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  • Company/Organisation: McKenna Long & Aldridge LLP
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  • Activity: McKenna Long & Aldridge LLP ('MLA') is an international law firm with more than 575 attorneys and public policy advisors in 15 offices and 13 markets. The firm is uniquely positioned at the intersection of law, business and government, representing clients in the areas of complex litigation, corporate law, energy, environment, finance, government contracts, health care, infrastructure, insurance, intellectual property, private client services, public policy, real estate, and technology. MLA has been recognized as a leader in Government Affairs, providing our clients with a broad range of legal, governmental and political experience. MLA houses a highly acclaimed Public Policy and Regulatory Affairs practice with more than 60 attorneys and professionals, in seven offices in the U.S. and in Brussels. Our bipartisan team is composed of professionals who have held public office and served as diplomats, as well as those who have previously served as staff and advisors to U.S. presidents, governors, Members of Congress, and mayors. MLA's International Trade practice is recognized by Chambers USA as having "experience, deep knowledge and [the] ability to predict government movements." MLA's team assists clients in all aspects of trade, from moving goods, services, capital and technology across national boundaries, to helping companies comply with global anti-corruption enforcement. More specifically, MLA provides advice on national, EU and international trade rules affecting businesses, including but not limited to export control laws, trade remedies, technical barriers to trade, bilateral and multilateral trade agreements, WTO law and the trade aspects of international environmental and investment treaties.
  • Profile: Law Firm
  • Transparency register: No
  • Prior investment in the US: Yes

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?

We agree that the Investor-to-State Dispute Settlement (‘ISDS’) mechanism should only protect the investment made in the territory of a TTIP Party (‘Contracting Party’) by enterprises established and performing substantial business activities in the territory of another Contracting Party. This caveat would allow TTIP Arbitral Tribunals to be relieved of cases involving investments made by investors with no substantial connection to the home Contracting Party because they are substantially controlled by persons established in the territory of either the host Contracting Party or of a third State. This caveat would ultimately preclude the ISDS mechanism from extending to artificial arrangements by which enterprises abuse the loose definition of “investor” with a view to claiming excessive compensation from a State for breach of their investment rights.

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.

We agree with the Consultation Document that the benefit of the MFN principle and of the national treatment clause applicable to established investments should extend to the pre-establishment phase subject to a negative list of sectoral exclusions (e.g. audio-visual sector) and to derogation grounds that should trigger a proportionality assessment. In other words, any proposed investment not falling within the negative list and not subject to a derogation ground should be covered by the MFN principle and the national treatment clause. We also agree that the MFN principle, whether at the pre- or post-establishment phase, should not have the effect of extending to a TTIP investment dispute the benefit of a more favorable ISDS mechanism that a Contracting Party would have concluded with a third State. This generous reading of the MFN principle would make the TTIP ISDS framework institutionally unpredictable and in practice unworkable in the event of fundamental divergences between the TTIP ISDS framework and the incorporated ISDS mechanism. As Rudolf Dolzer and Christoph Schreuer have rightly suggested, the application of the MFN clause should not result in a “regime change in regard to the basic treaty containing the clause” (Principles of International Investment Law OUP 2012 p. 211). In short, the MFN clause should only procure investors substantive but not jurisdictional advantages. An ICSID Tribunal has ruled that, unless expressly and unambiguously provided in a bilateral investment treaty, the incorporation of a new ISDS mechanism may not be inferred from the mere provision of a MFN clause in that treaty (Plama Construction v. Bulgaria, ICSID Case No. ARB/03/24, 8 February 2005, para. 204). According to the ICSID Tribunal, “Contracting States cannot be presumed to have agreed that those provisions can be enlarged by incorporating dispute resolution provisions from other treaties negotiated in an entirely different context” (para. 207). Notwithstanding these ICSID rulings, in order to avoid all ambiguity in the interpretation of the future TTIP ISDS provisions and to spare lengthy debates on this question before a TTIP Arbitral Tribunal, these TTIP Agreement should expressly and clearly limit the scope of the MFN principle to its substantive dimension.

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?

