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Respondent details

  • Company/Organisation: The Chambers of Commerce of Ireland (ICC Ireland)
  • Location: Ireland
  • Activity: Representing the interests of Chambers of Commerce and their members throughout Ireland
  • Profile: Trade association representing EU businesses
  • Transparency register: No
  • 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?

1. We believe that the objective of the EU to define investment and limit the investment protection to those investments made in accordance with the laws of the host State is laudable. Such limitation will avoid abusive investments and, for instance, the use of bribery. 2. However, so-called legality clauses have been abused by respondent States in the past by invoking laws that are obscure or have fallen out of use – only to be “re-activated” for the purposes of the arbitration. In order to prevent abuse, the clause should be rephrased as follows: “made in accordance with the investment admission regime of the host State in force at the time of making the investment. The investment admission regime must be published by the host State in a transparent and easily accessible manner and must be notified to the home State or Contracting Party of the investor. For the purposes of this Treaty only duly published and notified rules for the admission of investments form part of the admission regime of the host State.” 3. Moreover, we have the following comments concerning the proposed text and some of the objectives of the EU: - The characteristics of the investment: the EU–Canada Comprehensive Economic and Trade Agreement (CETA) makes reference to any kind of asset “which has the characteristics of an investment, such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk, and a certain duration”. The term investment has not been defined, either in the ICSID convention or in investment law, and no clear objective test has been agreed upon. The use of “such as” makes it possible for arbitrators to limit the applicability of the protection by adding other criteria (i.e. development of the host state). It creates uncertainty for both investors and States. - The duration of the investment: the CETA makes reference to “a certain duration”. This could be understood as limiting the protection to investments that have already lasted a certain duration. 4. Therefore, the first paragraph of the definition should read as follows: Any kind of asset or interest (whether current, future, actual or contingent) that an investor owns or controls, directly or indirectly, which has the characteristics of an investment, namely: - the commitment of capital or other resources, or - the expectation of gain or profit, or the assumption of risk, and which has been (x) made or (y) in the case of the assumption of risk taken or (z) is or has been contemplated for a certain duration. 5. The second paragraph (examples) of investments should address the following concern: - ‘Intellectual property’ as an investment should be defined to cover methods of transmitting or transferring intellectual property, including but not limited to all legal instruments (e.g. all types of contracts, which in turn comprise all types of license agreements). - All methods of providing legitimate marketplace exclusivity should be covered in the treaty. This comprises, without limitation, all types of regulatory exclusivity or protection associated with pharmaceuticals or other life sciences, such as regulatory data protection (e.g. clinical data). - The exclusion of so-called “shell” or “mailbox” companies owned by nationals of third countries from protection might create some difficulties and excludes investments that should be protected. - The non-exclusion of treasury bonds from the scope of protection might be dangerous for European States when looking back at the Euro crisis and the need to restore, strengthen or maintain investor confidence in certain euro denominated Member States issued sovereign bonds or corporate bonds issued by companies incorporated in EU Member States. - Limitation of the protection in situations where investors have already committed substantial resources to the host state: This objective does not seem right and is not consistent with CETA. - CETA does not limit the protection to investors that have already committed substantial resources as investors that seek to make or are making investment will be covered. 6. It is of note that an investor can commit enormous sums of money to prepare an operation before any capital or resources are physically transferred to the host State. 7. If the protection were to be restricted to situations where investors have already committed substantial resources to the host State, many investments that should be protected would as a consequence not be protected. This is particularly true as to SMEs and/or first time cross border investors. 8. Moreover, the use of the word “substantial” may be seen as a limitation regarding the amount at stake in the investment creates uncertainty.

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.

