November 25, 2015

Bernd Lange accepts perverse incentives in ISDS

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Bernd Lange, chair of the European Parliament international trade committee, has sent a letter to EU trade commissioner Cecilia Malmström regarding the EU commission’s investor-to-state dispute settlement (ISDS) reform proposal.

His letter shows that he overlooks many deficiencies in the commission’s proposal, among them perverse incentives. The proposed system lacks integrity and would undermine our values. I will go through his letter line by line.

“Dear Commissioner, dear Cecilia,

On the 8th of July 2015 the European Parliament adopted a resolution with the European Parliament’s position on the TTIP negotiations. In this resolution, the EP called for a comprehensive investment chapter focussed on achieving sustainable growth, addressing different standards of protection while protecting the right to regulate in the public interest.”

The commission’s proposal contains a right to regulate clause that does not protect against unlimited backward looking damages including expected profits and interests. See Van Harten (point 4) or FFII. Unlimited damages and the threat of such damages have a chilling effect on policy makers, compromise the independence of officials, and could force a state to revise a regulation or decision as part of a settlement.

Discrimination

“The investment chapter should also address investor’s responsibilities in line with the OECD Guidelines for Multinational Enterprises and the UN Principles of Business and Human Rights. Investors should be treated in a non-discriminatory fashion, but they should not benefit from greater rights than domestic investors.”

In the commission’s proposal only foreign investors have access to ISDS. They have greater procedural rights. Substantive rights are always open to interpretation. The national and supranational systems can grow apart. The commission’s proposal does not contain a workable mechanism to avoid this.

No democratic scrutiny

“Most importantly, the ISDS-system should be replaced by a NEW system which is subject to democratic principles and scrutiny,”

The commission’s proposal does contain some new elements. The system would however not be “subject to democratic principles and scrutiny”. At the national level, parliaments can change laws that do not work out well. This is not possible at the supranational level. The development of law would take place beyond democratic scrutiny. Interestingly, the Parliament demanded something that makes a supranational solution impossible: democratic scrutiny (TTIP resolution 2 (d) (xv)).

The commission’s proposal is dead if the Parliament takes this demand seriously.

Perverse incentives

“where potential cases are treated in a transparent manner by publicly appointed, independent professional judges, in public hearings.”

The commission’s proposal does not include “independent professional judges”. The adjudicators would be paid per day worked. This creates perverse incentives to accept frivolous cases, let cases drag on, and to let the only party that can initiate cases (foreign investors) win to stimulate more cases. Lange overlooks “a fee of US$ 3,000 per day” . The proposal doesn’t provide certainty that this will ever change.

“This new dispute settlement system would include an appellate mechanism and should ensure consistency of judicial decisions respecting the jurisdiction of European courts.”

An appellate mechanism would give more consistency, but would not protect against expansive interpretations of investors’ rights which interfere with states’ policy space, as the appellate mechanism in the commission’s proposal contains perverse incentives as well. Lange overlooks “a fee for each day worked” .

“As the rapporteur for this resolution, I am happy to see that the European Parliaments’ concerns have been taken on board in the Commission’s new Investment Court System proposal.”

This provisional conclusion is only possible because Lange overlooked major deficiencies.

Trust

“The ISDS-system, which is a system that is derived from commercial arbitration, has come under more and more public scrutiny, not only because of problems related to individual cases, but also because of the role that the ISDS-system has been playing as a system of public international governance without having the institutional structures that in a normal domestic judicial system would go along with it. As you rightly pointed out during your press conference, we need to build a dispute settlement system that citizens can trust in the same way they trust their domestic courts.”

For trust, start with institutional safeguards for judicial independence — all international courts have these. Then note that even courts may suffer from expert bias. Domestic legal systems have supreme courts to cancel out expert bias. And they have a legislative feedback loop; parliaments can change laws that do not work out well. The last two elements are not available at the supranational level.

How to solve this? Contain what a supranational court can do. Require exhaustion of local remedies — all supranational court systems require citizens and companies to first exhaust local remedies (See also Van Harten, footnote 25). Allow states a wide margin of appreciation — like the European Convention on Human Rights does regarding property. This is a tricky point as it is up to the court to respect this or not. For necessary leverage, ensure that it is possible to withdraw from a stand-alone treaty that creates the supranational court, without a long afterlife. This stimulates the court to respect the margin of appreciation.

