Investment Arbitration and the EU-USA Free Trade Agreement

The adoption of the Transatlantic Trade and Investment Partnership (TTIP) treaty by the EU and the US, including its Investor to State Dispute Settlement (ISDS) mechanism, should be a significant development in investment arbitration. Since the issue of “secret courts” is one of the focal points of protests against the TTIP, to form an informed opinion it is worth taking a look at the ISDS rules of the EU- Canada Comprehensive Economic and Trade Agreement (CETA), which is likely to serve as a regulatory model of the TTIP ISDS rules.

(a)        Current situation

On the basis of the currently existing more than 3000 bilateral investment protection treaties, investors from one of the state parties to the treaty can initiate a legal dispute, typically an international arbitration procedure, directly against the other state party to the treaty, if the latter violates the bilateral treaty in connection with the investor’s investment within its territory, typically by unlawfully expropriating it. The host state’s submission to arbitration is incorporated in the bilateral treaty. The arbitration forum is often an institutional arbitration tribunal, the International Center for the Settlement of Investment Disputes or ICSID, established by the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States. In other cases, other institutional arbitration tribunals proceed or ad hoc arbitrations take place pursuant to UNCITRAL rules.

According to critics of the current system, the laconic, one article arbitration clauses in the bilateral treaties do not provide any guarantees against an abuse of the arbitration procedure and the applicable ICSID or UNCITRAL rules are also not sufficient to protect the integrity of the process. Complaints relate to, among other things, the lack of guarantees in connection with the transparency of the procedure, participation by other stakeholders who are not directly parties to the dispute, the independence of the arbitrators, frivolous claims and the costs of the procedure.

(b)       The rules of CETA relating to the arbitration procedure

The EU and Canada have reached an agreement on the terms of the CETA. The final text is now being confirmed and ratification is expected by the end of 2015-2016. In contracts to current BIT practice, Article X Section 6 of the CETA relating to the ISDS contains 18 pages of regulation connected to the arbitration of investment disputes between foreign investor and host state.

According to these rules, the IBA Guidelines on Conflicts of Interest in International Arbitration are applicable in every procedure, and not only on the basis of the parties’ agreement. In addition, the Canadian-EU Committee on Services and Investment reviewing the implementation of the CETA can adopt further binding rules ensuring the independence of arbitrators.

The UNCITRAL Rules on Transparency shall also be applied in every proceeding initiated according to the CETA. Otherwise, these rules would be applicable only in cases initiated on the basis of a UNCITRAL arbitration clause made after April 1, 2015.On the basis of these rules, practically every submission and decision is available and every hearing is open to the public.

The CETA enables and regulates in details the participation of third party stakeholders (NGOs, human rights organisations, trade associations, other states, etc) in the procedure.

Claims that are manifestly without legal merits and claims that are unfounded as a matter of law, even assuming that all the facts are true, can be dealt with in expedited procedure, without examining the merits of the case. Detailed rules apply to consolidating and deciding together cases that are related. As a result, the arbitration procedure can be simpler and more efficient, thereby preventing abuse of the process by filing several and/or frivolous claims to force a settlement on the defendant, who could not otherwise support the extensive legal costs of the procedures.

The costs of the procedure and the reasonable legal costs of the winning party are born by the losing party. Deviation from this rule is only allowed in exceptional cases.

(c)      Evaluation

The CETA rules represent substantial developments to current bilateral investment protection treaty practice, and this can be expected to be the same in the case of the TTIP. The proper question in connection with ISDS is thus not whether the TTIP will properly regulate investment arbitration, but rather whether the TTIP should at all permit investment arbitration and include ISDS clauses.

According to critics, there is no need for arbitration between the foreign investor and the host state, because the domestic courts of the EU member states and the US provide adequate and more democratic protection. Arbitration would provide disproportional benefits to the stronger party, which is openly or secretly feared to be American multinational companies. They could frustrate the decisions of democratically elected decision makers of the host states serving the public good of the society, if those decisions violate their particular individual interests. Critics do not fail to emphasize that of the 28 EU member states, only 9 has a bilateral investment protection treaty with the USA. Thus, in the majority of the cases, the TTIP is not about the reform of an existing system, but rather the introduction of a new system.

We think that the above criticism is superficial and naïve. Arbitration is the only available forum where the investor harmed by state measures can receive compensation. The avenues available in civil law systems, such as constitutional reviews, have typically a public law nature; they are appropriate for providing a public law remedy, but they do not remedy the private harm suffered as a consequence of the unlawful state measure (by awarding damages). We cannot see why the democratic legitimacy of a domestic court would be stronger than that of an arbitration tribunal created on the basis of an instrument adopted by a democratically elected government. The latter is just as legitimate as any other measure of the same government (including any measure potentially complained about). Regarding the institutional, financial conditions of domestic courts, it is also questionable whether they would be properly prepared to handle complex investment cases, with many international elements. And finally, from the assumption that the extreme violations of rights are not typical in EU-USA relations as of now, it does not follow that it will always be the same.

Empirical data also does not support that investment arbitration is biased towards large American companies or that investment arbitrators would be biased in favor of investor claimants. 53% of known investment arbitration cases (299 cases) were initiated by European investors; US investors account only for 22% of the cases (127 cases) (source). In 45% of the cases, the investor is indeed a large or very large multinational company, but in 22% of the cases the claimant is a small or family owned enterprise (no information was available in 33% of the cases) (source). In 59% of the investment arbitrations ending with a judgment, the defendant state won; while the claimant investor was successful only in 41% of the cases. The quantum of the awards also does not show a leaning towards claimants. Even in the minority of the cases when the investor won, the average quantum awarded was approximately 15% (USD 76,331,000) of the originally claimed amount (USD 491,656,000) (source).

UPDATE: The European Commission has in the meanwhile published the results of the consultations relating to ISDS rules here.


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