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Respondent details

  • Company/Organisation: Transatlantic Consumer Dialogue
  • Location: United Kingdom
  • Activity: TACD has the mission to influence EU and US policies in the consumer interest. Consumer policy and rights cover a large number of issues; the current TACD priorities are reflected in its five policy committees: information society/digital policies; intellectual property rights; food safety and health; financial services; nanotechnologies and chemicals. The main current focus is on TTIP, including as top priorities the horizontal issues of ISDS, Regulatory Cooperation/Coherence, Transparency and TBT/Standards. TACD policies are agreed by consensus, so may differ from the policies of individual members. All of TACD's policies and documents produced since 1998 can be found on its website, www.tacd.org
  • Profile: Umbrella non-governmental organisation
  • Transparency register: Yes
  • Prior investment in the US: No

Contribution

A. Substantive investment protection provisions

Explanation of the issue

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

Approach in most investment agreements

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

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

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

The EU's objectives and approach

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

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

Link to reference text

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

As explained throughout this response, investor-state dispute settlement (ISDS) should not be included in TTIP. Whether or not the substantive investor protections provisions are enforceable by ISDS, to avoid giving foreign investor superior rights to domestic investors the definition that designates which investments and investors are subject to the substantive protections must be limited to forms of property and investors that would be granted similar substantive protections in both U.S. and EU member nation laws. However, the broad definition of an investment in the EU-Canada agreement (CETA) text provided with this questionnaire would extend the substantive property rights protections to categories of activities and instruments that would not be provided the same substantive protections in domestic law. This broad definition risks granting foreign investors greater rights than domestic firms under the laws of EU member states. If ISDS were included, it would also invite a greater number of investor-state claims for compensation by allowing foreign firms to target a wider array of government actions as claimed violations of the treaty’s expropriation or minimum standard of treatment provisions. Of particular concern would be inclusion in the definition of an investment of vague concepts such as “assumption of risk” and “expectation of gain or profit” to be used as a basis of determining whether an investment exists. In contrast to definitions of investment that require the commitment of capital or acquisition of real property or other tangible assets, these highly subjective standards would grant investor-state or state-state tribunals excessive discretion in determining whether an actionable investment exists – in the form of a veritable investment. Investor-state tribunals have repeatedly used the discretion afforded by vague treaty terms both to continually expand the scope of covered investments and to create broad, unintended substantive obligations of States to foreign investors with respect to the ever-expanding categories of deemed investments. Increasingly, the use of such broad terms to define “investment” is enabling investor-state awards that order governments to compensate foreign firms that have not truly made a tangible investment in their countries. The most comprehensive way to foreclose this risk would be to exclude ISDS from TTIP, since investor-state tribunals have proven much more willing than state-state tribunals to use inventive notions of “investment” to rule against governments. Whether or not ISDS is included, the definition of investment should be explicitly limited to the commitment of capital or the acquisition of real property, and language should be added to make clear that vague concepts such as “assumption of risk” or “expectation of gain or profit” are not to be used as a basis for determining whether an investment exists. But a more general problem with attempting to define “investment” in an international treaty is the reality that the jurisprudence defining various property rights is a living doctrine. Even if a trade pact text were to include provisions that described the state of European property rights jurisprudence at any particular juncture, over time the pact could result in greater rights for foreign investors, as domestic jurisprudence continues to be refined. To resolve this problem, another potential way to improve the investment definition would be to directly link it to the domestic laws of the host country. (See the uploaded document in Section C for a suggested definition that makes such a link). Regarding the definition of an investor, requiring “substantial business activities” in the host country is a step in the right direction in trying to prevent foreign firms from setting up shell companies in a Party so as to launch an investor-state case (or to convince the home government to launch a state-state case) against the host government’s policies or actions. However, “substantial” is not defined in the sample text, providing too much discretion for tribunals on a matter that should be made clear by the signatory Parties. (See the uploaded document in section C for suggested text to define “substantial.”) Moreover, provisions for denial of benefits must be tightened to ensure a firm has substantial business activities in the home Party. Again, the term of art “substantial business activities” must be explicitly defined so to be premised on real-world, economic activity rather than merely reflecting legal artifices. It is critical that the definition eliminate the current wide discretion provided to tribunals. And, a relevant duration of such “substantial business activities” must be explicitly included, so as to avoid opportunistic “nationality planning” (for instance re-incorporations aimed at newly obtaining standing) in the lead-up to initiation of arbitral proceedings. A critical aspect of fixing these provisions relative to past pacts is ensuring that nationals of a given country are not challenging their own country’s regulations using offshore subsidiaries and the TTIP. In addition, the burden of proof that any TTIP investor protections apply must be borne by the investor (or the home Party in the case of a state-state dispute). That is, the claimant must prove the investor maintains (precisely defined) “substantial business activities” in the home country and that the ultimate beneficial owners of the investment are not actually located in the host Party or a non-Party. (Further details and evidence for Question 1 can be found in the uploaded document in Section C.)

