Investment protection in the EU-US Transatlantic Trade and Investment Partnership (TTIP)

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1 Investment protection in the EU-US Transatlantic Trade and Investment Partnership (TTIP) Marc Maes, for the Seattle to Brussels Network 5 March 2014 Content: Main conclusions Introduction A. Background B. The negotiating mandate C. Text proposed by the EU on Trade in services, investment and E-commerce D. The EU Concept note TTIP-Negotiations on Investor-State Dispute Settlement Main conclusions Three leaked documents provide insights into the EU approach to investment protection and ISDS in TTIP: the negotiating mandate given by the Council of the EU; a chapter on trade in services, investment and E-commerce presented by the EU to the US in July 2013 and a concept note on ISDS from the same period. In comparison with the first negotiating mandate on investment protection given by the Council in 2011, the TTIP mandate given in June 2014: Introduces a wide coverage and expresses a higher ambition by calling for the the highest levels of liberalisation and highest standards of protection that both Parties have negotiated to date ; But at the same time it reserves the right to exclude investment protection and ISDS from TTIP depending on an assessment by the MS of the content and the overall balance of the agreement; It allows for reforms to the functioning of the ISDS, while maintaining its fundamentals and also its wide range of arbitration forums. The chapter on investment presented by the EU to the US in July 2013 is a step back compared to the advancement made in the EU-Canada negotiations on investment protection. It has a weak right to regulate clause at the beginning of the text and in the expropriation clause. It actually subordinates the right to regulate to the provisions of the agreement instead of the other way around. The text has a less adequate article on expropriation which leaves much more interpretation to the arbitrators. Moreover the expropriation article submits general policy measures to necessity and proportionality tests and leaves these tests up to the arbitrators who are not appropriately qualified to make such judgements. The EU concept note on ISDS presents 19 issues that have also been covered by CETA, but as mentioned in the analysis of the CETA negotiating texts on this website they do not address the fundamental flaws of the system. The EU note does not give reasons to expect more thorough reform of the ISDS. 1

2 Introduction Investment protection is a new EU competence and it is still under construction. The EU Commission, Council and Parliament are not yet in agreement about its content and direction, yet investment protection negotiations are being launched at an increasing rate. Until the free trade negotiations between the EU and the USA were launched in July 2013 the CETA negotiations with Canada were regarded as standard setting for the EU s investment protection approach. In spite of the announcement on 18 October 2013 that the EU and Canada had reached an agreement on CETA, negotiations on investment protection have continued. Today the investment protection negotiations between the EU and Canada are still the most advanced. Therefore a closer look at the CETA texts also helps to understand the EU approach to investment protection in TTIP. The CETA chapter on investment as it currently stands may constitute an improvement compared to the existing Bilateral Investment Treaties (BITs) of the EU Member States, but not when compared with recent Canadian practice. A detailed description and analysis of the CETA investment chapter can be found elsewhere on this website. Negotiations on investment with the US have not yet begun in earnest. The two parties exchanged information on their approaches and took note of divergences and convergences. There are three specific leaked documents that reveal the EU approach to investment protection and ISDS: - the mandate for the TTIP negotiations given by the Council of the EU to the Commission on 14 June a chapter on Trade in services, investment and e-commerce presented to the US in July a concept note on ISDS used as a basis for an oral presentation during the negotiations in July 2013 In January 2014 the EU Commissioner for Trade unexpectedly announced a break in the investment negotiations in TTIP in order to consult EU civil society. This announcement came not only as a reaction to growing public opposition against the inclusion of investor-to-state dispute settlement (ISDS) in TTIP but most probably also with a view to find more time to deal with the many disagreements on the matter between the Commission and the Member states, and among the Member States. Disagreements have indeed persisted on the inclusion of ISDS in TTIP and on the content of the provisions; but also still on the division of competence and the legal and financial responsibility between the EU and the Member States. A. Background The Treaty of Lisbon, in force since 1 December 2009 added foreign direct investment to the exclusive common trade policy competence of the European Union. Since then the EU is developing its own investment protection policy. Before, this was a competence of the EU Member States (MS) that used it to negotiate about 1400 Bilateral Investment Treaties (BITS) which more or less followed a standardised approach of concise treaties, with broad unspecified protection standards, leaving much room for interpretation to a whole plethora of international arbitration tribunals. The 1400 Member State BITS in general do not deal with market access, only with protection. The European Commission on the other hand already included market access for investments in its 2

