As reported in our previous blog posts (please click here and here), the proposed inclusion of investor-state-dispute settlement (ISDS) provisions in the Transatlantic Trade & Investment Partnership (the TTIP), has caused considerable debate amongst many stakeholders. Against this backdrop of heated public discussion, the European Parliament (the EP) has drawn up recommendations on the TTIP, including on ISDS. Whilst it is the European Commission (the Commission) which is negotiating the TTIP with the US on behalf of the EU, there can be no final agreement without the EP’s approval. The EP’s recommendations are a crucial indication of what it would want to see in the final agreement and will undoubtedly shape the Commission’s negotiating position. Continue reading
Tag: Transatlantic Trade and Investment Partnership (TTIP)
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. It also elaborates on the steps it has already taken in the EU-Canada FTA (the CETA) and the EU-Singapore FTA to improve the systems, and makes proposals which it considers will offer further progress towards its goal of protecting and encouraging investment without affecting the ability of the EU and its Member States to pursue policy objectives.
The Commission has proposed what it terms “concrete ideas” and a “concrete solution” (as summarised below). The Concept Paper is not binding and the Commission states that the content is without prejudice to its final position. However, the Concept Paper is a clear indication of the evolving thinking of the Commission in these areas. In particular, the Concept Paper contains two clear messages:
- Despite the outcome of last year’s consultation 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.
The proposed Transatlantic Trade and Investment Partnership (TTIP) 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 investment protection and investor-state dispute settlement (ISDS) 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. A further consultation is promised.
But why has ISDS in TTIP aroused such opposition? Can it be improved to strike a balance between investment protection and the right of governments to regulate? And, if TTIP is a blueprint for future free trade agreements (FTAs), what lies in store for this form of dispute resolution?
Chatham House in partnership with Herbert Smith Freehills are holding a symposium to bring together voices from across a broad range of stakeholders.
Sapfo Constantatos, Senior Group Legal Counsel, Dispute Resolution in the General Counsel’s Office, Standard Chartered Bank
Andrew Coop, Senior Legal Adviser, EU and International Trade, Department for Business, Innovation and Skills
Lorenzo Cotula, Principal Researcher, Law and Sustainable Development, International Institute for Environment and Development
Andrea Shemberg, Lead, Investment and Human Rights Project, London School of Economics; Legal Adviser to UN Secretary-General’s Special Representative for Business and Human Rights (2007-11)
Christian Leathley, Partner, International Arbitration and Public International Law, Herbert Smith Freehills LLP, London
Andrew Cannon, Partner, International Arbitration and Public International Law, Herbert Smith Freehills LLP, London
For further information, please click here.
Yesterday afternoon, the EU Commission issued its Report on the outcome of the public consultation on the inclusion of investment protection and investor-state-dispute-settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP) being negotiated between the EU and the US. As discussed in our blog post here, the public consultation was launched against the backdrop of vociferous debate about the nature of ISDS and investment protection more generally and in relation to the TTIP. The controversy surrounding investment protection and ISDS in connection with the TTIP is described in our recent podcast.
It is no surprise that the Report reveals strong opposition to, and concerns about, ISDS in the TTIP. It is also no surprise that the discussion as to both the content of the investment protections (including any “right to regulate”, as it is known), and the nature of the mechanism by which these can be enforced, will continue. In its Report, in response to the criticisms of inclusion of ISDS in the TTIP, the Commission refers back to the fact that the consultation takes place in specific circumstances in which the Council (and therefore, to all intents and purposes, each Member State) has unanimously entrusted the Commission to negotiate high standards of investment protection and ISDS within the TTIP, providing the final outcome corresponds to EU interests. Further, whilst the negotiating directives include an element of conditionality and make clear that a decision on whether or not to include ISDS is to be taken during the final phase of negotiations, it cannot be ignored that the US position is also that investment protection and ISDS should feature in the TTIP.
Whilst the consultation received an extremely high proportion of pre-populated responses organised by NGOs (which generally opposed the inclusion of ISDS), it also solicited responses from a broad cross-section of stakeholders which has allowed the Commission to identify a number of key points areas (or “core issues”) to develop. These are:
- The protection of the right to regulate
- The supervision and functioning of arbitral tribunals
- The relationship between ISDS arbitration and domestic remedies
- Review of ISDS decisions for legal correctness through an appellate mechanism
The Commission has committed to further consultation with EU stakeholders in the first quarter of 2015. However, at this stage it is not clear how further consultation on these “core issues” will put the Commission in a better position to develop the investment chapter. For example, the “right to regulate” is the flip-side of the guarantee to an investor of fair and equitable treatment. Any re-consideration of the right to regulate will be deficient if it does not take into account the positive rights of investors which impact on the state’s right, as well as the sectors in which such right should exist without limitation. Again, the relationship between ISDS arbitration and domestic remedies depends on the balance struck between investment protections and the rights of states. A holistic approach is needed.
