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Respondent details

  • Company/Organisation: SAK - The Central Organisation of Finnish Trade Unions
  • Location: Finland
  • Activity: The SAK is the largest trade union confedereation in Finland. SAK is a labour market organisation, social interest group, campaigning force and a NGO. It represents the interests of more than one million members in 21 affiliated trade unions. SAK's unions organise mainly blue-collar workers. More informarion: http://www.sak.fi/english
  • Profile: Trade union/organisation representing EU trade unions
  • Transparency register: Yes
  • Prior investment in the US: No

Contribution

A. Substantive investment protection provisions

Explanation of the issue

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

Approach in most investment agreements

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

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

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

The EU's objectives and approach

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

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

Link to reference text

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

The scope of the EU’s investment chapter is based on the definitions of the terms “investor” and “investment”. Both definitions are too broad. One problem is that they would enable foreign shareholders of a company to raise claims in the same matter as the company itself. Furthermore, the definition of investment is “asset-based” and includes portfolio investment. SAK opposes this. A lasting or significant interest in a foreign enterprise should be a necessary element of the definition of investment Investments which are not made in accordance with the applicable law at that time are not considered protected investments. This is positive in principle but it should include the requirement that the investment does not cause or contribute to serious adverse human and labour rights impacts. The definition of an investor is limited to enterprises with substantial business activities. This is to be welcomed in principle. However, the term “substantial business activities” should be further defined to ensure that it is not interpreted in a narrow way. More generally, international investment law should: • protect domestic and foreign investors engaged in sustainable investment activities against arbitrary state actions • promote the rule of law and the protection of property rights in order to foster sustainable development and growth in all countries • be compatible with domestic regulations aimed at legitimate public interests even if they have negative impacts on private business activities • be integrated into domestic legal systems and support the development and maintenance of an impartial and functioning judicial system which is compatible with international human rights standards.

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 non-discrimination treatment clauses (national treatment and most-favoured nation treatment) cover de jure and de facto discrimination. However, the draft text contains no further definition of the scope of de facto discrimination. Hence even general laws which have de facto a discriminatory effect could be a violation of the non-discrimination clauses. SAK opposes such a broad reach of the non-discrimination treatment. The principle should be limited to regulatory measures enacted primarily for a formally discriminatory purpose. National treatment and most-favoured nation treatment are subject to general exceptions modelled on the basis of the relevant WTO provisions (Art. XX GATT and Art. XIV GATS). This allows states to defend discriminatory measures taken for specific legitimate policy goals provided that the measures are necessary and that their application is not discriminatory and does not constitute a disguised restriction on trade. However, these general exception clauses only apply to the non-discrimination provisions, but not to the rest of the agreement. A measure amounting to an indirect expropriation could not be justified on the basis of the exception clauses. SAK therefore proposes to apply the general exception clauses to the entire investment chapter. Furthermore, the scope of the exception clauses is limited to those policy goals mentioned in Art. XX GATT and Art. XIV GATS such as public order and public security measures, health and safety measures and environmental measures. It is absolutely essential that labour law and collective agreements are also covered by exception clauses. It should not be possible for a foreign investor to claim discriminatory effect where working conditions are more protective in a given EU Member State than in the investor’s country of origin, thereby allegedly placing the investor at a competitive disadvantage. Other general measures such as subsidies, procurement, tax, or the protection of essential public services should also be part of an exception clause. The EU approach seeks to exclude the import of standards from other investment agreements through an MFN clause. However, the exclusion only applies to procedural matters and not to substantive clauses. This presents a major problem, because the restrictions of Fair and Equitable Treatment and indirect expropriation proposed in the EU document could be circumvented if the MFN clause does not exclude the importation of substantial standards from other investment agreements as well.