9. The non-discriminatory treatment of international investment is a necessary condition for the development of a level playing field for FDI worldwide which would improve the allocation of capital and minimize distortions, releasing additional resources. As the Commission has noted: “[d]iscrimination on the basis of the nationality of the (ownership, control, or place of residence) investor does not make much sense given the complex organizational structure of multinational companies”. 10. The MFN principle is one of the fundamental elements of international investment agreements and of the WTO system. 11. Since BITs typically cover investments established in accordance with the laws of the host country, the MFN clause applies, as a general standard, to post-establishment treatment of foreign investments. Some other BITs, for instance those concluded by the US and Canada, as well as the NAFTA, also include the MFN principle with respect to the establishment (or admission) of foreign investments. 12. We have serious concerns about the proposal to, in effect, disapply the MFN principle in the TTIP investment chapter. We fear that this could set a significantly negative precedent for future agreements in which MFN treatment plays an important role as regards further liberalization. 13. MFN is a driver that makes investment treaties living instruments and creates a level playing field for all investors. European investors would be cut-off from benefits that the USA may grant to non-European investors in existing and future agreements. This could create a serious imbalance and lead to a loss of competitiveness for European businesses as opposed to other investors in the USA. 14. MFN should also extend to the right of the investor to access ISDS. The current discussion about excluding the right to seek redress in arbitration from the scope of MFN is misplaced. The right to seek redress is a substantive protection (as is the right to a fair trial or the right to be treated fairly and equitably). Indeed the right to seek redress is perhaps the most important substantial protection granted in a treaty as there can never be a true substantive right unless it can be enforced. 15. MFN would also not create a burden on the Contracting Parties. MFN is guaranteed in existing Friendship and Shipping treaties between the USA and European States. Such treaties (including their predecessors) have been in force for nearly 100 years. 16. The EU should also afford MFN treatment to the pre-establishment phase. This can be done by explicitly referring to establishment-related activities (e.g., “establishment, acquisition or expansion”). Under such circumstances, the entry regime is governed by the treaty itself and not by the domestic framework. When combined with NT pre-establishment commitments, the system offers more transparency, certainty and predictability for investment flows.

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?

17. The right to fair and equitable treatment (FET) and the observance of obligations (umbrella) clauses as well as the right to ISDS are the most important protections for investors. 18. A treaty that does not have effective FET and umbrella clause protection as well as effective ISDS system provides little practical value. In this context, we would encourage the Commission to be cognisant of setting a precedent in TTIP which could undermine the protections afforded to EU firms by planned agreements with other third-countries,. 19. At the core of FET is the principle that a State may regulate, but may only do so in accordance with rule of law principles and that it has to pay compensation, even if the regulation was made in good faith, because it imposes an excessive burden on an investor. Thus, the concept of FET is by no means inimical or antagonistic to the State’s right to regulate, but it is a necessary corollary of that right in a rule of law State. No “extension” of FET 20. It is suggested that FET has been interpreted “too broadly” by tribunals and criticises the concept of legitimate expectations. This is not due to a broadening of the FET standard but a side-effect of a limitation of the expropriation provisions by arbitral tribunals over the last decade. Tribunals as collective decision making bodies tend to converge to a finding of a violation that may be perceived by the losing party as “less offensive”—a finding of a violation of FET rather than a finding of an illegal expropriation, even though the facts support a finding of expropriation. Thus, FET has replaced the prohibition on indirect expropriation in many if not most situations and the perceived “growth” of FET is correlated to a weakening of expropriation findings. 21. The proposed “limitations” of legitimate expectations would further reduce the protection and create a gap between what was protected under the expropriation provision until recently and what is today a gap which is filled by FET. The protection of legitimate expectations must therefore be preserved. FET and Umbrella Clause 22. The concepts of FET and umbrella clause are separate concepts and should not be mixed up in the same provision. While FET is based on the relationship between the State and the investor and touches upon the principle of proportionality, the observance of obligation/ umbrella clause is based on the principle of pacta sunt servanda. Closed list 23. We would caution against the concept of a closed list per se. The notion that future legal situations (as regards factual circumstances, the State’s responses to them as well as the types of businesses and investments and the ways in which they can be affected) will be the same or largely the same as in prior cases is illusory. CETA 24. The Commission states that “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”. This means that a State could not be held liable for any violation of the right to FET. The proposed “limited set of basic rights” is a collection of protections other than FET. Those protections are separate rights under existing treaties and model BITs both of the US and European States, as well as in general EU and ECHR law. 25. The core content of the right to FET, the right to be compensated in case of wrongful regulation or for an excessive burden imposed by bona fide regulation, are not included. Not even in the form of a renvoi to international law as is done in NAFTA. 26. The CETA draft also raises concerns as regards protection against arbitrary treatment. Limiting the protection against arbitrariness to “manifest” arbitrariness might suggest that a “bit” of willful disregard for the rule of law is acceptable for the EU. This is concerning. Unless an offending State was to leave a paper trail of self-confessed arbitrariness, a violation of a standard of “manifest arbitrariness” could never be found.

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.

