binding arrangements for cooperation (e.g. Clean Trade and Investment Partnership with South Africa). Recent EU trade agreements also demonstrate pragmatism in fully avoiding investor−statedispute settlement arrangements (Australia, Mercosur), introducing mediation instead of the Investment Court System (Indonesia) or leaving the conclusion of negotiations for an investment protection agreement for later (India).
The current geopolitical environment is hostile to the existing international institutions (e.g. World Trade Organisation, International Criminal Court), which makes creating new ones even more complex. However, the EU’s proposal for the MIC should not be fully dismissed. For the EU proposal to succeed in the UNCITRAL, it will require the consensus of its members. The opt-in design of the multilateral reform options allows the EU to potentially establish the court at the end of the UNCITRAL process and leave many of the institutional details to be determined later by the Conference of Parties composed of states that would become parties to its statute. This could also give more leverage to the EU and its Member States in advancing their preferred arrangements, especially if the uptake of the new court by other states is slow. Given the number of EU Member States’ investment treaties with non-EU states (over 1400), the impact of the court might be more profound if the EU succeeds in bringing these treaties within its framework. Ultimately, the MIC may emerge as a regional court with broader international impact.
While reform deliberations will continue into 2027, the EU’s strategy of using the UNCITRAL as a vehicle to promote its own vision of the ISDS reform persists, as still does the uncertainty about its success.
Dr Ivana Damjanovic is an Associate Professor of Law at the University of Canberra Law School and the Australian National University Centre for European Studies. Her research focuses on public international law, particularly international investment law and governance, international dispute settlement, and the EU’s external investment and trade law and relations. She is the Project Director of the Jean Monnet Centre of Excellence in Critical Minerals at the University of Canberra and serves as a principal investigator or key member of research teams on a number of projects in Australia and Europe. She is a Fellow of the Australian Academy of Law. Her first book “The European Union and International Investment Law Reform: Between Aspirations and Reality” was published by Cambridge University Press in 2023
.
This article was originally published in the Australian Outlook on 5 March 2025 under the title “The European Union’s Reform of International Investment Law: per aspera ad astra or an unfeasible aspiration”. It has been updated and revised in light of recent developments, which are also reflected in the new title. Portions of the original article are republished with attribution under a Creative Commons Licence.
The opinions expressed in this blog are solely those of the author and do not reflect the views of EU-VALUES Network.