Explanation of the issue

Under the standards of non-discriminatory treatment of investors, a state Party to the agreement commits itself to treat foreign investors from the other Party in the same way in which it treats its own investors (national treatment), as well in the same way in which it treats investors from other countries (most-favoured nation treatment). This ensures a level playing field between foreign investors and local investors or investors from other countries. For instance, if a certain chemical substance were to be proven to be toxic to health, and the state took a decision that it should be prohibited, the state should not impose this prohibition only on foreign companies, while allowing domestic ones to continue to produce and sell that substance.

Non-discrimination obligations may apply after the foreign investor has made the investment in accordance with the applicable law (post-establishment), but they may also apply to the conditions of access of that investor to the market of the host country (pre-establishment).  

Approach in most existing investment agreements

The standards of national treatment and most-favoured nation (MFN) treatment are considered to be key provisions of investment agreements and therefore they have been consistently included in such agreements, although with some variation in substance.

Regarding national treatment, many investment agreements do not allow states to discriminate between a domestic and a foreign investor once the latter is already established in a Party’s territory. Other agreements, however, allow such discrimination to take place in a limited number of sectors.

Regarding MFN, most investment agreements do not clarify whether foreign investors are entitled to take advantage of procedural or substantive provisions contained in other past or future agreements concluded by the host country. Thus, investors may be able to claim that they are entitled to benefit from any provision of another agreement that they consider to be more favourable, which may even permit the application of an entirely new standard of protection that was not found in the original agreement. In practice, this is commonly referred to as "importation of standards".

The EU’s objectives and approach

The EU considers that, as a matter of principle, established investors should not be discriminated against after they have established in the territory of the host country, while at the same recognises that in certain rare cases and in some very specific sectors, discrimination against already established investors may need to be envisaged. The situation is different with regard to the right of establishment, where the Parties may choose whether or not to open certain markets or sectors, as they see fit.

On the "importation of standards" issue, the EU seeks to clarify that MFN does not allow procedural or substantive provisions to be imported from other agreements.

The EU also includes exceptions allowing the Parties to take measures relating to the protection of health, the environment, consumers, etc. Additional carve-outs would apply to the audio-visual sector and the granting of subsidies. These are typically included in EU FTAs and also apply to the non-discrimination obligations relating to investment. Such exceptions allow differences in treatment between investors and investments where necessary to achieve public policy objectives.

Link to reference text

Taking into account the above explanations and the text provided in annex as a reference, what is your opinion of the EU approach to non –discrimination in relation to the TTIP? Please explain.

The referenced CETA wording for the national treatment provision would allow tribunals to interpret the text as a prohibition of regulatory actions resulting in de facto discrimination even when there is no facial or intentional discrimination involved. This interpretation could result in tribunal orders to compensate foreign firms for environmental, health and other public interest policies that are facially neutral but that have an inadvertent, disproportionate impact on foreign investors. For example, a governmental measure restricting hydraulic fracturing (“fracking”) in natural gas production could be interpreted by a tribunal as a national treatment violation if most domestic energy companies did not yet use fracking as a primary method of gas extraction while foreign investors depended significantly on fracking. To limit national treatment claims against such facially non-discriminatory policies, the national treatment text should be explicitly limited to instances in which a measure is enacted for a primarily discriminatory purpose. Regarding the most-favored-nation (MFN) text, the attempt to prevent the “importation of standards” is prudent. However, to fully foreclose this possibility, more comprehensive language is advisable. The clarification that MFN does not cover “investor-to-state dispute settlement procedures provided for in other international investment treaties and other trade agreements” satisfactorily limits the ability of foreign firms to import greater procedural rights from treaties signed with third Parties. However, it is not clear that any of the CETA reference language would bar foreign investors from importing the substantive rights afforded in such treaties. For example, the language would appear to allow tribunalists to grant a U.S. investor, upon its request, access to the definitions of indirect expropriation and “fair and equitable treatment” (FET) from an EU member state’s earlier BITs, without the modifications to those terms included in the CETA reference text that the EC claims as significant improvements. By allowing firms to access these more expansive, earlier definitions of substantive foreign investor rights, the EU would expose itself to a broader array of investor-state or state-state challenges to domestic policies. The EC could close this loophole by adding language explicitly excluding from the definition of “treatment” the substantive rights afforded in other BITs and agreements, to parallel the text explicitly excluding ISDS. The intention to provide an exception for environmental and other public interest measures in this section is laudable, but the language described would fail to meet this goal. First, the importation of GATT Article XX and GATS Article XIV replicates weaknesses of those texts. Only one of 40 attempts to use these exceptions at the WTO has ever succeeded due to legal hurdles contained within the exception that would be replicated under the CETA text. To take advantage of the exception for policies “to protect human, animal or plant life or health,” for example, a government would first have to prove that the policy was designed to fulfil one of those objectives. It would then need to prove that the policy was “necessary” for the fulfilment of the environmental objective. This requirement has been most responsible for failed attempts to invoke the general exception at the WTO, as tribunals can require high thresholds of necessity. An investor-state tribunal would have the discretion to even require the State to prove that no less trade restrictive alternative measure existed, placing the State in the unenviable position of proving a negative. Finally, the State would have to prove that the measure was not applied in a discriminatory manner or as a disguised restriction on investment. The EC should develop a more robust general exception that avoids these legal hurdles, particularly omitting any “necessity” test. Second, the general exception in the CETA reference text is not actually generalized. The text states that the exception would not apply to the claims most frequently and most successfully used in investor-state claims: “fair and equitable treatment” (FET) and expropriation. Of the ISDS cases brought under U.S. FTAs and BITs in which the tribunal ruled in favor of the foreign investor, 74 percent of the claims were “successful” on the basis of “fair and equitable treatment” violations. This includes a wide array of environmentally-focused cases in which the tribunal decided that a respondent government’s environmental protection measure constituted an FET violation and ordered compensation to the investor. Halting anti-environmental tribunal rulings on the basis of such broad rights requires that public interest exceptions apply to those rights.