3 free trade agreements for some time. At first this came solely as Mode 3 of the services chapter (note that 60% of investments are in services) until market access for non-services investment was added in Since then a chapter (or title ) on services, establishment and e-commerce became a standard feature in the EU FTAs. Investment liberalisation under this title followed the GATS-way of scheduling market access and national treatment in a table that listed all (services and nonservices) economic sectors. Thus the EU had investment liberalisation agreements without investment protection provisions and the member states had investment protection agreements without investment liberalisation provisions This situation was increasingly regarded by the Commission as a handicap vis-à-vis for instance the US that could negotiate agreements that combined both aspects. From the first months after the coming into force of the Lisbon Treaty the European Commission indicated its intention to introduce some reforms to the traditional approach to investment protection of the member states.this was met with great suspicion by many EU Member States. The Netherlands, Germany, Finland and Spain in particular vehemently took up the defence of the golden standard set in their BITS. The same hardliner countries have contested the exclusiveness of the competence of the EU/the Commission and maintained that some aspects related to investments like portfolio investment, property and expropriation aspects have still remained within their competence. The rational for the reformist approach of the EU Commission is unclear: is it genuinely concerned with the threat to public policies; or does it seek to fix certain flaws in the system in order to ensure its survival; or is it mainly seeking convergence with the reforms introduced by Canada and the US after bad NAFTA experiences, in order to be able to generalise investment protection and investorstate-dispute settlement and foster a global investment protection regime? The first mandate for negotiations on investment protection given by the EU Council to the EU Commission dates from July 2011 and concerned Canada, India and Singapore. It was very concise and reflected the practice of the EU Member States (MS) calling for unspecified protection standards. Only new element was the inclusion of a right to regulate clause, proposed and strongly defended by Belgium. The mandate came as an amendment adding investment protection to earlier mandates for free trade negotiations that were already on-going. Since this first mandate negotiating mandates for investment protection chapters in EU free trade agreements have been adopted by the Council for negotiations with - Morocco, Tunisia, Egypt and Jordan at the end of Japan on 29 November the USA on 14 June China and ASEAN on 18 October The EU institutions also adopted an EU Regulation (bill) that confirmed the validity of the 1200 EU member states BITs that are in force and allows the member states to continue to negotiate BITS in the future (if this does not stand in the way of the EU plans for EU investment protection negotiations and provided that the EU Commission authorises these bilateral BIT negotiations) 1 The EU institutions are still discussing a draft EU Regulation on the division of the legal and financial responsibility between the Union and the Member States in case of an investor claim based on an EU investment treaty: will the Commission or the hosting member state act as the defendant and who will pay the awards and the costs 2? These discussions have been dragging on 1 Regulation (EU) No 1219/2012 of the European Parliament and of the Council establishing transitional arrangements for bilateral investment agreements between Member States and third countries was officially adopted on 12 December 2012 (Official Journal L351/40 of 20 December 2012) and is in force since 9 January 2013 ( 2 See 3

4 for three years and have seriously soured the relations between the Commission and the member states on investment protection matters. B. The EU Council mandate for negotiations on investment in TTIP The EU Council mandate for the TTIP-negotiations was, approved on 14 June 2013 after long and lively debates. The part on investment protection is more elaborate than the previous EU Council mandates. It has some peculiarities that have to do with - the CETA experience: on the one hand it consolidates some innovations and deviations from the EU Member State BITS; on the other hand it gives the impression that the Member States have tightened the reins of the Commission; - doubts and disagreements among the Member States: Member States differ about whether investment protection and ISDS should be included at all in TTIP; and if they would be included, what their content would be. Investment protection in the EU Council mandate for the TTIP negotiations 3 Investment protection 22. The aim of negotiations on investment will be to negotiate investment liberalisation and protection provisions including areas of mixed competence, such as portfolio investment, property and expropriation aspects, on the basis of the highest levels of liberalisation and highest standards of protection that both Parties have negotiated to date. After prior consultation with Member States and in accordance with the EU Treaties the inclusion of investment protection and investor-to-state dispute settlement (ISDS) will depend 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. 23. As regards investment protection, the objective of the respective provisions of the Agreement should: provide for the highest possible level of legal protection and certainty for European investors in the US, provide for the promotion of the European standards of protection which should increase Europe's attractiveness as a destination for foreign investment, provide for a level playing field for investors in the US and in the EU, build upon the Member States' experience and best practice regarding their bilateral investment agreements with third countries, and 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 for the promotion and protection of cultural diversity. Scope: the investment protection chapter of the Agreement should cover a broad range of investors and their investments, intellectual property rights included, whether the investment is made before or after the entry into force of the Agreement. Standards of treatment: the negotiations should aim to include in particular, but not exclusively, the following standards of treatment and rules: a) fair and equitable treatment, including a prohibition of unreasonable, arbitrary or discriminatory measures, b) national treatment, c) most-favoured nation treatment, d) protection against direct and indirect expropriation, including the right to prompt, adequate and effective compensation, 3 4

