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Respondent details

  • Company/Organisation: CBI
  • Location: United Kingdom
  • Activity: The CBI represents all sectors.
  • Profile: Trade association representing EU businesses
  • Transparency register: Yes
  • Prior investment in the US: Yes

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?

We support the objectives and approach that have been taken in relation to the proposed scope of the investment protection provisions in TTIP. The fundamental principle that investment protection should apply to investors that have respected the laws of the host state is protected through the definition of ‘covered investment’. The proposed definitions for ‘investment’, ‘covered investment’ and ‘investor’ provide improved clarity. However there is still scope for further clarity regarding the definition of ‘no substantial business activities’ as well as for specific criteria to define shell/mailbox companies. The use of the word ‘substantial’ could create doubt around when an investment qualifies for ISDS (e.g. trademarks or number of employees) and such doubt should be avoided.

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.

National treatment and MFN provisions are key to underpin basic principles of non-discrimination towards foreign investors and covered investments. National treatment provisions should provide legal certainty that the investment of a foreign investor is treated by authorities, at all levels, including at sub-federal levels, in the same way as if the investment had been made by a domestic investor. The MFN provisions ensure that foreign investors covered by the agreement are not treated any less favourably than any third country, again reinforcing investor confidence that an investment will be treated impartially. The non-discrimination principle should be applied for pre- as well as post-establishment investment (i.e. on the conditions of access of an investor to the market as well as once the investor has made the investment in accordance with the applicable law). It is important to respect the need for Governments to achieve legitimate public policy objectives. However it is also essential to guarantee that, in combination with other proposed reforms, general exceptions to the basic national treatment and MFN principles of non-discrimination would not be used as a cover for protectionist behaviour by Governments. GATT 1994 Article XX and GATS Article XIV do contain a closed list of measures, however non-discriminatory principles under GATT/WTO law do not apply in exactly the same way as they do under international investment law. There needs to be certainty that interpretation by tribunals of, for example, ‘environmental measures necessary to protect human, animal or plant life or health’, is not broader than was initially intended under GATT or GATS and is assessed in the context of other parts of the GATT and GATS agreements. Currently we do not have that certainty. The same point applies with the interpretation of ‘measures for the conservation of living and non-living exhaustible natural resources’. The Commission should also clarify the meaning of exceptions allowed “in certain rare cases” and “in some very specific sectors” and provide guidance to their interpretation in the investment protection context. We would not support any sectoral carve-outs from ISDS. As it stands, we are concerned that the basic principles of national treatment and MFN treatment would be undermined as a result of the proposed general exceptions, which are not consistent with the UK’s model bilateral investment treaty. We believe that other proposals to ensure that legitimate policy actions by Governments are protected, concerning fair and equitable treatment and expropriation for example, are more suitable than general exceptions to the national treatment and MFN principles. These general exceptions would mean that foreign investors could be treated differently to domestic investors and could actually weaken investor confidence. During the course of the negotiations, the EU should at all costs avoid undermining the national treatment and MFN principles, and prioritise other options in relation to fair and equitable treatment and expropriation to address the concerns that have been raised about the ability for Governments to regulate to achieve legitimate public policy objectives. We support the European Commission’s position on the importation of standards in relation to MFN.

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?

We support the proposed approach to give increased clarity and certainty to the definition of fair and equitable treatment. The approach to introduce a specific list of basic rights is acceptable, but the EU and US must be extremely vigilant to cover all bases to ensure that all examples of arbitrary behaviour, unfair treatment or abusive treatment by the host country fall within scope. Public procurement contracts won by the investor should be covered, with clear definition of provisions on this point. We support the inclusion of an ‘umbrella clause’ to ensure that representations made by Governments to foreign investors when they make an investment are covered by TTIP, providing consistency with existing UK bilateral investment treaties.