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 Commission is correct to attempt to narrow the “fair and equitable treatment” (FET) obligation, given the wide discretion that tribunals have employed in interpreting vague FET provisions as expansive obligations for respondent States, including obligations to maintain a static regulatory environment and to respond to investors’ unlawful behaviour in a manner that the tribunal deems proportional. However, efforts to narrow the FET obligation could be of limited utility if ISDS is included in TTIP, given that investor-state tribunals have repeatedly ignored governments’ past efforts to rein in tribunals’ expansive FET interpretations. For example, in the U.S.-Central America Free Trade Agreement (CAFTA), the U.S. government and other CAFTA Parties inserted an annex that attempted to narrow the vague FET obligation by defining “fair and equitable treatment” as derived from customary international law as defined by the practice of States. But in Railroad Development Corporation (RDC) v. Guatemala – one of the first investor-state cases brought under CAFTA – the tribunal simply ignored the annex and the official submissions of four sovereign governments (including the U.S. government), each of which argued for the narrower definition. The RDC v. Guatemala tribunal asserted that the States were in error in their interpretation of the FET standard. Instead, the tribunal cited yet another investor-state tribunal, imported its more expansive interpretation of “fair and equitable treatment” (including an obligation to honour investors’ expectations), ruled that Guatemala had violated the expanded obligation, and ordered Guatemalan taxpayers to pay $18.6 million. To foreclose the demonstrated risk of ISDS tribunals simply ignoring government attempts to narrow the FET obligation, ISDS should be excluded from TTIP. Whether or not ISDS is included, the approach to FET should be neither that included in the CETA reference text (an ostensibly closed list of the substantive components of FET), nor that included in the 2012 U.S. Model BIT (an open-ended methodology for interpreting FET). Instead, a narrow methodology for interpreting FET should be clearly stated. The standard of proof for establishing an FET obligation should require the claimant to prove that the obligation is required by customary international law as demonstrated by State practice and opinio juris. That is, to prove the existence of an FET obligation, the claimant must perform a thorough analysis of State practice and opinio juris that clearly demonstrates the claimed obligation as an established component of the customary international law minimum standard of treatment. To use a more open-ended methodology, as seen in CAFTA and the 2012 U.S. Model BIT, would enable sweeping and unsubstantiated tribunal interpretations of FET, as demonstrated by the RDC case. But to use an ostensibly closed list, as seen in the reference text, risks explicitly expanding the FET obligation beyond the denial of justice standard embodied in customary international law. Indeed, that is exactly what the list in the CETA reference text does. For example, the list defining FET includes “manifest arbitrariness” as a qualifying criterion. While the other criteria in the list are more precisely defined (e.g. “targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief), “manifest arbitrariness” is a more open-ended term that tribunals could interpret widely to rule against domestic measures taken in the public interest. For example, in S.D. Myers v. Canada, brought under the North American Free Trade Agreement (NAFTA), the tribunal concluded that an FET violation was one in which “an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective.” On the basis of this definition, the tribunal ruled that Canada had violated S.D. Myers’ right to “fair and equitable treatment” by banning the export of a hazardous waste called polychlorinated biphenyls (PCB) that is proven to be toxic to humans and the environment. Though the PCB export ban complied with a multilateral treaty encouraging domestic treatment of toxic waste, the tribunal deemed Canada’s non-discriminatory ban as “arbitrary” and ordered the government to compensate S.D. Myers with $5.6 million. Simply adding the qualifier “manifest” to “arbitrary” is not likely to rein in such overreaching tribunal interpretations. Instead, if a closed list approach is taken despite the risk of inviting overreaching tribunal interpretations of the substantive terms, “manifest arbitrariness” should be eliminated from the FET language. Second, the CETA reference text’s allowance for tribunals to consider an investor’s “legitimate expectation” threatens to expose EU member countries to investor-state or state-state claims against policy reforms in the public interest. While the text ties the consideration of legitimate expectations to instances in which “a Party made a specific representation to an investor to induce a covered investment,” this qualifier is not likely to be sufficient to foreclose the risk to progressive policymaking. Under the CETA language, a tribunal could conceivably find that a government’s decision to respond to a financial crisis by restricting banks from dealing in risky derivatives, for example, frustrated a foreign bank’s legitimate expectation, based on communications from an earlier administration under a more lax regulatory framework that the bank would be free to engage in derivative trading. A tribunal could well reason that this statement of permissiveness toward derivatives was one “upon which the investor relied in deciding to make or maintain” its investment, and that the subsequent restriction on derivatives “frustrated” that legitimate expectation. Similar logic could be envisioned for policy responses to climate crises, emerging food safety concerns, or other areas in which governments choose to alter policies, despite the fact that doing so contradicts earlier statements by government officials, in response to emergent crises or consumer demands. To not expose such responsive policymaking to foreign demands for compensation, no reference should be made to investors’ expectations, regardless of the overall approach used for FET.

