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The UN adopts Convention to enhance ISDS transparency

On 10 December 2014, the United Nations General Assembly adopted the Convention on Transparency in Treaty-based Investor-State Arbitration. The Convention will be open for signature on 17 March 2015.

The new Convention is to take into account the public interest involved in an ISDS by giving the public access to documents and the opportunity to participate in the ISDS proceeding. It has been globally recognized that transparency will promote predictability and accountability.

Previously, in 2013, the United Nations Commission on International Trade Law (UNCITRAL) adopted Rules on Transparency in Treaty-based Investor-State Arbitration.

As a general rule, the Transparency Rules are set to apply to ISDS proceeding under future investment treaties, concluded after 1 April 2014. However, thanks to the newly adopted Convention, the impact of the UNCITRAL Transparency Rules will become more far-reaching, by making it possible for States to apply the rules to ISDS cases arising also under any of the 3,000 investment agreements concluded also before 1 April 2014. The Transparency Rules may also apply to ISDS cases decided under arbitration rules different from the UNCITRAL Arbitration Rules.

Salient features of the Transparency Rules:

  1. All documents related to the arbitration proceedings shall be made public, including notice of claims, submissions by parties, transcript of hearings and the award.
  2. Hearings should be open to the public; the public may also attend through video links.
  3. The tribunal may allow written submission of a non-party to the dispute about a matter within dispute.

It may be noted that also before the adoption of this Convention, transparency and public participation have existed in ISDS. For instance, the NAFTA countries United States, Canada and Mexico have agreed that all ISDS cases under the NAFTA shall be made transparent, and that tribunals should provide opportunities for submissions from non-disputing parties.

However, the new Convention forwards a level of transparency that is unprecedented in international arbitration. With the new rules, ISDS will be more transparent than most domestic courts.

The adoption of the Convention demonstrates how ISDS reform is entirely possible – and under way.

A better debate on ISDS

Let us start with a better debate on ISDS. Describing ISDS as a method by which investors are “circumventing decisions states deem in their best interest” is simply not correct. Yet, this argument recently came up in an Op-Ed at the New York Times.

But a better debate should start with a comprehensive understanding of the basis and functioning of ISDS.

From the outset, the Op-Ed reflects a lack of understanding of the rule of law. Governments are not immune. We cannot go back to the days where “the King can do no wrong”. When a government violates a certain right, an individual who suffers damage from the violation should be able to bring a claim to enforce his/her right.

The right to bring a claim against the state in ISDS does not come from thin air. It comes from an investment treaty, concluded by the very same state. The treaty typically provides, for the substantive part, certain rights to foreign investor and, for the procedural part, the right to bring a claim against government to enforce this right.

In comparison, the human right regime similarly provides for the right of individuals to bring a claim against a government for an alleged violation of a human rights protection. In fact, the European Court of Human Rights received more than 65,000 claims in the year 2013 alone. As we have written before, a large number of ISDS claimants are also individuals.

Governments have also been using ISDS to bring claims against investors, provided the underlying agreement provides for this possibility. See for example an ICSID case, Republic of Peru v Caraveli.

A better debate on ISDS should carefully put numbers into perspective. The Op-Ed is critical towards the huge claims in the Vattenfall and Pacific Rim cases to illustrate the system’s flaws. These cases are not yet decided thus it is at best unwise to assess ISDS as a legal mechanism based on undecided claims.

The Op-Ed further points out the unusually high award in Occidental Petroleum v Ecuador. This fact however does not define ISDS as a legal mechanism. If the investor’s claim is granted, the amount of damages does not depend upon ISDS as a procedural form, but upon the size of the investment in the first place. A calculation of damages needs to be done also when domestic courts are charged with the task of deciding claims based on an alleged violation of rights.

The ICSID statistic is clear that in 43% of cases, government was successful in defending its case.

The Op-Ed is therefore nothing more than a selective mentioning of different ISDS claims. It does not analyze the functioning of the system or even the merits of the claims. The important debate on the future of ISDS and the importance of the rule of law deserves a more fact-based approach.

Enforcing state policy

ISDS has not, to any great extent, been used by investors to challenge legislative acts of states. Nor has it been used to annul any laws passed by parliaments.

