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Respondent details

  • Company/Organisation: EUROPEAN SERVICES FORUM - ESF
  • Location: Belgium
  • Activity: The European Services Forum is a private sector trade association that represents the interests of the European services industry in International Trade Negotiations in Services & Investments. It comprises major European service companies and European service sector federations covering service sectors such as financial services, telecommunications, maritime transport, business and professional services, distribution, postal and express delivery, IT service, etc. (www.esf.be). It is estimated that ESF membership covers approximately 70% of Extra EU services exports and investments. ESF members employ more than 90 million workers, are present in more than 200 countries and provide services to hundreds of millions of consumers in Europe and around the world.
  • Profile: Trade association representing EU businesses
  • 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?

ESF is supportive of clearer definitions in the text of the investment protection chapters but would recommend that exceptions to the rules should be kept to a minimum, since they often can be a source of diverging interpretation triggering more disputes and uncertainty. Definition of “investment”: commercial contracts for the sale of goods and services ESF does not support the blanket and seemingly arbitrary exclusion from the definition of “investment” of “claims to money that arise solely from commercial contracts for the sale of goods or services...”. The Commission has not explained the reason for this carve-out which could exclude from the protections of the treaty, for example, financial services and products which would have the characteristics of an investment. For example, an ICSID tribunal has found that a hedging agreement with a 12-month term fulfilled the criteria for an investment, namely contribution, risk and duration. Claims arising under other types of contracts for the sale of goods and services which nonetheless constitute investments may similarly be excluded from the intended scope of the treaty. We refer to the tribunal’s statement in the Deutsche Bank AG v Sri Lanka case: “As the Tribunal pointed out in the Pantechniki case, the same product can be an ordinary sale of goods or an investment depending on the attending facts and circumstances of the case: “[i]t is admittedly hard to accept that the free-on- board sale of a single tractor in country A could be considered an “investment” in country B. But what if there are many tractors and payments are substantially deferred to allow cash-poor buyers time to generate income? Or what if the first tractor is a prototype developed at great expense for the specificities of country B on the evident promise of amortisation? Why should States not be allowed to consider such transactions as investments to be encouraged by the promise of access to ICSID?” ESF therefore advocates the deletion of the paragraph starting with the words “For greater certainty...” in order to allow for a more accurate and fairer fact-based assessment by a tribunal as to whether a particular contract for the sale of goods and services has the characteristics of an investment as set out in the definition starting with “Every kind of asset...” including items (a) to (i). In addition, please note that this paragraph in its current form may be difficult to reconcile with the main definition of “investment” including, in particular, sub-paragraph (i) which provides that: “Forms that an investment may take include....(i) claims to money or claims to performance under a contract”. Definition of “investment”: management contracts ESF would like to understand why interests arising from management contracts have been excluded from the definition of investment. This is an important form of services related to public procurement contracts in particular, and it is difficult to see why “turnkey, construction, production, or revenue-sharing” contracts, and “their similar contracts” have been transposed from the BIT example on the left hand side of Table 1 and included in the definition of investment but management contracts have been left out. ESF would strongly advocate for the express inclusion of management contracts in the definition of investment. Returns ESF strongly supports the clear statement that “Returns that are invested shall be treated as investments. Any alteration of the form in which assets are invested or reinvested does not affect their qualification as investment”.

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.

