TTIP and ISDS, Are We Asking the Right Questions?

TTIP and ISDS, Are We Asking the Right Questions?

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By: Gabriel Simões

The System and Its Critiques

The Transatlantic Trade Investment Partnership (TTIP) is an international treaty that is being negotiated between the United States and the European Union (E.U.) to facilitate the trade of goods, services and investment. TTIP involves two of the biggest economic forces in the world, but the Treaty has been in the spotlight of international law primarily because of the Investment-State Dispute Settlement (ISDS) system.

ISDS refers to a mechanism through which an investor can initiate a claim against a given State for breach of a substantive legal protection. These protections include, but are not limited to, prohibitions on expropriation without compensation, and fair and equitable treatment. Backed by a multitude of Bilateral (BITs) or Multilateral Investment Treaties, arbitration has been the typical means of solving these kinds of disputes.

However, during recent years, the use of arbitration for solving these disputes has been severely criticized. News organizations, civil society groups, and academics have directed a wide range of indictments against investor-state arbitration. These critiques include lack of transparency, disproportionate power to investors, expansion of frivolous claims, freezing of State regulatory power, lack of arbitrator impartiality and independence and inconsistency of arbitral awards.

The E.U. Alternative

Due to these concerns, the European Commission made a proposal to change the ISDS mechanism to an Investment Court (IC). The proposed IC would be a permanent body comprised of a two instance tribunal. The first instance would be composed of five judges from the U.S., five judges from the E.U. and five judges from various other countries. The second instance, an appeals court, would be composed of two judges from the U.S., two from the E.U. and two from third-party countries. The judges would be elected amongst jurists of recognized competence, and would have to be proficient in international law.

Similar courts have already been established, such as a court between the E.U. and Canada, in the E.U. Canada Comprehensive Economic and Trade Agreement (CETA), as well as between the E.U. and Vietnam, in their Free Trade Agreement (FTA).

E.U. agreements in the CETA and FTA, as well as its proposal in the TTIP negotiation, show its commitment to enacting this new type of ISDS in its future trade agreements. Given the global significance of the E.U. market, this push for adopting an IC system begs the question whether this new form of ISDS would become the rule.

The preliminary factor in making this determination is examining whether the model is actually adopted in the TTIP. Although the E.U. itself is making a strong push for an IC system, other major economic forces have so far refused to do so.

The recent Transpacific Trade Partnership (TTP) concluded by the U.S. and several other states indicates that the American position would be contrary to that proposed by the European Commission. The TTP maintained a revamped version of investor-state arbitration as the elected mechanism for dispute settlement. It addressed some of the critiques to investor-state arbitration, for example, by providing for enhanced transparency, creating stricter ethical rules on arbitrators and numerous exceptions preserving State regulatory powers.

Another aspect to this negotiation is the historical reluctance of the U.S. to be bound by the judgements of international courts. Although the E.U. has a unique system that it could put in place to enforce the IC decisions on member States (despite some critiques as to its incompatibility with the E.U. rules), the U.S. has, in the past, accepted an agreement to form an international judicial body only to repudiate its jurisdiction later on.

The Problems With the Alternative

But the crucial matter is whether the IC system solves the problems attributed to investor-state arbitration. Although a court system can ameliorate the problem of lack of transparency, current arbitration institutions have already come a long way to address this issue. The International Center for Settlement of Investment Disputes (ICSID) keeps an extensive online database of its cases. The TTP model also demonstrates that transparency rules can be used in conjunction with arbitration mechanisms.

The matters regarding disproportionate power to investors, expansion of frivolous claims and freezing of State regulatory power, are all related to the substantial protections provided for the investors. These protections are not inherent to one dispute resolution mechanism, but can be addressed by including provisions allowing for prima facie dismissal of claims, counterclaims by the State and reservations for claims arising from State power to regulate.

The only critiques that are inherent to the current model of investor-state dispute resolution are the lack of arbitrator impartiality or independence and the inconsistency of arbitral awards. However, the fact that each treaty in the new IC model creates its own courts indicates that overall consistency of decisions would be a dubious achievement at best. And, impartiality and independence of the judges will depend entirely on the means of appointment as well as remuneration. Allowing states to nominate all judges is a way to guarantee a pro state tribunal. Having remuneration based on a case-by-case basis would enact incentives for judges to be friendlier to plaintiffs, as receiving more cases would generate higher compensation.

Nonetheless, these arguments do not begin to address the inherent problems of this IC system.

