Investment Protection: ISDS or ICS?

In the 1990s, European member states have concluded about 200 bilateral investment treaties (BITs) with Eastern European countries. For example, the Netherlands has BITs with Poland, the Baltic States, Slovakia and Czech Republic. Now most of these Eastern European countries are member states of the European Union themselves, the European Commission wants to put an end to the intra-EU bilateral investment treaties (BITs): agreements concluded between EU member states. If these agreements are terminated, there is a risk that European investors will not be strongly and adequately protected under the provisions currently included in the single market. There is no dispute settlement mechanism established at the EU level, therefore member states often implement investment protection differently, resulting in the discriminatory treatment of investors within the EU. The governments of Austria, France, Finland, Germany and the Netherlands have made an attempt to institutionalise ISDS throughout the European Union. The proposal would in deed terminate the intra-EU BITs but at the same time launch a new super intra-EU investment agreement that would grant investor privileges across the entire Union.

The European Commission recently released a proposal to reform the investor-state dispute settlement (ISDS) mechanism, one of the most controversial aspects of the ongoing EU-US trade talks (the Transatlantic Trade and Investment Partnership, or TTIP). According to the European Commission, the system will be based on principles of fairness and impartiality, with independent judges to rule on the cases, and provisions to guarantee right of governments to regulate in the public interest. The Commission promised that its new approach to investment protection – outlined in the Investment Court System (ICS) proposal put forward in the TTIP negotiations - would “protect the governments’ right to regulate and ensure that investment disputes will be adjudicated in full accordance with the rule of law.”

On 29 February 2016, the European Commission and the Canadian Government have agreed to include a new approach on investment protection and investment dispute settlement in the EU-Canada Comprehensive Economic and Trade Agreement (CETA). This represents a clear break from the old Investor to State Dispute Settlement (ISDS) approach and demonstrates the shared determination of the EU and Canada to replace the current ISDS system with a new dispute settlement mechanism and move towards establishing a permanent multilateral investment court. This revised CETA text is also a clear signal of the EU’s intent to include this new proposal on investment in its negotiations with all partners. "I am very glad that we have been able to reach this agreement with our Canadian partners," First Vice-President Frans Timmermans said. "With the changes we have agreed we bring CETA fully in line with our new approach on investment protection in trade agreements. In particular, we demonstrate our determination to protect governments' right to regulate, and to ensure that investment disputes will be adjudicated in full accordance with the rule of law."

It looks like the European Commission is planning to dramatically expand the reach of ISDS under the guise of reforming ISDS in trade agreements such as the EU-Canada trade agreement (CETA) and TTIP. ISDS is still alive in the EC’s proposals, the EU “Investment Court System” is the same as ISDS under another name, for several reasons:

-- Foreign investors would still be allowed to circumvent domestic courts and sue states directly through international tribunals. This discriminates against domestic investors. In fact, the EC has introduced a complicated “U-turn” clause, which prevents foreign investors from turning back from ISDS, once they have resorted to ISDS.

-- It grants no rights to the public or to any victims of investor action. Citizens who suffer damage as a result of the activities of multinational companies (eg polluted water, or health effects) do not have recourse to the international tribunals. Foreign investors can choose to avoid the courts, they can turn back from the courts at any point to pursue ISDS instead, and they can use ISDS to seek compensation for a court’s decisions at any level. This arrangement is an extraordinary gift for foreign investors, not available to anyone else who might need international protection

-- Arbitrators are not independent “judges”. They do not have a fixed tenure, with a fixed salary. They are paid by the day, with a financial incentive to rule in favour of investors to attract more claims; there is no clear definition of conflict of interests, and no explicit ban on being paid for related work (for ISDS) while sitting as an arbitrator.

In the report Investment Court System put to the test: New EU proposal will perpetuate investors’ attacks on health and environment, the authors argue the EC proposal has failed the democracy test: "The EU’s proposal for investor protection and the Investment Court System fails to protect right to regulate and therefore respect citizens’ demand to protect public policies from investors’ attacks. It will not prevent companies from challenging regulations or government decisions to protect public health and the environment enacted in the public interest when these interfere with their expected profits. And it will not prevent arbitrators from deciding in investors’ favour." In five exemplary investment cases discussed in the report authors came to the conclusion these cases might have had the similar outcome under the EU Investment Court System.

"The “Fair and Equitable Treatment” investment standard is retained as part of the EU’s investment court system proposal. This is the most widely used and expansively interpreted investment protection standard, and a close reading of article 3 in the EU proposal shows that it leaves the door wide open for investors to claim that this standard has been breached should governments take legitimate measures in the public interest. (...) The European Commission has widened the fair and equitable treatment concept by explicitly allowing tribunals to take into account the notion of investors’ “legitimate expectations”. (....) The inclusion of an article on the right to regulate is misleading and gives a false sense of security because governments will have to prove that any regulations introduced were “necessary” and sought to achieve “legitimate” objectives. The definitions of “necessary” and “legitimate” are open for interpretation. Nothing in the Commission’s proposal prevents investors from claiming – or receiving – compensation from governments for the loss of expected (future) profits, even when governments can show that the measures taken were necessary and legitimate."

In his  Osgoode Legal Research Paper about Key flaws in the European Commission’s proposals for foreign investor protection in TTIP professor Gus Van Harten presents an alternative: "EC could decline to pursue new treaties based on ISDS. It could work to establish an international judicial process that replaces ISDS in existing treaties. It could ensure that the law of foreign investment is balanced by permitting foreign investor rights and responsibilities to be enforced in the same process. It could ensure that this area of law is respectful of domestic institutions based on longstanding principles of international legal protection for all individuals. The EC could do all of these things, and it should."

See also: Schill, S.W., The European Commission’s Proposal of an “Investment Court System” for TTIP: Stepping Stone or Stumbling Block for Multilateralizing International Investment Law? 20 ASIL Insights No. 9 (22 April 2016)