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 EU tries to limit the FET standard by reducing it to specific cases such as denial of justice, fundamental breach of due process, manifest arbitrariness, and targeted discrimination on manifestly wrongful grounds or abusive treatment of investors. This would reduce the scope of this clause which has been used to curtail a number of regulatory policies in past investment cases. However, FET is not limited to its core standard under customary international law. In addition, the parties may amend the list of specific cases which might amount to a breach of FET. This may open the door to a broader scope of FET. The text should therefore clarify that any future amendments may not broaden the scope of FET beyond the scope defined in the treaty. The term “full protection and security” is limited to the protection of the physical security of investors and covered investments. This is a useful restriction. Another problem of the FET standard is the reliance on the investor’s expectations. In the past, this has been interpreted broadly by some investment tribunals. The EU text should clarify that invertor’s expectations are only relevant if they are based on formal representations issued by competent authorities which are based on existing law. In particular, if a state official makes a promise which is not in accordance with domestic law, such a promise cannot give raise to legitimate expectations of the investor. Furthermore, it should be made clear the expectations of the investor cannot prejudge the legislative process or the application of existing laws by the administration.

Explanation of the issue

The right to property is a human right, enshrined in the European Convention of Human Rights, in the European Charter of Fundamental Rights as well as in the legal tradition of EU Member States. This right is crucial to investors and investments. Indeed, the greatest risk that investors may incur in a foreign country is the risk of having their investment expropriated without compensation. This is why the guarantees against expropriation are placed at the core of any international investment agreement.

Direct expropriations, which entail the outright seizure of a property right, do not occur often nowadays and usually do not generate controversy in arbitral practice. However, arbitral tribunals are confronted with a much more difficult task when it comes to assessing whether a regulatory measure of a state, which does not entail the direct transfer of the property right, might be considered equivalent to expropriation (indirect expropriation).

Approach in most investment agreements

In investment agreements, expropriations are permitted if they are for a public purpose, non-discriminatory, resulting from the due process of law and are accompanied by prompt and effective compensation. This applies to both direct expropriation (such as nationalisation) and indirect expropriation (a measure having an effect equivalent to expropriation).

Indirect expropriation has been a source of concern in certain cases where regulatory measures taken for legitimate purposes have been subject to investor claims for compensation, on the grounds that such measures were equivalent to expropriation because of their significant negative impact on investment. Most investment agreements do not provide details or guidance in this respect, which has inevitably left arbitral tribunals with significant room for interpretation.

The EU's objectives and approach

The objective of the EU is to clarify the provisions on expropriation and to provide interpretative guidance with regard to indirect expropriation in order to avoid claims against legitimate public policy measures.  The EU wants to make it clear that non-discriminatory measures taken for legitimate public purposes, such as to protect health or the environment, cannot be considered equivalent to an expropriation, unless they are manifestly excessive in light of their purpose. The EU also wants to clarify that the simple fact that a measure has an impact on the economic value of the investment does not justify a claim that an indirect expropriation has occurred.

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, what is your opinion of the approach to dealing with expropriation in relation to the TTIP? Please explain.

The EU approach covers direct and indirect expropriation. These terms are further defined in an Annex on Expropriation. Indirect expropriation is a measure or a series of measures with an effect “equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure.” This is a standard and broad definition of indirect expropriation. It is further specified by a list of factors which should be taken into account when determining indirect expropriation. Furthermore, measures designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations except in rare circumstances. These definitions clarify the scope of indirect expropriation and reject an understanding of indirect expropriation which is only based on the effects of the measure. However, the definition is still relatively broad. In general, SAK suggests that the term expropriation should be limited to cases “in which a host state appropriates an investment for its own use, or the use of a third party”. Hence, indirect expropriation should never apply to general regulatory or administrative measures. In any event, any reference to the investor’s expectations should be defined as suggested in the answer to question 3. Furthermore, the notion of “manifestly excessive” should be clarified. For example, it should be made clear that a fundamental change of a particular policy (such as prohibiting certain energy forms such as nuclear energy, or introducing mandatory minimum wages etc) can under no circumstances be considered as manifestly excessive.