27. Our comments focus on the suggestion that "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”. Although this rule may at first sight seem legitimate, it raises four very critical concerns as follows. a. The exclusion of measures taken for a "legitimate public purpose" from the scope of indirect expropriations is irrelevant: i. It should be emphasized that arbitral decisions taken under ISDS do not prevent the State from taking measures nor do they result in the invalidity of such measures. The arbitral tribunals merely decide whether the foreign investor is entitled or not to indemnification, and on the amount of such indemnification. ii. Under current law, the States therefore already retain their full sovereignty and are in no way prevented from taking measures they believe must be taken. iii. The proposal could even lead to a broader control of State decisions by the arbitrators (in particular with respect to the legitimacy of the public purpose followed by such measures) b. The confusion between the general criteria of "public interest” and an alleged more specific criteria of "legitimate public purpose" and its consequences: i. In most BITs, nationalization or expropriation is only possible if four cumulative criteria are met which provide that a foreign investor is entitled to compensation in case of an expropriation event if the first three criteria are met (in particular, even if the measure is decided in the "public interest”). ii. Under the current rules, a nationalization or expropriation measure that would not be taken for the public interest would be null and void. The remedy is to return to the status quo ante and not an indemnification. iii. Conversely, if the suggested exception were adopted, not only would the contemplated measure be legally valid, but a foreign investor would not be entitled to compensation because the relevant measure would have been taken for a "legitimate public purpose". iv. This new concept of "legitimate public purpose" is not only unclear but more strikingly close to, whilst being broader than, that of "public interest". v. This confusion between both criteria therefore purely and simply jeopardizes the traditional mechanism and concepts which investors (including those in which sovereigns hold a significant shareholding) have been relying on for decades. vi. Furthermore, reference to "health or the environment" does not "clarify" the scope of the criteria, as per the objective of the Commission, since these are merely examples of what would be a "legitimate public purpose". vii. Finally the concept of "legitimate public interest”, being very vague, if adopted, would grant the arbitral tribunal the authority of assessing whether the public interest protected by the disputed measure is "legitimate" or not. This extension is questionable in terms of sovereignty. c. It results in the costs for measures of public interest being borne by the expropriated foreign investor rather than by the community. d. It will result in a discrepancy in the level of protection according to the relevant industry sector. i. Should the exception be adopted, despite its potentially very broad interpretation, the concept of "legitimate public purpose", would remain confined to the nature of the specified examples ("health, environment", and "safety", quoted in the CETA). This would lead to a dual and unfair protection system. ii. Industrial sectors such as food and beverages, life sciences and energy would be, unlike others, automatically will be more likely to be excluded from the protection against expropriation because the potential impact on “health” or “environment is allegedly more obvious.

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?

28. The right to regulate has always been recognised under international law. Indeed, as has been explained above, the investor’s rights to be treated fairly and equitably as well as the rules governing expropriation are the result and direct consequence of the fact that the State has a right to regulate. They are the other side of the coin. The protections are necessary to ensure that the State will make use of its right to regulate only in such a manner that is compatible with the rule of law and has due respect for the rights of the individual (be it a natural or juridical person). 29. Given that the right to regulate has always been recognised, there is no need to include a specific provision re-emphasising the inherent right of the State to regulate. However, if the Contracting Parties which to do so, this should be done in the preamble and it should be made clear that the right to regulate must have due regard to the principle of proportionality, the protection of individual rights, including the right of the investor to be treated fairly and equitably and not be burdened with an excessive burden without compensation. 30. Further to our comments in relation to question 4, above, we have particular concerns about the proposed use of binding interpretive guidance in the context of ISDS cases. There is significant concern that the application of these powers may undermine the rule of law in four particular ways, specifically: - Interpretations, if binding as suggested, may constitute an ultra vires amendment of TTIP, as it adds words that are neither in the text nor in the drafting history of the agreement. - Interpretation may be inconsistent with the ordinary meaning of the TTIP investment provisions and, therefore, contrary to Article 31 of the Vienna Convention on the Law of Treaties (VCLT). - Interpretations that apply to pending disputes would inevitably violate the principle of non-retroactivity—and, moreover, the principle that no one may be the judge of his or her own cause. - Interpretations that are issued by State parties to ISDS without due consultation may violate the principle of equal treatment of parties. 31. These issues raise significant policy concerns for international business and may undermine the important protections afforded by international investment agreements. We would welcome the opportunity to discuss these issues further with the Commission in due course.

