Addressing the ISDS nightmare

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

Sorin Moisa []

It will be a major strategic mistake to sacrifice carefully negotiated trade agreements of a new generation on the altar of ‘Investor-State Dispute Settlement’ (ISDS), if public opinion does not accept it, writes MEP Sorin Moisa.

MEP Sorin Moisa (S&D, Romania) is member of the Committee on International Trade. He is the former Chief of Cabinet of Agriculture Commissioner Dacian Ciolo?. This is a shortened version of a larger analysis he published with Blogactiv.

I see the ISDS debate as an extension – for the worse- of a widespread syndrome. Many of our citizens are frustrated that they are losing control to distant bureaucrats. They also believe their national leaders are overwhelmed by Brussels and/or big business. So how can they possibly trust a mysterious ‘private tribunal’ appointed offshore which can arbitrate between their country and a big multinational?

ISDS is an international law instrument allowing an investor to sue the state hosting its investment if it believes the latter has treated it unfairly. The main institution dealing with ISDS cases is the International Centre for the Settlement of Investment Disputes (ICSID), a member of the World Bank Group, in Washington, D.C.

Without prejudging in any way on the final position of my group (S&D), as food for thought, I suggest that one or a combination of several of the following options might offer a way out, because what hangs in the balance is CETA, the new generation treaty between the EU and Canada, then perhaps TTIP, and the future of trans-Atlantic relations beyond trade.

1. The scope of ISDS should be limited to cases of denial of justice. If, for any reason, a company does not have access to the judicial system of a country, then it should be able to invoke the jurisdiction of an arbitral tribunal. In other words, if there a void, i.e. no jurisdiction to consider a case, there is no rule of law, and arbitration should be allowed. Denial of justice is the number one example of a breach of the obligation of ‘fair and equitable treatment’ in the CETA text. It is rightly so. The other types of breaches (manifest arbitrariness, targeted discrimination, etc.) can be dealt with by domestic courts.

2. An argument invoked by proponents of ISDS is the length of judicial proceedings in EU Member States, with some founding member states being given as example. It is reasonable for any citizen or company to expect a fairly quick resolution of their case. Therefore, we could imagine an automatic right for an investor to trigger ISDS if its case has not reached the final level of jurisdiction within say 36 months from the date of the initial claim. This would create an incentive for legislators and judiciaries, too, to speed up judicial proceedings. I disagree with The Economist suggestion that firms should first ‘exhaust domestic legal remedies before arbitration can begin’. Arbitration should not become higher than the highest court of a democratic country. Once a final ruling has been achieved, that should be just that.

3. In meetings with stakeholders representing the business world, I have repeatedly heard the argument that ISDS will be more useful for SMEs than for large multinational companies, as the latter have resources, armies of lawyers and access to governments, so they can look after themselves. Well, then, let’s make ISDS available only for SMEs, the really potentially vulnerable companies. We would have to agree on a ceiling based on turnover and/or number of employees for eligibility for ISDS. This would remove the core suspicion that ISDS is an instrument in the hands of big business against civil society: let it make the weak stronger.

4. A possible systemic solution is the one suggested by The Economist in its 11 October article ‘A better way to arbitrate’: turning ISDS into either a state-to-state mechanism, with the choice of arbiters by the states themselves. It would be even better if there could be permanent arbitral courts, to prevent charges ad-hoc-ness and allow for jurisprudence to accumulate. In the ‘state-to-state dispute settlement’, the state of the investor would take up the claim itself and would either represent it before the other state or subrogate into its right for the purpose of the case. After all, it is rights and obligations created by the treaty between the two states that are alleged to have been breached. The award or penalty would then need to be passed on to the investor, minus the charges involved. A softer version of ‘state-to-state’ is to still allow for investor-state-dispute, but with the consent of both governments, as provided by Article 11.16 of the Australia-US FTA. This would take the automaticity out of the process and would introduce a filter, basically requiring the consent of both governments before the arbitration process would start. When consent is given by both governments, most likely good faith prevails and the public interest is safeguarded, as no government would tell anyone ‘sue me’ if it did not believe it was right. ‘State-to-state’ has the advantage of more social control and more relative legitimacy, despite the lack of confidence in national politics mentioned earlier and arguably, a state is more likely not to pursue an abusive or partisan claim against another state than a corporation. In fact, this scenario would offer an answer to a question begged by the whole ISDS debate: why would states desist from pursuing their roles in defending their nationals, including companies? Why would they privatise that function? Aren’t they making their already serious social confidence problem worse?

Last but not least, an appellate body, modelled on the WTO, should be introduced in the ISDS architecture, for appeals on issues of law, composed of more – and more senior- arbitrators than the first layer of jurisdiction. Perhaps the seven-member Standing Appellate Body of the WTO itself could be used by for ISDS appeals, since it is there already and dispute settlement is viable pillar of the multilateral trading system. Perhaps this would require a strengthening of the WTO Appellate Body, and generally the move would not harm the WTO, quite the contrary.

I believe the importance of ISDS is blown out of proportion by its supporters, some of whom may suffer from a degree of strategic blindness: it is simply not going to be the end of the world if ISDS clauses are eliminated, circumscribed, remodelled or limited in scope as suggested above. On the contrary, it is a major strategic mistake to sacrifice carefully negotiated new generation trade agreements on the altar of ISDS, if public opinion does not accept it. It is a threat to the already frail legitimacy of trade negotiations and to the further economic integration of the Atlantic world that is simply not worth pursuing. Moreover, it is not so clear that non-Western countries with which we are or will be negotiating might not want ISDS if we do not have it as standard in intra-Western trade agreements. The unfamiliarity of 28 legal systems for companies from these countries might be a strong incentive for them to want ISDS. For example, there is evidence that China had a strong preference for ISDS in the FTA negotiation with Australia. We should treat ISDS on its merits, in all negotiations, rather than using it for scare mongering.


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