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 text accompanying question 5 indicates that the investment and services liberalisation chapter of the agreement are based on a negative-list approach with a so-called ratchet clause (at least concerning national treatment and most-favoured-nation- treatment). The SAK oppposes this approach which could bind any autonomous liberalisation measures at the international level and make the reversal of such liberalisation policies in the future impossible. In addition and as mentioned above, the general exclusion clauses only apply to non-discrimination clauses (national treatment and MFN), but not to other provisions or to chapter in general. In addition, they only cover a limited set of policy goals. There is no clause which would exempt public interest objectives including fundamental labour rights, protection of public, health, education, security, rights of employees, social legislation, human, rights, financial market regulation, industrial, policy and tax policy and environmental protection from the scope of the investment protection chapter. This should be changed as already suggested in our answer to question 2. SAK noted with satisfaction that EU's approach does not contain a so-called umbrella clause. It is essential that the EU does not accept an umbrella or stabilization clause in any investment protection chapter.

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 EU Commission proposes to include the 2013 UNCITRAL Rules on Transparency in Treaty-based Investor-State-Arbitration as mandatory in any ISDS. This would require the publication of all relevant documents (briefs and statements of the parties including annexes and all decisions of the tribunal). Furthermore the Tribunal would have the right to receive amicus curiae briefs. Finally all hearings would be public. This is a welcome step in the right direction. However, some questions remain: According to Article 6 (3) of the UNCITRAL Rules a tribunal may “decide to hold all or part of the hearings in private where this becomes necessary for logistical reasons, such as when the circumstances render any original arrangement for public access to a hearing infeasible”. It is unclear how the tribunals should apply the requirement of “infeasibility”. It would therefore be beneficial if the EU text would provide guidance in this matter. In addition, Article 6 (3) of the UNCITRAL Rules allows video transmissions of the hearing. The EU draft does not mention this possibility. It should be clarified that the possibility of video links is not excluded in the EU draft.

Explanation of the issue

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

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

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

Approach in most existing investment agreements

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

The EU’s objectives and approach

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

Link to reference text

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

The draft text includes “Fork-in-the-Road”- and “No-U-Turn”- clauses which exclude parallel proceedings before an investment tribunal and a domestic court. This is a useful restriction. However, if an investor turns to the domestic legal system first and obtains a final judgement, the investor can still bring a claim to an investment tribunal. This means that the investment tribunal becomes the ultimate adjudicator over a final judgement of a domestic court. This is one of the reasons why SAK is critical of ISDS in general. In any event, there are also problems with the EU approach even if ISDS is accepted in an EU trade and investment agreement: For example, it is not clear if the EU proposal would exclude parallel proceedings initiated by the parent company or its shareholders on the one side and the local subsidiary on the other. In particular does the EU proposal allow a parent company to lodge an investor-state claim while domestic subsidiary raises the same claim in domestic courts? The EU draft text does not include the requirement of the exhaustion of local remedies. SAK holds the position that the investor needs to exhaust domestic remedies within the host state before being able to file a claim under ISDS unless futility is demonstrated. In order to determine “futility”, the investor would need to demonstrate that local remedies are not available or effective by proving that the investor cannot expect effective remedies from the domestic legal system, because these remedies are not available to him or her and may not offer effective remedies. In general, international investment law should be integrated into domestic legal systems and support the development and maintenance of an impartial and functioning judicial system which is compatible with international human rights standards. An alternative investment protection system could be built on a number of ideas including reliance on specific state-investor investment contracts. Another option could be to include chapters on judicial reform and the rule of law international trade and investment agreements should and offer cooperation and support for countries which are struggling with these issues. For example, it might be worth exploring this avenue in negotiations with Thailand, Vietnam or other countries. However, a trade agreement with the US does not need such a chapter, because the US legal system offers sufficient protection for economic actors including foreign investors.

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?