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.

32. The Commission’s approach contributes to the objective of the EU to increase transparency and openness in the ISDS system for TTIP. Increased transparency will in turn reinforce ISDS’ legitimacy and acceptance, hence providing aggrieved investors with a treaty based investor disputes mechanism. We believe, however, that the EU’s transparency initiative goes too far at the cost of investors’ confidential/sensitive information. 33. We welcome the broadening of the list of documents that shall be made available to the public to all information relating to the procedural history of the case, including the choice to mediate the dispute, challenge an arbitrator, request for consolidation, etc. This transparency will most likely encourage more responsible decision making by the parties to the arbitration. 34. We are, nevertheless, have some remaining concerns about the EU’s proposal to: (i) make public the documents listed in article 3.1 of the UNCITRAL Transparency Rules (any written submissions by disputing parties) and (ii) in article 3.2 as modified by the CETA proposed text -potentially making publicly available all the Exhibits that would have been produced during the proceedings “upon request by any person to the arbitral tribunal”. 35. The principal reasons for these concerns are as follows: a. this level of transparency does not exist anywhere nor in any state Court where most often only the judgment is made public, including in the ECJ or in all or part of the Member States administrative Courts; b. there is no legitimate purpose for demanding that an exception be made for investor-state disputes; c. publication of parties’ submissions, including witness testimony and expert reports, and exhibits would not only significantly slowdown the arbitral proceedings and potentially increase its cost by creating an opportunity to dispute with the tribunal and the other party what should or should not be made public, but also will greatly increase the risk that sensitive commercial information is shared with the public; d. the publication and the measures necessary in order to protect confidential business information may increase the costs of proceedings. This results, in part, from potential disputes as regards the scope of what constitutes confidential information. A 36. We submit that that integrity of the arbitral process guarantees that the process employed is fundamentally fair. Excess transparency can open the door to intimidation techniques, other public pressures and even generate security issues for members of the arbitral tribunals, the witnesses and even state officials. We therefore believe that the exception to a public hearing to protect the integrity of the arbitral process should be at the very least maintained. 37. We are concerned that the proposed transparency rules would violate the legitimate right of witnesses and experts to the protection of their personal data such as CVs, personal addresses, names, backgrounds, achievements and failures whether professional, academic or other). Indeed, in any arbitration, such personal data may be discussed at the hearings or commented on in the submissions. 38. The issue of cost should also be carefully considered. In the decision whether to initiate arbitration or not, an investor carefully looks at the foreseeable expenses. The proposed transparency rules contained in CETA render such assessment impossible in relation to the rental of premises to be used to host the needed hearings. Indeed, if the arbitration is confidential, small premises will often suffice. By contrast, if it is necessary to be able to host dozens of members of the public or journalists, the arbitral tribunal will be obliged to host the hearings in international conference rooms. These costs could be very significant.

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.

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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.

39. We generally welcome the EU’s willingness to suggest different dispute resolution mechanisms, including mediation. As you may be aware, ICC is a global non-governmental organization— with consultative status to the United Nations—which works to promote peace and prosperity through the promotion of open markets and the rule of law. As part of this mandate, we offer a range dispute resolution services adapted to international trade requirements. 40. It is an investor’s fundamental right to bring a claim against a host state—just as it is any person’s right to bring a claim against public authorities—in a forum made available, and one cannot judge investment protection and ISDS by the claims brought. One has to judge on the basis of the awards rendered. Statistics available indicate that a significant proportion of ISDS panels decide in favour of host states. According to the UN, of the 244 concluded BIT cases known by the end of 2012, 42% were in favour of the host state, 31% were in favour of the investor, and approximately 27% were settled. Multiple claims and relationship with domestic courts 41. While there is a need to avoid “over-compensation” of investors, this need has always been recognized by international courts and tribunals. Mechanisms are already in place that avoid “double-dipping”. We therefore do not share the EU’s concern. 42. We understand that the EU wishes to make domestic courts more attractive for ISDS disputes. However, the attempt of achieving this by either making deadlines for the submission to arbitration longer or by introducing a fork-in-the-road or waiver requirement would have the opposite effect. Experience shows that investors are much more likely to attempt a resolution of their dispute in the domestic forum, if they have the assurance that they can at all times commence an international arbitration if the national proceedings turn out to be ineffective or unfair. Whereas in such legal regimes where the investor has to make a choice whether to seek redress in the domestic courts or go to ISDS the investor is more likely to choose international arbitration and will not make an attempt to “try” the domestic courts. 43. There is a concern that the proposals may introduce a novel requirement to exhaust domestic remedies before being allowed to go to ISDS. If this is the Commission’s intention, we consider this to be a significantly retrograde step. As an example, this would add an additional layer of costs which would make ISDS inaccessible for SME investors. The situation (also for bigger investors) is often aggravated by the fact that their cash reserves have been depleted as a consequence of the bad act of the State. 44. Moreover, even those open to the argument that there is no lack of transparency or undue political influence in the national courts of the US nor EU Member States will have to take into account that each legal system is based on a specific culture. This in itself may give rise to an impression of bias from the point of view of a foreign investor involved in a major dispute with the host state. Industry favours arbitration and the rationale for this is even stronger in cases involving the interests of the host state. In our view, it is therefore reasonable to give investors the choice between national courts and international arbitration.