This was one of the findings in a recent study by law professors at Leiden University and University Halle:

a. Most ISDS claims did not challenge legislative acts. Instead, the claims arose from governmental contract, permit or license.

b. After analyzing all concluded ICSID decisions, the study found that 47% of the disputes were associated with ministries or agencies and 9% (14 cases) resulted from legislative acts. The remaining disputes concerned acts by, among others, local governments and state enterprises.

c. In ISDS cases brought under the North American Free Trade Agreement (NAFTA), all claims which directly challenged legislative acts have failed.

In large majority of cases, investors did not challenge for instance, policies under environmental law, health law or mining law of a country. Rather, investors have sought to enforce specific promises from governments under instruments such as a contract or a permit related to their investment activities.

A contract is a promise. If a party under a contract fails to fulfill the promise thereunder, another party who suffers damage as a result of this non-fulfillment can bring a claim to enforce the promise. The same goes when the non-performing party is a government or a state. This is an inherent element of rule of law.

Case law includes cases where governments for example have explicitly agreed in a contract with an investor that an investment activity shall be conducted in a certain location. This is a promise that investor should be able to rely on. See for example MTD Equity Sdn Bhd and MTD Chile, SA v. Republic of Chile.

ISDS is a mechanism to enforce policy as defined by states in its contractual or treaty undertakings. But it does not define which promise – or policy – governments should extend towards investors. This power rests entirely with the state.

Positive Impact of Investment Agreement and ISDS on Foreign Investment

The United Nations Conference on Trade and Development (UNCTAD) recently released a paper on the relationship between International Investment Agreement (IIA) and Foreign Direct Investment (FDI). The research concludes the followings:

a. The majority of empirical studies found that IIA does have a positive impact on the flow of FDI.

b. IIA plays a complementary role among several factors which may boost FDI, among others economic, political and social stability as well as protection of property rights.

c. The existence of ISDS was associated with a positive impact of IIA on FDI.

The roles of IIA, however, have to be seen within the context. The report notes that since its role is complementary; it cannot substitute for the need of sound domestic policies, regulatory and institutional frameworks. IIA is not an insurance that more FDI will come, if the country’s domestic policies are not favorable and stimulating enough for foreign investors. Similarly, we may not expect that IIA can turn a weak domestic policy into a strong one.

Let’s take renewable energy as an illustration. Investment in renewable energy is of great importance since it is seen as one of the solutions to tackle climate change. Many countries have great potentials for renewable energy, but not all have favorable domestic policy to support its development. It would be hard to imagine that foreign investment will come just because of the fact that a country has an IIA in place; domestic policy is also a necessary prerequisite.

As addressed in the paper, attracting FDI is neither the prime nor the only role of IIAs. Its key role is to contribute to predictability, stability and transparency in investor relation. IIA thus ensures that for example a renewable energy investor can reasonably rely on the laws and regulations currently in place when making the investment,  and also that the investor should be able to rely on permits and contracts with government. This stability allows foreign investors to plan its investment – which in the end will boost investor’s confidence.

The fact that IIA has a positive impact on the flow of FDI opens up opportunities for governments to boost investment in a particular area, such as for example sustainable development. ISDS, in turn, safeguards the implementation of the IIA by providing an efficient enforcement mechanism for the terms of the treaty.

The environment needs more investment protection – not less

Does investment protection represent a threat against the environment? On the contrary; there is a good argument to be made that investment protection – with the support of ISDS – can be used to enhance measures to mitigate climate change.

In a recent report by Calvert Investments, Ceres and the WWF global investments in renewable energy is discussed. In the report it is shown that a large number of the world’s biggest companies invest significantly in renewable energy as it simply makes good business sense. But the report also identifies several potential obstacles to these investments. In addressing the concerns, future investment protection treaties such as TTIP could play an important role, for example by safeguarding stable and predictable environments for investments in renewable energy.

The key point is this. Investment protection treaties offer states a great potential to set the standard for environmental development. While the substantive protection is important when drafting future treaties – what should states offer in order to attract investments in the renewable sector? – ISDS plays an integral part because having neutral, third-party adjudication is an essential aspect of providing confidence and security.

The potential to use investment treaties to combat climate change is currently discussed a lot in academic circles, but so far it has failed to enter the general public discussion. Let’s help each other – and the environment – by changing this and unlocking this potential for development.

