“Legal scrubbing” of the CETA results in adoption of an Investment Court System for resolving Investor-State disputes: a clear signal to the US for the TTIP negotiations?

On Friday 26 September 2014, after five years of negotiations, the EU and Canada released the agreed text for the Comprehensive Economic Trade Agreement (CETA). The content of that "agreed text" is commented upon in some detail in our earlier blog post here. It included enshrining the principle of "government autonomy" and further defining the standards of protection offered to investors. Notably, it retained investment arbitration as the method for resolving Investor-State disputes, but with additional procedural features such as full transparency of proceedings, a future code of conduct for arbitrators, costs assumptions and the ability to dismiss unfounded claims. It also stated that consideration would be given in future to the introduction of an appeal mechanism.

Consideration of an appeal mechanism has come about rather sooner than might have been expected. Since its agreement in principle in 2014, the CETA text has been undergoing legal review (also referred to by the Commission in its Press Release of 29 February 2016 as "legal scrubbing").

It became apparent during 2015 that, following the Commission's further work on the investment chapter for the TTIP (including a public consultation), the EU would be seeking some substantial changes during this legal review, aiming to bring the CETA in line with the Investment Court System (ICS) proposed in the EU-Vietnam FTA and the TTIP chapter (as formally presented to the US in November 2015). The process for agreeing these changes has not, however, been smooth. On 9 December 2015, Canada's Chief Negotiator for CETA, Steve Verheul, apparently ruled out the full inclusion in the CETA of the ICS proposed by the EU stating that "We have reached the balanced agreement that was supported by our leaders and I think that we have to be very cautious about revisiting things that have been agreed and endorsed".

Nearly four months later an agreement has now been reached, and Canada appears to have overcome its concerns regarding the EU's proposed ICS. The Press Release states that the revised CETA Investment Chapter "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."  From a US perspective and the ongoing TTIP negotiations, it is also interesting to note the strong language of the Press Release that "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".

So what does the revised text include? Drawing very strongly on the EU's proposal for the TTIP investment chapter, the CETA now envisages the establishment of a permanent Tribunal of 15 members (5 from the EU, 5 from Canada and 5 from other countries) to hear claims by investors for breach of investment protections standards. Under Article 8.30, as with the TTIP proposal, those Tribunal members "shall refrain from acting as counsel or as party-appointed expert or witness in any pending or new investment dispute" under the CETA or any other international agreement.

Unlike the TTIP proposal, the CETA does not yet annex a Code of Conduct for Tribunal members, although Article 8.44.2 provides for the Committee on Services and Investment to adopt such a code in future. In the meantime, the CETA relies upon the IBA Guidelines on Conflicts of Interest in International Arbitration to fulfil that function.

Clearly some elements of the Investment Court System, particularly surrounding the Appellate Tribunal, could not be agreed during the negotiations, and the EU and Canada have agreed to allow the CETA Joint Committee to resolve those outstanding issues (Article 8.28.7). These issues include:

  • The procedure for the initiation and conduct of appeals, including referring issues back to the Tribunal;
  • The procedure for filling Appellate Tribunal vacancies and constituting that Appellate Tribunal;
  • The number of Members of the Appellate Tribunal and their remuneration; and
  • The cost of appeals.

While these details have yet to be ironed out, it is certainly of note that the EU and Canada were able to reach agreement that some form of appellate structure was desirable, and that appeals would be allowed for errors in the application or interpretation of law as well as "manifest errors of fact" (Article 8.28.2). Also of note (particularly in the context of the TTIP negotiation) is Article 8.29 in which both the EU and Canada agree to pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes and to amend the CETA to allow investment disputes to be decided under such multilateral mechanism once established. The Joint Statement confirms that working with other trading partners to pursue the establishment of a multilateral investment tribunal is "a project to which the EU and Canada are firmly committed".

We also see the impact of the development of the EU's position on the relationship between international law, ISDS and EU law, as seen throughout its amicus curiae submissions in intra-EU BIT cases. The text now "clarifies" that CETA will not prevent the EU from enforcing its laws on state aid and that a tribunal cannot decide on matters of EU or Member State law, nor can it interpret EU or Member State law in a way that could be binding on EU courts or EU governments.