Link to reference text

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 introduction of trade law concepts through the GATT/GATS exceptions ESF emphasizes that one of the main objectives of a BIT, as well as international trade law, is to prevent discrimination against investors on grounds of nationality. Hence, the provisions for national and most-favoured nation (MFN) treatment are fundamental. ESF considers therefore that host State authorities (at whatever level) should not be allowed to discriminate between a domestic and a foreign investor once the latter is already established in a Party’s territory. As for the definitions (see ESF Response in Q1), we consider that exceptions to the rules should be kept to a minimum and would therefore encourage the Commission to offer clearer explanations of what any exceptions would be. However, the Commission is now stating that “in certain rare cases” and “in some very specific sectors”, discrimination against already established investors may need to be envisaged. This appears to be transcribed from the introduction of the General Exceptions article of GATT XX and GATS XIV into the agreement. Whatever the rationale behind this, investors’ trust, as already stated, is a key factor in any investment decision. We fear that the introduction of such general exceptions in the Investment Chapter will raise doubts as to the value of these basic protections. In addition, it is unclear how these trade law concepts at article XX of the GATT and Article XIV of the GATS would work in investment law and how this would be interpreted by tribunals. ESF also questions the utility and meaning of the exceptions since they must not be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail... ”. This is circular to a large extent and ambiguous. Also, the application of the exception clauses requires that they should not be in relation to measures that are a “disguised restriction[s] on international trade” or “trade in services”. Does this imply than an investor can bring all trade law issues into the investment dispute? ESF urges the Commission to carefully consider the implications of this Article Y and provide guidance as to their meaning and interpretation in the investment protection context. Different non-discrimination protections for financial services Although the Commission has not provided the proposed text in this consultation, there appear to be different protections proposed for financial services (see the references at Question 10, para 1(a) to “X.3 (Financial Services – National Treatment) and X.4 (Financial Services – Most Favoured Nation). ESF believes that all investors should benefit from the same standard of protection against non-discrimination, including financial services firms. No justification has been provided for departing from the uniform standards enshrined by individual Member States in existing BITs. Meaning of Article X.2 para 3 ESF can subscribe to the restriction of "importation of standards", as the spirit of the MFN provisions is not to allow investors to abuse the system by taking advantage of procedural or substantive provisions contained in other agreements concluded by the host country. However, the meaning and wording of section Article X.2 para 3 is unclear. We ask the Commission to please clarify this provision.

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.

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 fair and equitable treatment of investors and their investments in relation to the TTIP?

ESF agrees with the statement that the obligation to grant foreign investors “fair and equitable treatment” (FET) is an important substantive investment protection standard. The aim is to protect the investments against measures by the host country that would be arbitrary, unfair, abusive, etc. in the absence of any other protection afforded by more specific treaty standards such as non-discrimination. The vast majority of European BITs guarantee “fair and equitable treatment” of investment, and ESF would strongly recommend the adoption of this standard in the TTIP. Other treaties, and in particular those signed by the United States, refer to the concept of “customary international law”, but this has been considered by some to provide a lower level of protection and represents a minimum standard for the treatment of property or aliens. Significant narrowing of the protection to investors ESF supports the EU’s aim of bringing more clarity to the meaning of FET, however in our view, the proposed definition represents a significant narrowing of the protection currently afforded to investors. In particular, the references to “manifest” arbitrariness, “fundamental” breaches of due process and transparency, “targeted” discrimination imply a very high threshold of misconduct, tantamount to bad faith, in order to establish a breach of the right to FET. The consensus in this area is that there is no requirement for an investor to prove bad faith in order to establish a violation by the state with this obligation of FET . In addition, Article XX para 4 has narrowed the protection currently afforded to investors under FET by eliminating, as a standalone right, the respect of legitimate expectations arising from specific representations by a state to an investor to induce a covered investment. The proposed text states that “When applying the above fair and equitable treatment obligation, a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation...”. ESF would urge the Commission to re-introduce this protection as a separate element of FET at Article XX para 2. This would not deny a state’s exercise of sovereign powers because the legitimacy of the investor’s reliance on the state’s conduct must take into account the Party’s reasonable right to regulate domestic matters in the public interest. Finally, it must be underlined that investment protection should cover not only the visible part of an investment, but also the activities related to that investment, such as the public procurement contracts won by the investor. The Commission states “the EU will 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”. This is an important protection for investors and ESF would urge the Commission to include express language to this effect in the treaty in line with the Commission’s stated aim.

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.