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.

While the annex clarifying the meaning of expropriation may be helpful in deterring the most far-fetched claims against domestic policies or actions, it still allows for a broad definition of indirect expropriation that invites tribunal decisions against regulatory policies on the mere basis that they adversely affected the value of an investment. The combination of the right to compensation for such “indirect” expropriations and the opening for investor-state or state-state claims over “investments” that go far beyond real property would mean that States would be obliged to compensate foreign investors for regulatory actions that would not be subject to compensation for expropriation claims under domestic law. While the domestic legal systems of many developed countries limit firms’ ability to pursue claims of indirect expropriation for regulations affecting anything beyond real property, the CETA language would enable foreign investors to claim indirect expropriations for regulations implicating copyrights, money or other forms of intangible property. Indeed, the definition is not even limited to measures directly affecting “property,” but those affecting “the fundamental attributes of property” in a firm’s investment “including the right to use, enjoy and dispose of its investment.” Such an expansive definition invites tribunals to allow claims against regulations blamed for losses extending beyond traditional business assets (e.g. diminished market share, which can arguably be used, enjoyed and disposed of). The definition of indirect expropriation also allows that government actions constitute acts of indirect expropriation for which foreign investors are entitled to compensation, even if there was no government appropriation of the asset in question. This contradicts the dominant legal standard used by States, which typically require government compensation only if there has been government acquisition or an action short of acquisition which extinguishes all value for all time of certain non-real-estate assets, not when a regulation merely diminishes an asset’s value (no matter how “substantially”). Offering foreign investors “indirect expropriation” rights that go beyond the domestic takings laws of the EU member states would expose EU regulations to significant investor-state or state-state liability. While the CETA reference text includes a seeming safeguard for “non-discriminatory measures by a Party that are designed and applied to protect legitimate public welfare objectives,” the language requires a respondent government to overcome several high legal hurdles to successfully use the safeguard. Based on the wording, a tribunal could require the government to prove that a given welfare objective is “legitimate,” that the measure is designed to protect that objective, that the measure has been applied to protect that objective, and that the measure is non-discriminatory (likely in both intent and effect). Even if a given measure would clear this series of hurdles in the eyes of a tribunal, it could still constitute indirect expropriation in “rare circumstances[].” These legal obstacles significantly undercut the utility of the safeguard and should be excluded. To avoid exposing a broad array of domestic measures, including public interest policies, to claims of indirect expropriation, the annex defining expropriation should be rewritten. It should clarify that an indirect expropriation occurs only when a host State acts indirectly to seize or transfer ownership of an investment, and not when the government merely acts in a manner that decreases the value or profitability of an investment. One option for codifying this approach would be to include language defining indirect expropriation as when “a Party acts indirectly, including through a series of actions, to seize, appropriate, or transfer ownership of a property right.” This definition should be followed by a strenghtened safeguard: “Facially non-discriminatory regulatory actions by a Party that are designed and applied to protect public welfare objectives, such as public health, safety, environmental protection, and real estate price stabilization (through, for example, measures to improve the housing conditions for low-income households), do not constitute indirect expropriations.”

