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Respondent details

  • Company/Organisation: Quercus - Associação Nacional de Conservação da Natureza
  • Location: Portugal
  • Activity: Quercus works on all major environmental areas - energy, climate change, waste, chemicals, water, sustainable consumption, sustainable development, nature conservation. We develop action from environmental awareness to lobbying activities.
  • Profile: 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?

Quercus would like to state that we disagree with the European Commission objectives and approach in relation to the inclusion of investment protection in the Transatlantic Trade and Investment Partnership (TTIP) through the investor-state dispute settlement (ISDS) mechanism. We believe that the proposed reforms will not solve any fundamental flaws of ISDS, and as such should be excluded from TTIP and the Comprehensive Economic and Trade Agreement (CETA). The Commission intends to agree on the inclusion of investor-state dispute settlement (ISDS) mechanisms in EU investment treaties, conferring jurisdiction over EU investment treaties to privately appointed arbitrators. The Commission cannot ensure that, in the context of ISDS proceedings, even the proposed improved definitions will not be stretched significantly and beyond the intention of the parties. The definition of “investor” encompasses not only natural and legal persons actually making investments in the territory of the EU, but also those that “seek to make” an investment, allowing for pre-establishment rights. The proposed wording of the provisions would unduly extend protection to potential investors, leaving the subjective scope of investment protection agreements undefined. This definition of “investor” also omits any requirement that potential investor claimants are in ultimate beneficial ownership and control of the investment. The chosen definition of “investment” opts for the most open-ended concept, so as to include non-FDI (foreign direct investment) forms of investment, such as portfolio investments. These broad definitions, alongside the inherent vagueness of other proposed terms - “substantial business activities” and “substantial resources” - means that EU member states are likely to be vulnerable to ISDS litigation from a much wider range of actors than is foreseeable. The definitions of terms in international investment agreements have been subject to the interpretative trends chosen by arbitrators. These definitions have often moved beyond the will of the states that initially signed the agreements under which the claims were brought. ISDS tribunals have proven unreliable and often unwilling to interpret definitions in accordance with the intentions of the treaty parties. The Commission’s commitment to rule out claims made by companies that have routed their investments through a third party state simply in order to gain the protection of the TTIP treaty provisions, also identifies a key problem in current ISDS practice. But the proposed approach is weak. The Commission position is to “rely on past treaty practice”. ISDS case law shows that arbitrators have widely accepted the principle of investors “treaty shopping” in this way. Indeed, this practice is promoted by arbitrators in case awards and advertised by international law firms fishing for clients. Investors have proven adept at creating corporate structures which maximize their recourse to investment protection agreements and arbitrators themselves have a vested interest in ensuring a steady flow of claims. The EU’s approach is therefore unlikely to create any effective deterrent. ISDS as a system is characterised by structural imbalances and lack of democratic oversight, and invests a high degree of power - to interpret treaties and adjudicate disputes - in a restricted number of private individuals. Simply tinkering with certain provision will not alter this. In light of this, abuse of the system can only be truly assured by excluding any ISDS mechanism in the agreement.

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.

