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TTIP Treaty Negotiations Loom as Investor-State Dispute Settlement Is Debated

International ADR

By Veronica Mazzoleni April 2016

The Transatlantic Trade and Investment Partnership, known by the acronym TTIP, is a proposed trade and investment agreement that is being negotiated between the European Union and the United States.

“In early 2013, the United States-European Union High Level Working Group on Jobs and Growth … discussed the prospects of a Transatlantic Trade and Investment Partnership (TTIP) and ‘ … reached the conclusion that a comprehensive agreement that addresses a broad range of bilateral trade and investment issues, including regulatory issues, and contributes to the development of global rules …’ should be concluded… . It argues that TTIP is in the mutual interest” of the United States and the European Union. Andreas Freytag, Peter Draper & Susanne Fricke, The Impact of TTIP 5 (Konrad-Adenauer-Stiftung e. V. 2014)(citations omitted)(direct download available at bit.ly/1oo9ezE).

The TTIP was announced in February 2013, and the negotiations started on July 8, 2013. It is for sure a unique agreement as it “concerns the world's two biggest economic entities entering what is presented as an ambitious and comprehensive partnership, an agreement that will have considerable economic consequences extending far beyond the economies concerned.” Lionel Fontagné, Julien Gourdon & Sébastien Jean, Transatlantic Trade: Whither Partnership, Which Economic Consequences? CEPII Policy Brief, 2 (September 2013)(available for download at bit.ly/1QNGunJ).

As a bilateral agreement between the world's two biggest advanced economies, it is also likely that the TTIP will produce systemic and spillover effects on third countries not directly involved in the negotiations. As a result of these effects, we can expect further multilateral negotiations.

ASSESSING BENEFITS

First, it is important to note that the E.U. and the U.S. will benefit from the liberalization of transatlantic trade in goods and services in terms of trade expansion.

Furthermore, an important agreement like the TTIP will reinforce the leadership role in the world trade for both the E.U. and the U.S. The benefits will show their effects on trade and investments as well.

Regarding general benefits, according to different sources, the gain for the European Union will be about 0.5% of the E.U. gross domestic product, equivalent to an amount between €86 to €120 billion of annual income for the European economy.

At the same time, the gain for the United States will be around 0.4% of the U.S. GDP, equivalent to about €95 billion, or, at current rates, nearly $104 billion. We also might expect wages to rise as a result of the TTIP by about 0.5%. Id. at 7. See also European Commission, Transatlantic Trade and Investment Partnership: The Economic Analysis Explained 2 (2013)(available for download at bit.ly/1oG6pke).

Concerning investments, “with €1,200 [billion] invested by each country into its partner's economy in 2010 (Eurostat), investment is potentially an important part of the agreement.” Lionel Fontagné, Julien Gourdon & Sébastien Jean, supra, at 6.

Finally, the negotiation over investor-state dispute settlement, or ISDS, will also serve the important purpose of reforming and setting the standards for international investment arbitration.

As a consequence, it is possible to state that the TTIP will contribute to general welfare gains both in the U.S. and the E.U., and, also, likely in different ways in third countries. “As the extent of trade and investments between both economies is already significantly high, it is by far the largest bilateral economic relationship in the world… . Both economies together represent more than 40% of world GDP. It can thus be expected that the elimination of trade barriers would have significant effects both on the involved economies as well on third countries.” Andreas Freytag, Peter Draper & Susanne Fricke, supra.

Notwithstanding the recognized benefits deriving from the TTIP, the Transatlantic Trade and Investment Partnership is surrounded by significant controversy emerging in Europe. There is opposition against the TTIP as a trade agreement—not only a fight over Investor-State Dispute Settlement.

As a result, it is important to note that the negotiations for the TTIP have been delayed because the matter is controversial to some E.U. participants.

Many commentators in Europe are revealing skepticism and concerns about the trade agreement in terms of consumer protection, privatization, food regulations and standards, and environmental protection.

They are particularly concerned about the agriculture sector because of big differences between the E.U. and U.S. regulations, arguing that their regulations are more rigid and severe. As a consequence, for critics the TTIP represents a threat to the safety and health of the environment, food, and European consumers in general.

The criticism can be vehement:

One worry is that the main goal of TTIP is to remove E.U. regulations that stop its citizens being poisoned, killed or subject to rampant pollution so that more profits can be made by corporations on both sides of the Atlantic.

