Investment protection and ISDS in the TTIP: the discussion continues with more consultation around the corner

Yesterday afternoon, the EU Commission issued its Report on the outcome of the public consultation on the inclusion of investment protection and investor-state-dispute-settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP) being negotiated between the EU and the US. As discussed in our blog post here, the public consultation was launched against the backdrop of vociferous debate about the nature of ISDS and investment protection more generally and in relation to the TTIP. The controversy surrounding investment protection and ISDS in connection with the TTIP is described in our recent podcast.

It is no surprise that the Report reveals strong opposition to, and concerns about, ISDS in the TTIP. It is also no surprise that the discussion as to both the content of the investment protections (including any "right to regulate", as it is known), and the nature of the mechanism by which these can be enforced, will continue. In its Report, in response to the criticisms of inclusion of ISDS in the TTIP, the Commission refers back to the fact that the consultation takes place in specific circumstances in which the Council (and therefore, to all intents and purposes, each Member State) has unanimously entrusted the Commission to negotiate high standards of investment protection and ISDS within the TTIP, providing the final outcome corresponds to EU interests.   Further, whilst the negotiating directives include an element of conditionality and make clear that a decision on whether or not to include ISDS is to be taken during the final phase of negotiations, it cannot be ignored that the US position is also that investment protection and ISDS should feature in the TTIP.

Whilst the consultation received an extremely high proportion of pre-populated responses organised by NGOs (which generally opposed the inclusion of ISDS), it also solicited responses from a broad cross-section of stakeholders which has allowed the Commission to identify a number of key points areas (or "core issues") to develop. These are:

• The protection of the right to regulate
• The supervision and functioning of arbitral tribunals
• The relationship between ISDS arbitration and domestic remedies
• Review of ISDS decisions for legal correctness through an appellate mechanism

The Commission has committed to further consultation in the first quarter of 2015.  However, at this stage it is not clear how the next consultation on these "core issues" will put the Commission in a better position to develop the investment chapter. For example, the "right to regulate" is the flip-side of the guarantee to an investor of fair and equitable treatment. Any re-consideration of the right to regulate will be deficient if it does not take into account the positive rights of investors which impact on the state's right, as well as the sectors in which such right should exist without limitation. Again, the relationship between ISDS arbitration and domestic remedies depends on the balance struck between investment protections and the rights of states.  A holistic approach is needed.

The Commission's Report on the responses to the Consultation is found here, and the accompanying Commission Memo is found here. Aspects of the Report are considered in further detail below. You may also wish to hear Herbert Smith Freehills public international law partner Matthew Weiniger QC discussing these issues on the Today programme on Radio 4 on 14 January 2014 (at 18.55 mins into the broadcast).  

For further information, please contact Matthew Weiniger QC, partner, Christian Leathley, partner, or Andrew Cannon, partner, or your usual Herbert Smith Freehills contact.

Responses to substantive key issues

The key issues on which the Commission sought views focussed on the scope of substantive investor protections and the nature of investments to which they would apply, the content of those protections, and the inclusion of a positive right of states to regulate in the treaty. They also looked at the arbitral process: including transparency, the relationship between ISDS claims and domestic court proceedings, arbitrator ethics, conduct and qualifications, reducing the risk of frivolous cases, claims filtering and guidance by the treaty parties to interpretation of the TTIP. Finally, there was considerable focus on the possibility of an appellate mechanism (although no detailed proposal of such was provided in the consultation). Some of these issues are considered further below.

Unsurprisingly, the views expressed on most of these issues were divergent, reflecting the varying interests of the different categories of stakeholder which responded to the consultation.   However, as might be expected, there was general consensus as to the need to develop some areas of principle on which criticism of ISDS is often based.

• Right to regulate and striking a balance

There was general agreement on the need to find a balance between the right of states to regulate and the need for investment protection. As noted by the Commission, this balance is at the heart of the Commission's work on developing the investment protection chapter of the TTIP. However, where this balance lies or how it can best be achieved will be the subject of further consideration by the Commission in its consultation.