Comment

We have been expecting some changes to the CETA. It has been apparent for some time that the Commission considered it very important to attempt to bring the CETA in line with the recently agreed text of the EU-Vietnam FTA and its TTIP proposal. Given the position of Canada back in December, however, the extent of changes to the ISDS provisions in the CETA are somewhat surprising, as is Canada's agreement to pursue the establishment of a multilateral investment tribunal and appellate mechanism with other trading partners. The fact that there are some important points still to be agreed, particularly on the Appellate Tribunal might suggest that that reaching that agreement has not been easy. The scope and breadth of the substantive changes reached through such a "legal review" process is perhaps also surprising.

What does this mean for the EU's negotiations on the TTIP with the US? As discussed in our earlier blog piece, the EU's Chief Negotiator has confirmed that the negotiators have been "working on the basis of textual proposals from both sides" during the 12th round of TTIP negotiations, and that ISDS has been a key area of discussion. The strength with which the EU is pursuing the ICS as the method of resolving investor-state disputes with other states may pose difficulties for its negotiations with the US.  The Commission has suggested that the changes introduced in the CETA "ensure that citizens can trust it to deliver fair and objective judgements", and that it offers a "fairer, more transparent, system". Given these statements, it may well be hard for the EU to justify a retreat to the more traditional ISDS arbitration favoured by the US and many other commentators, who have questioned both the fundamental need for, as well as some of the key features of, the proposed ICS.  Whether it will need to do so remains to be seen.

For further information, please contact Laurence Shore, Partner, Andrew Cannon, Partner, Isabelle Michou, Partner, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact.

Laurence Shore
Laurence Shore
Partner
+1 917 542 7807
Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Isabelle Michou
Isabelle Michou
Partner
+33 1 53 57 74 04
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585

TTIP: 12th Round of Negotiations concludes, investment protection remains high on the agenda; plus newly published CETA text includes EU’s Investment Court System proposal

The 12th Round of Negotiation of the TTIP, which concluded last week in Brussels, provided the first opportunity for the negotiating parties to discuss the EU's proposed Investment Chapter. The EU's formal proposal for the Investment Chapter, which is discussed here, includes a two-tiered Investment Court System (ICS) for resolution of investor-state disputes.

As noted in our blog post here, it is no by means a foregone conclusion that the US will depart from the form of investor-state dispute settlement (ISDS) envisaged in its 2012 Model BIT and included in the recently concluded Trans-Pacific Partnership Agreement (the TPP).  The EU's Chief Negotiator has confirmed that the negotiators are "working on the basis of textual proposals from both sides", and identifying areas of convergence.  However, the method of resolving investor-state disputes has become such a controversial issue in Europe – including in the European Parliament – that the EU may find it difficult to retreat too far from its ICS proposal should the US decide to oppose it. 

Whilst the EU and US are likely to find some degree of common ground in terms of the desire on both sides to protect the right to regulate, ISDS may not be the only area of divergence.  For example, in the US Model BIT, it is confirmed that the concept of fair and equitable treatment does not require treatment in addition to or beyond that which is required by the customary international law minimum standard.  This language is replicated in the Investment Chapter of the TPP. In contrast, the EU's proposed text avoids linking the concept of Fair and Equitable Treatment to the customary international law minimum standard by limiting fair and equitable treatment to a closed list of types of behaviour.

The EU and US have stated that they aim to conclude negotiations by the end of 2016 and have planned two further negotiating rounds before the summer break.  Whilst the 12th Round has formally concluded, negotiators will reportedly remain in contact to progress matters with a view to producing a draft text by July in which only the most sensitive issues are subject to further negotiation.

In a further significant development published today, the EU and Canada have released the revised text of the Comprehensive Economic and Trade Agreement (CETA) – which was concluded in August 2014 – following the completion of a legal review process which has resulted in modification of the text of the Investment Chapter.  The revised CETA Investment Chapter will be continued in more detail in a later blog post. The most notable amendment is the removal of the previous text providing for investor-state arbitration. This has been replaced with the inclusion of a two-tier ICS, replicating the EU's TTIP proposal, and following the recent conclusion of similar provisions in the EU-Vietnam FTA.  The apparent acceptance by Canada of this new form of investor-state dispute resolution may assist the EU in its negotiations with the US on this point.

For more information, please contact Larry Shore, Partner, Isabelle Michou, Partner, Christian Leathley, Partner, Andrew Cannon, Partner, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Isabelle Michou
Isabelle Michou
Partner
+33 1 53 57 74 04
Laurence Shore
Laurence Shore
Partner
+1 917 542 7807
Christian Leathley
Christian Leathley
Partner
+1 917 542 7812
Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585

 

European Commission formally presents proposed Investment Chapter for TTIP to the US

Yesterday, 12 November, the EU formally presented its proposed language for the Investment Chapter of the TTIP to the US. As discussed in our earlier blog piece here, the EU is suggesting an "Investment Court System" to resolve disputes between investors and states under the TTIP.

