While EU and US negotiators meet for a new round of trade talks this week, experts are questioning Parliament’s rejection of arbitration mechanisms in the Transatlantic Trade and Investment Partnership (TTIP) on 9 July.
“ISDS cannot be dead, as there will always be investment-state disputes and someone will have to settle them,” said independent arbitrator Vera Van Houtte, Vice-President of the ICC Court of Arbitration.
ISDS supporters believe such clauses guarantee the terms of investment treaties, since they offer an independent resolution mechanism for parties who don’t sign them. Arbitration is carried out by a number of specialised bodies and often result in settlements between the parties, rather than lead to formal tribunal decisions.
Last week, the European Parliament voted to overturn 50 years of international law on the Investor-State Dispute Settlement (ISDS) mechanism.
The rejection of the extra-judicial arbitration mechanism, which has been the most contentious point in the TTIP negotiations, was finally adopted by 447 votes for to 229 against, with 30 abstentions. The final compromise calls for a new public legal structure, “with publicly appointed, independent judges”.
Even if it is a non-binding resolution, it creates red lines for the European Commission, in its negotiations with the US.
“It is not clear to me what the other system means,” said Vera Van Houtte, Vice-President of the ICC Court of Arbitration, explaining arbitrators are already independent from parties involved.
The “publicly appointed” applies already to the arbitrators of the state, she added. “It is up to each state to lay down the rules according to which it chooses its arbitrator and whether it publishes this appointment,” Van Houtte noted.
Legal experts also seem puzzled by the idea of relying on public courts. “No matter how good an EU country’s courts are, investors from other countries would not necessarily feel they would get a fair trial: they want a neutral body,” explained David W. Rivkin, President of the International Bar Association.
Developing a new system will be difficult, concedes Rivkin, who questions Washington’s willingness to go that route.
Dissecting compromise amendment 117, which calls for the new system to replace ISDS, Niuscia Bassiri, a partner at Hanotiau & van den Berg, an arbitration firm in Brussels, said that the way it is phrased “would imply that the new system is different from the court systems of the member states and from the courts of the European Union”.
Critics have spent months arguing that the EU and the US had mature legal systems and didn’t need arbitration, since the national courts offered a perfectly appropriate framework to resolve disputes.
International Investment Court?
“Another notable feature – Bassiri continues – is that it deleted the recommendation to the Commission to pursue in the medium term the creation of a public International Investment Court.”
Cecilia Malmström, the EU’s trade commissioner, proposed last May creating an investment court to allay concerns among Europeans that ISDS would effectively allow companies to bypass national courts if they feel their investments are under threat.
In Europe, critics have pointed to secret trials without democratic legitimacy, biased arbitrators and non-transparent proceedings.
The argument of transparency appears awkward to some, as arbitration has evolved over time and it has improved under the World Bank’s ICSID arbitration rules, and the United Nations Commission on International Trade Law (UNCITRAL) rules of transparency.
“The compromise amendment echoes here the prevalent practice in investment arbitration of ensuring transparency today,” argued Bassiri, noting that the new system will include public hearings and disclosure of pleadings, procedural orders, decisions and awards, which already apply under ICSID and UNCITRAL.
These practices are fairly new, concedes Rivkin. “I think the Commission could take a look at the transparency rules, insist that they be part of the new system and perhaps find ways to improve them and make them even more transparent than the rules already in place.”
Horse-trading with the Americans
The ball now is in the Commission’s camp, which has to negotiate with the US.
Washington has rejected the EU proposal to ditch ISDS, and create an international investment court.
“At most, I expect they may accept the ongoing role of the ISDS industry combined with an appellate mechanism,” reckoned Gus Van Harten, a professor at York University’s Osgoode Hall Law School, in Toronto. “But that falls short of the judicial aspirations of the Parliament.”
Within the World Bank’s ICSID there is an annulment mechanism, which is not the same as the appellate system, but it offers the losing party the possibility to annul the award if procedural protections were not met, explained Rivkin, arguing that it provided sofar sufficient protection.
“It is an outcome that allows for ISDS arbitration to coexist with a judicial process, assuming an appellate body was designed to be judicial.”
Despite fierce lobbying, and political infighting, to come up with a clear direction for negotiations, ISDS remains in limbo. Arbitrators concede that a reformed ISDS, with increased transparency, that takes better account of the public interest, would go a long way.
“Throwing the baby out with the bathwater doesn’t really work,” said another expert.
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.
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.