News

back

The current state of the debate on the inclusion of an investor/State dispute’s settlement clause in the Transatlantic Trade and Investment Partnership (TTIP)

Article Dispute resolution | 11/03/15 | 9 min. | Marie Danis

The question of the inclusion of an arbitration clause for settlement of disputes between investors and States, known as "ISDS" in English (Investor-State Dispute Settlement) in the Transatlantic Trade and Investment Partnership ('TTIP') has been the subject for several months of a heated controversy in the European Union ("EU"), to the point of jeopardizing the use of this type of clause.

 
Classically, ISDS clauses are included in bilateral or multilateral investment protection treaties and provide that any dispute arising from the application of the investment treaty between a State and a foreign investor must be submitted to international arbitration.
 
It is useful to recall the genesis of these clauses in order to understand the current debates.
 
ISDS clauses, protective of the rights of investors since the 1960s
 
ISDS clauses appeared for the first time in 1959 at the request of Germany in an investment treaty with Pakistan. Their goal was - and still remains - to protect foreign investors against any arbitrary acts on the part of the investments’ recipient State (such as discrimination or expropriation without fair compensation) by allowing a resolution of disputes in a non-national framework, by arbitration. Gradually, and then systematically included in bilateral investment treaties, they were considered as essential to foreign investments, particularly when the investments’ recipient State lacked a sufficiently stable legal system or serious legal guarantees, necessary for the protection of fundamental economic rights. Until recently, Germany, the Netherlands and Finland insisted that an ISDS clause be incorporated in their investment agreements with China.
 
The rise of strong criticisms regarding ISDS clauses in the context of the Transatlantic Partnership negotiations between the EU and the United States
 
Today, the protective character of ISDS clauses is the subject of sharp criticism by the governments of the EU Member States and the negotiation of the TTIP recently crystallized the debate on these clauses.
 
For the record, in June 2013, Member States of the EU unanimously mandated the European Commission for the purposes of negotiating a trade partnership treaty with the United States. As is now customary, an ISDS clause was thus included in the TTIP, from the outset of the negotiations.
 
However, negotiations on the TTIP ceased as soon as January 2014 due to the emergence of a strong disagreement within the EU regarding the presence of an ISDS clause in the Treaty. Without doubt, these criticisms were strongly influenced by recent events: several arbitration proceedings initiated by multinationals against EU Member States, including Germany, have led these States as well as part of the European public opinion to consider ISDS clauses as threat to State sovereignty.
 
The consultation launched by the European Commission in response to the criticism
 
As a response to such criticisms, the European Commission launched on 27 March 2014 an online public consultation in order to determine the best way to preserve a balance between the protection of foreign investors and the freedom of States to legislate. The consultation was closed in July 2014 after receiving 150 000 contributions, 99% of which were made by individuals. The report on the results of the consultation was published on 13 January 2015.
 
The concerns aroused by ISDS clauses
Interference with the right of States to legislate
 
Numerous arbitral procedures initiated on the basis of ISDS clauses for claims reaching several tens of billions of euros are currently pending before the ICSID. Part of the public opinion in Europe therefore fears that ISDS clauses, and the significant award in damages that can result from their implementation, are used as a mean of exercising pressure on States in order to force them to renounce from legislating in the public interest at the expense of certain investors’ private interests.
 
In Europe, opposition to ISDS clauses is expressed mainly by Germany which faces, since May 2012, a condemnation of 4.7 billion of euros in the context of an arbitration proceeding launched by the Swedish company Vattenfall. This company, specialized in the production of electricity, seeks compensation for the prejudice it suffered as a result of Germany’s decision to close some nuclear plants following the events of Fukushima. Since then, Germany has been firmly opposed to the inclusion of an ISDS clause in the TTIP.
 
At the global level, the example of Vattenfall is not unique.
 
Philip Morris also seeks several billions of dollars of compensation from Australia due to its adoption of the new anti-smoking regulations imposing generic packaging for cigarettes. In October 2012, Ecuador was ordered to pay 2.3 billion of dollars to the Western Oil Company for breach of a concession contract. In July 2014, in three "record” awards, the Federation of Russia was ordered to pay 37 billion of euros of damages to the majority shareholders of the oil company Ioukos for illegal expropriation.
 
Notwithstanding such decisions, it remains that according to recent UNCTAD statistics, 60% of the 356 awards which have been rendered worldwide on the basis of ISDS clauses have been in favor of the State.
 
In fact, it appears that Western States which were originally favorable to ISDS clauses, since these were typically invoked by their own nationals, have now become more averse to such clauses to the extent that they could now be enforced against them by foreign investors.
 
The infringement of European regulatory standards
 
Austria, Luxembourg, Great Britain, and France also expressed reserves about the inclusion in the TTIP of an ISDS clause. These States fear that such a clause could be invoked by American firms whose purpose is to overcome European protective labor, consumer, health or environmental legal standards.
 
In addition, the reluctant European States consider that specific guarantees for foreign investors are not justified since their judicial protection systems are already sufficiently stable and developed.
 
From the point of view of ISDS clauses proponents, access to a neutral forum to resolve a dispute against a State remains a fundamental right, even in countries with sophisticated legal systems.
 
The solutions proposed following consultation
 
The European Commission proposed several concrete solutions in its consultation.
 
First, guaranteeing States’ right to legislate by:
 
- reaffirming in the TTIP the principle of the freedom of States to legislate;
 
- redefining the legal concept of expropriation so that claims would be declared inadmissible to the extent that the State pursues an objective of general interest or does not behave in a discriminatory manner;
 
- delimitating the obligation of fair and equitable treatment, by creating a list of acts presumed to violate this obligation;
 
- giving possibility for States to adopt measures aimed at ensuring the stability of their financial systems.
 
Second, modernizing ISDS dispute resolution procedures by:
 
- allowing for an early dismissal of unfounded claims;
 
- giving the parties the possibility decide beforehand that the arbitration costs will be borne by the losing party;
 
- greater procedural transparency (adoption of the UNCITRAL rules, publication of texts containing ISDS clauses and opening of the hearings to the public);
 
- adopting a code of conduct for arbitrators;
 
- establishing an appellate body to review awards in order to ensure greater consistency in the interpretation of the Treaty;
 
- allowing parties to agree beforehand on the interpretation of the Treaty and voluntarily intervention.
 
The conclusions drawn from the consultation
 
Although the report confirmed the existence of differences of opinion, the analysis nonetheless helped identify four areas where further improvements should be explored, namely:
 
- the protection of the right of States to legislate;
 
- the supervision and functioning of arbitral tribunals;
 
- the relationship between ISDS arbitral proceedings and national proceedings;
 
- the setting up of an appeal procedure on the merits of ISDS awards.
 
During the first quarter of 2015, the Commission shall consult the governments of the EU Member States on each of these four points.
 
The decision to include the ISDS in the TTIP will be made in the final phase of the Treaty negotiations.
 
To conclude...
 
The future of the ISDS clause in the TTIP remains uncertain due to the great skepticism of the European civil society as demonstrated by the European Commission’s consultation.
 
In fine, this debate had led to a useful brainstorming on the means to improve the investor/State dispute resolution mechanism. Although the controversy is not yet settled it will, without doubt, be seen as an example and have a significant impact beyond the EU on multilateral treaties currently under negotiation, in particular with China.
 
 
 
Marie Danis, Partner

 

Explore our collection of PDF documents and enrich your knowledge now!
[[ typeof errors.company === 'string' ? errors.company : errors.company[0] ]]
[[ typeof errors.email === 'string' ? errors.email : errors.email[0] ]]
The email has been added correctly