May 28, 2014

Investor-to-state dispute settlement is a rigged system

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Investor-to-state dispute settlement (ISDS), the most controversial element of the proposed trade agreement with the US, has characteristics of a rigged system. ISDS gives the US an unfair advantage, we can not expect EU companies to win ISDS cases against the US.

Trade agreements including ISDS would lock-in the EU, as it is practically impossible to withdraw from trade agreements.

ISDS is controversial. Investment agreements with ISDS give foreign investors, usually multinationals, the right to circumvent domestic courts and challenge decisions of states for international investment tribunals if decisions may lead to lower profits than expected. These ISDS tribunals can review all decisions of the state, all decisions of governments, legislators and courts, including supreme courts and human rights courts. For-profit arbitrators decide the ISDS cases and can award unlimited damages.

Multinationals can challenge reform of copyright and patent law, challenge privacy measures, challenge environmental and health policies. For an introduction see Stiglitz (2013) or Vrijschrift (2014). For intellectual property rights and human rights see FFII (2014).

Perverse incentives

The ISDS system lacks conventional institutional safeguards for independence: tenure, prohibitions on outside remuneration by the arbitrator and neutral appointment of arbitrators. The for-profit arbitrators are paid at least 3000 dollar a day. This creates perverse incentives: accepting frivolous cases, let cases drag on, let the only party that can initiate cases win to stimulate more cases, pleasing the official that can appoint arbitrators.

No neutral appointment of for-profit arbitrators

The appointment of arbitrators is not neutral. One arbitrator is appointed by each of the disputing parties. In which supreme court can parties bring their own judge? The third arbitrator, the presiding arbitrator, is appointed by agreement of the disputing parties.

The US appoints the president of the World Bank. This president
– is ex officio chairman of the International Centre for Settlement of Investment Disputes (ICSID) Administrative Council,
– proposes the ICSID secretary-general,
– appoints all three the arbitrators in appeal cases under ICSID rules.

The secretary-general of ICSID
– appoints the third arbitrator if the parties can not agree on the third one,
– will decide over conflicts of interest. (ICSID, articles 5, 10, 38, 52 and Commission, 2014b, Table 8, article x-25.10)

The ISDS system gives the US an unfair advantage. Adjudicative processes have to be free of reasonably perceived bias. This is not the case with ISDS.

Statistically significant evidence

There may be more than a reasonably perceived bias, a study suggests there may be actual bias. The study “examines trends in legal interpretation instead of case outcomes and finds statistically significant evidence that arbitrators favour: (1) the position of claimants over respondent states and (2) the position of claimants from major Western capital-exporting states over claimants from other states.”

The study finds that claimants from the US were 91% more likely to benefit from an expansive resolution than claimants from all other states combined. Claimants from Western European former colonial powers were 75% more likely to benefit from an expansive resolution than claimants from all other states combined, other than the US.

The study concludes: “These tendencies, especially in combination, give tentative cause for concern and provide a basis for further study and reflection on the system’s design, not least because the use of investment treaty arbitration appears to be a relatively recent phenomenon.” (Van Harten, 2012)

These are sensitive issues. Expansive interpretations put pressure on the public interest. Furthermore, if ISDS amounts to a neo-colonialist instrument, that would not be compatible with the EU treaties.

The US never lost an ISDS case

The US never lost a known ISDS case. The US could have lost the Loewen ISDS case, as the domestic court took a terrible decision. The US won the Loewen ISDS case on a technicality.

After the Loewen ISDS case one of the tribunal members publicly conceded having met with officials of the US Department of Justice (DoJ) prior to accepting his appointment. The DoJ put pressure on him. (Kleinheisterkamp, 2014)

The ISDS system gives the US an unfair advantage. The US is not shy to exert pressure on arbitrators.

We can now draw six conclusions:
– ISDS gives the US an unfair advantage,
– we can not expect EU companies to win ISDS cases against the US,
– ISDS is not free of reasonably perceived bias,
– ISDS has characteristics of a rigged system,
– expansive interpretations put pressure on the public interest,
– ISDS may not be compatible with the EU treaties.

Locking in failed reforms

The EU commission’s reform proposals, presented in its consultation (Commission, 2014a), do not solve the problems noted above: lack of conventional institutional safeguards for independence: no tenure, no prohibitions on outside remuneration by the arbitrator and no neutral appointment of arbitrators; for-profit arbitrators; perverse incentives; the ISDS system gives the US an unfair advantage; reasonably perceived bias.

ISDS agreements concluded by EU member states are stand-alone investment agreements from which it is possible to withdraw. The EU considers adding ISDS to its trade agreements. This would create a lock-in, as it is almost impossible to withdraw from trade agreements.

The EU aims to create a global standard. Presently a minority of foreign investment is covered by ISDS, after ISDS agreements between the major capital exporting countries a large majority of global foreign investment would be covered by ISDS.

Failed reforms, impossibility to withdraw and wide coverage of global foreign investment would create a global lock-in, an uncontrollable situation with unprecedented and unchecked power for for-profit arbitrators, which will burden democracies, local investors, tax payers, human rights and the rule of law.

We can now draw three more conclusions:
– to avoid lock-in, the EU should not deviate from standing European practice of stand-alone investment agreements, the EU should not add ISDS to trade agreements,
– the EU commission’s reform failed,
– the EU’s ambition to create a global standard is unrealistic and dangerous.

Stay tuned! Digital groups are preparing an answering guide for the commission’s ISDS consultation.

References

Commission, 2014a, Consultation website, http://trade.ec.europa.eu/consultations/index.cfm?consul_id=179

Commission, 2014b, Public consultation on modalities for investment protection and ISDS in TTIP, http://trade.ec.europa.eu/doclib/html/152280.htm

FFII, 2104, ISDS threatens privacy and reform of copyright and patent law, http://acta.ffii.org/?p=2109

ICSID, Convention on the settlement of investment disputes between states and nationals of other states, https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/partA.htm

Kleinheisterkamp, J., 2014, Is there a Need for Investor-State Arbitration in the Transatlantic Trade and Investment Partnership (TTIP)?, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2410188

Stiglitz, J. E., 2013, South Africa Breaks Out,
http://www.project-syndicate.org/commentary/on-the-dangers-of-bilateral-investment-agreements-by-joseph-e–stiglitz

Van Harten, Gus, 2012, “Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration.” Osgoode Hall Law Journal 50.1 (2012) : 211-268.
http://digitalcommons.osgoode.yorku.ca/ohlj/vol50/iss1/6

Vrijschrift, 2014, Investment tribunals above supreme courts, https://www.vrijschrift.org/serendipity/index.php?/archives/154-Investment-tribunals-above-supreme-courts.html

See also

CEO, 2014, Still not loving ISDS: 10 reasons to oppose investors’ super-rights in EU trade deals, http://corporateeurope.org/international-trade/2014/04/still-not-loving-isds-10-reasons-oppose-investors-super-rights-eu-trade

Secret deals
http://eu-secretdeals.info/news/

CEO and TNI, 2012, Profiting from injustice – How law firms, arbitrators and financiers are fuelling an investment arbitration boom,
http://corporateeurope.org/publications/profiting-from-injustice