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01/10/2016

Analyst: ISDS model is Australia, not Canada

Trade & Society

Analyst: ISDS model is Australia, not Canada

Ahead of the release of a report on a controversial arbitration clause in the Transatlantic Trade and Investment Partnership (TTIP), Gus Van Harten told EurActiv that the EU should explore the option of an international arbitration court and use Australia, not Canada as a benchmark.

Gus Van Harten, associate professor of law at the Osgoode Hall Law School in Toronto, has studied the Investor-State Dispute Scheme for 15 years. He has written a number of studies on the topic.

He spoke to EurActiv’s Editor-in-Chief, Daniela Vincenti.

You have worked on ISDS for 15 years. There are plenty of people that think we don’t need ISDS in TTIP. Do we need it?

It depends on what the purpose would be. Let’s focus on the purpose of resolving disputes, involving foreign investors. The primary alternative is to use existing courts, which in Europe would include the domestic courts of member states, subject to review in European courts. In the US, it would use American courts subject to the Supreme Court.

In the context of a treaty between two countries with mature and reliable courts systems, the primary historical argument for these treaties falls away, because the purpose was to use arbitration to substitute for courts systems where they were thought to be unreliable. It goes further than that.

Normally, in international law, there is no requirement to rely on the courts if they don’t offer justice. The European Court of Human Rights, for example, has that approach. That relies on the assumption that the courts systematically fail to offer a reliable recourse, which is not the case between Transatlantic partners.

In fact, courts in the US and Canada are more independent than the arbitration process itself, because the arbitrators do not enjoy the institutional safeguards of the independence of judges.

They actually have economic, financial career interests that taint the adjudicated decisions they arrive at. So it’s not logical to replace domestic courts with a less independent international arbitration process.

The logical thing would be to create an international judicial process, an international court. In international law, it is fairly rare to allow a private actor to sue a country. But it does happen sometimes, and in Europe that happens with the European Court of Human Rights, the European Court of Justice.

And in all other contexts, there is an international court that plays a role. It is not allocated to an arbitration process that lack those markers, judicial independence, procedural fairness, and so on.

But if it’s so simple, why do you think the business community is pushing to have this an arbitration system in TTIP?

There are alternative potential explanations, and there is probably a mix of explanations.

I think that business associations listen to their lawyers. Sometimes, they are in-house lawyers, but usually they are working for large law firms that service the companies, and those are the lawyers who are specialize in this field of resolving investment disputes.

The legal industry has its own interests, because the arbitration process is lucrative in a way that a judicial process is not. As you probably know, arbitrators can work also as lawyers in the field. This is totally inappropriate, because if a judge represents a paying client on one side, and the same legal issues arise in different cases, one could reasonably suspect that the judge interprets the law in a way that favours paying clients..

Whether or not it is actually true, it does not matter. If there is a reason to suspect that, it contradicts judicial independence.

Now, with TTIP, and a few other treaties, we are talking about a kind of great leap forward in the scope of the power of these arbitrators, beyond any court. 

Just to give you an idea, existing treaties cover something like 15-20% of investment flows, whereas TTIP alone would maybe cover 50-60%. It gives you an idea of how significant this step would be. It would dwarf all the existing treaties in terms of the role of arbitration, as a substitute for international or domestic courts.

Some say the system is undemocratic, but we have to be more precise than that. It’s possible for legislative decisions to be overruled by courts, but that happens in courts subject to say a constitution, or maybe the European Convention of Human Rights.

Here we have a treaty that only protects foreign investors, (and) doesn’t have the same kind of balancing language to preserve the right to regulate that you see in, for example, the ECHR.

This system allows arbitrators to override any state decision which will include legislative decisions, and decide how much public money should be paid as a result of a legislative decision in the past.

The legal uncertainty and financial risks are linked to the fact that you don’t know how the arbitrators will decide. Some of these cases may involve billions of dollars.

One of the supporters of ISDS argues that if TTIP does not include ISDS, other countries, especially those with questionable judicial systems, might want to turn back the clock and ask to remove ISDS in their investment treaties. Is that really a valid argument?

I started hearing this argument about 6 months ago. Usually there are other arguments that are offered. And over time, research has cast doubt upon some of them. This was a new one.

And it’s usually referred to with respect to China. The argument goes along the lines of, “Well, if we don’t use this arbitration mechanism with the US and Canada, then China won’t be willing to agree to it.”

My first response to that is: Isn’t it a good idea to have a fair and independent process for everyone?

Wouldn’t you want to reassure foreign investors and states alike that this is a proper judicial process, that there is not going to be favoritism towards a large company or a powerful country?

That favoritism can work in all different kinds of ways. Sometimes you will win, sometimes you will lose, but wouldn’t we all want to agree to a judicial process anyway and bring China into that model?

The second response is: Has China in the past refused to agree to this arbitration mechanism? China has agreed to this arbitration method more often than any country except Germany.

There is no indication that China is inclined not to sign this kind of agreement. Recently, China and Canada concluded a bilateral investment treaty that includes the arbitration mechanism. Based on that past experience, I think this is a convenient new explanation, rather than a legitimate reason.

