Tag Archives: CETA

Frequent standards of protection: full protection and security (FPS)

Old and very used wooden Rubber StampOur first text about standards of protection in investment treaties is about the frequently occurring provision giving investors “full protection and security” (FPS). Most investment treaties contain this language, or wording similar to it.
In older treaties, the language is usually relatively short. These clauses have historically been interpreted to provide physical protection against interference with foreign investments, particularly during conflicts and/or in regions where the police power might interfere with foreign property.

The very first ISDS case, AAPL v. Sri Lanka, is an example of this interpretation. AAPL won its case against Sri Lanka, after the state was found to have neglected its duty to take precautionary measures in connection with a security force operation against the rebel group Tigers of Tamil. The operation, and the ensuing battle, destroyed AAPL’s shrimp farm, which the tribunal found could have been avoided if the state had acted differently.

A number of other FPS clauses have been interpreted more broadly, and even been found to encompass legal protection and legal security. Such interpretations of FPS overlap to the aspects of fair and equitable treatment (FET) which protects investors against denial of justice.

How broadly a tribunal interprets full protection and security is largely dependent on the language of the individual clause. Many new treaties therefore clarify the scope of the provision, most commonly by making clear that it only applies to physical protection.

Swedish National Board of Trade investigates Most Favored Nation treatment

Night view of Gamla Stan, the old part of Stockholm, SwedenMany investment treaties contain a clause providing for ”most favored nation” treatment (MFN). Such clauses have been part of trade treaties for centuries and their basic principle is that the treaty states guarantee that if they enter into other more favorable treaties with third states, then the states to the original treaty are entitled to the protection contained in the treaty with third states. The original purpose is to level the international playing field: state A should not be able to give state B (or investors from state B) treatment that is less favorable than the treatment given to state C (or investors from state C).

Sweden’s investment treaties contain MFN clauses. Therefore, the Swedish National Board of Trade, an expert agency within the Swedish government, has published an analysis of these clauses and their meaning for Sweden.

The review shows that all of Sweden’s 66 bilateral investment treaties contain MFN but that the exact scope of the clauses varies significantly. It is thus difficult to say with clarity what the clauses mean for Sweden: what kind of protection an investor could ”import” into Swedish BITs would have to be determined on a case by case basis. The report also analyzes how MFN clauses have been interpreted in arbitration jurisprudence and uses that to explain how the limits of the clauses could be understood more generally, depending on the language of the individual clause.

Several of the more recent treaties – including the non-ratified CETA and TTIP – have clarified the scope of MFN, in order to avoid the very uncertainty that the National Board of Trade points out with respect to the older Swedish BITs.

One concluding recommendation from the National Board of Trade is that Sweden revisits its BITs, in order to clarify the scope of MFN. This, of course, faces certain practical problems since the treaties are bilateral and thus would have to be discussed one by one with Sweden’s counterparts.

How investment protection affects the “right to regulate”

Green paragraph between black paragraphsIn discussions of investment protection provisions in the context of the Transatlantic Trade and Investment Partnership (TTIP), issues have been raised regarding the risk of such investment provisions affecting the signatory states’ “right to regulate”.

A report from the Swedish National Board of Trade seeks to bring clarity to these issues by examining how two of the most commonly used investment protection provisions affect states’ “right to regulate”. At the outset, the report explains that the term itself is misleading, for an investment protection agreement never entails a waiver of the states’  right to regulate. Rather, the “right to regulate” in this context refers to the state’s ability to legislate and adopt administrative acts without running the risk of having to pay damages to investors.

Using the concluded trade agreement between the EU and Canada (CETA) and the US model bilateral investment treaty, the report analyzes two investment protection articles that frequently occur in investment disputes, and which also have the greatest potential impact on the state’s “right to regulate”. These two articles relate to (1) fair and equitable treatment and (2) expropriation without compensation.

The “fair and equitable treatment” article protects investors against, inter alia, fundamental breach of due process in judicial and administrative proceedings, manifest arbitrariness, and targeted discrimination. The article is often interpreted to include protection of investors’ “legitimate expectations”, based on the laws, regulations and government commitments that attracted the investment. According to the Swedish National Board of Trade, foreign investors in Sweden already enjoy this type of protection under Swedish law. The article on “fair and equitable treatment” in an investment protection agreement will thus not affect Sweden’s “right to regulate”.

The article regarding “expropriation without compensation” prevents states from nationalizing private property (direct expropriation), or by legislation or other means causing the investor to lose control of the investment or rendering the investment worthless (indirect expropriation). The provision again direct expropriation is broadly consistent with Swedish law; while the provision against indirect expropriation provides investors with some additional protection beyond that offered by Swedish law. According to the National Board of Trade, the expropriation article on the whole has only a slight, if any, impact on Sweden’s “right to regulate”.

The report concludes that, because the protection that these articles provide foreign investors in Sweden is already largely covered by Swedish law, they have a very small impact on Sweden’s “right to regulate”.

ISDS reform is already happening

Governments of both sides of the Atlantic have made significant policy revisions of ISDS mechanism over the past few years, as concluded in this recent article.

A decade ago, the U.S introduced transparency and third-party participation in ISDS as provided in its 2004 Model BIT. The current US BIT model, the 2012 model, contains these provisions as well. The 2012 model further provides an opportunity for the investors to discuss the effects of change of regulations with the host government, which may prevent the initiation of ISDS by investors. This model serves as the template for US’ position in the negotiation of future investment agreements.

The European Union has also introduced new elements to the ISDS regime, most notably in the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA”). The ISDS provision under this agreement contains among others:

  1. Prohibition of parallel proceedings in domestic court or other international tribunals;
  2. Introduction of a fast-track system for rejecting frivolous claims; and
  3. Full transparency in ISDS proceedings.

In addition, the CETA is the first trade and investment agreement which contains a binding code of conduct for arbitrators. The code of conduct obliges arbitrators to continuously disclose any possible conflict of interest as well as to maintain their independency and impartiality. This code of conduct is also included in the draft free trade agreement between the EU and Singapore.

The negotiations of the CETA have been completed and the text will now undergo a legal review followed translation into all official languages of the EU. The agreement will, at the later stage, need to be approved by the Council and the European Parliament.