The greatest risk for a foreign investor is to lose its investment, i.e. to be expropriated without any compensation. One of the fundamental protections provided by BITs is indeed the prohibition of expropriation without fair, prompt and effective compensation. Direct expropriation ESF agrees that direct expropriations, like for instance nationalisations, rarely lead to disputes because public authorities usually abide by the rules of fair compensation, although recent examples of nationalisation in Argentina or in Venezuela are a reminder of the importance of these basic protections. We therefore welcome paragraphs 1 to 4 of this article. Indirect expropriation ESF understands the willingness of the EU to clarify that the simple fact that a state measure has an impact on the economic value of the investment does not automatically justify a claim that an indirect expropriation has occurred. But nor should a claim be excluded. When necessary, such a claim should be examined on a case-by-case basis and ESF therefore supports the approach at para 2 of the Annex on Expropriation which requires the tribunal to conduct a fact-based inquiry. ESF also recognises the right and responsibility of a state to protect the public welfare. However, the Commission proposes that only public welfare measures which are “manifestly excessive in light of their purpose” could constitute indirect expropriation. ESF has concerns that this would in practice preclude claims to compensation in circumstances where investors have made significant commitments in good faith as a result of representations by the state in relation to its public policy objectives. In this regard, ESF would support a less prescriptive approach which would allow the tribunal to make a determination following the fact-based inquiry with reference to the general criteria at paras 2(a) to (d) of the Annex, including the extent to which the government action interferes with distinct reasonable investment-backed expectations. To reiterate, we do not seek to question the right of a government to radically change its policy in one domain or another, but that government must take full responsibility of the consequences of that new policy and adequately compensate domestic and foreign investors who took long term investment decisions with good faith economic expectations. For instance, when a state changes its policy in a given sector, this can be done by respecting all the criteria listed at para 3 of the Annex, i.e. for a legitimate public purpose, to protect health or/and the environment; and it is possible that the only way to achieve such a policy would be to decide to close down some types businesses related to that sector, which will probably not be considered to be a measure “manifestly excessive in light of its purpose”. Does this mean that all operators (domestics and foreigners) who invested in that targeted sector can be expropriated without receiving any compensation? We believe that this should not necessarily be the case. Our understanding is that this could correspond to an indirect expropriation, and hence be eligible for compensation. Furthermore, we must also express our concern that this new interpretative guidance for arbitrators is expressed in very specific terms which, since they form an integral part of the agreement, will be binding on the arbitral tribunal. Question 5 (below) correctly says that “In the end, the decisions of arbitral tribunals are only as good as the provisions that they have to interpret and apply”. In ESF’s view, a balance needs to be struck, rather than moving from an excessively broad framework to an excessively prescriptive framework in the proposed text, which will significantly limit the arbitral tribunal’s margin of manoeuvre

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?

As stated earlier, ESF reiterates that it is clear and indisputable – and indeed it should go without saying - that sovereign states will always have the right to regulate and to make changes in their rules in the public interest, for social, environmental, or any other public policy purpose they see fit. However, because the Commission’s statement on the right to regulate constitutes a carve-out from fundamental investor protections, it is important to ensure that the drafting is tight and the language is consistent throughout so that the meaning of the words used and the scope and application of the right to regulate is clear with respect to each of the investment protection standards as well as in the treaty as a whole. For example: - the Annex on Expropriation at para 3 refers to measures “designed and applied to protect legitimate public welfare objectives”; - the preamble at Question 5 refers to “measures to achieve legitimate public policy objectives on the basis of the level of protection that they deem appropriate”; - the general exceptions clauses to the non-discrimination provisions at Question 2, Article Y cross-refer to the general exceptions in GATT 1994 and GATS which themselves consist of a distinct list of measures “necessary” to achieve the relevant policy objectives. In this regard, ESF would like to draw the attention of the Commission that the public objective of ensuring level playing field in services sectors through regulation is never mentioned, although it is a primary objective of the regulation, i.e. to ensure competition so as all services providers can operate in fair and non-discriminatory manner. ESF accepts that it is well-established policy that foreign investors have to abide by the terms and conditions defined by the host country. Horizontal exceptions are normal, as long as they are on a non-discriminatory basis. We also accept that decisions on competition matters cannot be subject to investor-to-state dispute settlement (ISDS), and that a host country can take measures providing for general exceptions that many apply, for prudential reasons, in situations of crisis. As we understand, an arbitral tribunal cannot repeal a measure taken by a government, but can only order compensation for the investor when appropriate. In this regard, it is interesting to note that, on the contrary, when a case is brought before a domestic court, the court might also, in certain cases, invalidate or nullify the measure taken by the relevant public authority which amounts to, for example, expropriation.

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.

