A parade of ISDS reforms: The Commission’s new float

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

ISDS, still in limbo. [Corporate Europe Observatory]

EXCLUSIVE / The Commission’s new ideas to reform the investor-state dispute settlement (ISDS) are still inadequate to tackle the flaws of the system, and the parade is still going towards special privileges for foreign investors, posing a big risk for democracy, writes Gus Van Harten.

Gus Van Harten is associate professor at Osgoode Hall Law School in Toronto, Canada, and an expert on ISDS. His anlaysis of the Commission’s paper is freely available here.

The European Commission’s new proposal on investor-state dispute settlement (ISDS) is an example of how decision-makers have used the word “reform” to promote ISDS, without addressing its fundamental flaws.

The proposal is not all negative. It moves beyond essentially fake reforms to something potentially more meaningful. But the Commission’s vision of ISDS still does not meet the minimum criteria of independence, fairness, openness, subsidiarity, and balance. It is not even close. The proposal also appears unreliable, if not backed by a legal text and negotiating red line for the proposed TTIP, CETA, and other agreements.

If the fundamental flaws in ISDS are not fixed, the case for ISDS does not stand, especially in an agreement among countries with established democracies and independent courts. The threat to democracy, courts, and public budgets is too high, compared to whatever public benefit is thought to come from privileging and subsidizing foreign investors.

The most positive aspect of the Commission’s proposal is its signal that the EU might move to a more judicial model of ISDS. Most importantly, the proposal indicates that arbitrators would be assigned to cases from a roster and that the roster members would be chosen by states instead of corporations or tycoons. That is a small step forward, I suppose. Also, the Commission seems to have thought carefully about the option of an appellate body with judicial safeguards. This step also marks a shift from the Commission’s deeply unfortunate position so far.

Even so, critical flaws remain, starting with judicial independence. First, the Commission still refers to arbitrators instead of judges. Second, it does not commit to arbitrators being paid a set salary instead of operating for profit. Third, it does not propose a judicial process to replace the role of executive officials in deciding conflict of interest claims against arbitrators. Fourth, it does not commit to prohibiting arbitrators from working on the side as ISDS lawyers. Among other things, these gaps raise the concern that the roster would end up populated by the repeat players in the ISDS arbitration industry who have behaved so adventurously in cases to date, at great expense to voters and taxpayers.

These flaws are very serious. After all, we are speaking of an international process that would have supreme power over legislatures, governments, and courts and that creates major financial risks for countries.

Another key weakness in the Commission’s proposal is its failure to commit to requiring foreign investors—like everyone else—to go to a country’s domestic courts, where they are independent and fair, before seeking an international remedy. Instead, the Commission seems dead set on giving a special status to foreign investors, by allowing them to challenge the laws that apply to everyone—outside the processes that everyone else must use.

It is frankly incredible that the Commission would take this position in an agreement among countries with arguably the most established court systems in the world. In effect, it endorses rigged rules that benefit foreign investors, most of all large companies and very wealthy individuals.

On the question of the state’s “right to regulate”—a euphemism for values of democracy, sovereignty, and fiscal responsibility—the Commission still downplays the harm it has done to this right in the text of the Canada-EU CETA. The proposal indicates that the right may be put directly in the investment chapter instead of merely the preamble, but only for the TTIP. Even for the TTIP, the devil is in the details and it is necessary to wait for a clear text and red line before trusting in these promises.

Also, the Commission has not ameliorated the extraordinary financial risks that ISDS creates for the public, by putting strict limits on the remedy of retrospective compensation for foreign investors. That is another major omission. Finally, for anyone who thinks that foreign investors should have actionable responsibilities alongside their rights, the Commission’s proposal does not even mention the issue.

Perhaps the most concerning aspect of the proposal lies in its sequencing. Logically, the Commission should address the flaws in ISDS in existing agreements, before pushing to expand ISDS in a new mega-deal with the United States. The CETA with Canada, for example, is a low-hanging fruit, ready for picking. Why not commit to ISDS reforms in existing agreements, for which we have a public text that can be scrutinized and revisited?

I worry the proponents of ISDS have a less benign aim: to distract from the push to lock in ISDS in lesser-known deals. By making soft promises focused on the TTIP, the Commission kicks the ball of ISDS down the field. Decision-makers should fix what is wrong with ISDS, instead of looking to expand its reach exponentially in the TTIP.

The parade of reforms has a new float, but the parade is still going the same way: toward special privileges for foreign investors, and big risks for democracy, courts, and public budgets.

European Union


Professor Gus Van Harten from the Osgoode Hall Law School: A parade of reforms: The European Commission's latest proposal for ISDS

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