Quercus would like to state that we disagree with the European Commission objectives and approach in relation to the inclusion of investment protection in the Transatlantic Trade and Investment Partnership (TTIP) through the investor-state dispute settlement (ISDS) mechanism. We believe that the proposed reforms will not solve any fundamental flaws of ISDS, and as such should be excluded from TTIP and the Comprehensive Economic and Trade Agreement (CETA). It is important to highlight that Article 207(3), paragraph 2, TFEU “the Council and the Commission shall be responsible for ensuring that the agreements negotiated are compatible with internal Union policies and rules.” Thus EU institutions should under no circumstances negotiate and conclude commercial agreements that may limit the EU’s competence to define its policies, or conflict with existing or future internal rules. It is consistent with this premise that the EU should retain the power, under the TTIP, to adopt discriminatory measures “where necessary to achieve public policy objectives”: any limitation of this power would lack justification under the TFEU and therefore be invalid. The Commission’s proposed approach, whilst stating the objective of protecting the policy-making and regulatory authority of the EU, is bound to be ineffective in this regard and puts such authority at risk. If the TTIP include an ISDS mechanism, which it should not, privately appointed arbitrators would be entrusted with deciding whether EU measures comply with standards of non-discriminatory treatment laid down in the TTIP agreement and whether derogations from the non-discrimination principle are justified in the light of EU public policy objectives. Such risk is greatly increased by the Commission’s deficient approach to the most-favoured nation (MFN) treatment provision, included in the reference text. The effect of this clause in ISDS claims has enabled investors to simply select more favourable provisions from other investment treaties to which the state is a party. The proposed language appears only to exclude the application of MFN to procedural standards (and therefore may be effective in preventing investors using MFN to skirt the TTIP rules on transparency), but does nothing to prevent the application of MFN to material standards, as is the Commission’s professed intention. In practice, this would have the effect of negating the supposed improvements the Commission purports to make, such as its attempt to limit the scope of the “fair and equitable treatment” (FET) standard. In effect, an investor may potentially use the proposed MFN provision to simply invoke the much broader and more favourable FET standard under the Energy Charter Treaty, of which the EU is a member. The “general exceptions” clause is flawed in two further respects. The closed list of exceptions incorporated from WTO law would allow exceptions on the grounds of protection of public morals, public order, human, animal or plant life or health, or national security, but would appear to preclude any exception on the basis of labour standards, or a number of other legitimate social or welfare policy objectives. It is unclear why the Commission’s approach aspires to apply such exceptions only to the non-discrimination standard and not to other material standards such as the FET standard or the provision on expropriations. These limitations in scope and application of the “general exceptions”, which allow the EU and its member states to take measures necessary to achieve public policy objectives, is of particular concern in light of ISDS case law. To date, arbitration tribunals do not recognise the states’ right to define what their own legitimate, public policy objectives actually are. A number of arbitration tribunals have rejected the argument raised by states that they and they alone, should be able to define what a legitimate public interest objective is. This is even more concerning, when one considers that ISDS cases are primarily presided over by arbitrators from corporate legal practice, with no background in public policy, government or even public international law. In order to ensure that the EU and its member states maintain the regulatory space that is necessary to achieve public policy objectives, in all spheres, ISDS provisions should be excluded from the TTIP. The Commission approach to non-discrimination is flawed and will allow for continued excessive use of the ISDS mechanism. The only way to close the loopholes is to drop ISDS as a whole from TTIP and all other free trade agreements including CETA.

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 fair and equitable treatment (FET) standard is characterized by its inherent vagueness. The interpretation about what constitutes FET or is in breach of it still fully relies on the for-profit arbitrators, including: • What constitutes “manifest arbitrariness” (c.) without any proposed safeguard to prevent arbitrators from re-opening the supposedly closed definition list of the provision through expansive interpretation of “breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article”. • What constitutes a “specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated” (article 4). Representation could mean anything that arbitrators will decides. The definition also requires the representation to have been made to induce the investment, but not that the investment took place only because of this. The introduction of a broad basis for reviewing the legitimate expectations of an investor adds increased uncertainty and subjectivity to the interpretation and application of this clause. According to the article, it is up to arbitrators to decide whether an investment only took place because of this representation or not – which is a big loophole, making the article much broader than the Commission states. The imposition of an FET standard on treaty parties (the EU and its member states), without any concrete obligation on investors to also abide by standards of conduct, illustrates the underlying imbalance in the ISDS mechanism. While it is generally accepted that an investor cannot claim a breach of the FET standard where they have committed fraud or engaged in illegal conduct, the proposed FET clause does not expressly require that the investor’s conduct - for example, with regard to the environment or social impact of their investments – be a determining factor in the assessment of whether the FET provision has been breached (as is alternatively recommended by UNCTAD). This omission means that corporations which have conducted their investment operations without any regard for standards of corporate social responsibility may still be able to claim the right of FET, and to sue for breach of the standard through ISDS. The Commission’s approach simplifies a complex and problematic area. Previous ISDS cases have demonstrated that where investors’ legitimate expectations are protected by an investment agreement, states may find themselves bound by the statements of individual officials who engage with investors, or by “commitments” inferred from general laws and regulations. The text requires only that there be a “specific representation” which gives rise to the legitimate expectation, leaving a very wide scope for interpretation. As such, a host of potential “representations” which do not reflect the intended, democratically-based policy decisions of states, or that originate from remote corners of public administration, may nonetheless be relied upon as enduring and binding commitments on the future policy space of states. The proposal does not make clear how this wholly undemocratic guarantee to investors can be reconciled with the right of states to regulate, unfettered, in the public interest. Like the issue of investor conduct, the right of states to regulate – which should be central to any TTIP agreement – is referred to only in the preamble of the reference text and in the limited provision on Prudential Carve-Out/Exceptions (see question 10). The lessons learned to date from the practical application of the FET standard, and the potential scope of investors’ “legitimate expectations”, provide good reasons for the exclusion of any ISDS provisions from the EU’s international trade and investment agreements.