The proposed TTIP ISDS provisions define the fair and equitable treatment (‘FET’) standard by reference to an exhaustive list of specific violations (i.e. denial of justice; disregard of the fundamental due process principles; manifest arbitrariness; targeted discrimination and abusive treatment such as coercion and harassment) whereas it leaves the “full protection and security” standard undefined and open-ended. One listed ground of violation of the FET standard is “targeted discrimination based on gender, race or religious belief”. This ground is too restrictive since it overlooks discrimination based on sexual orientation, ethnicity and political affiliation. Even though these discrimination grounds are self-explanatory, they reflect the EU’s attachment to fundamental values and therefore should be included within the list of FET violations. Indeed, Article 21 of the Charter of Fundamental Rights of the European Union provides that “[a]ny discrimination based on any ground such as sex, race, colour, ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation shall be prohibited”. In addition, Article 1(1) of Protocol No. 12 to the European Convention on Human Rights stipulates that “[t]he enjoyment of any right set forth by law shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.” Another listed ground of violation of the FET standard under the TTIP ISDS framework is “disregard of the fundamental principles of due process”. The concept of “due process” being anchored in the Anglo-American legal tradition, the normative relation between procedural due process and the right to a fair trial should be elaborated upon. Under European human rights law, the right to a fair trial gives rise to the following minimum guarantees: (i) any person aggrieved in the exercise of his/her rights must enjoy effective judicial protection; (ii) no party to a trial must be placed at a procedural disadvantage vis-à-vis the other(s); (iii) the civil claim must be adjudicated in a timely fashion by an impartial and independent court; (iv) the judicial hearings and the judgment must be made public; and (v) the judgment must be reasoned. The TTIP should clarify how the “full protection and security” standard distinguishes itself from the FET standard, in particular with respect to coercion and to harassment (listed as FET breaches under the TTIP ISDS framework). Rudolf Dolzer and Christoph Schreuer have argued that the “full protection and security” standard covers the legal protection of the investors’ rights as well as their protection against physical violence and harassment (Principles of International Investment Law OUP 2012 pp. 160-166). If the FET standard is defined by reference to exhaustive illustrations thereof and is guaranteed in the same provision as the “full protection and security” standard, the same drafting technique should apply to the latter standard. The definition of both standards through exhaustive listing should prevent or minimize substantive overlaps between them. Moreover, the proposed TTIP ISDS provisions do not take position on the normative relation between the “full protection and security” standard and international customary law and thus on whether it is designed to merely codify international customary law or to constitute an autonomous investment protection standard. Clarification in this respect is all the more needed, as the underlying reference text (i.e. the Comprehensive Economic and Trade Agreement between the EU and Canada) suggests that the list of basic rights associated with the FET standard is meant to codify international customary law and not to impose more demanding norms than the latter.

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.

We agree with the Commission’s Consultation Document that most investment treaties do not define indirect expropriation. We also observe that NAFTA puts direct expropriation, indirect expropriation and measures equivalent to the first two categories of expropriation on an equal footing for the purpose of complying with the public purpose, due process, non-discrimination and compensation requirements. As the OECD has acknowledged in its Policy Framework for Investment – A Review of Good Practices (2006 p. 23), “there is increasing concern that concepts such as indirect expropriation may be applicable to regulatory measures aimed at protecting health, safety, and environmental interests of society”. The proposed TTIP distinguishes between three types of expropriatory measures: (i) direct expropriation; (ii) indirect expropriation; and (iii) regulatory measures pursuing welfare objectives, which may be re-qualified as manifestations of indirect expropriation if they are excessive in relation to the objectives that they pursue. In Metalclad Corporation v. Mexico (ICSID Case No. ARB(AF)/97/1, 21 August 2000, para. 103), the ICSID Tribunal found that expropriation “includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State”. The list of criteria for determining the existence of an indirect expropriation should not be limited to factors relating to the measure’s object, context, intent, economic impact, or to the investor’s legitimate expectations, but should also include the degree of control which the investor maintains over its investment as a result of the indirect expropriation (Azurix v. Argentina, ICSID Case No. ARB/01/12, 14 July 2006, para. 322). In relation to regulatory measures pursuing a welfare objective, the proposed TTIP should further substantiate the notion of excessiveness as a normative threshold for turning them into indirect expropriatory measures. Presumably, the Consultation Document refers to the suitability and the necessity tests, in other words, to the proportionality requirements that the measure be adequate for pursuing the underlying welfare objective and be the least restrictive (of the investor’s economic rights) amongst other equally suitable measures reasonably available to the regulating authority. In this respect, inspiration may be drawn from the EU Courts’ case-law regarding market access impediments under the Treaty on the Functioning of the European Union. In Gebhard (C-55/94 [1995] E.C.R. Reports I-4165 para. 37), the Court of Justice held that “national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfill four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it”. The Consultation Document appears to suggest that if a regulatory measure is disproportionate as a result of being excessive in pursuing its welfare objective(s), it shall be treated as a form of indirect expropriation and accordingly be subject to the public interest, non-discrimination, due process of law and prompt/adequate/effective compensation requirements. The proposed TTIP should shed more light on the transposition of the well established requirements conditioning the legality of expropriation to excessive regulatory measures, in particular the due process and the compensation requirements.

