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Respondent details

  • Company/Organisation: International Institute for Sustainable Development
  • Location: Canada
  • Activity: International investment law and policy, international dispute settlement, capacity building, advisory services
  • Profile: Think tank
  • 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?

Definition of investment: “Investment” is arguably the most critical term to define. The definition will determine which foreign capital flows will be covered by the TTIP and benefit from its provisions. The Commission’s statements make the reader believe that the treaty only applies once the investment is made but not before or at the time of admission. However, the language provided in the reference text leads to another conclusion. First, the text provided by the Commission defines “investor” as “a Party […] that seeks to make, is making or has made an investment […].” The terms “seeks to make” and “is making” effectively extend the treaty’s scope to the pre-establishment phase. Second, the texts on national and most-favoured nation treatment likewise indicate that the Commission intends to cover the phase when the investment is being established (see further IISD’s reply to Question 2). In terms of the scope of the term “investment,” the Commission’s reference text shows that it has opted for a traditional open-ended, asset-based definition of investment. The text defines investment as “every kind of asset” and provides an indicative list of assets that can qualify as investment. Assets are covered independently of whether or not they are associated with a functioning enterprise in the host State. In other words, they are protected even if owned and controlled wholly from outside the host State. This contrasts with a so-called enterprise-based definition, or a closed asset-based definition, both of which would be more predictable and less prone to arbitral activism to expand the scope of investment arbitration to unexpected areas. The Commission appears to want to limit the risk of expansive arbitral interpretations through language requiring assets to have certain characteristics in order to qualify as investments under the treaty. However, the phrase “such as” indicates that, to qualify for treaty protection, investments do not need to fulfill all listed requirements, but that one alone will suffice--a very simple condition to satisfy. This qualification is insufficient to protect host States from expansive interpretations by investment tribunals, as it will have limited impact on the initial expansive language of “any asset.” Moreover, it will not exclude portfolio investments from its scope, as even stock market or bond investments will fall within the definition and satisfy the conditions. Finally, the Commission states that investment protection should apply only to those investments made “in accordance with the laws of the country where they have invested” and proposes language in this respect. A review of case law indicates, however, that investment tribunals have limited the meaning and scope of this requirement and by that means extended their jurisdiction over treaty disputes. This provision, therefore, does not ensure that only investors that have made their investment in compliance with the law will be afforded protection under the treaty. Definition of investor: The definition of investor, which is the second important element here, determines which investors are protected, and may also exclude certain types of investors--either to prevent opportunistic use of the agreement or to target investors with real operational investment. The Commission states that it precisely wants to avoid abuse and eliminate so-called “shell” or “mailbox” companies owned by nationals of third countries from the scope. We agree that this issue has been addressed by requiring enterprises to have substantial business activities in the territory of the alleged home State. However, it does not reduce the use of the investor-State process by thousands of potentially covered investors, including multinational companies with just “some” substantial business activity in the United States.

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.

Pre-establishment rights: The Commission’s statements on national treatment and most-favoured nation (MFN) make the reader believe that the agreement does not include obligations for investment liberalization and market access. However, the national treatment and MFN provisions of the reference text indicate the opposite, as they cover the “establishment, acquisition, conduct, operation, management, maintenance, use, enjoyment and sale or disposal” of investments. This extends the scope of the investment chapter beyond investment protection to investment liberalization, including pre-establishment rights. The Commission’s consultation document is also silent on whether the European Union and the United States seek to include other market access provisions and the prohibition of performance requirements in the TTIP as included in the draft CETA texts of November 2013 and April 2014. Moreover, it leaves open whether investor-State dispute settlement (ISDS) would apply to investment liberalization commitments and--if included--performance requirement prohibitions. While EU Member States’ BITs did not include investment liberalization elements, the United States has done so for almost two decades, subjecting them to ISDS. It can thus be expected that the United States will insist that the European Union consider the same approach in the TTIP. These important questions should have been included in the public consultation. MFN treatment: In the CETA context, we indicated that the MFN clause alone could undermine all of the objectives the Commission states it seeks in its improved drafting. In response to this concern, the Commission notes here that “the EU seeks to clarify that MFN does not allow procedural or substantive provisions to be imported from other agreements.” This is the right objective, but the language currently proposed does not achieve this goal. Paragraph 4(a) of the MFN article is a useful clarification and responds to a host of arbitral decisions that allowed the importation of procedural rights. However, it directly implies that other provisions from pre-existing treaties, e.g., substantive provisions setting the rights of investors and obligations of States, are covered by MFN and can be imported. This is common practice for arbitrators who routinely allow investors the “importation of standards.” Through this practice, more carefully drafted wording in the TTIP could be circumvented. Paragraph 4(b) has been added supposedly to avoid the importation of substantive provisions from other investment treaties. However, by stating that MFN “shall only apply with respect to treatment accorded by a Party through the adoption, maintenance or application of measures,” the Commission does nothing to prevent the importation of standards because the broad term “measure” will likely include provisions in investment treaties. Although a definition of what constitutes a “measure” under the TTIP is not provided, the definition provided in the April 2014 CETA text indicates that the term is wide, and includes investment treaties and the guarantees provided therein. As a result, the Commission’s proposed language does not achieve the stated goal. Any language attempting to exclude the substantive provisions will have to be very clear, particularly in light of paragraph 4(a). Paragraph 4(b) demonstrably lacks this needed clarity. A better approach could be to use the language included in the 2004 Canadian Model BIT (Annex III, paragraph 1). General exceptions: We fail to see any utility in incorporating by reference Article XX of the GATT--a trade-related exception--into the non-discrimination provisions of the investment chapter. Products are regulated in much more limited ways than investments. Regulations needed for the establishment, operation, production processes, etc. of an investment have a much broader range than that of measures regulating the importation, sale or marketing of a product.

