Following a heated debate, the European Commission has finally recognised the risks inherent in the proposed Investor-to-State Dispute Settlement (ISDS) mechanism in the Transatlantic Trade and Investment Partnership (TTIP): namely that it lacks transparency and that its arbitrators are prone to conflicts of interests. This realisation has led to a Commission proposal to step away from private arbitration.
We welcome this decision. Furthermore, the recently published proposal for an Investment Court System (ICS) is an interesting attempt to respond to many of the criticisms of the ISDS. In the new proposal, judges would no longer be appointed by the parties; the proceedings would be (more) transparent; and there would be an appellate body and explicit ethical rules for judges. In short, the new provisions amount to an acknowledgement by the Commission that the previous system was significantly flawed. This is a major victory for all of those who have been calling for the reform of investment dispute settlement, and not the least for the European Parliament.
Nevertheless, the new ICS proposal fails to address several of the core flaws of the ISDS, and consumer organisations are not convinced that it is the appropriate way forward. Our first concern is linked to the right to regulate. The Commission once again uses traditional ‘trade terminology’, specifying that ICS “shall not affect the right of the Parties to regulate within their territories through measures necessary to achieve legitimate policy objectives” (such as consumer protection). However this language is not sufficient to genuinely protect or promote these public interests, as we established in a previous blog. Under this terminology, a government could indeed regulate, but at the same time might be forced to pay compensation for the impact of the regulation on a foreign investor. In other words, the deterrent effect of the required compensation for specific regulations might lead to a ‘regulatory chill’, similar to what was anticipated with ISDS. For example, a government or even the Commission might intend to stimulate sustainable production by introducing provisions obliging producers to design repairable products with long life cycles. However, a foreign investor with products that are unable to be repaired could claim that these regulations would hurt sales and demand compensation.
From the consumer perspective, there is only one way forward: claims against measures designed to meet public policy objectives must not be allowed, and there can therefore be no question of compensation.
Secondly, the ICS proposal includes provisions on ethics and a code of conduct for members of the court system in order to protect parties against conflicts of interests. Under ISDS, arbitrators can be corporate lawyers who have worked as counsel for one of the parties. The new provisions are a commendable effort to improve the independence of the judges, but still fall short in preventing unacceptably close links with one of the parties. In particular, judges are still allowed to work as corporate lawyers before or after a trial, despite the general provision that they should be chosen in such a way as to prevent any conflict of interest. We recommend that the Commission further reinforce the code of conduct and the ethics provisions in its proposal in order to ensure that judges are truly independent and to prevent conflicts of interests. In the case that these provisions are not respected, sanctions should be applied. Furthermore, it must be explicitly mentioned that judges should have no links of any nature to either of the parties before or after a dispute. Strict revolving doors principles should be applicable to ICS judges.
Finally, it is alarming that the Commission, despite its Better Regulation Agenda, is unable to provide a clear breakdown of the expected costs and the impact of establishing an ICS. We urge the Commission to seriously evaluate the financial and administrative impacts of its proposal before imposing this additional burden on the taxpayer. We understand that the ICS proposal is a template for future trade deals, also potentially with partners lacking an efficient and independent judiciary. However, its integration into TTIP is worrying because the Commission has not provided evidence of the need for a parallel judiciary structure between the world’s two most developed legal systems. Existing protection measures in the EU and the US are surely enough to guarantee legal security for investors. (This is also the conclusion of the European Parliament’s Committee on Legal Affairs.) Pro-ICS arguments referring to discrimination against foreign investors in the US are not based on fact, but rather appear to be a copy/paste of messages developed by an industry coveting an easily accessible tool catering to its private interests.
Please find a brief analysis of our key concerns regarding ICS here.