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 direct and indirect expropriation is a fundamental part of bilateral investment treaties and should be safeguarded in TTIP. We support increased clarity on provisions covering direct and indirect expropriation. High thresholds must be met in order for it to be possible for covered investments to be nationalised or expropriated, and misinterpretation of the following criteria must be avoided – for a public purpose, under due process of law, against payment of prompt, adequate and effective compensation, and on a non-discriminatory basis. The non-discriminatory aspect of the proposed provisions are essential to protect, and should not be undermined by a general exception. It is important to stress that direct and indirect expropriations should be compensable notwithstanding that they might be a “legitimate public policy measure”. We fully agree that the determination of whether a measure constitutes indirect expropriation requires a case-by-case fact-based inquiry. However, there are concerns that the Commission’s proposed text on expropriation, specifically the Annex, has the effect of limiting the coverage of indirect expropriation and we would caution against this. A more open definition of indirect expropriation, which would more clearly cover the intangible assets of investors, such as intellectual property rights and trade secrets, would be welcomed. We are also concerned as to how wording on the need to determine if a policy action is “manifestly” excessive would be interpreted. This could limit the concept of ‘indirect expropriation’ and undermine the fundamental right to property which is enshrined in the European Convention of Human Rights, the European Charter of Fundamental Rights and the legal tradition of EU Member States.

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?

We consider it appropriate that the EU and US negotiate a high quality investment agreement that ensures that the right of Governments to regulate is fully protected and confirmed as a basic underlying principle. Proposals to give extra clarity on investment provisions under a TTIP agreement concerning fair and equitable treatment and expropriation reduce scope for misinterpretation. However, we are concerned about moves to apply horizontal exceptions to non-discrimination obligations as previously outlined in the response to question 2. The consultation also proposes that parties should have the possibility to adopt interpretations of the investment protection provisions which are binding on independent arbitral tribunals, which is ‘designed to oversee how the agreement is interpreted in practice and, where necessary, to influence the interpretation’. This could increase the scope for individual cases to become subject to political influence. Whilst the EU and US should be able to update the ISDS agreement with further amendments and revisions over time, introducing additional interpretive guidance binding on arbitrators as cases arise appears to infringe on the independence of arbitral panels and why they are established in the first place. We support the move to clarify the already existing practice that an arbitral tribunal will not be able to order the repeal of any given measure, but can only award compensation for the investor once all the relevant criteria have been met. We have concerns about the proposed wording concerning the ‘loser pays principle’, and there is a problematic blurring between frivolous cases and unsuccessful cases, as is explained in our response to question 9.

B. Investor-to-State dispute settlement (ISDS)

Explanation of the issue

In most ISDS cases, no or little information is made available to the public, hearings are not open and third parties are not allowed to intervene in the proceedings. This makes it difficult for the public to know the basic facts and to evaluate the claims being brought by either side.

This lack of openness has given rise to concern and confusion with regard to the causes and potential outcomes of ISDS disputes. Transparency is essential to ensure the legitimacy and accountability of the system. It enables stakeholders interested in a dispute to be informed and contribute to the proceedings. It fosters accountability in arbitrators, as their decisions are open to scrutiny. It contributes to consistency and predictability as it helps create a body of cases and information that can be relied on by investors, stakeholders, states and ISDS tribunals.

Approach in most existing investment agreements

Under the rules that apply in most existing agreements, both the responding state and the investor need to agree to permit the publication of submissions. If either the investor or the responding state does not agree to publication, documents cannot be made public. As a result, most ISDS cases take place behind closed doors and no or a limited number of documents are made available to the public.

The EU’s objectives and approach 

The EU's aim is to ensure transparency and openness in the ISDS system under TTIP. The EU will include provisions to guarantee that hearings are open and that all documents are available to the public. In ISDS cases brought under TTIP, all documents will be publicly available (subject only to the protection of confidential information and business secrets) and hearings will be open to the public. Interested parties from civil society will be able to file submissions to make their views and arguments known to the ISDS tribunal. 

The EU took a leading role in establishing new United Nations rules on transparency[1] in ISDS. The objective of transparency will be achieved by incorporating these rules into TTIP.

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, please provide your views on whether this approach contributes to the objective of the EU to increase transparency and openness in the ISDS system for TTIP. Please indicate any additional suggestions you may have.

We support transparency in ISDS proceedings, and support that documents about cases should be made publically available subject to the protection of confidential information and business secrets, as is outlined in the proposal. On the possibility of making all exhibits used by the Parties automatically part of the public record, given the confidential nature of such documents, it is preferable for a request for disclosure to be considered by the tribunal on a case by case basis. We support public hearings and the proposal to integrate UNCITRAL Transparency Rules into the agreement.

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.