For instance, critics argue that if TTIP involves, as the E.U. hopes, a commitment that would guarantee automatic licenses for all future U.S. crude oil and gas exports to Europe, that would result in a boom in U.S. fracking to keep Europeans powered with shale gas, not to mention greater exploitation of oil from Canadian tar sands. Such developments, argue critics, would undermine not just the E.U.'s fuel quality directive but ruin what is left of the planet worth ruining.

Or consider food regulations. While the E.U. has an impressively alliterative “farm to fork” strategy, for instance, regulating each link in the food chain, Americans pump their cattle and pigs with growth-promoting hormones banned in the E.U. As a result, most U.S. beef can't be sold in the E.U.

Worse, Americans use 82 pesticides banned in the E.U. They wash their chicken in chlorinated water to kill bacteria. Ninety per cent of their soya, cotton and corn is genetically modified, while the E.U. allows member states to ban GM production.

Stuart Jeffries, “What is TTIP and why should we be angry about it?” The Guardian (Aug. 3, 2015)(available at bit.ly/1Ujhcf7).

For now, we can only wait to know how the E.U. intends to assess all those concerns and critics from the various groups—environmental, social, and political—when negotiating the European standards in the TTIP.

ISDS'S ROLE

Investor-State Dispute Settlement is a dispute resolution mechanism that involves a private party in the role of an investor—an individual or a business entity—and a state. It is generally represented by a standard clause usually found in investment treaties, like Bilateral Investment Treaties, or BITs, and Multilateral Investment Treaties, known as MITs, including the proposed TTIP.

The ISDS clause provides that in case of a dispute arising out of the investment treaty between the host state and the foreign investor, the parties will proceed through investment arbitration to solve the dispute. The clause represents an improvement compared to the previous use of gunboat diplomacy or political techniques to solve similar disputes. It has de-politicized the investment system, providing a neutral forum to attract foreign investors.

Together And Apart

The unavoidable: States and investors trade, and then dispute about the deals.

The inevitable: The parties also disagree on the means over which to settle the disagreements.

The current divide: Negotiations continue over the Transatlantic Trade and Investment Partnership, and a forum for resolving matters under it will be a part of the treaty.

In the past, when an individual or a company wanted to invest in a foreign host state, they had to go through the ministry, involving politics and diplomacy. When a problem arose concerning the investment, or when the foreign investor was not satisfied by the behavior of the host state, they had to resolve the dispute through the diplomatic channel—if your government decided your case was worth it. As a result, the investor lost the management of his, her or its case.

Around 1965, the governments started using gunboat diplomacy to solve investment disputes and to protect their investors. This was also the era of the Calvo Doctrine, for which it was generally recognized that foreigners could not be treated better than nationals; the doctrine refers to the fact that in case of an investment dispute, the foreign investors had to proceed through national courts.

But this doctrine sounds controversial. Can we really talk about equal treatment in courts for nationals and foreign investors?

This is the reason why BITs and MITs came into existence, together with the ISDS clause. The states were willing to relinquish part of their immunity and sovereignty to attract business and investors by promising to solve their disputes in an equal and neutral forum through investor-state arbitration.

In particular, the states were losing immunity because, according to the ISDS clause contained in investment treaties, only the investor can sue the state and not vice versa. The idea behind this solution is that usually investors need more protection, while states have more capital at their disposal. The state could only proceed through local courts.

In addition, and as a consequence, in investment arbitration, based on a treaty between two countries, the investor is able to elevate his claim by applying not only the law of the treaty but also international public law. As a consequence, investors obtain extra layers of protection, and a treaty claim also will create more pressure on the state in the international arena.

States decide to enter into investment treaties to attract more business by guaranteeing the respect of high standards. On the other side, they also receive benefits by obtaining protection for their same investors abroad. The number of treaties rose increasingly because, in theory, every state wants to invest everywhere. A treaty is the best way to attract investors by granting protection, as well as the best way for your own investors to invest safely.

As another advantage, the states no longer need to use diplomatic channels for investment disputes, and so the resolution of the disputes will not depend on the governments anymore, like in the past.

Furthermore, arbitration is attractive for resolving investment disputes between parties coming from two different backgrounds and legal systems. Arbitration is also advantageous in terms of enforcement as provided for in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), better known as the New York Convention, and the Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965), also called the Washington Convention, which applies in connection with cases of the International Centre of Settlement of Investment Disputes, best known as ICSID.

