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Respondent details

  • Company/Organisation: European Public Health Alliance
  • Location: Belgium
  • Activity: Public Health
  • Profile: Non-governmental organisation
  • Transparency register: Yes
  • Prior investment in the US: No

Contribution

A. Substantive investment protection provisions

Explanation of the issue

The scope of the agreement responds to a key question: What type of investments and investors should be protected? Our response is that investment protection should apply to those investments and to investors that have made an investment in accordance with the laws of the country where they have invested.

Approach in most investment agreements

Many international investment agreements have broad provisions defining “investor” and “investment”.

In most cases, the definition of “investment” is intentionally broad, as investment is generally a complex operation that may involve a wide range of assets, such as land, buildings, machinery, equipment, intellectual property rights, contracts, licences, shares, bonds, and various financial instruments. At the same time, most bilateral investment agreements refer to “investments made in accordance with applicable law”. This reference has worked well and has allowed ISDS tribunals to refuse to grant investment protection to investors who have not respected the law of the host state when making the investment (for example, by structuring the investment in such a way as to circumvent clear prohibitions in the law of the host state, or by procuring an investment fraudulently or through bribery).

In many investment agreements, the definition of “investor” simply refers to natural and juridical persons of the other Party to the agreement, without further refinement. This has allowed in some cases so–called “shell” or “mailbox” companies, owned or controlled by nationals or companies not intended to be protected by the agreement and having no real business activities in the country concerned, to make use of an investment agreement to launch claims before an ISDS tribunal.

The EU's objectives and approach

The EU wants to avoid abuse. This is achieved primarily by improving the definition of “investor”, thus eliminating so –called “shell” or “mailbox” companies owned by nationals of third countries from the scope: in order to qualify as a legitimate investor of a Party, a juridical person must have substantial business activities in the territory of that Party.

At the same time, the EU wants to rely on past treaty practice with a proven track record. The reference to “investments made in accordance with the applicable law” is one such example. Another is the clarification that protection is only granted in situations where investors have already committed substantial resources in the host state - and not when they are simply at the stage where they are planning to do so.

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, what is your opinion of the objectives and approach taken in relation to the scope of the substantive investment protection provisions in TTIP?

There is a clear conflict between public health interests and the interests of certain potential investors (and their activities) who may seek to exploit the ISDS mechanisms through the protections it offers. It is crucial that the scope of substantive investment protection provisions recognises (1) that this conflict exists and (2) that domestic governments’ drive to introduce policies that protect public health should without exception override the principle of investment protection. National governments should maintain their legal sovereignty in public health policy and should not be prevented or disincentivised from introducing policy that aims to protect public health. Therefore, the condition that ‘protection is only granted in situations where investors have already committed substantial resources in the host state’ should be supplemented by an additional condition that precludes protection where potential investors’ activities interfere with the public health policies of the host nation (or indeed the health of the global population more broadly). There is no justification to confer commercial protections which could undermine the primacy of states’ public health mandate. International law is crucial for raising standards on public health and this should be reflected on. “Investments made in accordance with the applicable law” should include reference to international agreements such as the Framework Convention on Tobacco Control. Investments in activities that are broadly considered to have the potential to impact public health negatively should not expect to benefit from investment protection; such investments include tobacco, alcohol and unhealthy foods. In addition to the above supplementary conditions, the principle that governments are free to introduce measures that protect public health should be made explicit within the scope of protection. This is crucial to mitigate the threat of investors that threaten public health. There is a body of evidence that bears testament to industry’s efforts to push at the doors left open to them in international trade agreements, either through ISDS or similar mechanisms. For example, the tobacco industry has a well documented history of employing tactics to ‘Block, Amend or Delay’[i] public health legislation which could negatively impact on their profits. These tactics include the repeated inference of international or bi-lateral trade agreements in an attempt to forestall or block tobacco control measures, or in an effort to affect a ‘regulatory chill’[ii]. By its own admission[iii], the tobacco industry has been a driving force behind challenges to Australia’s plain packaging law, brought about through the process of the World Trade Organization dispute panel. On 28th September 2012, in response to a request by Ukraine, the World Trade Organization Dispute Settlement Body[iv] agreed to set up a panel to assess whether the plain packaging law passed in Australia breaches intellectual property rules under the Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement or violates the Agreement on Technical Barriers to Trade (TBT). Private businesses and organisations are not permitted to do this. As at December 2013, seven countries and the EU have joined the dispute as third parties. The disputes panel with Australia was established on 28 September 2012[v]. In May 2014, the Director-General of the WTO appointed panelists to examine the complaint (1). (1) http://www.mccabecentre.org/focus-areas/tobacco/dispute-in-the-world-trade-organization

Explanation of the issue

Under the standards of non-discriminatory treatment of investors, a state Party to the agreement commits itself to treat foreign investors from the other Party in the same way in which it treats its own investors (national treatment), as well in the same way in which it treats investors from other countries (most-favoured nation treatment). This ensures a level playing field between foreign investors and local investors or investors from other countries. For instance, if a certain chemical substance were to be proven to be toxic to health, and the state took a decision that it should be prohibited, the state should not impose this prohibition only on foreign companies, while allowing domestic ones to continue to produce and sell that substance.

Non-discrimination obligations may apply after the foreign investor has made the investment in accordance with the applicable law (post-establishment), but they may also apply to the conditions of access of that investor to the market of the host country (pre-establishment).  

Approach in most existing investment agreements

The standards of national treatment and most-favoured nation (MFN) treatment are considered to be key provisions of investment agreements and therefore they have been consistently included in such agreements, although with some variation in substance.

Regarding national treatment, many investment agreements do not allow states to discriminate between a domestic and a foreign investor once the latter is already established in a Party’s territory. Other agreements, however, allow such discrimination to take place in a limited number of sectors.

Regarding MFN, most investment agreements do not clarify whether foreign investors are entitled to take advantage of procedural or substantive provisions contained in other past or future agreements concluded by the host country. Thus, investors may be able to claim that they are entitled to benefit from any provision of another agreement that they consider to be more favourable, which may even permit the application of an entirely new standard of protection that was not found in the original agreement. In practice, this is commonly referred to as "importation of standards".

The EU’s objectives and approach

The EU considers that, as a matter of principle, established investors should not be discriminated against after they have established in the territory of the host country, while at the same recognises that in certain rare cases and in some very specific sectors, discrimination against already established investors may need to be envisaged. The situation is different with regard to the right of establishment, where the Parties may choose whether or not to open certain markets or sectors, as they see fit.

On the "importation of standards" issue, the EU seeks to clarify that MFN does not allow procedural or substantive provisions to be imported from other agreements.

The EU also includes exceptions allowing the Parties to take measures relating to the protection of health, the environment, consumers, etc. Additional carve-outs would apply to the audio-visual sector and the granting of subsidies. These are typically included in EU FTAs and also apply to the non-discrimination obligations relating to investment. Such exceptions allow differences in treatment between investors and investments where necessary to achieve public policy objectives.

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Taking into account the above explanations and the text provided in annex as a reference, what is your opinion of the EU approach to non –discrimination in relation to the TTIP? Please explain.