The 12 November text is very similar to that seen in the previous draft, with a number of small changes. These changes include (but are not limited to):

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European Commission publishes draft investment chapter for the TTIP, including investment protection provisions and the establishment of an International Investment Court

On 16 September the European Commission published detailed draft proposals for the investment chapter in the proposed Transatlantic Trade and Investment Partnership treaty between the EU and the US (“TTIP”). The full text is available here. The chapter includes detailed investment protections and the establishment of an International Investment Court to resolve disputes under the TTIP. These proposals follow the Commission’s 5 May 2015 Concept Paper (discussed in our earlier blog here), which looked at reforming the ISDS system and proposed moving away from the current system of Investment Treaty arbitration.

The Commission has made it clear that this draft is for discussion and consideration within the EU before being put to the US as part of the TTIP text.

We explore and summarise below some of the key issues raised in the chapter.

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Upcoming webinar: The changing landscape of Investment Treaty arbitration – Tuesday 23 June 2015 – 12.45pm BST

There has never been a time of greater public engagement in the whole system of Investment Treaties and the Investor State Dispute Settlement (ISDS) provisions contained within them. The ongoing negotiation of both the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership has provoked very heated legal and political debate from both sides of the globe. Yet, while the debate rages over the provisions contained within these treaties, arbitral tribunals continue to produce arbitral awards which raise interesting new issues in this ever developing area of international law.

In this webinar, four of our Investment Treaty arbitration specialists will look at the ongoing debate surrounding investment protection and ISDS, focusing on the TTIP and TPP and the current approaches being adopted in their negotiation. They will consider what the future looks like for ISDS if these two treaties form a “blueprint” for the future of investment protection. They will also provide an update on recent developments in the sphere of investment arbitration, including the EU’s developing position on Intra-EU claims, provisional measures, arbitrator challenges and the annulment process.

Speakers:

Isabelle Michou, Partner, International Arbitration, Paris (Chair)

Christian Leathley, Partner, International Arbitration, London

Andrew Cannon, Partner, International Arbitration, Paris

Iain Maxwell, Of Counsel, International Arbitration, London

 

If you would like to register for this event please contact Prudence Heidemans.

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EU Commission issues “Concept Paper” on ISDS in the TTIP and beyond: proposals for “profound reform”

Further to its report on the outcome of the consultation on investment protection and investor-state dispute settlement in the TTIP, the EU Commission has issued a “Concept Paper” which envisages a very different future for resolution of investor-state disputes.

The Concept Paper builds on the four key areas which the Commission previously identified as requiring further consideration, explaining that there is opportunity for “profound reform” of the investment protection and ISDS systems. In particular, the Concept Paper contains two clear messages:

  • Despite the outcome of last year’s con and the apparent weight of opinion in the European Parliament, the Commission is not minded to remove substantive investment protections or investor-state arbitration from the TTIP.
  • The Commission envisages major changes in the future for ISDS which, if adopted in the TTIP and accepted more broadly in other free trade and investment agreements, would have significant implications for the way in which investors are able to protect their investments and resolve disputes with host states.

A summary of, and comment on, the Concept Paper can be found on our Public International Law Notes blog here.

For further information, please contact Andrew Cannon, Partner or Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
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+33 1 53 57 65 52
Hannah Ambrose
Hannah Ambrose
Professional Support Consultant
+44 20 7466 7585

 

Herbert Smith Freehills and Chatham House event on TTIP: meeting report now available

As reported in our previous post, on Wednesday 4th March Herbert Smith Freehills hosted an event in partnership with Chatham House (the Royal Institute for International Affairs, London), seeking to explore the opposition to the TTIP and, in particular, the Investor State Dispute Settlement (ISDS) chapter within it. Chaired by HSF partner, Andrew Cannon, the panel represented a broad range of stakeholders from in-house counsel, government officials, academia and civil society, together with HSF partner, Christian Leathley. The panel explored why ISDS arouses such opposition, and whether and how it can be improved to strike a balance between investment protection and the right of governments to regulate. The panel also considered whether the TTIP and its ISDS provisions will be a blue print for future free trade agreements.