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.

As highlighted in the answer to question 2, above, Article 207(3) TFEU requires that EU commercial agreements are compatible with internal Union policies and rules. This means that the TTIP provisions on the protection against expropriation, as well as the criteria applying to compensation, should adhere to the principles enshrined in the European Convention on Human Rights (ECHR, Article 1) and in the EU Charter of Fundamental Rights (Article 17(1)). Investment treaties should not put foreign investors in a more favourable position, vis-à-vis public authorities, than natural and legal persons of the EU. EU public authorities should therefore be entitled to enjoy a wide margin of appreciation in their exercise of powers of expropriation, “subject to fair compensation being paid in good time”. In exceptional circumstances, EU law recognises justifications for expropriation without payment of compensation. The principle that the use of property may be regulated by law - in so far as is necessary in the public interest - should also apply to foreign investments as it does to domestic situations of the EU, without discrimination. The Commission’s proposed approach replaces the standards defined by ECHR and EU law with those of international investment law, thereby treating investors’ property rights more favourably than those of EU citizens and EU businesses. The Commission’s reference text assumes that compensation must always be paid and must always be “prompt, adequate and effective”. This approach to expropriation simplifies a complex debate - within investment law - on expropriations undertaken for a public purpose, largely ignoring the alternative approaches to levels of compensation that should be paid to foreign investors. The option to require compensation to be “appropriate, just and equitable” – an approach which would be closer to EU law standards – would grant states a wider margin of discretion and allow them to assess investors’ own conduct, as well as the circumstances around the investment and its expropriation, and to compensate accordingly. This would make it possible to reduce the level of compensation payable where the expropriation serves a public interest. This policy option for treaty-makers is outlined in UNCTAD’s IPFSD Report. In the Commission’s approach, it is further stated that the EU wants to limit indirect expropriation claims which arise from the mere fact that a measure has had an impact on the economic value of an investment. However, the suggested approach would not appear to effectively limit the number of potential claims. The draft clause in the reference text provides a non-exhaustive list of factors which, in addition to an economic impact, would amount to expropriation (including the extent, duration and character of the challenged measures). This would leave to the discretion of arbitrators the finding of practically any other factor, additional to an economic impact, on which to base a claim of indirect expropriation. Terms such as “substantial deprivation” of certain property rights and the implementation of “manifestly excessive” measures which are designed to protect “legitimate public welfare objectives” also leave a very wide area of interpretation for arbitrators in any potential dispute brought under ISDS mechanisms. The breadth of claims brought under “indirect expropriation” provisions is, as the Commission itself acknowledges, a “source of concern”. What these proposals fail to address is that the expansive interpretative trends seen in ISDS to date, which have opened up the possibility of legal challenges to legitimate public policy measures taken by host states, are principally driven by the adjudicative preferences of the arbitrators themselves. The only way to effectively address this concern is to wholly exclude the ISDS mechanism from all TTIP and all other free trade agreements including CETA.

