The mooted Investor-State Arbitration System (ISDS) is one of the most controversial elements of the ongoing TTIP negotiations.
Much to the surprise of negotiators, ISDS is one of the driving forces behind recent major public protests throughout Europe against TTIP. Despite severe criticism (outlined in a previous blogpost) DG Trade remains determined to defend the private arbitration mechanism, even though it has come to recognise the need for reform.
However, we believe that ISDS is too flawed to be fixed. This is something we have highlighted time and again in the past, especially in our response to the Commission’s public consultation on ISDS.
But ISDS continues to give us reasons to consider it a red line. Let me tell you a story, which blatantly demonstrates how flawed this arbitration mechanism is. It’s a story of conflict between ISDS rulings and EU law leading to legal uncertainty and conflicting obligations for Member States.
The Micula brothers own a Swedish company which had invested in Romania before the country’s accession to the EU. The company took up business incentives of the Romanian government. As it acceded to the EU in order to comply with state aid rules, Romania discontinued its incentives programme.
Consequently, Romania was sued by the company under a bilateral investment treaty (BIT) between Romania and Sweden before an arbitration tribunal and sentenced to pay compensation amounting to USD $250 million for not having respected its obligations under the investment agreement. In 2014, DG Competition served an injunction on Romania provisionally ordering the country not to pay this compensation because it would be considered … illegal state aid.
Let’s recap: A state discontinues business incentives in order to bring its policies in line with EU legislation. A foreign company who was benefitting from such incentives may then claim compensation for their discontinuation.
From tax payers’ perspective this is scandalous, because the Romanian tax payer will have to subsidy 1) the original business incentive and 2) the sky-rocketing compensation.
The case has not yet been brought to a final decision. However it deserves the following comments:
- This case illustrates the risk that a Member State can be successfully sued by a company within ISDS for merely bringing its legislation or policies in line with EU legislation. Where would this end? Especially considering companies’ ever increasing creativity in challenging national, public interest policies (e.g. sustainable energy, public health). Could a Member State implementing a future EU Directive requiring standardised information on food packaging be sued by a company for an intellectual property right infringement? Could the company sue all of the Member States in which it has subsidiaries on the same grounds?
- One may legitimately question whether DG Trade is fully considering all side effects, while assessing the risks and perverse effects of ISDS. This seems to be a recurring theme across all sectors in the negotiations as other services within the Commission are not effectively enough involved to obtain the full picture of pros and cons on the table. There is certainly room for improved involvement of services with more expertise on the issues at stake in order to draft an EU negotiation position which takes better account of stakeholders’ expectations.
The Micula case is yet another example of why ISDS can be detrimental to the general interest while being beneficial to big corporations.
If we accept that currently investment between the US and the EU is faring well without ISDS, why should this contentious arbitration mechanism ever be needed in a transatlantic trade deal?
USD $116 million plus interests (http://www.iareporter.com/).
Decision of 26 May 2014. Please note that BEUC asked the Commission to have access to the full injunction, and was refused, even on appeal, on the basis of overriding interests of the institution. Please note that Member States have been– and will continue to be - systematically asked to bring their legislation in line with EU law when acceding the EU. So, more Micula cases in the pipeline?
Ιn the meantime, the Micula parties have obtained, in spite of the Commission’s decision, an authorisation from the arbitrators to claim payment of the compensation before US courts, because of a clause referring to the New York Convention which allows to seek enforcement of the awards in non-party state courts…another central flaw in the ISDS system.
The EU was the biggest investor in the US (in 2011), the second largest destination for US exports of goods (in 2012) and biggest market for US exports of services (in 2010). http://ec.europa.eu/trade/policy/in-focus/ttip/questions-and-answers/