The right of governments to introduce policies that protect public health must be safeguarded as it constitutes a necessary mechanism in meeting its ‘duty of care’ to its citizens. In some cases, discrimination against certain investors may indeed be necessary to achieve public health goals. In other words, non-discriminatory treatment of investors is not a principle that serves public health goals and should not take primacy. The text should distinguish between discrimination that occurs as a direct result or as a by-product of national measures. If investors are discriminated against by a national public health measure that inadvertently impacts their activity they should not be allowed to pursue a claim. We note the provision that the EU includes exceptions allowing parties to take measures relating to the protection of health. We do feel this is positive but with reservations. First, as stipulated above, the right to introduce policy that protects public health is the right of domestic governments. This should not be reduced or weakened by obliging governments to introduce such policies via an exception, with the associated conditions and hurdles associated with this. There are concrete examples where measures or exceptions for public health within international treaties can be difficult to implement in practise. Only one of 40 attempts to use GATT Article XX and GATS Article XIV at the WTO has ever succeeded due to the high threshold contained within the exception that would be replicated under the current proposal. To take advantage of the exception for policies “to protect human, animal or plant life or health,” for example, a government would first have to prove that the policy was designed to fulfil one of those objectives. It would then need to prove that the policy was “necessary” for the fulfilment of the environmental objective. Although the interpretnation of necessity leaves policy space for governments, this requirement has shown to be a barrier and led to failed attempts to invoke the general exception at the WTO. This is the result of tribunals requiring high thresholds of necessity. In his discussion on US tobacco companies’ gaining market access to Japan, South Korea, Taiwan and Thailand, Robert Stumberg notes: ‘Studies showed that liberalizing tobacco trade in the 1990s resulted in lower tariffs, lower prices, aggressive marketing, and greater tobacco use-in the range of ten percent for all four countries’ . Thailand attempted to ban US imported cigarettes ‘on the grounds that the imports were more addictive and marketing of imports was driving up consumption’ , but was successfully challenged by the US, who argued they had violated the GATT in not satisfying ‘the health exceptions of GATT Article XX’ As complainants usually identify a less trade restrictive approach to achieve the policy object, the State would have a difficult case to make at investor-state tribunals to prove that no less trade restrictive alternative measure existed. (unevitably proving a negative) Finally, the State would have to prove that the measure was not applied in a discriminatory manner or as a disguised restriction on investment. A more mechanism and clause should be developed that avoids these legal hurdles, particularly omitting any “necessity” test, for example removing investors who threaten public health from the scope of the ISDS mechanism. Similarly, the provision that ‘in certain rare cases and in very specific sectors, discrimination against already established investors may need to be envisaged’ should be strengthened and clarified. ‘In certain rare cases’ and ‘in very specific sectors’, coupled with ‘may need’ sets a very high bar for governments and may provide too much protection for investors: governments must be free to introduce policies that protect public health, and this should take precedent over the principle on non discrimination. We recognise the importance of the principle regarding Most Favoured Nation. However, we also feel that this wording should be clarified. It is crucial to guarantee that no provisions can be imported from other Free Trade Agreements (FTAs); the existing wording, ‘MFN does not allow procedural or substantive provisions to be imported from other agreements’ leaves enough scope for interpretation, which may suggest that provisions deemed ‘non procedural’ or ‘non substantive’ could be imported from existing FTAs. It must be made clear that no provisions of any type could be imported. With this consultation response and the opportunity to provide answers on the specific clauses in the investment chapter protection, EPHA will advocate that ISDS should not be included in the EU’s future investment treaties, including the TTIP.

Explanation of the issue

The obligation to grant foreign investors fair and equitable treatment (FET) is one of the key investment protection standards. It ensures that investors and investments are protected against treatment by the host country which, even if not expropriatory or discriminatory, is still unacceptable because it is arbitrary, unfair, abusive, etc. 

Approach in most investment agreements

The FET standard is present in most international investment agreements. However, in many cases the standard is not defined, and it is usually not limited or clarified. Inevitably, this has given arbitral tribunals significant room for interpretation, and the interpretations adopted by arbitral tribunals have varied from very narrow to very broad, leading to much controversy about the precise meaning of the standard. This lack of clarity has fueled a large number of ISDS claims by investors, some of which have raised concern with regard to the states' right to regulate. In particular, in some cases, the standard has been understood to encompass the protection of the legitimate expectations of investors in a very broad way, including the expectation of a stable general legislative framework.

Certain investment agreements have narrowed down the content of the FET standard by linking it to concepts that are considered to be part of customary international law, such as the minimum standard of treatment that countries must respect in relation to the treatment accorded to foreigners. However, this has also resulted in a wide range of differing arbitral tribunal decisions on what is or is not covered by customary international law, and has not brought the desired greater clarity to the definition of the standard. An issue sometimes linked to the FET standard is the respect by the host country of its legal obligations towards the foreign investors and their investments (sometimes referred to as an "umbrella clause"), e.g. when the host country has entered into a contract with the foreign investor. Investment agreements may have specific provisions to this effect, which have sometimes been interpreted broadly as implying that every breach of e.g. a contractual obligation could constitute a breach of the investment agreement.

EU objectives and approach

The main objective of the EU is to clarify the standard, in particular by incorporating key lessons learned from case-law. This would eliminate uncertainty for both states and investors.

Under this approach, a state could be held responsible for a breach of the fair and equitable treatment obligation only for breaches of a limited set of basic rights, namely: the denial of justice; the disregard of the fundamental principles of due process; manifest arbitrariness; targeted discrimination based on gender, race or religious belief; and abusive treatment, such as coercion, duress or harassment. This list may be extended only where the Parties (the EU and the US) specifically agree to add such elements to the content of the standard, for instance where there is evidence that new elements of the standard have emerged from international law.

The “legitimate expectations” of the investor may be taken into account in the interpretation of the standard. However, this is possible only where clear, specific representations have been made by a Party to the agreement in order to convince the investor to make or maintain the investment and upon which the investor relied, and that were subsequently not respected by that Party. The intention is to make it clear that an investor cannot legitimately expect that the general regulatory and legal regime will not change. Thus the EU intends to ensure that the standard is not understood to be a “stabilisation obligation”, in other words a guarantee that the legislation of the host state will not change in a way that might negatively affect investors. In line with the general objective of clarifying the content of the standard, the EU shall also strive, where necessary, to provide protection to foreign investors in situations in which the host state uses its sovereign powers to avoid contractual obligations towards foreign investors or their investments, without however covering ordinary contractual breaches like the non-payment of an invoice.

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Taking into account the above explanation and the text provided in annex as a reference, what is your opinion of the approach to fair and equitable treatment of investors and their investments in relation to the TTIP?

The EU’s attempt to cap fair and equitable treatment (FET) obligations is positive. As cited within the question, the principle of fair and equitable treatment has in the past led to challenges of states’ right to regulate, which threatens public health. As with the principle of non discrimination (question 2), fair and equitable treatment should not override public health priorities; states’ measures to protect health should not be challenged by this principle. However, although the intentions of the EU are laudable, this intention is thwarted by much of the language within the text which is too vague or weak to ensure effective support for public health measures. In particular, ‘manifest arbitrariness’ is a term that leaves much room for interpretation, and indeed creates less clarity on the scope of protection here, not more. This expression, in particular, should be removed from the text and replaces with more tangible, less interpretative language. There are concrete examples where language of this kind has prevented countries from introducing measures to protect public health. For example, under the North American Free Trade Agreement (NAFTA), a tribunal concluded that an FET violation was one in which “an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective.” On the basis of this definition, the tribunal ruled that by banning the export of a hazardous waste Canada had violated the investor’s right to “fair and equitable treatment”. The conditions around legitimate expectations should also be reviewed. Although it is positive that the EU is aware that this provision could be understood as a stabilisation mechanism, there is not enough clarity in the language to ensure that member states are free at any point to introduce legislation that protects health. In particular, the wording ‘upon which the investor relied’ should be removed; commercial interests should not be considered in cases where public health are concerned. In a similar way to the principle of ‘non-discrimination’ in question 2, the principle of fair and equitable treatment could prove to be a barrier to implementation of public health measures. As UNCTAD explains: “A further concern about how the FET standard has evolved arises from the relationship between regulatory measures adversely affecting investors and the reasons underlying these measures. One such reason could be that the host country is under an international obligation to achieve a specific regulatory outcome, such as an international environmental, public health or human rights protection obligation. Where a government undertakes a regulatory measure in furtherance of such a commitment and results in a change to the legal or commercial environment and negatively affects investment, it is uncertain whether the tribunal will accept the nature of the measure as a response trumping an FET claim. “

Explanation of the issue

The right to property is a human right, enshrined in the European Convention of Human Rights, in the European Charter of Fundamental Rights as well as in the legal tradition of EU Member States. This right is crucial to investors and investments. Indeed, the greatest risk that investors may incur in a foreign country is the risk of having their investment expropriated without compensation. This is why the guarantees against expropriation are placed at the core of any international investment agreement.

