INTERNATIONAL ARBITRATION 1/3LY
MARKET COMMENTARY 13
ISDS PROVISIONS IN FREE TRADE AGREEMENTS – MUCH ADO ABOUT NOTHING NEW?
The free trade agreement between the European Union and Canada signed in Ottawa on 26 September 2014 – the so-called “Comprehensive Economic Trade Agreement” (CETA) – represents a turning point in the history of Europe’s approach to investment policy and arguably sets the standard for other investment agreements currently being (re)negotiated. The European Commission also holds it out as the “most progressive system to date” for Investor-to-State Dispute Settlement (ISDS). A CHANGE IN RHETORIC The provisions of CETA, signed in Ottawa on 26 September 2014, the first agreement signed by the EU within its exclusive competence over member states’ investment policy following the Lisbon Treaty, may shed some light on the likely tone of future agreements, including the anticipated Transatlantic Trade and Investment Partnership (TTIP) (between the EU and US) and the Trans-Pacific Partnership Agreement (TPP) (concerning certain Asia-Pacific States) that are set to reshape global trade and investment. However, might the recent upswing in anti-ISDS rhetoric mean that such provisions do not ultimately find their way into future agreements notwithstanding the provisions contained in CETA? In past years, the proliferation of ISDS, usually under bilateral investment treaties (BITs), has been criticised for allowing sophisticated investors from developed countries to sue unsuspecting developing states before international tribunals, with insufficient visibility to the public, even though the cases raised issues of general concern. Investors often recovered substantial amounts, usually through arbitration under the auspices of ICSID – the International Centre for the Settlement of Investment Disputes in Washington D.C. – with cases decided by arbitrators from a limited pool, most often from developed states, giving rise to accusations of bias in the system. Today the debate has shifted and the outcry against ISDS is also being heard from developed nations and their nationals. This is currently in the context of various multilateral free trade agreements, such as CETA, which contain ISDS provisions and give investors rights to sue states in which they invest. Those against the inclusion of ISDS provisions in such treaties insist that they present a sovereign risk to national governments and court systems. The new President of the EU Commission, Mr Jean-Claude Juncker, recently said that “My commission will not accept that the jurisdiction of courts in the EU member states be limited by special regimes for investor-to-state disputes. The rule of law and the principle of equality before the law must also apply in this context”. Likewise, incoming trade commissioner Ms Cecilia Malmström, who approved the EU-Canadian deal containing ISDS recently called ISDS a “toxic” element in the EU-US trade deal and a “nuclear weapon”. While the ISDS chapters in future treaties may be in the spotlight, neither politician has gone so far as to say that they will be scrapped altogether. It will be interesting to see what emerges from the Commission’s public consultation on the future of investment protection. One possibility is that the ISDS provisions will be watered down, for example to include carve-outs in relation to government measures of public interest, and/or a requirement that investors must exhaust local remedies before host states’ domestic courts before resorting to arbitration.
BY DEVIKA KHANNA, PARTNER AT CLYDE & CO
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