The Question

It seems, therefore, that IC and investor-state arbitration mechanisms, and especially their shortcomings, are not completely distinct. Corroborating this assumption is the fact that, ultimately, the critiques seem to remain the same for both instruments, and the ISDS system in general.

Having these facts in mind, it seems that whether a court system or an arbitration system is preferable is a subsidiary question. Maybe a better question would be if ISDS, in general, is the best way to solve international trade disputes between investors and states.

Gabriel Simões is an LL.M Candidate at Berkeley Law. He is a Student Contributor for Travaux.

The Trans-Pacific Partnership and the Advancement of Investor-State Regimes

The Trans-Pacific Partnership and the Advancement of Investor-State Regimes

By: Jessica Rose

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Photo Credit: epSos .de

 

On October 5th of this year, the United States and eleven other nations in the Pacific Rim concluded negotiations on the largest regional trade agreement in history – the Trans-Pacific Partnership (the “TPP”). While the finalized version of the text has yet to be released, an outline of the agreement by the office of the United States Trade Representative includes an investment chapter that places the TPP squarely within the tradition of investor-state dispute settlement (ISDS) regimes. According to the outline, the TPP will include rules on expropriation and “provisions for expeditious, fair, and transparent investor-State dispute settlement subject to appropriate safeguards … [that] will protect the rights of the TPP countries to regulate in the public interest.”

The conclusion of TPP negotiations coincides with a significant but little-remarked event in the history of ISDS. A recent skirmish in August between foreign investors and the Polish Parliament suggests that foreign investors have found ways to use investor-state laws to influence governments even before those governments enact legislation, calling into question the right of TPP governments to “regulate in the public interest.”

The Background: Investor-State Dispute Settlement

ISDS treaties are designed to encourage the flow of investment, usually from developed to developing countries. One of the ways that these treaties try to attract foreign investment is by giving foreign investors, usually multinational corporations (“MNCs”), a mechanism to challenge the behavior of host states when that behavior negatively affects the value of their investment. MNCs can sue host governments through private arbitration – a system where ad hoc arbitrators, who are private citizens, act as judges. These arbitrators decide whether or not the host state’s behavior was sufficiently unfair to constitute expropriation– effectively taking the investor’s property. If so, the state must then compensate the MNC for its losses. In order to accommodate a range of claims against host governments, usually the ISDS regime will loosen the meaning of “expropriation” with words such as “tantamount to,” as in Chapter Eleven of North American Free Trade Agreement.

What does this look like in practice? In March of this year, an arbitration panel awarded Owens-Illinois Inc., an American MNC, $455 million because Venezuela, its host country, seized two of its glass-bottle plants back in 2010. This award is of the less-controversial variety, as Hugo Chavez spent much of his tenure nationalizing a significant portion of Venezuela’s economy. In cases like this, there are few concerns that a foreign investor was unfairly leveraging their powers under the ISDS regime to punish the host state for legitimate governing behaviour.

Why is ISDS controversial?

Objections to “interference” by foreign investors in the governance of host states are, however, common, because most ISDS regimes allow investors to object even if the action of a host state only indirectly affects the value of an MNC’s investment. Much discussion has focused on foreign investors’ ability to abuse that power.

For example, Elizabeth May, the leader of the Canadian Green Party, has repeatedly voiced objections to ISDS agreements Canada has entered into on this basis. She argues that governments are likely to avoid passing laws if they think a foreign investor will object on the basis that that law interferes with their investment. She says it is difficult to accurately assess the extent to which this “regulatory chill” is operating to shift the course of government action, since it probably comes up before proposed regulation even makes it into parliaments or congresses.

Quantitative research performed in 2014 analyzed empirical evidence to conclude that such regulatory chill is not, in fact, occurring. However, a political skirmish in Poland suggests that this conclusion may have been reached prematurely.

What Happened in Poland

On August 5th of this year, the lower chamber of the Polish parliament adopted a draft law on the restructuring of consumer mortgage loans denominated in foreign currency. The law mandated conversion of foreign currency mortgage loans into Polish zlotys at the exchange rate on the day of the granting of the loan. Banks were to bear 90% of the restructuring costs imposed by this law. Predictions about the net loss to the banking sector were estimated at five billion euro.

Before the higher chamber of parliament in Poland voted on the law, however, several foreign banks controlling the major Polish banks whose business would be affected by the law started a letter-writing campaign. Their message to Polish governmental authorities was that they would be bringing claims under the applicable ISDS treaty if the government voted the proposed bill into law. The Senate changed the loan restructuring terms by reducing the banks’ share of the costs to 50%. The law has since been sent back to the lower chamber of Parliament, where it may be completely retooled so as not to place any direct restructuring costs on banks.

