TTIP and ISDS, Are We Asking the Right Questions?

TTIP and ISDS, Are We Asking the Right Questions?


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.