The Commission is proposing the inclusion of transparency provisions in all ISDS to reflect the public’s interest in the resolution of investment treaty disputes. This would incorporate and expand on developments at UNICTRAL which has recently adopted transparency rules. ESF believes there is already a degree of transparency in current ICSID arbitrations. In recent years, certain hearings have been held in public and third parties can submit amicus briefs to the tribunal. ESF believes it is also important take into account the parties’ right to protect confidential information and maintain the integrity of the arbitral process. It should be noted that the UNCITRAL Transparency Rules, which are incorporated by reference and expanded by the proposed text, are much broader than the access given to the records in many national court systems. For example, the English courts only allow automatic access to the statements of case filed by parties but not the exhibits. Other documents, such as witness statements, expert reports, skeleton arguments, can only be obtained if the court gives permission. ESF believes there has been insufficient debate on the impact of such level of transparency in arbitration proceedings. The application of the UNCITRAL Transparency Rules will likely increase time and costs, and create a significant logistical and legal burden on the parties and the tribunal. The losing party (i.e. which could be the investor or the state) will bear the bulk of such costs in accordance with the proposed costs apportionment rule. The open nature of proceedings also risks the leak of protected information (ex to competitors) and politicisation of the process (ex through media intrusion). There is also no guarantee that the most potentially interested persons or organisations will have the means to participate in this process. Tthe redaction of confidential information from documents and partial open hearings create opportunities for distortion and misunderstanding of the record and the issues both within the arbitration process (in any amicus submissions) and in the wider public debate. Moreover, it is also in the interest of justice that the parties feel able fully to present their case to the tribunal through the disclosure of internal documents and the provision of expert and witness evidence. Concerns about the protection of confidential information may discourage a full ventilation of the issues, and even may discourage some claims, leading to disinvestment rather than trying to seek for redress. ESF is of the view that the 2012 US Model BIT strikes a better balance in the types of documents made available to the public in light of the considerations discussed above: pleadings, memorials and briefs are made available but not witness statements or experts’ reports or exhibits. If the Commission is minded to incorporate the UNCITRAL Transparency Rules, then ESF would suggest that they should not be expanded as follows: - Matters relating to efforts by the parties to settle the dispute prior to the commencement of arbitration should not be subject to the same transparency rules. Such discussions are challenging enough without them taking place in public. For this reason and in circumstances where the Commission would wish to encourage the parties to reach an amicable resolution, ESF would recommend removing the agreement to mediate from the list of documents to be made public. - Paragraph 3 goes too far in making all exhibits used by the parties automatically part of the public record. This would unnecessarily frontload the time and costs associated with identifying and redacting confidential information from a potentially large number of documents. Given the confidential nature of such documents, it is preferable for a request for disclosure be considered by the tribunal on a case by case basis. This is what the UNCITRAL Transparency Rules provide at article 3(3), and ESF supports that provision.

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.

Some BITs require the investor first to “exhaust all domestic remedies”. But when that process is ineffective, the availability of neutral arbitration is necessary to provide confidence to investors. It must be recognized that in the EU as well as the US, the federal or sub-federal government, or the local authorities do make mistakes, and the local courts are not always neutral. Partiality may indeed occur and the local court may favour the local government/investor over the foreign investor, for instance when assessing a claim for a breach of investment protection or for expropriation, or by denying due process rights or the right to access avenues for appeal. Companies investing abroad may find that a specific dispute cannot be solved through the host state’s domestic legal system, because in many countries, investment agreements are not directly enforceable in local courts. Some provisions are part of an international treaty, but have not been transposed into national law. Often the protection offered in investment agreements cannot be invoked, in part or in whole, before domestic courts and the applicable legal rules are different. Anon-discrimination clause may only be enshrined in a BIT or a FTA, under international law and can only be invoked through an ISDS case. A claim against such clause will not be admissible before a US Court. This means that international arbitration is often the only means to obtain redress when an alleged breach of an investment agreement occurs. This is the reason why an ISDS is compulsory in the Investment Chapter of the TTIP with the US. No ISDS in TTIP is not an option. Otherwise, it can result in a denial of the very protections that the treaty will be designed to guarantee. ESF is of the view that an investor under TTIP should be able to withdraw the case launched in domestic court and pursue the case through ISDS, when there are reasons to believe that the claim is not receiving a fair and equitable treatment and is being discriminated against. Lapse of time before initiating arbitration: The Commission has not included the text relating to submissions of requests for consultation and determination. Nevertheless, the proposed aggregate 9 month cooling-off period to be imposed on an investor before allowing for the initiation of arbitration is, in our view, too long. Given time and costs involved, recourse by investors to arbitration is often a last resort rather than a tactical step, after attempts at settlement to national courts have been unsuccessful. In the meantime, the investment’s value may become irrecoverable. ESF propose shorter timeframes to allow the parties a window for negotiation without undermining the effectiveness of the remedy. Other related proceedings: ESF agrees with the approach in not requiring exhaustion of local remedies before initiating proceedings. This is consistent with the purpose of investment treaties. It is desirable to avoid parallel proceedings which may lead to contradictory decisions. However, paras 1(f) and (g) would preclude an investor from making claims in different fora which may have the same factual basis but give rise to different causes of action, possibly against different parties. An investor may wait for years to receive a final judgment/award/decision before being able to initiate treaty arbitration – and even then will be subject to 9 month waiting period - assuming the time limit for initiating a claim has not run out. Alternatively, an investor may be forced to abandon an investment treaty arbitration within 12 months of the constitution of the tribunal (which might be prior to a final award) in order not avail itself of a contractual remedy (to avoid being time-barred). The proposed measures will be prolonging the ISDS process, including in cases where recourse to domestic courts is not available. We recommend that the Commission assess the practical implications of such requirements more thoroughly before moving ahead.

