kom (2013) 0136 - Bilag 6: Henvendelse fra Greenpeace Norden m.fl. vedr. Transatlantic Trade and Investment Partnership, investor-stat tvistbilæggelse (ISDS)

Erhvervs-, Vækst- og Eksportudvalget 2013-14
KOM (2013) 0136 Bilag 6
Offentligt

Corporate Europe Observatory, Still not loving ISDS: 10 reasons to oppose investors’

super-rights in EU trade deals, 16 April 2014

http://corporateeurope.org/international-trade/2014/04/still-not-loving-isds-10-reasons-

oppose-investors-super-rights-eu-trade

Annex 1: Reality check of the Commission’s plans for ‘reform’ of “substantive”

investor rights

When European Trade Commissioner Karel de Gucht launched the public consultation on the investor

rights in the proposed EU-US trade deal (TTIP), he

said:

“I fully agree with the many critics who

claim that investor-to-state-dispute settlement (ISDS) up until now has resulted in some very worrying

examples of litigation against the state.” The problem, according to de Gucht, lies in some problematic

features of existing investment agreements – which the Commission claims to “re-do” to build a

“legally water-tight system”.

This Annex looks into the Commission plans to re-do the so called “substantive” investor rights

(Annex 2 is on their proposals to reform the dispute settlement system). The Commission claims that

it will introduce “clear and innovative provisions” with regards to some of the traditionally vaguely

formulated investor rights so that they “cannot be interpreted by arbitral tribunals in a way that is

detrimental to the right to regulate”. Because, it argues, “in the end, the decisions of arbitral tribunals

are only as good as the provisions that they have to interpret and apply,” (question 5 in the

Commission's

consultation document).

PR-speak:

what the Commission claims in its

consultation

document

The EU wants to make sure that states’

right to

regulate

is “confirmed as the basic underlying

principle” of the EU-US agreement so that

arbitrators “have to take this principle into

account” when assessing an investor-state dispute.

The Commission quotes a section of the preamble

of the EU-Canada agreement (seen as a template

for TTIP) that indeed recognises the parties’ right

“to take measures to achieve legitimate public

policy objectives”, (from question 5 in the

consultation document).

The EU sees no problem with the “intentionally

broad”

definition of “investment”

in investment

treaties covering “a wide range of assets, such as

land, buildings, machinery, equipment, intellectual

property rights, contracts, licenses, shares, bonds,

and various financial instruments,” (from question

1).

The EU wants to avoid abuse by improving the

definition of “investor”

to eliminate so called

“shell” or “mailbox” companies from the scope of

the agreement: “to qualify as a legitimate investor

of a Party, a juridical person must have substantial

business activities in the territory of that Party,”

(from question 1).

Reality check:

what the Commission really does

– and what it means in practice

It is impossible to check the claim with just an excerpt of

the preamble. According to a Canadian

summary

of it, the

‘right to regulate’ is specified (“in a manner consistent

with the Agreement”). According to

this

analysis from the

International Institute for Sustainable Development

(IISD, p.2), this detail puts the investor rights above the

right to regulate – the exact opposite of what the

Commission claims. During a public

debate

in March, a

high-ranking Commission official admitted that the

formulation on the right to regulate will “not make any

difference” in investor-state disputes.

The definition of “investment” is key because it

determines what is covered by the chapter. A broad – and

open-ended – definition such as the Commission’s not

only covers actual enterprises in the host state, but a vast

universe ranging from holiday homes to sovereign debt,

exposing states to unpredictable legal risks.

The definition of “investor” is key because it determines

who is covered by the agreement. The EU seems to have

understood that a broad definition can lead to abuse of the

treaty via “treaty shopping”, allowing, for example, a US

firm to sue the US via a Dutch mailbox company. But

unfortunately, it fails to define the term “substantial

business activity”.

Thousands of investors

will be

covered by the chapter.

kom (2013) 0136 - Bilag 6: Henvendelse fra Greenpeace Norden m.fl. vedr. Transatlantic Trade and Investment Partnership, investor-stat tvistbilæggelse (ISDS)

PR-speak:

what the Commission claims in its

consultation

document

National treatment:

Investors “should not be

discriminated against” except in “rare cases” and

“specific sectors” where discrimination “may need

to be envisaged”. The aim is to ensure “a level

playing field between foreign investors and local

investors,” (from question 2).