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.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on these 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?

45. The International Bar Association, the drafters of various arbitration rules, decisions of arbitral tribunals, arbitral institutions, national and international courts and, last but not least, ICSID have developed a detailed framework for the independence and impartiality of arbitrators. Independence and impartiality requirements also form a central element of the ICC Rules of Arbitration. 46. The standards applied in ISDS around the world and irrespective of the applicable rules are high. In practice, the rules are stricter for arbitrators than for national and international judges (for example as regards nationality and prior affiliations). We therefore do not agree that there is a currently a lacuna in relation to arbitrator conduct which needs to be filled by new treaty provisions. 47. The CETA text raises concerns that the proposed innovative drafting will make finding qualified tribunal presidents an impossible or at least very difficult task. The notion that even the parties cannot go outside a pre-set list of candidates is not only questionable vis-à-vis the fundamental procedural principle of party equality (the investor will not have had a chance to influence the composition of the list)—it is, moreover, also unworkable. This is evidenced by the experience with the ICSID list of arbitrators: under the ICSID Convention, each Contracting State is able to appoint up to four panellists. In addition, the Chairman of the Administrative Council can appoint ten of them. This means that the ICSID panel of arbitrators contains more than 400 candidates. Nevertheless, it can be difficult for ICSID to identify a suitable president. In response to those difficulties, ICSID has developed a multi-tiered process in order to forge party agreement on candidates that are not on the ICSID panel of arbitrators. This shows that even an ostensibly large panel can be problematic. 48. According to reports, the CETA panel is to be comprised of a little more than a dozen candidates for the presidency (indeed the draft provision appended to the consultation request states that the minimum is only 5 persons). That this will multiply the inherent difficulties of using a pre-selected list and in many cases will make the appointment of a president virtually impossible—e.g., due to conflicts caused by prior affiliations. 49. The mechanism that the panel be appointed by a “Committee on Services” is also very problematic. It calls into question the independence of the appointees and the objectivity of the appointment process. This is because there is a marked difference between a situation of a Free Trade Agreement where a limited number of Contracting Parties (USA, EU and EU Member States) determines the panelists and the situation under the ICSID Convention where 150 Member States each make four appointments (in addition to appointments by ICSID as an institution). 50. if there is to be a panel mechanism, the panel should be appointed by experienced and respected institutions, such as the ICC Court, ICSID or the Permanent Court of Arbitration (PCA)" 51. The proposed approach also raises significant diversity issues. One factor in this regard is the possible insistence on “single-hatting”, meaning that an arbitrator is excluded from acting as counsel or expert in other cases. This is likely to create a bias in favour of retirees. Single-hatting is also detrimental for independence, as it may create an incentive to create a market by taking predominantly positions that are pro-state or pro-investor. 52. In conclusion, experience reveals that (i) panel or list limitations are detrimental, (ii) a small list of less than 100 to 200 candidates is unworkable, (iii) if a panel mechanism is to be adopted the panellists should be selected by independent institution such as ICSID, the PCA or both, and (iv) panel nominations must follow the concept of diversity and a requirement of single-hatting should not be introduced.

