April 25, 2016

CETA ISDS not conform European Parliament resolution

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In February 2016 the European Commission and Canadian government published the final draft text of the EU – Canada trade agreement (CETA). This final draft includes an investment chapter with investor-to-state dispute settlement (ISDS). ISDS is one of the most controversial elements of proposed EU trade agreements as it gives foreign investors the right to challenge government decisions outside local courts.

The ISDS section in CETA is based on the 12 November 2015 ISDS proposal for TTIP. According to Germany’s largest association of judges and public prosecutors (original in German) and the European association of judges the adjudicators would not be independent. Both associations note that the TTIP proposal is not compatible with the Council of Europe’s Magna Charta of Judges. They also doubt whether the EU is competent. [1] I noted earlier that the TTIP proposal is a threat to democracy and civil rights and that the EU commission went into denial mode regarding the effect of ISDS on software patents. Claims challenging health and environmental policies will still be possible as the new proposal provides the same substantive rights. See also Gus van Harten and S2B. For a broad analysis of ISDS see here.

The ISDS section in CETA is mostly the same as the proposal for TTIP. One notable change is that the EU commission silently vacated the much touted right to regulate. Ouch.

European Parliament resolution

Unfortunately the EU commission managed to confuse politicians. It may be good to point out that the investment chapter with ISDS in CETA does not comply with sensible demands in the European Parliament resolution on TTIP, paragraph 2 (d) (xv).

First, the CETA draft text does not provide for independent professional judges. See above the statements of the associations of judges. To provide a detail, the adjudicators would be paid per day worked (article 8.27(14) in conjunction with ICSID Regulation 14(1): “a fee of US$3,000 per day”). This creates perverse incentives to accept frivolous cases, let cases drag on, and let the only party that can initiate cases (foreign investors) win to stimulate more cases.

Second, the CETA draft text does not ensure that foreign investors will not benefit from greater rights than domestic investors. Foreign investors would benefit from greater procedural rights. CETA would give foreign investors – and only foreign investors – the right to bypass domestic legal systems and use ISDS to challenge government decisions. Foreign investors would also benefit from far reaching substantive rights, which investment tribunals have interpreted expansively, beyond the interpretations of local courts. For instance, investment tribunals have (a) seen the exercise of discretionary power by enforcement agencies as discriminatory [2], and (b) interpreted legitimate expectations in a broader way than local courts [3]. In sum, the proposal creates competing systems (ISDS versus local courts) that may drift apart, especially as the adjudicators would not be independent.

Third, the ISDS mechanism will 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. Supranational adjudication does not have a legislative feedback loop for democratic scrutiny of the development of law. The European Parliament will not be able to step in if the ISDS adjudicators would interpret the investment protection rules expansively. The Parliament could only adopt non-binding resolutions.

Fourth, the CETA draft text undermines the jurisdiction of courts of the EU and of the Member States, as foreign investors can by-pass them. Furthermore, if the EU Court of Justice would invalidate ISDS in CETA, for instance to protect the independence of data protection authorities, article 30.9(2) provides that the investment chapter including ISDS would continue to be effective for a further period of twenty years. This undermines the effectiveness of the Court.

Fifth, the CETA draft text does not ensure that private interests cannot undermine public policy objectives. The EU commission vacated the right to regulate in the investment Chapter. CETA article 8.9 (1) now states that “the Parties reaffirm their right to regulate”, which is a referral to a right to regulate that is assumed to already exist. See also this analysis.

In a crucial aspect the proposal is worse than the current practice of the member states’ stand-alone investment treaties from which it is possible to withdraw. We can not expect the EU to withdraw from trade agreements. CETA would vastly expand the coverage of investments (see page 19) and the EU and member states would be locked in.

Foreign investors could also challenge measures to protect personal data. Within the EU legal order the Charter of fundamental rights supersedes CETA. However, ISDS adjudicators operate outside the EU legal order. For them CETA may supersede the EU legal order – including the Charter of fundamental rights. ISDS in CETA would undermine democracy, the rule of law and civil rights.

The right approach is to improve weak aspects of domestic legal systems. Domestic legal systems can combine equal access to the law with democratic scrutiny of the development of law. Investors are not obliged to invest in countries with weak legal systems. This may create an incentive for states to improve their legal system. Investors can take out political risk insurance for additional certainty.

Notes

[1] See also ClientEarth

[2] Discrimination in trade and investment agreements usually revers to discrimination based on nationality (national treatment). However, ISDS tribunals have seen any disparate treatment as discriminatory. Enforcement agencies have limited resources. They have discretionary power: they are allowed to act in some cases and skip others. ISDS tribunals have seen the exercise of such discretionary power as discrimination. This undermines the effectiveness of enforcement agencies. See Lise Johnson and Lisa Sachs, page 9, The TPP’s Investment Chapter: Entrenching, rather than reforming, a flawed system.

[3] CETA article 8.10 (4) mentions a specific representation which does not have to be in writing. This opens the possibility to start cases based on oral promises and leaves the door open for future application of the Bilcon approach. Lise Johnson and Lisa Sachs: “Under that approach, a tribunal identifies what it considers to be reasonable or legitimate expectations – which may have been generated by a wide range of even non-binding government conduct and need not rise to the level of actual ‘rights’ – and then strictly scrutinizes government actions or inactions to determine whether the investors’ expectations were wrongly frustrated.” In contrast, Netherlands’s highest general administrative court (Raad van State) is very restrictive regarding legitimate expectations; see for instance decision 201113437/1/R2, 20 juni 2012.