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 right of the EU and of its member states to regulate is only referred to in the preamble of the reference text and in relation to the “Prudential Carve-Out” provision (see question 10). There are no further substantive provisions on which states might rely. Protection of this right requires a clear and broadly formulated provision affirming the right of the EU to maintain and develop domestic regulatory measures in pursuit of its public policy objectives, in accordance with the EU treaties. It must be reiterated that pursuant to Article 207(3) TFEU, the Commission and the Council cannot negotiate and conclude commercial agreements that would conflict with internal EU policies and regulations. The text provided by the European Commission as a reference only mentions the right to regulate in the preamble, not anywhere else in the actual agreement, or in the articles provided by the European Commission for consultation. As such, having the right to regulate mentioned in the preamble of the agreement is not binding on the parties. This was confirmed by a Commission representative at a debate organised by Friends of the Earth on March 13, 2014 . The proposed approach is manifestly ineffective, as the articulation of a specific substantive “Prudential Carve-Out” exception to the protections established under the agreement necessarily implies that other substantive exceptions are precluded. This limits the right to regulate to a narrow list of reservations and exceptions, rather than affirming it as a general principle, encompassing all the policies and public interests referred to in the EU treaties and subject to which all investment protection standards should be interpreted. The further, unpersuasive reference in the preamble of the reference text, to enterprises having respect for internationally recognized standards and principles of corporate social responsibility (CSR) is equally wholly inadequate to the purported aim of the Commission. Without precise and comprehensive provisions detailing the responsibilities of investors to conduct their business in the investment environment with respect to the laws of the host state (including environmental, consumer protection and labour laws), and the effect of investors’ breach of these responsibilities, then such aspirations are effectively meaningless. The weakness of these approaches - to CSR standards and the right to regulate - is particularly important, as it significantly diminishes the capacity of the EU and its member states to regulate the activities of corporations in the public interest. Major international developments recognising the necessity of states to regulate corporate activities – such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises – demonstrate clearly that the EU and its member states must retain a wide scope for regulatory action in order to confront and remedy the often negative impacts of multinational enterprises on the environment, public health, labour and human rights. An ISDS mechanism would inevitably limit this scope, to the detriment of the EU and its citizens, and should therefore be wholly excluded from the agreement. The EU’s approach to addressing the right to regulate in TTIP is unacceptable. As long as ISDS is included in the agreement, the right to regulate will be endangered and there will be potential for the mechanism to create a chilling effect on regulation. ISDS as a whole must be excluded from TTIP and all other free trade agreements including CETA.

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.

ISDS is unnecessary, since the judicial systems of the EU and of its member states, already provide foreign investors with an adequate and complete set of remedies. The EU judicial systems fully comply with the fundamental legal principles which this treaty chapter purportedly intends to extend to investors through ISDS. Recourse to ISDS provisions for EU investors in the US are similarly unnecessary; the judicial system of the US (as well as that of Canada in the case of CETA) provides adequate existing protection to investors from the EU. Furthermore, ISDS mechanisms are incompatible with the principle of the autonomy of EU law and the exclusive jurisdiction of the EU Court of Justice (ECJ), to the extent that they: • allow arbitrators to review EU measures and decide on their compatibility with international agreements which are binding upon the EU (and which are, therefore, fully integrated into EU law); and • offer foreign investors an additional avenue with which to establish the liability of the EU and its member states and their obligations to pay compensation. In relation to the first aspect, the Commission should bear in mind that it is for ECJ to ensure the correct interpretation and application of EU law and the coherence of the EU legal system, as mandated by Article 19 of the EU Treaty. ISDS mechanisms would give arbitrators the task of deciding whether measures adopted by the EU institutions (or by member states, in execution of their EU law obligations) are compatible with the provisions of investment treaties. Such a task necessarily implies that arbitrators would have to interpret EU law (in order to decide, for instance, on its discriminatory effect or on its justification in the light of a particular public policy objective), without having the right or the duty to refer preliminary questions to the ECJ. This violates the ECJ’s exclusive jurisdiction and impinges on the autonomy and uniform interpretation of EU law. The TFEU already provides that the Union shall “make good any damage caused by its institutions” (Article 340(2)). The treaty confers exclusive jurisdiction on the ECJ over the non-contractual liability of the EU and over all claims for the reparation of damages, including those brought by individual investors (Articles 268 and 274 TFEU). This judicial protection is available to everyone, including companies based in third countries. The introduction of ISDS mechanisms would therefore open a loophole in the judicial architecture of the EU. Indeed, under ISDS mechanisms, arbitrators would be called upon to decide whether EU laws and the national laws of EU member states violate foreign investors’ rights. Based on this review, arbitrators would issue rulings on the liability of the EU or its member states towards foreign investors, and could order the payment of compensation. This is clearly incompatible with the exclusive jurisdiction of the ECJ over non-contractual liability claims when the EU acts as a respondent. In the light of the foregoing, and the concerns related to ISDS practice that Greenpeace highlights elsewhere in response to this consultation, the measures proposed by the Commission to ensure transparency and openness in ISDS proceedings appear to be totally inadequate to offset the numerous risks of the ISDS system as a whole. Over the past ten years, minor steps have been taken to increase transparency and public participation in ISDS proceedings, including such measures as proposed by the Commission for allowing civil society submissions in individual cases. Overwhelmingly, these processes have only been exploited to provide a thin veneer of democratic legitimacy to the ISDS system, while the substantive arguments raised by non-disputing parties (on issues of jurisdiction, environmental standards, and international human rights law among others) have been, for the most part, cursorily ignored by tribunals.