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?

The Commission’s approach in the Consultation Document reflects a normative import of trade law concepts into the area of international investment law. Such trade tools are intended to shape and delineate the nature and the extent of States’ regulatory autonomy. The references to treaty reservations, exclusions of scope, general derogation grounds based on welfare objectives (e.g. environmental and public health protection, labor and consumer protection), special derogation grounds (e.g. national security clause), and temporary safeguard measures can be found in a number of in regional trade agreements and in WTO Agreements. In addition, the new generation of free trade agreements (‘FTAs’) called for by the European Commission in its Communication entitled “Global Europe: Competing in the World” (COM(2006) 567 final 8) ought to better reconcile trade considerations with legitimate areas of regulatory autonomy such as sustainable development. In its Communication, the Commission insisted on the fact that, in order to be successful, free trade agreements had to be comprehensive in their scope and govern trade-related disciplines beyond or to a higher extent than those already regulated by the WTO Agreements. Such FTAs ought to mainly regulate those aspects of labor and environmental protection that affect trade between parties to these agreements. In other words, new generation FTAs should not only provide for negative harmonization clauses (i.e. those clauses laying down general and specific derogation grounds) but also include positive convergence clauses in different areas of sustainable development. Furthermore, the US Model Bilateral Investment Treaty (‘US Model BIT 2012’) and the OECD (Policy Framework for Investment – A Review of Good Practices 2006 p. 41) convey the importance of asserting areas of regulatory autonomy when negotiating regional and bilateral investment treaties and insist on not letting investment incentives get in the way of achieving certain legitimate objectives. The US Model BIT 2012 states in particular that no host State should lessen its environmental law or labor law standards for the sake of accommodating or encouraging certain investment schemes. The OECD also indicated that “[m]any governments, including all OECD member countries, consider that it is inappropriate to encourage investment by lowering health, safety or environmental standards or relaxing core labour standards”. With respect to derogation clauses, the TTIP ISDS framework should draw a rational bridge between the rules on indirect expropriation through excessive regulatory measures and the list of horizontal exceptions. Based on the model of the WTO Technical Barriers to Trade Agreement, the list of horizontal exceptions could be based on an open-ended reference to a “legitimate objective” illustrated by a non-exhaustive list of welfare objectives such as environmental protection, the prevention of deceptive practices, the protection of human health and of the environment. Any derogation from an equal treatment clause should be subject to a clear proportionality framework that enables a regulating authority to adopt a regulatory measure provided that it pursues a welfare objective, that it is rationally connected to the underlying welfare objective and that it is the least restrictive of the investor’s rights amongst other equally suitable measures reasonably available to it. As regards positive convergence clauses, the TTIP ISDS framework should recall a number of key environmental, labor protection and public health principles that are part of international law or of common legislative practice, which the Contracting Parties should comply with either directly or through corporate social responsibility initiatives. The TTIP provisions must also make it clear that no Contracting Party should use its investment policy in a way that negates or minimizes its sustainable development commitments.

