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Respondent details

  • Company/Organisation: Central Europe Energy Partners
  • Location: Belgium
  • Activity: Central Europe Energy Partners (CEEP) is an organisation of companies and scientific institutions, mainly from Central Europe, involved in the energy and energy-intensive sectors within the European economy. It was established almost four years ago, (June 2010), and has got, as of now, 23 members from 5 countries, representing more than 300,000 employees, and an overall turnover in excess of Euros 42 billion. CEEP is very active at the EU level (see the activities of CEEP on the website: www.ceep.be ). CEEP’s position represents the opinions of its members from energy and energy-intensive sectors, as well as from scientific institutions.
  • Profile: Non-governmental organisation
  • Transparency register: Yes
  • Prior investment in the US: No

Contribution

A. Substantive investment protection provisions

Explanation of the issue

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

Approach in most investment agreements

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

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

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

The EU's objectives and approach

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

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

Link to reference text

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

The CEEP generally agrees with the EU's approach to defining the terms 'investment' and 'investor' in the TTIP. The proposed definition is more precise than in most of the IIAs and may contribute to the efficiency of the investment protection system. However, the CEEP would like to point to some deficiencies in the EU's approach to the definition of the terms 'investment' and the 'investor'. Lack of protection of "planned investments" The proposed approach not to protect so-called "planned investments", i.e. projects that never came to fruition but to which investors devoted some capital during preparations, might deprive those investors who committed a lot of resources to the planning of a project which failed from protection under the TTIP. It is not entirely clear why the investor should be deprived of such protection if the cause of the failure of the project lies with the host state, for instance due to introduction of new legislation which did not exist beforehand. Protection of investors performing "substantial business activities" in the host state The approach of the EU might prevent special purpose vehicles (SPVs) from using the TTIP to protect their interests, while doing business through such companies is very common. The EU's proposal that a definition of the term 'investor' should exclude enterprises having no 'substantial business activities' in the host state from protection under the TTIP might turn out to be problematic because the term 'substantial business activities' is quite vague and would cause interpretation problems. Therefore, it might be useful to consider introducing a definition or guidelines for defining the term 'substantial business activities' into the TTIP. Here, the proposed idea of allowing the EU and the US to provide interpretations of the text of the TTIP which would be binding on arbitral tribunal might prove helpful. However, this should be considered from the perspective of the potential prolongation of the arbitration proceedings.

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 CEEP generally agrees with the EU's approach of allowing the states to envisage discrimination in certain cases and sectors (i.e. health, the environment, consumers, the audio-visual sector and the granting of subsidies, as proposed by the EU), as long as the catalogue of these cases is kept to a strict minimum, not allowing the states to use this tool in all cases it sees fit. Therefore, the CEEP would like to raise the following concerns in relation to the non-discrimination standard. Non-discrimination The sectors in which some form of discrimination would be envisaged should be limited to the protection of health, the environment, consumers, the audio-visual sector and the granting of subsidies, as proposed by the EU. Further, the idea of not protecting those investors that are only planning to make an investment from discrimination, i.e. in fact allowing the host states to discriminate against investors before they are established, might lead to a situation in which the host state decides who can invest in them without any particular criteria. This in turn might limit competition. Most-favoured nation treatment The idea of including the MFN treatment clause into the TTIP is itself welcome, however, the approach preventing the investors from obtaining broader protection than that provided for in the TTIP through the MFN clause in other investment treaties or trade agreements appears to be controversial. Without any possibility of using this clause in order to include ISDS settlement procedures or substantive standards provided for in other investment treaties or trade agreements, the investors will have limited capacity to make claims for breaches of international standards on the part of host states and could rely solely on the standards provided for in the TTIP. The CEEP is of the opinion that such solution is not advisable from the perspective of investment protection.

