Current portal location

Website content

Consultations

Respondent details

  • Company/Organisation: Confederation of Finnish Industries EK
  • Location: Finland
  • Activity: Confederation of Finnish Industries EK is the leading business organization in Finland. EK's main task is to create an internationally attractive and competitive business environment for companies operating in Finland.
  • Profile: Trade association representing EU businesses
  • 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?

EK encourages the use of a broad, comprehensive and open-ended asset-based investment definition. Defining the scope of the agreement through a clear yet open-ended ("such as", "include") definition allows at the same time sufficient certainty and flexibility as well as for the agreement to stand the test of time. We agree that also returns and altered forms of invested assets qualify and are to be treated as investments. As to the definition of covered investments, EK agrees that to receive protection investments need to be made respecting the laws of host country. However, the effect of this requirement cannot be that e.g. a relatively minor misunderstanding or technical mistake, possibly out of the investor's control, could deny protection for an investment that would otherwise be covered. As to the definition of investor, EK's understanding is that the requirement of substantial business activities refers to activities in the home country party, and its aim is to exclude from the scope of the agreement 3rd country (non-party, i.e. non-EU, non-US) investors who would only establish "shell companies" in the home country party in order to benefit from (or abuse) the agreement when investing in the host country party. If our understanding is correct, EK agrees with the approach and supports the requirement. (If, instead, the requirement is meant to establish a threshold and scrutinize the level of activity or value of assets of the investor/its investment in the host country, we would be skeptical. Setting up activity and investing abroad is a gradual process and protection needs to be enjoyed from early stages on.) EK supports defining investor in a manner that clearly includes the pre-establishment phase ("seeks to make, is making").

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.

Non-discrimination, in the forms of National Treatment and MFN, are fundamental elements of trade and investment agreements. EK considers it important that these protections are granted in TTIP to the largest extent possible, including both pre- and post-establishment phases. The reference texts for these non-discrimination standards and the definition of investor indicate that investors would enjoy NT and MFN also in the pre-establishment phase. Similarly the texts indicate that covered investments would enjoy NT and MFN, thus their investing of e.g. returns could not be discriminated against. Adopting these approaches as the general rule is supported by EK. Any exceptions to the NT and MFN, e.g. through limiting the right of establishment, need to be minimal, clearly defined and circumscribed. With regard to incorporating WTO trade agreement exceptions, EK encourages prudence to ensure that these fit into the investment context. When applying such incorporated exceptions our assumption is that also e.g. WTO jurisprudence will be taken into account, as instructed by the Vienna Convention General Rule of Interpretation. Not allowing the Importation of Standards from other agreements guards the integrity of a treaty and prevents a form of treaty shopping. As such, this limitation on MFN is understandable and acceptable. Yet agreements need to stand the test of time and compared to agreements currently negotiated future agreements will likely go further in granting rights and protection, and cover substance that cannot be foreseen today. Thus allowing importation of substance (and not limiting MFN to the actual treatment provided by a party) would better guarantee a level international playing field. However, considering the positive aspects mentioned above and trusting that EU investment agreements will be of gold-standard, EK can accept the limitation. Alternatively, if the Importation of Standards and its consequences on reciprocity (i.e. no effect on the obligations of the other party) were adopted, parties should consider limiting importation to the content of investment agreements only – that is, excluding importation of for example WTO GATS commitments (including Mode 3, i.e. trade in services through establishment). With no express limitation these commitments could become subject to dispute settlement outside the WTO system. Economic integration agreements should also be excluded from the scope of importation as the reference text already indicates.

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?

