Category Archives: TTIP

SCC seminar on ISDS & TTIP at the European Parliament

isdsbloggbrysselThe Stockholm Chamber of Commerce took an initiative to organize a seminar on ISDS at the European Parliament on 5 May 2015. The aim was to discuss the importance of the mechanism in support of the global economy – with a special focus on the Transatlantic Trade and Investment Partnership (TTIP).

Participants came from the Members of the European Parliament offices, governments’ representatives including the European Commission and different NGOs. The panel consisted of experts from different backgrounds and was moderated by Andreas Hatzigeorgiou, Chief Economist at the Stockholm Chamber of Commerce.

ISDS comes in the form of international arbitration and it is therefore essential to understand how the mechanism has been used. Annette Magnusson, the Secretary General of the Arbitration Institute of Stockholm Chamber of Commerce explained that historically, arbitration served as a neutral dispute resolution venue in times of geopolitical crisis, among others during the fall of the Soviet and Iran-U.S crisis. Today, ISDS plays an even more important role. In recent years, investors in the renewable energy sector have used ISDS to enforce investment protections in IIAs. This demonstrates that ISDS has the potential to protect investment in sustainable development efforts.

Rikard Wikström, a partner at White & Case in Stockholm, explained that rule of law and legal principles underpin ISDS as a procedural mechanism. The disputing parties in ISDS have equal rights to present their case, arguments are made based on the law and due process should exist throughout the process.

ISDS reform is underway, among others by the adoption of international rules to enhance transparency in ISDS proceedings. Timothy Lemay, the Principal Legal Officer of the United Nations Commission on International Trade Law (UNCITRAL) explained how the UNCITRAL Transparency Rules work in practice. By the application of these rules, most documents in an ISDS proceeding will be made public, the public will be able to access the hearings through video-streaming and participate in the proceedings by submitting amicus curiae.

Turning to the question of ISDS in the TTIP, Christofer Fjellner, a Member of the European Parliament, emphasized that having investment protection in the TTIP is a matter of rule of law. It is a matter of ensuring that foreign property will not be expropriated without fair compensation and that investors are treated without discrimination. ISDS is just a mechanism to enforce this protection.

Finally, Freya Baetens, associate law professor of the Leiden University, conducted a cost-benefit analysis of including ISDS in the TTIP. She concluded that the TTIP may benefit from some improvements in the ISDS system, among others by invoking a loser-pays principle and ensuring that frivolous claims are dismissed at an early stage of the proceedings.

Above all, ISDS in the form of international arbitration is a well-established mechanism to resolve international disputes. It is governed by both international law and domestic law – which means that States maintain full control in the functioning of the system.

The European Commission Concept Paper on ISDS

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The European Commission has published a concept paper on proposals for a potential future ISDS-mechanism in the TTIP.

According to the paper, a new approach in the EU investment policy is needed, where “a major part of the challenge is to make sure any system for dispute settlement is fair and independent”.

It may be observed that the paper contains no clear elaboration on how the current system is unfair and not independent. In contrast, in our experience the current system in the vast majority of cases does represent the values of fairness and independence.

As a starting point, the paper asserts that the EU has achieved a certain level of ISDS reform as embodied in the EU free trade agreements with Canada and Singapore. The paper addresses “what should be further improved”.

Firstly, the paper proposes an exclusive roster of arbitrators pre-established by State parties of the investment agreement. Several arguments could be raised against such practice. It is impossible to foresee what future disputes under an agreement will look like and what specific expertise will be required. A pre-established roster may constitute an obstacle for the dispute to be resolved by the most suitable arbitrator.

Secondly, the paper proposes an appellate mechanism “to ensure correctness and predictability”. It deserves pointing out that the ICSID Convention or the provisions of New York Convention already serves this purpose. Under the ICSID system, an award can be annulled on procedural grounds, among others if the tribunal manifestly exceeded its powers.

If what is desired is to try the whole case again at the appeal stage, it will significantly increase the time and costs associated the dispute. An appeal mechanism in itself is no safeguard to enhance predictability – this is best achieved by well formulated substantive terms.

Finally, the paper foresees the creation of “a permanent multilateral system for investment disputes”. The Commission seems to ignore that such system is already in place through the Washington Convention and the ICSID system, which has been endorsed by more than 150 states.

The impression is that the reform proposals were made based on “perception”, or more precisely, misperception on the system. A stronger emphasis on empirical evidence would better serve a higher standard in the decision-making process ahead.

For more information, read the SCC’s remarks on the Concept Paper here.

Empirical research does not support perceived bias of ISDS awards

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A recent academic article by Susan D. Franck, Professor of Law of Washington and Lee School of Law analysed the issue of whether or not ISDS could be said to favour host states from either the developed or the developing world. To this end, all ISDS awards that are publicly available as of 1 January 2012 were analysed.

At the outset, it is noted that ISDS is intended to provide investors with a real forum for non-politicized rule of law adjudication.

The main conclusion of the empirical research is that States’ relative success in ISDS appears to operate independently of development status. This, according to the author, suggests that other factors, such as the host state’s level of democracy and domestic political infrastructure may have more influence in the outcomes of ISDS.