While it would be unfair to presume that these changes were entirely a result of that intervention by the foreign banks, it would also be naïve to suggest that their actions played no role in the Polish Parliament’s change of heart. What this means, then, is that foreign actors managed to leverage the tools afforded them under an ISDS regime to influence the direction and shape of Polish legislation – instead of merely receiving compensation post-facto, when their investment had already been affected by those regulatory actions.

This example presents an interesting dilemma: the democratic process in Poland was arguably compromised by the intervention of foreign interests. However, the effects of a predicted 5 billion loss to the banking sector would likely have been so dire that it is easy to argue that the influence of those foreign interests, in this case at least, were a good thing.

Conclusion

The negotiations underpinning the biggest regional trade agreement in history have just concluded yet the landscape for ISDS regimes is still undergoing drastic shifts. The office of the United States Trade Representative assures that the TTP will include investor-State dispute settlement subject to appropriate safeguards that will protect the rights of the TPP countries to regulate in the public interest.

In this case, foreign corporations redirected the Polish State’s actions – but it is not clear whether it was at the expense of Poland’s sovereignty to regulate in the public interest. Regardless, clarity is necessary for an informed discussion to take place. The relationship between foreign investors and host states must be scrutinized to separate theory from practice, to ensure these agreements are entered into eyes-wide-open.

Jessica Rose is an LLM candidate at Berkeley Law. She is a student contributor for Travaux.

 

 

Investor-State Dispute Settlement at a Crossroads: Who Should Decide Transatlantic Investment Disputes?

By: Maria Nicole Cleis |

This week, the ninth round of negotiations on the Transatlantic Trade and Investment Partnership (TTIP) took place in New York. The mega-trade deal between the United States and the twenty-eight Member States of the European Union was initially scheduled to be finalized by the end of 2014, but, due to disagreements on various issues, the negotiations are dragging on. The window for concluding the agreement will close in mid-2016, just before US presidential elections in November.

Whether or not the hotly debated investor-state dispute settlement (ISDS) chapter will become a part of the TTIP—or opposition against it will bring down the entire deal—will remain uncertain until the final phase of the negotiations. In the interest of an effective ISDS system within and outside of the TTIP, the US and EU negotiators should make every effort to draw up an investment chapter which addresses existing flaws of ISDS, instead of omitting the chapter. Of all available dispute resolution mechanisms, investment arbitration is the lesser evil.

Mandates Granting the Authority to Negotiate the TTIP

The negotiations of the TTIP are led by the Directorate-General for Trade (DG Trade) on the European side. DG Trade is a subdivision of the European Commission, which derives its authority to negotiate trade and investment agreements on behalf of the EU Member States from the Lisbon Treaty. In June 2013, the Member States’ governments explicitly mandated the European Commission with negotiating the TTIP, setting out the key topics and goals to be pursued. If a consensus is reached in the TTIP negotiations, the European Parliament and the individual Member States’ governments will need to approve the final draft of the agreement for it to become binding on all EU Member States.

On the American side, the Office of the US Trade Representative (USTR) is in charge. It is part of the Executive Office of the President, who has the power to make treaties with the advice and consent of the Senate, by virtue of the US Constitution. At the same time, the Constitution endows Congress with the authority to “regulate commerce with foreign nations”. The Trade Promotion Authority (TPA) legislation, which was introduced last week, would disentangle this complex web of responsibilities and allow for a more contemporary and expedited decision-making within the constitutionally defined framework. It establishes clear objectives for international trade negotiations, and guarantees an up-or-down vote by Congress on trade agreements which conform to said parameters. At the same time, it provides for the removal of issues that are not covered by the objectives set out in the TPA from the fast-track process.

The TPA and the European Commission’s mandate both refer to investment arbitration as the desirable mechanism for resolving future investment disputes arising under the TTIP. Even if these references are not always specific and sometimes conditional upon a satisfactory outcome of the entirety of the negotiations, they document the parties’ initial intent to include investment arbitration in the TTIP.

Investor State Dispute Settlement: Nothing New

In the light of existing ISDS mechanisms, it is not surprising that the United States and the European Union aimed to include ISDS in the TTIP when the negotiation process began in mid-2013. Investment arbitration is the dispute settlement mechanism of choice in most bilateral investment treaties (BITs) and multilateral agreements, such as the North American Free Trade Agreement (NAFTA) or the Energy Charter Treaty (ECT). It allows investors to bring claims directly against the countries hosting their investments without the intervention of their home countries’ governments, or (usually) the involvement of the host countries’ courts. ISDS is therefore said to provide investors with a de-politicized and reliable process for the resolution of their claims against host states—at least in comparison to the former dependence on diplomacy for the resolution of such disputes. Whether ISDS is an effective tool for attracting and maintaining foreign direct investments remains controversial.