Controversial Editorial in The Economist

The usually well-informed, pro-trade newspaper The Economist recently published an editorial that has been used by anti-globalization voices as a victorious proof that also “market friendly” voices question ISDS. This is not an accurate reading of the editorial, which, as the sub-heading states, argues that investment protection “is not the horror critics claim, but could be improved”. This is a relatively moderate – and arguably uncontroversial – approach that should not be understood as an attack on investment protection.

That being said, the text echoes many of the common misconceptions thrown around in the debate surrounding ISDS. The newspaper claims that the clauses defining the scope of ISDS are “insufficiently precise”. By claiming this, the Economist fails to make the crucial distinction between substance and procedure. The substantive protections can very well be said to be imprecise in some cases, which has indeed been done repeatedly and also led to more recent agreements including more detailed regulations of the scope of substantive protection. ISDS is, however, a whole other matter and only concerns the procedural tools to enforce the substantive clauses.

Furthermore, the newspaper criticises the confidential ISDS proceedings. This is indeed something that can be questioned in an investment dispute context. But the simple fact is that TTIP is likely to include the most transparent ISDS proceedings in history (as we discuss in Swedish here ) through the application of the UNICTRAL Rules on Transparency in Treaty-based Investor-State Arbitration.

Very few court systems in Europe, if any, can demonstrate the same level of transparency as the UNCITRAL Rules on Transparency, adopted in 2013 and in force as of 1 April this year. UN member states spent three years drafting these rules. They spent another year drafting a convention on the same topic, to expand the scope of the Rules on Transparency. Yet, in the public debate, it is as if none of these events ever took place.

The Economist also makes the populist mistake of using a few controversial cases as benchmarks for an entire procedural regime. But the very fact that a controversial case is brought does not mean that the procedural system as such is defect: neither in international law nor in domestic courts.

When national courts render decisions we do not approve of, perhaps in favor of parties we do not approve of, we do not say “Close the court!”.

We may say “change the law!”, or “that was a poorly drafted agreement”. We may even say that “the court got it wrong”, “the judge didn’t understand the case”. But we do not say that the court should be closed every time we disagree with one of its decisions. That would be an unacceptable principle in any system governed by the rule of law.

The real focus of discussion should be the substantive commitments by states. Once these commitments have been made, most sensible commentators find it reasonable that there should be a way to hold states accountable for them.

More than anything, the fact that even a normally moderate voice succumbs, at least in some aspects, to over-simplified rhetoric is a worrying sign that the entire discussion about ISDS has been tilted in a worrisome direction.

ISDS is not a threat to environmental protection

Arguments against ISDS are triggered by assumptions and careless readings of the outcomes of some ‘controversial’ cases. In these cases – some of which do not even have an outcome yet – investors brought a claim against governments to ISDS stemming from environmental measures. Therefore, according to these arguments, ISDS as a whole is therefore a threat to environmental protection.

These assumptions are, at best, ignorant – at worse, false.

Investment agreements provide commitment of two (or more) governments to accord treatment according to international law to investors from its treaty partner. When an investor alleged that this standard of protection has not been fulfilled, it has the right to submit a claim to ISDS.

The fact that this claim may also cover those stemming from an environmental measure does not mean that governments cannot regulate for environmental protection.

First, ISDS as a legal procedural mechanism does not define policy. It does not regulate the substance of environmental regulation governments can have and levels of environmental standards governments can impose.

Second, in no case will the government be required to change its policy since ISDS do not provide injunction as a remedy.

Third, as a matter of fact, the number of cases stemming from measure with environmental motives has been small.

Fourth, the claims typically do not concern legislative acts.

Most of the challenged measures are administrative in nature, for instance treatment under certain permits, licenses and contracts which gives specific right to investors. When a government has given a specific right under an administrative instrument to a foreign investor, such investor has the right to reasonably rely upon it. As a matter of legal principle, the same right goes to any other actors, including a domestic investor.

Fifth, case law suggests that when environmental concerns have been found justified,  and investment protection standards were fulfilled, claims against governments have not been successful. Tribunals have found that governments do not have to compensate investors for  measures with justified environmental concern. This includes measures which are, among others, non-discriminatory, transparent, does not violate a specific commitment given by the government, and which are supported by a certain degree of scientific evidence (see among others, Methanex v US, Glamis Gold v US, Chemtura v US, Emilio Agustin Maffezini v Spain, Saar Papier v Poland available on italaw.com).

The chosen description of a claim as ‘environmental’ is not a decisive factor to assess whether ISDS poses a threat to environmental protection. It is the content that matters. As in any system governed by the rule of law.