Direct expropriations, which entail the outright seizure of a property right, do not occur often nowadays and usually do not generate controversy in arbitral practice. However, arbitral tribunals are confronted with a much more difficult task when it comes to assessing whether a regulatory measure of a state, which does not entail the direct transfer of the property right, might be considered equivalent to expropriation (indirect expropriation).

Approach in most investment agreements

In investment agreements, expropriations are permitted if they are for a public purpose, non-discriminatory, resulting from the due process of law and are accompanied by prompt and effective compensation. This applies to both direct expropriation (such as nationalisation) and indirect expropriation (a measure having an effect equivalent to expropriation).

Indirect expropriation has been a source of concern in certain cases where regulatory measures taken for legitimate purposes have been subject to investor claims for compensation, on the grounds that such measures were equivalent to expropriation because of their significant negative impact on investment. Most investment agreements do not provide details or guidance in this respect, which has inevitably left arbitral tribunals with significant room for interpretation.

The EU's objectives and approach

The objective of the EU is to clarify the provisions on expropriation and to provide interpretative guidance with regard to indirect expropriation in order to avoid claims against legitimate public policy measures.  The EU wants to make it clear that non-discriminatory measures taken for legitimate public purposes, such as to protect health or the environment, cannot be considered equivalent to an expropriation, unless they are manifestly excessive in light of their purpose. The EU also wants to clarify that the simple fact that a measure has an impact on the economic value of the investment does not justify a claim that an indirect expropriation has occurred.

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, what is your opinion of the approach to dealing with expropriation in relation to the TTIP? Please explain.

While the definition of direct expropriation has traditionally been relatively clear, the evolving understanding of indirect expropriation (to include, for example lost profits) has left significant leeway for companies to challenge national regulation by using investment treaty provisions. Public health concerns have been relatively neglected in investment treaties to date , and the issue of safeguarding a state’s right to regulate in the public interest has become central in international investment agreements especially after the case of Philip Morris Asia (PMA) v Australia, whereby the provisions of the Hong Kong – Australia bilateral investment treaty (BIT) were invoked to challenge Australian legislation requiring plain packaging of tobacco products. Specifically, PMA claims that the legislation deprived it of its intellectual property rights and that it did not receive fair and equitable treatment. While the details of this ongoing case have not been released to the public due to a PMA confidentiality request, available information illustrates how companies can challenge states’ freedom to regulate in the interests of public health and public interest. This consultation question raises several issues: - The Commission’s stated goal is to avoid claims against legitimate public policy measures. However, the definition of legitimate and where the burden of proof lies is insufficiently addressed. Our view is that in designing regulation particularly in the area of public health, governments are already subject to sufficient scientific and public scrutiny. Therefore, claimants should have to demonstrate that a government’s measure is illegitimate. - The Commission does not define what an “excessive” public health measure would be when put in balance with corporate interests. Since legal systems across the world place the highest value on human life, it is hard to envisage how measures aiming to protect and promote health could ever be ruled as “manifestly excessive in light of their purpose.” These measures should be defined by default as not equivalent to expropriation. Explicit clarification that expropriation does not result from a decrease in value is essential. - The definitions provided in the supportive document tend to consider the right to property as equivalent to the positive right to use that property. However, WTO and EU case-law establishes that, at least in regard to intellectual property rights, trademark owners have a negative right to prevent third parties from using their property but they do not automatically have a positive right to use such property under the TRIPS and EU trademark law. Finally, the growing use of ISDS by investors on grounds of expropriation deters other governments that may consider ambitious regulation in the area of public health protection. If challenged under ISDS, states are forced to spend significant amounts of time and resources defending their regulatory autonomy which can result in the adoption of a wait-and-see approach for fear of resource-draining litigation. To illustrate, the New Zealand Health Ministry is waiting for the outcome of the PMA v Australia case to enact plain packaging. The loopholes in the definition of expropriation, the lack of clarity as to who should bear the burden of proof in demonstrating the legitimacy of policies, the weak definition of the primacy of public interest over indirect expropriation all create strong enough concerns for us to recommend that ISDS should not be included any of the EU’s future investment agreements, including TTIP.

Explanation of the issue

In democratic societies, the right to regulate of states is subject to principles and rules contained in both domestic legislation and in international law. For instance, in the European Convention on Human Rights, the Contracting States commit themselves to guarantee a number of civil and political rights. In the EU, the Constitutions of the Member States, as well as EU law, ensure that the actions of the state cannot go against fundamental rights of the citizens. Hence, public regulation must be based on a legitimate purpose and be necessary in a democratic society.

Investment agreements reflect this perspective. Nevertheless, wherever such agreements contain provisions that appear to be very broad or ambiguous, there is always a risk that the arbitral tribunals interpret them in a manner which may be perceived as a threat to the state's right to regulate. In the end, the decisions of arbitral tribunals are only as good as the provisions that they have to interpret and apply.

 Approach in most investment agreements

Most agreements that are focused on investment protection are silent about how public policy issues, such as public health, environmental protection, consumer protection or prudential regulation, might interact with investment. Consequently, the relationship between the protection of investments and the right to regulate in such areas, as envisaged by the contracting Parties to such agreements is not clear and this creates uncertainty.

In more recent agreements, however, this concern is increasingly addressed through, on the one hand, clarification of the key investment protection provisions that have proved to be controversial in the past and, on the other hand, carefully drafted exceptions to certain commitments. In complex agreements such as free trade agreements with provisions on investment, or regional integration agreements, the inclusion of such safeguards is the usual practice.

The EU's objectives and approach

The objective of the EU is to achieve a solid balance between the protection of investors and the Parties' right to regulate.

First of all, the EU wants to make sure that the Parties' right to regulate is confirmed as a basic underlying principle. This is important, as arbitral tribunals will have to take this principle into account when assessing any dispute settlement case.

Secondly, the EU will introduce clear and innovative provisions with regard to investment protection standards that have raised concern in the past (for instance, the standard of fair and equitable treatment is defined based on a closed list of basic rights; the annex on expropriation clarifies that non-discriminatory measures for legitimate public policy objectives do not constitute indirect expropriation). These improvements will ensure that investment protection standards cannot be interpreted by arbitral tribunals in a way that is detrimental to the right to regulate.

Third, the EU will ensure that all the necessary safeguards and exceptions are in place. For instance, foreign investors should be able to establish in the EU only under the terms and conditions defined by the EU. A list of horizontal exceptions will apply to non-discrimination obligations, in relation to measures such as those taken in the field of environmental protection, consumer protection or health (see question 2 for details). Additional carve-outs would apply to the audiovisual sector and the granting of subsidies. Decisions on competition matters will not be subject to investor-to-state dispute settlement (ISDS). Furthermore, in line with other EU agreements, nothing in the agreement would prevent a Party from taking measures for prudential reasons, including measures for the protection of depositors or measures to ensure the integrity and stability of its financial system. In addition, EU agreements contain general exceptions applying in situations of crisis, such as in circumstances of serious difficulties for the operation of the exchange rate policy or monetary policy, balance of payments or external financial difficulties, or threat thereof.

