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Respondent details

  • Company/Organisation: EDRi
  • Location: Belgium
  • Activity: Civil rights in the digital environment
  • 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?

The EC should exclude the ISDS from every trade agreement, in this case from the TTIP, as it is not necessary and detrimental for democracy, human rights and the rule of law. Regarding the concept of investment, the European Commission (EC) uses the so-called “Salini criteria”[1] in the EU-Canada agreement (CETA) as the basis of the definition, but the EC is neither clear nor precise and omits some characteristics, such as the “significant contribution for the host State’s economic development”.[2] First, the definition set forth is too broad, vague and subjective. It gives too much discretion to the Tribunal. Experience under the International Centre for Settlement of Investment Disputes (ICSID) shows how diverse interpretations of the notion of investment[3] have left governments with no choice but to compensate foreign investors even when they had not made a sizeable investment within their frontiers. Secondly, the text of reference incorporates a list of forms of investment, but it is not a closed list. Even the EC seems to recognise its lack of certainty because it adds a provision for ‘claims to money’, breaking the coherence of the text. Thirdly, point d) of the definition of ‘covered investment’ does not clearly limit the application of the CETA in time. Point d) should end with “and always before the eventual termination of the Agreement”. This is particularly relevant if we put it in relation to Article X.18 of the leaked draft of the CETA of 21 November 2013, which states that in case of termination of the CETA, the latter “shall continue to be effective for a further period of 20 years” for the investments carried out before the termination.[4] Any ‘survival clause’ should be deleted from the final text. In short, the EC did not narrow the scope of the investment protection provisions, is not accurate and does not avoid vague expressions such as “assumption of risk” to serve as exclusive means to determine the existence of investments. Concerning the definition of investor, it is also unsatisfactory. To avoid abuses, the EC requires undertakings to have substantial business activities before being able to resort to the Investor-state dispute settlement (ISDS). The EC does not define ’substantial’, so many investors could be covered. Hence, that measure is insufficient to avoid forum shopping, as evidenced in the case of Philip Morris Asia, which set up a subsidiary in Hong Kong to sue the Australian government under the ISDS agreement Hong Kong had with Australia. As a result, protection should not be granted if the activities or instruments in question do not enjoy the same substantive protection under national law. Otherwise, foreign investors would have greater rights in comparison with national investors. The proposal does not offer any balance between the rights and obligations of foreign investors and put them in an advantageous position as compared to domestic investors. That gives the former a huge bargaining power before legislators, governments and courts. Governments do not even enjoy equivalent rights within the agreement, but are placed in a defensive position. If the EC truly seeks to learn from “past treaty practice” and “avoid abuses”, as stated in the Consultation document, it must eliminate the ISDS from the TTIP. Otherwise, the aforementioned risks shall remain, to the detriment of the public interest. [1] Cf. The Salini Costruttori S.p.A. and Italstrade S.p.A. v. Morocco [2]http://www.iisd.org/itn/2012/04/13/defining-an-icsid-investment-why-economic-development-should-be-the-core-element/ [3]https://coursewebs.law.columbia.edu/coursewebs/cw_14S_LAW_L8133_001.nsf/0f66a77852c3921f852571c100169cb9/A48182E48387550C85257C700079FC8C/$FILE/Notion+of+Investment+Cheatsheet.pdf?OpenElement [4] http://eu-secretdeals.info/upload/COM-doc-CETA_-investment-protection-newText-Nov-21-2013_clean.pdf

