What will become of investment protection in the Transatlantic Trade and Investment Partnership?

The world’s two largest economies – the United States and the European Union – began negotiating a comprehensive free trade and investment, known as the Transatlantic Trade and Investment Partnership (“TTIP”), in July 2013. The United States and the European Union stated that TTIP would increase economic growth, jobs, and international competitiveness¹. Less than two years later, it is unclear whether TTIP will get off the ground, notably with regards to investment protection. 

When the Member States authorized the European Union to negotiate TTIP on their behalf,² they proposed that disputes arising under TTIP’s investment protection provisions be submitted to international arbitration.³ The United States is understood to have proposed the same. This is commonplace: in over 3,000 bilateral investment treaties (“BITs”) concluded worldwide – where States have agreed to, among other things, protect foreign investments from expropriation without compensation, guarantee fair and equitable treatment to foreign investments, ensure full protection and security to foreign investments and allow for the free transfer of returns on those investments – disputes arising between a foreign investor and a State are usually submitted to international arbitration, instead of domestic courts. This process is generally known as Investor-State Dispute Settlement (“ISDS”). Despite the overall success of BITs and ISDS, there are currently only 9 out of 28 Member States that have BITs with the United States, namely, Bulgaria, Croatia, Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, and Slovakia.⁴ TTIP would therefore bring investment protection and ISDS to the remaining 19 Member States of the European Union in their relations with the United States. 

In negotiating the investment protection and ISDS provisions of TTIP, the United States presumably came to the table with a text resembling the 2012 United States Model BIT.⁵ The European Union presumably came to the table with a text along the lines of that included in the Comprehensive Economic and Trade Agreement (“CETA”), which the European Union and Canada negotiated between 2009 and 2014.⁶ 

In CETA, the European Union and Canada negotiated investment protection and ISDS provisions that sought to correct certain perceived ills of the existing investment protection and ISDS regimes. Canada has stated that “CETA builds on Canada’s and the [European Union]’s past experience and practices on investment rules,” providing for a more “open and transparent ISDS process that allows greater public participation” and safeguards “against frivolous claims in order to ensure that the process will not be abused”. ⁷

 According to the European Union, CETA has established “clearer and more precise investment protection standards” for arbitral tribunals to apply, in order for the European Union and Canada to “preserve their right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, public morals and the promotion and protection of cultural diversity”. ⁸ As examples of this, the European Union has noted that CETA precisely defines the fair and equitable treatment standard to avoid interpretation by arbitrators,⁹ as well as “indirect expropriation” to avoid claims against what the European Union or Canada considers legitimate public policy measures. ¹⁰ 

The European Union has also stated that CETA sets “new and clearer rules on the conduct of procedures in arbitration tribunals”. ¹¹ In this regard, the European Union has highlighted that CETA contains, among others: a binding code of conduct for arbitrators; a list of arbitrators pre-agreed by the European Union and Canada, who have been “vetted […] to ensure that they live up to the highest standards”; full transparency in ISDS disputes, making all documents publicly available and all hearings open to the public; a fast track system for rejecting unfounded or frivolous claims; in the field of financial services, a “filter mechanism” to ensure that only specific concerns may be brought to arbitration; and provisions regarding the possible creation of an appeals mechanism, when appeal is usually not available in international arbitration.¹² 

During the TTIP negotiations, certain stakeholders queried whether TTIP’s proposed investment protection and ISDS provisions would give investors more rights at the international level than they would have at the local level or than domestic investors.¹³ In this regard, certain stakeholders expressed concern that ISDS would prevent the European Union or Member States from being able to take measures to regulate in the public interest,¹⁴ these concerns seemingly based on the perception that international arbitral tribunals skew in favor of investors by condemning regulatory acts as violating the State’s obligation to protect investments. In addition, certain stakeholders queried whether international arbitration was necessary to enforce TTIP’s proposed investment protection provisions, when the judicial systems in the United States and Europe are well-established and could arguably adjudicate such disputes themselves.¹⁵ In this respect, stakeholders raised criticisms regarding the procedures used in ISDS (e.g., whether paid arbitrators can be independent judges, whether States will lose resources defending frivolous claims).¹⁶ 