Using different formulations, FET has been included in investment agreements to provide protection against reprehensible host country action and a certain level of protection is provided already through customary international law. While FET is necessary as an absolute standard of protection (as opposed to the relative non-discrimination standards), EK recognizes the need to better define what constitutes a breach of the FET obligation. However, EK questions the use of a closed list of FET breaches. No drafter can foresee future forms of host country action that investors should be protected against. Further, highly detailed breaches will create uncertainty through introducing new concepts (e.g. "manifest arbitrariness", "targeted discrimination on manifestly wrongful grounds") to interpret. Alternatively, guidance could be provided through an open, illustrative list ("such as", "including") of breaches. In any event, it should be made clear that for the host state to have breached FET there is no requirement of bad faith on its part. The provided explanation and the reference text appear to diminish Legitimate Expectations from a standalone protection to optional guidance that a tribunal may take into account when applying the above-mentioned closed list. Without assuming the existence of a Stabilization Clause (as EK by no means questions e.g. the right to regulate), an investor needs to be able to trust the host country and its authorized representatives. Thus, a specific representation to induce an investment that creates a legitimate expectation and that an investor has relied on in deciding to make or maintain an investment, should, if frustrated, be a standalone ground for a FET claim. Such protection for Legitimate Expectations should be clearly defined to avoid confusion with expectations that are legitimate e.g. merely in the sense that they are acceptable or not illegal (such as an investor's expectation of profit). It should be noted that legitimate expectations is a fundamental principle of the EU, firmly established in EU case law. EK agrees with preventing host countries from using their sovereign powers to avoid contractual obligations and supports drafting the agreement so as to ensure that business activities integral or relevant to an investment are not left without protection. That being said, we can agree with the approach of not elevating ordinary contractual breaches to the level of breaching an international agreement. This approach, i.e. not having an Umbrella Clause, should not, however, completely and categorically exclude contract breaches from the scope of the protection provided as they may play a role in treatment that constitutes a breach of an enumerated protection.

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.

Protection against Expropriation, both in its direct and indirect forms, is a fundamental element of investment protection. EK agrees with the approach of providing a tribunal open-ended guidance to determine whether Indirect Expropriation has taken place. What EK does not agree with is the limitation that would exclude certain Indirect Expropriations prescriptively from the scope of protection. Thus we do not support leaving investors generally without any compensation whatsoever if a host country measure is taken to protect an open-ended category of public welfare objectives. EK's non-agreement does not in any way imply opposition to the host countries' right to regulate or determine their policies. Instead, it advocates responsibility on behalf of hosts and respect for investors' rights and property. As we understand the current reference text, it denies any compensation for the loss of an investment in case the new relative standard is not met. While the objective of the limitation is understood, the standard is very high and subject to interpretation (what effect is "in the rare circumstance" meant to have; when is a measure "so severe in light of its purpose that it appears manifestly excessive"?; given an important purpose, what would be severe enough?), and leaves to future discretion the objectives that can be covered.

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 to regulate is indisputable and EK fully agrees with confirming it in the preamble and various prescriptions in the agreement. To the extent that this right and related agreement articles entail carve-outs to prescribed investment protection, they must be limited and well-defined. (See also reply to Q2 above.) We also suggest the inclusion of a requirement that any regulatory measure be "otherwise consistent" with the agreement. EK would like to point out that the right to regulate does not give any democratic government a carte blanche. Additionally, it is in the very nature of any agreement to create a framework, in which parties agree to operate. If agreements had no effect, there would be no point in having them. (The consultation text refers to procedural ISDS aspects under Q5 but also under Q9 and Q11, possibly others. We respond to these issues under the later questions.)

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.

EK supports increasing transparency of ISDS procedures and awards, as well as allowing 3rd party participation in these disputes that concern also public affairs. Increased transparency will allow the public to be better informed of the facts of each dispute and investment protection more generally. On the other hand it could easily lead to the politicization of a dispute, which among other things urges prudence in defining and developing it. A main objective of increased transparency should be improving the accountability of ISDS. Thus, it is neither appropriate nor sufficient to simply aim at making everything public. Instead, a certain amount of discretion should be used to give the broader public a realistic opportunity to acquaint itself with the disputes, their facts and related circumstances, applicable agreements, etc.. An option could be to agree on a level of automatic openness that could be complemented with the opportunity to request further information. EK finds it crucial that increasing transparency does not jeopardize the protection of confidential business information. This is one of the conditions that will likely require the redaction of materials before they can be made public. While not all redaction work would have such effect, it needs to be ensured that the chosen approach and practices do not display disputes in a distorted manner that would only promote misunderstandings. We would seek guidance on why the carefully drafted and recently adopted UNCITRAL Transparency Rules are proposed to be expanded as regards the scope of document disclosure. There may be a need to examine the legal and practical (including cost) consequences of further disclosure obligations. Also more generally we would seek guidance on who is intended to bear the increased cost and be responsible for burdens that will follow from increased transparency (document production, redaction, open hearings and their security, etc.). This issue is linked to the broader question of cost allocation (see Q9 and Loser Pays).

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.

