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21 September 2015

ANALYSIS: Does the Commission’s new proposal mark the end of ISDS?

Examining the key points under the new ‘International Court System’ in TTIP

Simon McKeagney, Editor

On 16 September, Trade Commissioner Malmström presented a legal text proposal for the chapter on dispute settlement between investors and states in TTIP and other FTA negotiations of the EU (Japan, Vietnam). The proposal draws the Commission's 18-month consultation period on ISDS to a close, and will be discussed with Parliament's INTA Committee and Member States in the Council, before being submitted to the US side for consideration during the 11th TTIP negotiation round in Miami on 19 - 23 October. 

The proposal introduces a new structure dubbed the ‘International Court System’ or ICS, which the Commission claims puts an end to the existing ISDS system. While indeed the ICS proposal contains a number of important reforms of ISDS which go beyond what has already been developed in CETA, none of the 4 qualifiers mentioned by Malmström at the press conference on September 16 can be regarded as truly marking the end of "the old ISDS system”. Here is our analysis of Malmström’s four main considerations: 

1) Have exclusive rights for foreign investors been curbed? 

The Commission claims that the ICS will drastically limit foreign investor privileges, such as limiting the ability to take claims against states. Yet greater substantial rights are still afforded to foreign investors over domestic investors under the ICS, which can be evoked to challenge the rights of states to regulate.

The most widely-invoked substantial right of foreign investors under investment treaties is enshrined in the concept of "Fair and Equitable Treatment" (FET), which has no correspondence in domestic law (though it evokes similar notions of justice). ICS is still based on FET, but - as already in CETA - the Commission has opted for a defined list of FET criteria, which older BITs do not have. This is progress. In ICS, the CETA list is reproduced. However, as in CETA, it is not clear, if this list is regarded to be a "closed list". New criteria can theoretically be added, if the responsible Committee under TTIP decides so.

Moreover, a loophole continues to exist in ICS which investors have often invoked in claims: the concept of "legitimate expectations" of an investor. It is not part of the list of FET criteria, but the concept of "legitimate expectation", created by a "specific representation to an investor to induce an investment", in combination with the FET criterion of "due process" in "administrative proceedings" gives foreign investors a substantial right which domestic investors do not have. 

ICS, however, excludes some specific areas from investor claims, especially bank insolvencies and debt restructuring. It is also made clear that the discontinuation of subsidies or state-aid cannot be invoked for an investor claim. All these (positive) restrictions were already contemplated in the CETA negotiations and react to corresponding ISDS cases encountered in the recent past. 

The right of states to regulate "to achieve legitimate policy objectives" is mentioned quite exhaustively in ICS Article 2, including a reference that a change of the legal and regulatory framework cannot be evoked as cause for a claim. This, again, is progress. However, enshrined in an investment treaty, which is meant to protect investments, the value of this clause needs a reality check. Formulations in this spirit in other investment treaties were not taken into due account by arbiters. A clear formulation that foreign investors have no greater substantial rights than domestic investors is missing in the ICS. Only with such a clause, arbiters would be forced to take account of the (rather restrictive) solutions in conflicts between private and public interests in the sense of Art. 340(2) TFEU regarding compensation for damage caused by unlawful acts and conduct committed by Union institutions and bodies, in case of non-contractual liability of the Union.

2) Is the ICS a public court?

The use of the words “public” in the Commission’s new proposal needs to be carefully considered. For the Commission, the ICS is a ‘public court’ because the arbiters are publicly nominated and paid (at least partly). For the Greens/EFA group, the ICS remains private arbitration because it is outside the framework of national and Union jurisdiction, and not all members of the public have access to it. Moreover, it is a special court under an international treaty (TTIP) which does not need to follow standard practices of public courts, especially the guarantee of independence of the judges.

At the same time, ICS does go some way to guarantee the independence of the arbiters. We might follow the list established by Gus Van Harten, Associate Professor at the Osgoode Hall Law School and ISDS expert:

(a) security of tenure for the adjudicator; 

(b) a set salary for the adjudicator; 

(c) an objective method of case assignment such as lottery or rotation; 

(d) a prohibition on outside lawyering by the adjudicator; and 

(e) a judicial process to resolve conflict-of-interest claims. 

ICS would seem to guarantee the criteria (a) and (c), while falling short on (b), (d) and (e):

(a) security of tenure: judges shall be appointed for a period of 6, and partly of 9 years, with possibility of a second term. Hence: yes, tenure is secured.

(b) a set salary: judges shall be paid a monthly retainer fee which the EU contemplates at 2000 Euro/month. This salary for being in stand-by surely is not enough for a living, and the ICS does allow appointed judges to follow other activities as long as they do not lead to conflicts of interest (such as being counsel in other investment cases). However, judges are entailed to daily fees of 3000 Euro when they are engaged in ICS cases, which is an incentive for prolonged proceedings and for securing future cases to the tribunal. This latter leads to an in-build bias of judges of being claimant-friendly. Hence: the set salary does not guarantee the independence of the judges. 