5 e) full protection and security of investors and investments, f) other effective protection provisions, such as an "umbrella clause", g) free transfer of funds of capital and payments by investors, h) rules concerning subrogation. Enforcement: the Agreement should aim to provide for an effective and state-of-the-art investor-tostate dispute settlement mechanism, providing for transparency, independence of arbitrators and predictability of the Agreement, including through the possibility of binding interpretation of the Agreement by the Parties. State-to-state dispute settlement should be included, but should not interfere with the right of investors to have recourse to the investor-to-state dispute settlement mechanisms. It should provide for investors as wide a range of arbitration fora as is currently available under the Member States' bilateral investment agreements. The investor-to-state dispute settlement mechanism should contain safeguards against frivolous claims. Consideration should be given to the possibility of creating an appellate mechanism applicable to investor-to-state dispute settlement under the Agreement, and to the appropriate relationship between ISDS and domestic remedies. Relationship with other parts of the Agreement: investment protection provisions should not be linked to the market access commitments taken elsewhere in the Agreement. ISDS shall not apply to market access provisions. These market access commitments may include, when necessary, rules prohibiting performance requirements. All sub central authorities and entities (such as States or municipalities) should effectively comply with the investment protection chapter of this Agreement. In comparison with the first negotiating mandate, the TTIP mandate: expresses a higher ambition by calling for the the highest levels of liberalisation and highest standards of protection that both Parties have negotiated to date ; but at the same time it reserves the right to exclude investment protection and ISDS from TTIP depending on an assessment by the MS of the content and the overall balance of the agreement; drops the mentioning of unqualified protection standards and explicitly mentions the inclusion of a prohibition of unreasonable, arbitrary or discriminatory measures with regard to the Fair and Equitable Treatment standard; is much more detailed on enforcement (i.e. ISDS), explicitly mentioning: transparency, independence of arbitrators, predictability, binding interpretation, safeguards against frivolous claims, the possibility of creating an appellate mechanism. Overall it confirms an approach which: introduces a wide coverage (except pre-establishment) and a high ambition for the protection standards reforms the functioning of the ISDS, while maintaining its fundamentals and also its wide range of arbitration forums. C. The EU draft text on investment protection and liberalisation presented during the first round of TTIP negotiations on 8-12 July 2013 in Washington and how it differs from the 31 May 2013 CETA text In the first round of negotiations the two parties explained their approach to investment protection. The EU Commission presented a draft text on Services, establishment and e-commerce and the US introduced its 2012 Model BIT. The EU emphasised the conditionality on investment protection included in its mandate. The US also used its 2012 Model BIT to explain its approach to ISDS; The EU did not present a text but used its Concept paper on ISDS (see below under D.) as speaking points to indicate its position on certain issues; the Commission also explained the conditionality attached to it (in its mandate). 5