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 Commission’s proposed clause is not an innovation in international investment agreements. The ‘fork in the road’ clause does not require investors to exhaust domestic remedies before bringing ISDS claims, as is required of practically every other international judicial mechanism, including cases brought by individuals under human rights treaties such as the European Convention on Human Rights. This comparison betrays the preferential treatment for foreign corporate actors that is created by ISDS mechanisms. It prompts the question, why the Commission feels it necessary to provide these investors with recourse to leapfrog domestic courts, which are deemed adequate for the purposes of the human rights protection under their jurisdiction. The European Commission has repeated on several occasions that ISDS is necessary because EU companies would not have access to US courts in case of dispute, a recent London School of Economics study , concludes that the Commission concerns about the US judicial system are not substantiated enough to justify the inclusion of ISDS in TTIP . The use of such a clause is welcome only insofar as it would avoid farcical situations such as that created by the simultaneous cases brought against Germany by energy company Vattenfall in ICSID proceedings and in the German Federal Constitutional Court. It does not however resolve the issue of ensuring that a state’s right to regulate for domestic public interest purposes is free from the interference of international investors and arbitrators. While in normal circumstances routes to mediation might be welcomed, there can be no meaningful place for mediation between parties to an investment dispute, where one of the parties has the special right to invoke a legal process which will result in a hearing before a quasi-judicial body, which is not fit for purpose and inherently structurally imbalanced. The imbalance this creates between states and foreign investors inevitably alters the balance of power in any negotiations, to the extent that such negotiations are rendered effectively meaningless. We recommend that ISDS be excluded from TTIP and all other free trade agreements including CETA.

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 Commission’s proposal fails to address one of the structural flaws affecting ISDS mechanisms: arbitrators’ lack of neutrality, and the fact that they enjoy significant financial benefit from the existence and continued growth of the ISDS litigation. Only investors can initiate ISDS claims; there is no market for claims brought by states, because states cannot initiate arbitration against investors (routes for state-state arbitration are limited and rarely used). Therefore, the viability of the ISDS system is defined by its capacity to appeal to investors as a lucrative avenue for litigation against states. Arbitrators have a direct interest in the existence and development of a market for ISDS claims, which may well be a primary cause for the unprecedented growth in ISDS claims in recent years. The current composition of ISDS arbitration tribunals is structurally biased towards investors; this in itself should be sufficient to warn the Commission against the inclusion of any ISDS mechanism in EU commercial and investment agreements. The fact that arbitrators often act as legal counsel for parties in ISDS cases has produced a number of critical conflict of interest issues which have been raised in case proceedings and in case analyses. Such structural issues make it practically impossible to guarantee the type of standards and safeguards against misconduct, as would be expected in domestic judicial systems. The implementation of a “roster” system, as proposed by the Commission, is unlikely to mitigate issues of impartiality and independence of arbitrators, as it is effectively only a “back-up” for cases in which the normal procedure for appointing arbitrators fails. The proposal to impose a Code of Conduct on arbitrators cannot be evaluated, since the text of this Code remains unknown. Given that the role of arbitrators is at the core of many criticisms of ISDS, there can be little confidence in such vague proposals to safeguard against arbitrator “misconduct”. Civil society complaints and criticism have raised serious problems of implementation of the Commission’s own ethics rules and unchecked potential conflicts of interest. It is additionally worth noting that the implementation of the EU Commission’s own standards on conflicts of interest among staff has been subject to significant difficulties. The European Commission has not performed well in those areas. Furthermore, while it is true that investment treaties do not provide a roster of arbitrators, the ICSID system does use one. However this approach has not helped mitigate concern of impartiality and independence of arbitrators. In particular, this proposal does not specify which body would have authority to initiate or adjudicate disciplinary proceedings against arbitrators for breaches of the Code of Conduct, or under what circumstances these proceedings would lead to the removal of an arbitrator from a panel. Similarly, the proposal fails to lay down the conditions for the circumstances under which the nullity of an award – as a consequence of an arbitrator’s misconduct - could be established, including which body or institution would have authority to do this. Experiences of ISDS litigation to date have demonstrated that arbitrators tend to adopt a narrow approach to disputes wherever possible, often privileging the commercial and private law aspects and sidestepping other issues of public interest which may be relevant. In light of the curt treatment given by arbitrators to public policy issues, the proposed improvements do not come near to providing any reassurance that future ISDS disputes will be decided by arbitrators with either knowledge or competence to adequately understand or assess the manifold public interest concerns that may be affected.