The EU approach foresees a TTIP Committee on Services and Investment which shall establish a roster of panellists to be used only if the tribunal is not constituted within 30 days. In essence, this means that the roster of panellist only becomes relevant if the two arbitrators appointed by the parties cannot agree on the presiding arbitrator. The EU proposed roster would therefore serve the same function as the existing ICSID Panels of Conciliators and of Arbitrators. In order to secure consistency of the decisions of the tribunals it would be preferable if the roster would be mandatory, i.e. the disputing parties would have to select their arbitrator from the roster. The EU approach requires arbitrator experience in public international law, in particular investment law. However, the arbitrators should also have competence in the relevant domestic legal system. In order to avoid a conflict of interests, arbitrators shall comply with the International Bar Association Guidelines on Conflicts of Interest in International Arbitration which only relate to individual conflict of interests, but not to systemic interest in upholding investment arbitration for the benefit of investors and to a code of conduct for arbitrators adopted by Committee on Services and Investment. The draft text only contains a broad mandate and no specific guidance on the contents of the code. It would be preferable if the agreement would be specific on which situations such a code should avoid. It is also unclear whether the code of conduct is considered to be binding. While the draft text states that arbitrators “shall” comply with the code, the term “Code of Conduct” usually refers to nonbinding provisions. If the code should be binding it might be preferable to call it “Rules”.

Explanation of the issue

As in all legal systems, cases are brought that have little or no chance of succeeding (so-called “frivolous claims”). Despite eventually being rejected by the tribunals, such cases take up time and money for the responding state. There have been concerns that protracted and frequent litigation in ISDS could have an effect on the policy choices made by states. This is why it is important to ensure that there are mechanisms in place to weed out frivolous disputes as early as possible.

Another issue is the cost of ISDS proceedings. In many ISDS cases, even if the responding state is successful in defending its measures in front of the ISDS tribunal, it may have to pay substantial amounts to cover its own defence.

Approach in most existing investment agreements:

Under existing investment agreements, there are generally no rules dealing with frivolous claims. Some arbitration rules however do have provisions on frivolous claims. As a result, there is a risk that frivolous or clearly unfounded claims are allowed to proceed. Even though the investor would lose such claims, the long proceedings and the implied questions surrounding policy can be problematic.

The issue of who bears the cost is also not addressed in most existing investment agreements. Some international arbitration rules have provisions that address the issue of costs in very general terms. In practice, ISDS tribunals have often decided that the investor and responding state pay their own legal costs, regardless of who wins or loses.

The EU’s objectives and approach

The EU will introduce several instruments in TTIP to quickly dismiss frivolous claims.

ISDS tribunals will be required to dismiss claims that are obviously without legal merit or legally unfounded. For example, this would be cases where the investor is not established in the US or the EU, or cases where the ISDS tribunal can quickly establish that there is in fact no discrimination between domestic and foreign investors. This provides an early and effective filtering mechanism for frivolous claims thereby avoiding a lengthy litigation process.

To further discourage unfounded claims, the EU is proposing that the losing party should bear all costs of the proceedings. So if investors take a chance at bringing certain claims and fail, they have to pay the full financial costs of this attempt.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on these mechanisms for the avoidance of frivolous or unfounded claims and the removal of incentives in relation to the TTIP agreement. Please also indicate any other means to limit frivolous or unfounded claims.

The EU included provision to quickly reject a claim which is manifestly without legal merit or which is unfounded as matter of law. This is useful, but already exists under the ICSID Arbitration rules (Rule 41 (6)). It is therefore unclear whether the EU approach contains any added-value. At the same time, there is no general “Investor Screen” which would exclude claims which would cause serious public harm or which concern areas such as taxation or financial regulation. This is a significant lapse.

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?

In essence, the filtering mechanism enables the responding state to refer a matter which relates to financial services mechanism to the Financial Services Committee in order to determine if the state could rely on prudential carve-out. This is a useful procedural step in principle. However, its practical value may be limited as there is no agreement at the international level of what constitutes a “prudential measure” in financial services regulation. As the matter would be referred back to the investment tribunal if the Financial Services Committee or the Trade Committee would not come up with a decision, it is questionable if the filtering mechanism would ever work in practice.