It is an essential point to note that the applicable rules are different under recourse to domestic law compared to under international investment arbitration. It is the case in the UK that there are strong legal protections in place against direct expropriation, as indeed there are in the US. This is one argument that has been raised to say that in the EU-US context, ISDS is superfluous. However, investment agreements are not just about the direct expropriation of property rights – investment is a much broader concept with many other ways in which foreign investors can be discriminated against – and the reality is that international investment agreements exist precisely because there are not provisions in domestic law that ensure foreign investors are afforded the same protection as a domestic company. This is applicable as much to the US as it is to other markets where there may be more fundamental investor concerns about the independence and neutrality of the legal system. As a result, there are times when it is not suitable for a foreign investor to bring a claim which concerns provisions of an international investment agreement through a domestic court. It is for the investor to decide which is more appropriate for the specifics of the case. Bilateral investment treaties, like international trade agreements more broadly, are not directly enforceable through domestic courts. This is one crucial reason to explain the emergence of bilateral investment treaties featuring ISDS provisions in the first place, with the UK’s first BIT signed back in 1975. We agree with the Commission’s proposal to introduce provisions stipulating that claims should not be brought before ISDS tribunals and domestic courts at the same.

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?

We support the proposal for a Code of Conduct, which requires arbitrators to observe strict principles of ethical and professional conduct helping to promote public confidence in ISDS and in arbitration more broadly. The EU itself is a world centre for international commercial dispute resolution and many alternative dispute practitioners worldwide are already covered by codes that have the same objectives as the one proposed in the public consultation. We support the view that ISDS arbitrators must be independent and impartial, with expertise in international law and international dispute resolution.

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.

We support the principle of a filtering mechanism enabling ISDS tribunals to dismiss claims that are obviously without legal merit or are legally unfounded. However, in practice, it may be genuinely extremely difficult to filter a complex case in such a manner, which leads onto our concerns about the proposed wording in relation to the loser pays principle. We feel there is too much ambiguity in the proposed text in the consultation, where it says on one hand that a tribunal shall order that the costs of arbitration (and other reasonable costs including legal fees) shall be borne by the unsuccessful disputing party, and on the other hand says that in exceptional circumstances, a tribunal may apportion costs between the disputing parties if it determines that apportionment is appropriate in the circumstances of the claim. The Commission should avoid confusion between “frivolous” and “unsuccessful”, but well-founded cases.

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?

The CBI attaches very high importance to stability in the financial services sector. However, we do not support carve-outs to the ISDS system, including in the area of prudential supervision, as this should not create an opening for Governments to pursue discriminatory policies against foreign investors. In any case, even if there were to be any explicit reservations for prudential regulation, these should be outlined in other parts of the agreement, and should not necessitate an additional intervention mechanism that allows regulators of the Parties of the agreement to intervene in particular ISDS cases that involve measures taken ostensibly for prudential reasons. The ‘so-called’ filter mechanism for prudential measures encroaches on the role of independent arbitration and could lead to calls for further carve-outs in other areas.

Explanation of the Issue

When countries negotiate an agreement, they have a common understanding of what they want the agreement to mean. However, there is a risk that any tribunal, including ISDS tribunals interprets the agreement in a different way, upsetting the balance that the countries in question had achieved in negotiations – for example, between investment protection and the right to regulate. This is the case if the agreement leaves room for interpretation. It is therefore necessary to have mechanisms which will allow the Parties (the EU and the US) to clarify their intentions on how the agreement should be interpreted.

Approach in existing investment agreements

Most existing investment agreements do not permit the countries who signed the agreement in question to take part in proceedings nor to give directions to the ISDS tribunal on issues of interpretation.

The EU’s objectives and approach 

The EU will make it possible for the non-disputing Party (i.e. the EU or the US) to intervene in ISDS proceedings between an investor and the other Party. This means that in each case, the Parties can explain to the arbitrators and to the Appellate Body how they would want the relevant provisions to be interpreted.  Where both Parties agree on the interpretation, such interpretation is a very powerful statement, which ISDS tribunals would have to respect.

The EU would also provide for the Parties (i.e. the EU and the US) to adopt binding interpretations on issues of law, so as to correct or avoid interpretations by tribunals which might be considered to be against the common intentions of the EU and the US. Given the EU’s intention to give clarity and precision to the investment protection obligations of the agreement, the scope for undesirable interpretations by ISDS tribunals is very limited. However, this provision is an additional safety-valve for the Parties.

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Taking into account the above explanation and the text provided in annex as a reference, please provide your views on this approach to ensure uniformity and predictability in the interpretation of the agreement to correct the balance? Are these elements desirable, and if so, do you consider them to be sufficient?