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.

Many of the foreseeable ISDS claims which might arise from the TTIP agreement, whilst having an impact on the EU or its member states’ right to regulate on environmental, labour or other public interest concerns, may not be easily dismissed as frivolous or “obviously without legal merit”. The Commission’s approach is limited to proposing the sort of procedural efficiencies that are desirable in any judicial system. Ensuring that states do not incur costs for such claims is a reasonable aspiration in this respect. However, this approach does not even begin to address the fundamental concern that it will ultimately be left to the discretion of private arbitrators whether claims that impact on areas of public interest or the regulatory space of states are allowed to proceed. These cases may well raise substantive legal issues that would not be dismissed as frivolous or unfounded. It is not so much with frivolous or unfounded cases that civil society is concerned with but rather with the claims that make it to the arbitration panels and allow some companies to abuse the system. Under the current Commission proposals, cases such as the ones filed by companies Philip Morris against Australia’s attempts to introduce anti-tobacco legislation or Lone Pine Resources against Québec’s precautionary moratorium on fracking would still be possible. Claims that can easily be dismissed are only the ones without any legal merit according to the text. The mere fact that states have to defend claims, in which public policy decisions are challenged by foreign investors, generates an unacceptable risk of damaging the democratic process and the capacity of states to regulate in the public interest. This risk can only be effectively mitigated by wholly excluding the ISDS clause from the TTIP agreement. The European Commission’s reform proposal will only address the issue of costs (case terminated without expensive and long procedures), but in no way the scope of the decisions that would otherwise be made on jurisdiction or the merits. Imposing the burden of litigation costs on the losing party in ISDS cases is consistent with a generally accepted legal principle. However, the introduction of such a principle in the context of ISDS may be insufficient to dissuade investors from starting unmeritorious claims, given the significant imbalance in the levels of costs incurred by investors and by states. States generally incur significantly lower legal costs and this may not therefore be a particularly effective deterrent to potential litigants. Investors on the other hand tend to incur vast legal costs, and the danger of the defending state having to pay these if they lose the case is likely to have a significant impact on their defense of proceedings, as well as on the decision to settle a claim and on any related negotiations or mediation processes.

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 potential to limit in any way the scope of ISDS cases is welcome, given the structural deficiencies we have described above. However, it is difficult to satisfactorily assess the efficacy of the “filter mechanism” proposed by the EU, until this has been tested in practice. It is moreover unclear why “financial stability” is the only area of the proposed text in which the states’ right to regulate is given any substantive detail. The Commission’s proposals give no recognition to the necessity for governments to act quickly and unhindered, and free from the threat of costly international litigation, in other situations of crisis, such as for environmental and health protection, in labour relations, or other areas of public policy. There is no justification for such a limit to be established only with regard to measures that are undertaken to maintain the stability and integrity of the financial system. Measures taken by states in other areas of policy should benefit from at least the same level of protection. Indeed, the ISDS system poses a threat to the integrity of democratic systems of governance, but the Commission’s proposals make no such attempt to protect these. The Commission’s proposal ignores the very fact that ISDS claims often challenge regulatory measures undertaken for public policy reasons - resulting in these policies being subject to a quasi-judicial review by privately appointed arbitrators. The threat this represents to the integrity of fundamental principles of democracy and the rule of law should be addressed by excluding the ISDS mechanism altogether. The use and scope of the proposed filter mechanisms will not prevent abusive use of the ISDS mechanism and will not serve the announced purpose. The only way to ensure financial stability and other public interest objectives is not undermined is by excluding ISDS from TTIP and all other free trade agreements including CETA.