The Commission’s Report on the responses to the Consultation is found here, and the accompanying Commission Memo is found here. Aspects of the Report are considered in further detail below. You may also wish to hear Herbert Smith Freehills public international law partner Matthew Weiniger QC discussing these issues on the Today programme on Radio 4 on 14 January 2014 (at 18.55 mins into the broadcast).
For further information, please contact Matthew Weiniger QC, partner, Christian Leathley, partner, or Andrew Cannon, partner, or your usual Herbert Smith Freehills contact.
We live in interesting times for investment arbitration. There is wider public engagement with investment protection than there has ever been, prompted by the European Commission’s public consultation on the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, and the agreement in principle of the text of the Comprehensive Economic Trade Agreement (CETA) between the EU and Canada.
Unfortunately, this engagement is by and large negative. Some have railed against the treaties themselves, expressing the view that such protections privilege foreign investors over domestic investors, that they bypass the operation of domestic law and national courts and stymie the right of states to regulate. Others have criticised the investor-state arbitration process, claiming that it allows partisan, self-interested arbitrators to secretly overrule governments with no right of appeal.
This story of a system biased against impoverished states, used as a weapon by “big business” intent on flexing its muscles, is a compelling one, bolstered by a small number of high profile cases which (whether rightly or wrongly) add fuel to the fire. Those few small voices of calm trying to put the case for free trade, protection of investment and a non-national, neutral and pacific method of dispute resolution are easily overlooked in the debate. Yet there is a strong case to be put.
Limitations of recourse to national courts and diplomacy
Before the introduction of investment treaties, if a national of one state was poorly treated, their assets commandeered, or their safety threatened in another state, they may (in theory) have been able to pursue a remedy in the national courts of that state. The difficulties of this course are readily apparent. The investor may not have access to an independent judiciary untouched by political or other influences. A final remedy may take years to achieve and enforcement against the state in question may be impossible. The main recourse was instead through diplomatic channels. The investor would need to get its own government interested in the issue and willing to engage in international diplomacy to seek to resolve the situation.
A government may be more inclined to act in the context of an outright taking, but host state actions are increasingly more subtle than this. The success of that state-to-state diplomacy would ultimately depend on the relative strengths of the states involved and whether any other, more pressing diplomatic issues took precedence. Failing diplomacy, a national would need to rely on its home state being willing to “send in the gunboats” to enforce or protect its rights.
Investment treaties as a vehicle for investment protection
Diplomacy might be an option in a world in which international investment and business transactions are extremely limited, but in the 21st century, few states would be willing or able to elevate events affecting one commercial party to the level of international diplomacy. Investment treaties offer states the opportunity to de-politicise these kinds of disputes. Germany entered into the first bilateral investment treaty (BIT) with Pakistan in 1959 (a fact which now seems ironic given Germany’s position in the current debate on the inclusion of investor-state dispute settlement (ISDS) in the TTIP).
In the world’s 3000+ investment treaties, states agree between themselves standards of protection that they will offer to investors of the other. They then allow individual investors to enforce those standards against a host government, without needing the assistance or support of their own government. It is a system invented and developed by states for their own benefit, to attract foreign investment in order to boost their own economies.
These treaties have considerable importance for states in underpinning their viability as a place of investment. They contain protection standards with which few could take issue. They promise non-discrimination, fair and equitable treatment and compensation for expropriation of assets. In short, they ensure that foreign investors are treated fairly by the host state in which they invest.
In order to ensure that these standards of protection are concrete and enforceable, the treaties provide for investors who claim their investments have been damaged by the host state to claim recompense for that damage before an international arbitral tribunal. That arbitral tribunal is comprised of three individuals, one chosen by the state, one by the investor and the third by the co-arbitrators, to rule on whether the treaty standards have been breached by the host state and, if so, what compensation is payable. The tribunal sits outside the sphere of any domestic courts, free from the risk of domestic bias or political or other influence.
Potential for reform of the current ISDS system
As a basic proposition, the idea of investment treaties and “international” dispute resolution is a solid and positive one. Yet being a supporter of the idea of investment protection and investor state arbitration does not mean that one must also support the current system in its entirety. The reality of present-day investment arbitration is that states have created a system with flaws which need resolving in the light of modern experience.
1. Clearer standards of protection
Let us start first with the allegation that the protections offered by investment treaties favour foreign investors over domestic investors and stifle regulation. The language used in these treaties has historically been wide and open to interpretation. This has resulted in a lacuna which investors have sought to interpret to their advantage, just as they would the obliquely worded language of a commercial contract. Similarly, arbitral tribunals are criticised for upsetting the balance of the treaty or going “off script” in rendering an investor- friendly decision. Yet where there is lack of clarity, there is scope for interpretation. While we might not like the outcome of a particular award or the interpretation offered by a tribunal, few can disagree that clearer, narrower standards of protection would remove that scope for interpretation and many of these concerns.