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 objectives set forth by the EC are welcomed. However, the changes suggested by the EC fail to address the many loopholes of the non-discrimination clause. On the one hand, the wording of the reference text regarding ‘national treatment’ is not specific enough as to exclude indirect or ‘de facto’ discrimination claims. Even if a measure does not directly discriminate between national and foreign investors, it can still be challenged by a foreign investor. If the investor can prove the measure in question has an equivalent effect to a directly discriminatory measure, it could challenge it. In other words, this broadens the scope of the investment protection provisions in TTIP. The wording proposed would confer ISDS arbitrators a far-reaching discretion to decide when a State measure is de facto discriminatory without no guarantees of independence or impartiality. On the other hand, the Commission did not close a major well-known loophole, the most favoured nation clause. The wording suggested by the Commission is neither clear nor accurate.It seems to solve the problem for procedural rights, but not for substantive ones. In fact, companies would not only be able to use the substantive investment protection provisions in TTIP, but contrary to the EC’s attempts, they would be able to cherry-pick protection from any other investment agreement the EU or EU Member States signed or will be signing. Moreover, the EC incorporates Article XX GATT and Article XIV GATS to the text of reference so as to provide respondents with the right to invoke exceptions. As evidenced by the WTO case law in relation to the aforementioned Articles, these provisions impose a higher burden on states since they have to pass multiple tests in order to justify the measures adopted, namely, the fulfilment of legitimate objectives as well as the necessity and proportionality tests. Yet, the proposed exception provisions would fail to include the most used claims under ISDS mechanisms, i.e. ‘expropriation’ and ‘fair and equitable treatment’. This becomes especially relevant once we acknowledge that “[f]ully 74 percent of “successful” investor claims under” US FTAs and BITs succeeded on the basis of ‘fair and equitable treatment’ breaches.[5] [5] http://www.citizen.org/documents/MST-Memo.pdf

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?

Prior ISDS experience shows that case law on fair and equitable treatment has brought a shift in treaty practice, this standard should be clarified and narrowed. The European Commission argues that a closed list of rights would solve the issues that may arise from a provision on fair and equitable treatment of investors and their investments. However, from the text provided one cannot infer it is a closed list. There is no limitation in the list proposed by the European Commission and the terms used are open-ended and vague. The list is drafted in a way that leaves much discretion to arbitrators to interpret it. Experience shows arbitrators interpret this type of provisions in the widest way possible, which undermines the right to regulate of the EU and the US on behalf of the public interest. The EC wishes to limit the ‘fair and equitable treatment’ claims to only cover “breaches of a limited set of basic rights”. However, companies like Hong-Kong-based company Philip Morris Asia[6] and the US firm Lone Pine[7] have brought their claims on this basis, arguing the ‘manifest arbitrariness’ of the respondent state. Both cases show how the clarifications provided by the EC do not offer much protection. We welcome the intention of the EC not to consider the fair and equitable standard as a synonym of a ‘stabilisation clause’. However, it is not clear what a tribunal should understand by the fact that the state cannot have made a “specific representation” to a foreign investor which could have “created a legitimate expectation”. In other words, the EC is not precise enough in the text of reference provided as to exclude arguments as the one invoked by Lone Pine in its case against Canada pursuant to the NAFTA. In fact, Lone Pine argued that Canada’s revocation to its ‘right to mine for oil and gas’ violated its ‘legitimate expectation of a stable business and legal environment’. Due to the risks and abuses committed pursuant to this standard, we consider the ISDS should be excluded from the TTIP. [6] Case brought against Australia against its tobacco plain packaging act under the Australia-Hong Kong BIT http://italaw.com/sites/default/files/case-documents/ita0665.pdf [7] Case brought under the NAFTA on behalf of a Canadian enterprise they had set up in Canada. The claim was brought against Canada for ‘arbitrarily’ revoking its ‘right to mine for oil and gas’. http://www.italaw.com/sites/default/files/case-documents/italaw1596.pdf

