Investment Dispute Settlement in the Transatlantic Trade and Investment Partnership

The “Directives for the negotiation on the Transatlantic Trade and Investment Partnership” (TTIP), adopted by the Council of the European Union, on 14 June 2013, has been leaked this week. Para 22 and 23 deal with investment. Not surprisingly, the EU wants to negotiate rules for the protection and liberalisation of investment rules as part of the TTIP. Para 23 lists all the standard investment protection provisions that we know from EU member states’ practice of negotiating bilateral investment treaties.

The most interesting – and puzzling – aspect of the mandate is the question whether TTIP should contain an investor-state dispute settlement (ISDS for short) mechanism.

ISDS is a standard feature of investment agreements and allows foreign investors to sue host states in case of alleged breaches of the treaty’s substantive rules. The system is criticised as it grants foreign investors more rights than domestic investors, occasionally leads to contradictory rulings and is based on a rather weak institutional basis that for example lacks an appellate mechanism comparable to the WTO (see a recent UNCTAD report on these issues). The negotiation mandate offers some ideas on how to respond to this criticism by stressing the importance of transparency, independence of arbitrators and the possibility of creating an appellate mechanism (see “enforcement” para 23).

While the stated possibilities of designing the ISDS clause is rather mainstream practice nowadays and reflects the changes of the US and Canada in light of a number of arbitration cases brought against them the really interesting question is whether TTIP should include an ISDS clause at all. After all, both the EU and the US are not known for unstable and discriminatory legal system and the question arises whether there is a real need for an additional, transnational mechanism to resolve disputes between foreign investors and host states. There has been a lively debate on this matter on the other side of the Atlantic (see here, here and here).

Para 22 makes the inclusion of an ISDS conditional

“on whether a satisfactory solution, meeting the EU interests concerning the issues covered by paragraph 23, is achieved. The matter shall also be considered in view of the final balance of the Agreement.”

I am surprised that the EU wants to leave the question open whether to include ISDS or not especially in light of the upcoming/ongoing negotiations with India, China and developing countries about trade and investment agreements (countries for which ISDS has been designed in the first place). Apparently, the EU sees ISDS as an important bargaining chip to be used to negotiate concessions in other areas (at least that is the way I would interpret the second sentence above).

Also, the reference to para 23 is not clear: Does the EU wants to include ISDS if TTIP

“provides for the highest possible level of legal protection and certainty for European investors in the US”

or whether TTIP

“should be without prejudice to the right of the EU and the Member States to adopt and enforce, in accordance with their respective competences, measures necessary to pursue legitimate public policy objectives such as social, environmental, security, stability of the financial system, public health and safety in a non-discriminatory manner. The Agreement should respect the policies of the EU and its Member States [sic! read: France] for the promotion and protection of cultural diversity.”

Both aspects contradict each other in a way: should TTIP cover ISDS if substantive investment provisions are of the “highest possible level of legal protection” like in the old BITs of the member states which do not include exception or if such exceptions are included to reduce the risk of being sued by US investors? Any thoughts on this?

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