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Respondent details

  • Company/Organisation: Trade Justice Movement
  • Location: United Kingdom
  • Activity: We share trade policy analysis with our 60 organisational members who use this for campaigning purposes, reaching more than 6 million individuals.
  • Profile: Non-governmental organisation
  • Transparency register: No
  • Prior investment in the US: No


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?

This kind of investment protection is unnecessary, particularly in the context of TTIP, where the Commission has recognised that the Parties’ legal systems are sufficiently well developed. Responsibility for risk assessment and for insuring against risk should lie with the company, not with the host state. It is iniquitous to offer such protections to companies without any accompanying responsibilities and in the absence of equivalent rights for communities or for domestic companies. Specific problems with the proposed text include: The proposed definition of investment is too broad: it covers “every kind of asset”, independent of whether or not investments are associated with an existing enterprise in the host state. Assets need only “have the characteristics of an investment”, this too is defined broadly. This approach is problematic because it allows for the most expansive interpretation by tribunals of what that definition encompasses and is therefore the least predictable for host states. The indicative list does nothing to address the initial expansive definition. The risk is that tribunals expand the scope of the treaty to areas that were not intended, thereby increasing the risk of being sued. The EU’s claim that tribunals have refused to grant protection where investors have not respected the laws of the host state is problematic. A more accurate characterisation would be “where the tribunal agrees that investors have not respected the laws of the host state”. This is important as it captures the extent to which tribunals are given the power to assess national laws and legal proceedings and judge whether or not these are appropriate and proportionate. It is also not necessarily given that tribunals will rule in favour of countries where an investor breaks the law: in the case of Ecuador vs. Occidental (ICSID Case No. ARB/06/11) the tribunal agreed that the company had breached the participation contract but nonetheless ruled that Occidental was due compensation because Ecuador’s response was deemed disproportionate. It is encouraging to see that the EU is seeking to take steps to prevent mailbox companies from accessing treaty protection, however the provisions are unlikely to prevent treaty shopping itself (the bigger and more important problem), as larger companies will still be able to establish operations in countries whose agreements they view as being the most beneficial.

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.

Investment protection agreements give international investors much stronger rights than national companies: if international investors are unhappy with a Party’s behaviour, they have access to an international tribunal and potentially large sums in compensation. National companies and communities in the host state have no such protection, this creates an inbuilt component of discrimination. Specific issues with the proposed text include: The CETA text given in the annex indicates a pre-establishment right to national treatment, this implies significant market liberalization and a loss of policy space to regulate the entry of foreign investors, for EU member states. The precise impact of these clauses is impossible to predict without being seen alongside other market access clauses, e.g. whether or not it models GATS Article XVI market access, which prohibits limitations on the number of investments (such as quotas) on the total value of transaction or assets, the number of operations, caps on the participation of foreign capital, or the number of persons employed. Giving pre-establishment rights would go beyond EU MS existing BITs. The use of a negative list for carve-outs is a departure from the EU’s more usual practice and makes the impact of the deal unpredictable. There is no clarification in the text as to whether intent to discriminate is necessary to constitute a treaty violation. One example of where this would be pertinent is in case the parties to TTIP are unable to reach agreement on harmonisation or mutual recognition of standards in certain sectors. There is no clarification in the text of the meaning of the phrase “in like situations”; in Occidental vs. Ecuador (decision 1 July 2004) the tribunal found that a foreign investor involved in oil production and exportation, was in a “like situation” with domestic entities involved in the production and export of lumber, bananas, and palm oil. The EU’s current formulation does address the issue of the use of MFN to import procedural provisions (as claimed by the EU) but (contrary to the Commission’s statements) it does not address the issue of the importation of substantive provisions (cf. table 2, article X.2.4). Only ISDS procedures including compensation are excluded, not the substantive investment protection provisions. It must therefore be assumed that companies will be able to cherry pick from Parties’ agreements, rendering any potential improvements in the TTIP chapter useless.

