Investor Protection in CETA and TTIP Leaves a Lot of Room for Improvement Say Legal Experts in Parliamentary Hearing

27 January 2015 | Professor Steffen Hindelang of the Free University Berlin, a renowned expert for international trade law has today presented at a joint hearing of the EU-Parliament committees on law and on international trade the findings of three studies, comissioned by parliament.

The authors of the studies, Steffen Hindelang and Professors Pieter Jan Kuijper (University of Amsterdam) and Ingolf Pernice (Humboldt-University), agree that “The EU should include State-of-the art investment chapters in all of its comprehensive free trade agreements or, where appropriate, should negotiate stand-alone investment agreements. Substantive commitments should be backed by an investor-State dispute settlement mechanism”, Then, Hindelang proceeds by outlining five major flaws of the arrangements as currently envisaged and ways to fix those flaws. His presentation follows. A link to the studies is at the end.

Steffen Hindelang: Presentation of Studies on Investor-State Dispute Settlement provisions in the EU’s international investment agreements (ISDS)

European Parliament JURI/INTA Joint Public Hearing on the Transatlantic Trade and Investment Partnership (TTIP): Regulatory Aspects and Investor-State Dispute Settlement/Arbitration on 27.01.2015

Mr. Chairman, Members of Parliament, ladies and gentlemen,

Thank you very much for the opportunity to present briefly the main findings of three studies on investor-State dispute settlement (‘ISDS’) provisions in EU investment agreements, commissioned by the INTA Committee and published late last year.

The authors – Professor Kuijper, Professor Pernice, and I – very much hope to contribute with these works towards objectifying the current debate on investment protection in CETA, TTIP, Singapore, and other agreements currently under discussion.

Let me start right away with what I perceive as the most important message all three studies broadly have in common: The EU should include State-of-the art investment chapters in all of its comprehensive free trade agreements or, where appropriate, should negotiate stand-alone investment agreements. Substantive commitments should be backed by an investor-State dispute settlement mechanism.

By including modern investment chapters in all EU free trade agreements, the EU would make an important contribution to the development of the international rule of law and, simultaneously, protect European investments abroad.

To the extent that the studies have already considered CETA draft texts, overall they welcome the progress made by the European Union in improving the current investment protection regime. If compared to many older investment agreements in force, including those of EU Member States, CETA breaks new ground. It displays a new quality of investment treaty-making in Europe. Largely borrowing from Canadian and US American models, CETA defines substantive standards in more detail. Frequent reference is made to the right to regulate, and investment arbitration is made more transparent and, in tendency, less partial.

While explicitly acknowledging progress made with the regulatory approach taken in CETA, five significant challenges remain to be resolved. Interestingly, four out of five issue areas are also identified as “areas for further work” in the Commission’s Report on the Online public consultation on investment protection and investor-to-State dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement.iii Substantive provisions in EU investment agreements were not in the focus of the three studies I present here.

The five issue areas relate to the following:

1. The current CETA text does not only insufficiently incorporate national legal systems; it weakens functioning judiciaries such as the French, Dutch or European ones. Strengthening the rule of law in the international sphere is, to some extent, exchanged against a weakening of the same at a national level.

2. The current CETA text does not establish an appeals facility but only vaguely alludes to it. Legal errors and errors of fact or conflicting interpretations of international arbitral tribunals formed under CETA can hardly be corrected effectively. Consistency in the interpretation and application of the Agreement cannotbe guaranteed for.

3. The current CETA text does not sufficiently dispel a possible public perception of a tribunal’s bias in favour of investors. Arbitral proceedings against States can almost exclusively be initiated by investors in a meaningful manner. The ad hoc arbitrators and counsel – constantly changing their roles – will continue to see themselves subject to the accusation of furthering their business interests by an actual or perceived investor-friendly decision-making practice.

4. The current CETA text leaves administrative issues potentially critical to procedural outcomes, such as the selection of arbitrators, up to the ICSID Secretariat, part of an international organization in which European forces are traditionally of no dominance.

5. The dispute settlement mechanism contained in the CETA text might not fully be compatible with the EU Treaties as it does not pay sufficient regard to the Court of Justice of the European Union’s judicial monopoly and the principle of autonomy of EU law.

What Europe needs instead is an independent, innovative ISDS model, which protects investors and observes European and Member State interests. A European ISDS model can protect investments abroad in a sustainable fashion, thereby setting new global standards and providing stimuli for investment, bringing government regulation and private ownership interests in a reasonable balance, furthering the respect of human rights, and contributing to conveying Member State and European values and legal convictions. Such a European model

1. sufficiently incorporates functioning national and European courts in the settlement of disputes between investors and their host State. This may be especially be realized by an elastic local remedies rule dependent on the independence and competence of the respective national legal system in a given case. The extent of this obligation to exhaust local remedies can be determined by the tribunal on the basis of a rule of law index and adjusted flexibly.

2. creates a permanent appeals facility for investment disputes that may not only be nvoked in the context of arbitration on the basis of a specific EU agreement but may lso potentially be open to arbitration on the basis of agreements from third countries.

3. mitigates the perception of bias in favour of investors in ad hoc arbitral tribunals. Tis can be achieved by a significant increase in the group of potential abitrators who shall be nominated to sit in an arbitration based on their placement n a respective list. Access to the list shall principally be open to each and every awyer qualified for investor-State arbitration.xi In the long run ad hoc arbitration could be dismissed in favour of reviewing the exercise of governmental authority by a permanent court.

4. possibly delegates administrative decisions crucial to arbitral outcomes, such as the appointment of arbitrators, to an international (arbitral) institution based in Europe, which shall provide reasonable assurance as to its neutrality by virtue of its organization and status as an international organization. xiii Alternatively, the ICSID Secretary-General should not enjoy any discretion in its administrative decisions on the basis of CETA and any other EU agreement.

5. A European Model must sufficiently safeguard the autonomy of EU law and the CJEU’s judicial monopoly. This is only to be achieved if the EU legal order isshielded from spillover effects flowing from investment arbitration. When questions of EU law arise in arbitration, even if only indirectly, the CJEU might have to be involved by providing binding interpretations.xv In order to avoid any uncertainty, a draft ISDS text in an EU agreement should be submitted to the CJEU for a legal opinion before it is concluded and ratified.

All in all, the European Commission has been successful in submitting an updated investment chapter in CETA arriving largely at North American standards. If compared to other agreements, in particular to such of the Member States, improvements are visible. However, significant drawbacks remain. Since no agreement has been concluded yet, this is the opportunity for Europe and its Parliament to put forward solutions that would make European investment protection fit, attractive, and sustainable for the years to come.

Studies on INVESTOR-STATE DISPUTE SETTLEMENT (ISDS)