Long-awaited EU-Canada trade agreement agreed – a blueprint to set the standard for future investment protection?

On Friday 26 September, after five years of negotiations, the EU and Canada agreed in principle to a text for the Comprehensive Economic Trade Agreement (CETA). It is certainly comprehensive, running to 1,500 pages. It is the first such agreement signed by the EU as part of its policy (since the Lisbon Treaty) of assuming competence for trade and investment from the individual Member States. Its contents have therefore been keenly anticipated as an indication of the tone of future agreements, particularly as regards investment protection and investor-state dispute resolution (ISDS) contained in Chapter X.

CETA’s provisions are comprehensive as regards both of these areas, but with significant caveats, largely mirroring the drafts that have so far been made public in the EU-US forthcoming agreement in the Transatlantic Trade and Investment Partnership (TTIP) (see our earlier post on the TTIP consultation here).

As its Preamble sets out, the agreement expressly recognizes “that the protection of investments… stimulates mutually beneficial business activity“. At the same time, it stresses principles of governmental autonomy (including enforcement of labour and environmental laws) which can in some circumstances limit the rights of the investor. It also points out the responsibility of businesses to respect “internationally recognized standards of corporate social responsibility“, bringing these soft law norms into the ambit of the agreement.

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New regulation sets out financial responsibility for investor-state disputes between the European Union and third countries

Today (17 September 2014) a new European Regulation enters into force (EU No 912/2014) with wide-ranging implications for the global investment community. The Regulation allocates financial responsibility going forward, for claims brought by non-EU investors for harm done to their investment within the European Union. Depending on who was involved in the treatment in question – a Member State or a body, institution or agency of the EU itself, responsibility is allocated accordingly.

The rules will only be applied to investor-state disputes brought under agreements to which the EU is itself a party and which incorporate an Investor State Dispute Settlement (ISDS) mechanism. The Energy Charter Treaty (ECT) is one such treaty already in existence and several bilateral investment treaties (BITs) between the EU and third states are in the process of being negotiated, in some cases with a view to replacing the current BITs between EU Member States and third states. This forms part of a wider re-evaluation of investment issues and the relative competences of individual Member States and the EU.

EU Trade Commissioner Karel De Gucht has described the Regulation as “another building block in our efforts to develop a transparent, accountable and balanced investor-to state dispute settlement mechanism as part of EU trade and investment policy.”

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TTIP: EU Commission publishes statistical report on responses to the public consultation on ISDS and investment protection

On 18 July, the EU Commission published its Preliminary Report (statistical overview) on the responses to its consultation on investment protection and ISDS in the TTIP (for discussion of the consultation, see our previous blog post).

The Preliminary Report demonstrates that there was considerable interest in the consultation, with a total of 149,399 online replies. The greatest number of replies came from the UK at 34.8%, with 22.59% from Austria and 21.76% from Germany. The high proportion of responses from Germany in particular is unsurprising, given that the German Government’s approach to ISDS has received considerable coverage in both the legal and mainstream press.

Significantly, over 99% of responses were submitted by individuals (with only 569 by organisations, many of which were NGOs). 42% of the respondents agreed that their contribution can be made public and the Commission will publish those responses in due course.

The Commission will now analyse the responses, a task which it says is unlikely to be completed before November. It remains to be seen how the response analysis will influence the EU’s approach to negotiations of these issues with the US.

For further information, please contact Christian Leathley, Partner, Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

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Christian Leathley speaks at BritishAmerican Business event with keynote speech by EU Trade Commissioner Karel de Gucht: “TTIP and the Investment Dimension: What is the State of Play?”

International arbitration partner Christian Leathley spoke on a panel at an event organized by transatlantic business organization BritishAmerican Business yesterday discussing how important investor-state dispute settlement is to the success of the TTIP and whether it is feasible or desirable for the TTIP to be concluded in the absence of ISDS provisions. The TTIP is discussed in our blog post here. The keynote speech at the event was delivered by European Commissioner for Trade Karel de Gucht, who is negotiating the TTIP on behalf of the EU.

Mr de Gucht described the need for the EU Commission to get the right balance between protecting the rights of investors and preserving the right of states to regulate in the public interest. He also explained how the investment protection provisions in the TTIP were of fundamental importance in setting the standards which would be relevant in the negotiation of future investment agreements and FTAs between the EU and other states. Other speakers also referred to the global signal which would be sent by the inclusion of ISDS and the content of the substantive protections in the TTIP.

