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Respondent details

  • Company/Organisation: Quaker Council for European Affairs
  • Location: Belgium
  • Activity: Economic Justice, Peace, the Environment and Human Rights.
  • Profile: Non-governmental organisation
  • Transparency register: Yes
  • Prior investment in the US: No

Contribution

A. Substantive investment protection provisions

Explanation of the issue

The scope of the agreement responds to a key question: What type of investments and investors should be protected? Our response is that investment protection should apply to those investments and to investors that have made an investment in accordance with the laws of the country where they have invested.

Approach in most investment agreements

Many international investment agreements have broad provisions defining “investor” and “investment”.

In most cases, the definition of “investment” is intentionally broad, as investment is generally a complex operation that may involve a wide range of assets, such as land, buildings, machinery, equipment, intellectual property rights, contracts, licences, shares, bonds, and various financial instruments. At the same time, most bilateral investment agreements refer to “investments made in accordance with applicable law”. This reference has worked well and has allowed ISDS tribunals to refuse to grant investment protection to investors who have not respected the law of the host state when making the investment (for example, by structuring the investment in such a way as to circumvent clear prohibitions in the law of the host state, or by procuring an investment fraudulently or through bribery).

In many investment agreements, the definition of “investor” simply refers to natural and juridical persons of the other Party to the agreement, without further refinement. This has allowed in some cases so–called “shell” or “mailbox” companies, owned or controlled by nationals or companies not intended to be protected by the agreement and having no real business activities in the country concerned, to make use of an investment agreement to launch claims before an ISDS tribunal.

The EU's objectives and approach

The EU wants to avoid abuse. This is achieved primarily by improving the definition of “investor”, thus eliminating so –called “shell” or “mailbox” companies owned by nationals of third countries from the scope: in order to qualify as a legitimate investor of a Party, a juridical person must have substantial business activities in the territory of that Party.

At the same time, the EU wants to rely on past treaty practice with a proven track record. The reference to “investments made in accordance with the applicable law” is one such example. Another is the clarification that protection is only granted in situations where investors have already committed substantial resources in the host state - and not when they are simply at the stage where they are planning to do so.

Link to reference text

Taking into account the above explanation and the text provided in annex as a reference, what is your opinion of the objectives and approach taken in relation to the scope of the substantive investment protection provisions in TTIP?

The Quaker Council for European Affairs (QCEA) opposes the inclusion of substantive investment protection provisions in Transatlantic Trade and Investment Partnership (TTIP), particularly the insertion of an Investor-to-State Dispute Settlement (ISDS) clause. The introduction of the ISDS mechanism is a retrograde step which weakens European democracy. It would allow corporations and other investors to challenge legal decisions that could be the in the public interest and removes legal challenges from public scrutiny. QCEA agrees with the principle that judicial judgements should be made based on the merits of the case presented, as long as the appropriate laws are fundamentally correct. No judicial decision should be made on the basis of nationality, race, religion, or gender. Equally however, no one section of society should have access to any form of special justice because they have made an ‘investment’. This violates the principle of “equality before the law”, as foreign investors would have access to a form of justice unavailable to domestic citizens. QCEA believes that the fundamental rights of investors described in the explanation are already protected and we can see no rationale evidence for altering this system to offer further protections to investors. There is no evidence that the fundamental rights of investors highlighted in the explanation have been neglected or abused in either the EU or the US. There is also no evidence that the judgements made in legal cases relating to trade have been based on nationality, or race or other factors. From the €700bn worth of goods and services that are traded between the European Union (EU) and the United States of America (US) every year, it is clear that the current system offers adequate protection to investors. QCEA has great concern about the potential negative effect of ISDS on government decision making. Not only could there be a significant negative impact on elected representatives and their exercise of legislative powers, but there could also be arbitration tribunals determining that the penalty in the national law is excessive: thus, eviscerating democratically determined laws. Previous abuse of substantive investment protection of provisions (through ISDS clauses) illustrates how these unnecessary (and undeserved) special measures can be misused and abused to increase profits of corporations. Two examples are Lone Pine vs. Canada, (under NAFTA 1994) and Philip Morris vs. Australia (under Australia – Hong Kong BIT 2006). The current improvements are not sufficient to address this problem. QCEA opposes using the text from CETA as a model for the proposed substantive investment protection provisions for TTIP. The text referred to in the explanatory text and annex is from an agreement which is not yet signed nor implemented and which is therefore currently theoretical rather than tried and tested. There could be loopholes and problems which will not be apparent until CETA itself is signed and implemented.