What would be a convenient alternative? One which could satisfy the critics, and at the same keep those backing ISDS accept it — a last resort ISDS, maybe?

I am not against using international adjudication to resolve these disputes. Since 2007, I have taken a public position in my academic work calling for an international investment court.

It is useful, because there are problems with the existing arrangement and they need to be addressed. I also tried to make it more palatable by not calling it a court, but taking out the institutional components, which we see represented in some other arbitration processes, including in Canada.

I have provided the ideas to the European Commission as well as the Canadian government. But I was more optimistic that the European Commission might be prepared to be more enlightened at the time. This was during the CETA negotiations, and I am aware that this was in the hands of one of the European Commission negotiators. They adopted maybe 5% of the components.

It was a political choice to rely on the arbitrators and not to judicialise the process.

Are you hinting at national pressure?

I don’t know. I hear lots of stories about how the arbitration industry has connections, influence in the member states. There are some specific instances that I can demonstrate, but I cannot make any broad claims about why. All I know is the result. They were given the specific option and have chosen not to take it.

The European Commission has mostly delivered on openness, but an open process is still subject to conflict of interests. De facto, it’s not solving the problem. They have not delivered really at all on procedural fairness and judicial independence.

Another component is the relationship to domestic courts. I would think you need to exhaust local remedies when reasonably available. You have to go to local courts unless you can show that they are not offering justice. That is a pretty straightforward component that is not included in this treaty.

The last one is this broad issue of balance. There are two main imbalances. You have very elaborate investor rights and protections without a clear and express affirmation of the states – they usually call it the right to regulate. There are treaties, even within the CETA, in which you see an expression of the right to regulate, but not in the investor chapter. That’s quite problematic.

So you have three main aspects here: the judicial process, the relationship to domestic courts, and this issue of balance. CETA, I am sure TTIP, does not deliver any of this, except for mostly the issue of openness, which is only one part of having a judicial process.

How feasible it is to ditch ISDS and create an international arbitration court?

Legally, it is not difficult. We have lots of international courts. Politically, it requires agreement. It requires at least one major player to be on board and to push it politically.

The ISDS model comes from Washington and major EU capitals. That’s where it was born, that is where it has grown and that’s where it’s being made bigger and bigger. They can change it.

Would other treaties potentially adopt this system and drop ISDS altogether?

You need one new treaty, and every state could sign into it. All of our existing treaties would then be replaced by this new one after states and investors agree to pass all claims onto the new institution.

We set up a new proper judicial institution, which could write its own rules and procedures. You can have different details, some of them would be politically contentious and would have to be negotiated, but legally it’s very simple. One new treaty can override and fix everything.

But you need political will in Brussels and Washington.

So the controversy on ISDS is justified?

ISDS is like a supreme court of the world, but it doesn’t have judges, and you don’t know who they are and you never heard of it. It’s only there to protect foreign investors.

I expected the public controversy on ISDS, which in my view is justified, which jeopardizes all the other elements of TTIP. It shows the level at which they are willing to jeopardise everything else just to get ISDS. That to me is some mystery: Why would they put so much at stake for ISDS?

Is there anything like it in the Trans-Pacific Partnership, the US-led trade initiative with some 12 countries throughout the Asia-Pacific region, including Australia and New Zealand?

The consolidation and expansion of arbitrators’ power is happening so fast, on so many fronts. TPP is another example, because it’s the US model, and the investor state arbitration it brings in Japan, Australia. The only developed western country that has agreed to this arbitration mechanism is Canada with NAFTA. So this is taking that model and expanding it to the US relationship with the world. I suspect there is a deliberate decision to conclude as many treaties, big ones, as fast as possible because it’s obviously such a hot button issue that they want to get ahead of the curve.

I see it especially with Canada. We have EU-Canada, CETA, we have China-Canada bilateral investment treaty, and we have TPP. Once those three are concluded, plus NAFTA, Canada’s almost entire economy would be covered by this arbitration mechanism. It looks like a real rush to expand and consolidate.

Are there any treaties that are working well without ISDS that you can use as an example?

The most common example is between the US and Australia that was concluded about 10-12 years ago, where Australia refused to include investor state arbitration, the US agreed, and Australia was able to achieve that in negotiations.

They only have a judicial system. What happens if something goes wrong?

If there is a dispute under the treaty, there is a state to state dispute resolution, like in the WTO. Investors also have protection in the domestic courts, and there is another alternative, which are contracts.

Any big investment project has a contract associated with it, and those big contracts have their own dispute settlement clauses that can provide for all of the same arbitration mechanism on a contract by contract basis.

So it’s much more manageable for the government, because you can negotiate. If there is a dispute related to a contract, the courts will require the contractually agreed forum to be used first, unless the government intervenes with that forum. The treaty arbitrators almost always allow for parallel claims, so they will allow a contractual dispute under the treaty arbitrator alongside. It’s based on a creative legal maneouvre to grow the scope of the arbitrators’ role. I don’t know if the Commission was aware, but they didn’t address that in the CETA text.

So we need to look at Australia’s experience instead of Canada?

Yes, if Australia can do it, I don’t see how the EU does not have the power to say no and still get TTIP.