In terms of the procedural aspects relating to ISDS, the objective of the EU is to build a system capable of adapting to the states' right to regulate. Wherever greater clarity and precision proves necessary in order to protect the right to regulate, the Parties will have the possibility to adopt interpretations of the investment protection provisions which will be binding on arbitral tribunals.  This will allow the Parties to oversee how the agreement is interpreted in practice and, where necessary, to influence the interpretation.

The procedural improvements proposed by the EU will also make it clear that an arbitral tribunal will not be able to order the repeal of a measure, but only compensation for the investor.

Furthermore, frivolous claims will be prevented and investors who bring claims unsuccessfully will pay the costs of the government concerned (see question 9).

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, what is your opinion with regard to the way the right to regulate is dealt with in the EU's approach to TTIP?

EPHA expresses its concern over the Commission’s intention to “achieve a solid balance between the protection of investors and the Parties' right to regulate.”As the guardian of the Treaty, the Commission should aim to always safeguard the right to regulate EPHA takes note of the attempts to strengthen the right to regulate and that it is stipulated in the preamble and views this as useful in the interpretation of the agreement. However, EPHA would encourage further steps to be taken as a preamble is not binding. We urge that the objective to balance the protection of investors with the right to regulate be revised: the right to regulate should always take precedence over investment protection Furthermore, greater clarity is needed on what is meant by "legitimate" objectives and EPHA calls on the Commission to recognise public health as a reason to regulate in the public interest. Greater clarity is needed so this is not interpreted as a “necessity test” or “proportionality test” that could be construed as the least trade-restrictive measure to meet a regulatory objective. The Commission should additionally add reference to “public health” within the following text: “DETERMINED to strengthen their economic, trade, and investment relations in accordance with the objective of sustainable development, in its economic, social and environmental dimensions, and to promote trade and investment in a manner mindful of high levels of environmental and labour protection and relevant internationally recognised standards and agreements to which they are Parties, ” Within the wording “to promote trade and investment in a manner mindful of… relevant internationally recognised standards and agreements to which they are Parties” more clarity is needed in order to protect the “right to regulate”. This could be interpreted as the right to regulate is fully subject to other agreements and as a result, it could be argued that harmonisation of bilateral and multilateral treaties takes precedence over the right to regulate in the public interest.. EPHA would like to see stronger safeguards to promote population health and regulate in the public interest. There are several exemptions to ISDS envisaged within the text. In the Consultation document it is described as: “Additional carve-outs would apply to the audiovisual sector and the granting of subsidies. Decisions on competition matters will not be subject to investor-to-state dispute settlement (ISDS). Furthermore, in line with other EU agreements, nothing in the agreement would prevent a Party from taking measures for prudential reasons, including measures for the protection of depositors or measures to ensure the integrity and stability of its financial system.” There should be a wide public health safeguard that would reaffirm the right to regulate in: • Food labelling • Taxation, fiscal measures, and subsidies for public health purposes (such as a minimum unit price in alcohol or taxes on fiscal measures on food) • Health warning labels on tobacco products and alcoholic beverages • The decision of prices and reimbursement of medicines • Decisions on intellectual property • Health and social service delivery • Constructions and energy provision for public services While EPHA welcomes the efforts to prevent frivolous claims, not enough attention is given to the potential regulatory freeze that has been seen in areas, such as tobacco control as well as food and environmental cases in NAFTA. As with ‘prudential reasons’ a clear definition of what a frivolous claim would constitute should be laid down. With respect to what is identified as prudential “carve-out” language, first, the provision is not a “carve-out.” It is an exception that can be raised after a prudential measure has been challenged to try to convince a tribunal why, despite violating the agreement, it should never the less be allowed. A carve-out would state that the terms of the entire agreement simply are not applicable to prudential measures, and such a clause should be included. Such language would forbid foreign investors from bringing claims against prudential measures. In contrast, under the approach proposed, investors could target prudential measures with ISDS claims, and the respondent State would have to try to use the exception as its defense. The prudential language described is also weakened by this stipulation: “These measures shall not be more burdensome than necessary to achieve their aim.” This language offers foreign investors ample means of challenging prudential measures, as tribunals could require the respondent State to prove that there exists no less “burdensome” policy option that could have plausibly been pursued instead of the challenged measure. Since this high burden of proof (requiring the State to prove a negative) could well confound a government’s attempt to defend a legitimate prudential measure, the “more burdensome than necessary” provision should be eliminated. But even without this provision, the State would likely bear the burden of proving to the tribunal that a challenged measure qualified as “prudential” under the proposed language. To truly safeguard measures taken to ensure financial stability, it should be the investor that bears the burden of proving that a measure argued by the State to be prudential does not qualify. Such protection could be achieved by adding this text: “For greater certainty, if a Party invokes this provision, the exception shall apply unless the investor initiating the claim can demonstrate that the measure is not intended to protect investors, depositors, policy-holders or persons to whom a fiduciary duty is owed by a financial service supplier, or is not intended to ensure the integrity and stability of the financial system.”

B. Investor-to-State dispute settlement (ISDS)

Explanation of the issue

In most ISDS cases, no or little information is made available to the public, hearings are not open and third parties are not allowed to intervene in the proceedings. This makes it difficult for the public to know the basic facts and to evaluate the claims being brought by either side.

This lack of openness has given rise to concern and confusion with regard to the causes and potential outcomes of ISDS disputes. Transparency is essential to ensure the legitimacy and accountability of the system. It enables stakeholders interested in a dispute to be informed and contribute to the proceedings. It fosters accountability in arbitrators, as their decisions are open to scrutiny. It contributes to consistency and predictability as it helps create a body of cases and information that can be relied on by investors, stakeholders, states and ISDS tribunals.

Approach in most existing investment agreements

Under the rules that apply in most existing agreements, both the responding state and the investor need to agree to permit the publication of submissions. If either the investor or the responding state does not agree to publication, documents cannot be made public. As a result, most ISDS cases take place behind closed doors and no or a limited number of documents are made available to the public.

The EU’s objectives and approach 

The EU's aim is to ensure transparency and openness in the ISDS system under TTIP. The EU will include provisions to guarantee that hearings are open and that all documents are available to the public. In ISDS cases brought under TTIP, all documents will be publicly available (subject only to the protection of confidential information and business secrets) and hearings will be open to the public. Interested parties from civil society will be able to file submissions to make their views and arguments known to the ISDS tribunal. 

The EU took a leading role in establishing new United Nations rules on transparency[1] in ISDS. The objective of transparency will be achieved by incorporating these rules into TTIP.

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, please provide your views on whether this approach contributes to the objective of the EU to increase transparency and openness in the ISDS system for TTIP. Please indicate any additional suggestions you may have.