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?

ESF does not disagree with the proposal for a roster of arbitrators from which a chairperson or sole arbitrator may be appointed by the Secretary-General of ICSID in the absence of party agreement. However, although full details of the text have not been provided, there do not appear to be safeguards to ensure the independence of the dispute resolution process. For example, the Committee on Services and Investment, charged with establishing and maintaining the list of arbitrators (Article x-42), will also be responsible for recommending binding interpretations of the treaty (Article x-27), will have the power to make a binding determination on the validity of the prudential carve-out (Question 10) and generally provide a forum for consultation between the parties on issues concerning ISDS (Question 12). The roster would give a state party the opportunity to select its party-appointed arbitrator and also have a chairperson (with a decisive voice) whom it has vetted and approved. In this sense, the process could accord one of the disputing parties (i.e. the responding state) an advantage over the investor party. ESF would urge the Commission to consider carefully to role of this Committee and establish a structure to ensure the diversity and independence of the arbitrators appointed from the roster to hear these disputes. The roster should also contain a sufficient number of arbitrators to ensure such independence. The pool of possible arbitrators should not be limited and pre-established; indeed, some special expertise and experience may be required to deal with a large variety of cases, that might not be found is a closed group. It is important therefore to keep the possibility for one of the parties to challenge the arbitrators - as proposed in Article X-25 paras 7 to 10 - and to keep the possibility for the Secretary-General of ICSID, after hearing the disputing parties and after providing the arbitrator an opportunity to submit any observations, to issue a final decision within 45 days, which is a reasonable time. It will be necessary however to monitor the efficiency of such a measure as to assess whether this will address the issue that the chair is appointed from a list compiled by a state Committee. The text of future treaties would also contain unequivocal language requiring arbitrators to be impartial, independent and free of any conflict of interest. This proposal at para 6 seems largely to follow existing arbitration practice and is welcomed by ESF.

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.

Frivolous claims ESF favours a strong and efficient ISDS system and would wish to ensure that all parties have confidence in well-tried dispute settlement. We therefore support the proposal to dismiss frivolous claims early in the proceedings at Articles X-29 and X-30. Costs ESF understands the policy choice behind the “loser pays” principle: to discourage investors from bringing unmeritorious claims. For this reason, ESF would agree with the proposal of the Commission at Article X-36 in so far as it would apply only to frivolous claims dismissed by the tribunal at the outset pursuant to the provisions described above. However, ESF would like to question a blanket application of the ‘loser pays’ principle, including in well-founded cases, as it might limit arbitrators’ judgment and discretion in the award of fees. ESF would like, in particular, to highlight the unintended impact that a strict loser pays costs rule may have on smaller enterprises, which are key drivers for growth. SMEs, to the extent they can access foreign markets, may have less leverage in host states than large corporations and therefore might benefit the most from the investment protections in the treaty. Given the high costs associated with bringing a treaty claim , ESF would ask the Commission to assess the possible unintended consequences of the loser pays costs rule as currently drafted. ESF would suggest mitigating this impact by allowing the tribunal to apportion the costs of the arbitration in the same way as the legal fees, i.e. in principle the unsuccessful party pays unless the tribunal determines that such apportionment is unreasonable in the circumstances of the case (rather than only in “exceptional circumstances” as currently drafted).