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 text claims to have addressed the issues with FET by using a “closed list”, however the list is not in fact closed: there is simply no wording that suggests that. Clause 3 is particularly problematic in this regard as it leaves open the possibility that Parties may seek to make changes which again open up the scope of the clause, particularly in light of Article XX.2.f “A breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article”. Words such as “manifest arbitrariness” will also still require interpretation by arbitrators. The EC claims that the issue of legitimate expectation has been addressed by requiring a “specific representation” to have been made by the Party to the investor. However there is no clarity as to what constitutes a specific representation: does it need to be in writing or can investors claim a verbal representation? What if the context of the investment changes? The clause twice uses the wording “such as” which opens it up to bringing in an undefined list of possible breaches. Whilst not currently in the proposed text, we wish to flag that the inclusion of an ‘umbrella clause’ such as that originally proposed by the EU for CETA is not acceptable as it gives companies having a contract with a government the right to elevate any disputes to the level of a treaty dispute; contracts already set out procedures in case of dispute, and this agreement should be respected.

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.

Expropriation clauses in investment agreements have been problematic as the vague definition of ‘indirect expropriation’ has been widely interpreted, leading to governments being required to pay compensation for measures taken in the public interest, thereby potentially causing policy chill. The proposed paragraph is problematic as it still gives significant powers to tribunals to determine what constitutes indirect expropriation and only gives an indicative, rather than a definitive list of factors to be considered. The EU has previously suggested language on expropriation such that non-discriminatory measures of general application designed to protect legitimate public policy objectives are only carved out from qualifying as a compensable expropriation if (i) they are proportional and (ii) they are necessary and applied in a way that they ‘genuinely meet’ the objectives. This places the burden of proof on governments. It also leaves far too much to the tribunal’s interpretation (when is a measure ‘proportional’? what is ‘necessary’ and how does the tribunal know if measures ‘genuinely meet’ the state’s objectives?). This undermines governments’ democratic mandate. Under paragraph 3 of the annex, the phrase “in rare circumstances” creates a loophole which may undermine the spirit of the rest of that paragraph.

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 EU’s approach to this issue is questionable: it appears to take the right to regulate as something which must be disciplined by higher laws, which, it is implied, investment treaties are part of and which therefore gives tribunals the power to decide what government action is ‘legitimate’ and ‘necessary’, rather than a right that is given to governments by democratic mandate to be constrained primarily by the wishes of citizens. The CETA text given as a model in the consultation does not include an explicit “right to regulate” provision in the investment chapter itself. Instead, there is a general statement on the right to regulate in the preamble, which is not legal text. The wording leaves interpretation open to tribunals as it qualifies “public policy objectives” with “legitimate”. The text of table 5 article X.1 is unclear, it states that “Articles X- (National Treatment), X- (Most-Favoured-Nation Treatment), (…) do not apply to”; the final set of brackets makes it impossible to know the scope of the reservations and exceptions. The EU’s explanatory note suggests that safeguards and exceptions will only be applied to non-discrimination obligations (national treatment and most favoured nation treatment) and therefore not to fair and equitable treatment or expropriation. The CETA text has been compared with that of Article 1114(1) of NAFTA, where the legal analysis is that it does nothing to establish or enhance a right to regulate. Furthermore, it makes it clear that the right to regulate is fully subject to the Agreement and that all exercises of the right to regulate, at both the federal and provincial levels, must conform to the agreement. This approach prioritizes conformity with treaty obligations over the right to regulate. The transfer of GATT/WTO language into investment text is untested and the document says little about how this would be applied, it is therefore impossible to know what the impacts of this will be in terms of the right to regulate.

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.

Unlike domestic and most international judicial proceedings, investment arbitration proceedings are typically not public and can remain secret from beginning to end, including with respect to the commencement of a proceeding, the awards and other documents, as well as hearings. This is due to the arbitration rules that apply in investment arbitration cases, including ICSID and UNCITRAL Rules. The CETA text refers to UNCITRAL rules, which, as of 1st April 2014, provide an increased degree of transparency. However the EU’s proposals would give companies a significant ability to resist the publication of information by arguing that it was commercially sensitive.

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 text in the consultation document explicitly allows companies to bypass domestic courts. It even cites an example of a policy decision to support local companies (used to support local job-creation, skills development and expertise) which was not prohibited under US law but could be challenged via an investment agreement – a clear example of how investment agreements seek to control democratically elected governments’ decisions. Contrary to what the EU claims, it is not apparent that the measures outlined in its proposal (disallowing simultaneous claims in domestic courts and at investment tribunals, or encouraging mediation) would have the effect of incentivising the use of domestic courts. Recourse to mediation seems a common-sense response to a dispute but it should not be necessary to include such a provision in a trade deal. Rather, this could form part of the general advice offered by home governments to their companies.