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?

As the Commission notes, the fair and equitable treatment (FET) obligation is the most widely invoked standard in investment treaty arbitration, and tribunals have delivered such widely differing interpretations that it is difficult to predict when State actions will violate the standard, leading to fundamental uncertainty. The Commission states that it wishes to address this problem and proposes to provide a general enunciation of the FET obligation. It then goes on to paragraph 2, which is a list of government conduct that is meant to provide clarity and certainty, and restrict the scope for arbitral mischief. This closed list seems reasonable and also useful to provide the investor with clear protection from unacceptable treatment by the State (though there is no guarantee that tribunals under the currently proposed arbitration system will follow this guidance). The proposed text does not include a problematic second prong, which was included in an earlier CETA draft text, and introduced the notion of FET as recognized under customary international law. That approach would have led to a reversal of the objectives achieved in the closed list. While the language proposed in the consultation document has avoided this mistake, the desired predictability remains diminished by paragraph 4 on legitimate expectations, which allows “a tribunal … [to] take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation.” In this respect, the Commission asserts that a breach of legitimate expectations is limited to situations where an investor relied upon “clear, specific representations” by a State when the investment was made or maintained and that were subsequently not honoured by the State. But rather than requiring that legitimate expectations are triggered only by a “specific promise” or a “written commitment,” as the European Union is proposing in relation to a so-called “umbrella clause” in the CETA draft text of April 4, 2014, the consultation text refers to “a specific representation,” a much more open term. As a consequence, the threshold for the investor to establish “legitimate expectations” is very low, adding increased uncertainty and subjectivity. The Commission--without explicitly naming it--also aims to include an “umbrella clause,” a clause that the European Parliament identified as problematic because it raises contract issues to the treaty level. [1] In this context, the Commission notes that 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.” We can therefore expect that the Commission will propose to include an umbrella clause in the treaty that would allow an investor to circumvent the designated forum under the contract to bring the claim under the treaty. The European Union proposed such a clause in the CETA negotiations as can be seen in the April 2014 draft text. In sum, the proposed text on FET is an improvement over earlier versions, for example in the CETA context. However, legal uncertainty has not been avoided, as the FET provision is open to expansive interpretation of the notion of legitimate expectations. The possible introduction of an umbrella clause will also be problematic because it may further expand the scope of “legitimate expectations.” [1] Committee on International Trade (Kader Arif) (2011, March 22). Report on the future European international investment policy (2010/2203(INI)).