As mentioned previously, we do not see the need for binding interpretations on issues of law following joint interpretations between the EU and US. We do however agree that both Parties should be free to explain how they would want any relevant provisions to be interpreted, and if there is agreement on this, then clearly this may be of significance to the ISDS panel, as the public consultation notes. Recommendations would be a better concept than binding interpretations. Ultimately, it is the job of the EU and US negotiators to make the agreement as clear as possible in the first place. In independent ISDS tribunals, arbitrators are tasked with the job of interpreting the agreements, so binding interpretations on cases of international investment law from the EU and US does not make sense. In any event, binding interpretations/recommendations should not be applied retrospectively and this should be clarified in the text.

Explanation of the issue

In existing investment agreements, the decision by an ISDS tribunal is final. There is no possibility for the responding state, for example, to appeal to a higher instance to challenge the level of compensation or other aspects of the ISDS decision except on very limited procedural grounds. There are concerns that this can lead to different or even contradictory interpretations of the provisions of international investment agreements. There have been calls by stakeholders for a mechanism to allow for appeal to increase legitimacy of the system and to ensure uniformity of interpretation.

  

Approach in most existing investment agreements

No existing international investment agreements provide for an appeal on legal issues. International arbitration rules allow for annulment of ISDS rulings under certain very restrictive conditions relating to procedural issues. 

The EU’s objectives and approach 

The EU aims to establish an appellate mechanism in TTIP so as to allow for review of ISDS rulings. It will help ensure consistency in the interpretation of TTIP and provide both the government and the investor with the opportunity to appeal against awards and to correct errors. This legal review is an additional check on the work of the arbitrators who have examined the case in the first place.

In agreements under negotiation by the EU, the possibility of creating an appellate mechanism in the future is envisaged. However, in TTIP the EU intends to go further and create a bilateral appellate mechanism immediately through the agreement.

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Question 12. Taking into account the above explanation and the text provided in annex as a reference, please provide your views on the creation of an appellate mechanism in TTIP as a means to ensure uniformity and predictability in the interpretation of the agreement.

We are open to the idea of an appellate mechanism, however any discussion on this issue should have a global reach involving UNCITRAL, ICISD and other relevant forums. Proceedings should be well-defined within strict time limits, since ISDS cases can already be long and burdensome. We believe that multilateral consensus on this issue has to emerge and should be sought prior to creating a bilateral appellate mechanism in TTIP. Furthermore, very little information has been provided on the functioning of this proposed initiative in the public consultation document.

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?

International investment protection provisions help to reduce the added risk taken on when investing in a foreign market compared to a domestic market by at least anchoring some fundamental principles of non-discrimination, fair and equitable treatment and protection against direct and indirect expropriation. Without ISDS provisions enforceable under international law to underpin these basic principles, international investment agreements would be meaningless in affording protection to foreign investors. No bilateral investment treaty currently exists between the UK and US or between the EU and US. However, it is logical that if the EU and US were to negotiate new disciplines to promote increased bilateral investment under a TTIP agreement, there should be ISDS provisions to back these new disciplines up. It is also important to ensure that EU investors are not afforded lower levels of investment protection than competing markets due to the presence of other ISDS agreements that have been negotiated between the US and third countries. Some valid concerns have been raised about various elements of ISDS. TTIP provides an opportunity to ensure that the system is updated to reflect the increasingly complexity of cases. We support some of the proposals outlined in the EU’s consultation to address this, though we have concerns about others, notably in relation to proposed general exceptions to the fundamental non-discrimination principle of national treatment, binding interpretations on arbitrators, prudential carve-outs and the lack of clarity concerning the loser pays principle. In many examples, we feel that interventions from some stakeholders claiming that the UK Government would be limited in its ability to pursue legitimate policy objectives because of ISDS have been unsubstantiated. Nevertheless, increased clarity over the meaning and scope of ISDS provisions to be taken in TTIP and the explicit reaffirmation of the Parties’ right to regulate and pursue legitimate public policy objectives is helpful for foreign investors, Governments, arbitrators and public citizens in the long-term. We look forward to providing our input during the course of the negotiations to develop a solid ISDS framework that can also be relevant for the EU’s investment negotiations with other markets where there may be more significant concerns about the treatment afforded to foreign investors than is the case with the US. Across the UK, the CBI speaks on behalf of 190,000 businesses of all sizes and sectors which together employ nearly 7 million people, about one third of the private sector-employed workforce. With offices in the UK as well as representation in Brussels, Washington, Beijing and Delhi, the CBI communicates the British business voice around the world.