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 EU approach foresees the potential for the parties to the agreement to issue binding definitions on specific legal points. Again, this is a useful mechanism in principle, but experience in the NAFTA context suggests that parties may be reluctant to issue such interpretations. Furthermore, investment tribunals may either find ways to ignore such a decision of the parties (see the tribunal in Methanex/USA) or may question whether the definition of the parties is really an interpretation or whether it is in fact an amendment (see the tribunal in Pope and Talbot/Canada). It is therefore not clear whether the tribunals would actually accept the definition as “binding” as the Vienna Convention on the Law of Treaties treats such definitions as a means of interpretation, but not as an amendment of the treaty.

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 EU proposal includes an Appellate Mechanism, but it would apply only in the context of the respective agreement (CETA or TTIP). Unlike some investment agreements, the EU proposal does not foresee the possibility of a general appellate mechanism for all investment cases. This also means that investment tribunals in a CETA context could issue different interpretations of the same clause as an investment tribunal in the TTIP context. The Appellate Mechanism would therefore only ensure uniformity and predictability of the interpretation of the CETA or TTIP, but would not reduce the overall heterogeneity and fragmentation of the investor-state dispute settlement system. The EU should therefore consider the establishment of an Appellate Mechanism which would apply to all investment treaties and not only the CETA or TTIP. At least, there should be an appeals mechanism which ensures uniformity of the interpretation of all EU agreements.

C. General assessment

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

The SAK is critical about including ISDS in TTIP. Investment protection is neither necessary nor helpful in an agreement between the EU and the US. The US and the EU legal systems provide sufficient legal protection to businesses. Two reasons for an investment protection chapter in the TTIP which are often claimed are: • Including an investment chapter with the elements suggested in the consultation document would be a major step in the process of reforming the international investment law; and • Without investment protection in TTIP, the EU cannot ask for investment protection in other negotiations e. g. with China Neither argument is convincing: first, it should be noted that most reforms proposed by the EU in the consultation document have already been implemented in other investment agreements and model BITs (such as the Canadian model BIT) or are being discussed in various fora including UNCTAD’s Investment Framework for Sustainable Development. It is unlikely that the exclusion of an investment protection chapter in the TTIP would significantly impede the reform of the system. In fact, excluding investment protection from the TTIP might even support those reforms because this would indicate that investment protection chapters are not always the best and only solution. Second, even if one assumes that an investment chapter in agreements with other trading partners are necessary, investment protection in the TTIP is not a prerequisite. In fact, trade and investment relations between European and North America traditionally did not involve investment protection agreements. In addition, countries such as Australia have shown that a country can credibly exclude investment protection in a trade agreement with one country (e.g. US-Australia FTA) and still include it in an agreement with another country (e.g. Korea-Australia FTA). It is not plausible that the EU could not follow a similar path. Despite proposed improvements on current practice, the SAK is skeptical of including ISDS in TTIP for the following reasons. ISDS establishes a system of judicial protection which is only available for foreign investors. By definition, this additional system awards benefits to foreign companies which are not given to domestic companies. This discriminates against domestic companies. ISDS destabilises the domestic judicial system because public measures can be subject to two diverging legal assessments. This leads to legal uncertainty in particular if the questions before domestic courts and investment tribunals are essentially the same. ISDS can influence domestic legislative and administrative decision-making even if the substantive standards are defined in a restrictive way and even if ISDS proceedings are transparent. The EU approach towards investment protection and ISDS in TTIP contains a number of improvements if compared with traditional BITs, including BITs of some of the EU Member States. However, the EU approach fails to incorporate key reform proposals outlined elsewhere in the SAK’s response to this consultation. In particular, the EU approach contains no provisions on obligations of investors or the promotion of human rights, labour rights and environmental standards. This is regrettable. Investors should be required to adhere fully to international standards and guidelines for multinational enterprises (such as the OECD Guidelines or the ILO Declaration) before turning to ISDS. Furthermore, an EU investment protection chapter should also require the investor to prove that he or she also adhered to the laws of the host state. Improving the international investment protection system requires a new start instead of relying on reforms of the current system. A fundamental change is needed and the EU’s approach, as laid down in the draft investment chapter of CETA, is not the appropriate path. Making policy on the back of negotiations with particular countries is not acceptable.