Christian noted that there was a need to identify what was the fundamental problem with ISDS; namely, that it was not the arbitral institutions (in particular ICSID) which were the issue and, whilst access to arbitration is fundamentally important, the core of the criticism of ISDS addressed the substantive rights granted to investors. He commended the EU Commission for launching the public consultation on the investment protection provisions in the TTIP as an attempt to bring together the perspectives of states and investors on substantive protection in a meaningful way. In terms of the EU Commission’s approach to the negotiation of the investment protection chapter with the US, Christian highlighted some points for further consideration, including: (i) questioning the need to amend or add to the UNCITRAL Transparency Rules, which themselves were the product of very detailed consideration; (ii) noting that the “closed list” of grounds for breach of the Fair and Equitable Treatment Standard was in places inconsistent and incomplete, particularly with regard to the treatment of an investor’s legitimate expectations; and (iii) criticising an approach which was premised on an assumption that use of shell companies was per se abusive.

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Europe consults on investment protection and ISDS in the TTIP

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.

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The Trans-Pacific Partnership: a New Year’s resolution of special significance

Following a further round of negotiations for the Trans-Pacific Partnership Agreement (the TPP) held in Singapore at the start of December 2013, it is expected that the agreement will be signed in early 2014 after more than three years of highly secretive negotiations. The TPP is a regional free trade agreement which, if the negotiations are successfully concluded, could create a trade bloc second only to the European Union in the size of its total trade value. The conclusion of this agreement is expected to have enormous significance for the dynamics of global trade and the outcome is keenly anticipated.

Although the negotiations have taken place behind closed doors, which is itself a source of great concern for many observers, speculation has centred on the public commentary by the participating states around issues central to the agreement. This has been augmented by the leak of several draft chapters of the agreement over the past three years. While the negotiations are likely to have moved on significantly since they were disclosed, the leaked chapters continue to shape the discussion around the content of the TPP and its highly contentious provisions.

With the twelve state parties – including the United States, Canada, Japan, Australia and Singapore – having set the ambitious goal of reaching agreement by the end of last year, this twenty-first round of negotiations was anticipated as the potential turning point for issues believed to be the source of significant rifts in the partnership. However, reports indicate that while a resolution has not yet been reached, the agreement is likely to be concluded early in 2014.

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Upcoming webinar: Structuring investment and maximising treaty protection

Tuesday 22 October 2013, 1-2pm UK time.

Investors are increasingly alive to the investment protections offered by bilateral and multilateral investment treaties.  Yet not all investment treaties are the same, with some offering stronger or more extensive protections than others. With careful advance planning, investors can make their investments using the right vehicle and transaction structure to ensure the best treaty protections possible.

In the third webinar in our investment treaty series, our speakers will use their experience and insight to guide you through some of your options for investment treaty planning to maximise your investment treaty protection, raising some potential hurdles and pitfalls along the way. Our speakers will also discuss other commercial factors influencing the choice of transaction structure, including taxation planning, and cover additional or alternative methods of investment protection.

Speakers:

  • Laurence Shore, Partner, International Arbitration, New York
  • Emmanuelle Cabrol, Partner, International Arbitration, Paris
  • Christian Leathley, Partner, International Arbitration, London
  • Andrew Cannon, Senior Associate, International Arbitration, London

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

The webinar will be recorded. If you are unable to listen to the event on the day please still register and then you will be able to access the recorded version later.

UNCTAD proposes ISDS reforms

On 26 June 2013, the United Nations Conference on Trade and Development (UNCTAD) published a report proposing a series of paths to reform and improve the existing international system for settling disputes between foreign investors and States.  The report builds on UNCTAD’s May 2013 survey of recent developments in the field of Investor-State Dispute Settlement (ISDS), which identified a number of potential threats to the legitimacy and effectiveness of the ISDS system:

  • Divergent interpretations of the same or similar provisions in International Investment Agreements (IIAs);
  • Claims arising out of State measures to address financial crises;
  • Challenges to State measures taken to protect the environment or public health;
  • Ineffective enforcement of awards rendered against States in investment-related cases;
  • Legitimacy questions raised by the lack of transparency in certain cases, especially under the existing UNCITRAL arbitration rules; and
  • Third-party funding of claims.

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