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 provisions in investment chapters and treaties determine in which situations a State will have to compensate the affected rights holder. While generally allowing States to expropriate, investment treaties require that any expropriation must be compensated. In addition, investment treaties require that an expropriation be for a public purpose, non-discriminatory and in accordance with due process of law. Thus, the crucial question is: what qualifies as a direct or indirect expropriation in the first place? Especially with regard to the interpretation of indirect expropriation, tribunals have applied fundamentally different concepts in their assessment of the issue. In some cases, only the financial impact of the measure on the investor--not its purpose--was considered relevant, while in others, non-discriminatory measures taken in good faith for public welfare reasons were deemed to not constitute expropriation and therefore were not compensable. Under the first approach, virtually any environmental, health protection, consumer protection or similar measure could potentially qualify as an expropriation requiring compensation of foreign investors by the government. In order to be clear, the proposed reference text specifies in an annex what characteristics should be looked at when determining what constitutes an indirect expropriation, including economic impact, the expectations of the investor and the character of the measure. More importantly, the annex specifies that certain measures do not constitute an indirect expropriation subject to compensation in the first place. In particular, it carves out from the definition of indirect expropriation “non-discriminatory measures … to protect legitimate public welfare objectives, such as health, safety and the environment.” These non-discriminatory measures will in principle not be compensable because they cannot be viewed as indirect expropriation. However, the wording “except in rare circumstances” allows the possibility that certain public welfare measures would constitute indirect expropriation. This wording has been criticized by some as potentially undermining the character of the carve-out for police-power measures, since it leaves to the tribunal to decide what is a rare circumstance, instead of formulating a clear carve-out. The language proposed slightly alleviates the risk, in that it adopts a long period of CETA language that clarifies “in rare circumstances” to refer to situations “where the impact of the measure or series of measures is so severe in light of its purpose that it appears manifestly excessive.” This clarification is more precise and limitative of the risks of claims than that found in U.S. treaties and its 2004 and 2012 model treaties, which include the reference ”except in rare circumstances” without providing any indication of what this might mean. Given the U.S. longstanding practice, it may be difficult for the Commission to negotiate the approach proposed in the consultation document.

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 preamble: The reference text provided in the consultation document does not include an explicit “right to regulate” provision, neither in the body text, nor in the preamble. Instead, it includes a general statement in the preamble that refers to “RECOGNISING the right of the Parties to take measures to achieve legitimate public policy objectives on the basis of the level of protection that they deem appropriate.” This will require tribunals to assess what is “legitimate,” a very broad and undefined term. Moreover, the language used appears to limit the right of parties to “protection” measures, when the more general “right to regulate” is much broader. Beyond the language on the right to regulate, we note the ongoing pattern of the promotion of voluntary approaches to corporate standards in this agreement, as opposed to their legal rights and the legal obligations on governments. This is seen in the preambular paragraph referring to corporate social responsibility. Hard rights in the text against generalized desires to encourage levels of corporate conduct simply do not equate one to the other as a matter of law. Rather, the stark difference is open to reinforcement by tribunals, with resulting limitations on the right to regulate. Here, it is important to note that the European Union recognizes the capacity to enforce certain standards on investors through investment treaties. In the CETA draft text of April 3, 2014, Article x-17.3 states: “For greater certainty, an investor may not submit a claim to arbitration under this Section where the investment has been made through fraudulent misrepresentation, concealment, corruption, or conduct amounting to an abuse of process.” Thus, the parties impose a clear penalty for breach of the obligation to make the investment in accordance with applicable law, at least for certain types of breaches of the law. This principle has already been applied by some tribunals. That it is expressed in the CETA text shows that there is no legal barrier to imposing an obligation on investors and a penalty for failure to comply. Rather, it is a choice of the parties not to do so and instead to include generalized, hortative references to non-binding standards. The paragraph provided in the consultation process, in our view, does not show an affirmative approach to promoting high standards of investors, but rather the very absence of the resolve to do so. Safeguards and exceptions: The European Commission notes that it will “ensure that all the necessary safeguards and exceptions are in place.” Indeed, the draft text contains, amongst others, a carve-out for prudential measures, and allows for safeguard measures in “exceptional circumstances of serious difficulties for the operation of monetary and exchange rate policy” as well as “safeguard measures with regard to capital movements or payments, including transfers, in case of serious balance-of-payments or external financial difficulties, or under threat thereof.” We generally agree this is a significant improvement on prior EU Member State texts and that it addresses some of the concerns related to the free transfer of capital provisions. This will add some level of protection for governments in financially stressed times. However, the present wording of the proposed provision on safeguard measures would allow investors to challenge the measures and invite arbitral tribunals to ascertain whether there were “exceptional circumstances” and “serious difficulties” so as to render them necessary. Leaving such issues to investor-State tribunals will necessarily bring in uncertainty and unpredictability. The six-month time limit for the duration of measures is also a matter of concern, as it may not allow enough time for the desired macroeconomic results to be achieved. The provision on balance-of-payments and external financial difficulties, on the other hand, does not include a specific time limit for adoption, which, in our view, is a preferable approach.