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 CEEP generally agrees with the EU's approach concerning the "fair and equitable treatment" ("FET") standard. However, the CEEP also would like to raise some concerns in relation to the contents of the FET standard. Rights encompassed by the FET The CEEP considers the limitation of the catalogue of the rights encompassed by the FET to be too restrictive. The limitation would make it impossible for the investors to use the FET standard in order to claim damages for types of breaches committed by the host states other than the ones listed in the catalogue. In this scenario, investors would not be able to rely on the argument that the particular circumstances of the case led to violation of FET, which is a common claim under various IIAs. In the CEEP's view a desirable approach would be to allow the EU and the US to extend the FET standard provided for in the TTIP under a specific agreement (as proposed by the EU), as it is difficult to predict what types of breaches on the part of host states will occur in the future. Nevertheless, at this point it is difficult to imagine how this agreement should work in practice. Would the two states come to such an agreement where an investor from one of them raised "new" claims (not yet covered by the FET) against the other? Legitimate expectations Although generally the approach of including legitimate expectations of the investor as a criterion to be taken into account in determining the breach of the FET clause is a very good development, limiting the investors' possibility of relying on such legitimate expectations only to cases in which the host state made a specific representation towards the investor might turn out to be problematic for ensuring investment protection. This is mainly because the term 'specific representation' is vague. Moreover, the CEEP considers it difficult to determine that investors should not be protected in all the cases where they have not concluded a specific contract with the host state, but when the host state made a representation through other means than by issuing a specific decision concerning the investor's project (for instance through a promise). Stabilization obligation As the EU does not seem to allow the inclusion of the so-called stabilization obligation of the host state (i.e. an obligation to guarantee a stable legal framework) in the TTIP , some means of protection for investors in case this framework is radically changed shall be available to foreign investors. This is particularly vital in cases where the states' political regime or economic condition suddenly changes, leading to numerous amendments to the applicable law, which may affect FDI, for instance in the form of targeted legislation. Clearly, the legal framework for investment may evolve, but should not be changed by the states radically. Umbrella clause The CEEP welcomes the fact that the EU approach envisages some protection in situations in which the host states used sovereign powers to avoid contractual obligations towards foreign investors. The best way to achieve this would be to insert into the TTIP an umbrella clause, which would make the states' failure to honour its commitments under contracts concluded with the investors a breach of the TTIP and would allow the investors to raise contractually-related claims before an investment arbitral tribunal. Here, the CEEP considers that from the perspective of the investor such a clause does not necessarily have to be limited to obligations in connection with the investment, but could refer to "any obligations of the host state" and to the "investment", not the "investor".

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 CEEP agrees with the EU's approach towards clarifying the provisions on expropriation and stating that non-discriminatory measures taken for legitimate public purposes, as the right of the host states to apply regulatory measures in certain cases, is undeniable. At the same time however the CEEP is of the opinion that these measures should be deemed not to constitute expropriation only when they were performed for the purpose of general public welfare and related to sectors such as health, safety and the environment. In this context, the CEEP raises the following concerns as to the EU's approach towards expropriation. Legitimate public purpose The fact that the list of legitimate public purposes is not to be exhaustive could be used by the host states to argue that other sectors (i.e. not only health or the environment) are also vital for public welfare, in order to justify application of measures in these sectors. Although it is very difficult to establish a precise borderline between indirect expropriation and a regulatory measure, it could be considered if the list of the so-called public welfare spheres can be limited. Measures that are 'manifestly excessive in light of their purpose' In the context of the EU's policy of considering measures taken for legitimate public purposes as not expropriatory only if they are not 'manifestly excessive in light of their purpose' the CEEP is of the view that the term 'manifestly excessive' provides arbitral tribunals with too much room for interpretation. It might prove difficult for investors to establish what kind of measures fall into the 'manifestly excessive' category. The state could always argue that other measures than the ones applied would not have been sufficient, and it might be impossible for the investor to evidence that the measures were in fact disproportionate for the given legitimate public purpose. Impact of the measure on the economic value of the investment The CEEP generally does not object to the proposed solution, that it is not possible to bring an expropriation claim on the sole grounds that the measure applied by the host state for a legitimate public purpose had an impact on the economic value of the investment. However, safeguards need to be provided to protect investors from being substantially deprived of the fundamental attributes of property in their investment, as for example in the proposed wording of the CETA. This would include the right to use, enjoy and dispose of the investment (i.e. situation in which the investment is rendered worthless).