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 of the CETA reference text states, “recognising the right of the Parties to take measures to achieve legitimate public policy objectives.” However, such preambular language is merely hortatory and does not carry the same legal weight as the substantive investor rights covered above. As such, insofar as there are conflicts between an investor’s binding rights and this non-binding recognition of the right to regulate, a tribunal would not limit the investor’s explicit rights on the basis of the hortatory language in the preamble. With respect to what is identified as prudential “carve-out” language, first, the provision is not a “carve-out.” It is an exception that can be raised after a prudential measure has been challenged to try to convince a tribunal why, despite violating the agreement, it should nonetheless be allowed. A carve-out would state that the terms of the entire agreement simply are not applicable to prudential measures. Such a clause should be included, as it would forbid foreign investors or States from bringing claims against prudential measures. In contrast, under the CETA approach, investor-state or state-state claims could target prudential measures, and the respondent State would have to try to use the exception as its defence. The prudential language described is also weakened by this stipulation: “These measures shall not be more burdensome than necessary to achieve their aim.” This language offers foreign banks ample means of challenging (or requesting their government to challenge) prudential measures, as tribunals could require the respondent State to prove that there exists no less “burdensome” policy option that could have plausibly been pursued instead of the challenged measure. Since this high burden of proof (requiring the State to prove a negative) could well confound a government’s attempt to defend a legitimate prudential measure, the “more burdensome than necessary” provision should be eliminated. But even without this provision, the State would likely bear the burden of proving to the tribunal that a challenged measure qualified as “prudential” under the CETA reference language. To truly safeguard measures taken to ensure financial stability, it should be the claimant that bears the burden of proving that a measure argued by the State to be prudential does not qualify. (See the uploaded document in Section C for suggested text.) The “Safeguard measures” and “Balance of Payments” provisions in the CETA reference text indicate that the EC intends to replicate the terms in the investment chapter of prior agreements that generally prohibit a Party from restricting transfers. This provision acts as a ban on capital controls, which the International Monetary Fund has officially endorsed as a legitimate policy tool to mitigate or prevent financial crises in certain instances. Indeed, the EU itself used intra-EU capital controls to stem the fallout of the recent Eurozone crisis. The standard transfers language, written before the global financial crisis of 2007-2009, also conflicts with financial transaction taxes, which 11 EU member nations are slated to implement. The CETA reference text under the “Safeguard” and “Balance of Payments” sections do not sufficiently safeguard capital controls and do nothing to protect a State’s prerogative to enact financial transaction taxes. Capital controls can be employed for numerous legitimate policy objectives: ensuring economic stability in the face of balance-of-payment (BOP) crises, maintaining effective monetary policies in the face of procyclical flows, avoiding currency appreciation, eliminating rent-seeking activities, preventing asset bubbles, and ensuring a stable climate for long-term domestic investment. Of these six objectives, the “Safeguard” language could only plausibly cover the first three, as policies falling under the exception must address “difficulties for the operation of…the economic and monetary union” rather than other domestic difficulties created by speculative capital flows. But the availability of this exception for even these three policy objectives is severely hampered by the requirement that the capital control measure must last only six months. The requirement for capital controls to be temporary prohibits their valid usage, specifically with respect to avoiding floods of speculative inflows, which is critical as a preventative tool to stop crises before they start. Even if a capital control measure would fit within the narrow confines of this exception, a defence of the measure would face at least three high hurdles: the circumstances in which the measure is used must be “exceptional,” the difficulties caused must be “serious,” and the measure itself must be “strictly necessary.” The last hurdle, again, would allow a tribunal to require a respondent State to prove that no other less trade restrictive measure exists. Meanwhile, the CETA balance-of-payments provision replicates many of the weaknesses of the BOP exception found in GATS Article XII. First, the exception only applies to capital controls used to address BOP problems. Second, any BOP-focused capital control must be temporary according to the text, barring the usage of capital controls as an ongoing measure to prevent rather than respond to crises. Third, the exception poses another series of hurdles, including that the measure “avoid unnecessary damage to the commercial, economic or financial interests of the other Party.” The threshold for “damage” is not specified, allowing a tribunal to refuse the exception with an iota of “unnecessary damage.” Rectifying the weaknesses of these safeguards requires the creation of new language that makes explicit that any included transfers provisions do not apply to financial transaction taxes or capital controls, including capital controls that are not temporary and whose purpose extends beyond addressing BOP and monetary concerns. While anti-abuse language could be added to ensure that the primary intent of a given measure is not to cause economic harm to an investor, the burden of proof should lie with the claimant to convince the tribunal that the challenged measure is in fact intended to cause harm.

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.

Transparency in any TTIP dispute settlement system is necessary, but it is not sufficient to foreclose the threat that ISDS poses to consumer protections or governments’ right to regulate. As investor-state documents have become more publicly available, tribunals have not indicated greater hesitance to use overreaching interpretations of investors’ rights to rule against public interest policies. Documents were generally made available, for example, in the recent Occidental v. Ecuador case brought under the U.S.-Ecuador BIT. That includes the publicly-available 2012 award in which the tribunalists concocted a new obligation for Ecuador to respond proportionally to Occidental’s breach of the law, deemed themselves the arbiters of proportionality, and ordered the government to pay $2.3 billion for violating the creative obligation. Preventing the threats posed by ISDS requires not a more transparent investor-state system but abstention from said system. If ISDS were included in TTIP despite the threats, the CETA reference language to make public most ISDS documents and hold public hearings (with limited exceptions) is welcome. However, doing so in accordance with the new transparency rules of the United Nations Commission on International Trade Law (UNCITRAL), as envisioned in the reference text, would be problematic. The importation of UNCITRAL rules would mean the incorporation of a provision empowering the tribunal to block information that would “jeopardize the integrity of the arbitral process” (Article 7:7). The text lists several reasonable instances in which this exception could be invoked: when the information would “hamper the collection or production of evidence, lead to the intimidation of witnesses, lawyers acting for disputing parties or members of the arbitral tribunal.” But it also includes this catch-all: “or in comparably exceptional circumstances,” giving the tribunal wide discretion for determining that a given document or hearing should not be public due to suspicion that it could interfere with the arbitral process. If, for example, a controversial ISDS case spurred public demonstrations against the investor’s claim, the tribunal would seem to have ample room to use the demonstrations as a pretext for not making documents or hearings public, even in the likely scenario that the demonstrations posed no actual threat to witnesses, lawyers, parties, or tribunal members. This tribunal discretion should be narrowed by adding an exception to the importation of UNCITRAL rules that negates the “comparably exceptional circumstances” basis for not making documents public.

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.