The Chatham House report of the event is now available here.

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Company vs Country: BBC documentary on investor-state dispute settlement on BBC Radio 4 tonight

After decades of governments concluding international investment agreements, reservations concerning free trade agreements (such as the TTIP, between the US and the EU) have led to unprecedented levels of public debate, focussing largely on the proposed inclusion of investor-state dispute settlement (ISDS) provisions.

Matthew Weiniger QC was interviewed for a BBC Radio 4 programme to be broadcast at 8pm tonight, titled “Company vs Country“. It will discuss the nature of investment protections and ISDS, including the high profile investor-state disputes which are relied on as evidencing the alleged threat ISDS poses to democracy.

The programme will be available here shortly after the broadcast.

For further information, please contact Matthew Weiniger QC, or your usual Herbert Smith Freehills contact.

Matthew Weiniger QC
Matthew Weiniger QC
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Herbert Smith Freehills hosts TTIP event in partnership with Chatham House

On Wednesday 4th March Herbert Smith Freehills hosted an event in partnership with Chatham House (the Royal Institute for International Affairs, London), seeking to explore the opposition to the TTIP and, in particular, the Investor State Dispute Settlement (ISDS) chapter within it. Chaired by HSF partner, Andrew Cannon, the panel represented a broad range of stakeholders from in-house counsel, government officials, academia and civil society, together with HSF partner, Christian Leathley. The panel explored why ISDS arouses such opposition, and whether and how it can be improved to strike a balance between investment protection and the right of governments to regulate. The panel also considered whether the TTIP and its ISDS provisions will be a blue print for future free trade agreements.

The proposed Transatlantic Trade and Investment Partnership (TTIP) free trade agreement between the EU and the US, two of the world’s largest economies, is intended to remove trade barriers, create wealth and promote investment. On 13 January, the European Commission published the results of its public consultation on the investment protection and investor-state dispute settlement (ISDS) chapter in TTIP. Of the 150,000 responses, 97 per cent were negative. Critics have stated that the ISDS proposals would allow corporates to undermine regulation by governments in fields such as environmental protection.

The event was very well attended with around 100 delegates from across a broad spectrum of sectors and backgrounds. Held under the Chatham House rule, the event opened with presentations by each of the five panellists, followed by questions from the floor. Of particular focus was whether the European Commission’s efforts to revise the substantive standards in the draft TTIP consultation text were merely “tinkering”, doing little to address the legitimacy crisis in ISDS. The panel went on to consider whether a broader shift in mind set towards investor protection was required which gave greater significance to states’ other international obligations such as Human Rights and the environment.

Andrew Cannon comments, “this event gave us a unique opportunity to draw together viewpoints from the two sides of this very current debate at the historic venue of Chatham House. The ISDS system continues to come under ever-closer scrutiny and we will continue to follow developments closely.”

A fuller report of the seminar will be posted shortly.

For further information on the TTIP please contact partners Andrew Cannon, Christian Leathley, Matthew Weiniger and Laurence Shore or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Christian Leathley
Christian Leathley
Partner
+44 20 7466 2532
Matthew Weiniger QC
Matthew Weiniger QC
Partner
+44 20 7466 2364
Laurence Shore
Laurence Shore
Partner
+1 917 542 7807

The European Parliament’s study on arbitration legal instruments and practice in the EU and Switzerland: a step towards a uniform European regime on arbitration?

Two weeks ago the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs published a broad study on the legal instruments and practice of arbitration across the European Union and Switzerland.  This study was undertaken over the past year at the Brunel Centre for the Study of Arbitration and Cross-Border Investment and is based on academic research and the results of a large-scale survey of arbitration practitioners across the EU and Switzerland.

The primary goal of this study is “to portray accurately the actual diversity of arbitration law and practice across the European Union and Switzerland” in order to “discuss the strengths and weaknesses of the law and practice observed” in each European jurisdiction.  In doing so, it first examines the legal framework and practice of arbitration in each Member State.  It then analyses specialised topics of arbitration such as commercial, consumer and online arbitration and finally it evaluates the involvement of EU Member States and the EU in investor-state arbitration.

The study also provides insights into and recommendations for potential future actions and reforms mainly to improve the interaction between arbitration and EU law. Whilst the purpose of this contribution is to guide the European Parliament in its future decisions regarding arbitration, it remains uncertain whether potential reforms on this topic are part of Europe’s broader agenda. Continue reading