The European Commission has launched a public consultation on its proposed approach to investment protection and investor-state dispute settlement (ISDS) provisions in the Transatlantic Trade and Investment Partnership (the TTIP).  The TTIP is a free trade agreement currently in negotiation between the United States and the European Union. Negotiations for the TTIP began in July 2013.

The Commission has described its approach as containing “a series of innovative elements that the EU proposes using as the basis for the TTIP negotiations” and stated that the key issue on which it is consulting is “whether the EU’s proposed approach for TTIP achieves the right balance between protecting investors and safeguarding the EU’s right and ability to regulate in the public interest”.

Whilst the EU is not consulting on a draft text of the TTIP, it has included as a reference text the investment protection and ISDS provisions in the Comprehensive Economic and Trade Agreement (the CETA), between the EU and Canada. 

Whilst we are currently a long way from a signed agreement including investment protection and ISDS provisions, stakeholders may nonetheless want to take this opportunity to consider the ways in which the EU’s approach and the negotiations could impact upon them.  The European Commission’s Consultation can be found here and closes on 6 July 2014.

The Consultation

Whilst a draft of the investment chapter of the TTIP had been leaked before the consultation was launched, the consultation does not include a draft.  Instead, the EU’s proposed approach is accompanied by reference text which includes both traditional language found in bilateral investment treaties (BITs) and language from the CETA.  In October 2013, Canada and the EU reached agreement on the key elements of the CETA, however the agreement has not been signed or ratified.

The EU is consulting on its proposed approach to the negotiation of substantive investment protections including investor rights to: fair and equitable treatment; protection from expropriation; national and most favoured nation treatment.  The consultation document also deals with the need to ensure the right of states to regulate and the EU is looking to make a change from the traditional approach in BITs: to “strengthen the balance between investment protection and the right to regulate”.  The approach in the CETA was to preserve the right to regulate in an express provision. 

The EU’s approach integrates transparency into the ISDS process by incorporating the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration for all arbitrations conducted under the TTIP.  The underlying assumption in the EU’s approach is clear: that the public should know the basic facts and to be able to evaluate claims.  For our previous blog post on the UNCITRAL Transparency Rules, please click here

In a move away from the ICSID annulment system (whereby only the procedural legitimacy of an award can be challenged under limited grounds and an award can be overturned but no new award issued), the EU aims to establish an appellate mechanism under which the procedural and substantive legitimacy of ISDS awards can be challenged and the appeal body can make a new ruling. 

Other interesting provisions which form part of the EU’s approach to the negotiation which may be significant for stakeholders are: an opportunity for states to effectively seek to strike out frivolous and unfounded cases; a clear presumption that the losing party will pay costs; a filter mechanism by which the parties to the TTIP can intervene in cases where the investor is challenging a measure adopted pursuant to rules taken for prudential reasons to maintain financial stability; and a provision whereby the parties to the TTIP can intervene in an ISDS proceeding to explain how they want provisions to be interpreted and to issue binding interpretations on issues of law.

The implication from the consultation document and the surrounding statements and reports is that the CETA text would be the foundation of the EU’s negotiating position with the US in relation to the investment chapter of the TTIP.  However, one of the points which is reported to be holding up the final agreement of the CETA is investment protection and EU Trade Commissioner Karel De Gucht has not been drawn on whether outcome of the consultation on ISDS will be reviewed before finalising the CETA.

It is also apparent that certain aspects of the EU’s approach conflict with the US approach as apparent from the 2012 US Model BIT.

European Parliament must approve the agreement but are national governments to ratify or not?

Whilst conclusion of negotiations and an agreed draft are a relatively long way off, discussion has inevitably already started on if and how the agreement will be ratified.

The first stumbling block could be the European Parliament, since it will need to vote on the TTIP once it has been negotiated by the European Commission.  The two major party groups in the EP are in favour of the TTIP generally, and according to polls should remain the two major groups after next week’s European Parliament elections.  However, other parties have focussed on objection to any form of EU/US trade agreement  – in particular investment protections and ISDS – as part of their election campaigns.  The composition of the European Parliament after the May election could therefore influence the success of the TTIP.

A further issue is whether the TTIP will be a “mixed agreement”, meaning that elements of the agreement will fall outside the scope of the EU’s competence in trade policy as expanded by the Treaty of Lisbon and within the competence of the EU Member States.  If so, the TTIP will require separate ratification by each of the EU Member States before it formally enters force.  Germany has been particularly vocal in its objections to the inclusion of ISDS in the TTIP.

In a recent report on the TTIP earlier this month the EU Committee of the UK House of Lords outlined a number of concerns which remained with the inclusion of substantive investment protections and ISDS.  It stated that it supports the UK Government’s stance on the inclusion of investment protection provisions but only on the condition that “the EU is able to secure that same range of safeguards in an agreement with the United States as were included in the CETA agreement with Canada”.

For further information, please contact Matthew Weiniger QC, Partner, Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Matthew Weiniger QC
Matthew Weiniger QC
+44 20 7466 2364
Hannah Ambrose
Hannah Ambrose
Professional Support Lawyer
+44 20 7466 7585