These concerns – predominantly heard from the 19 Member States that do not currently have BITs with the United States – led to such strong public interest in investment protection and ISDS in TTIP that the Commission, which negotiates on behalf of the European Union, decided to organize a public consultation to solicit feedback as to whether the European Union’s proposed approach to investment protection and ISDS “would achieve the right balance between protecting investors and safeguarding the [European Union]’s and Member States’ right and ability to regulate in the public interest”.¹⁷ 

The public consultation was held between 27 March and 13 July 2014. The European Commission issued its report on the consultation on 13 January 2015.¹⁸ 

The public consultation sought feedback on 12 issues, touching on the substance of investment protection¹⁹ and the ISDS procedure.²⁰ In seeking feedback on these issues, the European Union offered CETA as the reference text “to facilitate participation in the consultation and illustrate the elements of the [European Union’s] innovative approach”.²¹ 

The European Commission received nearly 150,000 responses to the consultation, mostly from individual citizens (148,830), but also from organizations (569, including companies, academics, trade associations, et al.).²² While there were many critical responses, there were also constructive contributions (for example, from institutions familiar with investment arbitration).²³ In analysing all of the input received, the European Union has indicated that there are four areas where further improvement should be explored, namely: 

• The protection of the right to regulate; 
• The establishment and functioning of arbitral tribunals; 
• The relationship between domestic judicial systems and ISDS; and 
• The review of ISDS decisions through an appellate mechanism.²⁴ 

The European Union has recognized that the “investment relationship [between the European Union and the United States] is by far the largest and deepest in the world,” and that “TTIP has broader implications than other agreements negotiated” by the European Union.²⁵ The European Commission will now consult with stakeholders, the Member States and the European Parliament about the results of the consultation. The European Commission will then publish its policy recommendations over the course of spring 2015. In the meantime, the TTIP negotiations on investment protection-related aspects remain suspended.²⁶ 

Footnotes 

_{1) See U.S. Objectives, U.S. Benefits in the Transatlantic Trade and Investment Partnership: A Detailed View; see also How TTIP would affect you.
2) In 2009, the Lisbon Treaty transferred competence for foreign direct investment to the European Union. In other words – and stated over simply – as of that date, the individual Member States would no longer negotiate and conclude investment protection treaties in their own name. Instead, the European Union would enter into such treaties on behalf of all Member States, and in those cases the Member States’ existing treaties would phase out. However, the Member States provide the authorization and accompanying negotiating directives (the mandate) to the European Union. Moreover, through the so-called “transitional regulation”, the European Union has authorized its Member States to maintain in force pre-existing BITs notified to it and to open formal negotiations with a third country to amend or conclude a BIT under certain conditions (see Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJ L 351, 20.12.2012, p. 40–46).
3) See Directives for the negotiation on the Transatlantic Trade and Investment Partnership between the European Union and the United States of America.
4) See United States of America, Bilateral Investment Treaties.
5) See 2012 U.S. Model Bilateral Investment Treaty.
6) See EU-Canada Comprehensive Economic And Trade Agreement.
7) See Canada-European Union: Comprehensive Economic and Trade Agreement (CETA).
8) See Investment Provisions in the EU-Canada Free Trade Agreement (CETA).
9) Id.
10) Id.
11) Id.
12) Id.
13) Report at 33-34.
14) Id.
15) Id. at 34.
16) Id.
17) See Press Release, Report presented today: Consultation on investment protection in EU-US trade talks, 13 January 2015.
18) See Commission Staff Working Document, Report, 13 January 2015. (the “Report”)
19) The substantive issues identified in the consultation are: “the scope of the substantive investment protection provisions”; “non-discriminatory treatment of investors”; “fair and equitable treatment”; “expropriation”; and “ensuring the right to regulate and investment protection”. Report at 8.
20) The procedural questions identified in the consultation are: “transparency in ISDS, multiple claims and relationship to domestic court”; “arbitrator ethics”; “conduct and qualifications”; “reducing risk of frivolous and unfounded claims”; “allowing claims to proceed (filter)”; and “guidance by the parties on the interpretation of the agreement”; “appellate mechanism and consistency of rulings”. Id.
21) Id. at 3.
22) Id. at 11.
23) One of the authors contributed to the submission made by the International Court of Arbitration of the International Chamber of Commerce in Paris, France.
24) Report at 28.
25) Id. at 27.
26) In the interim, the European Union has completed negotiations with Singapore on investment, and is currently negotiating several other agreements covering investment protection.}