DEBATING THE PROCESS

Investor-state dispute settlement provisions in BITs have become controversial.

The critics usually refer to the fact that ISDS is not only unnecessary but also illegitimate. Furthermore, they argue that international investment arbitration is biased against the states in favor of foreign investors and that it undermines the host states' regulatory powers.

In addition, ISDS threatens the sovereignty power of states by allowing foreign investors to bring arbitration claims against them. In particular, European countries are worried about the possibility of U.S. investors, and mainly big corporations, suing them in investment arbitration.

But most of these criticisms are overturned by empirical studies of ISDS based on awards available to the public. Here are some key findings from the studies:

  • Over 90% of the nearly 2,400 BITs in force have operated without a single investor claim of a treaty breach.
  • The number of disputes filed in the past 10 years has increased. Overall, the rise in disputes has been proportional to the rise in outward foreign capital stock. There are more disputes, but there are also more investors and more capital invested abroad.
  • Investors from large capital-exporting economies are active users of ISDS. European countries are a party to over 1,200 BITs and account for 46 percent of global foreign direct investment (FDI) stock; in the past decade European investors have filed more than half of investment arbitration claims. Similarly, the United States is responsible for 24 percent of outward FDI stock; U.S. investors have filed 22 percent of ISDS claims.

  • Disputes are also most frequent in states with weak legal institutions. Argentina (53 claims) and Venezuela (36 claims) are the leading respondent states.
  • About a third of ISDS cases are settled in advance of a ruling. For disputes that end in an arbitral decision, states win about twice as often as investors. When investors do prevail, awards are a small fraction of the initial claim—on average, less than 10 cents on the dollar.

Scott Miller & Gregory N. Hicks, “Investor-State Dispute Settlement: A Reality Check” v-vi (Center for Strategic and International Studies 2015)(download link available at bit.ly/1S8Fny1).

The Miller-Hicks report continues:

While arbitration offers neutrality and finality, investors are typically aware of the low likelihood of prevailing and the risk that filing a claim presents to their future operations.

Many of the criticisms of ISDS are overblown. Some claim that ISDS gives investors “special rights,” yet most treaty protections are identical to universal civil rights accorded to most citizens. Further, critics exaggerate the notion that investors “sue to overturn regulations”; BITs explicitly limit awards to monetary damages. Finally, conflating ISDS with “big corporations” ignores that most U.S. investors who have filed investment arbitration claims are individuals or firms with fewer than 500 employees.

Notwithstanding the numbers and facts mentioned above, there is still a relevant debate over ISDS, with different critics and doubts highlighted about the process of international investment arbitration.

The quality and impartiality of judicial systems on both sides leaves open whether an investor-state arbitration procedure is necessary to protect investors against discriminatory measures or uncompensated expropriations of property. Such a procedure might even be a source of concern, since it would prioritize an ad hoc system of arbitration with minimal institutional underpinnings and questionable legitimacy over national judicial systems. Paradoxically, such an arbitration system might even promote discrimination if it were to provide to foreign investors rights which domestic investors are denied. All this call for great caution in the wording of the provisions that might be included in the agreement, and great attention to avoiding overly restrictive provisions that would limit the capacity of government to implement independent policy in the areas of environment and energy in particular.

Lionel Fontagné, Julien Gourdon & Sébastien Jean, supra, at 6-7 (citation omitted).

One of the main criticisms in the public ISDS debate refers to the fact that the system generates restrictions to governments' regulatory power, in particular their flexibility with respect to public policy issues.

The critics underline the imbalance between the protections afforded to foreign investors and other policy objectives of states. The risk is that a state will refrain from enacting legislation or public policy regulation for the possibility to then be brought before an international arbitral tribunal by a foreign investor.

“The international investment regime is undergoing serious questioning and finds itself in a ‘legitimacy crisis.’ Even before TTIP, the recourse to investor-state arbitration had been criticized as constituting an ‘undemocratic delegation of authority to unaccountable bodies,’ thereby curtailing ‘the freedom of action of national law-making authorities,’ … and poses ‘affronts to sovereignty’ threatening the rights of states to self-preservation and retarding the ‘development of regulatory initiatives that are the hallmarks of the mature social welfare state.’” Thomas K. Mayr-Riedler, “TTIP – A Boost for Arbitration and a More Balanced Multilateral Investment Regime?” 8 NYSBA New York Dispute Resolution Lawyer 52, 52 (2015).