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.

QCEA cannot find any evidence that investors from the EU or the US are discriminated against in legal proceedings in either area based solely on nationality. QCEA agrees with the principle that the EU should not discriminate in law against any party in any legal matter (including investors) without good reason (see below). Cases should be considered individually, and judged appropriately based on the evidence presented, taking into consideration a wide range of factors. We can find no cases where, either implicitly or explicitly, courts have unfairly favoured a party based on nationality. QCEA therefore does not see the need to include further substantive investment protection provisions as part of TTIP. QCEA supports positive discrimination in specific circumstances, which take into account individual and community well-being and the environment. There are many legitimate reasons why a government would want to give priority to domestic or local organisations over foreign investors. There are many credible reasons for legislators to place the interests of their local and/or domestic environments before those of foreign investors' profit margins. The environmental limitations and the need to consider the 'whole picture' including climate change, or local economic well-being are good examples. By denying governments the right to make such decisions, the EU could prevent the completion of some of their own targets and directives on climate change, renewable energy, biodiversity, water quality, and the green economy, to name just a few. Even if we were to believe that there should be absolutely no discrimination, positive or otherwise, it would be unjust for foreign investors to have an exclusive form of justice, which would provide unique privileges to people and corporations with money to invest. The inclusion of substantive investment protection provisions in TTIP would not create a level playing field; it would instead provide special protection for foreign investors, giving large multinational corporations an advantage over Small and Medium Enterprises (SMEs). This would contradict the European Commission aim of promoting “successful entrepreneurship and improve the business environment for SMEs”.

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?

QCEA does not consider that the inclusion of substantive investment protection provisions in TTIP are necessary in order to provide fair and equitable treatment for investors in either the EU or the US. QCEA agrees to the proposed principle that all individuals should have a right to fair and equitable judicial treatment. However, both the EU and the US already offer fair and equitable treatment to investors as a matter of principle, no matter what the nationality of the parties involved. This fact is proven by the huge amount of investments made annually between the two economic areas, which illustrates the high level of existing trust. A 2013 analysis from the London School of Economics (LSE), suggests that such investment provisions do not provide any incentives or inducements for investors, particularly in the US. The report states “there is little reason to think that an EU-US investment chapter [substantive investment protection provision] will provide…significant economic benefits…US investors have generally not taken much notice of investment treaties when deciding where, and how much, to invest abroad.” 1 If there is currently a disparity in fairness and equality, it is in favour of the investor. The existing arbitration courts are biased towards investors, as they are the only party able to bring claims to court. There is no similar international court for states to bring investors to justice when investors abuse human rights or the well-being of citizens. It has also been noted recently by legal practitioners and a plethora of experts that ISDS courts are themselves naturally unequal in structure. The ISDS process allows the claimant time to strategise prior to a claim, giving them a distinct advantage. There have also been repeated allegations that only arbitrators with a pro-investor bias are appointed and that, as they are paid by the case, they have a vested financial interest in encouraging more cases. As only the investor can bring claims, the more arbitrators find in favour of claimants the more cases are likely to be brought to the courts, providing more work for arbitrators.2 QCEA agrees that there have been claims without merit which have been brought to before international courts, which challenge the right of the state to regulate. However, it has been the inclusion of investment protection provisions which has lead to these frivolous cases such as Lone Pine vs Quebec (Canada) as part of the North American Free Trade Agreement (NAFTA) (1994). Adding further substantive investment protection provision will not alleviate this issue. If investment protection provisions are to be in included in TTIP, QCEA supports the principle of accurately and clearly defining the terms of this treatment to ensure the continuation of the right of the states to regulate.

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.