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 CEEP considers the EU's approach to achieving a solid balance between the protection of investors and the states' right to regulate by reaffirming the right to regulate by inserting a separate provision to this effect in the TTIP to be healthy. Since the EU's current approach has already been confirmed by investment tribunals in cases against Argentina, following the financial crisis in 2001-2002, there is no reason why states should not be directly permitted to apply such measures in the TTIP. At the same time however, it is vital to ensure that the host states' right to regulate is not unlimited, is worded in a narrow way, and clearly defined. Hence, the proposal provided in the cited text of the CETA, such as the requirement not to discriminate between countries when adopting safeguards with regard to capital movements or payments, avoid unnecessary damage to economic interests of the other party and the temporary nature of these measures should be taken into account in order to maintain the protection of investors and prevent states from shielding from liability under international law. The option under consideration of granting the EU and the US a right to adopt binding interpretations on the provisions of the TTIP might be helpful in this respect.

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 approach presented by the EU of increasing transparency by making documents and hearings available to the public, as well as providing for the possibility of amicus curiae briefs being filed by civil society representatives, in the opinion of the CEEP serves the purpose of increasing transparency and openness of the ISDS system well. The CEEP considers that guaranteeing transparency of the ISDS system is a correct approach due to its many advantages such as better selection and performance of arbitrators, enhancing civil society and facilitating social acceptance of arbitral awards or the ability to follow current trends in investment arbitration case law. At the same time, the CEEP points out that the EU has to make sure that confidential information and business secrets will be protected in these transparent arbitration proceedings under the TTIP. Incorporating the UNCITRAL Rules on Transparency in Treaty-based Investor-state Arbitration (similarly as in the proposed text of the CETA) which contain provisions eliminating the obligation to disclose confidential information to the public seems sufficient to achieve a reasonable balance between transparency and investors' interests.

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.

Link to reference text

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 CEEP generally agrees with the EU's approach of balancing access to ISDS with possible recourse to domestic courts in order to avoid double compensation. However, keeping in place protection of the investors depends largely on the particular wording of the provisions of the TTIP. Therefore, the CEEP raises a concern about the proposed wording of the referred to text of the CETA, which provides that in order to submit the claim to arbitration, the investor and its locally established enterprise must waive their rights to raise any claims or initiate any proceedings seeking compensation or damages before a tribunal or court with respect to any measure alleged to constitute a breach referred to in its claim to arbitration. In the CEEP's view, the fact that the locally established enterprise would also have to waive its right to claim damages in the future seems not to serve the aim of preserving a balance. This is because it is possible that the locally established enterprise would suffer a different type of damage due to the same measures constituting a breach of the host state's obligations, than the damage suffered by the mother company. In such a situation, under the proposed provisions of the TTIP, the local enterprise would be prevented from claiming compensation. Therefore, in the CEEP's view, this proposition should be reconsidered. Mediation As for the usefulness of mediation, in the CEEP's view it is an efficient and a rather quick method of dispute resolution which also allows a valuable business relationship to be maintained. Therefore, if states were willing to pursue mediation and it was possible for them to enter into settlements without involving numerous layers of bureaucracy, introducing the possibility for mediation in the TTIP should be considered as a positive development.

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?

According to the CEEP, the EU's approach to ensure that arbitrators are independent, act ethically and are qualified in the field of international law is correct. Specifically, the incorporation of a binding code of conduct into the TTIP is possibly the best way to achieve the goal of maintaining ethics and preventing conflicts of interest, since the fact that commonly used IBA Guidelines on the Conflicts of Interest are not binding on the parties of an arbitration dispute gives room to argue that the standards set out therein are not applicable. With regard to the EU's approach to the qualifications of arbitrators, it seems that introducing into the TTIP a requirement that arbitrators be qualified and compiling of a list of qualified arbitrators with expertise in international law from which the chairman of the arbitral tribunal could be chosen, would generally serve the purpose of guaranteeing that arbitrators are qualified. However, the CEEP would like to point out that it remains unclear who would decide who is to be placed on the list of arbitrators and that this idea need to be reconsidered carefully before it is included in the TTIP.

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.