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.

Link to reference text

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?

Private international tribunals give international foreign investors excessive rights as compared with domestic investors and communities, who do not have equivalent protections. They are an unnecessary additional layer of protection, particularly in the case of TTIP. This situation cannot be improved via a code of conduct or improving the qualifications of the arbitrators. Furthermore, there is an inbuilt bias in the ICSID system: the US currently appoints the president of the World Bank and that this president in turn: is ex officio chairman of the ICSID Administrative Council; proposes the ICSID secretary general and appoints all three of the arbitrators in appeal cases under ICSID rules. The secretary general of ICSID appoints the third arbitrator if the parties cannot agree on the third one and will decide on conflict of interest (ICSID articles 5,10,38,52 and Commission consultation document, table 8, article x-25.10). It is also of concern that at least one study (Van Harten 2012) finds significant bias towards the US (US claims 91% more likely to benefit from expansive interpretation than all other states combined) and EU (EU claims 75% more likely to benefit from expansive interpretation, once the US is removed). Response to the specific text: The ICSID system already uses a roster system under which the Secretariat maintains a list of Conciliators and of Arbitrators, so the idea is not new (as suggested in the document). The roster approach at ICSID has not helped mitigate concerns of impartiality and independence of arbitrators. Like in ICSID, the first two arbitrators under the CETA model text are nominated by the investor and the state unilaterally, and there is no need whatsoever to choose an arbitrator from the roster. The roster only comes into play where the parties fail to appoint the presiding arbitrator within three months of the submission of the claim, or fail to appoint their own arbitrator. This is very similar to the ICSID roster system, where the presiding arbitrator is only chosen from the roster when one of the arbitrators is not nominated. The roster is therefore only a backup and does not have the power of an exclusive roster for all the arbitrators fulfilling strict conditions of experience, independence and impartiality. As a consequence, all the problems resulting from party appointments, such as arbitrators focusing more on pleasing the nominating parties and being re-appointed in future cases, are not resolved through the roster system proposed in the CETA draft. The CETA model text also states that arbitrators must comply with the Code of Conduct. However, this Code does not yet exist. Instead, the text states that the Committee on Services and Investment “shall, on agreement of the Parties, and after completion of the respective legal requirements and procedures of the Parties, decide to adopt a code of conduct” for arbitrators which “may” cover disclosure obligations; the independence and impartiality of arbitrators; and confidentiality. It is therefore impossible to comment on the likely efficacy of such a system.

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 costs of defending cases and of compensation are prohibitive and potentially cause ‘policy chill’, whereby countries are reluctant to take action on an issue for fear of litigation from international investors. The Philip Morris vs. Australia and Philip Morris vs. Uruguay, where country policies to introduce plain cigarette packaging are at issue are a case in point. The EU claims that it is proposing that the losing party should bear all costs of proceedings, yet the CETA model text leaves it to the discretion of the tribunal, albeit in “exceptional circumstances”, to apportion costs between the disputing parties “if it determines that apportionment is appropriate in the circumstances of the claim”. Frivolous claims are by far not the biggest problem in investment arbitration. These provisions may in some cases help reduce the costs of some arbitration by having unmeritorious cases terminated without the time and expense of full hearings on the merits. But these provisions will only address this cost issue. A case dismissed on either ground would have been won by the state in any event and thus these provisions do not address the expansive interpretations by some tribunals on the merits or on jurisdiction issues. A tribunal determined to take an expansive interpretation of any provisions will also be able to do so from the beginning of these frivolous claims procedures. Consequently, this feature, while it may be useful, will only find its utility in reducing the costs of arbitration, not the scope of any decisions that would otherwise be made on jurisdiction or the merits.

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?