Explanation of the issue

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

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

Approach in most existing investment agreements:

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

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

The EU’s objectives and approach

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

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

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

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

53. While the ICSID Arbitration Rules, for instance, contain specific rules about claims that are “manifestly without legal merit”, this does not mean that there are no filtering mechanisms for arbitrations conducted under other rules. The Oil Platforms test (which was established by the ICJ) allows an arbitral tribunal to decide on the admissibility of claims in bifurcated proceedings and to reject cases where the claimant has not made a prima facie case on the merits. This test is applied by investment tribunals as a matter of course not only in ICSID proceedings but also under all other rules. 54. A review of the two proposed mechanisms in the CETA draft reveals that there is an overlap which is not cured by the reference in X-29 (2). The 30 day-period set out in X-29 (i.e., the time for making an objection under this article) will by definition have lapsed by the time of the counter-memorial (X-30 (2)). This means that, under the CETA draft, a State will always have the option to raise both objections, first under X-29, then under X-30. The tribunal will have to grant the claimant a right to be heard regarding the decision whether the tribunal should or should not decline to address the objection and grant the respondent a right to respond (which will trigger additional costs and cause delays). 55. Of greater concern, draft Article X-30 even envisages further options for the State to derail the proceedings as it states “Without prejudice … to a respondent’s right to raise any such objections at any appropriate time”. 56. The combined effect of Articles X-29 and X-30 is expected to lead to unnecessary procedural skirmishes and a multiplication of procedural delays (and costs) even if a State raises objections which turn out to be unfounded. 57. Experience shows that States make preliminary objections as a matter of course (even if the State knows them to be frivolous). It would be necessary to build in safeguards, such as an imposition of costs on the respondent, for raising unfounded objections. Moreover, the tribunal must be empowered to award costs for such a preliminary phase immediately in order to enable the claimant to recover costs from a respondent while the arbitration is ongoing. Otherwise, States may be encouraged to use the tool of objections hoping that a small or medium sized enterprise as claimant will run out of funds on the way. 58. Another point which is problematic and does not reflects the prevailing trend in arbitration procedure is that the CETA draft obliges a tribunal to bifurcate. The concept of mandatory suspension and bifurcation was a cause of complaint under the pre-2006 version of Rule 41 of the ICSID Arbitration Rules as it was abused by many respondent States. The draft CETA would thus revert to a system that was abused in the past and because of that abuse was abolished. 59. It is true that arbitral tribunals have in the past been too reluctant to shift costs. This reluctance has benefited States more than investors. This is particularly true for SME investors and claims by private persons. In some instances this has rendered awards in favor of investors ineffective as the sum recovered as damages had to be used to pay the arbitrators’ and legal fees. 60. However, while an imposition of claimant fees on a losing State is justified as the State’s conduct triggered the arbitration in the first place, mandatory imposition on the losing claimant is not adequate. In many cases, while the State’s conduct was found eventually not to have violated a treaty provision, the State had given the claimant sufficient reason to feel aggrieved and commence arbitration. In these cases, it was felt that fairness required that the State pay its own fees and its share of the tribunal fees. This option should be preserved. 61. A better way to deter abuse (on both sides) is to limit the scope of recoverable costs to reasonable costs. This discourages both parties from excessive procedural conduct.

Explanation of the issue

Recently, concerns have been expressed in relation to several ISDS claims brought by investors under existing investment agreements, relating to measures taken by states affecting the financial sector, notably those taken in times of crisis in order to protect consumers or to maintain the stability and integrity of the financial system.

To address these concerns, some investment agreements have introduced mechanisms which grant the regulators of the Parties to the agreement the possibility to intervene (through a so-called “filter” to ISDS) in particular ISDS cases that involve measures ostensibly taken for prudential reasons. The mechanism enables the Parties to decide whether a measure is indeed taken for prudential reasons, and thus if the impact on the investor concerned is justified. On this basis, the Parties may therefore agree that a claim should not proceed.

Approach in most existing investment agreements

The majority of existing investment agreements privilege the original intention of such agreements, which was to avoid the politicisation of disputes, and therefore do not contain provisions or mechanisms which allow the Parties the possibility to intervene under particular circumstances in ISDS cases.

The EU’s objectives and approach

The EU like many other states considers it important to protect the right to regulate in the financial sector and, more broadly, the overriding need to maintain the overall stability and integrity of the financial system, while also recognizing the speed needed for government action in case of financial crisis.

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Some investment agreements include filter mechanisms whereby the Parties to the agreement (here the EU and the US) may intervene in ISDS cases where an investor seeks to challenge measures adopted pursuant to prudential rules for financial stability. In such cases the Parties may decide jointly that a claim should not proceed any further. Taking into account the above explanation and the text provided in annex as a reference, what are your views on the use and scope of such filter mechanisms in the TTIP agreement?

