June 25, 2015

France proposes empty ISDS reforms

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The French government published a proposal for investor-to-state dispute settlement (ISDS) reforms: Towards a new way to settle disputes between states and investors, May 2015. (pdf, French: Le Monde)

Summary

The French proposal would grant for-profit arbitrators, working in a system that creates perverse incentives, vast discretionary powers. This creates a serious risk on expansionist interpretations. Foreign investors would be able to use this biased system to challenge governments. As it is practically impossible to withdraw from trade agreements, the EU would be locked in.

The French government proposes to create an international investment court. However, the court’s members would not be tenured judges with a fixed salary but for-profit arbitrators.

The French proposal would not decisively change the existing system. Regarding the most used ISDS forum, the court would only play a non-binding, advisory role.

France furthermore overlooks that this most used ISDS forum gives the United States unfair procedural advantages; it would be a diplomatic blunder to expose the EU and member states to this forum.

The French proposal would grant arbitrators vast discretionary power. It proposes a general safeguard but does not extend it to the most dangerous investment protection clause, rendering the safeguard ineffective. Moreover, France overlooks a loophole which undermines all substantive improvements.

Unsurprisingly, the French proposal would not solve the inherent flaws of the ISDS system: it discriminates against local investors, citizens and states, lacks a democratic context, and lacks instruments essential to correct expansionist interpretations.

The French reforms are mostly empty. ISDS is and would remain antithetical to the rule of law, to the rechtsstaat.

A court or a bunch of arbitrators?

France proposes to create a permanent international investment court. However, the court would not be surrounded by conventional institutional safeguards for independence: tenure, fixed salary, prohibition of outside remuneration, and neutral case assignment. The court’s members would be for-profit arbitrators.

The court would be a

“new permanent court for EU treaties, designed to review arbitral awards and to administer a dedicated roster of arbitrators”.

The text notes:

“It is of course evident that detailed procedural rules should be drawn up to organize the different awarding formations, based on the pre-established list of arbitrators working in the first instance, appeal (i.e. the review described above) or annulment proceedings, respectively.”

One list of arbitrators, formations for first instance, appeal and annulment proceedings. That is: arbitrators for all proceedings.

Arbitrators are paid for their task at least 3000 US dollar a day. This creates perverse incentives: accepting frivolous cases, letting cases drag on, letting the only party that can initiate cases (foreign investors) win to stimulate more cases, pleasing the officials who can appoint arbitrators.

The French proposal would prolong existing perverse incentives.

Advisory role in ICSID cases

The French proposal would not decisively change the existing system. Regarding the most used ISDS forum, the court would only play a non-binding, advisory role.

The Washington Convention established the International Centre for Settlement of Investment Disputes (ICSID). The ICSID forum is the most used ISDS forum.

Under the French proposal for-profit first instance arbitrators would issue interim awards in ICSID cases. The permanent investment court’s (for-profit) review arbitrators would review them, but only non-bindingly. The for-profit first instance arbitrators would then issue the final award. After that the parties can start an ICSID annulment procedure — a limited procedure in which the president of the World Bank appoints all three the for-profit arbitrators.

The French proposal would prolong perverse incentives.

Note that in all (presently 73) ICSID annulment procedures the president of the World Bank appointed all three the arbitrators. The president of the World Bank has always been the candidate of the US. This is only one example of unfair procedural advantages for the US. The US never lost an ISDS case. Accepting these unfair procedural advantages in EU agreements would be a diplomatic blunder.

In non ICSID cases the permanent court’s (for-profit) arbitrators would handle both the review of the interim award and the annulment procedure.

Investors can choose which system they want to use. They will choose the system which gives them the highest chance on success. The French proposal creates systems which will compete for the favour of investors.

Code of conduct

France wants to add a code of conduct; this may help to avoid conflicts of interest. It is however not an effective instrument against perverse incentives.

Vast discretionary power

The French proposal would give arbitrators vast discretionary power.

The fair and equitable treatment (FET) protection standard is highly problematic; it is open to abuse. It gives arbitrators vast discretionary power, way beyond a marginal test. The French proposal offers more specific language for one aspect of FET, “legitimate expectations”. Note however, that a “specific representation” does not have to be in writing, “reasonably” gives arbitrators discretionary power, and “change of legislation” is preceded by the word “mere”, giving arbitrators discretionary power over changes of legislation.

The French proposal does not take FET out, its “improvement” is limited to one aspect. Even on this one aspect it gives arbitrators discretionary power.

The French proposal also contains language regarding non-discrimination standards:

“For greater certainty, the ‘treatment’ referred to in this provision shall not prevent differences in treatment between investors resulting from rationale regulatory distinctions necessary to achieve legitimate public policy objectives.”

The words “rational[e]” and “legitimate” give arbitrators discretionary power.

Protection against indirect expropriation is problematic as it relates to democratic decisions. The French proposal includes further language on this issue. Note that “benefits which the investor could have expected”, “so severe in light of its purpose”, “manifestly excessive”, “a prejudice which is not suffered by other investors in like circumstances” and “legitimate” give discretionary power to arbitrators.

France proposes a horizontal clause, to be inserted into the agreement’s Preamble. Preambles are not binding, and depending on the formulation and context a horizontal clause may be meaningless itself.

France also notes that the right balance between the States’ right to regulate and foreign investors’ interests should be appropriately fostered through general exception provisions. However France does not want to extend general exceptions to all protection standards, even the highly controversial FET standard would not be included. This approach does not substantially limit the arbitrators’ discretionary power.