In the CEEP's view, the idea to dismiss frivolous claims in investment arbitration is reasonable and might ensure the efficiency of arbitration proceedings. Nonetheless, considering that the EU's approach is to provide numerous mechanisms for investors aimed at the investors not having easy access to the ISDS under the TTIP, the mechanism introduced to reduce the risk of frivolous claims requires a clear understanding of what kind of claim could be deemed frivolous or unfounded. In this respect, the CEEP raises the following concerns. 'Legally unfounded' claims The description of claims which would have to be quickly dismissed by the tribunals, i.e. apart from claims that are 'obviously without legal merit' those that are 'legally unfounded', remains unclear. The term 'legally unfounded' seems vague. As it might be fairly easy for a tribunal to quickly determine, for example, that the investor is not established in the EU or the US and thus dismiss the claim as being 'obviously without legal merit', determining in the very first phase of the arbitration proceedings that, for instance, there was in fact no discrimination would be a much more difficult task in most investment disputes. Costs follow the event The EU's proposal that the costs follow the event certainly serves the goal of discouraging investors from bringing meritless claims before investment tribunals. The costs of investment proceedings tend to be extremely high, and sometimes losing the case does not necessarily mean that the claim was unfounded in its entirety. Although it is a common practice in the national courts of many European jurisdictions for the losing party to make at least some contribution to the costs of winning party, it would be worth considering a more subtle approach and to apportion costs based on the relative success in different claims.

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 CEEP generally agrees with the host states' right to regulate the financial sector in order to maintain the stability and integrity of the financial system, as long as such regulation is well balanced with the protection of investors. However, the idea that investors' claims related to measures applied in the financial sector might be filtered by both the EU and the US may distort the protection of investors, as it is highly probable that the states would defend the regulatory powers instead of focusing on investment protection.

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?

In the CEEP's view, the possibility of the parties to the TTIP providing such guidance might ensure uniformity and predictability in the interpretation of the TTIP. However, the possibility of the non-disputing state's providing guidance on the interpretation of the TTIP may also distort the protection of investors, as states (even non-disputing ones) tend to focus on regulatory powers and not the protection of investors.

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.

The CEEP considers that an appellate mechanism in general might be a means to ensure uniformity and predictability in the interpretation of the TTIP. The CEEP notes however that as the existence of an appellate mechanism deprives arbitration of its crucial feature of the finality of the award and there is no tradition of reviewing an arbitral award on the merits within the EU Member States, such appellate mechanism must provide for clear criteria which could lead to a successful appeal and the structure of the appellate body must to be carefully determined. In the light of the above, the CEEP considers that an impact assessment of the existence of an appeal against an award issued by an international investment tribunal might be helpful to assess this proposition. Nevertheless, it should be considered whether, if introduced, the appeal would be possible only on procedural grounds or also on a substantive basis.

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?

The CEEP generally considers that the EU's approach is healthy, takes into account aspects that are important for balancing the interests of the host states' with the protection of foreign investments and investors, and aims to ensure the efficiency of the ISDS system. However, the review of the EU's approach and the referred to text of the CETA shows that some solutions tend to be more favourable to the host states than to investors. Specifically, the EU puts emphasis on the states' right to regulate virtually every investment protection standard, leaving investors with a limited possibility to build their arguments regarding breaches of the host states' international obligations. Moreover, the EU's approach that limits the possibility of investors' bringing claims under the TTIP is also visible in the proposed definition of 'investor' and 'investment' and in the limitation of the standards of protection, such as the FET. Therefore, a greater balance towards the protection of investors in the TTIP would be welcome. This could be achieved, in addition to the other means described in this questionnaire, by: (a) considering the broader definition of the term 'investor'; (b) introducing the umbrella clause into the TTIP; (c) ensuring that the states' right to regulate is carefully described in the TTIP so as not to limit the possibility of a state's using it as the state sees fit; (d) limiting in the TTIP the use of vague terms such as 'substantial business activities' or 'legally unfounded'; and (e) considering more subtle approach as to the costs of arbitration proceedings. Additionally, to ensure the completeness of the provisions of the TTIP, the CEEP suggests considering the inclusion of provisions on the recognition of awards issued under the TTIP, as this could facilitate the recognition process.