EPHA appreciates the positive developments within Commission proposal with regards to more transparency and its leadership in at the international level in this regard. However, the underlying concerns of the impacts on the right to regulate and defend the public interest remain. Making all documents publicly available (EPHA would encourage making rare use of the exemption for the protection of confidential information and business secrets)., public hearings and the ability of civil society to file submissions are positive developments. Traditionally, investment arbitration proceedings remained secretive. This will provide more openness throughout the arbitral proceedings. The transparency rules should apply for all arbitrations conducted under it, including in ICSID arbitrations and others. EPHA would ask the Commission to provide more information regarding what will be the weight of the input from interested parties; if the process will be open for all civil society organisations; if the contribution will input into the merits of the case and; to explain the impact within the ISDS process. However, doing so in accordance with the new transparency rules of the United Nations Commission on International Trade Law (UNCITRAL) could be problematic. The proposed importation of UNCITRAL rules would mean the incorporation of a provision empowering the tribunal to block information that would “jeopardize the integrity of the arbitral process” (Article 7:7). The text lists several reasonable instances in which this exception could be invoked: when the information would “hamper the collection or production of evidence, lead to the intimidation of witnesses, lawyers acting for disputing parties or members of the arbitral tribunal.” But it also includes this catch-all: “or in comparably exceptional circumstances,” giving the tribunal wide discretion for determining that a given document or hearing should not be public due to suspicion that it could interfere with the arbitral process. If, for example, a controversial ISDS case spurred public demonstrations against the investor’s claim, the tribunal would seem to have ample room to use the demonstrations as a pretext for not making documents or hearings public, even in the likely scenario that the demonstrations posed no actual threat to witnesses, lawyers, parties, or tribunal members. This tribunal discretion should be narrowed by adding an exception to the importation of UNCITRAL rules that negates the “comparably exceptional circumstances” basis for not making documents public. It will be important to understand the eligibility requirements for people sitting on the tribunals, and to make sure each tribunal has a set amount of experts in public health.

Explanation of the issue

Investors who consider that they have grounds to complain about action taken by the authorities (e.g. discrimination or lack of compensation after expropriation) often have different options. They may be able to go to domestic courts and seek redress there. They or any related companies may be able to go to other international tribunals under other international investment treaties.

It is often the case that protection offered in investment agreements cannot be invoked before domestic courts and the applicable legal rules are different. For example, discrimination in favour of local companies is not prohibited under US law but is prohibited in investment agreements. There are also concerns that, in some cases domestic courts may favour the local government over the foreign investor e.g. when assessing a claim for compensation for expropriation or may deny due process rights such as the effective possibility to appeal. Governments may have immunity from being sued. In addition, the remedies are often different. In some cases government measures can be reversed by domestic courts, for example if they are illegal or unconstitutional. ISDS tribunals cannot order governments to reverse measures.

These different possibilities raise important and complex issues. It is important to make sure that a government does not pay more than the correct compensation. It is also important to ensure consistency between rulings.

Approach in most existing investment agreements

Existing investment agreements generally do not regulate or address the relationship with domestic courts or other ISDS tribunals. Some agreements require that the investor choses between domestic courts and ISDS tribunals. This is often referred to as "fork in the road" clause.

The EU’s objectives and approach

As a matter of principle, the EU’s approach favours domestic courts. The EU aims to provide incentives for investors to pursue claims in domestic courts or to seek amicable solutions – such as mediation. The EU will suggest different instruments to do this. One is to prolong the relevant time limits if an investor goes to domestic courts or mediation on the same matter, so as not to discourage an investor from pursuing these avenues.  Another important element is to make sure that investors cannot bring claims on the same matter at the same time in front of an ISDS tribunal and domestic courts. The EU will also ensure that companies affiliated with the investor cannot bring claims in front of an ISDS tribunal and domestic courts on the same matter and at the same time. If there are other relevant or related cases, ISDS tribunals must take these into account. This is done to avoid any risk that the investor is over-compensated and helps to ensure consistency by excluding the possibility for parallel claims.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on the effectiveness of this approach for balancing access to ISDS with possible recourse to domestic courts and for avoiding conflicts between domestic remedies and ISDS in relation to the TTIP. Please indicate any further steps that can be taken. Please provide comments on the usefulness of mediation as a means to settle disputes.

Preventing investors from simultaneously pursuing the same claim in domestic courts and via the ISDS mechanism, as proposed here, is indeed critical to make sure that investors are not doubly compensated. However, this limitation does nothing to counter the much more fundamental problem of empowering foreign investors to circumvent domestic laws and courts and directly pursue claims before ISDS tribunals, as the proposed TTIP investment chapter would allow, undermining the validity of U.S. national member state and European legal systems EPHA does not agree with the logic laid out in the consultation document. The fact that investment agreements are not enforceable in national courts is not a reason to pursue ISDS. With trade disputes, states rely on state-state settlement. There is no clear reason to treat foreign investment differently. In addition to seeking to limit parallel clams and seeking amicable solutions, the EU should consider alternative dispute settlement systems. The Seattle to Brussels network argues that governments with less robust legal systems will generally be keen to maintain a good reputation with foreign investors and refrain from arbitrary expropriations or systematically discriminating against foreign investors. For this reason, EPHA does not agree with the statement in the consultation document “discrimination in favour of local companies is not prohibited under US law but is prohibited in investment agreements. There are also concerns that, in some cases domestic courts may favour the local government over the foreign investor e.g. when assessing a claim for compensation for expropriation or may deny due process rights such as the effective possibility to appeal.” EPHA agrees with the International Institute for Sustainable Development criticism: “The text succeeds in this respect. In order to submit a claim to arbitration, the claimant investor is barred from engaging in a parallel domestic process about the same measure. If the investor wishes to submit to arbitration, proof will have to be provided that the domestic proceeding has been completed and closed or that the investor has withdrawn from the proceeding. Moreover, the investor must waive the right to initiate such proceedings. In our view, this is a positive development. However, we do not see this favouring or encouraging domestic courts in any way.” This also demonstrates that more will have to be done, as the current text does not differ from other investment treaties, in allowing an investor to bring a case directly before international investment arbitration panels without having first exhausted local remedies. If ISDS is still included in TTIP despite its dangers, investors should at least be required to exhaust domestic remedies before proceeding to international tribunals. The exhaustion requirement is a fundamental principle of international law. Under international law, the exhaustion requirement does not apply when attempts to use domestic legal remedies would be futile. This would allow investors to proceed to international tribunals if, for example, domestic remedies caused undue delay or if domestic courts lacked jurisdiction to provide relief. Even if the domestic courts lacked jurisdiction to hear international law claims, the exhaustion requirement could be satisfied by raising the substance of the claim under domestic law. EPHA would also seek greater clarity on the role of the European Court of Justice in these proceedings.

Explanation of the issue

There is concern that arbitrators on ISDS tribunals do not always act in an independent and impartial manner. Because the individuals in question may not only act as arbitrators, but also as lawyers for companies or governments, concerns have been expressed as to potential bias or conflicts of interest.

Some have also expressed concerns about the qualifications of arbitrators and that they may not have the necessary qualifications on matters of public interest or on matters that require a balancing between investment protection and e.g. environment, health or consumer protection.

Approach in existing investment agreements

  Most existing investment agreements do not address the issue of the conduct or behaviour of arbitrators. International rules on arbitration address the issue by allowing the responding government or the investor to challenge the choice of arbitrator because of concerns of suitability.

Most agreements allow the investor and the responding state to select arbitrators but do not establish rules on the qualifications or a list of approved, qualified arbitrators to draw from.

  The EU’s objective and approach

The EU aims to establish clear rules to ensure that arbitrators are independent and act ethically. The EU will introduce specific requirements in the TTIP on the ethical conduct of arbitrators, including a code of conduct. This code of conduct will be binding on arbitrators in ISDS tribunals set up under TTIP.  The code of conduct also establishes procedures to identify and deal with any conflicts of interest.  Failure to abide by these ethical rules will result in the removal of the arbitrator from the tribunal. For example, if a responding state considers that the arbitrator chosen by the investor does not have the necessary qualifications or that he has a conflict of interest, the responding state can challenge the appointment. If the arbitrator is in breach of the Code of Conduct, he/she will be removed from the tribunal. In case the ISDS tribunal has already rendered its award and a breach of the code of conduct is found, the responding state or the investor can request a reversal of that ISDS finding.