62. We are not in favor of filter mechanisms in investment treaties. 63. In general, both for investors and states, the ISDS system is a quick, relatively cheap and flexible system for resolving disputes on international investment. As a result, ISDS reduces the political risk for investors (i.e. of losing an investment due to expropriation or unequal treatment). It also is a driver for the proliferation and the protection of the rule of law internationally. 64. Filter mechanisms may limit and frustrate access of investors to obtain a neutral and independent decision. This will lead to legal uncertainty, a slowdown of the legal process and higher costs for both states and investors. 65. Furthermore, the applicability of one or more filter mechanisms will inevitably bring ISDS cases to the political arena, while ISDS was specifically designed to prevent this. The right of investors to have their dispute adjudicated by an independent and impartial entity will be severely hampered if representatives of the respondent State can influence the decision of whether a claim may proceed to arbitration. To prevent such influence is especially necessary when one of the parties is a state with a weak national legal system. The outcome of an ISDS case should never be dependent on the agenda regarding national elections or the political color of a ruling government. With regard to filter mechanisms in TTIP, it is important for the EU and the US to take into account the fact that TTIP will act as a standard for succeeding bilateral treaties. Implementation of a filter on the ISDS system in TTIP will have a domino effect; in the future such a system will also apply on countries with weaker national legal systems than the systems in the EU and the US, hence to the detriment of investors from the EU and the US. 66. The reference text developed in the CETA agreement implies a worrisome development. It grants the respondent the possibility to refer a case to an intergovernmental committee, so that the host and home states may decide whether a claim may or may not proceed any further. Whereas the explanation to the question refers to the EU’s intention to prevent measures taken “in case of financial crisis” from being adjudicated by an arbitral tribunal, the suggested treaty text is far more encompassing and general. The explanation suggests that any measure taken “for prudential reasons” justifies the impact of such measure on the investor. Under public international law however, measures, albeit taken “for prudential reasons” may still be disproportionate, unreasonable, discriminatory or arbitrary. In fact, expropriatory measures aimed specifically against one investor may well be characterized or disguised by the host State as being “for prudential reasons” so as to avoid that the measure may become the subject of an investment treaty claim. Facilitation of such behavior via the TTIP treaty would constitute a serious setback in the protection of international investments. 67. Investors are looking to reduce risks of expropriation or unequal treatment when investing abroad. The introduction of filter mechanisms in TTIP would bring investor-state disputes back to the political arena leading to legal uncertainty, a slowdown of the legal process and increasing costs. This increase in risk and (legal) uncertainty would make companies less willing to deploy large amounts of capital for international investment. This effect would not be limited to EU-US investment flows. Since the structure of ISDS filter mechanisms in TTIP is expected to be considered a blueprint for the structure of ISDS systems in bilateral investment treaties in other parts of the world, this would consequently affect investment flows on a global scale.

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?

68. We consider this a rather political suggestion which raises serious concern in a number of respects. 69. The contracting parties are indisputably masters of the treaties, irrespective of the fact that investors hold rights under these treaties. Consequently, it is within the power of the parties to amend or change the treaties. This can be done formally through a revision of the treaty, but it can also be done less formally through the adoption of other agreed texts. 70. We find this perfectly agreeable as long as these initiatives are confined to general matters with effect only for future investments. 71. On the other hand, the notion of the parties adopting a text with a view to an existing dispute against one of the contracting parties would be contrary both to the most widely accepted legal principles and counterproductive with respect to the essential purpose of an investment protection treaty in that it would remove previsibility for the investor as to the legal treatment of its investment. If implemented, this would entail a situation where States could annul the right to a fair trial to enforce the rule of law through ISDS thus undermining the entire reasoning behind arbitration as an independent dispute settlement mechanism securing investment.

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.