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 scope of the substantive provision is very broad. In fact, the suggested approach entails that foreign investors could sue the government when they are directly or indirectly expropriated, provided their profits are believed to be reduced by the actions of the latter. In case of indirect expropriation, foreign investors are offered wide margin of manoeuvre to lodge a claim on the ground their profits are lower than expected. The basis for such kind of assertions is not clear because the definition provided for indirect expropriation is too broad. Accordingly, that would have a clear chilling effect over the measures adopted by legislators. This is an open-ended right that could be very risky, indeed. As it is drafted, foreign investors are not solely given the right to be compensated for an indirect expropriation, but also a right to launch a claim over their ‘investments’. The way in which ‘indirect expropriation’ is defined encompasses more than real property. It would include forms of intangible property, such as copyrights or even trade secrets. What is more, the notion provided goes beyond measures affecting property in a direct manner, since it includes the “right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure”. As a result, foreign investors would be granted a compensation that would not be given if the claim was brought pursuant to the national laws of some of the EU Member States. The Commission solely proposes a limit affecting the above-mentioned right, that is, foreign investors shall be entitled to enjoy protection unless the measures in question protect “legitimate public welfare objectives”. Additionally, the text of reference also allows the affected investor to invoke that the measure in question is ‘manifestly excessive’ or discriminatory. The problem here is that ISDS arbitrators, whose expertise is generally related to investment and not to public welfare, would decide on what legitimate public welfare objectives are and whether or not measures are ‘manifestly excessive’. The Commission's proposal gives investors much stronger protection than Article 1 of Protocol 1 to the European Convention on Human Rights (ECHR). Under Article 1 of Protocol 1 to the ECHR every natural or legal person is entitled to the peaceful enjoyment of his/her/its possessions. This "shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties." In these circumstances it is up to the states to decide what is "deem[ed] necessary". However, under ISDS, the arbitrators would conduct the assessment. Finally, throughout the Consultation document, we noticed the EC assumes that foreign investors shall have rights that deserve to be protected under the ISDS. However, the public is not requested to provide its input on why corporate rights should be addressed by the TTIP without matching obligations. Available evidence shows that companies infringe human rights at a global scale. Yet, corporate social responsibility is not included within the issues raised by the EC, which is worrisome. In virtue of the above, we strongly urge the EC to not include ISDS in TTIP due to the risks exposed, whose gravity increases if we take into account that the US is a country embedded in a culture of litigation.

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 inclusion of the ISDS within the TTIP would impair democracy, indeed. Legislative decisions would not be fully based on the interest of the population of the country, but would be constrained by the power of foreign investors. Even the mere fact of filing a case can have a chilling effect. E.g. Peru reversed its decision to regulate toxic waste and close a heavy metal smelter when US Renco Corporation launched an ISDS claim for $800 million.[8] In the EC’s proposal there are not enough guarantees to prevent governments from enacting laws which would risk a claim by foreign investors that would damage the public purse. In fact, compensation under TTIP is of a pecuniary nature and the amounts awarded are exorbitant. Whereas under the WTO state-to-state dispute settlement the remedy imposed is to bring the infringing State in conformity with the treaty, the punishment here is always monetary compensation. This is detrimental because not only damages awards can be significant, but costs of bringing an action as well. The fact that the losing party bears the costs is a way to limit speculation, but it is not enough, as evidenced in the Philip Morris Asia case (cf. question 3). More precisely, the definition of the ‘right to regulate’ is vague and would contribute to create legal uncertainty. The reference text proposed by the EC does not expressly grant a general right to regulate, but solely “RECOGNIS[E]S” its existence for legitimate objectives. Such “recognition” solely appears in the Preamble of the reference text, which is not binding. Consequently, arbitrators could disregard its application. Moreover, the right to regulate is solely an exception to investment protection. The right to regulate is limited to ‘legitimate’ objectives. The lack of clarification on what constitute a legitimate objective creates even more legal uncertainty. It is up to the arbitrators to decide how narrowly they interpret the exception. Experience shows that arbitrators follow a very broad interpretation of investor protection. On the other hand, the proposed text does not ensure human rights will be protected. The mere referral to Article 14 GATS is not enough, as it replicates the flaws contained therein. For instance, Art. 14 GATS only mentions privacy as an exception to trade and investment rules, but not as a human right. Finally, EDRi is highly concerned for the fact that the text provided does not guarantee the legislation to evolve in accordance with innovation, raising issues linked to copyright and patent law. This can be seen in the Eli Lilly case against Canada. Following a minor adjustment to Canadian patent law, to facilitate better access to medicine, the US pharmaceutical company Eli Lilly claimed $500 million of damages in ISDS arbitration. Eli Lilly lambasted the Canadian patent policy framework for being “discriminatory, arbitrary, unpredictable and remarkably subjective”, and accused Canada of expropriation. If a minor adjustment already leads to such accusations, bigger reforms will certainly be attacked. The chilling effect caused will prevent new models to evolve, getting a lock-down of existing and outdated legislation. For instance, the envisaged EU copyright reform to adapt it to the digital age could be at stake. If legislation cannot be changed in fear of high damages being imposed by ISDS tribunals, innovation will be clearly impaired. Due to the wide discretion given to arbitrators and the lack of safeguards under the ISDS, we urge the EC to move aside from entering into an agreement which would impair or even nullify the enjoyment of human rights, innovation and would not solve the chilling effect described above. [8] http://justinvestment.org/2012/04/fact-sheet-la-oroya-peru/

