This article is part of our special report TTIP and the arbitration clause.
SPECIAL REPORT: On Tuesday (9 December) an estimated 60 “Stop TTIP” activists will give Commission President Jean-Claude Juncker a giant 60th birthday card signed by one million opponents of the Transatlantic Trade and Investment Partnership.
But Juncker needs no card to remind him that TTIP – and in particular the issue of whether it should include an Investor State Dispute Settlement mechanism within it – poses his presidency with an early test of its authority.
Investor-State Dispute Settlements (ISDS) are legal provisions often included within investment treaties between two states, which offer public and private sectors recourse to arbitration with the states which have signed the treaty if they allege a breach.
Supporters believe such clauses guarantee the terms of treaties, since they offer an independent resolution mechanism for parties who did not sign the treaty.
Arbitrations are carried out by a number of specialised bodies, proceedings are usually conducted in private, and often result in a settlement between the parties, rather than leading to formal tribunal decisions. However such decisions are made where the parties cannot come to an agreement.
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.
According to the United Nations Conference on Trade and Development, of the 247 concluded cases known by the end of 2013, around 43% were decided in the state’s favour and 31% in favour of the investor. The rest (26%) were settled.
There has been no ISDS case between the United States and an EU-15 country, but a handful of cases between US investors and member states that joined the EU in the 2000s.
Last week, NGO Friends of the Earth released research into 127 known ISDS cases brought against 20 EU member states since 1994.
“The total amount awarded to foreign investors – inclusive of known interest, arbitration fees, and other expenses and fees, as well as the only known settlement payment made by an EU member state – was publicly available for 14 out of the 127 cases (11%) and amounts to €3.5 billion,” FoE claimed.
Detractors claim that such clauses allow big business to sue governments, enabling corporate interests to challenge the sovereign will of democratic states in un-transparent fora.
Trade unions, consumer groups and environmentalists have all been vociferous in their opposition. In addition, the European Parliament’s centre-left groups – including the large Socialists & Democrats grouping – have voted against it. So have the French and Dutch Parliaments.
Arbitration a regulatory threat?
The surrounding debate has seen a barrage of statistics and soundbites coming from all sides.
Noted cases highlighted by opponents include tobacco giant Philip Morris’s ongoing arbitration cases against Uruguay and Australia over health warnings on cigarette packs, and Swedish energy giant Vattenfall’s call for damages from Germany following its government decision to phase out nuclear energy.
In a communication on ISDS, BusinessEurope, the group representing European employer organisations, has stated that “under no circumstances does a ruling under ISDS require a state to revoke a law, regulation or any other measure, even in cases where the particular law, regulation or measure has been found to violate the bilateral agreement”.
Detractors have argued that Philip Morris’ request that Australia should suspend or revoke its plain packaging laws shows this is not true.
However, what Philip Morris has requested is not a benchmark for arbitrations, since its case against Australia is not yet concluded.
Meanwhile, Trade Commissioner Cecilia Malmström has indicated that any EU agreement concluded by her will provide “absolute clarity that a state cannot be forced to repeal a measure”.
That will not silence those critics who believe that governments can be effectively bullied by the threat of arbitrations, however.
“Even if arbitrators cannot force states to revoke a law, this won’t stop governments from doing so ‘voluntarily’ once a multi-billion-dollar lawsuit has been filed or threatened in order to avoid the potential risk of a huge fine,” according to a paper by Corporate Europe Observatory (CEO), a campaign group.
Bruno Maçães, the Portuguese minister for European affairs, said that the Commission’s mandate is unambiguous on the issue.
“It [the mandate] states very clearly that the inclusion of ISDS in TTIP will never touch the public power to regulate in the public’s interest in the areas of health, labour standards, safety and environment,” according to Maçães.
“The high standards in these areas are an asset to the EU. They are a reason why investors want to invest in the EU; to jeopardise them would be foolish,” he said.
National courts or arbitration procedures
Opponents of the ISDS clause have emphasised that they believe arbitrators have a vested interest in pleasing investors, and that investor-state arbitration has a built-in pro-investor bias.
Since arbitrators are effectively “judges for hire” and depend on their appointments for their fees “in a system where only the investors can bring claims, this creates a strong incentive to side with them – as investor-friendly rulings pave the way for more claims, appointments and income in the future,” according to CEO’s paper.
“These private tribunals are comprised of three for-profit arbitrators who issue their decisions behind closed doors and often have a conflict of interest as they have a commercial interest in keeping the system alive, and they often work for the same companies that file cases,” according to Friends of the Earth.