QCEA does not consider substantive investment protection provisions as part of TTIP as necessary to achieve the goal of preventing unfair loss of property. The right to property is a right for natural persons; human rights do not apply to judicial persons. QCEA supports the EU’s recognition of the right of the state to create policy which expropriates property for public purposes, so long as it is non-discriminatory and is accompanied by prompt and fair compensation. We can find no evidence that unfair or unjust direct or indirect expropriations have taken place in either the EU or the US. Conversely, QCEA is firmly convinced that the inclusion of such a clause could in fact lead to further unfair, unjust, and egregious claims against governments by investors. Substantive investment protection could further add to the ambiguity, as even within the text provided there is clearly room for “interpretation”. The words ‘indirect expropriation’ could be construed in many ways. Legislation which inhibits profits could be considered to be a form of indirect expropriation, allowing investors to make claims against governments. Alternatively, the statement in the “manifestly excessive in light of their purpose” could be understood in a wide variety of ways leading to misinterpretation and the sort of abusive and flagrantly erroneous claims discussed in other sections of this questionnaire.

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?

QCEA completely rejects the inclusion of substantive investment protection provisions and specifically ISDS as part of TTIP. We consider that the existing national judicial structures in both the US and the EU provide adequate, unbiased, and democratically sound legal systems that afford investors from both regions fair and equitable legal treatment. There is no evidence to suggest that substantive investment protection provisions will offer any benefits to either economy. Conversely, as witnessed by the numerous egregious claims currently ongoing, these settlements have the potential to damage the right of states to regulate. The potential cost to governments is enormous. It is morally wrong that the taxes paid by individual European citizens might go either to the retainers of arbitrators or in compensation awards to corporations. QCEA does not consider the inclusion of substantive investment protection provisions in TTIP as necessary to protect either the rights of the investor under international law or the right of the state to regulate. QCEA supports the EU principle on the right of states to devise and implement regulation. We also agree that this regulation should respect fundamental human rights – when pertaining to natural persons. People should share the same rights as other natural persons (e.g. are not given more rights due to access to monetary wealth). However, the absence of a protection provision does not deny either party access to such rights. Neither the explanation nor the annex provided present any evidence to support these claims. If substantive investment protection provisions are included as part of TTIP then QCEA supports the EU policy of developing the clearest possible definitions. We also support the inclusion of a mechanism for continual revision and renewal to improve the practical implementation of this provision and to ensure the prevention of abuse through use of loopholes. A sunset clause would also ensure that unwelcome outcomes of this FTA could be prevented. QCEA wants to see frivolous claims actively discouraged and clearly punished. QCEA would oppose the use of a universal, loser-pays-all-costs rule, as this may discourage individuals with a legitimate claim from proceeding against a government who are not abiding by the rules because they fear potential ruinous financial losses.

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.

QCEA supports the principle of increasing ISDS transparency to provide more openness. The 2014 UNCITRAL Rules state that their objective is to increase accountability and promote good governance, aims which QCEA promotes. However, as there is no ISDS in practice which has yet been shown to help achieve these aims. The inclusion of an ISDS in a trade deal as large as TTIP is in fact creating unnecessary risk to good governance. We consider that the measures proposed in the text provided are fundamentally weak and leave considerable scope for abuse. The most glaring fault is the exclusion from public scrutiny of “confidential information and business secrets”. A 2013 EU Commission report stated that such information and secrets are “difficult to frame within a rigid definition” and that this could include “any information that has an economic value” 1 This is a vague definition, open to a wide range of interpretation and abusive practices. Such an exception would provide those bringing cases to ISDS courts with a simple, but effective, method of avoiding transparency and continuing their current practices. In addition, the Commission in its proposal has not specified which information from the TTIP would be excluded from public scrutiny in the exception made possible under Article 7 of the UNCITAL Rules, 'information that is protected against being made available to the public under the treaty'. Finally, the US has broad rules regarding another class of non-public information under the UNCITAL Rules, 'Information the disclosure of which would impede law enforcement.' Although transparency is certainly a good aim, the actual exclusions would, or could, in cases where the EU has not provided an actual scope of exclusion, interfere with transparency. From the explanations provided throughout this consultation, it seems apparent that the EU Commission is strongly in favour of an ISDS provision as part of TTIP, in spite of widespread public opposition. Therefore, while QCEA is firmly against an ISDS provision for TTIP, if such a mechanism were to be included we support increases in transparency. We encourage maximum stakeholder and civil society participation to ensure these terms are not defined to provide an advantage to any single section of society. QCEA believes that transparency helps facilitate democratic accountability: the TTIP negotiations themselves should also be fully transparent. QCEA strongly supports the calls from several hundred NGOs for increased transparency in the TTIP negotiations. We would like to see a broad public consultation on the desirability of such a vast free trade agreement, taking into account the potentially huge impacts on human well-being such as protection of workers and the environment, including climate. We support increases in transparency for all agreements and negotiations. We encourage maximum stakeholder and civil society participation to ensure these terms are not defined to provide an advantage to any single section of society.

