If recent speculation is to be believed, the EU and US are sleep-walking into a scenario where they surrender their regulatory sovereignty to a conclave of self-interested and corrupt lawyers, intent on imposing their will though a collection of “rigged pseudo-courts”. This, so the story goes, will inevitably lead to the destruction of the UK’s sacred National Health Service (NHS), an environmental “free-for-all” and a “race to the bottom” for regulatory standards.
In many ways, the passion and determination with which civil society has approached the fledgling Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) is encouraging. Public disengagement – with politics generally and issues of trade and investment in particular – is an all too common symptom of ageing democracies. However, the quality of the public debate around these two monumental agreements has been disheartening to those with genuine and long-standing concerns regarding trade and investment policy.
At the heart of the current fracas is the question of whether TPP (a free trade agreement between the US and a mix of developed and developing countries in the Pacific rim) and TTIP (a free trade agreement between the EU and US) should include an arbitration-based “investor-state dispute settlement” mechanism (ISDS). To many within the arbitration community, the sudden uproar against ISDS, not only by civil society but also by prominent politicians and policy-makers in both the US and EU, is bizarre. ISDS has been an indispensable component of bilateral investment treaties (BITs) for over 50 years. US and EU governments have preciously guarded their investors’ rights to avoid lengthy and unpredictable legal proceedings before host (i.e. developing) state courts, by providing direct access to impartial and trustworthy arbitral tribunals. The apparent “U-turn” in the context of a treaty between developed states therefore exudes more than a hint of hypocrisy.
A central argument of opponents is that ISDS simply provides large multinationals with an opportunity to deconstruct hard-won achievements in the form of environmental, health and economic regulation. This view is misguided, for a number of reasons. First, a recent OECD survey shows that the top 100 multinationals account for only 8% of the claims brought under ISDS mechanisms, whereas 22% of claims were made by individuals or very small companies with limited foreign operations.
Second, ISDS arbitral tribunals do not have the power to force governments to repeal regulations – they can only award compensation where the government has breached its treaty obligations. While some have argued that the threat of being liable for such compensation creates a “chilling effect” on the introduction of necessary regulations, this is not borne out by the examples of Australia and Germany who have maintained their new regulations respectively concerning tobacco advertising and nuclear plants, despite the commencement of multi-million dollar claims against them (which, as is often omitted from the current debate, have not yet been determined).
One of the more coherent arguments that has been expressed in opposition to ISDS is that no case has been made for why such a mechanism is needed in the context of an EU-US agreement. As a recent UNCTAD report explains, the EU-US relationship is already the largest in terms of foreign direct investment (FDI) held in each other’s territories. EU investors hold 62% of inward FDI into the US, while US investors hold 38% of inward FDI into the EU. This is despite the fact that none of the pre-2004 Member States of the EU have a BIT with the US and so less than 1% of the US’s investments into Europe (and less than 0.1% going the other way) are covered by ISDS provisions. Clearly, most investors are perfectly happy to invest without the protections of ISDS, so why bother?
A related and widely deployed argument against ISDS is that the courts of the EU and US do not raise the same problems regarding bias and inefficiency as those of Sub-Saharan Africa, South Asia or South America. Whilst this logic appears on its face to have some merit, one need only consider the average length of legal proceedings in Italy (nearly 8 years) or the decision of the Mississippi Circuit Court in O’Keefe v. Loewen Group, Inc (requiring payment of a US$ 625m bond in order for a Canadian investor to appeal a first instance decision), to see that “developed world” legal systems aren’t necessarily superior.
Of course, not all of the hyperbole comes from the “antis”. A very popular argument in favour of including ISDS in TTIP is the idea that its exclusion will set a negative and irreversible precedent for future investment agreements with large developing states. Would China honestly accept the inclusion of ISDS, on the basis that its courts are less trustworthy than the EU’s? Again, there seems to be some logic to this charge, but the evidence does not substantiate it. Australia famously refused to accept ISDS in its free trade agreement with the US – yet it had no problem agreeing to include ISDS in its more recent free trade agreement with China.
In response to the backlash against ISDS, the EU Commission decided to postpone negotiations on the investment chapter of TTIP, while it consulted with the public. The results of the consultation, which were published in January 2015, paint an unhappy picture for ISDS. Fully 97% of the responses received were pro-forma statements, many of which simply rejected TTIP in its entirety. While such responses might be expected from NGOs and their supporters, there has also been a surprising indifference (if not open opposition) towards ISDS from organisations such as the British Chamber of Commerce and the Institute of Directors, as well as writers from the Cato Institute and the Economist.
Thankfully, the EU Commission’s response to the consultation is more considered and less “knee-jerk” than some might have anticipated. The new EU Trade Commissioner, Cecilia Malmström, recently acknowledged the important role that the EU’s 1,400 BITs (including their ISDS provisions) have played in making EU Member States the largest foreign investors in the rest of the world. She also acknowledged that much of the current debate is overblown, in that the most controversial cases cited in opposition to ISDS are still undecided, investors tend to lose more often than they win, and excessive claims are frequently rejected by tribunals. However, the EU Commission still believes that a reform of ISDS will be necessary before it can be included in TTIP and has therefore decided to consult further with a variety of stakeholders.
As part of this exercise, the European Parliament is shortly due to adopt recommendations to the Commission for the ongoing negotiations. Member States have also been asked to provide their input, although their willingness to state a position publically is in some doubt. For example, the UK Government has indicated that it does not plan to submit a formal response, much to the chagrin of the UK’s parliamentary committee on business, innovation and skills. That committee has expressed its view, in a recent report, that the case has not yet been made for ISDS in TTIP. Instead, it recommends that the UK Government pushes for an express “right to regulate”, a mechanism to ensure the dismissal of frivolous claims and an unequivocal statement guaranteeing the protection of public services, such as the NHS.
Many of these recommendations line-up with the EU Commission’s previous negotiating position, which involved a “two-pronged” approach of (a) clarifying and improving the investment protections in the treaty (e.g. drafting restrictive definitions of “indirect expropriation” and “fair and equitable treatment”), and (b) improving how the ISDS mechanism operates (e.g. introducing a “loser pays” principle, ensuring greater transparency, regulating the members of ISDS tribunals and introducing an appellate mechanism). Such proposals and reforms are supported (at least in principle) by a large number of people familiar with ISDS, both on the side of investors and host states.
It is therefore crucial that the ongoing debate around TTIP does not continue to be dominated by half-truths and mis-information from either camp. Perhaps most worryingly for arbitration practitioners more generally, the toxic debate around ISDS in TTIP has painted an unflattering picture of the profession, and risks throwing the entire international arbitration community into disrepute. Those with an informed interest in the debate should therefore take the opportunity afforded by the EU Commission’s renewed consultation to engage with the real issues and help to allay the genuine and valid concerns that need to be addressed. Only then can the balance be tipped in favour of a reformed ISDS that is truly fit-for-purpose.