ISDS – one month after the results of the public consultation

By EDRi · February 11, 2015

National sovereignty of the EU Member States and the rule of law would be endangered if Investor-State Dispute Settlement (ISDS) was part of the Transatlantic Trade and Investment Partnership (TTIP). Respondents to the public consultation conducted by the European Commission (EC) between March and July 2014 made it clear that they oppose ISDS, but the Commission doesn’t seem to be taking their opinion into account.

On 13 January 2015 the EC presented the results of the public consultation on ISDS. A month later, the Commission’s strategy seems to be a quiet but strong defence of ISDS.

The public consultation took the Comprehensive Economic and Trade Agreement (CETA) text as a reference; text that made 97% of the respondents oppose ISDS in TTIP. Nevertheless, the EC is not considering the option of excluding the ISDS clause from TTIP. Instead, as a political manoeuvre to ease the discussion and avoid further controversies, the Commission recognises that four areas need to be improved, namely the protection of the right to regulate; the establishment and functioning of arbitration tribunals; the relationship between domestic judicial systems and ISDS; and the implementation of an appellate mechanism. So if the CETA’s text is in such need of improvement, why did the Commission follow that approach in CETA in the first place? The whole issue is even more confusing since the text the Commission is negotiating on TTIP is not yet published.

As the Commission has heard from several stakeholders, ISDS is not the only way to protect investors. There are alternatives, such as leaving it to the national courts, implementing a standing international investment court or introducing a state-to-state dispute settlement, but seems not to effectively consider them so far.

Some stakeholders argue ISDS has been included in other Bilateral Trade Agreements (BITs) of the Member States. However, that doesn’t mean flaws did not exist already. In fact, ISDS includes many points that potentially threaten the states’ sovereignty, citizens’ rights and the rule of law.

The Micula case is one of the most exemplary and surreal cases which show how the ISDS system could endanger the coherence of the European legal system. In this case, a Swedish investor (the Micula brothers) sued Romania before the International Centre for Settlement of Investment Disputes (ICSID) under a BIT between Sweden an Romania. Back in 2004, Romania stopped all its investment incentives to companies, in order to be compliant with EU law on state aid. As a result, Micula brothers sued Romania for “loss of profits”. In 2013, the ICSID found Romania guilty and ordered it to pay Micula brothers a total award of almost 180 million Euro. In 2014, the Commission warned Romania that “any implementation of the award would constitute new aid”. In other words, the ISDS award was a way to circumvent EU Competition law. Accordingly, Romania interrupted any payment of the award and asked ICSID to annul the award. In response, the Micula Brothers filed a lawsuit against the European Commission before the Court of Justice of the European Union (CJEU). The procedure is still pending.

More recently, in light of the CJEU’s opinion on the accession to the European Convention on Human Rights (ECHR), some uncertainties arose on the compliance of ISDS with EU law. In its opinion, the Court held that submitting disputes to the European Court of Human Rights would violate Article 344 of the Treaty on the Functioning of the European Union (TFUE), which states that “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.” If it is true for an international, independent and accountable court, the same could be argued for private and opaque arbitral tribunals.

In the meantime, the Commission wants to delay its decision to the end of the negotiations on TTIP, ignoring concerns raised by itself on the CETA text and by respondents to the public consultation. Considering the mandate the Commission received from the Council, the inclusion of ISDS in the TTIP is conditional. Was the inclusion of ISDS in CETA also conditional? We don’t know. The CETA mandate has never been published. By the end of this year or beginning of 2016, the European Parliament will be faced with a yes or not vote on CETA.

For its part, the European Parliament is now preparing a resolution on the TTIP. In its draft report, the rapporteur for the Resolution, Member of the European Parliament (MEP) Bernd Lange, asks the Commission to exclude ISDS from the negotiations as investment protection “can be achieved without the inclusion of an ISDS mechanism; such a mechanism is not necessary in TTIP given the EU’s and the US’ developed legal systems.”

Concerns are increasingly raised also by Member States, and last week the French Senate adopted a resolution calling for the removal of ISDS from TTIP.

European Commission’s report: Online public consultation on investment protection and ISDS in the TTIP (13.01.2015)

EDRi’s response to ISDS consultation (18.06.2014)

EDRi’s red lines on TTIP (13.01.2015)

Friends of the Earth Europe study: The hidden cost of EU trade deals (04.12.2014)

Committee on International Trade (INTA) Draft report containing Parliament’s recommendations to the Commission on the negotiations for the TTIP (05.02.2015)

French Senate tells TTIP negotiators to “abolish” ISDS (04.02.2015)

(Contribution by Aldo Sghirinzetti, EDRi intern)