ISDS in TPP and TTIP Negotiations – Lessons for the EU

by Prof. Loukas Mistelis, QMUL*

The Transatlantic Trade and Investment Partnership (TTIP) and, in particular, its Investor-State Dispute Settlement provisions (ISDS) have been the focal point of an intense and polarising debate within the EU. Opponents of TTIP, on the one hand, reject the very idea of a new multilateral trade and investment agreement and see this as a threat to democracy and unconditional surrender to global commercial interests, a development that fully undermines sustainable development and growth. Proponents of TTIP, on the other hand, argue that globalisation of trade is a fact and a developmental process so that the focus should now be on better treaty making; they suggest that globalisation empowers consumers and new multilateral agreements can effectively promote a social and human rights agenda.

In relation to ISDS (or what it used to be called Investment Treaty Arbitration) the attack is even more aggressive. While the negotiating parties consider whether TTIP should offer the opportunity to an investor to sue in arbitration a state signatory to the agreement (since the state is deemed – by virtue of the signature of the treaty and the relevant provisions of the treaty – to have consented to such arbitration), a number of NGOs and a good part of the press, including several well-established newspapers left-of-centre argue that ISDS is a threat to national sovereignty and a vehicle for further privatisation of justice for the benefit of few very wealthy arbitration lawyers and arbitrators. It is also suggested that ISDS cases are designed for the benefit of investors. This, however, is not corroborated by facts.

The EU itself, in its discussion of ISDS (pp. 7-8) summarised that:

  • 37% (132 cases) had been decided in favour of the State, with all claims dismissed either on jurisdictional grounds or on the merits;
  • 28% (101 cases) had been settled;
  • 25% (87 cases) were found in favour of the investor, with monetary compensation awarded;
  • 8% (29 cases) had been discontinued for reasons other than settlement or for unknown reasons;
  • 2% (7 cases) had found in favour of the investor, yet no monetary compensation had been awarded.

In other words in 73% of the cases the state prevailed or settled the cases while in only one in four cases (25%) a damages award was rendered.

In relation to EU Member States the data is even more compelling:

  • In 44% of the cases, all claims were dismissed or jurisdiction was declined;
  • In 36% of the cases, the dispute was settled or otherwise discontinued;
  • In 20% of the cases, the dispute led to an award upholding claims in part or in full.

In 80% of the cases involving an EU Member State as a respondent the state prevailed or settled the matter while only in one in five cases a damages award was rendered.

It is noteworthy that the arbitration community as well as the business community have not been particularly vocal or proactive in this debate, save for a few specialist conferences. It has also been rather impossible to bring together a wider and open public debate despite several efforts of EFILA and other organisations to engage in constructive discussions with NGOs.

In the recently published report of the US-EU TTIP Negotiations, which took place in Washington, D.C and Miami in October 2015, there is no reference to ISDS. This is particularly interesting given that the EU through Commissioner Malmstrom published on 16 September 2015 a comprehensive proposal for a permanent Investment Court System. I suspect that the EU Commission proposal was published too late to be tabled for and discussed during the October negotiations. From the EU press release one can draw the conclusion that the EU Commission is confident that it had addressed various concerns voiced by parts of the press and NGOs. It will be significant to see the reactions of Member States and the EU Parliament. See, for example, the brief report which indicates that the UK government appears to favour a traditional ISDS mechanism but also note that this is not the official UK government response.

This post does not address the merits and disadvantages of a permanent investment court but addresses the question of negotiation strategy and policy. The investment court system proposal was discussed in another EFILA Blog post on 14 October 2015. It perhaps useful to add here merely that the reaction of the USTR Ambassador Froman to the EU suggestion was lukewarm.

While the EU was authorised by the Member States in 2013 to conduct the TTIP negotiations it seems that the negotiations will take some time to conclude. The US presidential elections in 2016 will slow down the negotiations at least until mid or late 2017. A conclusion of TTIP will not be on the agenda for a few years to come.

This is in stark contrast with the conclusion of the Trans-Pacific Partnership (TPP text) which the US accelerated and recently completed. TPP has been signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US in Atlanta a few days ago. The TPP negotiations started in 2008 and it took good seven years to conclude.

The text of TPP will be scrutinised by the EU negotiators, the EU Commission and the Member States. It would suffice to say here that TPP is largely a typical US Trade and Investment Agreement with some variations from previous texts and that ISDS is included. It contains substantive protections found in many investment agreements and essentially mirrors the provisions found in the 2012 US Model BIT. As such TPP differs from the EU-Canada Comprehensive Economic Trade Agreement (CETA) and the EU-Singapore Free Trade Agreement.  For example, it grants minimum standard of treatment in accordance with customary international law. It is also reported that TPP includes a code of conduct (code of ethics for arbitrators) while at the same time more power is conferred upon arbitrators to dismiss summarily frivolous claims. There is also an exclusion for tobacco companies from using ISDS, further enhancing and strengthening the regulatory space of states.

The key conclusion to draw from the ISDS provisions in TPP is undoubtedly a strong and unequivocal endorsement of the current practice of private arbitration of investment disputes (traditional ISDS) where the focus has moved to substantive protection rules rather than arbitration as a method. In this respect TPP dispelled ISDS myths and focused on facts.

In light of the recently concluded TPP it is tactically unhelpful that the EU has published an alternative ISDS Model at this stage of negotiations. One could easily argue that the TPP model for ISDS is “state of art”, widely accepted by a number of developed economies such as Canada, the US, Australia, Japan and Singapore (in fact 40% of the world’s GDP) and that the EU should also operate in a similar system, increasing multilateralism rather than introducing further fragmentation of international investment law. It is also expected that both the EU and the US take a central role in promoting free trade and investment promotion and protection and it would be awkward, to say the least, to have different standards of investment promotion and protection depending on who the counterpart is. The introduction of “formal” discrimination could have negative impact of the global role of the EU as a preferred trading partner of developing countries.

Tactically a very early announcement of the EU basis of negotiation on ISDS in TTIP looks very much like a game theory faux pas. Or it may well be a very shrewd tactic. Any draft which is proposed to merely satisfy domestic or regional needed of the proposing side can be used by the other side to the proposing side’s detriment if the need for a quid pro quo settlement arises. Alternatively it may a tactic to silence the opponents of ISDS by proposing something that can easily be rejected so that both sides would, for example, be satisfied with a permanent investment appellate body while retaining private arbitration at first instance. In such a case the EU could argue that they fought hard for a permanent two-instance investment court and the permanent appellate body is a great success.

Rejecting private arbitration while the statistics are clear that most cases are in favour of states rather than investors and while it is also widely accepted that we should not be depriving investors the access to arbitration (or ISDS) seems to parochial rather than modern and protectionist rather than liberal. The attention should move to improving ISDS and private arbitration by drafting clearer treaties, better procedural rules and enforceable codes of conduct. Polarising the debate does not allow space for regulatory nuances nor does it help to create a convergent if not harmonised investment protection and promotion regime.

* Prof. Loukas Mistelis, Clive M. Schmitthoff Professor of Transnational Commercial Law and Arbitration, Queen Mary University of London, School of Law.