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 European Union has appropriately addressed the concerns about the lack of transparency in investment arbitration proceedings. The proposed text integrates transparency through incorporation of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, which officially came into effect on April 1, 2014. These provide for a significant degree of openness throughout the arbitral proceedings. [1] The proposed text provided even goes beyond what is required in the UNCITRAL Rules and extends to all arbitrations beyond those conducted under UNCITRAL Rules. [1] See Lise Johnson and Nathalie Bernasconi-Osterwalder (2013, August), New UNCITRAL Arbitration Rules on Transparency: Application, Content and Next Steps. Retrieved from http://www.iisd.org/pdf/2013/uncitral_rules_on_transparency_commentary.pdf

Explanation of the issue

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

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

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

Approach in most existing investment agreements

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

The EU’s objectives and approach

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

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

The consultation text provided allows foreign investors to sue the State directly before international investment arbitration tribunals without first having to exhaust local remedies. This contrasts with the approach taken in other areas of public international law, such as human rights or diplomatic protection, where domestic courts and processes need to be resorted to prior to the initiation of international proceedings. Given the approach proposed here, which enables direct access to international arbitration, we do not see that anything in the text “favours domestic courts” or “aims to provide incentives for investors to pursue claims in domestic courts” as the European Commission claims it does. Similarly, the language provided stands in contrast with the Commission’s stated objective that it wishes to provide incentives “to seek amicable solutions - such as mediation.” The explicit provisions for mediation contained in the text will do little to prevent disputes. The current draft Article x-19 on mediation simply states in paragraphs 1 and 2 that the disputing parties “may at any time agree to have recourse to mediation” and that “recourse to mediation is without prejudice to the legal position or rights of either disputing party under this chapter.” Since disputing parties can always agree to submit to mediation, this adds nothing to what is already a given. Compared to an earlier CETA draft, the new version of the text omits saying explicitly that recourse to mediation is “voluntary,” but nonetheless the language indicates that there is no requirement for mediation on the part of an investor prior to resorting to investor-State dispute settlement (ISDS). Apart from this, “amicable” deals cut with the threat of ISDS in the background may not always be adequate, especially where legitimate policy measures are adapted to accommodate the investor, or where high compensation is paid out of the public purse when domestic law does not foresee compensation. Finally, the Commission only partially succeeds in addressing the problem of multiple parallel proceedings: In order to submit a claim to arbitration under the TTIP, the investor has to waive its right to initiate proceedings for compensation elsewhere, which means that the investor is barred from engaging in parallel domestic or other arbitration processes for compensation relating to the same measure. Because many domestic remedies against the State are non-monetary in nature, in contrast to arbitration, where the primary remedy is monetary, parallel proceedings in domestic courts and international arbitral tribunals will continue to be possible. Also, in light of investment tribunals’ history of expansive approaches to jurisdiction, it is not excluded that an arbitral tribunal will find it is competent even where another domestic or international process for compensation has been initiated over a dispute relating to the same measure alleged to constitute a breach.

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?

Several characteristics of the investment arbitration process have led to concerns regarding the independence and impartiality of the arbitrators. Acknowledging these concerns, the Commission states that it “aims to establish clear rules to ensure that arbitrators are independent and act ethically.” It does this by referring to a code of conduct for arbitrators that will be included in the TTIP. Because the Commission does not explain its content in the consultation document, we cannot know whether this code will adequately deal with the aforementioned problems. For example, will it continue to allow arbitrators to be involved in simultaneous investment treaty cases as counsel, or will this be prohibited? We have not seen this issue addressed in previous CETA draft texts or in U.S. treaties. The Commission also draws attention to the roster system or “lists” of arbitrators that are meant to be established “to ensure [the] abilities and independence” of the arbitrators. However, the language provided in the consultation draft indicates that the Commission has chosen to continue with the system of party appointments predominant in investment arbitration today. Like in ICSID, for instance, under the proposed text the investor and the State unilaterally appoint one arbitrator each, and are not required to choose arbitrators from the roster. Then, the disputing parties jointly appoint the third and presiding arbitrator. 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 latter situation is not expected to be common under TTIP). This is very similar to the ICSID roster system, where the presiding arbitrator is only chosen from the roster when the disputing parties cannot agree on a president. The roster is therefore only a backup and does not have the power of a roster from which all arbitrators are drawn, and which includes arbitrators fulfilling strict conditions of experience, independence and impartiality. [1] As a consequence, we are of the view that the kind of roster system proposed for the TTIP will fail to address the problems resulting from party appointments, such as arbitrators focusing more on pleasing the nominating parties and being re-appointed in future cases. Given the nature and design of arbitration--a for-profit business--perhaps the only way to adequately address concerns raised in the current ISDS context would be to move towards a system with tenured adjudicators or at least a small group of persons that would form a permanent group of adjudicators from which dispute settlement panels would be formed on a rotational or similar basis. This is not achieved through the roster system proposed. [1] For example, in the area of sports arbitration, all arbitrators are chosen from a roster and those listed may not act as counsel in sports arbitration cases. No such safeguards are present in the language proposed here.