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.

We welcome the EC’s recognition that transparency is essential. However, such objective would not be fully achieved by importing the UNCITRAL rules on transparency. We welcome the nuances introduced in the text of reference, but encourage adopting more changes, as explained below. In the Consultation notice, the EC does not refer to any restriction on the publicity and transparency of the process. However, it does so in the Consultation document and, more precisely, in the reference text attached. Point 2 of Article x-33 (transparency of proceedings) of the text developed in the CETA mentions the documents which shall be disclosed to the public. Fortunately, the EC realised that Article 3(1) of the UNCITRAL rules expressly exclude exhibits from the documents to be made available to the public and solely requests the disclosure of a list of them. Accordingly, the EC included the disclosure of exhibits in point 3 of Article x-33. As long as this point is interpreted that way and is not dropped from the TTIP negotiations, we welcome the EC’s proposal in this regard. Yet, we urge the Commission not to solely include exhibits, but to create an open-ended list. In order to do that, the EC could simply add “and any other documents presented to the proceedings” at the end of point 2 of the proposed Article. Otherwise, the disputing parties could easily circumvent the obligation of transparency contained therein by submitting documents under different labels to those mentioned in Article 3 of the UNCITRAL rules. Article 7 of the UNCITRAL rules include exceptions empowering tribunals to block the publication of documents related to a large variety of measures. By incorporating this article, arbitrators would be entitled to still block the access to documents or restrict public hearings so as to “protect the integrity of the arbitration process”. (cf. Article 7.7 of the UNCITRAL rules). In the same vein, Article 4.5 of the UNCITRAL rules state that “[t]he arbitral tribunal shall ensure that any submission does not disrupt or unduly burden the arbitral proceedings, or unfairly prejudice any disputing party”. Such wording gives arbitrators a wide margin of discretion, whose limits are not clarified by the EC and may lead to abuses. For instance, Article 7.5 of the UNCITRAL rules would permit the respondent (i.e. the EU or the US) not to disclose information or documents that could be considered to be “contrary to its essential SECURITY interests.” Point 6 of Article x-33 of the text proposed by the EC goes in line with it but is more confusing and ambiguous than the former. It omits the word “security”, and broads the scope of the provision by making the laws of the State in question to apply to “confidential or protected information”. Who is going to make that balance between national security interests, for instance, and transparency? In addition, Article 7.7 of the UNCITRAL rules would allow ISDS arbitrators to apply analogy to enlarge the list of exceptions contained therein. Therefore, the expression “or in comparably exceptional circumstances” should be expressly excluded from application by the EC. On the other hand, transparency in other aspects of the ISDS, such as the appointment of arbitrators, are not included in the UNCITRAL rules. Furthermore, the fact that the TTIP negotiations are not transparent themselves may confront the honourable aim pursued by the EC. Finally, the EC recognises in the Consultation notice that the aforementioned rules shall be subject to negotiations with the US, which means that the EC will probably have to make concessions to the detriment of its original proposal. For instance, we would like to remind that the UNCITRAL rules are applicable as of April 2014 unless otherwise agreed by the Parties to the agreement (cf. Article 1(1) of the UNCITRAL rules on transparency). EDRi believes that any promise that such a rule would be applied after the possible adoption of TTIP is entirely devoid of credibility.