The answer must therefore be in clearer drafting. States are alive to the need to clarify the protections given: the CETA text and TTIP consultation show that states can actively seek to draft the treaty protections they are willing to offer. It remains to be seen whether this awareness will in future also prompt more states to utilise their rights under the Vienna Convention on the Law of Treaties (Article 31) to seek to agree a binding interpretation of their existing stock of BITs with their state counterparties (in a system akin to that provided by the North American Free Trade Agreement (NAFTA)).
2. Greater transparency
Similarly, the lack of transparency in the arbitral process has, rightly, been criticised. Lack of transparency has enabled allegations of “secret courts” to abound. Most now accept that, in order for investment arbitration to retain legitimacy, transparency is required. Increasingly, some transparency is becoming the norm.
Most investor-state arbitrations take place under the rules of either the International Center for the Settlement of Investment Disputes (ICSID), an autonomous institution within the World Bank that can facilitate the resolution of disputes between investors and signatory states to the ICSID Convention, or as an ad hoc arbitration under the UNCITRAL Rules. ICSID has a process that requires transparency (with greater transparency planned) and the UNCITRAL Transparency Rules have introduced a more transparent and open system, whilst still offering necessary protection for commercially sensitive information.
3. Development of an appeal mechanism
Criticism of the ICSID annulment process is also hard to refute. Whether by design, over-reaching of the tribunals appointed in annulment proceedings, or misuse by the (mostly state) parties seeking annulment, the process has turned into a very different creature from that which the ICSID Convention originally intended. There remains real scope for states, investors, practitioners, academics and interest groups to give thought to a way in which the annulment process could be improved or, indeed, replaced. As yet, however, the suggestions being offered, including some form of appeal mechanism, remain embryonic.
4. A more streamlined process
It is also fair to complain about the length of time taken to bring an investment treaty to a conclusion. In the light of a recent study finding that an ICSID arbitration takes an average of 3.6 years, many may believe efforts can and should be made by all concerned to make the process more efficient and cost effective.
So what does the future hold? States need to decide whether there is still merit in offering investment protection in the form of treaties or free trade agreements (FTAs). Some, like South Africa, appear to have decided to the contrary, and Australia has determined that ISDS will be considered on a case by case basis. Yet it is worth bearing in mind that both these states are resource-rich nations that will always attract investment. For other states this is a highly nuanced picture: Is it necessary between developed nations with established and reliable domestic court systems? Is it necessary for states negotiating with the EU, where not all courts create the same level of confidence in the eyes of foreign investors? Should investor protection be part of, or separate to, free trade negotiations?
Even once those questions are resolved, states who do decide to enter into investment treaties must acknowledge that investors can only claim the protections that are offered to them. If states wish to retain the right to regulate certain parts of their economy, to limit the ability of treaty-shopping shell companies to claim, or to limit the meaning of certain protections, the power rests with them to enter into new treaties on that basis. Given the backlash against CETA and the TTIP, we should and must expect real developments in this sphere over the coming years.
And finally, what is the future for arbitration in resolving disputes under investment treaties? If we decide that investment protection is important, then we must also acknowledge that in many regions of the world, the best custodians of that protection may well not be national courts. If we accept this to be the case, then an international system of dispute resolution is required. ICSID was established with this aim. Current fledgling proposals regarding standing international tribunals of state-appointed arbitrators do not appear to resolve concerns about legitimacy, and run the risk of being far more expensive and less reliable than the current system.
While we should anticipate change in the scope of investment protections offered going forward, and increasing revision of past treaties, the future for investor-state dispute settlement is far less certain. I, for one, hope that the benefits of arbitration do not get lost in the debate.
For further information, please contact Matthew Weiniger QC, Partner, Vanessa Naish, Professional Support Lawyer or your usual Herbert Smith Freehills contact.
The above article has been written by Matthew Weiniger QC for the inaugural Global Law Summit which takes place in London next February to celebrate the rule of law and mark the 800th anniversary of the signing of the magna carta. The Summit will consider as one of its key themes, ‘Law at the heart of 21st century business – from internal governance to regulation, competition and arbitration/dispute resolution’.
With the increase of global commerce, it also becomes increasingly important to provide for effective and quick dispute resolution mechanisms across state borders. A number of developments in international law recognise this trend and seek to address it. These developments include:
- The inclusion of Investor-State Dispute Resolution mechanisms in the Trans-Pacific Partnership Agreement and the Transatlantic Trade and Investor Partnership,1
- Further global acceptance of the importance of the New York Convention, which now has 152 signatories (Bhutan and Guyana being the most recent state to become parties), and
- The European Union Justice Ministers approval of a decision to ratify The Hague Convention of 30 June 2005 on Choice of Court Agreements.
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.
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.
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.