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.

QCEA can find no evidence to support the European Commission claim that in either the EU or the US “it is possible that investors will not be given effective access to justice” based on discrimination against nationality. QCEA support the use of domestic courts as a means to settle any disputes that may arise as part of international trade, including between EU and US investors in each market. We also believe that mediation is favorable over legal conflicts and so support the principle behind such measures. QCEA however, does not feel it necessary to legitimise a new judicial level, which would be beyond the control of either the EU or US governments and which could potential have a serious negative impact on democratic structures and regulatory standards. QCEA firmly believes that the inclusion of an ISDS will simply increase the cost and complexity of judicial system without offering any substantial benefits. There is no logical or legal reason why “TTIP provisions cannot be directly invoked in front of a national court”, considering the “general solidarity of developed court systems such as the US and the EU”. Many other NGO’s who oppose ISDS as part of TTIP support this viewpoint. According to the ‘Bureau Européen des Unions de Consommateurs’, ISDS is unnecessary as the EU and the US “both have well-functioning court systems and robust private property rights which are sufficient to resolve any claim of unfair treatment by States”. In any legal procedure, multiple claims should be prevented and ongoing claims in other courts should be taken into account. However, it is premature to examine the detail before agreeing the entire structure – in open dialogue with those citizens (natural persons) who would be affected by this agreement.

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?

There is no evidence to support the EU claim that, in either the EU or the US, “it is possible that investors will not be given effective access to justice” based on discrimination against nationality. Therefore QCEA rejects the inclusion of an ISDS as a part of TTIP. Instead, QCEA support the use of domestic courts as a means to settle any investor disputes that may arise. Both the EU and the US have well-structured legal systems, with professional bodies and codes of conducts. These ensure that legal professionals follow stringent guidelines in terms of professional conduct and ethics, thereby avoiding conflicts of interest. QCEA firmly believes that these domestic courts provide fully qualified and impartial legal professionals, who are able to impartiality pass judgments on investor dispute claims. However, if despite the risks and the broad public opposition to ISDS, the EU intends to continue to include an ISDS as part of a TTIP treaty, then QCEA advocates the creation of strong, well-defined regulations for those lawyers, judges, and arbitrators working on ISDS claims. These regulations should not only cover the working practices of such arbitrators, but should also cover their selection, to ensure that they are chosen fairly and that a pro-claimant cultures does not continue or develop. We strongly support the general principle of improving judicial standards at all levels.

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.

QCEA rejects the need for an ISDS as part of TTIP. We feel strongly that ISDS offers corporations and big business a dangerous tool to undermine democracy, justice, and the right of the state to regulate. We consider that an ISDS offers no tangible benefits in terms of judicial equality or efficiency. Furthermore, this mechanism goes against the ideal of 'equality before the law' by providing one section of society, corporations, with privileged access to justice. QCEA considers the proposed mechanism to prevent frivolous claims to be unworkable and not fit for purpose. The definition of a “frivolous claim” could easily be open to interpretation and cannot prevent truly egregious claims being filed. What is flagrantly frivolous to the public or civil society could be considered a just and correct case by large corporations. We support the Corporate Europe Observatory statement that many of the most outrageously unfounded claims, which have brought the ISDS to public attention, would not be prevented under the proposed “improvements” laid out by the EU Commission. For example the Philip Morris vs Australia (under Australia – Hong Kong BIT 2006) case over the anti-tobacco legislation would not be excluded by these new rules. We also believe that this mechanism would not prevent some of the indirect negative consequences of ISDS. As outlined in the provided explanation, without actually taking proceedings forward, the mere threat of action can result in undemocratic changes of public policy. This is known as the chill effect. This makes these the proposed improvement provisions somewhat obsolete, as governments could potentially change policy to suit the preferences of big business rather than risk losing large sums of tax-payers money, even if the claim is potentially frivolous. One example of this is the decision of the New Zealand Ministry of Health to delay the implementation of its anti-tobacco legislation until a decision is made in the aforementioned Philip Morris vs Australia case, which could be years away. QCEA welcomes reforms which attempt to limit frivolous, and unfounded cases but not as part of TTIP; an ISDS brings too many risks to democracy. QCEA would also oppose the use of a universal, loser pays all-costs rule. This rule could discourage individuals with a legitimate claim from proceeding against a government who are not abiding by the rules because they fear potentially financially ruinous losses. This would deny justice to small claimants, who fear they could not meet the cost of losing a case and make these judicial provisions the exclusive preserve of large corporations.

