IR Blog | 3 Dec 2014
Investor-state dispute settlement in Europe
In the last few months, criticism of TTIP’s proposed investor-state dispute settlement (ISDS) provision has become so mainstream that even The Economist is questioning whether it’s such a good idea. More to the point, some of the biggest players this side of the Atlantic have also come out against it, largely it would seem, mirroring public sentiment; French officials now claim that TTIP is a no-go if ISDS is kept in, while Germany has spoken out against its inclusion in TTIP, and has gone so far as to backtrack on agreements already made, saying that they want ISDS scrapped from CETA, the EU-Canada free trade agreement (which, until recently, nobody outside of Canada seemed to care about).
The perception of the threat that ISDS poses is connected to the different health, food and environmental standards in Europe and the US. ISDS allows investors to sue host state governments for unfair or discriminatory treatment, and critics argue that investors will use arbitration (or even the threat of it) to force Europe to lower its regulatory standards based on treaty provisions. As proof of the potential for investors to employ ISDS to attack regulatory standards, critics frequently cite the cases of tobacco company Philip Morris v. Australia, in which the tobacco company is suing over the country’s decision to require plain packaging of cigarettes, and Swedish energy company Vattenfall suing Germany over Merkel’s nuclear phase-out.
A threat does exist, as investors, and more importantly, arbitration lawyers are expanding the use of investment arbitration. As this article/advertisement written by arbitration lawyers suggest, there is money to be made by actively looking for “innovative” uses for ISDS.
However, others argue that Europe’s sudden distrust of ISDS is hypocritical. European states, or at least European investors, have been a driving force behind ISDS in the past. The first Bilateral Investment Treaty was signed by Germany (with Pakistan) in 1959, and since then, EU member states have signed at least 1400 BITs. Between 2008-2014 alone, EU investors made up 53% of all claimants in investor-state disputes.
Of course, more interesting to critics is likely the track record of EU states as respondents in these lawsuits. So here’s a breakdown of the cases Europe has faced so far, based on my own research.
Here we see the EU member states which have been respondents in arbitration cases. The majority are transition economies, although Spain, Germany, Belgium and the UK have also been faced lawsuits. The concentration of disputes in formerly Communist countries is not surprising, given the logic that has (up until TTIP and CETA) governed BITs. That is, these agreements have usually been signed by pairs of countries between which the investment generally flows only in one direction – most often from developed to developing countries (or at least countries perceived to have unreliable domestic courts). In other words, when the US and the Czech Republic signed a BIT in 1991, the implicit goal was to protect US investments in the Czech Republic. On the other hand, Western European states and the US have not found it necessary to sign BITs between themselves, as both sides have been confident in the domestic courts and investment climate of the other. At least, until now.
The above shows the industries most often implicated in investor-state disputes involving EU members. How does this compare to investment disputes worldwide? At the global level, electricity and other energy, as well as oil, gas and mining, are the industries that see the greatest number of disputes. Not surprising, given that these industries are often politically interesting already. Extractive industries seem to attract a range of governance problems, while public utilities are often are privatized to the detriment of low-income consumers. What appears to be Europe-specific here is the concentration of cases in media and health insurance (although both relate to a number connected cases in Czech Republic and Slovakia).
And here we have a breakdown of the state “measures” which are triggering disputes in Europe. The top two categories are the very specific measure of canceling an agreement, permit, or license of an investor, while the second category – regulatory change – encompasses a range of measures which effect an entire industry or even the general public.
Finally, how litigious are US companies? Of the 561 known arbitration cases listed on UNCTAD’s IIA database, 124 cases, or 22%, involve US investors. It’s impossible to know how often US investors will use ISDS under TTIP, if the agreement ultimately includes the provision. All we can say for certain at this point is that if it is left in, a great deal more of global FDI flows will suddenly be covered by ISDS.