One of the most hotly debated topics around the negotiations of a trans-Atlantic Trade and Investment Partnership (TTIP) is the so-called Investor-State Dispute Settlement (ISDS) mechanism. However, many of you may ask, ‘what exactly is ISDS?’
In 1959, Germany became the first country to conclude a bilateral investment agreement when it closed an agreement with Pakistan. It is unclear when exactly the first ISDS clause was introduced, though the agreement between the Netherlands and Kenya of 1970 contains an early reference (article 11). By the ’80s ISDS clauses were common features in bilateral investment agreements. This clause allows a company, from either of the two countries investing in the other, to bring the government of that country before an international arbitration court if it believes it has been unfairly treated. This would be for example if property is expropriated or if a contract is broken. In most bilateral agreements, investors are granted access to the domestic legal system, while sometimes requiring investors to exhaust all local remedies before proceeding to international arbitration.
ISDS clauses have been especially popular for Western governments and companies when closing an agreement with a country where the rule of law was not a given. (This study, commissioned by the Dutch government, provides a good oversight of the history and development of ISDS)
Companies often seek legal certainty before they make large-scale investments. The idea of creating rules to facilitate investment makes sense from that angle. We should not forget that investment is a very important foundation of economic growth. The current European stagnation is partly caused by a lack of access to capital, for example for SMEs.
Although TTIP has brought ISDS to the current public debate, it is not new. There are over 3000 agreements containing ISDS clauses in the world, and many of the 1400 bilateral agreements EU member states have also contain ISDS. It has become a complex patchwork, and European member states even have ISDS in agreements with each other. The most infamous European ISDS case, concerning Vattenfall challenging the loss of investment as a result of the banning of nuclear energy, has been filed under the agreement between Germany and Sweden. There has been no ruling yet.
There are many unsolved issues around ISDS as we know it.
Opponents of ISDS claim it would derail the democratic process and allow companies to sue governments left, right and centre. But has this been the case so far? In the 55 years since the conclusion of that first ISDS clause by Germany, 568 cases have been initiated, of which 274 have been concluded (i.e. 294 cases are still pending). Of these, 43 per cent were concluded in favour of the states, 31 per cent in favour of the investor and 26 per cent has been settled. Moreover, more than half (54 per cent) of the cases were brought by companies from European member states. The majority of cases were brought against African and South American states. (click here for a comprehensive overview of current and past ISDS cases)
Another critical claim is that we have seen a dramatic increase in the number of new ISDS cases, from around ten cases a year in 2000 to more than fifty in 2013. While this sounds alarming, we must see it in the context of a significant increase in global investment flows. The growing number of cases between 2000 and 2014 is directly caused by an increase of global investment stocks in the same period from 7 trillion USD to 25 USD. Many of these investments went to developing countries where there are often more concerns about the rule of law.
There are still other problems surrounding ISDS procedures. The language used in the ISDS clauses is unclear, so that companies can bring governments before courts for a broad range of issues. Furthermore, the arbitrators are not always independent as they often work on other cases and work for both companies and governments. The procedures take place behind closed doors and documents are rarely accessible. These are valid concerns that we have been addressing in the European Parliament, and that are shared by the European Commission.
To make the needed improvements, the Commission has proposed innovations to ISDS, which would increase transparency, limit the issues which companies can sue for, protect the right and space of governments to regulate and looks to guarantee the independence of arbitrators. (click here for a link to the Commission’s proposals)
Are there any supporters of ISDS? Maybe… To make sure all voices are heard, the Commission froze the negotiations on ISDS in TTIP to hear from people. And 160.000 responded. We want to know as soon as possible what these consultations say about what stakeholders think about this new ISDS. In any case it shows people know and care about EU politics.
After all the discussion on ISDS, one may wonder, ‘are there no alternatives to ISDS?’. As a matter of fact, two alternatives have been suggested, but both are not without problems.
The first is state-to-state dispute settlement. States would then take the case of a company upon themselves, and address it before a tribunal. This creates a problem for small and medium size enterprises, which may not have the resources to convince their government that their case is worthy of attention. A second problem is that the cases might well be influenced by inter-state relations and other global events.
The second alternative is a permanent ISDS tribunal, much in the way the WTO also has a permanent tribunal for dispute settlement. This is definitely a good option, but it will probably not be put in place very soon. Therefore, while the idea is good, it will not solve the current debate.
That leaves the question, ‘why do we need this system between the EU and the US?’ Surely, the EU and the US have highly predictable and well-functioning legal systems that do not need separate rules to protect companies? Yet, businesses in both the EU and the US do not always agree. European companies question whether they would get the same treatment in Texas as a Texan company would, or the same trial in New York as their American competitor. American companies on the other hand wonder whether they would get the same treatment as local companies would in for example Italy or Romania. These are not easy questions, but we should not shy away from them.
Complex facts may not always be as sexy as fast claims, but I’m afraid trade negotiations are often very technical and complex to understand. They are not the material for one-liners.
Hypes are easily born. This article from Euractiv for example, purported that the French government stated that it would not sign TTIP in 2015 and was against including ISDS in TTIP. However, this claim is incorrect if we look at the transcript from the hearing the article is based on. It is even a completely incorrect translation of a French version of the article posted on the same website.
We need to make sure that the current problems with the system are remedied in the agreements that already exist, and we must make sure that European (and other) governments retain their right to regulate. But to have that debate, we need the facts and not the fiction. The consultation from the European Commission will come out soon, and that will provide us with a more solid ground to weigh the pros and cons of ISDS once more, this time based on a major crowd sourced consultation, hearing the voices of people from all over Europe.
Correction: This article was updated on 19 November to rectify an earlier version which stated that the first ISDS clause was introduced into the 1959 BIT between Germany and Pakistan, whereas in fact this agreement contains a state-to-state dispute resolution mechanism.