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?

QCEA is firmly opposed to the inclusion of an ISDS as part of TTIP, and we do not believe this filter mechanism will enhance either public policy making provisions or provide a more fair and equitable legal system. QCEA strongly supports the exclusive right of fairly and freely elected governments to enact appropriate public policy and we consider the measures described, both in the ISDS itself and the filter mechanism, as potentially contravening this right. If an ISDS is to be included in the TTIP agreement, QCEA believes that both the EU and the US should still wholly and completely retain the right to regulate independently, including regulation around financial stability. QCEA does not believe that the EU should not have to consult and gain permission from another state when implementing policies. We do not consider it appropriate for this agreement to provide the US or the EU with powers, however indirect, to influence each others regulations.

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?

QCEA opposes the inclusion of an ISDS in TTIP. We believe that this mechanism is undemocratic, unnecessary, and potentially dangerous, as the numerous recent egregious claims have highlighted. National and supra-national courts in both the US and the EU currently provide uniformity and predictability in legal cases and QCEA can find no reason to supersede or replicate this judicial system. The framing of the explanation related to this question by the EU encapsulates some of the major risks of including ISDS in any trade deal. The Commission acknowledges that the arbitration tribunals may find loopholes in agreed text and force an unpredicted interpretation. This highlights the risk of this proposed inclusion. The solution is not to incorporate ISDS in TTIP.

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.

QCEA is strongly opposed to the inclusion of an ISDS provision for TTIP. This unnecessary and potentially dangerous mechanism will not improve the well-beings of citizens in either the US or the EU and could have the opposite impact by providing a method for corporations to gain further power over regulation. Having an appeals mechanism can help to balance the interpretation made by the small panel of arbitrators. The option of an appellate mechanism would improve access to justice for individuals through the revision of errors and would support the development of more uniform, predictable verdicts. However, this is one of the reasons that the existing and well-developed legal systems in the EU and the US are sufficient to address investor needs for recourse in the event of unfair treatment. An ISDS is not needed for the EU and US. To set up a special courts systems for which investors can make claims against governments, and then to add an additional structure to mimic the appeals mechanism of regular courts, is unnecessary. In addition, both the new structures and the appeals system would be an additional burden on state's funds, which is provided by the people through their taxes. At a time when the EU should be focusing on relieving increasing inequality and when governments are streamlining their expenditure, the EU should not contemplate spending funds on an unnecessary mechanism which will only benefit people and corporations who are already wealthy.

C. General assessment

General assessment
  • What is your overall assessment of the proposed approach on substantive standards of protection and ISDS as a basis for investment negotiations between the EU and US?
  • Do you see other ways for the EU to improve the investment system?
  • Are there any other issues related to the topics covered by the questionnaire that you would like to address?