EK would emphasize that ISDS is a crucial element of investment protection and in ensuring the enforcement of investment agreements. If a breach of a substantive protection or obligation is suspected, an impartial process through which a dispute can be decided is necessary. The use of local courts is an option but they may not have the power to apply an international agreement or a host state may have immunity in its own courts and cannot thus be challenged. Also in this light EK agrees that an investor should be able to withdraw its case from a local court to pursue it in ISDS. EK also agrees that multiple claims concerning the very same breach should not be pursued, not simultaneously in different fora (e.g. local courts and ISDS) nor subsequently (unless the result of a prior procedure has not resolved the substantive dispute at hand). We would, however, raise the possibility of different causes of action (as opposed to the breach of the investment agreement) based on the same facts supporting claims against different defendants and providing different remedies. As we understand the reference text, it would only prevent multiple claims with respect to the measure alleged to constitute a breach of an investment agreement -- not prevent for example a legal proceeding to determine related wrongdoing of a private 3rd party or a charge of bribery.

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?

EK fully agrees with the requirement that arbitrators be independent, impartial and free from conflicts of interest. When developing a Code of Conduct for arbitrators, guidance should be sought in the already existing Codes and if possible, the latter or parts of them could be incorporated by reference into the agreement. Using this technique would allow the content of the agreement to evolve along with the Code(s). EK encourages the continued use of the well-functioning approach, under which the disputing parties are free to appoint one arbitrator each and these two agree on a president of the tribunal. This approach gives neither party an advantage and is thus in line with the requirement of impartiality, and also better allows the appointment of arbitrators who have the required case-by-case expertise. EK can also agree with creating a roster of arbitrators for the optional use by the disputing parties or for the use of another appointer in case the disputing parties are unsuccessful in constituting a tribunal. Any possible roster would need to be large enough in number and provide sufficient expertise and diversity to cover the various cases that may arise. If the roster were small in number and in practice a closed list instead of a living document, this would only limit the pool of international lawyers available for tribunals. In the reference text the establishment and maintenance of the roster is assigned to a Committee that also has other tasks related to the settlement of investment disputes. Taking into account assumed party representation in the Committee, a concern arises as to impartial treatment of disputing parties, i.e. investor/claimants and host country/responding parties. A legal procedure must be safeguarded against improper interference or even appearance of such. EK fully understands the approach, according to which a rendered award may have to be annulled or revised in the event that one of the arbitrators is later found to have been in breach of an applicable Code of Conduct. However, this does not equal the right of the losing party to request a reversal. While the arbitrator would have committed misconduct, this should not have such an automatic effect. Instead, the case-by-case consequences could be more varied, also considering that the arbitrator in question may have been appointed by the party that lost. Further, while it is EU-level agreements that are being negotiated EK would question the true usefulness of categorically excluding all EU nationals from the role of presiding arbitrator when another EU country is involved in the dispute. In practice an agreement providing for such exclusion of EU and US nationals would result in a large number of qualified and respected professionals being prevented from taking on the role of president of a tribunal.

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.

EK understands the attempts to create generally applicable rules on the apportionment of costs. This could help prevent forum shopping based on different rules or practices that may have developed under different arbitration systems (ICSID vs. UNCITRAL). EK supports the early dismissal of claims that are obviously without legal merit or legally unfounded. In such situations we also agree with adopting the Loser Pays principle. Loser Pays is a settled principle in Europe but its general application to investment disputes, as a rule in ISDS context is not as straightforward. While it intuitively provides a simple solution that leads to fair apportionment of costs, the principle needs to be considered more broadly. Loser Pays could make host countries reluctant to defend cases that they deem important but that are uncertain. The principle could also raise the pecuniary value of a strong case (initially of low value), which could lead to encouraging the pursuit of the case instead of settling. This would only increase costs to be collected from the loosing defendant. Also those with nothing to lose or those with “limitless” means might have no incentive to find amicable solutions to strong cases, even if these are of low value. These are a few views on this principle or rule that can work in different directions. Having said the above, we recall that arbitration rules already provide a toolbox for tribunals to allocate costs and adjust them to reasonable level. It is possible to retain flexibility even if there is a general principle or rule to be used as a starting point. We would request more guidance on the suggested Loser Pays approach and clarification as to the reference text and its treatment of costs in different scenarios (frivolous and unfounded cases vs. cases that proceed to arbitration). As the text currently stands we are uncertain as to its intended interpretation and application.

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?

EK encourages ensuring that financial services do not unjustly receive lesser substantive protection and are not unjustly denied access ISDS proceedings. Any exceptions to protection and particularly those applicable only to certain sectors or activities need to be well founded, minimal, clearly defined and circumscribed. Further, legal procedures must be safeguarded against improper interference. According to the reference text the task of determining whether a host country measure enjoys a valid defense (prudential carve-out/exception) is assigned to a Committee that also has other dispute settlement related tasks. If the Committee finds that a defense exists, the investor's claim would be deemed withdrawn. Taking into account assumed party representation in the Committee, a concern arises as to impartial treatment of investor/claimants and host country/responding parties. While the latter would be represented in the Committee, there is no information e.g. on the right of the claimant even to be heard.

