Proposed ISDS changes risk stacking the cards against investors
In an attempt to assuage public fears and move to the other – arguably more important – aspects of the deal, the European Commission on Tuesday released a concept paper on ISDS, which recognises the concerns raised in recent months and explains the changes it would like to make to address them. While Commissioner Malmström must be praised for sticking to her guns and not caving in to myth-peddling on investor protection – even in the face of opposition from high-ranking MEPs – the EU executive’s new position on ISDS has adopted much of the language used by opponents. And the change in stance is not just in rhetoric, but also in substance. All in all, the Commission’s proposals to “modernise” ISDS risk rendering the clause toothless and even stacking the cards against the foreign investors whom the provision is supposed to protect.
Let’s look at some of them. First is the state’s right to regulate, which – it is important to note – was never at issue with ISDS because the clause is strictly about compensating foreign investors for arbitrary government action – there is no impact whatsoever on domestic law and EU Single Market rules. But the Commission now wants to go a step further – and indeed it already has to some extent in its free trade deals with Canada and Singapore – by adding an article to the deal which would reaffirm “the right of Governments to take measures to achieve legitimate public policy objectives, on the basis of the level of protection that they deem appropriate.”
At best, this is irrelevant – for the reasons outlined above. At worst, it could be interpreted to mean that foreign investors would have no right to claim compensation from governments for policy changes that would affect their investments, so long as those changes were justified as being “in the public interest.” And it must be said that the concept of “the public interest” is an expansive one, and a growing number of environmental, public health and other measures are defended in that way. Ending investors’ right to compensation with a definition that is entirely up to governments raises substantial rule of law and fair treatment concerns. Moreover, what will happen to foreign investment in sectors already subject to heavy intervention like energy, healthcare and construction? Legal uncertainty never helps.
The second area of concern are the mechanisms established for arbitration. In its new proposal, the Commission wants arbitrators of ISDS cases to be chosen from an agreed roster of candidates, determined by consensus by the two parties to the treaty, i.e. the EU and US governments. In addition, it seeks to provide for an appellate mechanism, presumably to give states the possibility to contest rulings. This is to address perceptions that arbitrators, currently privately chosen by the disputing parties (investor and state), face a conflict of interest in that they may later be hired as counsel by private companies. There is no evidence to back this perception – as of 2013, close to half of all concluded ISDS cases had ruled in favour of the state, with just under 30 per cent for the investor (a quarter were settled). Moreover, the changes suggested amount to a lengthening of proceedings – with the concomitant costs – and a strengthening of states’ hands by giving them power over the choice of arbitrators. This is likely to discourage affected investors with a perfectly legitimate complaint from seeking redress – especially as the Commission’s “loser pays” principle will mean they will have to cover the full cost of the dispute. And given available statistics, they are more likely to lose than to win.
The main danger in the Commission’s proposals is that they all sound superficially reasonable. What could be wrong with reaffirming a government’s right to regulate, even if that bears little relation to the purpose of investment protection clauses? Similarly, what can be bad about choosing the arbitrators in advance, thus minimising the risk of a conflict of interest, however small it may be? And why not have a mechanism for appeals to ensure the decisions are properly reviewed and backed up by sound legal and economic advice?
The problem is that, as with all legislation, the impact of the clause will be defined by how it is implemented and enforced – not by the intent and the spirit of the drafters. And the Commission’s proposals risk granting one party to disputes, namely governments, far too much power in determining the circumstances under which arbitration can take place. This would severely undermine the purpose of international arbitration as envisaged in ISDS, which is to provide a reliable and impartial forum in which legitimate claims for compensation can be pursued. Given that it is the Commission’s intention to move towards a permanent multilateral investment court with tenured judges, following principles that are consistent with the rule of law and that grant plaintiffs a fair hearing is critical. There is a danger that the proposed arrangements will not do so.