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 publicity of the hearings is a point on which international human rights law and international investment arbitration rules diverge from each other. Whereas the publicity of the hearings is required under most international human rights instruments, such publicity is generally left to the disputing parties’ discretion under most ISDS instruments. Article 29(1) of the 2012 US Model Bilateral Investment Treaty is an exception in this respect, as it urges for the automatic publicity of certain arbitral documents subject to safeguards relating to protected information. The publicity of the hearings should improve the quality of the ultimate arbitral award given the public scrutiny to which the debates would be subject. In contrast with Article 6(1) of the European Convention on Human Rights and with Article 14(1) of the International Covenant on Civil and Political Rights, the proposed TTIP ISDS provisions however provide no legal basis for ordering closed sessions in order to ensure the integrity of the proceedings or to protect the rights of third parties. Whereas they are more protective of the investors’ procedural rights than international human rights law and most international (investment) arbitration rules, the proposed TTIP ISDS provisions do not consider the interests of third parties that may be affected by such publicity. The proposed provisions on the publicity of the TTIP awards constitute an improvement compared to the current practice of ISDS mechanisms, which typically condition the publication of the investment award upon the disputing parties’ consent (e.g. Article 48 of the ICSID Convention). The proposed TTIP provisions will enhance predictability in investment law adjudication. On the one hand, the TTIP arbitrators will have direct access to prior awards delivered by other TTIP arbitrators. On the other hand, investment tribunals constituted under other ISDS mechanisms will be able to draw from published TTIP awards. The lack of publicity of investment awards (subject to the disputing parties’ consent) has contributed to the fragmentation of international investment law, a concern which the TTIP ISDS framework has rightly addressed. The possibility for civil society representatives to file amicus curiae briefs should improve the quality of the ultimate award given the addition of experts’ and stakeholders’ opinions. This procedural possibility would be a positive evolution compared to international human rights law, international (investment) arbitration rules and international trade law. International human rights law does not require domestic courts in private law disputes to allow for and to review amicus curiae briefs. International (investment) arbitration rules typically do not provide for the filing of amicus curiae briefs with the consequence that arbitrators may or may not decide to request or to review such briefs contingent on the use they make of their inherent powers. With respect to international trade law, Article 13 of the Dispute Settlement Understanding (‘DSU’) empowers each WTO Panel “to seek information and technical advice from any individual or body which it deems appropriate” and “to seek information from any relevant source”. In United States – Import Prohibition of Certain Shrimp and Shrimp products (AB-1998-4 para.105-108), the WTO Appellate Body interpreted Article 13 as not precluding a Panel from considering a brief filed by an individual or a legal body whose opinion it did not seek. However, the Panel’s review and consideration of unsolicited briefs are left to its discretion and are not a right conferred upon the public or affected stakeholders. The TTIP ISDS framework would, contrary to the DSU, confer the right upon the public to contribute its views to a particular investment dispute. The proposed TTIP ISDS provisions remove the element of discretion which the DSU confers upon WTO Panels when pronouncing on whether to admit and to consider spontaneous amicus curiae briefs.

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.

The possibility to resort to mediation as a means of resolving international economic disputes already exists under Article 5 of the Dispute Settlement Understanding (‘DSU’). Any party to a WTO dispute (which must be a WTO Member) may request the activation of mediation proceedings at any stage of the dispute. Such proceedings are confidential and may be accompanied by a conciliation mission. If the mediation proceedings fail, the complainant may still request the establishment of a WTO panel procedure. Few regional trade agreements (‘RTAs’) condition the right of the Complaining Party to launch arbitration proceedings against the other Party upon the exhaustion of a mediation procedure. This is however the case of the Economic Partnership Agreement concluded between the EU and 15 Caribbean countries (i.e. Antigua & Barbuda, Bahamas, Barbados, Dominica, Belize, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Christopher & Nevis, Saint Lucia, Saint Vincent & the Grenadines, Suriname and Trinidad & Tobago) (Signed October 2008; not yet in force). Certain ISDS instruments make optional the recourse to alternate means of resolving international investment disputes. The ICSID Convention provides for a conciliation procedure and the ICSID Additional Facility Rules provide for both a fact-finding and a conciliation procedure. Article 2007 of NAFTA empowers the Federal Trade Commission to activate good offices, conciliation or mediation proceedings at the request of a Party to NAFTA should the (disputing) Parties to NAFTA fail to resolve their dispute (including investment dispute) through consultations. The proposed ISDS provisions under TTIP should extend the mediator’s role to include a fact-finding role, which typically falls within the scope of a conciliation procedure (John Merrills, International Dispute Settlement CUP 2011, pp. 26, 58). Mediation and conciliation should be available to the parties at all times throughout the procedure, as is already the case under the DSU. If the parties to a TTIP dispute do resort to mediation, the TTIP ISDS provisions should clarify that the parties must give sympathetic consideration to the mediator’s report and may not just dismiss it without reviewing it. The parties are thus bound by a procedural good faith obligation. Any decision by the parties to the dispute to endorse the content of a mediator’s report needs to be recorded by a TTIP Arbitral Tribunal in the form of a final settlement award, which the parties may request the Tribunal to make confidential. Such an award could not be appealed except to the extent that a party’s consent to the mediator’s report was based significantly on the other party’s misrepresentation or in case the mediator committed a misuse of power or acts of corruption in the exercise of his/her mission.

