Commission opens investor-to-state dispute settlement consultation

By EDRi · April 9, 2014

The EU Commission has published a public consultation on modalities for investment protection and on investor-to-state dispute settlement (ISDS) in the EU – US trade negotiations (TTIP / TAFTA). ISDS is the most controversial aspect of these negotiations. The ISDS mechanism gives multinationals the right to sue states before special tribunals if changes in law may lead to lower profits than expected. These tribunals can overturn decisions of our supreme courts. Many civil society organisations see ISDS as a threat to democracy.

There are concerns about the quality of the explanations the Commission added to the questions. For instance, members of EU parliament Franziska Keller (Greens/EFA) and David Martin (S&D) asked the Commission for examples of cases where foreign investors have been denied access to local courts, expropriated, and not paid compensation in the USA. In its answer the Commission gave examples. Professor Jan Kleinheisterkamp, LSE Department of Law, scrutinized the answer and notes that a closer look suggests that the cases actually undermine the strength of the Commission’s argument rather than supporting it. Despite being refuted, the Commission uses the same argument in its explanation of one of the questions in the consultation.

Kleinheisterkamp recalls that in the Loewen ISDS case one of the tribunal members publicly conceded having met with officials of the US Department of Justice (DoJ) prior to accepting his appointment. The DoJ put pressure on him. The incident highlights how vulnerable the ISDS system is for outside pressure. Kleinheisterkamp notes, “[a]s it happens, the US is not known to have so far lost in any investment arbitration.” The incident raises the question how much influence outside pressure can have on the outcome of ISDS cases. An argument for inclusion of ISDS in TTIP is that if ISDS is not in TTIP, China may object to having ISDS in its trade agreement with the EU. But the vulnerability to outside pressure defeats the sense of including it in trade agreements. What if China will also be able to pressure arbitrators?

The Commission takes pride in “introducing modern and innovative provisions clarifying the meaning of those investment protection standards that have raised concerns in the past”. But the Commission does not go as far as the options suggested in the “UNCTAD World Investment Report 2013, Global value chains: investment and trade for development,” which describes systemic deficiencies of ISDS. The Commission appears to have no desire to repair systemic deficiencies which could be repaired.

Moreover, core features of the ISDS system are widely seen as design flaws, examples are: giving companies equal standing to states, unequal standing (as citizens do not have standing) and placing specialised investment panels above general supreme courts. These flaws are inherent design flaws as they can’t be taken out without abolishing the ISDS system.

The Council and Parliament reached an agreement on a draft regulation that establishes rules for managing the financial consequences of ISDS disputes. The regulation is a preparatory step to the inclusion of ISDS in EU trade agreements. The Council notes that the agreement should enable the regulation to be adopted at first reading, before the Parliament adjourns for elections at the end of May. The vote will reveal which members of the parliament are in favour of this inherently flawed system.

Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP)

Question Franziska Keller (Verts/ALE) and David Martin (S&D), E-013215-13 (21.10.2013)

Answer given by Mr De Gucht on behalf of the Commission, E-013215/2013 (27.01.2014)

Jan Kleinheisterkamp, Is there a Need for Investor-State Arbitration in the Transatlantic Trade and Investment Partnership (TTIP)? (14.02.2014)

UNCTAD, World Investment Report 2013 Global value chains: investment and trade for development

Jane Kelsey and Lori Wallach, “Investor-State” Disputes in Trade Pacts Threaten Fundamental Principles of National Judicial Systems

Vrijschrift, Investment tribunals above supreme courts (1.01.2014)

S2B, Campaigners slam Commission’s mock consultation on investor rights in EU-US trade deal (27.03.2014)

Investor-state dispute settlement: Council confirms deal with EP (04.04.2014)

(Contribution by Ante Wessels – FFII)