Article 12 May 2015

Will TTIP, the proposed new EU-US trade deal, change investment disputes?

A proposed new bilateral trade partnership between the European Union and the United States has attracted heated debate regarding provisions that would allow companies to sue foreign governments.

The Transatlantic Trade and Investment Partnership agreement (the “TTIP”) currently being negotiated by and between the European Union and the United States has attracted plenty of public scrutiny even before any actual text versions have been published.

Most of the public criticism has focused on the investor-state dispute settlement (the “ISDS”) process.

The ISDS provision would allow investors to seek arbitration and compensation in the event of unfair treatment. Opponents to the provision claim the measures would undermine the power of national governments to act in the best interests of their citizens.

While this is not totally new in the world of global investment business, the general principles and goals of the ISDS, as proposed by the Commission, differ in some respect significantly from arbitration under the International Centre for Settlement of Investment Disputes (the “ICSID”) Convention.

For Finnish companies operating in the United States, the practical impact of the new trade deal could make it easier for them to sue the US government if they can prove that an action by the state effectively mounts to unfair treatment and it has affected their investment. Similarly, US companies could sue the Finnish government. While these are undoubtedly daunting undertakings, they are not outside the realm of possibility.

Investment protection provisions

The EU’s main aim with the TTIP is to improve the EU firms’ access to the US market by opening up the market for goods and services and enabling EU firms to bid for more public contracts in the United States.

The TTIP would consist of three main sections: (1) market access, (2) regulatory cooperation and (3) rules. The provisions regarding investment protection will be included in the third section.

The aim of investment protection is to protect investments from unfair treatment by governments. Unfair treatment can encompass, amongst others, nationalisation of property (expropriation) without adequate compensation, introduction of discriminatory legislation or unfair treatment of foreign investors in domestic courts.

It has been suggested that regarding the ISDS would be included in the TTIP. This would allow an investor to take the matter to arbitration if a state has breached its commitments and refuses to pay the appropriate compensation for so-called unfair treatment. In the ISDS, disputes would be judged by one or more arbitrators chosen by the parties.

What changes are in store?

Globally, there are ca. 3,000 investment protection agreements in place out of which EU member states are party to ca. 1,400. Finland has signed 67 investment protection agreements with different states.

Many of these agreements include an arbitration clause and are governed by the ICSID Convention. Since only states can currently join the ICSID Convention and the TTIP would be entered into by and between EU and US, the ISDS would not be governed by the ICSID Convention.

According to the Commission, the aim of the TTIP is to improve and modernise the investment protection agreements.

Clarifying investment protection rules

The Commission has informed that one of the main goals of the process is to find a better balance between states’ right to regulate and investors’ protection. The Commission is suggesting that this could be done by clarifying and improving investment protection rules by reaffirming states’ right to undertake regulative measures in order to protect the public interest. Some of the current investment protection agreements could be seen as restricting this right.

The Commission is also looking to clarify terms such as indirect expropriation and fair and equitable treatment. According to the Commission, the future EU agreements will provide a detailed set of provisions giving guidance to arbitrators on how to decide whether or not a government measure constitutes indirect expropriation.

According to the Commission, the EU agreements will include precise standards regarding which actions are not allowed (for example, manifest arbitrariness and abusive treatment such as coercion, duress or harassment).

Improving the dispute settlement system

The Commission wants to prevent abuse of the dispute settlement system by allowing early dismissal of unfounded claims. Frivolous or tactical claims could be discouraged by making an investor who loses his case liable to pay for all the costs, including those of the state. Currently in most cases the parties have to bear their own expenses irrespective of the outcome of the dispute.

The Commission has also mentioned the possibility of making the system more transparent by making documents publicly available, organising hearings that are open to the public and allowing interested parties such as NGOs to make submissions.

Furthermore, the Commission has also mentioned prohibiting the arbitration tribunal from ordering the repeal of a government measure and establishing an appeals system in order to provide more consistent judgements.

When will the ISDS see daylight?

The TTIP negotiations are still on-going but the aim is to conclude the negotiations by the end of 2015. However, all EU Member States have to approve the agreement before it can be entered into.

However, the negotiations regarding the possible inclusion of ISDS provisions in the TTIP are currently on hold. The most recent round of negotiations did not include negotiations about the investment protection clause. It is also possible that the TTIP agreement will be entered into without an ISDS clause.

The TTIP, with its planned investment protection provisions, is without a doubt a very ambitious undertaking by the negotiating parties. However, as long as no actual drafts of the TTIP have been published, it is not possible to evaluate the actual impact of the TTIP and the potential differences with the current ICSID system.

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