But “those advocating against the inclusion of ISDS in TTIP shall be reminded that the E.U. and the U.S. are already fully exposed to the risks emanating from investment arbitration as combined they are parties to some 1,500 BITs, all of which entail substantial investment guarantees, including the right to enforce such guarantees via ISDS. The non-inclusion of ISDS in TTIP … would preserve the status quo along with its inconsistencies and deficiencies while missing the chance to move the international investment framework forward towards a more adequate and up-to-date dispute settlement system.” Id. at 53.

NEW PROPOSAL

The E.U. intends to introduce a provision to re-balance investment protections in terms of protecting a state's right to regulate, when necessary, for public policy interests and objectives, in particular in fields like public health, consumer protection, and environmental protection.

In addition, the E.U. intends also to recommend a roster of qualified established arbitrators, as well as to implement a provision for mandatory transparency in investment arbitration. Furthermore, probably the most revealing innovation, the E.U. suggests also the establishment of a permanent multilateral investment court as a new investment dispute resolution mechanism.

“The proposed court would draw its decision-makers from a pool of 15 pre-determined judges chosen by the state parties, at least some of whom might serve full-time. Each panel of the court would include three judges, put together ‘on a rotation basis, ensuring that the composition of the divisions is random and unpredictable.’” Alison Ross, “Don't shun freedom of ISDS, warns Nappert,” Global Arbitration Review (Nov. 27, 2015)(available with a subscription at bit.ly/1QklP8E).

But the new E.U. investment court, with its appeal system proposed by the European Commission, probably represents a step back from the protections and guarantees offered by international investment arbitration. The proposal seems to create different issues, which will not be analyzed in detail in this article, including decisions with respect to ethical challenges, enforcement, and the appeal system.

The best approach probably should be to persevere with international investment arbitration, a system with well-known qualities, and then try to reform ISDS in order to improve it, prevent abuse, and overturn its weaknesses. The permanent court has its own problems and limits, and an appeal tribunal, with power to review the facts of the case, does not offer more predictability than arbitral tribunals.

It is quite clear, especially to investment arbitration practitioners, that ISDS requires some improvements in order for the investment arbitration system to acquire that level of legitimacy and consensus now expected in the international arena.

In negotiations over the Transatlantic Trade and Investment Partnership, the form of dispute resolution as well as politics will continue to be a subject for the negotiation process, in the midst of the higher-profile political heat the treaty will continue to face in a U.S. presidential election year. David Lawder, “EU trade chief: U.S. campaign rhetoric won't stop TTIP trade talks” Reuters (March 10, 2016)(available at reut.rs/1SBwEEA).

Even if some of the critics deserve attention and should possibly lead to some reforms of the international arbitration system, the general debate needs to be conducted in a constructive manner. Indeed, it is important to keep in mind that BITs and investment protections represent a major improvement in terms of a fair treatment of foreign investors and a neutral forum for dispute resolution.

The debate over ISDS should be used for an informed, sophisticated, and wise amendment of investment arbitration, because the alternative of “withdrawing from investment treaties—the logical conclusion of the critics' position—would likely have negative consequences for economic growth and the rule of law.” Scott Miller & Gregory N. Hicks, supra.

It is necessary not to polarize the debate, but to provide an opportunity instead for new regulatory measures in order to promote a harmonized treaty-based investment regime.

We might look at ISDS as a “teenager, who must be given a chance to mature and show its promise … by allowing it to perform before declaring its futility.” Alison Ross, Global Arbitration Review, supra.

Biography

  • The author is Corporate Counsel for Sinkrom Corp., a Brooklyn, N.Y.-based international business development company. She concentrates her practice in the area of international dispute resolution and is involved in different projects and studies committed toward advancing intercultural negotiation matters, as well as mediation and arbitration with a business perspective and focus. This article has been adapted from the introduction to the paper “The Mystery Around the Transatlantic Trade And Investment Partnership (TTIP) And Investor-State Dispute Settlement (ISDS),” scheduled for publication this month, and co-authored by Veronica Mazzoleni and Joseph Ralph Fraia. The paper will cover the TTIP's background, the purposes and benefits of the partnership, negotiation developments, and investor-state dispute settlement. For more information, contact the author at legal@sinkrom.com.


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