In the text provided as reference (the draft EU-Canada Agreement), the Parties (i.e. the EU and Canada) have agreed for the first time in an investment agreement to include rules on the conduct of arbitrators, and have included the possibility to improve them further if necessary. In the context of TTIP these would be directly included in the agreement.

As regards the qualifications of ISDS arbitrators, the EU aims to set down detailed requirements for the arbitrators who act in ISDS tribunals under TTIP. They must be independent and impartial, with expertise in international law and international investment law and, if possible, experience in international trade law and international dispute resolution. Among those best qualified and who have undertaken such tasks will be retired judges, who generally have experience in ruling on issues that touch upon both trade and investment and on societal and public policy issues. The EU also aims to set up a roster, i.e. a list of qualified individuals from which the Chairperson for the ISDS tribunal is drawn, if the investor or the responding state cannot otherwise agree to a Chairperson. The purpose of such a roster is to ensure that the EU and the US have agreed to and vetted the arbitrators to ensure their abilities and independence.  In this way the responding state chooses one arbitrator and has vetted the third arbitrator.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on these procedures and in particular on the Code of Conduct and the requirements for the qualifications for arbitrators in relation to the TTIP agreement. Do they improve the existing system and can further improvements be envisaged?

EPHA would like to underline even with the changes and initiatives undertaken, may of the concerns regarding the system remain unchanged: the arbitrators remain private lawyers, they preside over cases that only investors can initiate, and there is still the real possibility for broad interpretations of the scope and meaning of the investment agreements. For this reason, excluding ISDS from the investment chapter is still the most preferable option. The Commission should explore the possibility of a system of Arbitration composing of judges from US and EU and international bodies such as WTO (i.e. expert lawyers, ECJ judges, US judges and WTO lawyer). Nothing is done to address the fact that often investment lawyers sit on the same arbitration panels, acting as both arbitrators and counsels and can be witnesses in arbitration cases. There are also concerns that appointed arbitrators with the wish to be re-appointed in future cases, could act in the favour the nominating parties. This has led to growing concerns, including within the broader legal community, over conflicts of interest. Regarding the qualifications of arbitrators in cases relating to public health, there is the concern that they lack expertise in the nexus between public health policy and investment. It is also important that the responding state have the ability to challenge the appointment decision by the investor if the arbitrator does not have the necessary qualifications or if he or she has a conflict of interest.In our view, public health should be grounds for both. It is unfortunate that policy expertise that is relevant for the case is not being sought, and the current draft text states the following: “Arbitrators appointed pursuant to this Section shall have expertise or experience in public international law, in particular international investment law. It is desirable that they have expertise or experience in international trade law, and the resolution of disputes arising under international investment or international trade agreements.” If ISDS is implemented, EPHA supports the fact that the code of conduct will be binding on arbitrators in ISDS tribunals set up under TTIP, the reference to the International Bar Association Guidelines on Conflicts of Interest in International Arbitration and the accompanying sanctions. Regarding the Code of Conduct, there are concerns as it does not yet exist. Without seeing the exact text, it is impossible to know if this Code will adequately address arising conflicts of interest. Additionally, the adoption of the Code is postponed by up to two years after the entry into force of the agreement. EPHA agrees with the International Institute for Sustainable Development “In our view, the Code of Conduct should be finalised along with the rest of the investment text. Given the uncertainty as to whether this Code will ever be finalized and the uncertainty regarding its content, we cannot, at this point in time, agree with the European Commission that steps have been take to address the issue of arbitrator impartiality and independence. Any assessment of impact of the Code would be mere speculation. ” For what rules that should be incorporated into the Code of a Conduct, it include a prohibition on those who seek to serve a tribunalists also representing investors in ISDS challenges; public disclosure of any indirect association with any party – State, investor or other tribunalists – in the case; and a process for swift removal of tribunalists for conflicts and qualifications that does not rely on the consent of the tribunal.

Explanation of the issue

As in all legal systems, cases are brought that have little or no chance of succeeding (so-called “frivolous claims”). Despite eventually being rejected by the tribunals, such cases take up time and money for the responding state. There have been concerns that protracted and frequent litigation in ISDS could have an effect on the policy choices made by states. This is why it is important to ensure that there are mechanisms in place to weed out frivolous disputes as early as possible.

Another issue is the cost of ISDS proceedings. In many ISDS cases, even if the responding state is successful in defending its measures in front of the ISDS tribunal, it may have to pay substantial amounts to cover its own defence.

Approach in most existing investment agreements:

Under existing investment agreements, there are generally no rules dealing with frivolous claims. Some arbitration rules however do have provisions on frivolous claims. As a result, there is a risk that frivolous or clearly unfounded claims are allowed to proceed. Even though the investor would lose such claims, the long proceedings and the implied questions surrounding policy can be problematic.

The issue of who bears the cost is also not addressed in most existing investment agreements. Some international arbitration rules have provisions that address the issue of costs in very general terms. In practice, ISDS tribunals have often decided that the investor and responding state pay their own legal costs, regardless of who wins or loses.

The EU’s objectives and approach

The EU will introduce several instruments in TTIP to quickly dismiss frivolous claims.

ISDS tribunals will be required to dismiss claims that are obviously without legal merit or legally unfounded. For example, this would be cases where the investor is not established in the US or the EU, or cases where the ISDS tribunal can quickly establish that there is in fact no discrimination between domestic and foreign investors. This provides an early and effective filtering mechanism for frivolous claims thereby avoiding a lengthy litigation process.

To further discourage unfounded claims, the EU is proposing that the losing party should bear all costs of the proceedings. So if investors take a chance at bringing certain claims and fail, they have to pay the full financial costs of this attempt.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on these mechanisms for the avoidance of frivolous or unfounded claims and the removal of incentives in relation to the TTIP agreement. Please also indicate any other means to limit frivolous or unfounded claims.

The EPHA is not of the view that ISDS is not necessary for the TTIP, however, EPHA takes advantage of this opportunity to suggest the following comments on the proposed text. Including a mechanism for an early discharge of frivolous (unmeritorious) claims, in order to avoid wasting resources on full-length proceedings and making the losing party pay all costs of the proceedings are positive developments. These measures may help reduce the costs of arbitration by having unfounded cases terminated. There is a problem that these only address the cost issues – delaying regulation or the ability to expand interpretation of IIAs are other incentives. A tribunal determined to take an expansive interpretation of any provisions will also be able to do so from the beginning of these frivolous claims procedures. These issues must still be addressed. According to the International Institute for Sustainable Development: "Consequently, this feature, while it may be useful, will only find its utility in reducing the costs of arbitration, not the scope of any decisions that would otherwise be made on jurisdiction or the merits." However, the proposed provisions are not likely to have prevented the recent surge in investor-state challenges to public interest policies , nor tribunals’ decisions against many of these policies, given that most of the claims could not have been accurately described as “manifestly without legal merit” or “unfounded as a matter of law.” Until the substantive rights, definition of investment and tribunalists’ discretion are narrowed, language to prevent claims not falling under those rights will have limited impact in preventing investor-state challenges and rulings against public interest measures. One issue that is not dealt with adequately is the question of regulatory “chills” resulting from claims would have on public health policies. Even the threats of claims could have serious consequences given that a lot of the policies on national level are political decisions, this could coincide with elections often, meaning new party may not continue with policy. The measures to reduce frivolous claimes as it is currently presented it does not really discourage investors from attempting to use ISDS as a delaying tactic. EPHA would also ask for a definition or criteria for “frivolous”, unfounded and without legal merit. A vague definition of this term would create more uncertainties and potentially open the door for frivolous claims, opposite to the intention of the European Commission. As stated elsewhere in this consultation, the state’s right to regulate on public health should take precedence; governments should not be threatened by the prospect of having to spend time arguing over definitions.