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?

International procedural rules emerging from the 2010 UNCITRAL Arbitration Rules, the 2012 PCA Arbitration Rules, the ICC Arbitration Rules, the ICSID Convention, the ICSID Additional Facility Rules and the IBA Guidelines on Conflicts of Interest in International Arbitration all point to the need for independent, impartial and competent arbitrators from the time of and for the entire duration of their appointment. Pursuant to Article 11 of the 2010 UNCITRAL Arbitration Rules: “[w]hen a person is approached in connection with his or her possible appointment as an arbitrator, he or she shall disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence”. Article 12 of the UNCITRAL Arbitration Rules also stipulates that “[a]ny arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence”. The 2012 PCA Arbitration Rules and the Model Statement on Impartiality are drafted in an identical way to Articles 11 and 12 of the 2010 UNCITRAL Arbitral Rules. Article 11(1) of the ICC Arbitration Rules provides that “[e]very arbitrator must be and remain impartial and independent of the parties involved in the arbitration”. Article 14(1) of the ICC Arbitration Rules provides that “[a] challenge of an arbitrator, whether for an alleged lack of impartiality or independence, or otherwise, shall be made by the submission to the Secretariat of a written statement specifying the facts and circumstances on which the challenge is based”. Article 15(2) of the ICC Arbitration Rules also provides that “[a]n arbitrator shall also be replaced on the Court’s own initiative when it decides that the arbitrator is prevented de jure or de facto from fulfilling the arbitrator’s functions, or that the arbitrator is not fulfilling those functions in accordance with the Rules or within the prescribed time limits”. Article 14(1) of the ICSID Convention provides that persons serving on the Panel of Arbitrators must be “persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be relied upon to exercise independent judgment”. Moreover, Article 8 of the ICSID Additional Facility Rules provides that “[a]rbitrators shall be persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be relied upon to exercise independent judgment”. The first general standard of the IBA Guidelines on Conflicts of Interest in International Arbitration stipulates that “[e]very arbitrator shall be impartial and independent of the parties at the time of accepting an appointment to serve and shall remain so during the entire arbitration proceeding until the final award has been rendered or the proceeding has otherwise finally terminated”. According to the second general standard, “[a]n arbitrator shall decline to accept an appointment or, if the arbitration has already been commenced, refuse to continue to act as an arbitrator if he or she has any doubts as to his or her ability to be impartial or independent”. Effective and efficient rules on the removal of arbitrators who have displayed a conflict of interest, bias and/or a lack of competence in matters falling within the jurisdiction of a TTIP Arbitral Tribunal should be put in place for every stage of the arbitral proceedings. We welcome the proposal to encourage retired judges to become TTIP arbitrators given that they are less likely to be embroiled in conflicts of interest situations assuming that they do not act as counsels in parallel. The TTIP ISDS provisions should indeed ensure that appointed arbitrators enjoy substantial expertise in international economic law and in areas of sustainable development such as environmental and labor protection laws. Rules on conflicts of interest should be an integral part of the TTIP ISDS mechanism and not be confined to guidance documents.

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 proposal to empower a TTIP Arbitral Tribunal to impose the entirety of the legal costs on the unsuccessful party subject to the law of reason should be further nuanced. The circumstances under which the legal costs of the respondent party shall be borne in whole or in part by the investor must be outlined with a view to guaranteeing legal certainty. A non-exhaustive list of such circumstances could include: (i) whether the investor is a natural or a legal person; (ii) the investor’s turnover; and (iii) the extent of the frivolous claim or of the investor’s abuse of procedure. Another way of sanctioning blatantly frivolous claims or abuses of procedure could consist in depriving the investor’s counsel of his or her right to represent an investor before a TTIP Arbitral Tribunal for a definite or indefinite period of time depending on the nature and scale of the frivolous claim(s).

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?