Governments must be able to manage their own economies without interference by international investors and must maintain the right to regulate. The recent crisis demonstrates that this is particularly important in respect of the financial sector. Investors have been using Bilateral Investment Treaties to challenge countries like Greece and Cyprus to challenge their post-crisis economic decisions. This is unacceptable and must be prevented. The best way to prevent this is to remove the ability of international investors to sue via private international tribunals. This clause gives power to the Party not facing a claim the power to decide whether or not measures are ‘legitimate’ to achieve financial stability: the Parties must decide jointly, as noted above. Prudential carve-outs must also be “not more burdensome than necessary to achieve their aim”: this phrase is very vague and again leaves open to arbitrators or the opposite Party, the interpretation of what is considered to be too burdensome to investors.

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?

No comment

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.

Rather than creating an extra layer of bureaucracy, ISDS should be removed, there would therefore be no need for an appellate mechanism. The Commission states that the CETA is the “first EU agreement which provides for the possibility to establish an appellate mechanism,” and then adds “the U.S. has included such provisions in all of its agreements since 2004.” The 10-year U.S. experience of including such provisions has led to nothing, however. It might therefore be taken as an indication that a provision stating that parties will “discuss whether, and if so, under what conditions, an appellate mechanism could be created under the Agreement,” might also fail to materialize. Certainly, at this stage, we cannot conclude that the CETA text has solved the problems relating to lack of consistency, predictability, and legal correctness just by including the possibility of establishing an appellate mechanism.

C. General assessment

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

There are serious flaws in this consultation process. First: it fails to give European communities the possibility of responding to the proposed TTIP in its entirety. The EU should provide this opportunity, particularly in light of the controversy regarding issues such as the secrecy surrounding the negotiations and the undermining of basic democratic processes, regulatory harmonisation and the impact on standards, the impact on jobs and on the economies of non-Party countries. Second, the consultation is written in such a technical (and occasionally obscure) language that it excludes everyone but investment law experts. As most of these are arbitration practitioners, the questionnaire in effect invites ISDS-friendly responses by design. Third, the consultation is not in fact a consultation on the TTIP text but on a CETA text that was valid in March but has since progressed further in the CETA negotiations. In addition, the Commission says that it wants to build on CETA but also refer back to existing treaty practice. It is therefore a consultation on a non-existent text; given the significance of the details, this renders the consultation all but useless. Fourth, the consultation starts from the assumption that ISDS should be in the agreement. This is despite the fact that in the negotiating mandate it states that “the inclusion of investment protection and investor-to-state dispute settlement (ISDS) will depend on whether a satisfactory solution, meeting the EU interests concerning the issues covered by paragraph 23 is achieved”. There are a number of reasons why investment protection and ISDS should not be included in an agreement such as TTIP, including: the EC acknowledges that the court systems in the EU and US are well-developed, there is therefore no necessity for an additional layer of protection. Even where court systems are deemed to be insufficiently developed, the EC has not made a strong argument as to why business risk should be transferred to communities in this way, particularly given that it can impinge on the public good by causing policy chill. Finally, it is much more difficult to withdraw from or amend the investment chapter of a trade deal than it is that of a Bilateral Investment Treaty (the more common way of tackling these issues). The majority of investment flows currently take place outside of any investment protection regimes. Many countries (e.g. South Africa and Indonesia) are reviewing or cancelling their BITs, a number of countries in receipt of high levels of investment (e.g. Brazil) have never had this kind of agreement. Investment flows between the US and EU are already among the highest in the world, without requiring this extra layer of protection. This underlines the extent to which this is an outdated and unnecessary protection. Investors should be encouraged to mitigate their business risks via commercial insurance, for example via the Multilateral Investment Guarantee Agency. The consultation makes no reference to ongoing issues regarding the protection of personal data. The EU views US protections as insufficient, to the extent that the Parliament has called for the suspension of the safe harbour agreement. The Commission must give serious consideration to the implications of entering into an agreement which may expose it to litigation if it takes action on this, particularly if MFN provisions are included. Finally, these kinds of protections give investors highly-actionable rights without corresponding responsibilities, and gives no equivalent rights to communities. This is of particular concern given it seems likely that investment protection in TTIP would give arbitrators higher standing than the European Court of Human Rights. There are concerns that the wording of the finalised chapter might lead to investment liberalisation being subject to ISDS. This must be avoided: the best way of doing so would be to cease offering such protections to investors.