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.

The Record: This Week in Review

Governments and Private Sector Meet to Discuss Strategies for Combatting Transnational Organized Wildlife Crime

Over 150 governments and businesses are attending a UN-backed conference in Thailand from March 3rd to March 14th, organized under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). Thus far the conference has focused on the importance of international cooperation in combating transnational organized wildlife crime.

UN and Arab League Negotiate with Syrian Rebels to Free Detained UN Peacekeepers

The UN has monitored Israeli-occupied Golan Heights since the 1974 ceasefire between Israel and Syria. UN representatives were on a “regular supply mission” in the area, when they were detained by Syrian rebels. The UN and Arab League have entered into negotiations with the rebels to free the UN representatives.

EU Fines Microsoft for Failing to Meet Previous Competition Agreement

In its settlement following a previous EU competition investigation, Microsoft agreed to promote a wider range of browsers in its operating system, rather than just Internet Explorer. While it implemented a “Browser Choice Screen” feature in accordance with the settlement in 2010, its most recent software update eliminated the feature. The UN viewed this oversight as a “serious breach” of the settlement agreement and fined Microsoft.

42,500 Nazi Ghettos and Camps from World War II Identified in Europe

The Holocaust Memorial Museum has identified and catalogued a shocking number of Nazi-run war camps, providing for deeper understanding of the magnitude of the Nazi camp network. Identifying these camps may have legal implications for survivors whose insurance claims and claims over stolen property have been denied in the past because they took place at unknown camps.

Saudi Arabia Halted Executions of Minors

Seven Saudis were convicted of armed robbery as juveniles and sentenced to death by crucifixion and firing squad. Human rights groups demanded that the executions be halted to prevent Saudi Arabia from violating the Convention of the Rights of the Child that was ratified by Saudi Arabia in 1996. On the day of the planned executions, the Saudi government announced that it would delay the executions in order to review the sentences.

Kenyatta Leading Poles in Kenyan Presidential Election

Uhuru Kenyatta, indicted by the Internation Criminal Court for crimes against humanity related to the violence that erupted in Kenya after the heavily disputed 2007 presidential elections, has a significant lead in the current elections as ballot counting is slowing down. Measures are being taken to prevent disputes over the election results from leading to violence, but controversy over 300,000 spoiled ballots may lead to questions over the legitimacy of the vote count.

Hugo Chavez Dies After Fourteen Years in Power

Chavez died after struggling with cancer for over a year. Vice President Maduro will be the acting President of Venezuela until elections are held in the next 30 days. New leadership in Venezuela may impact the political balance and economy of Latin America if the next president embodies more centrist values than the socialist, anti-imperialist Chavez.

Potential HIV Cure

A toddler in Mississippi has been “functionally cured” of HIV after antiretroviral medication was given immediately after birth. If this method proves effective after further testing, it may provide a revolutionary and cost-effective solution to managing the AIDS epidemic across the globe.

Technology and Index Tools of the International Chamber of Commerce

The International Chamber of Commerce released a new digitally interactive Model International Sale Contract, specifically adapted for transactions governed by the United Nations Convention for the International Sale of Goods, with user-friendly features such as pop-ups when parties select incompatible clauses. The International Chamber of Commerce further presented Open Markets Index findings that G20 countries still are not leading by example in their efforts to reduce trade barriers, stimulate growth, and create jobs, “achieving only average scores for openness.”

Tajikistan joins the WTO

Tajikistan joined the World Trade Organization on 2 March 2013, bringing the WTO’s total membership to 159. In negotiations, Tajikistan agreed to further liberalize its trade regime and integrate itself in the world economy.

The United Nations Conference on Trade and Development Collaboration Initiatives

UNCTAD coordinated a United Nations Inter-Agency Cluster on Trade and Productive Capacity mission to Myanmar along with the Economic and Social Commission for Asia and the Pacific, the International Trade Centre, the United Nations Industrial Development Organization, and the United Nations Development Programme, the World Bank, and the Asian Development Bank from 18-22 February. Their goals included establishing a Diagnostic Trade Integration Study and assisting Myanmar’s integration into the world trade system. In another collaboration, the UNCTAD and Eurasian Economic Commission agreed to sign a memorandum of cooperation to work together on regional integration, trade and competition policy, facilitation of customs procedures, entrepreneurship development, transport, and statistics.

