New investment dispute system for TTIP

On September 16, the European Commission (Commission) released its long-awaited proposal for a new system intended to resolve disputes between investors and states, the so-called “Investment Court System” (the Proposal). The Commission describes the Proposal as a “new era in the settlement of investment disputes”. It would replace the current ad hoc Investor-to-State Dispute Settlement System (ISDS) between the United States and EU Member States under the Transatlantic Trade and Investment Partnership (TTIP) agreement, but it would also serve as a model for all ongoing and future EU investment negotiations.

ISDS reform is part of the mandate received by the Commission prior to the launch of the TTIP negotiations. The reform touches on very controversial issues, such as finding the right balance between protecting investors and safeguarding EU Member States’ right to regulate in the public interest. Certain national governments and Members of the European Parliament (MEPs) have opposed to the inclusion of an ISDS in TTIP claiming, among other reasons, that Europe and the United States have comparable legal systems and that there is no need for private arbitration to settle disputes.

In order to address stakeholders’ concerns, in March 2014, the Commission decided to conduct a public consultation on its proposed approach to include an improved ISDS in TTIP. The Proposal is based on the contributions received from the European Parliament, Member States, national parliaments and stakeholders through the consultation.

In this briefing, we provide background information on the current ISDS system and highlight the most important elements of the Commission’s Proposal.

Investment in a foreign country involves legal and political risks, particularly if the investor’s legal rights in relation to actions by the host state are unclear or hard to enforce in local courts. An ISDS is a mechanism allowing, under certain conditions, an investor to bring a claim directly against the authorities of the host country in front of an international tribunal when it considers that national laws are threatening its investment. ISDS allows investors to obtain possible compensation when they are treated unfairly by host states, in light of investment protection commitments agreed in a treaty between the host state and the investor’s home state.

Introducing the current ISDS system in TTIP would have allowed companies to settle their disputes with national governments before private arbitration courts, prompting fears among certain stakeholders that businesses would hold too much power over legislators. The new Investment Court System outlined in the Proposal intends to restore the credibility of dispute resolution mechanisms, ensuring that all actors can rely on a system which is transparent, based on public justice (as opposed to the current private system) and contains clear rules.

ISDS claims have been a recurrent instrument for investors to protect their investments. According to United Nations Conference on Trade and Development (UNCTAD) data, until end 2014 there have been a total of 608 known ISDS claims. While more than 50% of the cases have been brought by EU investors, EU Member States have rarely been challenged by third country investors. A number of studies by UNCTAD and the International Centre for Settlement of Investment Disputes (ICSID) show that, on average, states were significantly more successful than investors in the defence of their interests. It is also illustrated that where the Tribunals have found in favour of the investor (which is in 25 % of all ISDS cases according to UNCTAD), investors are on average granted only a small part of their original claim.

New Investment Tribunal

The Proposal involves the creation of a new Investment Tribunal, with 15 judges (five EU nationals, five US nationals and five nationals of third countries) and an Appeal Tribunal, with 6 publicly appointed members (two EU nationals, two US nationals and two nationals of third countries).

The Investment Tribunal will hear cases in divisions consisting of three judges, a EU national, a US national and a national of a third country who would also be the Chairman. Disputes under TTIP would be allocated randomly in order to prevent dispute parties from having any influence on particular cases.

Right to regulate

The Proposal clarifies that investment protection provisions do not prevent governments from changing the legal framework (known as the non-stabilisation clause) even if this has a negative impact on investment expectations. It also confirms that the right to regulate for public policies is fully preserved and that TTIP will not prevent the EU from enforcing its law on state aids.

Standards of investment protection

The Proposal provides “standards of investment protection”. These are basic guarantees that governments will respect and which are granted to foreign investors when making a decision to invest. In order to prevent abuse, the standards of protection have been narrowly defined as follows:

1. no expropriation without compensation;
2. the possibility to transfer (and eventually repatriate) funds relating to an investment;
3. a general guarantee of fair and equitable treatment and physical security (e.g. denial of justice, targeted discrimination on manifestly wrongful grounds such as gender, race or religious beliefs or on the grounds of harassment);
4. a commitment that governments will respect their own written (and legally binding) contractual obligations towards an investor; and
5. a commitment to compensate for losses in certain circumstances linked to war or armed conflict. Another guarantee – against nationality-based discrimination – was already included in the European Union’s formal proposal to the United States on Trade in Services, Investment and E-Commerce.

Building on existing EU reforms

The Commission has stressed that many elements in the proposal are already included in the free trade agreements with Canada and Singapore, however, the TTIP text goes further by including a prohibition for judges to act as legal counsel in investment dispute cases and including a so-called “third party funding” disclosure clause (i.e., the disputing parties are required to disclose who is funding their claim).

Investment dispute resolution and domestic remedies

Investors would be able to either seek to obtain redress in domestic courts or to submit a claim to the Investment Tribunal. Before submitting a claim to the Investment Tribunal, they would first have to withdraw from any domestic ongoing proceedings they had started. However, investors who have obtained a final ruling from a national court on their claim would be also able to seek to obtain redress on the same matter before the Investment Tribunal. This means that the Investment Tribunal can also be used by investors as means of appeal for unsuccessful claims before domestic courts.

According to the Proposal, the Investment Tribunal will hear exclusively on the provisions of TTIP. Where the Tribunal would be required to ascertain the meaning of a provision of domestic law of one of the Parties it would have to follow the interpretation made by that Party’s domestic courts. The meaning given to domestic law by such Tribunal would not be binding on domestic courts.

The Proposal has now to be discussed with the Council and the European Parliament before being presented as an EU formal proposal to the United States in the context of TTIP talks.

The proposal represents a long-standing policy objective of the Commission with regard to trade relations with third countries. Indeed, in parallel to the TTIP negotiations, the Commission is expected to start work, together with other countries, on setting up a permanent International Investment Court. The Commission aims that, in future, the International Investment Court would replace all investment dispute resolution mechanisms provided in EU agreements, EU Member States agreements with third countries and in trade and investment treaties concluded between third countries.

In the meantime, TTIP talks continue. Both parties have indicated the need to accelerate and incentivize the talks in all areas. The initial deadline for the conclusion of the talks by the end of this year seems not to be realistic with the most sensitive issues such as public procurement, market access and non-tariff barriers still remaining blocked by one or the other side. The next round of TTIP negotiations is reportedly scheduled for 19-23 October in Miami (US), although these dates have not been officially confirmed.