Most-favoured nation treatment (MFN):

provision to ensure “a level playing field” between

different foreign investors. EU member states and

the US would have to treat investors from the other

party “no less favourably” than investors from any

other state. But the Commission “seeks to clarify”

that investors will not be able to “import” more

favourable rights from other agreements signed by

the US or EU member states, (from question 2).

Reality check:

what the Commission really does

– and what it means in practice

The EU’s investor rights do not create a “level playing

field”, but VIP treatment for foreign investors: they get

greater private property rights than everyone else and

access to a parallel legal system that is exclusively

available to them – not local businesses or ordinary

people.

In reality the provision has indeed been interpreted like a

“magic wand” that allows investors to ‘import’ rights

from other treaties signed by the host state (as a lawyer

defending states against investors

has recenty put it).

Under the EU’s current MFN wording, this cherry-

picking would be possible, self-cancelling all of the

supposed ‘clarifications’ of investor rights and

multiplying the risks of successful investor-state attacks

against public policy. In meetings with NGOs, the

Commission admitted that it only recently became aware

of the problem.

The standard has become the catch-all guarantee most

relied on by investors when suing states. In

74% of the

cases

won by US investors, tribunals found an FET

violation. And investors frame their claims precisely

around the same “basic rights” listed by the Commission.

Philip Morris, for example,

argues

that Australia’s anti-

tobacco law was arbitrary because the claimed health

benefits are “contradicted by facts” and other policies to

reduce smoking without a negative effect on Philip

Morris were available. Canadian mining firm Lone Pine

also

argues

that the revocation of its “right to mine for oil

and gas” in Quebec was “arbitrary” and without “due

process”. It seems the EU's ‘clarifications’ do not offer

much protection.

The protection of an investor’s “legitimate expectation”

has been interpreted by tribunals as a right to a stable

regulatory environment – binding governments to not

change regulation. In the Quebec case where strong

community resistance halted a fracking project, Lone

Pine, for example,

argues

that the “revocation” of its gas

exploration permits violated its “legitimate expectation of

a stable business and legal environment”. The EU does

not define the type of “specific representation” by a state

which could create such legitimate expectations. Would a

prime minister’s twinkling of an eye be enough?

From a certain, investor-friendly view, almost any law or

regulatory measure can be considered an ‘indirect

expropriation’ when it has the effect of lowering profits.

Several tribunals have interpreted legitimate public

policies that way and have ordered states to pay

compensation. Would the EU’s ‘carve-out’ for public

welfare measures prevent this? Not necessarily. The state

would have to prove that a measure “was designed and

applied to protect public welfare objectives” (and as in

the Philip Morris case, investors would challenge this). In

Fair and equitable treatment (FET):

Investors

shall be treated in a “fair and equitable” manner.

The EU wants to clarify the standard so that it only

covers “breaches of a limited set of basic rights”

(denial of justice; disregard of fundamental

principles of due process; manifest arbitrariness;

targeted discrimination; abusive treatment), (from

question 3).

Protecting investors’ legitimate expectations:

The Commission explicitly states that tribunals

which apply the fair and equitable treatment

standard may take into account whether a state

made a “specific representation” to an investor that

“created a legitimate expectation” upon which the

investor relied when making or maintaining an

investment, (from question 3).

Expropriations

(direct and indirect ones) of

investors are permitted only if they are for a public

purpose, non-discriminatory, follow due process

and are compensated. The EU wants to clarify the

provision to “avoid claims against legitimate

public policy measures”. It wants to make clear

that “non-discriminatory measures taken for

legitimate public purposes, such as to protect

health or the environment, cannot be considered

equivalent to an expropriation, unless they are

kom (2013) 0136 - Bilag 6: Henvendelse fra Greenpeace Norden m.fl. vedr. Transatlantic Trade and Investment Partnership, investor-stat tvistbilæggelse (ISDS)

PR-speak:

what the Commission claims in its

consultation

document

manifestly excessive,” (from question 4).

