Investor-State dispute settlement (ISDS) used to be a niche corner of international economic law. It allowed foreign investors to bring claims directly against host States before arbitration tribunals, usually when they believed that government action had breached an investment treaty. The system was designed to depoliticize investment disputes and give investors a neutral forum outside domestic courts. Over time, ISDS became politically controversial, especially in Europe. Critics argued, in essence, that private investors could challenge public-interest regulation before ad hoc tribunals lacking public-court safeguards.
The European Union’s response has been to attempt to redesign the mechanism itself. Rather than abandoning investment adjudication, the EU has sought to make it resemble public adjudication. This is evident in the Investment Court System (ICS) established in the Comprehensive Economic and Trade Agreement with Canada (CETA) and in the EU’s support for a Multilateral Investment Court (MIC) through UNCITRAL Working Group III. These two examples illustrate the EU’s use of legal design as external policy actorness: by changing who decides disputes, how adjudicators are appointed, whether hearings are public, and whether decisions can be appealed, the EU projects a constitutionalized vision of legitimate investment adjudication.
The EU’s constitutional starting point matters. After the Lisbon Treaty brought foreign direct investment within the common commercial policy, the Union gained a stronger role in a field previously dominated by Member States’ bilateral investment treaties. This explains the EU’s dual approach. Internally, the Court of Justice has treated intra-EU investment arbitration with suspicion. In Achmea, Komstroy and PL Holdings, it objected to arbitral tribunals interpreting or applying EU law outside the EU judicial system. Externally, the EU still negotiates investment protection mechanisms, provided that the model is redesigned and carefully limited.
Legal design becomes foreign policy when procedural rules do more than organise a dispute. In investment adjudication, design determines who exercises authority, how adjudicators are selected, whether proceedings are public, whether awards can be appealed, and how treaty parties may control interpretation. These choices allocate power. Yet a standing investment court cannot be exported through market access alone. It requires treaty consent and political acceptance. This is why the EU works bilaterally, by embedding the ICS model in agreements, and multilaterally, by using UNCITRAL Working Group III to build support for a permanent court.
The political crisis around ISDS became especially visible during the debates over TTIP and CETA. Civil society organisations, public-interest advocates, anti-globalisation movements and Eurosceptic actors argued that investment arbitration gave private economic actors privileged access to challenge public regulation. The European Commission responded by reframing ISDS as a rule-of-law problem. Its reform agenda focused on the right to regulate, tribunal legitimacy, and appellate review. Once ISDS is described in rule-of-law terms, the answer becomes institutional design. A tribunal that can impose liability on a State for sovereign regulation cannot be treated as purely private arbitration.
CETA is the clearest bilateral expression of this approach. Its ICS changes traditional ISDS in several ways. Disputing parties no longer choose arbitrators for each case; adjudicators are appointed in advance by the treaty parties. Cases are allocated by rotation, reducing incentives for adjudicators to cultivate reputations with repeat users. CETA also introduces appellate review, ethics rules, independence safeguards and greater transparency. Treaty parties retain the power to adopt binding interpretations, limiting adjudicatory overreach. Still, CETA remains a hybrid: decision-making is judicialised, while enforcement continues to rely on international arbitration infrastructure.
The EU’s model is judicialised in a specifically EU constitutional way. This became clear in Opinion 1/17, where the Court of Justice held that CETA’s ICS was compatible with EU primary law. The CETA Tribunal may interpret and apply CETA, but it may not authoritatively interpret EU law or bind EU institutions and courts on the meaning of EU legal rules. Domestic law may be considered only as fact. Opinion 1/17 also suggests that an external investment tribunal must satisfy minimum standards of independence and access to justice. The Tribunal must therefore be independent in individual disputes, but not so autonomous as to threaten the EU legal order.
CETA was never intended to remain only bilateral. Article 8.29 commits the parties to pursue a multilateral investment tribunal and appellate mechanism. UNCITRAL Working Group III has become the main forum for this project. Through it, the EU seeks to transform CETA’s bilateral judicialisation into a multilateral template built around standing adjudicators, appellate review, ethics rules, transparency, predictable case allocation and a structure capable of applying across multiple treaties. The MIC project is both normative and strategic, as it reflects the EU’s commitment to multilateralism while moving investment disputes toward a public-law framework more directly controlled by States.
The initiative, however, remains ambitious. Ratification remains difficult, and CETA itself shows how a flagship model may remain only partially operational. The EU also faces constitutional ambivalence, by rejecting intra-EU arbitration while promoting reformed external adjudication. Legally, the distinction rests on the autonomy of EU law; politically, it can appear that the EU accepts international adjudication only when redesigned on its own terms. Fragmentation is another obstacle. International investment law consists of thousands of treaties, divergent standards, survival clauses and pending proceedings. A multilateral court may discipline this fragmentation, but it cannot immediately replace the existing treaty network.
The EU’s reform of ISDS reveals a broader pattern in its external action. Europe’s power in a fragmenting world is increasingly legal, institutional, and constitutional. In investment law, legitimacy has become a question of institutional architecture. The promise lies in recognising that investor challenges to sovereign regulation require public-law safeguards, while its fragility lies in uptake and broader acceptance.
Note: This blog post is based on the article of the same title, presented at the UACES Graduate Forum, “Europe at a Crossroads: Integration, Identity and Power in a Fragmenting World,” held in Cluj-Napoca on 5 June 2026. I am grateful to Dr. Laura Lazăr for her valuable feedback during the presentation session.
The post Designing Legitimacy: The EU’s Reframing of ISDS and the Move Toward Standing Adjudication appeared first on Ideas on Europe.