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.

A frivolous claim is a claim that is without any legal merit, sometimes brought in bad faith for the purpose of harassing the other side. The Commission explains that there are two situations that permit frivolous claims to be rejected very quickly--where the case is either “obviously without legal merit or legally unfounded.” The Commission stresses that the proposed text “provides an early and effective filtering mechanism for frivolous claims thereby avoiding a lengthy litigation process.” However, frivolous claims are far from the biggest problem in investment arbitration, if one at all. The proposed provisions may in some cases help reduce the costs of some arbitrations 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. What these provisions do not address are the expansive interpretations by some tribunals on the merits or on jurisdictional issues. Consequently, while this feature may be useful, it 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?

If investor-State disputes involving complex macroeconomic issues can be subject to arbitral panels, the possibility provided in the suggested language to leave certain questions to a specialized Committee can be useful. However, where the Joint Financial Services Committee cannot come to an agreement, the issue returns to the investor-State tribunal. A similar approach was taken in the Canada-China BIT (2012), which provides in Article 20 that, with regard to whether a financial prudential measure constituted a valid exception, the investor-State tribunal must seek a joint decision from contracting States or a decision by a State-to-State arbitral tribunal, if established. In particular, the question of whether the prudential measure constitutes a valid exception is referred to a State-State tribunal in the event that no decision can be reached by the contracting parties. In our view, this approach is preferable.

Explanation of the Issue

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

Approach in existing investment agreements

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

The EU’s objectives and approach 

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

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

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

The inclusion of a process for binding joint interpretation in the CETA is useful, as it can effectively preclude unintended interpretations through arbitral tribunals from being binding on the parties over the longer term. It requires, however, that both parties are willing to express the same understanding of the treaty provisions in the first place.

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 idea of introducing an appellate system is a good one in our view. As we can see from WTO experience, the WTO appellate mechanism is working well. The Appellate Body is well respected, and has contributed to a more predictable trading system through its clarifications regarding key questions of interpretation. The result has been not only better law and consistency, but also improved compliance and trust in the system. The Commission states: “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.” It is unclear what this mechanism will look like or how it will function, and therefore it is impossible at this stage to have an opinion on whether it will resolve some of the problems raised in investor-State arbitration. Who will be on the panel? How will they be nominated and chosen? Are they chosen on a longer-term, permanent or ad hoc basis? How will this work in conjunction with the system set up under ICSID or other arbitration rules? These are not easy issues to resolve, especially because no such mechanism has ever been set up or tested in investment arbitration. The two short “possible draft provisions establishing an appellate mechanism” provide no answers to this question whatsoever. Until these issues are settled, and the appellate mechanism is up and functioning, the investor-State arbitration options should be entirely put on hold.

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?

Overall, the European Commission seems to be responsive to some of the concerns that have been raised concerning previously leaked drafts of the CETA investment text. Yet, in several areas--for example, the most-favoured-nation treatment, fair and equitable treatment, the right to regulate, and investor-State dispute settlement (ISDS)--inconsistencies remain between the stated objectives and the actual legal text that the Commission proposes be used as the basis for investment negotiations with the United States. Further, the consultation document does not shed light on whether the Commission intends to include investment liberalization elements and the prohibition of performance requirements, and leaves open whether ISDS would apply to these. It does not provide draft language in this respect that would provide a basis for a proper analysis or response. Finally, the Commission is determined to allow U.S. investors to challenge European executive, legislative and judicial measures in international investment arbitration instead of domestic courts in Europe and the United States. The Commission does not, however, explain why it finds that ISDS is desirable or needed in the United States-European Union context and what problems it is trying to solve with the inclusion of ISDS. Further, the Commission’s intended approach to State-State dispute settlement does not form part of the consultation, and the consultation document does not address its potential to be complementary to or replace ISDS.