72. We are against the introduction of an appellate mechanism in TTIP for reviewing arbitral awards and rely on the existing methods for ensuring consistency of decisions. The control mechanisms available under the ICSID Convention and the New York Convention have proven to be effective and provide a good balance between finality and substantive correctness/procedural fairness. 73. An appellate mechanism would create an additional layer of delay and costs making it extremely burdensome especially for SME investors to resort to ISDS. It is to be expected that States and Investors with sufficient financial capabilities would use such a mechanism as a matter of course in many, if not most cases thus turning ISDS de facto in a two instance process which leads to a doubling of costs. 74. The widespread policy in international arbitration is to recognise the finality of the award. Finality corresponds to the interest of the parties and meets their need for an efficient and expeditious mechanism for the settlement of disputes. Yet, certain safeguards ensure an appropriate balance between finality and correctness/procedural fairness—for instance Article V(1)(e) of the New York Convention which provides that the domestic courts at the seat of the arbitration have exclusive competence to set-aside “their” arbitral awards. 75. For instance, the ICSID Convention itself establishes several mechanisms to safeguard the balance between finality and correctness/procedural fairness. It provides Parties with the option to request: (i) a supplementary award addressing issues (inadvertently) omitted by the Tribunal and/or rectifying any clerical, arithmetical or similar error in the award (Article 49(2) ICSID- Convention); (ii)the interpretation of the award (Article 50 ICSID-Convention); (iii) revision of the award after discovery of new facts which decisively affect the award and which were unknown to the Tribunal and the applicant when the award was rendered (Article 51 ICSID-Convention); and, most importantly, (iv) annulment of the award by an ad-hoc committee. 76. Revision and interpretation have not been required often and the parties of ICSID arbitrations have also felt relatively little need to apply for annulment of awards. According to statistics of ICSID applications for annulment were filed in less than 20% of all ICSID cases. 77. The introduction of an appellate mechanism in TTIP would create various disadvantages in investment arbitration:  an appellate mechanism will certainly have the effect of delaying the effectiveness of the arbitration, submitting the case to a newly appointed appellate body: it has to be considered that the most recent cases have been characterized by a long, complex and expensive introductory phase and, consequently, the possibility of an appeal might render the procedure even longer;  As pointed out above, the additional costs and the impression that an appellate mechanism is a “normal” remedy will result in a de facto two-instance process and render ISDS prohibitively expensive especially for SME investors. 78. To the extent that the EU is concerned that an external, independent tribunal could be interpreting EU law in the course of an ISDS, one could establish a right for the ISDS tribunal to apply for a preliminary ruling from the ECJ. If a question of the interpretation of EU is concerned, the arbitral tribunal request a preliminary ruling from the ECJ. This would avoid that a unilateral interpretation of one Member State which itself is inconsistent with the view of the ECJ is held to be in violation of TTIP. A parallel system could be set up for the US, for example by allowing the tribunal to submit a question on the interpretation of US law to the Supreme Court. 79. This would not affect the finality of the award and reduce time and costs of an appellate solution.

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?

80. We very much welcome the Commission’s initiative to consult on the TTIP investment chapter, and we appreciate the Commission’s commitment to include investment provisions in its trade agreements. As noted, above, however, we have a number of serious concerns about the proposed investment “model” and its ramifications for EU companies. We trust that our comments will be helpful in reconsidering some of the proposed aspects of the TTIP investment chapter; and would welcome the opportunity to discuss these issues with Commission officials in due course. 81. We would also like to highlight a number of points to underscore the importance of investment standards and ISDS in trade agreements, and which we hope the Commission will take into consideration when shaping its policy approach in relation to the investment chapter within TTIP. 82. FDI and international trade serve as the twin engines of world prosperity. Since 1980, merchandise trade has expanded by a factor of six and the stock of FDI has expanded by a factor of 20. Employment growth associated with FDI is impressive: some 21 million people were employed by foreign affiliates of multinational companies in 1990, rising to 69 million in 2011. 83. To recover from its growth slump, the world economy needs a big dose of new FDI. At the current rate, US$1.6 trillion, new FDI flows are little more than 2 percent of world GDP. Doubling that rate, to around US$3 trillion annually, would provide a major stimulus to the world economy—helping create jobs, raise living standards and contributing to government tax revenues. 84. Implementing strong investment protection standards should be a policy priority for all governments in order to promote new waves of prosperity-enhancing FDI. 85. The benefits of a strong TTIP investment chapter should not be viewed in isolation. As the largest bilateral trade deal ever negotiated, third countries will look to TTIP as a model for future free trade agreements. A gold-standard agreement could play a central role in fostering improved conditions for a much-needed expansion of global investment flows. A lowering of standards of protection would conversely be a negative signal - not only for US investors – and have a negative impact on the investment climate in Europe. The effect would be even stronger as some of the standards that the current proposal suggests to lower or abolish have been in effect between the US and Europe for almost one hundred years.