6 The leaked text is actually an earlier draft (m.d.101/13) of the text that the Commission tabled in the first round of negotiations. This earlier draft was presented to the Council s Trade Policy Committee Services and Investments (TPCSI) on 24 June 2013 and may have undergone some changes before it was tabled in the negotiations, as the EU MS made many (diverging) comments. The draft that the Commission presented does not consolidate the results of the CETA negotiations, but rather takes quite a number of steps back. This could be a negotiating tactic but it could also mean that the Commission does not consider the (provisional) CETA outcome as a good precedent. It could also have to do with the fact that the CETA negotiations are not over yet and that the Commission can of course not table a bracketed text. The Commission also said from the beginning that it did not want to adopt a Model BIT, but that it wanted to be able to adapt to different circumstances and partners and therefore preferred to work on the basis of essential principles. The Commission told the US as much in the first TTIP round in July: We noted that we considered it important to adopt the approach to each individual negotiation and that, clearly, TTIP was a special case. This would however contradict a prime aim of the TTIP negotiations, i.e. to set global standards. The draft is very similar to texts with the same title in previous EU FTAs The only addition is that it contains elements of investment protection. The draft starts with a chapter on general provisions including scope and definitions; and than follows the four GATSmodes of services trade, beginning with investment (comparable with mode 3 in GATS, but expanded to non-services investments); followed with cross border supply of services (mode 1 and 2 in GATS) and temporary presence of natural persons (mode 4 in GATS). Than come chapters on regulatory framework, electronic commerce and finally the exceptions. In the CETA negotiation this architecture was not accepted by Canada so that CETA has separate chapters on services, e-commerce and investment. The investment chapter deals with market access, protection, and temporary presence of natural persons related to investments. In TTIP the Commission returned to its original approach. In chapter 1 General provisions the Commission re-introduces its weak and selfdefeating right to regulate clause (art.1.1): Consistent with the provisions of this Title, each Party retains the right to adopt, maintain, and enforce measures necessary to pursue legitimate policy objectives. The three underlined words render the clause virtually meaningless or worse: the formulation consistent with the provisions actually subordinates the right to regulate to the agreement instead of te other way around. The definitions proposed by the Commission are also different from CETA but they are just as broad. They do however again exclude investors without substantive business operations in the home country (i.e. post box companies)(art.1.4.c) but include natural persons or juridical persons that seek to make investments, allowing for preestablishment rights. (art.1.4.q). Under liberalisation of investment (in both services and non-services sectors) Audio-visual services was originally are excluded from market access (MA) but not from national treatment (NT); however this was corrected in revised version of 3 July which excluded audio-visual services from both MA and NT (art.3.2). A positive list approach is proposed for MA (art.4.1) but a negative list approach for NT (art.5.3) (as in the on-going plurilateral negotiations for a Trade in Services Agreement (TISA); which is better than the full negative list approach in CETA. (however the EU has accepted to use the negative list approach in the mean time). The MA article repeats the GATS art.xvi market access standards, but does not add the welcome carve outs included in CETA (see CETA analysis on this website). No MFN clause and no performance requirements are proposed 6

7 The investment protection section Carries a note repeating the conditionality of the EU s TTIP mandate: The inclusion of investment protection and ISDS provision will depend on whether a solution satisfactory for the EU is achieved with regard to the contents of section 2 (i.e. this section) The section has no text on ISDS The FET standard (art.12) does not carry over the 21 November CETA text, but goes a step back to the 7 February CETA version which was less qualified and offered more protection. Such vague formulations leave a lot of scope for interpretation to the arbitrators, e.g.: o a breach of legitimate expectations of investors arising form a government s specific representations or investment inducing measures (art.12.2.f) o a disregard of the principle of effective transparency in any applicable administrative or judicial procedure (art.12.2.g) The FET article also contains an umbrella clause (art.12.3): Each Party shall observe any obligation it has entered into with regard to an investor of the other Party or an investment of such an investor. Article 14 on expropriation comes with an annex as in CETA, but o It does not carry over the strong formulation of the 31 May CETA text (see above footnote 5) o Instead It only contains the same weak and self-defeating right to regulate clause (art.2.d) as proposed under the general provisions o Worse it also re-introduces the EU s proportionality and necessity test that was there in the 7 February CETA text but dropped in the 31 May text: For greater certainty, non-discriminatory measures of general application taken by a Party that are designed to protect legitimate public policy objectives do not constitute indirect expropriation, if they are necessary and proportionate in light of the above mentioned factors and are applied in such a way that they genuinely meet the public policy objectives for which they are designed. The article on transfers on the other hand adds a number of policy measures that should not be considered in contradiction with the freedom of transfers: (laws related to) bank recovery and resolution and prudential supervision of financial service suppliers (art.15.2.a); issuing, trading or dealing in futures, options and derivatives (art.15.2.b); social security, public retirement or compulsory savings schemes (art.15.2.f) Article 17 on termination includes a survival ( zombie ) clause of 20 years. In article 18 the EU proposes to terminate the US BITS with EU MS on the day of the coming into force of the agreement; but for measures taken before that time, the old BITs can still be used until three years after. The investment protection chapter does not contain articles on general exceptions, denial of befits or formal requirements (comparable with 21 November CETA, art.x.14- X16). There is an article on general exceptions at the very end of the text which repeats some of the CETA language, but the scope of its application is left open. Conclusion: what the EU tabled in the first TTIP round on investment liberalisation and protection is bad, and in any case worse that what has come out so far from the CETA negotiations. 7

