EXCLUSIVE / The European Commission will not ask EU judges to decide on the legality of the investor-state dispute settlement (ISDS) mechanism in free trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP).
Only the major EU institutions or individual member states have the ability to ask the ECJ for an opinion on a point of EU law in this case. Compatability with, and competence (legal right) under the EU treaties, can be two separate justifications for such a request. The European Parliament would have to back a resolution by a majority to ask for an opinion.
Commission lawyers argued in 2010 that an ISDS mechanism in a Netherlands-Slovakia trade deal broke EU law. But officials told EurActiv that did not mean similar ISDS clauses in free trade agreements (FTAs) were illegal.
ISDS is controversial, because it allows investors such as multinationals to take governments to international arbitration tribunals, which critics say could interfere with countries’ right to regulate and ultimately lower standards.
On Tuesday (8 September), campaigners urged the Commission to ask the European Court of Justice (ECJ) to settle once and for all if ISDS was compatible with EU law.
The executive has already asked the court for an opinion on whether it has the “competence” to negotiate a free trade agreement with Singapore. The opinion could influence the final form of other FTAs such as CETA, with Canada, and TTIP, between the EU and US.
“The EU court must consider whether ISDS fits with EU law before we enter any major trade agreement. NGOs and other stakeholders can’t ask the ECJ, so the Commission must ask to avoid a democratic deficit,” said Karla Hill, director at ClientEarth, an NGO of environmental lawyers.
Hill, who said ClientEarth lawyers were analysing the compatability issue, said the ECJ could also decide to expand its investigation into the Singapore FTA to take into account the compatability issue, as well as the competence one.
The ECJ told EurActiv it would not comment on the legality of ISDS or whether it trespassed into its jurisdiction. Any opinion would only be given if judges were asked by those able to make a request for an opinion.
EU officials confirmed to EurActiv that they had no plans to also ask EU judges if rulings by international arbitration tribunals could undermine the ECJ’s role as sole and supreme arbiter of EU law.
Extra-EU and intra-EU
Trade deals between the bloc and non-EU countries would not result in international tribunals interpreting or applying EU law, but rather on the provisions of the free trade agreement (FTA) itself, officials told EurActiv.
“Hence, investment dispute settlement provisions in EU trade agreements with third countries are entirely consistent with EU law,” one official said.
The bilateral investment treaty (BIT) between the Dutch and Slovaks was an intra-EU agreement, meaning its tribunals would apply EU law, which is an exclusive competence of the EU courts, officials said.
The Commission and member states have had “numerous” disagreements over the competence to sign and finish the Singapore deal, which necessitated legal clarification, EU official said. Other parties can make comments until October on the Singapore question, which was asked on 10 July.
The Commission does not think that the ISDS provisions of TTIP and CETA “raise an issue of compatibility with EU law”, officials said.
The executive was forced to temporarily take the ISDS clause in TTIP , a key US demand, off the table, in the face of unprecedented public opposition.
It is too early to ask for an ECJ opinion with regards to TTIP. An opinion can only be asked after a treaty is negotiated, but before it is in force.
CETA is currently undergoing “legal scrubbing” but will soon be past the point when EU judges can be asked. Lawyers consulted by EurActiv estimated a rough autumn deadline before it would be too late.
It can take up for a year for judges to produce an opinion but fast-tracking the process is possible.
In 2010 during the Achmea B.V. v. Slovakia case, the Commission legal service argued the bilateral investment treaty (BIT) between the Dutch and Slovaks raised “fundamental questions regarding compatibility with EU law”.
“Most prominent among these are the provisions of the BIT providing for an investor-state arbitral mechanism,” lawyers said.
“There has not been a change, between 2010 and now, in the Commission’s position with respect to the compatibility of intra-EU BITs with EU law,” the official said.
“The Commission has consistently and over a number of years pointed out to all member states that intra-EU BITs are incompatible with EU law.”
On 18 June, the executive launched legal action against five member states over their BITs and asked them to scrap the treaties.
ClientEarth’s Hill said: “The Commission may be confident that ISDS is compatible with EU law, but others aren’t so sure. The Economic and Social Committee is questioning its compatibility, and the EU Parliament have said they want to ensure the powers of the EU courts are not affected.”
The European Economic and Social Committee is an EU consultative body from civil society.
In May, it said, “Private arbitration courts have the capacity to make rulings which do not comply with EU law or infringe the Charter of Fundamental Rights.
“It is absolutely vital for compliance of ISDS with EU law to be checked by the ECJ in a formal procedure for requesting an opinion.”
When he took over as President of the European Commission, Jean-Claude Juncker told concerned MEPs that EU law would not be settled in “secret courts”- understood to refer to the arbitration tribunals.
In July, the European Parliament adopted a resolution supporting TTIP (8 July), but rejecting ISDS, which is a key US demand.
Trade Commissioner Cecilia Malmström said in May that she supported the idea of creating a permanent investment court to replace ISDS. But that was rejected by a senior US official, shortly afterwards.
Some campaigners argue that ISDS mechanisms are already weakening EU legislation.
Hamburg’s environmental authority imposed strict quality controls on waste water released into rivers by a coal-fired power plant in Hamburg-Moorburg, located on the Elbe river.
In 2009, Swedish energy company Vattenfall used an ISDS procedure in the EU’s Energy Charter to challenge the standards.
Manfred Braasch, regional boss for Bund für Umwelt und Naturschutz Deutschland (Friends of the Earth Germany) said the standards were brought in to ensure compliance with the EU’s European Water Framework.
Vattenfall argued that the standards made their investment in the plant unviable, and demanded €1.4 billion compensation. A settlement was reached, which resulted in the weakening of the standards.
Braasch told EurActiv that his NGO won a court case in the highest Hamburg administrative court, arguing that the lowering of standards broke EU law.
The case was appealed and will now go before a German federal court. A decision is expected in 2016.
If federal judges agree that EU law was broken by the lowering of water standards, it would be an example of how ISDS can affect the application of EU law, he said.
Braasch warned that the threat of ISDS cases, and the compensation payments, would have a chilling effect on environmental legislation before it is even drafted.
Although investor-state arbitration clauses have been included in investment deals since the late 1950s, arbitration has emerged strongly in the last two decades.
Since the 1950s, EU member states have concluded over 1,400 bilateral investment treaties (BITs) with a large number of third countries, representing roughly half the total number of BITs world-wide.
In Germany, the debate over ISDS has been raging since a similar arbitration was launched against the country in 2012. The case was brought by the Swedish company, Vattenfall, for €4.7bn worth of compensation. It followed Germany’s decision to phase out nuclear power plants, which led to the closure of two of Vattenfall’s atomic power stations in the country.
Opponents of ISDS argue that the mechanism allows a foreign investor to bypass domestic courts, and to challenge what may otherwise be a legitimate policy objective.
Critics also cite another investment treaty arbitration, brought by tobacco company Philip Morris, against both Uruguay and Australia, for introducing plain packaging laws on cigarette packets. The company argued that the laws were a form of expropriation. Although these cases are still pending, some argue that ISDS provisions tilt the balance of power away from governments and towards global corporations.
>> Read our Special Report: TTIP and the arbitration clause
2016: German federal court to rule on Vattenfall.
- Website: DG Trade