Who is the investor?

The description of the investor in the ISDS debate has grown to almost mythical proportions. For an outside observer it would be easy to get the impression that the beneficiaries of investment treaty protection treaties – and the users of investor-state dispute settlement – are a narrow group of multinational companies, who use treaties to bully states. This assumption is simply not supported by the basic facts.

Investment protection treaties, be they bilateral or multilateral like the NAFTA or the TTIP that is now being negotiated, generally put no lower threshold on the size of investment to be protected. The treaties’ definitions of which types of investments are protected in practice presuppose some kind of risk-taking and long-term commitment in the host state but apart from that, definitions are wide and include a wide range of activities. As a matter of principle, investors small and big, get the same protection.

In reality, about one fourth of all ISDS claims have been brought by individuals or very small corporations, according to a comprehensive OECD study. This share of the caseload increases significantly if also medium-sized companies are included. Conversely, the same survey found that the very large multinational companies count for only 8% of the known cases.

Unlike the impression often painted in the debate, a minority of claims relate to public health or environmental protection. By way of example, one of the sectors with most ISDS claims launched in the last few years is the renewable energy sector, as many states have recently withdrawn different incentives for renewable energy investments. Some international investors claim that these measures violate the Energy Charter Treaty, which has led to over 20 arbitration cases.  Many of these solar and wind power companies are relatively small.

It also deserves pointing out that a large number of investment treaty claims have been launched by private persons (see cases listed at www.italaw.com).

Ignoring the facts – again

The Swedish Trade Union Confederation (Sw. LO) is arguing that ISDS is “characterized by a lack of transparency, high costs, un-justified lawsuits and also carry the risk that human rights are violated.”

The arguments once again illustrate the careless treatment of facts in the ISDS-debate. This is what LO failed to mention.

ISDS is becoming more transparent than courts

In 2013, UNCITRAL adopted transparency rules for ISDS.  ISDS-proceedings under the new UNCITRAL Transparency Rules will be more transparent than proceedings in domestic court. For example; (i) information about the case will be promptly made available as soon as the case has been initiated; (ii) the public will as a general rule have access to all documents from the proceeding; (iii) non-disputing parties will be allowed to file submissions; (iv) hearings may be open to the public, including through video link.

Governments have also agreed to more transparency, even before the adoption of the UNCITRAL Transparency Rules. As a result, documents from ISDS proceedings can easily be accessed online now, including almost 300 ISDS decisions.

ISDS is not more costly than proceeding in domestic court

Any dispute can be costly, depending on the complexity of the case, and complex cases naturally will result in higher legal counsel fee. A study by the OECD has found that legal counsel fees and experts is the largest cost component in ISDS, estimated to average 82% of the total cost of a case.

Legal fees being the decisive factor, costs would not necessarily be lower in a public court proceeding. It is more likely that they run higher. This is so because litigation in domestic court can be subject to one or two stages of appeals. In such cases, counsel fees will triple. In contrast, international arbitration is a one instance procedure.

ISDS is not characterized by unjustified lawsuits

The statement that ISDS is characterized by un-justified lawsuits is completely unsubstantiated. There is not support for such statement from any of the institutions or organs involved in investor-state dispute settlement.

In a democratic society, any person who is of the opinion that its rights have been violated should be entitled to initiate a legal procedure to defend this right. This is an inherent element of rule of law.

It is for the arbitration tribunal to decide whether the claim bears merit, depending on the evidence presented, i.e. exactly the same as for litigation in domestic court.

The character of lawsuits does not define a system.  The quality of the awards does.

ISDS does not increase the risk of human rights violations

The protection of human rights is an important element of international law. It is defined for example by the European Convention of Human Rights, and alleged human rights violations are decided by the European Courts of Human Rights.

The European Court of Human Rights received 65,900 applications – in 2013 alone. As of 31 January 2013, there were a total 568 known ISDS cases – in the last 20 some years.

Risks of human rights violations are very high in some parts of the world, illustrated not least by the applications to the European Court of Human Rights in one year only. This is of course worrying.

The ISDS system however is designed to enforce rights in accordance with international law. These rights will in most cases include the protection against expropriation and non-discrimination, rights also protected under the European Convention of Human Rights.

Risks of human rights violations should always be mitigated. But removing the one mechanism which truly enforces treaty rights under international law is not the way forward.