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?

EK would like to differentiate interpretations that are adopted through reviewing an agreement or basically conducting new negotiations to develop it further from interpretations provided to a tribunal while a case is pending. The former type we support, excluding retroactive effect of the interpretations. What we object to is the latter type that would basically allow parties to change the law or command its interpretation after the fact. Again, legal procedures must be safeguarded against improper interference. EK can support the right of a non-disputing party to participate in the proceedings e.g. through submitting a non-binding submission on the interpretation of the agreement. As is suggested, disputing parties need to be given a reasonable opportunity to present their observations on any such submission. Similar right to present observations needs to be granted as regards any third party submission.

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.

EK can support the establishment of an appellate mechanism that could promote consistency and reduce uncertainty in investment protection. We would, however, caution against creating a mechanism that would make it a rule that disputes go through a two-tiered proceeding. Justice delayed can be justice denied and the relative speediness of ISDS needs to be safeguarded. An appeal should not become a norm to the losing party. To avoid this, limiting grounds for review to particular recognized grounds would need to be considered. EK would encourage for any development in this area to take place multilaterally in cooperation with stakeholders. We would request guidance on how the Commission intends to pursue this matter further.

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?

1. 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? EK supports attempts to improve the investment protection system in cooperation with the US and to agree with the US on non-discriminatory treatment and appropriate protection of the parties' foreign investments. We have provided our detailed views on substantive investment protection and its enforcement above and below briefly reiterate some of our main points: - EK supports defining the scope of investment agreements clearly yet in an open-ended manner, which allows sufficient certainty but also flexibility. To the extent possible, both pre- and post-establishment phases should be covered. - EK encourages granting National Treatment and Most-Favored-Nation Treatment to the largest extent possible, including both pre- and post-establishment phases with minimal exceptions. - EK recognizes the need to better define breaches of Fair and Equitable Treatment but questions the use of a highly detailed closed list and diminishing Legitimate Expectations from a standalone protection to optional guidance. EK encourages making clear that there is no requirement of bad faith on behalf of the host state to determine it has breached FET. - EK considers protection against Direct and Indirect Expropriation a fundamental element of investment protection. EK agrees with providing open-ended guidance for determining whether Indirect Expropriation has taken place but does not agree with excluding certain Indirect Expropriations prescriptively and fully from the scope of protection. - EK fully agrees with confirming in the agreement the right to regulate. Any related carve-outs to prescribed investment protection must be limited and well-defined. - EK supports increasing transparency of ISDS procedures and awards. In doing so we also urge the negotiators to use already existing commonly agreed rules. - EK finds ISDS a crucial element of investment protection and ensuring the enforcement of investment agreements. Compared to local courts that may not have the power to apply international agreements or the required competence or resources, ISDS provides an impartial process for deciding disputes. - EK fully agrees with the requirement that arbitrators be independent, impartial and free from conflicts of interest. With regard to developing a Code of Conduct, guidance should be sought in the already existing Codes and if possible, the existing codes incorporated by reference into the agreement. Consequences in case of a breach of a Code need to vary based on the breach and its possible effects. - EK supports the early dismissal of claims that are obviously without legal merit or legally unfounded. In such situations we agree with adopting the Loser Pays principle. We wish to receive guidance and further details as to a more general application of the principle. - EK encourages ensuring that financial services do not unjustly receive lesser substantive protection and are not unjustly denied access ISDS proceedings. - EK can support party guidance in the form of interpretations adopted through reviewing an agreement to develop it further. We object to binding interpretations provided to a tribunal while a case is pending. - EK can support the establishment of an appellate mechanism but would caution against creating a mechanism making a two-tiered proceeding the rule. Any development would best be done multilaterally. 2. Do you see other ways for the EU to improve the investment system? EU Member States have numerous bilateral investment agreements that remain in force. To improve the investment system new EU-level investment agreements need to be negotiated to replace them. EK encourages these negotiations that provide the opportunity to address raised concerns in appropriate ways and for an investment regime covering all EU Member States equally. The alternative to new EU-level agreements is continuing with the already existing web of bilateral agreements and the varied protection and procedures that they provide. 3. Are there any other issues related to the topics covered by the questionnaire that you would like to address? We are pleased to remain at disposal to continue discussion and to provide further information on the topic.