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?

The Commission itself acknowledges that ISDS mechanisms raise a number of fundamental concerns that should logically lead to their exclusion from trade and investment treaties. Nevertheless, the Commission appears to either underestimate or ignore such concerns, and merely endeavours to propose remedial measures that are manifestly insufficient to address them. In contrast to the Commission’s analysis, ISDS case law has shown that the scope for “undesirable interpretations” by ISDS tribunals is in fact very wide. The purported “clarity and precision” of the provisions proposed by the Commission still leave significant scope for interpretation by tribunals. A mechanism allowing for the treaty parties to agree on binding interpretations is highly unlikely to be sufficient to remedy this problem. Past experiences of treaty parties adopting binding interpretations have demonstrated the limits of their value. For example, the Notes on Interpretation of the “fair and equitable treatment” (FET) standard, issued in 2001 under the aegis of the NAFTA Free Trade Commission, were subsequently subject to significant challenge in the decisions of ISDS tribunals, which simply “shifted the goalposts” in favour of a broader interpretation of the FET standard. The Commission acknowledges that the “balance” between “investment protection and the right to regulate” needs be “corrected”. This is because ISDS arbitrators have, in their decisions, persistently undermined states’ right to regulate. The claim that ISDS tribunals “would have to respect” the interpretations of the treaty parties is therefore based on a naive and high-risk assumption which ignores lessons learned from ISDS case law. The immense power that is invested in ISDS arbitrators has produced outcomes which have frequently frustrated the expectations of parties to investment agreements. It is certainly desirable that this trend be addressed, but the proposed “safety-valve” is unlikely to achieve this. In light of past experiences, the comprehensive exclusion of ISDS in the TTIP would clearly be the most prudent policy, and the only effective method to ensure that the EU’s investment protection policy does not produce “undesirable outcomes”. According to the reference text, it is up to the committee on services and investment to make a recommendation to the CETA trade committee on the adoption of the interpretations of the agreement. It does not outline an automatic process for concerns to be raised. When it comes to the Commission proposals on how guidance by the parties would look like in CETA, the reference text mentions that “interpretation adopted by the CETA Trade Committee shall be binding on a Tribunal established under this chapter. The CETA Trade Committee may decide that an interpretation shall have binding effect from a specific date”, while leaving it unclear what will be the exact process to ensure this interpretation becomes binding on the tribunal. It does not mention to whom arbitrators will be accountable to and what happens in cases when they do not follow the provided interpretation. To underscore the relevance of that point, in the context of NAFTA, there are several examples of arbitrators ignoring the supposedly binding interpretations provided by either the US, Canada, or Mexico. The Commission’s proposal on guidance by the Parties to interpret the agreement are neither sufficient nor satisfactory. We believe ISDS should be excluded from TTIP and all other free trade agreements including CETA.

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.