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 EC’s proposal has the effect of promoting ISDS to the detriment of national courts. Alternative dispute resolution (ADR) has proved to be efficient in many cases. However, ISDS does not offer the same guarantees as the latter (e.g. the need for the award to be recognised or enforced by a national court) or the safeguards embedded in the judiciary. In other words, it can be used as a means to circumvent judicial systems. This has been experienced by Ecuador. In February 2011, a court of Lago Agrio (Ecuador) condemned the US oil company Chevron to pay $9.5 billion allegedly for environmental and social harms to indigenous people in the Amazon. In March 2014, the US District Court for the Southern District of New York declared the Ecuadorian ruling unenforceable in the US, allegedly for fraud. Currently, the dispute has brought to the investor-state dispute settlement established under the BIT between Ecuador and the US. Chevron argues that its right to fair and equitable treatment has been violated and is thus seeking compensation.[9] In other words, an ISDS can be misused and be a means to evade justice. Arbitrators themselves have already recognised this threat. In the words of Mr. Juan Fernández-Armesto, “[w]hen I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all. […] Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”[10] In fact, whereas national legal systems are ruled by the principle of separation of powers, the ISDS system is neither independent nor impartial. ISDS systems do not provide institutional safeguards for independence: tenure, prohibitions on outside remuneration by the arbitrator and neutral appointment of arbitrators are not guaranteed. The judiciary must follow rules regarding procedural fairness, such as the legal standing of those whose rights or interests are affected by the outcome of the case. Under the ISDS system, undertakings can circumvent national courts remedies since there is no need to exhaust domestic remedies in order to resort to the ISDS. Under the ISDS the requirement to exhaust local remedies is waived, indeed. Accordingly, the Commission’s assertion that the ISDS favours national courts is dubious. Actually, once an investor uses the ISDS, it cannot bring an action before a national court afterwards. That means that the arbitral awards acquire the force of res iudicata without the procedural or material guarantees we can find under national and international legal systems. Finally, we welcome the EC’s initiative to encourage mediation. However, any mediation mechanisms should ensure both institutional and personal safeguards are in place. In virtue of the above, the EC should drop the ISDS from its TTIP agenda and implement a state-to-state dispute resolution mechanism. [9] http://www.chevron.com/ecuador/ [10] http://globalarbitrationreview.com/journal/article/30399/stockholm-arbitrator-counsel-double-hat-syndrome

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?

As previously stated, we encourage the EC to drop the adoption of an ISDS. The proposal of the EC to adopt a binding code of conduct for arbitrators and a set of qualifications’ requirements could be helpful, but not enough to remedy the flaws of ISDS systems in this regard, namely the flagrant lack of conventional institutional safeguards for independence and accountability. First, arbitrators usually have a private-law background and have been involved in prior commercial and investment cases, being thus predisposed and biased to the arbitration. Secondly, the exorbitant compensatory sums awarded are a high incentive to accept “frivolous and unfounded cases”, following the wording used by the EC. Thirdly, the lawfulness of the appointment of arbitrators is highly questionable. Each party chooses one arbitrator and the third one is appointed by the Secretary General of ICSID if the parties do not reach an agreement. The Secretary-General of ICSID also decides on conflicts of interest. It is worth noting that the ICSID Secretary-General is appointed by the President of the World Bank, who is himself appointed under the influence of the US Administration. Regarding the eventual appeal mechanism and in view of the current ICSID rules, the President of the World Bank appoints the three arbitrators in appeal cases. ISDS therefore gives the US an unfair advantage. More precisely, the Consultation document does not provide a set of provisions which would be included in the code of conduct. It does not even provide guidance on the content the EC would like to see included therein. Likewise, the proposal does not foresee any guarantees of enforcement. It even confers a margin of two years to put it into place after the entry into force of the trade and investment agreement, without explaining what would happen in the transition. Once again, the EC is assuming they will adopt a credible, complete and enforceable code as well as comprehensive qualification requirements, without giving any safeguards or hints on its position. It is neither clear what the position of the US would be. In sum, the proposal on arbitrator ethics is very lax. Until a finalised code is presented to us, we cannot form a full opinion on it.