If ISDS were to be included in TTIP, investors should indeed be prevented from simultaneously pursuing the same claim in domestic courts and via the ISDS mechanism, as the reference CETA text proposes, to make sure that investors are not doubly compensated. However, this limitation does nothing to counter the much more fundamental problem that would be created if ISDS were to be included in TTIP: the empowerment of foreign investors to circumvent domestic laws and courts and directly pursue claims before three-person extrajudicial tribunals, undermining the validity of U.S. and EU domestic legal systems. ISDS is an extraordinary mechanism in that it elevates individual investors to equal standing with an agreement’s signatory governments, empowering firms to privately enforce the terms of the public treaty. Its inclusion in TTIP would grant foreign investors greater procedural rights than domestic investors who do not have access to this parallel, extrajudicial legal track. Moreover, the European Union and United States have some of the most respected domestic legal systems and most robust property rights protections in the world. What is the need for extrajudicial enforcement when investors have access to such trustworthy domestic judicial systems? Given its overreach and its unnecessary nature, investor-state dispute settlement should be replaced with a state-to-state mechanism for settling investment disputes in TTIP. In addition to not giving foreign firms greater rights than domestic firms or undermining domestic rule of law, state-to-state dispute settlement has proven to be an effective enforcement mechanism in fora such as the World Trade Organization. If ISDS is still included in TTIP despite its clear dangers and unclear benefits, investors should at least be required to exhaust domestic remedies before proceeding to international tribunals. The exhaustion requirement is a fundamental principle of international law. There is no reason for foreign investors to skirt a nation’s judicial system in pursuing claims against that nation, unless it is an attempt to obtain greater rights than those provided under national law. Under international law, the exhaustion requirement does not apply when attempts to use domestic legal remedies would be futile. This would allow investors to proceed to international tribunals if, for example, domestic remedies caused undue delay or if domestic courts lacked jurisdiction to provide relief. Even if the domestic courts lacked jurisdiction to hear international law claims, the exhaustion requirement could be satisfied by raising the substance of the claim under domestic law.

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?

While the CETA reference text regarding arbitrator independence is an improvement over the scant conflict-of-interest rules relied upon in many investor-state cases, it fails to address more fundamental, structural conflicts of interest inherent in the ISDS regime. Even if a tribunalist has no connection to the corporation bringing a given claim, by interpreting that corporation’s rights broadly and ordering government compensation for violation of those rights, the tribunalist boosts the utility of ISDS for corporations, thereby increasing the number of firms interested in launching new cases. Since firms are permitted to pick one of the arbitrators under standard ISDS rules, tribunalists that have proven most favourable to corporations in the past are likely to be popular picks for firms launching ISDS claims. (This helps explain why just 15 lawyers are repeatedly picked as arbitrators, covering 55 percent of all investment treaty disputes between them.) In this way, tribunalists are incentivized to create expansive rights for foreign investors and to find government violations of those rights to boost the number of firms interested in serving as ISDS clients. To avoid this structural conflict of interest, in addition to providing a more fulsome fix for the narrower conflicts of interest that the CETA text addresses, TTIP should exclude ISDS. Whether or not ISDS is included, the method for picking arbitrators envisioned in the CETA reference text should be replaced with an approach that would prove more effective in ensuring arbitrator impartiality. Rather than having the disputing parties choose arbiters, all tribunalists should be randomly assigned from a roster of arbitrators in each dispute. This method would diminish conflicts of interest by not allowing parties to pick arbitrators biased toward their interests, while removing the incentive for arbitrators to rule in favor of the party that selected them so as to invite further selections. The criteria for appointment to the roster would need to be publicly accountable and include comprehensive conflict-of-interest rules. If ISDS were to be included in TTIP, the CETA conflict of interest rules should also be strengthened to better ensure the impartiality of arbitrators. Core rules must include a prohibition against representing corporations in ISDS challenges for those who seek to serve as tribunalists; a requirement for tribunalists to publicly disclose any indirect association with any party – State, investor or other tribunalists – in the case; and a judicial process for removal of tribunalists for conflicts and qualifications. While the CETA text states that tribunalists shall “not be affiliated with or take instructions from any disputing party or the government of a Party with regard to trade and investment matters,” it does not bar selection of arbitrators affiliated with the foreign investor in ways unrelated to trade and investment or those who used to be affiliated with the investor (even in a capacity related to trade and investment). Such appointments would ostensibly violate, however, the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration, which are invoked by the CETA text and which define a conflict of interest as one in which “a reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merits of the case.” The relevant question though is how, under the CETA reference text, arbitrators could be removed after the identification of such conflicts of interest. Though the CETA text stipulates that a party in the dispute can contest the other party’s arbitrator selection as a violation of conflict-of-interest rules, the contested tribunalist would not be removed unless the other party agrees, the arbiter removes herself, or the Secretary General of the International Centre for Settlement of Investment Disputes (ICSID) decides she should be removed. The first scenario seems unlikely – a party should not be expected to dismiss the arbiter they had picked, particularly if that person’s conflict-of-interest bends in their favour. The second scenario has rarely played out – challenged arbitrators in investor-state cases have generally not proven willing to leave the arbitration on their own volition. The third scenario, delegating the decision over challenged arbitrators to the Secretary General of ICSID, does not inspire confidence that conflict-of-interest rules will be effectively enforced. Though the ICSID Convention contains a rule against conflicts of interest, only four attempts to disqualify arbitrators have ever been successful in ICSID’s 50-year history, while 37 attempts have failed. While the CETA conflict-of-interest language is stronger than that of ICSID, by delegating the ultimate decision over challenged arbitrators to the Secretary General of ICSID rather than an independent judge, it is not clear that we should expect a change from ICSID’s pattern of failed attempts to remove compromised arbitrators. Further, the reference text grants wide discretion to the Secretary General to make a unilateral decision – the rules neither stipulate criteria that shall guide the Secretary General’s decision nor require disclosure of the criteria actually used. As a more sensible and effective means of determining whether contested tribunalists are unbiased (and of removing those that are not), a judicial process should be established to adjudicate challenges to tribunalists’ impartiality. Such a process would establish a clear, public set of decisionmaking criteria, require judges to enforce that criteria and require disclosure of the rationale behind each decision. And while the CETA proposal to have the Committee on Services and Investment create a code of conduct for arbitrators represents an iterative improvement over past FTAs and BITs, it is not clear how effective the proposal would be. Not only does the development of the code depend on the agreement of both Parties, which could be indefinitely delayed, but also it is not clear what mechanism, if any, would ensure enforcement of the code. If developed as a set of hortatory guidelines rather than binding rules, the code would be ill-equipped to rein in the bias of tribunalists. Assuming the code is actually created and enforced, its prospective contents remain unknown – the text only states that it “may address topics” such as disclosure, independence and confidentiality.