The creation of an appellate mechanism might be, in principle, a welcome process of review of the rulings of ISDS tribunals, which are at present largely immune from any challenge. However, the stated aims of the Commission’s in proposing this mechanism - to “increase legitimacy” and “ensure uniformity” - betray the hollowness of the Commission’s approach. The proposal contains no further provisions on the functioning of the appellate body, its constitution, jurisdiction, or how leave to appeal would be granted. The lack of any comprehensive plan for the appeal mechanism suggests that its primary function is merely then to “increase legitimacy” – i.e. public confidence – in ISDS by constructing a facade of the sort of functions one would expect to find in a judicial system, without any of the qualitative standards or substantive rules that might ensure that fundamental principles of law are respected or applied. The CETA reference text provided mentions that “the committee on services and investment shall provide a forum for the parties to consult on issues relation to this section, including […] whether, and if so, under what conditions an appellate mechanism could be created…” This creates further uncertainty, partly by leaving it up to the committee on services and investment to take the issue forward, and partly by allowing this committee to bypass the right of scrutiny of parliaments and citizens. The problem of uniformity and consistency in ISDS rulings is complex and relates not only to the interpretation of single treaties but also to the interpretation of identical provisions in various different treaties. The ad-hoc nature of ISDS tribunals, as well as the variety of treaties under which claims are brought, has resulted in arbitrators simply cherry-picking precedents from ISDS case law in order to justify their decisions, without any systematic or comprehensive review which would ensure consistency or predictability of the law. It is unclear precisely how the decisions of the appellate body under the TTIP agreement would operate in the wider sphere of this case law. The mechanism may therefore - contrary to the Commission’s stated intention - exacerbate this problem and create even greater inconsistency in ISDS rulings. Even with the implementation of the Commission’s proposals, the ISDS system would not to be fit to provide either consistency of rulings or an effective or meaningful recourse to appeal which would guarantee states’ right to regulate. The ISDS mechanism should therefore be excluded from the TTIP agreement. The Commission’s proposals for an appellate mechanism do not ensure consistency, predictability or legal correctness of the agreement, unlike it is guaranteed in the normal court systems. The fundamental instability brought by the introduction of the ISDS mechanism remains, which is why ISDS should be excluded from TTIP and all other free trade agreements including CETA.

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 proposals do not amount to a reform of the ISDS system, but a mere tinkering with the sorts of clauses typically found in existing investment agreements, while failing to meaningfully address key criticisms of it. The entire structure of this consultation is designed to suggest that the Commission’s proposals are progressive in comparison to existing agreements. The description of approaches in “most investment agreements” largely ignores the many significant developments in investment treaty-making over the past fifteen years and the spread of new agreements and model agreements which attempt to balance investment protection with standards of investor conduct, and to reduce or wholly exclude the scope for ISDS claims. Meaningful attempts to address inherent imbalances in the system are overall lacking. The proposals hardly take into account the benefit of prior ISDS experience or the wealth of available legal literature and policy tools, such as those developed by UNCTAD. The lack of any extensive, substantive standards of corporate social responsibility for foreign investors is similarly lamentable. That the Commission’s strategy is to ignore the blatant, tangible and costly risks of ISDS, without taking much-needed radical steps to redress the system’s inherent imbalances, betrays the influence of massive lobbying on behalf of corporations who are committed to the ISDS mechanism. It is entirely foreseeable that the proposed clauses will be easily navigable by the small clique of experienced arbitrators and lawyers who dominate the ISDS circuit, who will strive to ensure that the ISDS system continues to serve those who are currently its primary beneficiaries: namely, corporations and the lawyers themselves. Therefore, the only way to ensure predictability and consistency around investment protection is to exclude ISDS from TTIP and all other free trade agreements including CETA. Many experts, academics, organizations and even EU member states regard the inclusion of ISDS in the context of transatlantic investments between Canada, the United States and the EU as unnecessary. As explained above, there are fundamental doubts about the compatibility of ISDS mechanisms with the exclusive competence of the EU Court of Justice to interpret EU law and with that Court’s exclusive jurisdiction over non-contractual liability claims against EU institutions. In the light of the above, ISDS mechanisms should be excluded from the agreement. The Commission should furthermore commit to excluding any ISDS mechanism, not just in the TTIP agreement, but also in CETA and all future international trade and investment agreements. In recognition of the concerns about ISDS expressed in the responses above, a number of states have already rejected any future commitment to ISDS in their investment policies, and it would be prudent of the Commission to do the same. The manner in which this consultation is being conducted is illustrative of a lack of genuine willingness on the part of the Commission’s to provide a meaningful space for public opposition to the inclusion of ISDS in TTIP. The design of the consultation questions is overly legalistic - leading to the exclusion of any potential participants not previously versed in trade, investment or ISDS issues - and moreover presumes the inclusion of an ISDS mechanism in the final agreement. Scant opportunities are provided for participants to object to the ISDS mechanism generally, only when reaching this last question (number 13) of the 44-page technical document that the respondent has the chance to express his/her broad views on the system. The Commission’s commitments to transparency described in its approach to ISDS in the TTIP agreement are also highly unpersuasive. It is questionable to what extent these commitments can be taken seriously when the Commission has gone to lengths to prevent the publication of key negotiation documents.