February 1, 2016

EU-Vietnam ISDS not conform European Parliament resolution

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The European Commission today published the negotiated text of the EU – Vietnam FTA. The investment and investor-to-state dispute settlement (ISDS) chapter is not conform the European Parliament 8 July 2015 resolution. ISDS gives foreign investors the right to challenge state decisions outside local courts.

The draft FTA does not meet the conditions the European Parliament formulated in its resolution, paragraph 2 (d) (xv); it

– does not provide for independent professional judges as the proposal lacks various institutional safeguards for independence, such as fixed salary and prohibition of outside remuneration; [1]
– does not ensure that foreign investors will not benefit from greater rights than domestic investors; [2]
– is not subject to democratic principles and scrutiny, as the Parliament will not be able to change the rules later on; [3]
– undermines the jurisdiction of courts of the EU and of the Member States, as foreign investors can by-pass them;
– does not ensure that private interests cannot undermine public policy objectives. [4]

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. The EU and member states would be locked in.

There are some minor changes compared to the reform proposal for discussion with the United States, published on 12 November 2015. Most of the earlier analysis is still valid.

[1] 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, see articles 12, paragraphs 14-16, page 35 and article 13, paragraph 14, page 38.

There is an optional way out of the perverse incentives, but it takes the consent of the other parties, article 12, paragraph 17, page 35; that consent may never come.

[2] The proposal creates competing systems (ISDS versus local courts) that may drift apart, especially as the proposal contains perverse incentives, as noted in footnote 1.

[3] At a 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. If the adjudicators would interpret the investment protection rules expansively, our societies would be unprotected.

[4] Article “(…)”, paragraph 2, page 2) contains “Consistent with the provisions of this Title”, which makes it ineffective. Furthermore, “measures necessary” gives for-profit adjudicators room to second guess political decisions: are the measures necessary, could other measures have been taken? Which measures are legitimate? Article 13bis, page 12 and the general exception, page 89 contain the same issues. In only two of 45 WTO cases states successfully invoked a similar Gatt article XX or GATS article XIV general exception, see, generally, Public Citizen. Moreover, article 13bis, paragraph 3, page 12 explicitly excludes “requiring that Party to compensate the investor therefor”; however, only with regards to discontinuing the granting of a subsidy. A contrario, the right to regulate in general does not protect against unlimited backward looking damages including expected profits and interests.