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 approach chosen by the EC to reduce the risk of frivolous and unfounded case leaves many questions behind and, unfortunately, does not solve the problems raised. EDRi once again emphasises the need to exclude the ISDS from TTIP . To begin with, the texts of reference do not provide a definition for “unfunded” or “frivolous” claims, which creates legal uncertainty and gives wide discretion to arbitrators to decide what frivolous or unfounded cases are. Regarding “frivolous” objections, for instance, the reference text presumably allows a party to lodge them in the “manifest” absence of legal merits. Conversely, most of the claims will not be considered as “frivolous” or “unfounded” because they would not actually violate the vague and ambiguous language of the agreement. In other words, many cases might not be frivolous or unfounded under the rules put in place, but the legal merit is still dubious. If the TTIP negotiations do not result in a more accurate and clearer text, the risk of frivolous and unfounded cases will not be reduced. In addition, we disagree with clause 5 of the proposed Article x-29 when it sets forth that “the Tribunal shall ASSUME the alleged facts to be true”, wording which is also included in clause 1 of Article x-30. The aforementioned claims and objections need to be reviewed in an impartial and independent way, not surmising the veracity of the facts, unless the parties provide sufficient, lawful and adequate evidence to prove the facts alleged. Moreover, the EC stated that the EU wishes to introduce measures to “quickly dismiss frivolous claims”. Yet, arbitrators have a personal financial incentive not to dismiss claims on this basis. Other agreements included these preliminary remedies, but failed to encourage the Parties to the agreements to use it.[11] The EC further proposes to include a provision stating that “the losing party should bear all costs”. While that can indeed have a deterrent effect, the provision proposed, Article x-36 (final award), once again gives wide discretion to the arbitrators to decide when the apportionment of the costs is unreasonable and thus serve as an exception to the arbitration costs’ rule mentioned in the Consultation. None of the measures proposed are sufficient, as evidenced by previous experience under other trade and investment agreements. In fact, such mechanisms have not helped reducing the number of disputes under an ISDS. Contrary to the wishes of the EC, the number of disputes has grown from fewer than 50 cases between 1950s and 2000 to 514 known cases between 2000 and 2012.[12] [11] https://groups.google.com/forum/#!topic/canada-eu-ceta/ZWMCxkXXb4g [12] http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151916.pdf

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?

The objective set by the EC in this regard is to be welcomed, but the means deployed are not sufficiently adequate to reduce costs and increase regulatory autonomy of the EU or the US. In the following lines we explain why: First, the filter mechanism proposed has a very limited scope as it solely focuses on financial aspects. In this sense, the text provided in the annex continuously refers to other Articles whose content is unknown since they are not included in the Consultation document. Such absence prevented us to provide a more complete analysis in that regard. What is clear is that other investor-claims are not included. Here, the EC is giving more importance to financial stability measures, forgetting about other public interest measures, such as those related to the protection of human rights or the environment. According to the text of reference, in order to filter an undeserving claim, the governments would have to demonstrate that the public measure challenged by investors was taken for “prudential reasons”. That sets forth an additional legal burden for the governments because they would be forced to further justify the validity of the legislation. The EC should acknowledge that this also means that the legislation shall pass the scrutiny of an opaque arbitration process. Arbitrators shall be given an enormous power to bindingly review executive, legislative and judicial decisions. No safeguards are put in place. For instance, the text of reference establishes that if the disputing parties do not agree otherwise, the arbitrators will be appointed by the Secretary-General of the ICSID from the names contained in a list that will be created by virtue of another article whose content is not provided. Such measure is worrisome. Finally, the filter proposed is dependent on other parties and does not help against the chilling effect of anticipated cases or threats to sue the State in question.

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?