8 D. The proposed concept note (m.d. 103/13) of the EU Commission on ISDS in TTIP presented to TPC SI on 24 June 2013 and used as speaking point in the first round of negotiations This is a short note that list a number of ISDS issues that the Commission wants to address in the TTIP negotiations. The text repeats the conditionality of the mandate regarding ISDS. It contains more issues than listed under the heading enforcement in the EU TTIP mandate reproduced above under 2. All 19 issues have also been covered by CETA, but as said there they do not address the fundamental flaws of the system. Like in CETA the note does not place a clear fork in the road: the EU seeks to prevent double or excess compensation, but does not ban parallel claims (point 9). Typical for the EU is point 8) on the need to determine whether the EU or a MS will be the respondent in a case. In point 19 the EU leaves open whether to ISDS would apply to financial services (but it is known that it does want to include them, as in CETA). Conclusion : no reasons to expect further or more thorough reform of the ISDS --- Re: TTIP Negotiations on Investor-State Dispute Settlement. Concept note (103/13) The inclusion of a system of investor- state dispute settlement, along with the provisions on investment protection, will be subject to a satisfactory solution meeting the EU interests, concerning the EU s objectives on investment protection and investor-state dispute settlement and the overall balance of the negotiations. Subject to such a satisfactory outcome, investor-state dispute settlement should be effective and reflect the state of the art. Such a system must carefully balance the interests of investors and the public policy objectives of the respondent. The system of investor-state dispute settlement should have the following features: 1) it should only apply to claims in respect of violations of the agreement concerning post-establishment treatment. To be specific, it will not apply to market access commitments in the area of investment; 2) appropriate mechanisms should be in place which would encourage amicable settlement of investorstate disputes; 3) it should only be possible to initiate investor-state dispute settlement within a certain period of time of the occurrence of the events giving rise to the claim.; 4) an investor which requests consultations, but which does not move to arbitration within a set period of time shall be deemed to have withdrawn its claims; 5) mediation shall be encouraged, and shall, in particular once started, suspend relevant time periods; 6) arbitration should be possible under a) the ICSID Convention, b) the ICSID Additional Facility, c) UNCITRAL Arbitration rules and d) any other set of rules when agreed by the disputing parties; 7) in addition to the investor in the home country, the foreign-owned locally-established company should have access to investor-state dispute settlement (Article 25(2)(b) ICSID Convention); 8) before submitting a claim against the EU, or a Member State, the investor must request a determination as to whether the EU or the Member State will act as respondent in any particular case; 9) provisions will be included which will prevent double or excess compensation for the investor and multiple claims against the respondent State; 8

9 10) in the absence of an agreement between disputing parties, the arbitrators shall be drawn from a roster established by the Parties. The arbitrators will need to have a number of specific qualifications, and must adhere to a Code of Conduct to be established under the agreement; 11) the agreement will specify the relevant applicable law and rules of interpretation. Provision will be made for the possibility of the Parties to adopt binding interpretations of the agreement; 12) the agreement will include provisions dealing with manifestly unjustified claims; 13) disputes under the agreement will be subject to a high standard of transparency, subject only to protection of genuinely confidential information (i.e. documents will be publicly available, hearings will be open) and amicus curiae will be able to make submissions. The other Party to the Agreement will also be able to file submissions. The applicable rules will be those set out in the UNCITRAL Arbitration Rules on Transparency (expected to be adopted in July 2013); 14) provisions will be included which address the form of the final award to be adopted by arbitral tribunals; 15) the agreement will include provisions setting a limit to the remuneration of arbitrators and establishing that the unsuccessful party shall normally bear the costs of the dispute. 16) provisions will be included addressing the role of the Parties to the agreement, in particular, the right to make submissions in a dispute and to allow state-to-state dispute settlement as concerns measures having a general effect; 17) the agreement will provide for consolidation of claims where there are questions of law or fact in common; 18) the Parties will explore options to permit that awards under this agreement would be subject to appeals on questions of law; 19) whether and the extent to which specific consideration should be given to the financial services sector as concerns prudential measures in the context of investor-state dispute settlement shall be subject to further assessment. 9