The commission’s proposal falls short on all these points. Citizens are well advised not to trust the commission’s proposal.

Stuck in the middle

“The newly adopted ICS-proposal, which will be tabled during the TTIP negotiations, is not only an important step forward in addressing these institutional deficiencies of the existing dispute settlement system but it is also an important first building block towards a public International Investment Court.”

This is typically EU. We start with something that is broken. That leads to a crisis. We then have to take the next step — we force deeper integration this way. This approach worked with the common market, but it led to the euro crisis. Now the commission and Lange want to create a supranational court this way. This is ill-advised, because the next step depends on external states. On the consent of all external states involved. That consent may never come.

The U.S. negotiated unfair procedural advantages in NAFTA, their investment treaties and the draft TPP. They never lost an ISDS case. The commission negotiated unfair procedural advantages for the U.S. in CETA and EUSFTA. The commission’s proposal for TTIP still contains some procedural advantages for the U.S. The U.S. is close to secure them in TPP and may get some of them in TTIP. They will never give them up. A public International Investment Court is a fallacy — the U.S. will stay out. The approach the commission took is a diplomatic blunder.

Loopholes

“While I recognize the important progress made with this proposal, in particular with regard to its procedural provisions, some outstanding issues remain. First of all, the EC proposal could be more explicit on the link between the appointment of judges as part of the international court system and the submission of claims (under article 6 and 7) so that it is crystal clear that claims cannot proceed under TTIP if the judges are not nominated.”

Good point. Lange points out a loophole which could cause the system to fall back to old style ISDS.

“Moreover, it remains to be seen for instance, what the interaction will be between the “right to regulate clause” in article 2 and the standards of protection enshrined in the provisions on fair and equitable treatment (article 3), in particular the language on “legitimate expectations”, the provisions on (indirect) expropriation (article 5), and the umbrella-clause (Article 7).”

As noted above, the “right to regulate clause” is ineffective.

“The umbrella clause elevates contractual commitments of the Parties to the level of an international treaty, which can of course have an important negative impact on the “right to regulate” and which also discriminates against domestic investors who would have to rely on local remedies or the contractual dispute settlement mechanism. As you stated in your intervention in the EP, the ICS-system should build on the existing reforms in CETA. The CETA-text does not include an umbrella clause.”

Good point. It is easy to remove the umbrella clause.

“Thirdly, in spite of its reference to principles of national administrative law as guiding principles of interpretation, the ICS-proposal does not make it explicit either that foreign investors should not have greater rights than domestic investors.”

In the hands of for-profit supranational adjudicators we can expect expansive interpretations.

“Last but not least, the ICS proposal does not appear to sufficiently address the issues of investor obligations, corporate social responsibility, or sustainable development, in spite of the clear request coming from the European Parliament and ideas put forward by international institutions such as UNCTAD. As stated in the EP resolution, sustainable development provisions should be mainstreamed through the agreement (including in the investment chapter) and should be enforceable.”

Note that it would normally be a separate enforcement mechanism. It would not curtail the ISDS mechanism proposed by the commission. Even if it would, it would not protect other values, such as privacy.

Lange supports commission

“Nevertheless, I would like to express my support for the new approach of the Commission on dispute settlement for investment protection, for TTIP and for all other trade and investment agreements we expect to receive in the European Parliament.”

Lange is willing to accept: no exhaustion of local remedies, no wide margin of appreciation for states, missing institutional safeguards for judicial independence, perverse incentives, greater procedural rights for foreign investors, substantive rights open to broad interpretation, an ineffective right to regulate, development of law beyond democratic scrutiny, no workable instruments against expansive interpretations of investors’ rights which interfere with states’ policy space, and lock in, as we can not expect the EU to withdraw from TTIP.

Our values

“I wish you all the best in convincing our trading partners of this new approach and I expect that we will all stand for and defend our principles and values. I look forward to continue engaging with you in order to ensure that the European Parliament’s voice and opinion is reflected in any final text.”

Lange’s analysis is so flawed that we can not expect he will effectively defend our principles and values. Like with ACTA, citizens will have to step in.