Explanation of the issue

Recently, concerns have been expressed in relation to several ISDS claims brought by investors under existing investment agreements, relating to measures taken by states affecting the financial sector, notably those taken in times of crisis in order to protect consumers or to maintain the stability and integrity of the financial system.

To address these concerns, some investment agreements have introduced mechanisms which grant the regulators of the Parties to the agreement the possibility to intervene (through a so-called “filter” to ISDS) in particular ISDS cases that involve measures ostensibly taken for prudential reasons. The mechanism enables the Parties to decide whether a measure is indeed taken for prudential reasons, and thus if the impact on the investor concerned is justified. On this basis, the Parties may therefore agree that a claim should not proceed.

Approach in most existing investment agreements

The majority of existing investment agreements privilege the original intention of such agreements, which was to avoid the politicisation of disputes, and therefore do not contain provisions or mechanisms which allow the Parties the possibility to intervene under particular circumstances in ISDS cases.

The EU’s objectives and approach

The EU like many other states considers it important to protect the right to regulate in the financial sector and, more broadly, the overriding need to maintain the overall stability and integrity of the financial system, while also recognizing the speed needed for government action in case of financial crisis.

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Some investment agreements include filter mechanisms whereby the Parties to the agreement (here the EU and the US) may intervene in ISDS cases where an investor seeks to challenge measures adopted pursuant to prudential rules for financial stability. In such cases the Parties may decide jointly that a claim should not proceed any further. Taking into account the above explanation and the text provided in annex as a reference, what are your views on the use and scope of such filter mechanisms in the TTIP agreement?

EPHA considers it important to protect the right to regulate in the field of public health and to maintain a high level of human health and well functioning health systems system. It is unclear why any prudential measures would only apply for financial sustainability. Any filter should be also applied in the health sector and not prevent the EU, USA, Member States or States from regulating in the public interest. If the current filter proposal is kept, then the EC should expand the range of measures covered to those beyond financial regulations. The Parties could use such a filter, for example, to examine cases in which the general exception (hopefully a strengthened version of it) is invoked as a defense for challenged environmental, health and other public interest measures. The proposed addition of a filter in which regulators from both Parties may offer binding judgments on whether claims should be dropped for prudential reasons marks a significant improvement over standard U.S. and EU pacts that contain no such provision. It is critical that this filter step take place early in the investor-state process so that resources are not needlessly expended in cases where claims are dismissed for prudential reasons. In terms of the EU or USA responding to future crises, it would not help either side to be dependent on an extra party as this would make solving the crisis more complex. For example, responses to public health crises which require large-scale and immediate distribution of supplies – such as population-wide vaccination or inoculation – could be hindered by restrictive treaty terms and the fear of legal action resulting from inadvertently breaching these terms. (For example, see the case of the U.S and Bayer (2001) in which under TTIP, it could be argued that Bayer were treated in a way that could be considered ‘unfair’ and ‘unequitable’.

Explanation of the Issue

When countries negotiate an agreement, they have a common understanding of what they want the agreement to mean. However, there is a risk that any tribunal, including ISDS tribunals interprets the agreement in a different way, upsetting the balance that the countries in question had achieved in negotiations – for example, between investment protection and the right to regulate. This is the case if the agreement leaves room for interpretation. It is therefore necessary to have mechanisms which will allow the Parties (the EU and the US) to clarify their intentions on how the agreement should be interpreted.

Approach in existing investment agreements

Most existing investment agreements do not permit the countries who signed the agreement in question to take part in proceedings nor to give directions to the ISDS tribunal on issues of interpretation.

The EU’s objectives and approach 

The EU will make it possible for the non-disputing Party (i.e. the EU or the US) to intervene in ISDS proceedings between an investor and the other Party. This means that in each case, the Parties can explain to the arbitrators and to the Appellate Body how they would want the relevant provisions to be interpreted.  Where both Parties agree on the interpretation, such interpretation is a very powerful statement, which ISDS tribunals would have to respect.

The EU would also provide for the Parties (i.e. the EU and the US) to adopt binding interpretations on issues of law, so as to correct or avoid interpretations by tribunals which might be considered to be against the common intentions of the EU and the US. Given the EU’s intention to give clarity and precision to the investment protection obligations of the agreement, the scope for undesirable interpretations by ISDS tribunals is very limited. However, this provision is an additional safety-valve for the Parties.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on this approach to ensure uniformity and predictability in the interpretation of the agreement to correct the balance? Are these elements desirable, and if so, do you consider them to be sufficient?

The inclusion of a process for binding joint interpretation in the TTIP is useful, as it can effectively preclude unintended interpretations through arbitration panels from being binding on the parties over the longer term. These could help arbitral panels and other users to understand better States’ intent in crafting various elements of investment treaties, thereby helping to eliminate inconsistencies. However, it is unclear what enforcement mechanism would make the revised terms any more “binding” than the original terms that failed to bind the tribunal. There are two important issues that UNCTAD encourages to consider the first borderline between interpretation and amendment can sometimes be blurred; second, if issued during an ongoing proceeding, a joint party interpretation may raise due-process related concerns. It is an important mechanism to increasing the contracting parties’ role in interpreting the treaty in order to avoid legal interpretations that go against their intentions; for exam¬ple, through providing for binding joint party interpretations, requiring tribunals to refer certain issues for determination by the treaty parties and facilitating interventions by the non-disputing contracting parties. There are concerns for state sovereignty as the final outcome is dependent on the other party and there are few opportunities to include the interpretations in the normal legislative process. For this reason, the Commission should also consider expanding to unilateral instruments States such as ratification documents or declarations. Often in the absence of conclusive joint interpretations some unilateral documents or statements may provide guidance to arbitrators as supplementary means of treaty interpretation and this is compatible with international law. (under VCLT Article 32.) Another tool that could help with the interpretations is providing the appropriate “context” and “object and purpose”. When the preambles in IIAs solely refer to the protection of investments in these areas, tribunals may adopt an interpretation focusing primarily on investors’ interests. Therefore, to prevent these situations the IIA should reaffirm a State's right to regulate in the public interest, and stipulate that the treaty is a means to facilitate sustainable growth. It is important to recognise that trade is a means to an end not an end in itself. The objective remains societies with a high level of well-being, as well as health, consumer and environmental protection.. The proven difficulty in limiting tribunals’ ability to defy the opinions of States and the revisions of a pact’s terms indicate once again the fundamental dangers of investor-state dispute settlement. While some textual reforms, such as narrowing the scope of covered “investment” and the narrowing of substantive investor rights, can help somewhat in reining in the wide discretion of tribunals, they are unlikely to foreclose tribunals’ overreaching rulings against public interest policies. To more effectively preserve the right to regulate, ISDS should be replaced with state-to-state dispute settlement, as discussed above. Barring this change, requiring domestic exhaustion and establishing an effective appeal mechanism are perhaps the best means of curtailing tribunals’ threats to regulatory autonomy.

Explanation of the issue

In existing investment agreements, the decision by an ISDS tribunal is final. There is no possibility for the responding state, for example, to appeal to a higher instance to challenge the level of compensation or other aspects of the ISDS decision except on very limited procedural grounds. There are concerns that this can lead to different or even contradictory interpretations of the provisions of international investment agreements. There have been calls by stakeholders for a mechanism to allow for appeal to increase legitimacy of the system and to ensure uniformity of interpretation.