Therefore, purely based on outcomes of the cases, available data does not show that ISDS favours host states from the developed world.

The article also carefully puts numbers into perspective. States won in equal or greater proportions than investors. Even when investors won in ISDS, the tendency is that they recovered less than USD 20 million in compensation on average. Overall, investors roughly obtained only 30% of the amount claimed.

Putting these numbers in mind, it should be difficult, if at all possible, to conclude that ISDS is either pro-investor, or pro-state. As in any well-functioning legal system, the reality of ISDS is more balanced than this and does not lend itself to simplified descriptions of who the system favours, or not.

The IBA on ISDS

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The International Bar Association, which has a membership of 55,000 individual lawyers across the globe, recently published a paper on ISDS. It is not only fact-based, but it also brings out some unfounded claims about ISDS that have not been widely addressed.

The paper mentions that it would be incorrect to state that ISDS is biased against developing countries as data on ISDS show no correlation between the success rates against states and their income levels.

Neither does ISDS enable investor to make “a fortune” from the system. Data show that even when investors won in ISDS, they have only recovered on average, less than half of the amount they claimed.

ISDS has at times been described as a one-sided system as it only allows investor to bring a claim against States. From a legal perspective, whether or not States can equally bring a claim in ISDS entirely depends on the exact language of the international investment agreement (IIA). This means that States retain the option to include this in the IIA. Case law also demonstrate that State-owned companies have frequently used ISDS.

Above all, it is not true that ISDS is not needed when domestic courts are already sophisticated. ISDS concerns questions of international law, hence international tribunal is needed to resolve those questions.

The IBA is further taking an initiative to analyse both the benefits and criticism on ISDS to make it a better system. To this end, the IBA is engaging with governments from both developed and developing countries, arbitral institutions, corporations and the legal profession.

Law professors in support of ISDS

Positive voices in support of ISDS continue to surface – and this time it comes from highly-regarded academics.

Forty seven law professors from various universities recently sent an open letter which seeks to clarify the skewed information surrounding the discussion on ISDS and offers the salient facts on the system.

From the outset, the letter makes a strong case for the relationship between state’s sovereignty, rule of law and ISDS. States enter into investment treaties with ISDS provisions as an exercise of its sovereignty. ISDS, in turn, enforces rule of law as it ensures that states respect their international obligations in such treaties. It is as simple as that.

When it comes to a challenge of regulation to protect public interest, ISDS cases have shown that bona fide government acts have not caused a liability for States to compensate investors. It is also not correct that showing a mere loss of profit is enough for an investor to get compensated – it has to show that a State has done wrong based on the treaty terms.

ISDS is not a completely alienated or ‘private’ system – in many ways it mirrors procedural protections in national courts. Both parties have the right to retain counsel and to submit evidence. Impartial arbitrators can be challenged. The system also works closely, instead of separately, with national courts. For example, a national court may consider whether or not an ISDS award is valid.

Above all, ISDS is governed and supported by both domestic and international laws.

When one takes a careful and diligent look into the legal framework of ISDS and the outcomes of the system, it would not be surprising to come to the same conclusion as reached by these law professors.

It just takes a willingness to learn and an open mind.

Sweden signs Mauritius Convention on Transparency

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Sweden is among the first eight countries to sign the Mauritius Convention on Transparency in Investor-State Arbitration when it opened for signature on 17 March 2015 in Port Louis, Mauritius. The Convention represents a significant multilateral reform on ISDS.

The Convention creates a level of transparency that is unprecedented in international arbitration as we have written in our previous blog post. Not only most documents in an ISDS proceeding as well as the hearings will be made public, the public will also have the opportunity to participate by writing submission to the tribunal. ISDS will therefore be more transparent than most domestic courts in Europe.

Other countries that also signed the convention at the signing ceremony are Canada, Finland, France, Germany, Mauritius, the United Kingdom and the United States.

The EU Commission’s consultation on ISDS

The EU Commission’s report on the consultation on ISDS in TTIP was recently published on 13 January 2015.

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC)  participated in the public consultation. Read the SCC:s response to the consultation here

It may be noted that the SCC has only commented on issues related to procedure within the framework of the consultation.

The SCC is an independent part of the Stockholm Chamber of Commerce and has developed into one of the world’s leading forums for dispute resolution. The SCC is also the second largest institution for the administration of ISDS disputes. Read more about the SCC here

The aim of the SCC is to continue to be involved in the discussion that has developed around ISDS and to contribute with facts about international arbitration in general and investment arbitration in particular.

Infographics: Facts on ISDS

The Stockholm Chamber of Commerce has created an infographics guide with facts on the dispute resolution mechanism Investor-State Dispute Settlement (ISDS).

The ISDS infographics guide presents core facts and statistics about ISDS in a quick, clear and creative manner.

What industries have brought claims to ISDS? Who are the investors in ISDS cases and who administers them?

Learn more about ISDS through the downloadable infographics guide below!

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Click image to enlarge and to download PDF-version.

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.

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.