1. QCEA opposes in the strongest possible terms the inclusion of an ISDS as part of TTIP. We regard ISDS as a potential hazard to democracy and an unnecessary measure that unbalances the current judicial system. We consider that the established domestic courts in the EU and US offer ample opportunity for access to justice for corporate bodies and individual investors who feel they have a genuine claim to recompense from governments. QCEA also believes that ISDS courts completely undermines the idea of 'equality before the law', by providing a single section of society, big business with an exclusive form of justice. QCEA can locate no examples of foreign investors being denied access to fair and equitable treatment based on nationality in either the EU or the US. However, we can see numerous cases where investors have used an ISDS, emanating from a free trade agreement, to frivolously claim compensation from a government over democratically enacted legislation. To give only a few examples, Lone Pine vs. Canada, (under NAFTA 1994) over fracking right in Quebec for $250 million; Philip Morris vs. Australia (under Australia – Hong Kong BIT 2006) because of Australia's anti-tabacco legislation, unknown but though to be billions of Australian dollars; or Vattenfall vs. German (under the Energy Charter Treaty (ECT) 1994) over the German decision to phase out nuclear energy, for hundreds of millions of Euros. Considering the previous misuse of these measures, often with flagrant disregard for the spirit of law with which these mechanisms were devised, QCEA considers the ISDS system to be fundamentally flawed. Despite the EU’s clear attempt to address some of the flaws identified by legal experts – and for this effort, we commend the Commission - loopholes are likely to exist. These could expose the governments of EU Member States and the European Commission to costs and to threats which could interfere with democratically elected governments fulfilling their duties to protect the public interest. The stated purpose of the proposed Free Trade Agreement is to increase incomes for citizens in both the EU and the US. The European Commission has estimated that, on average, each EU family will receive €535 per year (although QCEA has deep concerns about the robustness of these numbers). However, the rationale seems contradictory, claiming to improve the economic situation for EU citizens, while incorporating a dispute settlement mechanism which may prevent governments from serving the democratic interests of their citizens, and will almost certainly cost taxpayer money to provide arbitration and legal assistance. In this situation the profits will most likely go to those already who are already wealthy, the investors. If the EU Commission insists on implementing an ISDS as part of TTIP despite the risks and the public opposition, we strongly agree with the need to reform the system of arbitration, arbitrators, lawyers and judges as well as the overall administration of the ISDS legal system. We believe that regular reviews should be made to the entire ISDS system based on experience, and this means that the entire FTA should include a sunset clause, a set time at which the entire setup would be reviewed. As the current volume of trade and investment between the two areas illustrates, investors will not walk away from the EU or the US. It makes sense to ensure there is an exit option included in any commitments made by the EU institutions. Such reform and reviews should ensure maximum stakeholder participation to provide the broadest possible input from EU civil society. 2. QCEA considers it vital that the EU remembers and returns to its own fundamental values of citizen well-being. Well-being as a whole is far more than only short-term financial gain. The EU must focus on the ability of our social and natural systems to continue into the future and include the maintenance of the peace for which the EU was set up. It must reduce the diversion of wealth to the already rich, and prevent corporations being awarded vast sums because they can afford to hire arbitrators to bring claims against governments. The EU must also the place democratic participation of Europe’s citizens at the heat of its future investment systems. The EU must ensure that far-reaching changes, such as removing standards which have protected European workers and the ecosystems of Europe, are fully understood and agreed by citizens and that the voices already protesting this are heeded. Most ordinary citizens of the European Union are not asking for special protection for investors: they may be asking for jobs but they are asking for jobs where their health and rights and the natural resources on which the economic activities rests, are protected. 3.Overall QCEA is disappointed by the content of the questionnaire. While we welcome the European Commission’s decision to open a discussion on the subject of ISDS and substantive protection provisions, we consider that this discussion has been severely restricted. The wording and scope has clearly been carefully structured to control and limit the discussion to areas that the Commission wishes to discuss, specifically the improvements it hopes to make to the current ISDS system. There is no area or space within the questionnaire specifically for broader discussion on the merits of the inclusion of an ISDS within TTIP. There is currently a huge amount of trade between the EU and the US, which illustrates that investors already have confidence in the legal systems in both regions, and that neither ISDS nor TTIP is necessary for economic growth. The Australia-America Bilateral Investment Treaty (2005) does not contain an ISDS, which sets a precedent for this potentially disastrous mechanism to be excluded. The considerable number of frivolous and egregious claims under ISDSs already in existence illustrate how open to abuse and how incorrectly these mechanism can be utilised against governments, citizens, and democracy. QCEA firmly believes that an ISDS would bring enormous risks to democracy and is unnecessary for TTIP. QCEA would also want to see the wider subject of Free Trade Agreements addressed by the European Commission. At the moment there is no space for citizens to voice their concerns about this type of agreement, which would have a vast and long-term impact on the well-being of individuals and communities. QCEA calls on the EU to open a consultation, as well as other channels of communication, to discuss TTIP in general and let European citizens have their say on free trade and on TTIP before any agreement is finalised or signed.