In order for the tribunal not to interpret the treaty in a way different from the original intentions of the Parties (i.e. the EU and the US), the EC proposed two solutions. The first one entitles the non-disputing party to intervene in the proceedings. In the case both the US and the EU agree on the interpretation of the provision under scrutiny, the EC says the “ISDS tribunals would have to respect” it. However, “to respect” is not a synonym of “to follow” or “to be bound by” it. In other words, arbitrators would be able to find ways to circumvent their interpretations. What is more, we find another problem as regards the timing. On the one hand, the text of reference is not sufficiently clear as to the concrete procedural moment in which the non-disputing Party would be entitled to intervene, using vague words like “or promptly after”, “may” or “reasonable opportunity”. How compatible would this solution be with mediation (cf. question 7)? On the other hand, this solution is risky. The original intentions of the Parties could have changed over time. The interpretation agreed by the Parties in the proceedings in question could respond to various interests which may differ from the original intentions of the Parties in the negotiations and could be inconsistent under the circumstances of other cases. The second solution allows the Parties to issue binding interpretations on the legal matters of a provision to “correct or avoid interpretations by tribunals” “which might be considered to be against the common intentions of the EU and the US”. Both the wording of the reference text and the open way in which such proposal is drafted are troublesome. First, it seems that the executives of both the EU and the US would have a similar role as the Advocate General has before the European Court of Justice, but with no guarantees whatsoever. The executives will not even be independent themselves because they will depend on the other Party’s willingness to cooperate. Secondly, the proposed solution triggers the democratic decision-making process. This means that the executive will interpret the treaty provisions and not the legislator. Furthermore, national supreme courts are embedded in a constitutional and legal culture and tend to respect the legislator's intentions. Conversely, experience under the North American Free Trade Agreement (NAFTA) shows this mechanism is rarely used and arbitrators have barely taken such interpretations into account. ISDS tribunals are mostly constituted by foreign arbitrators and have multiple motivations to use a broad interpretation of the texts. Even under the best of the intentions, the EC does not propose an enforcement mechanism for the "binding interpretations" on arbitrators. The text of reference limits the use of this measure to situations in which “serious concerns arise”; a Committee “may recommend the adoption of interpretations” to another Committee set up under the CETA, which has the ultimate word to decide if an interpretation will have a binding effect and the date in which it will be binding. On this last point, such draft is not clear as to the application of the interpretations in time. For instance, would retroactive application be allowed?

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.

If we compare the WTO resolution system with the ISDS, we realise that foreign investors are given the status of sovereign nations, being entitled to privately enforce a public treaty. In this sense, the right conferred to foreign investors is not reciprocal for the Parties to the TTIP; they are only offered the defence position. We thus encourage the EC to replace an ISDS mechanism for a state-to-state dispute settlement. Unless otherwise agreed by the Parties later on, the ICSID rules would apply. There is no certainty whether this will happen and the outcome is dependent on both Parties. Under the ICSID rules there is no appeal available, as the EC seems to acknowledge. The awards issued by ISDS tribunals have the same status as final judgements of national courts. There is only a mere possibility of annulment, whose grounds to seek it are extremely limited. Following the ICSID rules, the three arbitrators would be appointed by the President of the World Bank, who, in turn, is appointed by the President of the United States. Interestingly enough, the US has never lost an ISDS case, as stated by the U.S. Trade Representative.[13] “In our current negotiations, we are working to expand upon this approach to ISDS”, he added. Such statements should worry and alarm the EC. In accordance with the reference texts, other arbitrators would decide on the basis of the same broken rules of the ISDS system. The proposal of the Commission is vague and ambiguous. “[I]n TTIP the EU intends to go further and create a bilateral appellate mechanism through the agreement”, the EC stated in the Consultation document. However, the Articles provided as reference are inconsistent with the purported goal of the EU. The text developed in the CETA sets forth a possibility to establish a forum “to CONSULT […] whether, AND IF SO, under what conditions, an appellate mechanism COULD be created”. With this approach, the EU would end up as with the Central American - Dominican Republic Free Trade Agreement (CAFTA-DR). Even if the latter included a binding provision to establish an appeal mechanism within three months after the entry into force of the CAFCA-DR (cf. Annex 10-F)[14], such commitment has not been materialised yet. In sum, lack of credibility of the intentions of the Parties in this type of agreements is thus considerable. In conclusion, the draft proposed by the EC does not solve the issues raised. It offers neither a solution nor a real appellate review. In fact, “Article XX (award)” solely creates a mechanism in which an “Appellate Body” issues a “REPORT” in which it may “modify or reverse” the award of the Tribunal. Nevertheless, it is not clear whether the findings of the Appellate Body would be binding on the Tribunal since the Appellate Body shall refer the case back to the original Tribunal. Furthermore, it is not clear whether the Appellate Body could hear the disputing parties before issuing its report. Only the Tribunal, if “appropriate”, shall allow that possibility to the disputing parties, with the effect that they may persuade the Tribunal not to adopt the Appellate Body’s findings. [13] http://www.ustr.gov/about-us/press-office/blog/2014/March/Facts-Investor-State%20Dispute-Settlement-Safeguarding-Public-Interest-Protecting-Investors [14] http://www.sice.oas.org/trade/cafta/caftadr_e/chapter6_12.asp#Annex10-F