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?

ESF considers that where filter mechanisms, carve-outs or any kind of exceptions are introduced in an Investment Chapter and in ISDS in particular for certain sectors or types of activity, they must be properly justified and limited to the maximum extent possible, because they introduce a risk of politicization of a case and risk making the protections less effective. Indeed the “Committee of experts” will typically be composed of officials from the two signatory countries. Rather than providing an avenue for direct recourse by the investor, the outcome might be decided without an opportunity for the investor’s case to be heard. Financial services filter: While the text in respect of financial services is incomplete and cross-refers to provisions that have not been included in the consultation, it appears that the Commission is proposing to: - modify the substantive investment protections that states will guarantee to financial services firms (§1(a)); - carve out from the standard ISDS process all disputes involving financial services (§1(a)) such that these investors would be subject to a different, yet undefined process, and would apparently lose the right to participate in the constitution of the arbitration tribunal (§2); - carve out from the standard ISDS all disputes in which a state invokes the prudential carve-out (§1(b)) such that the investor would lose the right to participate in the constitution of the arbitration tribunal (§2) and the determination of the validity of the prudential carve-out can be taken out of the arbitration process altogether and submitted to a state committee (§3). ESF strongly believes that all investors should benefit from the same standard of protection against non-discrimination, including financial services firms. No justification has been provided for departing from the uniform standards enshrined by individual EU Member States in existing BITs. Any such dilution of the protections would go beyond a “filter” mechanism to be applied to measures taken in a financial crisis. In addition, the proposal to allow a state to refer a measure which is ostensibly prudential for binding determination to a state committee is contrary to the very purpose of ISDS. The effect of this filter would be to politicise such disputes by referring them to a state body for decision. This is not necessary. Any emergency measures for the protection of the financial system will have already been taken by the state by the time an ISDS is initiated, and the tribunal would not have the power to abrogate such measures in any event. Moreover, the Commission has not set out any due process or transparency guarantees which would allow the investor to make submissions to the Financial Services Committee in response to the state’s case and receive a fully reasoned decision. No justification for this important omission has been provided. ESF opposes the Commission’s proposal to subject financial services investors to a different ISDS process and prevent them from participating in the constitution of the arbitration tribunal in the same way as other investors. Whilst there is reference to a process for “Financial Services – Dispute Settlement” no proposed text has been provided for comment by stakeholders. No reason has been stated for not allowing financial services investors to select their party-appointed arbitrator and participate in the appointment of the chairperson in the usual way, especially in circumstances where a filter in respect of prudential measures would be in place. Therefore, ESF disagrees with the carve-out proposed for financial services. While the need for prudential measures is undisputed, robust safeguards must be in place to prevent abuse of the prudential carve-out as a means to avoid a state’s commitments to the protections guaranteed by the treaty. ESF would welcome the opportunity to comment on the full text as part of the consultation process prior to the conclusion of the negotiations.

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?

ESF is rather concerned by these provisions, which re-introduce the possibility of politicising proceedings. The very reason why ISDS mechanisms were originally created was to avoid politics entering into the disputes and keep them truly neutral. ESF believes that the allowance for state parties (at Article X-27) to provide binding interpretations on the scope of investor protections outside the treaty negotiation process is really problematic. This could undermine confidence in investor protection by politicising the process, changing the normative framework in which investors operate retroactively, possibly even after a dispute has arisen, undermining the purpose of ISDS in submitting the dispute to a neutral decision-making body, and creating uncertainty for foreign investors when assessing the risks/rewards of a claim prior to pursuing a treaty claim. This lack of predictability in the protections provided to investors is compounded by the proposed provisions in Question 7 (Article X-21) which require an investor to postpone, and possibly entirely waive, alternative recourse to domestic court or commercial arbitration, in order to benefit from investor protection guarantees and avail themselves of ISDS. ESF would urge the Commission to assess the value-added of such provisions. Questions surrounding the scope and interpretation of the investor protection standards in the treaty should be addressed more properly in the drafting of the provisions, including the binding Annexes, which are the subject of this consultation. In addition, the transparency provisions at Question 6 (Article x-33) and the proposed express right accorded to the non-disputing state party to make submissions to the tribunal once a dispute has arisen (Article X-35) provide an opportunity for states to make submissions on the proper interpretation of the treaty and any relevant public policy considerations whilst preserving the integrity of the investment protection system. The ability for a tribunal to judge in full equity, in full fairness and without external interference is a fundamental principle of any adjudication system. We fear that the Commission’s proposal might go too far in diminishing the investor’s rights.