• Transparency

Similarly, in principle, the objective to achieve transparency is widely shared. Inevitably, however, different stakeholders have demonstrated divergent views as to what "transparency" should mean in the context of ISDS in the TTIP. Stakeholders from across the spectrum also noted the need for clarity as to the scope of the proposed exception for "confidential business information" from the general provisions on transparency. However, the concerns underlying the request were different, with, for example, NGOs concerned that a broad interpretation would lead to an undermining of the intent to provide for a transparent process and business organisations alarmed that the exception would be narrowly interpreted.

• Arbitrator's ethics, conduct and qualifications

The Commission has already expressed a commitment to introduce ethical requirements, including a code of conduct for arbitrators determining disputes under the ISDS provisions of the TTIP. On the basis of the analysis of the responses as presented in the Report, it seems likely that we will see not only a binding code of conduct, but also some sort of roster system for arbitrators. Notably, the Report responded fairly robustly to doubts expressed about the independence of the Secretary General of ICSID to decide on conflicts issues.

• The relationship between ISDS and domestic court proceedings

Unsurprisingly, there was a spectrum of responses to the Commission's stated approach of favouring domestic courts (and amicable resolution of investor-state disputes). These ranged from the anti-ISDS position expressed by some respondents who considered domestic court resolution should be exclusive, to those respondents who considered ISDS appropriate for some cases, to respondents who consider ISDS should be an open choice and not the last resort.

In developing its position in relation to this issue, the Commission will need to balance the views expressed in favour of a provision requiring exhaustion of local remedies, with those which advocate against this. The same categories of respondent are also largely against inclusion of "fork in the road" provisions.

There appears to be general agreement in principle to the prohibition of double compensation although there is a divergence of views as to whether this should be prevented by treaty provisions on parallel proceedings, including to stop claims by affiliates of the claimants, or whether it should be left to the tribunals appointed to resolve those claims.

• Appellate mechanism

Whilst the Commission consulted on an appellate mechanism, there was no detail provided in the reference text to the form that this would take. As a result, whilst many respondents in all categories were in principle in favour of an appellate mechanism, there was no clear view in favour or against an appellate mechanism – it would depend on the concrete form of the mechanism and the extent to which concerns raised can or cannot be addressed.

This is one of the "core issues" on which the Commission will solicit further views. However, on the basis of the Commission's position in the Consultation, and the nature of responses from across the spectrum of stakeholders, it seems highly unlikely that the EU's position in the negotiation will not include an appellate mechanism.

Commission's reaction to the general statements indicating opposition to ISDS in the TTIP or in general:

The Commission's Report contains a fairly brief, but forceful, response to the general statements opposing ISDS in the TTIP or more generally. As well as referring back to its negotiating mandate (as noted above), the Commission also cautioned against reaching conclusions based on pending cases which are the subject matter of much criticism of ISDS (although the Report notes that the risks for the right to regulate inherent in those cases must be the object of debate).

The Commission also highlights that its proposed approach to investment protection and ISDS in the TTIP is both informed and shaped by experience of arbitration under different arrangements and "the EU… has opportunity to set up a reformed EU wide regime which will replace and phase out the existing treaties of Member States". The position of other EU BITs was also questioned in Trade Commissioner Malmström's statement accompanying the Report. She noted the "need to reflect upon how to address the fact that EU countries already have 1400 bilateral agreements of this kind, of which some date back to the 50s", which do not contain the balance of state rights and investor protections which the EU is intending are included in the TTIP.

Importantly, the Report emphasises the distinction between ISDS, as an enforcement mechanism, and the rights of investors to bring a claim in circumstances where they can "demonstrate a breach of one of the investment protection standards and a resulting economic damage to the investment of the foreign investor". It also indicates how the Commission's proposed approach addresses concerns about ISDS based on existing texts – e.g. transparency, conduct and ethics of arbitrators.

In conclusion, whilst the Report makes clear that a decision on whether or not to include ISDS will be taken during the final phase of the negotiations, the overwhelming message which comes out of the Report (and, indeed, Commissioner Malmström's statement) is that the EU is resolute in its intention to address the concerns raised, such that investment protection and ISDS are here to stay in the TTIP.