(c) an objective method of case assignment: cases shall be assigned by rotation drawn by lot. Hence: yes, objective method of case assignment is guaranteed.

(d) prohibition on outside lawyering: there is no prohibition since remuneration for judges is not sufficient. The codes of ethics go some way into preventing conflict of interest through outside lawyering, but this is no fail-safe that outside lawyering could compromise appointed judges. Hence: the criterion is not fulfilled

(e) a judicial process to resolve conflict-of-interest: it is in the remit of the President of the Tribunal to decide on conflict-of-interests of appointed judges. Hence, it falls short of a judical process.

In short, there is no compelling reason to define ICS as a public court system, and thus a model beyond the "old ISDS system". 

3) Will domestic law and governments’ right to regulate be fully protected?

The biggest claim to come out of the ICS proposal is that the right to regulate, and domestic law is now fully protected, and clarity has been brought as to when investors can and cannot use the system. This claim is lacking any base. While it is true that ICS brings some clarification to the process of litigation by way of a requirement of the claiming investor to decide between domestic judicial remedy and ICS, and the faculty to correct a first ICS Tribunal ruling through the ruling of an Appellate Body, it remains entirely unclear why this should protect domestic legislation, or how this new system is compliant with the EU law. Malmström's explanation that the appointed judges are "trained in EU law" is not a safeguard that ensures the compliance. The point is not whether judges are "trained in EU law" but whether there are legal and/or factual obligations ensuring that the EU Law compliance is observed.

Art 13, paragraphs 3 and 4, try to calm fears of an encroachment of ICS on the autonomy of EU law by repeating the mantra of parallel systems of law that will never touch (however, the Commission is aware that both systems will touch, because the ICS shall accept 'the prevailing interpretation' of domestic law by domestic courts when they need to deal with domestic law 'as a matter of fact'). This is complete fiction, and requires us to accept the distinction between the ICS ordering the EU to pay a few billion Euros in compensation (which would be ok) and an ICS ruling declaring a piece of EU legislation 'illegal' (which would not be ok). 

The requirement of the claiming investor to decide between domestic judicial remedy and ICS is as such the key point of what is wrong with the dual system of domestic law and international investment law. In this way, foreign investors do not seek to correct poorly designed administrative or legal acts as domestic investors do, and domestic courts do not have the opportunity to correct possible mistakes in administrative or legislative behaviour, while foreign investors are stimulated to go for full and immediate compensation instead. This undermines the development of our law systems and the safeguard mechanisms for a true and full "right to regulate" in the public interest, without any fear to be called upon for compensation.

Domestic legislation is only protected - and  state and Union sovereignty guaranteed - if foreign investors have a requirement of local litigation or of complete exhaustion of domestic legal remedies. Only in this way any special rights for foreign corporations are at least tied to the domestic legal frame and can contribute to a constructive dialogue between the domestic and the international legal frameworks. The ICS is therefore not better than the "old ISDS system" in procedural clarity for protecting domestic legislation and the right to regulate. 

4) Is the process transparent now?

ICS goes somewhat beyond the new transparency rules that have recently been adopted by UNCITRAL (next to ICSID the most commonly used institution for ISDS cases) and which the EU wants to incorporate in all investment treaties. In particular, ICS Article 8 foresees "third party funding notifications" (however, this article is outside the Transparency Article 18 which could mean that the public may not be informed). Notification requirements of third party funding would greatly disrupt the business model of professional litigation firms. 

However, there are still limits, regarding for example the possibility for all interested stakeholders to submit witness or amicus curiae briefs, as is normal procedure in public court proceedings. Article 23 allows intervention by third parties only if this natural or legal person can establish a direct and present interest in the result of the dispute

In summary, ICS brings investment disputes closer to procedural transparency requirements which are normal for public courts. However, most of the transparency rules are in the near future also common in UNCITRAL proceedings which are part of the "old ISDS system".

Unanswered problems 

Finally, the proposal falls short on the principle objections that Greens and civil society at large have raised against ISDS inclusion in TTIP. Our main three objections are:

¬the judicial systems in the US and the EU are reliable. There is no compelling case documented in which an investor of the other side did not get its rights in the EU or the US. Transatlantic investment is on a very high level without ISDS provisions in most of the Member States.

The new ICS proposal does not respond to this point at all.

¬any particular right for foreign investors to seek justice in front of an international body is a discrimination against domestic investors which do not have this opportunity.

The new ICS proposal does not change this situation at all. 

¬International arbitration creates a second layer of substantial rights (reserved to foreign investors) which is completely detached from domestic rights, leading to conflict of hierarchy of law and regulatory chill.

The new ICS proposal does only touch upon this situation without resolving it. It is indeed just a reform of the existing ISDS system.

Read the full proposal here.

Read the press statement here.

In the news: Positive effects of TTIP tribunals for investment unclear, Euractiv.

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