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.

ESF welcomes the proposal to establish an appellate mechanism in TTIP so as to allow for review of ISDS rulings. This will promote fairness, consistency in the interpretation of investor protection system, reduce uncertainty and improve compliance. We believe that a mechanism similar to the appellate body of the World Trade Organisation, adapted to take into account that one of the parties to the dispute is a private investor would be a good starting point. In this context, the Commission should consider the establishment of an independent secretariat for the Appellate Body to enhance the independence of decisions. ESF calls on the European Commission to consult interested stakeholders so that they might have the opportunity to put forward their views prior to its adoption. Such appellate mechanism must strike a balance between reviewing awards on points of law and achieving finality for the parties to the proceedings through well-defined avenues for appeal within strict time limits. In relation to the possible draft provisions relating to the Award at Article xx, ESF believes that the proposal for an award to be remitted back to the tribunal to reflect the findings of the Appellate Body is unsatisfactory and undermines the jurisdiction and decision-making powers of the tribunal. In ESF’s view, a better approach would be for the Appellate Body either to modify or overturn the award, or to remit it to the tribunal for a further decision.

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?

There are currently 1400 BITs of EU Member States, which are offering strong investment protection. It has taken a long time, helped by national negotiators’ expertise plus well-established jurisprudence from arbitration cases, to achieve this degree of protection. There is no doubt that the very large volume of FDI invested by European firms around the world reflects the high level of protection now in place. Investment decisions require trust among private partners as well as between the private investor and the country where it decides to invest, and good BIT protection contributes to this trust. Investment protection is also a means for countries around the world to attract and retain FDI for the benefit of their economies. These agreements promote foreign investment, trade, value-added jobs and income. They enshrine a basic set of generally accepted investor protections with the following characteristics: broad-based definitions for investors and investment, unqualified Most Favourite Nation and National Treatment clauses, unqualified Fair and Equitable Treatment clause; a broad “umbrella clause; no exceptions for particular sectors; no filter mechanisms; full compensation for direct & indirect expropriation. All existing BITs signed by the EU Member States also include an ISDS process which allows investors to initiate arbitration proceedings against the host state before an impartial and neutral arbitral tribunal with free choice of arbitrators by the parties to the dispute. It should also emphasised that the initiation of a dispute between an investor and a state is triggered by a measure by the host state, for example if the host state takes a measure leading to direct or indirect expropriation (as defined in the BIT) which would hamper or nullify the reason for the original investment in that country. So the primary victim is the company, not the state, as too often heard. Investment agreements fulfil two fundamental purposes: a guaranteed level of substantive protection under international law which is not subject to the national law of the host state and a neutral forum for dispute resolution outside the national law system. It should be noted that the protections provided under a BIT (e.g. non-discrimination) are different to the contractual rights which may be enforced in national courts or commercial arbitration. This means that ISDS is usually the only means of seeking redress for breach of treaty rights. It is clear that European investors rely on and frequently use these treaties. Businesses do not like conflicts with the authorities of the host countries in which they invest. Disputes can be lengthy and costly. A decision by an investor to make a claim against a host state is usually not taken lightly or speculatively. Whilst no system can be completely shielded from abuse, most private enterprises which have made a long-term commitment of financial and human resources in a foreign state will assert a treaty claim as a last resort, when the problem cannot be solved through negotiation or within the domestic legal system of the host state. Most enterprises will initiate arbitration because they believe they have a legitimate claim and further to legal advice that the state’s conduct breaches the protections guaranteed under international law. Many months can pass before getting an ISDS process activated, and often many months will go by before a decision of the arbitration tribunal is given. In the meantime, the investor loses business. Such proceedings are not without risk for investors: apart from the time and substantial costs involved, they require the investor to take adversarial steps against the state in which they do business. ESF believes that the Commission should use its negotiating mandate under the Lisbon Treaty to improve and strengthen, and not dilute, the generally accepted, fundamental protections that are currently enshrined and relied upon in the existing 1400 BITs.