  

Approach in most existing investment agreements

No existing international investment agreements provide for an appeal on legal issues. International arbitration rules allow for annulment of ISDS rulings under certain very restrictive conditions relating to procedural issues. 

The EU’s objectives and approach 

The EU aims to establish an appellate mechanism in TTIP so as to allow for review of ISDS rulings. It will help ensure consistency in the interpretation of TTIP and provide both the government and the investor with the opportunity to appeal against awards and to correct errors. This legal review is an additional check on the work of the arbitrators who have examined the case in the first place.

In agreements under negotiation by the EU, the possibility of creating an appellate mechanism in the future is envisaged. However, in TTIP the EU intends to go further and create a bilateral appellate mechanism immediately through the agreement.

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Question 12. Taking into account the above explanation and the text provided in annex as a reference, please provide your views on the creation of an appellate mechanism in TTIP as a means to ensure uniformity and predictability in the interpretation of the agreement.

It is also critical that the appeals mechanism be established by the pact itself, rather than being included as language promising the future creation of such a mechanism. Certainly the non-binding language from the text would be insufficient. That text does not even require the future creation of an appellate mechanism, but only requires a “forum” for the EU and U.S. governments to consult on the question of whether to create such a mechanism. The idea of introducing an appeal mechanism could be a positive step to ensure consistency. The International Institute for Sustainable Development argues that the ”WTO Appellate Body is well respected, and has contributed to a more predictable trading system through its clarifications regarding key questions of interpretation. The result has been not only better law and consistency but also improved compliance and trust in the system.” The U.S. has an appeals mechanism and within its 10-year existence it has not been used. Therefore it is unclear if the underlying problems of lack of consistency, predictability, and legal correctness could be dealt with by simply including the possibility of establishing an appellate mechanism. To be effective, it is critical that the mechanism allow appeals on the legal merits of the tribunal’s decisions, not merely attempts to correct factual errors or to contest major procedural miscarriages (as provided for in the extremely limited annulment mechanism). UNCTAD argues that an appeal mechanism could rectify certain concerns if constituted of permanent members, appointed by States from a pool of the most reputable jurists, and the result could be delivering consistent – and balanced – opinions, which would rectify some of the legitimacy concerns about the current ISDS regime . There are additional benefits, as authoritative pronouncements by an appeals body would guide both the disputing parties (when assessing the strength of their respective cases) and arbitrators adjudicating disputes. We remain concerned however, that the Appellate mechanism may afford another opportunity by which the implementation of public health measures could be arbitrarily delayed. For example the tobacco industry has a documented history of using legal challenges – in domestic and international fora – to prevent the implementation of evidence-based public health measures. The effectiveness of any Appellate mechanism rests on; ensuring that the protection of commercial interests, with reference to Question 6 of the consultation, does not impede on transparency and; that the comments regarding Question 9 of the consultation with respect to “frivolous” or “unfounded” claims are acted absorbed. There are also underlying concerns that with more than 3,000 different legal texts absolute consistency and certainty would not be achievable in the current legal system. The Commission should also consider that including an appeals mechanism would further add to the time and cost of the proceedings. (Although time limits could be put in place at the WTO, the appeals procedure is limited to 90 days)

C. General assessment

General assessment
  • What is your overall assessment of the proposed approach on substantive standards of protection and ISDS as a basis for investment negotiations between the EU and US?
  • Do you see other ways for the EU to improve the investment system?
  • Are there any other issues related to the topics covered by the questionnaire that you would like to address?

On the grounds that other investment protection mechanisms exists, EPHA disagrees with the Commission’s statement that: "it is possible that investors will not be given effective access to justice, e.g. if they are denied access to appeal or due process, leaving them without any effective legal remedy. ISDS is therefore necessary to allow legitimate claims to be pursued. " Academics also raise questions about the need for ISDS within the TTIP agreement, and have also argued that investors can use local courts and insurance and states can use state-to-state arbitration. The argument that ISDS should be included in the TTIP as other “healthy, vibrant democracies sign into ISDS” is circular logic. It also ignores the fact that there have been other successful free trade and investment agreements without ISDS. The free trade agreement with South Korea offers another case study. This is often used to demonstrate that free trade agreements bring benefits. (For example, EU-South Korean where European companies are the largest investors in South Korea and several IIAs from Australia. In its Free Trade agreement (FTA) with the US in Article 11.16 there is a reference to Consultations on Investor-State Dispute Settlement where it is clearly indicated that any disputes will be solved under each country’s legal systems: For greater certainty, nothing in this Article prevents a Party from raising any matter arising under this Chapter pursuant to the procedures set out in Chapter 21 (Institutional Arrangements and Dispute Settlement). Nor does anything in this Article prevent an investor of a Party from submitting to arbitration a claim against the other Party to the extent permitted under that Party’s law. This consultation document does not adequately take into consideration how even the threat of expensive and time consuming claims can weigh on public budgets and cause policy-makers to reconsider proposed legislation. EPHA would like the Commission to provide concrete evidence that the EU and USA could attract more investment by signing up to such provisions. There are even American lawyers who argue the treaties are hardly ever important for investment decisions in practice. According to political risk insurance providers the treaties are very rarely relevant for the pricing of investment risks. There are many academics who argue that IIAs do not have an impact on promoting flows of investment and when they do the effect is very small . “Existing evidence suggests that the presence of an EU-US investment chapter is highly unlikely to encourage investment above what would otherwise take place.” Investment between EU and US is already higher than anywhere else in the world. Is the European Commission addressing a non-problem? Investors are already investing billions in the EU without ISDS, and EU investors invest in the USA without it. It is unclear why the mechanism is now needed. According to the Commission's own Web page: "Total US investment in the EU is three times higher than in all of Asia. EU investment in the US is around eight times the amount of EU investment in India and China together. EU and US investments are the real driver of the transatlantic relationship, contributing to growth and jobs on both sides of the Atlantic. It is estimated that a third of the trade across the Atlantic actually consists of intra-company transfers.” It is also unfortunate that this consultation did not explore the connections between investment agreements and other areas of international law. Human rights, public health, consumer and environmental obligations of states should be taken into account in the settling of investor-state disputes. This could be achieved by including in IIAs provisions regarding sustainable development, human rights, consumer protection and health policy. EPHA encourages the Commission to outline how it would incorporate the provisions of the Framework Convention on Tobacco Control along with its guiding documents and the public health exemptions of the Trade Related Aspects of Intellectual Property Rights (TRIPS) into the TTIP overall and in particular the investment chapter. It is imperative that TTIP is in conformity with other international obligations. EPHA also seeks greater clarification on how non-binding strategies and action plans at the international level relate to investment protection in the TTIP. Measures EU Member States or any states take to implement public health strategies and action plans should not be undermined by investment protection. EPHA encourages the Commission to exclude non-violation complaints even with regard to intellectual property rights. In the past these measures allowed for complaints to be brought that do not directly violate the terms but could damage an investor’s intellectual property rights. There are further concerns that SMEs may be discriminated against in favour of international investors if there is fair and equitable treatment of international investors, and request greater clarity on how ‘positive discrimination’ towards foreign investors will be avoided. EPHA advocates that ISDS should be excluded from the TTIP and future trade agreements due to the risks of abuse and to postpone or delay legislation. The risks for public health policy from ISDS are greater than potential benefits. The Commission should prove that ISDS is justified and proportionate measure to protect both investment and public health policy.