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.

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 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 attempt to limit the expenditure of State resources on claims that are frivolous or legally unfounded is a welcome one. However, the CETA reference provisions are not likely to have prevented the recent surge in investor-state challenges to public interest policies, nor tribunals’ decisions against many of these policies, given that most of the claims could not have been accurately described as “manifestly without legal merit” or “unfounded as a matter of law.” The problem is that many investor-state claims do in fact fall within the wide ambit of investor rights enshrined in most FTAs and BITs. The increase in investor-state claims owes not to the ability of investors to pursue claims outside of investor-state protections, but their ability to pursue an increasingly broad array of claims that are indeed covered by those protections. This is due to existing treaties’ expansive definitions of “investment” and “investor,” the vague substantive rights granted to investors, and the ample discretion of ISDS tribunals to interpret those definitions and rights ever more broadly. To avoid exposing domestic laws and government decisions to this expanding liability, TTIP should exclude ISDS while narrowing substantive investor rights and definitions of “investment” and “investor.” Until States’ wide obligations to investors are reined in, language to prevent “frivolous” claims not falling under those obligations will have limited impact in preventing challenges and rulings against public interest measures.

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.

Link to reference text

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 ISDS were to be included in TAFTA, the CETA text’s addition of a filter in which regulators from both Parties may offer binding judgments on whether claims should be dropped for prudential reasons marks a significant improvement over standard U.S. and EU pacts that contain no such provision. It would be critical that this filter step take place early in the investor-state process so that resources are not needlessly expended in cases where claims are dismissed for prudential reasons. While this would be a welcome addition, a more effective means of filtering out undeserving claims would be to use an ex-ante regulatory and diplomatic screen. Under such a provision, investors would be required, before mounting an investor-state claim, to present their case to a panel of regulators and other officials from their own government. The panel would determine whether to allow the claim to proceed as an investor-state challenge to the other Party’s measures. Such panels would help diminish the extent to which investor-state proceedings impinge on governments’ right to regulate. Regulators in the investor’s home country would have the incentive to not allow cases to proceed if they were likely to infringe on the other government’s regulatory prerogatives, given a desire to not have to respond to similarly overreaching cases from the other country’s investors. (The presence of foreign affairs officials on these screening panels would further help in vetting the merits of prospective investor-state cases, as they would be hesitant to incur the diplomatic costs of investor-state challenges launched against other governments if the claims were particularly spurious.) In addition, establishing this screen before the launch of a new investor-state case (as opposed to afterwards, as in the CETA filter provision) would prevent both parties from expending money for tribunal costs and legal fees for claims deemed unfit to proceed. The benefits in reduced costs and increased regulatory autonomy of this screening process would be amplified if it were not limited to claims affecting prudential financial measures, but instead applied to all investor-state claims. (Regulators serving on the screening panel would be selected based on the type of regulation at issue in the claim.) If ISDS is included, the EC should consider developing an ex-ante regulatory and diplomatic screening process for all ISDS claims in place of the CETA filter mechanism, providing a more effective check on unwarranted investor-state challenges. If, instead, the CETA filter language is kept (and ISDS is included), then the EC should expand the range of measures covered to those beyond financial regulations. The Parties could use such a filter, for example, to examine cases in which the general exception (hopefully a strengthened version of it) is invoked as a defence for challenged environmental, health and other public interest measures. A regulatory check would be just as important in such cases as in those implicating financial stability.

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.

Link to reference text

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?