The Contracting Parties should not be empowered to intervene in ongoing investment disputes within the framework of the future TTIP ISDS mechanism, even when such disputes raise issues relating to a Contracting Party’s prudential or financial law rules. Whilst the protection of the stability and integrity of a Contracting Party’s financial system is a legitimate concern, it could be discussed as part of the merits of a respondent party’s defence in a TTIP arbitral procedure. Rather than inserting these very open exclusions of scope into the TTIP ISDS mechanism, we would encourage the Contracting Parties to include within the ISDS framework specific limitation grounds that would empower a TTIP Arbitral Tribunal to limit the publicity of the hearings or of an award in pursuance of certain public interest grounds, including the safeguard of a country’s essential economic interests. The Contracting Parties should draw inspiration from the limitation grounds laid down in international human rights instruments whilst subjecting any restriction on the publicity of the hearing or of the arbitral award to a clear and predictable proportionality framework. Article 14(1) of the International Covenant on Civil and Political Rights stipulates that “[t]he press and the public may be excluded from all or part of a trial for reasons of morals, public order (ordre public) or national security in a democratic society, or when the interest of the private lives of the parties so requires, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice”. The United Nations Human Rights Committee, in its General Comment No. 32 (‘Article 14: Right to equality before courts and tribunals and to a fair trial’ CCPR/C/GC/32; 23 August 2007 para. 28), pointed out that the “[t]he publicity of hearings ensures the transparency of proceedings and thus provides an important safeguard for the interest of the individual and of society at large”. Article 6(1) of the European Convention on Human Rights also provides that “the press and public may be excluded from all or part of the trial in the interests of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice”. At the very least, if these public interest concerns are so overriding as to justify the non-justiciability of disputes regarding the impact of a Contracting Party’s financial rules on an investor’s investment rights, the ISDS exclusions of scope should be spelt out in detail in the TTIP Agreement. If such an approach were to be adopted, the TTIP Arbitral Tribunals should have the final word in determining whether a particular TTIP dispute brought to their attention falls within the exclusions of scope or not. In no way should the TTIP Agreement provide for virtual exclusions of scope that are so open-ended as to leave the justiciability of disputes over financial law or prudential rules entirely to the Contracting Parties’ political discretion. Furthermore, if a Contracting Party is worried that its financial and monetary policy will be misunderstood by a TTIP Arbitral Tribunal, the respondent party may always request this Tribunal to appoint an economic advisor as a technical expert in order to shed light on complex aspects of that country’s policy.

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?

Binding or authentic interpretations by the Contracting Parties on issues of international investment law should apply to future investment disputes but not interfere with ongoing investment disputes falling within the purview of a particular TTIP Tribunal. The ISDS process should indeed operate independently of the Contracting Parties’ decision-making powers even if “the scope for undesirable interpretations by ISDS tribunals is very limited”. TTIP Tribunals must be viewed as objective and independent in the eyes of potential investors. At the most, the Contracting Parties could file amicus curiae briefs in ongoing investment disputes, which in no way would bind the TTIP Tribunals when adjudicating such disputes. Authentic interpretations of the TTIP, which would only concern future investment disputes, should then be considered elements of interpretation and not new law from the perspective of the TTIP Tribunals. They would qualify as “any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation” (Article 31.3(b) of the Vienna Convention on the Law of Treaties, Signed in Vienna May 23, 1969, entered into force January 27, 1980, 1155, U.N.T.S. 331).

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.