For the same reason French proposals to preserve the financial sovereignty of States and compliance to domestic laws and regulations do not substantially limit the arbitrators’ discretionary power.

The MFN loophole

In their ISDS consultation the EU commission mentions an “importation of standards” or “most favoured nation (MFN) loophole” issue (see question 2). Arbitrators do not only apply the rules of the treaty under which claims are brought, but also import rules from other treaties.

The commission closed this issue for procedural rules, but not for substantive rules. In the EU-Canada trade agreement (CETA) the EU commission didn’t fully close the MFN loophole that makes it possible for investors to invoke protection standards included in older, more open treaties. As a result restrictions in newer treaties may be lost.

The CETA text page 156, article X.7.4 excludes ISDS procedures provided for in other international investment treaties and other trade agreements. However, the exclusion of substantive obligations contains the condition “absent measures adopted by a Party pursuant to such obligations”. This creates a risk that arbitrators would interpret local laws as implementations of treaty obligations, and interpret such laws in the light of old very open investment treaties. This way substantive improvements would be lost.

The French proposal overlooks this issue.

Special rights for foreign investors

ISDS in general, and also the French proposal, would give foreign investors rights no one else has; it discriminates against local investors, citizens and states.

In a letter to Congress prominent US legal experts write:

“Our legal system rests on the conviction that every individual, regardless of wealth or power, has an equal right to bring a case to court. To protect and uphold the rule of law, our ideals of fairness and justice must apply in all situations and equally to everyone. ISDS, in contrast, is a system built on differential access. ISDS provides a separate legal system available only to certain investors who are authorized to exit the American legal system. Only foreign investors may bring claims under ISDS provisions. This option is not offered to nations, domestic investors, or civil society groups alleging violations of treaty obligations. Under ISDS regimes, foreign investors alone are granted legal rights unavailable to others – freed from the rulings and procedures of domestic courts.”

No instruments to correct expansionist interpretation

We saw above that ISDS creates a serious risk on expansionist interpretations. See also Van Harten, Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration.

Regarding expansionist interpretations two more characteristics of the system are important: specialised adjudication and private access to supranational adjudication.

Two instruments essential to correct expansionist interpretations are missing. ISDS lacks a general supreme court and a legislative feedback loop.

Specialised adjudication

Specialised adjudication has a natural tendency to become expansionist. An example is the centralisation of appeals in patent cases before the U.S. Court of Appeals for the Federal Circuit; this prompted an expansionist interpretation and application of the US Patent Act. The Supreme Court intervened and opposed a series of judgments of the Federal Circuit.

No general supreme court

Specialised adjudication needs a general supreme court on top to integrate various law systems and to correct expansionist interpretations. The supranational level does not provide a general supreme court.

Private access to supranational adjudication

Allowing private investors to supranational adjudication promotes expansionist interpretation of treaties as private investors do not have the same restraint as states.

No legislative feedback loop

Democracies need a legislative feedback loop. We have to be able to change laws that do not work out well. Lord Steyn explained (regarding the UK):

“in striking the balance the courts may arrive at a result unacceptable to Parliament. In such cases Parliament can act with great speed to reverse the effect of a decision. It has done so in the past. That is in the spirit of our constitution, and is wholly in accord with the democratic ideal.”

The EU legislative can not reverse court decisions, but they can change laws for the future. In contrast, changing an international treaty is much harder than changing national or EU legislation. There is no workable legislative feedback loop at the supranational level. Unless all treaty parties agree there is no way to correct expansionist or otherwise unacceptable interpretation.

ISDS does not have a democratic context. There are no voters at the supranational level.

A broken French proposal

France proposes “Strengthening States’ right to interpret the protection standards of an agreement even after its entry into force”.

Article 31, paragraph 3(a) of the Vienna Convention on the Law of Treaties (VCLT) allows for any kind of subsequent agreement between the parties to a treaty.

The French proposal is more limited:

“Where serious concerns arise as regards matters of interpretation that may affect investment, the Committee on Services and Investment may recommend to the Trade Committee the adoption of interpretations of the Agreement”.

In contrast with the VCLT, interpretations by the parties are only possible if “serious concerns arise”. This is more limited than the VCLT. This gives the other treaty partner(s) the possibility to argue serious concerns did not arise (a political argument against stepping in) and arbitrators the discretionary power to find the concerns were not serious enough. Arbitrators are already not impressed by subsequent agreements on interpretation between the parties to a treaty; the French proposal would strengthen the arbitrators discretionary power.

Note that the “Committee on Services and Investment” and the “Trade Committee” are not part of the legislator.

The French proposal is incomparable with a legislative feedback loop as it would take the consent of all other parties to agreements – who may have contrasting interests. Furthermore, arbitrators do not find the parties’ interpretations binding. The French proposal would place our democracy at the mercy of other states and arbitrators.

Two instruments essential to correct expansionist interpretations are missing. ISDS lacks a general supreme court and a legislative feedback loop.

ISDS is antithetical to the rule of law, to the rechtsstaat.

As it is practically impossible to withdraw from trade agreements, the EU would be locked in.

Further reading

Letter prominent US legal experts to Congress

Over 110 scholars: Statement of Concern about Planned Provisions on Investment Protection and Investor-State Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP)

Gus Van Harten, A Parade of Reforms: The European Commission’s Latest Proposal for ISDS

Gus Van Harten, A Report on the Flawed Proposals for Investor-State Dispute Settlement (ISDS) in TTIP and CETA

Gus Van Harten, The European Commission’s Push to Consolidate and Expand ISDS: An Assessment of the Proposed Canada-Europe CETA and Europe-Singapore FTA

International investment court plan threatens our democracy