It is true that arbitrators often have experience gleaned from the industry or sector for which they consider claims. However arbitration is by its nature an attempt to build trust and agreement between disputing parties.
To achieve this, it is essential that both sides in the dispute have confidence in the machinery of the arbitration.
If an arbitrator attracted a reputation for bias, that would render his or her appointment unlikely in a system which gives both parties equal input into the choice of arbitrator. Choosing arbitrators is often one of the most time consuming aspects of such cases.
What began as a small protest against TTIP has developed into an all-out battle between those who consider ISDS as a tool to protect investors, and those who see it as a way for multinationals to undermine national law.
Having consulted on the issue, the EU executive is expected to publish a report on the issue early in the new year, indicating how it will proceed.
It seems certain that some tweaking of an ISDS proposal is likely. Leopoldo Rubinacci, the head of investment policy at DG Trade, acknowledged at a policy forum held in Brussels last month that ISDS is not transparent enough, and that there were problems arising from the fact that tribunal decisions are not appealable.
Portugal’s Bruno Maçães has suggested policymakers should seize this opportunity to reform ISDS.
“With the high level of public scrutiny on TTIP, there has never been a better time to do so,” he said.
ISDS also an issue in the US
Although the debate has led to expressions of fear about Europe accepting a lowest common denominator US-approach to regulation; this leaves US parties baffled and insulted.
The blanket expression – voiced in some quarters – that US regulation is ‘weaker’ or less enforced than that in Europe is simplistic and many American policymakers and trade negotiators find it insulting.
Indeed Juncker should take solace from the fact that ISDS is a problem in the US too, where inverse fears: that European companies will exploit the arbitration process to the detriment of their US counterparts, is one that policymakers have to address.
The US has recently updated its regulatory framework regarding ISDS, a process that started in 2009 and was concluded in 2012, after extensive public consultation.
The goal was to improve the procedures in order to ensure the balance between the need for investor protection and the government’s prerogative to regulate in the public’s interest, according to Elena Bryan, the senior trade representative of the US mission to the EU.
The new US model included the introduction of a mechanism enabling third parties to get more involved in the arbitration process, to address transparency issues.
This is an idea that the EU executive might reflect in some form in its own conclusions.
Whatever these conclusions are, however, it will face a considerable political battle. Once the Commission’s report has been published a new round of consultation will begin with the European Parliament, where considerable opposition remains.
This can already be seen in the parallel issue surrounding the conclusion of the negotiations over the EU-Canada trade agreement (CETA), a blueprint for TTIP and the first EU-wide deal including investor-state arbitration which the European Parliament must pass first.
No agreement has been reached on CETA, and with Greens such as Reinhard Bütikofer labelling ISDS a “corporate lobby Christmas tree agenda”, resistance to ISDS in TTIP remains fierce in some quarters.
MEPs have nuanced views on ISDS
Behind some of the bluster, however, possibilities for compromise appear available.
The centre-left Progressive Alliance of Socialists & Democrats group in the Parliament has issued a clear signal that it wants ISDS dropped from TTIP.
“The ISDS mechanism, where applied, has already shown how much power corporations have wielded in the name of profit. It is time the EU […] scrapped ISDS in the CETA and in the EU-US Transatlantic Trade and Investment Partnership (TTIP),” according to Gianni Pittella, the Socialists & Democrats’ president.
However colleagues have adopted a more nuanced approach. Italian socialist MEP Alessia Mosca, said recently she regretted that the general public and the media has underestimated the possible advantages of a TTIP and ISDS within it.
“The crucial point isn’t the possible inclusion of ISDS,” Mosca said, “but rather the form in which it would (or would not) be included.”
Mosca said “the procedure needs to be modernised and updatedso that there is a better balance between investor protection and democratic regulation.”
She said she was confident, however, “that the EU institutions and civil society together had the capacity to bring ISDS into the 21st century.”
Some birthday cheer for President Juncker.
In June 2013, EU heads of state and government mandated the Commission to start negotiating a free trade agreement with the US, giving guidelines concerning what the negotiations should include.
The guidelines stated that the EU should seek to include provisions on investment protection and investor-to-state dispute settlement (ISDS) in the proposed agreement.
Negotiations for an agreement – the Transatlantic Trade and Investment Partnership (TTIP) – started in July 2013.
The EU executive consulted the public on its possible approach to investment protection and ISDS in the TTIP, asking whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU's right and ability to regulate in the public interest.
This consultation was extended over the summer on account of the high interest and the Commission intends to publish a report probably early next year.
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