Reality check:

what the Commission really does

– and what it means in practice

“rare circumstances” it could then still be considered an

expropriation.

Academics

(p. 28) have argued that amidst

“significant debate and uncertainty” about the meaning of

such clauses, there is “the possibility that an arbitral

tribunal might interpret [...] an EU-US investment chapter

expansively [i.e. in a pro-investor way] despite the

addition [...] of cautionary footnotes and annexed

clarifications”. Also, the current text on MFN (see above)

would allow investors to refer to expropriation clauses in

other treaties without public policy exceptions, rendering

the EU’s carve-out pretty meaningless.

Following a wave of investor claims under the North

American Free Trade Agreement NAFTA, the US,

Canada and Mexico have already issued such joint

clarifications of vaguely formulated investor rights. In

practice, however, arbitrators have proven that they are

willing to ignore these ‘binding’ interpretations (see

here

for examples relating to fair and equitable treatment).

A closer look at the relevant provisions shows that this

provides false comfort. Measures to ensure financial

stability, for example, “shall not be

more burdensome

than necessary

to achieve their aim”. “Safeguard

measures that are

strictly necessary”

may be taken “in

exceptional

circumstances of

serious

difficulties for the

operation of monetary and exchange rate policy”. For

policies to tackle “serious balance-of-payments or

external financial difficulties”, the EU even states that

they should “avoid

unnecessary

damage to the

commercial, economic

and

financial

interests of the other

Party”. It will be up to a tribunal of unaccountable for-

profit lawyers to determine which policy was “strictly

necessary” and which caused “unnecessary” costs for the

other party. An easy hurdle to pass for investors.

This would bring all obligations a state assumed with

regards to an investment under the TTIP ‘umbrella’ (like

a contract with one investor), multiplying the risk of

costly lawsuits. In a 2011

resolution,

the European

Parliament had asked the Commission for a study on the

impacts of the inclusion of an umbrella-clause in future

European investment agreements. There is no such study

yet.

The EU discretely forgot to mention that the EU-US trade

deal would allow investors to sue states for decades –

even if they cancelled the treaty in the future. The

leaked

EU-Canada agreement

(article X.18) says that, for

investments already made, the treaty “shall continue to be

effective for a further period of 20 years” from the

moment it is terminated. The corporate super rights

would live on like a zombie – even if the agreement was

dead.

When greater clarity is needed to protect the right

to regulate, the EU and the US will be able to

“adopt

interpretations

of the investment

protection provisions which will be

binding

arbitral tribunals.” This will allow them to monitor

how the law that they created is interpreted and

influence the interpretation, (from questions 5 &

11).

The EU will ensure that “all the necessary

safeguards and exceptions

are in place” to protect

the right to regulate – for example, with regards to

environmental and consumer protection, health and

the stabilisation of financial markets. EU

agreements also contain “general exceptions

applying in situations of crisis”. This suggests that

certain types of regulatory measures might be

exempt from the obligations in the treaty, (from

question 5).

Umbrella clause:

The EU also wants to protect

investors when the host country avoids

“contractual obligations” towards them, (from

question 3). While there is no exemplary treaty text

in the consultation on this issue, there is a similar

clause in the

leaked EU-Canada investment chapter

from November 2013 (Article X on page 14).

‘Survival’ (or better: ‘zombie’) clause:

An issue

that is not mentioned in the Commission’s

document, but that deserves some attention.

kom (2013) 0136 - Bilag 6: Henvendelse fra Greenpeace Norden m.fl. vedr. Transatlantic Trade and Investment Partnership, investor-stat tvistbilæggelse (ISDS)

All in all, the Commission’s plans to “re-do” the “substantive” investor rights do not do the job of

building a “legally water-tight system”

that “cannot be interpreted by arbitral tribunals in a way that is

detrimental to the right to regulate”. On the contrary, many of the proposed provisions seem to have

the exact opposite effect (which was also the conclusion of

analyses

of previously leaked negotiation

texts from the Commission by the International

Institute for Sustaina ble Development (IISD)

and the

Seattle to Brussels Network).

Under the EU’s reforms, the investor rights will remain what a lawyer defending states in investor-

state lawsuits recently

called:

“weapons of legal destruction”.