Providing a double degree of jurisdiction for TTIP investment disputes would set an interesting precedent for the entire body of investment arbitration and go beyond the minimum requirements set by international human rights law. The provision of such a procedural safeguard could be modeled partly on the institution of the WTO Appellate Body, which is a standby body hearing appeals against any report issued by a WTO Panel. International human rights law sanctions the right of appeal only in criminal proceedings and subject to certain caveats (i.e. this right is typically defined by reference to national law and not autonomously) and reservations by States Parties (e.g. single degree of jurisdiction for criminal offences committed by high State officials). At the WTO level, Article 17 of the Dispute Settlement Understanding (‘DSU’) provides for the establishment of a standing Appellate Body that may hear challenges against Panel Reports that are limited to those “legal issues discussed and legal interpretations developed in the Panel Reports". The Appellate Body is composed of seven persons, unaffiliated with any Government, which must be of established authority in the field of law, of international trade law and of the covered agreement. The TTIP Appellate Tribunal should ideally be equipped to carry out a full review of the relevant facts that were put to the TTIP Arbitral Tribunal’s attention and of new facts which the parties to the dispute could not have been aware of at the time of the first instance proceedings, of the applicable investment law, of relevant rules and principles of public international law and of the procedural rules applicable to the first instance arbitral proceedings. The institution of a full review appellate mechanism at the transnational level has already been foreseen in the Agreement on a Unified Patent Court (‘UPC Agreement’), which is an enhanced cooperation treaty open to EU Member but not yet in force. Under the UPC Agreement, the Unified Patent Court is composed on the one hand of local, regional and central divisions and on the other hand of a Court of Appeal. Judgments by the former may be appealed before the latter on questions of law and/or of fact. If appeals are to be limited to points of law, legal challenges before the TTIP Apellate Tribunal should not be limited to those procedural grounds enumerated in Article 52 (i.e. annulment procedure) of the ICSID Convention (i.e. the Tribunal’s improper constitution; the Tribunal’s excess of powers; corruption by a Tribunal’s member; serious breach of a fundamental rule of procedure; failure to state the reasons of the award) and include substantive grounds (i.e. errors of interpretation of the substantive law; manifest errors of assessment of the underlying facts). The grounds of appeal provisions should also be more specific than Article 17 of the DSU by exemplifying what is meant by “legal issues discussed and legal interpretations developed [in first instance]” whilst leaving some space for open-endedness. The TTIP ISDS framework could also provide for an internal preliminary ruling procedure whereby the TTIP Arbitral Tribunal would be empowered to refer a legal matter to the TTIP Appellate Tribunal before delivering its final award either at the request of a party to the investment dispute or when the matter at stake is sensitive and requires uniformity within the TTIP ISDS jurisprudence. Such a procedure could be premised on the judicial system tailored at the EU law level under which an EU Member State’s national court may or must refer a request for a preliminary ruling over the interpretation and/or validity of EU law to the Court of Justice if a question of EU law is raised in the course of domestic proceedings unless the answer to this question is blatantly clear (e.g. due to established case-law on the matter).

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?

With respect to its substantive investment protection standards, the TTIP ISDS framework should better distinguish between the scope of the FET standard and that the “full protection and security” standard in order to avoid overlaps between the two and ultimately to provide more legal predictability for prospective investors and the regulating authority. This scoping exercise could be carried out by defining the “full protection and security” standard through an exhaustive list of violations thereof (as with the FET standard), by clarifying the relation between the “full protection and security” standard and international customary law, and finally by substantiating the “due process” FET guarantee in light of the European conception of the right to a fair trial. The International Court of Justice, in the Elettronica Sicula case, held that Article V of the Treaty of Friendship, Commerce and Navigation between Italy and the USA (“the full protection and security required by international law”) implied that the parties must “conform to the minimum international standard” whilst not excluding that such a standard may go beyond the requirements stemming from general international law (United States of America v. Italy, I.C.J. Reports 1989 p. 66). The drafters of the TTIP ISDS framework need to take position on whether the “full protection and security” standard is an autonomous one or not in order to avoid exhausting the TTIP Tribunal’s resources on such interpretative issues that could easily be resolved through detailed definitional clauses. The transformation of excessive regulatory measures into indirect expropriatory measures raises the question of how their legality should be assessed in light of the due process and the compensation requirements. The TTIP ISDS framework should draw a rational bridge between the rules on indirect expropriation through excessive regulatory measures and the list of horizontal exceptions. The latter could consist of an open-ended reference to a “legitimate objective” followed by a non-exhaustive reference to welfare objectives such as environmental, labor or consumer protection. Any derogation from an equal treatment clause should be subject to a clear proportionality framework laid down in advance. Based on the model of new generation FTAs, the TTIP ISDS framework should set out a number of key environmental, labor protection and public health principles that are part of international law or of common legislative practice, which the Contracting Parties should comply with either directly or through corporate social responsibility initiatives. The TTIP ISDS provisions should prohibit the Contracting Parties from using their investment policy in order to limit the impact of environmental or labor law on investors or future investors. As far as the TTIP ISDS procedure is concerned, recognition of a right of appeal and of the publicity of the hearings/award constitutes an improvement to past investment arbitration practice, which should make more uniform and predictable the body of international investment law. However, some of the proposed procedural innovations raise concerns from the angle of the independence of TTIP Arbitral Tribunals and of the protection of third parties’ rights. The independence of TTIP Tribunals would be adversely affected if the Contracting Parties could impose interpretations of the TTIP provisions on the Tribunals in ongoing disputes. Whereas the proposed provisions on the publicity of the hearings are more protective of the investors’ procedural rights than under international human rights law and current investment arbitration practice, they fail to account for the interests of third parties that may be affected by such publicity. We encourage the Contracting Parties to codify certain limitation grounds as well as a proportionality test, which would empower these Tribunals to order closed sessions without having to resort to their inherent powers.