Commission floats ISDS reform ahead of EU ministerial trade talks

Cecilia Malmström [European Council]

EU Trade Commissioner Cecilia Malmström met her counterpart in the United States on Monday evening (4 May), in order to untangle the Investor-state dispute settlement (ISDS) knot in the Transatlantic Trade and Investment partnership (TTIP), before presenting a formal proposal to EU ministers and MEPs this week, in a bid to unlock the negotiations.

The European Commission’s proposal intends to move from the current ad hoc arbitration system towards an international investment court, with intermediary steps along the way.

“We need a future-proof reform, which really tackles ISDS fundamental flaws and truly complies with basic judicial principles, a stepping stone towards an International Court,” said MEP Viviane Reding, who was the first to push for the idea in early March.

“We need gold-standards, not gold-plating! We need public justice, not private!”

>> Read: Brussels considers replacing ISDS with a public court

Negotiations on a comprehensive agreement have stumbled over a number of issues, but the ISDS mechanism blockage has proven to be the most difficult to solve so far.

Currently, the ISDS system allows investors to take governments to international arbitration tribunals rather than to domestic courts.

Even though the US has insisted that ISDS be included in the landmark free trade agreement, the system is unlikely to be kept in its current form when the trade pact is finally sealed, because of wide protests across Europe.

So great is public fear of the mechanism’s anti-democratic potential, that even officials at the United Nations have called for the suspension of TTIP talks, over fears that a mooted system of secret courts used by major corporations would undermine human rights.

After a long and cumbersome consultation (see background), negotiations on investment in TTIP were suspended in January 2014. They will only resume once the Commission believes its new proposals guarantee, among other things, that the jurisdiction of national courts won’t be limited by special regimes for investor-to-state disputes.

Arbitration revised: Towards a permanent multilateral investment court

In the formal proposal published on Tuesday by Malmström in her blog, the Commission suggests steps that can be taken to transform ISDS into a system which functions more like traditional courts. That involves the appointment of permanent arbitrators, with similar qualifications to those of national judges, and the introduction of a bilateral appeal system.

In parallel, the EU wants to work towards the establishment of a permanent multilateral investment court with tenured judges, who would replace the bilateral mechanism over time.

Eventually, what will be proposed in TTIP will set the standard for further development of investment protection provisions and investment arbitration in international negotiations, the paper says.

The EU is the world’s largest source and destination of foreign direct investment (FDI), and international investment rules were first set up in Europe. Today, member states are parties to almost half of the 3,000 investment agreement currently in force worldwide.

“It is high time the EU seizes its opportunity to act on the world stage. I expect Malmström to take a clear position in the negotiations and put firm demands on the table,” said Liberal MEP Marietje Schaake, who wants the EU trade chief to convince the United States to accept far-reaching reforms of investment protection.

Forum shopping out

“We do not want cases within the EU such as the one that is now being brought by Philip Morris against Australia,” she added referring to the well-known practice of ‘forum shopping’ according to which investors would pick the most suitable agreement to bring an ISDS claim.

“It must be crystal clear that investment protection can only be used when a company has obviously been treated unfairly, such as through expropriation of property. The discussion on reforming ISDS should not be limited to the US. We also need solutions for all the treaties member states already have,” Schaake insisted.

Such practice is prohibited in recent investment agreements, like the one signed with Canada. “Moreover, ‘mailbox companies’ will not be able to bring cases to arbitration. Only companies with real business operations in the territory of one of the parties will be covered by the investment protection provisions,” reads the proposal.

Right to regulate in

According to the leaked text, the Commission will not accept any deal that would not guarantee the right to regulate. The EU-Canada agreement (CETA) maintains it clearly in preamble, so will TTIP.

“We are strengthening that language in this proposal,” Malmström said, speaking at the Center for Strategic and International Studies in Washington before meeting with US lawmakers.

Malmström will present her proposals to the Parliament’s trade committee on Wednesday and to EU trade ministers on Thursday.

So far, nine TTIP negotiating rounds have been held, the latest in New York (20-24 April).

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.

Member states already have 1,400 ISDS-type agreements with other countries, some dating back to the 1950s. There is an urgent need for reform, and everybody agrees.

Read>>Special report: TTIP and the Arbitration Clause

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.

Negotiations on investment in TTIP were suspended in January 2014. They will only resume once the Commission believes its new proposals guarantee, among other things, that the jurisdiction of national courts won’t be limited by special regimes for investor-to-state disputes.

The final decision, which must be ratified by both EU Council and Parliament in a full vote, will only be taken with the agreement of European Commission First Vice-President Frans Timmermans. Commission President Jean-Claude Juncker gave Timmermans the veto. He will ensure ISDS complies with the rule of law, and principles of equality and transparency, according to a memo published by the executive.

Read>>Linksdossier: TTIP for dummies

  • 6 May: Commission presents ISDS proposals to European Parliament Trade Committee
  • 7 May: Commission presents ISDS proposals to EU trade ministers

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