Opposition Against Investment Arbitration

Despite the ubiquity of investment arbitration in existing investment treaties, its inclusion has become a major stumbling block for the conclusion of the TTIP. Opponents in the United States and Europe are numerous and vocal, and distinguished scholars are expressing concerns, arguing mainly that the threat of investor claims would have a chilling effect on the governmental regulation of legitimate public interests. Health and environmental protection, labor rights, and human rights are frequently mentioned as potentially affected spheres.

Indeed, the opponents’ arguments are not entirely unjustified. There have been instances in the past where investor claims for substantial damages were based on environmental or health regulations. Two examples are cited time and again: Vattenfall v. Germany, an ECT claim by a Swedish operator of German nuclear plants, based on Germany’s post Fukushima nuclear power phase-out; and Phillip Morris v. Australia, where the tobacco company’s claim for damages was based on Australia’s tobacco plain-packaging measure.

Europeans seem to be particularly concerned because of the relative litigiousness of American investors and their penchant to challenge public health and environmental policies. Indeed, US investors have filed the most investment disputes by far. Europeans fear that the currently low number of claims directed against them is a result of the fact that only a few BITs between the United States and EU Member States exist—nine BITs with “new” member states, to be precise—and that the number of claims would dramatically increase if ISDS was included in the TTIP. After all, the United States and the European Union maintain the world’s largest investment relationship.

No Need for ISDS in Treaties between Countries with Evolved Legal Systems?

Another frequent argument against ISDS in the TTIP is that the strength and fairness of the American and European judicial systems make investment arbitration unnecessary. Historically, investment arbitration was conceived to provide a fair and rules-based mechanism for the resolution of disputes between investors from capital-exporting countries and developing countries (North-South setting). Accordingly, some of its opponents argue that it is only needed in countries with protectionist policies and notoriously corrupt courts.

Foreign investment and the disputes arising from it have, however, evolved beyond the described North-South setting to encompass South-South, North-North and even South-North constellations. The issues involved in those settings are no less politically fraught. As neutral as the courts in developed host countries (and particularly in the European Union and the United States) may generally be, to expect them to always decide impartially when charged with balancing the pecuniary interests of foreign investors and their own country’s public interests is quixotic. Of course, neither European nor American courts disregard the rule of law systemically—but it is only reasonable to anticipate that, given the considerable room for interpretation that investment protection guarantees leave, domestic courts would disadvantage foreign investors to some degree. As a consequence, domestic decision-makers should not have a central role in the adjudication of such disputes—at least not by themselves.

In an international setting, where different legal cultures, political priorities and public expectations collide, it makes sense to delegate the resolution of investment disputes to decision-makers outside the host countries’ legal and political systems. Disinterested arbitrators remain the most suitable agents for this task. That is not to say that the current investment arbitration regimes are beyond reproach. The European Commission’s report on its ISDS consultation highlights the most important deficits of existing mechanisms, which will require particular attention in the negotiations of the ISDS chapter in the TTIP. In this regard, the ISDS provisions in the Comprehensive Trade and Economic Agreement (CETA) between Canada and the European Union, which served as a blueprint for the negotiations of the ISDS chapter of the TTIP, are a step in the right direction.

The Catalyst Function of a Well-Designed ISDS Chapter in the TTIP

Even if one takes the stance that the risk of unfair adjudication in US and EU courts is so negligible that ISDS is unnecessary, its inclusion would still be desirable from a systemic perspective.

Including an investment chapter that constructively addresses existing flaws of ISDS in a deal as important as the TTIP harbors the potential to recalibrate ISDS and influence the negotiations of various BITs that are about to be renewed. Considering the current legitimacy criticisms facing investment arbitration, the change could only be for the better: it is in the hands of US and EU negotiators to strike a more appropriate balance between investor protection and regulatory sovereignty, and to address other common ISDS concerns. Most importantly, the negotiators should include effective safeguards against frivolous cases, clearly define the requisite level of arbitrators’ independence and impartiality, make proceedings transparent, and consider the desirability of a mechanism of appeals or oversight.

Maria Nicole Cleis is a Visiting Scholar at the University of California, Berkeley.  She is a contributor to Travaux.