The European Commission is investigating a permanent international investment court as a replacement for the controversial Investor-State Dispute Settlement mechanism (ISDS). The plan for a court, and the road map towards it are fundamentally flawed, writes Ante Wessels.
Ante Wessels is an analyst with the Foundation for a Free Information Infrastructure (FFII).
Former Vice-President of the European Commission, in charge of justice, and now member of the European Parliament international trade committee, Viviane Reding proposed to replace ISDS with a permanent international investment court. Commissioner for Trade Malmström supports the idea. This plan creates a serious risk on expansionist interpretation and puts the EU at the mercy of other states.
First among a number of flaws is that specialised courts tend to become biased. An example is the centralisation of appeals in patent cases before the US Court of Appeals for the Federal Circuit; this prompted an expansionist interpretation and application of the US Patent Act. The Supreme Court intervened and opposed a series of judgments of the Federal Circuit. Specialised courts need a general supreme court on top to correct expansionist interpretation. Reding’s proposal lacks such a general supreme court.
Secondly, democracies need a legislative feedback loop. We have to be able to change laws that do not work well. Lord Steyn explained (regarding the UK): “in striking the balance the courts may arrive at a result unacceptable to Parliament. In such cases Parliament can act with great speed to reverse the effect of a decision. It has done so in the past. That is in the spirit of our constitution, and is wholly in accord with the democratic ideal”.
The EU legislature cannot reverse court decisions, but it can change laws for the future. Changing an international treaty is much harder than changing national or EU legislation; there is no workable legislative feedback loop at the supranational level. Unless all treaty parties agree there is no way to correct expansionist or otherwise unacceptable interpretations. Reding’s proposal would place our democracy at the mercy of other states.
As part of the reform plan, Reding wants to ratify the trade agreements with Canada and Singapore. She overlooks the fact that the ISDS sections in these agreements are deeply flawed. The European Commission used the EU-Canada text as the reference text in the ISDS consultation. Over 110 scholars published a joint submission to the ISDS consultation, showing that the Commission failed to solve a long list of crucial issues in the EU-Canada text.
The ratification of the agreement with Canada or the one with Singapore would be a game changer. Multinationals from the US and other countries would be able to use the flawed ISDS sections in the agreement against the EU. Both agreements contain measures against forum shopping through post box companies, but not against forum shopping by multinationals.
Including ISDS in these trade agreements creates a lock-in effect, as it is practically impossible to withdraw from a trade agreement. Changes are possible, but only if both parties agree. If we wanted to get rid of flawed ISDS provisions in the future we would be at the mercy of Canada, Singapore or any other country with which the EU would have concluded a trade agreement.
So far, in 72 annulment appeals of ISDS cases, the President of the World Bank has appointed all three of the arbitrators. This is not only problematic in itself, but is especially worrying because the President of the World Bank has always been the candidate backed by the US Moreover, this is only one example of procedural rules which give the US an unfair advantage.
Surely the EU Commission will not include rules that would give the US an unfair advantage in ISDS agreements? Unfortunately, in the agreements with Canada and Singapore they already did. After being alerted about this, the Commission kept silent and didn’t take action. This silence and inaction gives the US a strong position. The US now knows that the Commission will find cosmetic reforms sufficient (as they did in the agreements with Canada and Singapore) and will keep silent about procedural rules which give the US an unfair advantage. After ratification of the agreement with Canada or with Singapore the EU would be locked in – and the US would know the Parliament is just as lenient as the Commission. The US can resist anything beyond cosmetic reform and demand the inclusion of ISDS in TTIP. They have no reason to support a permanent international investment court unless it is just as rigged to their advantage as the ISDS system. After the ratification of the US-EU agreement (TTIP) the EU would be further locked in, this time directly by the US. A complete failure of the EU’s diplomacy.
Currently only 1% of US investments in the EU is covered by ISDS; this led to nine cases.
Coverage of 100% of US investments in the EU may lead to dozens of cases a year against the EU and its member states – to start with. ISDS arbitrators have so much discretionary power that they can twist cases to any side. The US has never lost an ISDS case; EU member states have lost or had to settle many. If TTIP is a marriage, our democracy is the dowry.
Neither ISDS nor a court is needed. Contracts, local courts, state-to-state arbitration and insurance provide sufficient protection.
The plan for a court and the road map towards it are fundamentally flawed. To protect our democracy the Parliament has to reject both ISDS and court.