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?

In both the Consultation document and Consultation notice, the European Commission makes challengeable assumptions. The EC seems to replicate many of the flaws evidenced in previous trade agreements. Although it conveys honourable objectives, its proposal is not as innovative as it claims to be. First, the need of an ISDS in the TTIP is not justified. The public is not aware of the purposes for which this public consultation is going to be used, which undermines its value and adds more uncertainty to the whole TTIP process. The EC assumes the ISDS is necessary to encourage investment, but stating that “Europe’s prosperity depends in large part on foreign investment” is not a valid justification. Brazil is a clear example that policy alternatives are available for the EU: even if no BIT has entered into force[15], it stills widely attracts foreign investment.[16] Secondly, the EC does not clarify the impact of the CETA on the TTIP negotiations. It just implies that the CETA and the TTIP will have a similar drafting. Yet, since the reference texts are solely illustrative and do not represent a final draft of the actual agreements, the public cannot properly address the issues raised by the Commission. The lack of transparency on the TTIP negotiations has a lot to do with that. Thirdly, the ISDS is a flawed mechanism, putting the rule of law principle at risk. The proposed text does not solve the problem of lack of conventional institutional safeguards for independence and impartiality of arbitrators, harmful incentives and risk for the right to regulate (cf. questions 5, 7 and 8), indeed. Since Article 207 TFEU gives an exclusive competence on direct foreign investment to the EU, adding the ISDS to the TTIP would create a lock-in for EU Member States. What is more, the ISDS gives the US and US companies a clear and unjustifiable advantage (cf. question 12). Hence, the EU should not only NOT include ISDS in TTIP, but also ensure that existing ISDS agreements with the US are terminated, in line with paragraph 1 of Article X.04 (termination) of the leaked CETA draft.[17] On the other hand, in the Commission's proposal, the rights of investors trump human rights and threaten our privacy and the reform of copyright and patent law (cf. question 5). The EU aims to create a global standard. Presently, a minority of foreign investments is covered by ISDS; after ISDS agreements between the major capital exporting countries, a majority of global foreign investments would be covered by ISDS. This seems unrealistic and dangerous. To honour its values and comply with the Treaties, the EU has to acknowledge the system's fundamental flaws and act accordingly. The EU should endeavour to abolish and not strengthen this system. In doing so, the EU would give global leadership in the debate and create room to strengthen alternatives. Finally, we kindly ask the European Commission to take into consideration the responses to the present consultation, retracting from statements like the one made by the Chief of Cabinet of European Trade commissioner Mr Karel de Gucht at the Forum for Agriculture on 1 April 2014, when he stated that “a public consultation is not the same as a referendum. It’s not so that if you have 60 contributions say ‘away with ISDS’ that then we are going to do away with ISDS”. If the EC does not set that view aside, it will undermine the rights of the EU citizens and will not succeed in defending the public interest and common good for the EU. [15] http://unctad.org/Sections/dite_pcbb/docs/bits_brazil.pdf [16] http://www.deloitte.dbbrazil.com.br/show.aspx?idCanal=Tap1ogfxsUipt3uYP2l7JA== [17]http://eu-secretdeals.info/upload/2014/02/EU-Canada-FTA-Negotiations-Investment-chapter-4-April-2014_clean.pdf