Jim Yong Kim visits Brazil

World Bank Group President Jim Yong Kim visited Brazil for three days, where he praised Bahia Hospital for providing low-income families better access to healthcare, spoke about the impact of domestic violence on economic opportunities, and launched the “Knowledge and Innovation Initiative on the Reduction of Poverty” with the Ministry of Social Development, Institute of Applied Economics, and the United Nations International Policy Center on Inclusive Grown.

A Law Student’s Arbitration Clerkship in Singapore

By: Ariana Green, Guest Contributor

I lived in Singapore during the fall of my third year of Berkeley Law, spending part of my time clerking at the Singapore International Arbitration Centre. Having spent almost four of my six pre-law school years living abroad (working as a journalist and on a Fulbright and a Gates Scholarship), I missed the adventure and discovery that comes with moving to a foreign country.

Life in Singapore as a lawyer-in-training exposed me to international law practice and also gave me a chance to travel the region and meet people from all over. Though I plan to join Cooley LLP as a corporate associate—doing transactional work for tech companies and startups—I want to be the kind of corporate attorney who understands dispute resolution. Many of the contracts I reviewed as a summer associate contained an arbitration clause, meaning that should a disagreement arise, the parties go to arbitration instead of seeking relief by way of the courts.

Arbitration is particularly suitable in situations where parties to the contract come from different countries, since arbitral awards have the potential to be enforced globally. Because arbitrations need not follow the same rules of procedure and evidence as trials, the process can be quicker. While court decisions are published and hold precedential value, arbitral awards are kept confidential. Arbitrations can therefore be a good choice for companies who do not want their dirty dispute laundry aired.

For disputes involving international parties, arbitration offers additional advantages. Courts in a given country employ local judges and apply local laws, but an international arbitration usually consists of one or more arbitrators appointed by each party, and the choice of applicable law should be indicated in the contract; it is frequently based on the law of the pre-selected location for the arbitration (for example, Singapore, London, New York etc.). Deciding on a jurisdiction and choice of law at the time the contract is signed provides clarity (ideally).

For law students who want to work abroad, I would highly recommend the Singapore International Arbitration Centre (SIAC). As a law clerk at SIAC, and separately, as a clerk for a senior arbitrator whose office was down the hall, I had an opportunity to get involved with high-stakes cases involving many millions of dollars, not to mention professional reputations.

At SIAC, I assisted in the scrutiny of arbitral awards—a process much like fact checking in journalism. I edited the awards for content and style. My colleagues included one other law clerk, from China, and the full-time attorneys at SIAC, who hailed from Singapore, Korea, India, London, Belgium, and Canada. Some of them had been law firm attorneys and judges. Each of them had had fascinating life and work experiences to share.

These lawyers, the so-called secretariat, provide support to parties and arbitrators, making the process smoother for everyone. The secretariat gets very involved in the details of each arbitration and makes sure parties comply with rules, meet deadlines, and receive cogent awards.

SIAC organizes events as a way to keep its presence in the community and further dialogue about arbitration. I went to several of their half-day conferences, on issues of enforcement and other topics. I met attorneys working in international arbitration and hailing from even more countries.

As part of my Singapore experience, I clerked for a very in-demand senior arbitrator. I followed a case, start to finish, on jurisdictional issues and had the opportunity to prepare a memo before the hearing, then to attend the hearing and conduct research for the award. This process resembles clerking for a judge, but with an international bent.

Throughout my time in Asia, I also made an effort to connect with people working on startups and in the tech scene, per my post-law school career plans. Free lunches at Google Singapore, hearing entrepreneurs’ pitches, and sitting in on mentoring sessions with new businesses made my semester varied and always stimulating.

In choosing to work at SIAC, I wanted exposure to dispute resolution so that I can be a better transactional attorney—one who understands what can happen if disagreements arise over the documents we transactional lawyers draft. My time in Singapore gave me that, and so much more.


Ariana Green is a 2013 J.D. candidate at Berkeley Law School. Her journalistic writing has been published in The New York Times, The Guardian, Popular Science, and elsewhere. Her law-related writing appears in The Berkeley Technology Law Journal (2012). Starting in the fall of 2013, Ariana plans to represent emerging companies as a corporate associate at Cooley LLP in New York.