Were ISDS to be included in TTIP, non-disputing Parties in investor-state cases should indeed have the opportunity to inform tribunals how they believe the investor rights and other provisions of the pact should be interpreted, as provided for in the CETA reference text. However, recent investor-state cases have shown that when not forced to heed such governmental input, tribunals have few qualms with ignoring it. For example, in the RDC v. Guatemala case brought under CAFTA, as mentioned above, three sovereign governments submitted comments to the tribunal as non-disputing Parties (in addition to Guatemala’s submission). Each argued that the substantive investor right at issue – “fair and equitable treatment” – should be interpreted narrowly as derived from State practice. But the tribunal simply rejected this input from the States, asserting that the States were in error in their interpretation of customary international law, and instead imported a much broader interpretation of “fair and equitable treatment” from another investor-state tribunal’s award. The most effective way to rein in such runaway tribunal interpretations would be to exclude ISDS from TTIP. The CETA provision intends to limit tribunal discretion by allowing the Parties to the agreement to provide a new interpretation of the pact’s terms. However, while the CETA text states that such an interpretation would be “binding” on tribunals, it is unclear what enforcement mechanism would make the revised terms any more “binding” than the original terms that failed to bind the tribunal. That is, if the Parties feel the need to provide a reinterpretation of the pact’s provisions because of “serious concerns as regards matters of interpretation,” as provided for in the CETA text, then it is likely that those concerns were sparked by tribunal interpretations that overstepped the intended bounds of the original written terms. What then would keep tribunals from simply overstepping the newly-defined bounds? Indeed, in the RDC v. Guatemala case, the Parties to CAFTA had included an annex in the pact that tried to narrow the “fair and equitable treatment” obligation, given serious concerns that tribunals had been interpreting the provision too broadly. The insertion of that annex did not stop the RDC tribunal from once again using a broader interpretation, paying little heed to the added language. The proven difficulty in limiting tribunals’ ability to defy the opinions of States and the revisions of a pact’s terms indicate once again the fundamental dangers of ISDS. While some textual reforms, such as narrowing the scope of covered “investments” and narrowing substantive investor rights, could help somewhat in reining in the wide discretion of tribunals, they are unlikely to foreclose tribunals’ overreaching rulings against public interest policies. To more effectively preserve the right to regulate, ISDS should be replaced with state-to-state dispute settlement, as discussed above. Barring this change, requiring domestic exhaustion and establishing an effective appeal mechanism would be perhaps the best means of curtailing tribunals’ threats to regulatory autonomy.

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.

Link to reference text

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.

As explained throughout this response, ISDS should be replaced with state-to-state enforcement. But if ISDS would be included in TTIP despite likely costs to consumers, the environment, taxpayers and the rule of law, a robust appellate mechanism would provide one of the better hopes of tempering the expansive decisions of tribunals that threaten the right to regulate. To be effective, it would be critical that the mechanism allow appeals on the legal merits of the tribunal’s decisions, not merely attempts to correct factual errors or to contest major procedural miscarriages (as provided for in the extremely limited annulment mechanism). It also would be critical that the appeals mechanism be established by the pact itself, rather than being included as language promising the future creation of such a mechanism. Certainly the non-binding language from the CETA text would be insufficient. That text does not even require the future creation of an appellate mechanism, but only requires a “forum” for the EU and U.S. governments to consult on the question of whether to create such a mechanism. But even when pacts have included binding language to create an ISDS appellate mechanism in the future, the promised mechanism has failed to materialize. For example, CAFTA stated, “Within three months of the date of entry into force of this Agreement, the Commission shall establish a Negotiating Group to develop an appellate body or similar mechanism to review awards rendered by tribunals under this Chapter…The Commission shall direct the Negotiating Group to provide to the Commission, within one year of establishment of the Negotiating Group, a draft amendment to the Agreement that establishes an appellate body or similar mechanism.” Nearly eight years have passed since CAFTA took effect in most participating countries, and no such amendment has been produced. In order for an appeals process to become a reality under TTIP, it would need to be created by TTIP itself.

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?

We have uploaded a fuller version of this submission, which includes additional argumentation, all the references, as well as suggestions for revised text. Transatlantic Consumer Dialogue overall recommendation remains as follows: All of the issues about which TACD is most concerned, including regulations to ensure safe foods, regulating emerging technologies, providing financial protections for consumers, ensuring that intellectual property rights safeguard consumer privacy, drug and medical devices, affordable quality services, control of toxic products and substances, tobacco regulation and energy and climate policy could all be caught up in an investor-state system that provides corporations with a new venue to undermine critical consumer safeguards and excludes citizen and consumer input. TACD recommends that the U.S. and EU exclude investor-state dispute resolution from any trade agreement. The agreement should not include investor-state dispute resolution. Investors should not be empowered to sue governments to enforce the agreement in secretive private tribunals, and to skirt the well-functioning domestic court systems and robust property rights protections in the United States and European Union. Experience elsewhere shows how powerful interests from tobacco companies to corporate polluters have used investor-state dispute resolution provisions to challenge and undermine consumer and environmental protections. Investors must not be empowered to sue governments directly for compensation before foreign investor tribunals over regulatory policy (including “indirect” expropriation), contract disputes, nor guarantee a Minimum Standard of Treatment for foreign investors. Increasing the transparency of investor-state proceedings does not in itself allay our concerns about this unnecessary and undemocratic mechanism, which fundamentally shifts the balance of power between investors, States and other affected parties and locks in a system of enforceable global governance that formally prioritizes corporate rights over the right of governments to regulate and the sovereign right of nations to govern their own affairs. The robust judicial systems and property rights protections on both sides of the Atlantic are sufficient to resolve any claim of unfair treatment by States, and state-state dispute resolution is a sufficient mechanism for resolving legitimate trade-related disputes. Full position on http://tacd.org/ttip-policy-statements/