Transatlantic Trade and Investment Partnership - Business, Innovation and Skills Contents

3  Investor State Dispute Settlement

Existing investor state clauses and international arbitration

24. Investor State Dispute Settlement (ISDS) provisions allow foreign investors to bring proceedings against a government that is party to a trade treaty. Any case is heard at an international court rather than using the domestic legal system. The rationale for this is that it provides investors with a greater level of certainty that their claims would be adjudicated in an impartial manner. If a government is found to be in breach of its treaty obligations, the harmed investor would be able to receive monetary compensation or other forms of redress.

25. ISDS provisions are not new and are normally found in bilateral investment treaties (BITs). When he came before us, the Minister said that the UK had 94 existing ISDS agreements and in that period, which he aggregated to cover "2,000 years", the United Kingdom had not lost a single case.[37] The extent of ISDS provisions in existing trade agreements was also highlighted by the Chartered Institute of Arbitrators (CIArb):

    The existing network of 1400 European Bilateral Treaties (BITs)—all of which include ISDS—already provide good protection to many European investors. These include 8 existing BITs between EU Member States and the US. The UK itself has negotiated 94 Bilateral Investment Treaties (BITs), the majority of which include ISDS provisions, with no ISDS challenge succeeding against the UK. CIArb is aware that the size of TTIP, as well as the active public debate surrounding the inclusion of ISDS, has raised concerns about the protection system. This system has served citizens and investors well.

26. However, there are concerns around the extent to which ISDS provisions go further than merely protecting a company's investment. In particular, there are concerns that ISDS can give a foreign investor grounds for redress should a Government change or reverse decisions on the delivery of public services. If these concerns are correct, such provisions could inhibit the legitimate work of Government by creating a "regulatory chill" in which governments are too fearful of ISDS to regulate in the provision of publicly funded services. An example of this is the action taken by Philip Morris Inc. against the Australian Government for its policy to introduce plain packaging for cigarettes. According to our witnesses, this action is being pursued though an Investor State agreement between Australia and Hong Kong and Philip Morris Inc. has established an office in Hong Kong so it can use the ISDS clauses.[38]

27. In order to gain a better understanding of the existing investor/state disputes system we took evidence from Professor Sir David Edward KCMG, QC, PC, LLD, Drhc, FRSE, Professor Emeritus, University of Edinburgh in his capacity as an arbiter at the International Centre for Settlement of Investment Disputes (ICSID). He explained that the ICSID was set up under the auspices of the World Bank in the 1960s in order to assist the promotion of investment into less developed nations. It was conceived as an answer to complaints from foreign investors about the way they were treated by the host countries, in particular those emerging democracies with underdeveloped legal systems.

28. Sir David explained that at that time there were only two methods by which investors could get remedies: to sue in the courts of the host country, which many considered to be unsatisfactory, or to invoke what was called "diplomatic protection under international law".[39] Under the latter the country of the investor "would seek a remedy under international law against the host country of the investment". ICSID was established as a system for conciliation and arbitration of those disputes.[40] In most cases the investment dispute provisions contain "a definition of who is to be considered an investor and what is to be considered an investment". If the investor and the investment falls within that treaty's definition, then any dispute would be within the jurisdiction of the ICSID.

Proposals for Investor State Dispute Settlement in TTIP

29. Much concern about TTIP has centred on ISDS, including a wide range of public campaigns. Those campaigns argue that ISDS would undermine the power of national governments to act in the interest of their citizens.[41] In particular, it is claimed that as a result of ISDS proposals in the TTIP, measures to open up the NHS to competition would be made irreversible and that US companies could sue for compensation in the event of a future change of policy to bring public services back into public hands. Other examples include the possibility of US oil companies challenging environmental regulations on fracking and genetically modified organisms.[42]

30. In response to the concerns the European Commission suspended negotiations and ran a public consultation on the ISDS proposals. The Commission received over 150,000 responses of which more than a third came from the United Kingdom. According to the Commission's response (published on 15 January 2015) around 145,000 (or 97%), of the responses were submitted collectively through various on-line platforms containing pre-defined answers which respondents adhered to. Of the remainder, the Commission received replies from around 3,000 individual citizens and 450 organisations representing "a wide spectrum of EU civil society (business organisations, trade unions, consumer organisations, law firms, academics, etc.)".[43]

31. Commenting on that consultation, the Minister described 97% of the responses as "standard". He acknowledged the validity of some concerns on ISDS but argued that the debate should be focussed not on "Is ISDS good or bad?", but, "What should be an ISDS, and what should not be?"

32. The responses did not provide a clear steer and therefore the European Commission has decided to further consult EU stakeholders, the EU Member States and the European Parliament on the following areas, as part of a wider debate on investment protection and ISDS:

·  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.[44]

The Commission concluded that this further consultation would help it develop "concrete proposals for the TTIP negotiations".[45]


33. Dr Marshall, from the British Chambers of Commerce, was sceptical of the need for ISDS clauses in the TTIP. He did not see why the domestic legal systems of "a group of very advanced industrialised democratic countries" were not able to settle such disputes, and had not heard a convincing answer to the contrary.[46] Frances O'Grady agreed:

    Our concern is why they cannot use the domestic courts like anybody else. Why do they need a special and what has been largely secret court to secure their investments and secure against potential loss of future profits?[47]

Frances O'Grady concluded by saying that the simple approach would be to "scrap" ISDS.[48] According to Allie Renison, the IoD would also support a trade deal without ISDS clauses.[49]

34. However, Sean McGuire, representing the CBI, argued that ISDS provisions were necessary in order to deliver a "speedier and more harmonised" approach than having to use domestic courts and he highlighted Italy as an example of a Member State that had a "very slow" legal process.[50] Elisabeth Roderburg, speaking for BritishAmerican Business, said her organisation had not "taken a stand" on ISDS.[51] However, she went on to argue that the underlying reason for the inclusion of ISDS provisions in TTIP was less about their importance "in a US-EU context", and more about a "question of precedents" with respect to trade deals with countries such as China. This argument was also put forward by Lord Livingston.[52]

35. It should be noted, however, that the absence of ISDS clauses does not in itself remove any threat of a dispute impacting on public policy. BritishAmerican Business pointed out that if a domestic court was used to resolve a case, that court "could conclude that the measure taken by Government is discriminatory or an expropriation is unlawful and the policy needs to be changed". This is not the case in an international tribunal which, according to BritishAmerican Business "cannot require that a Government change its policy" as it "can only award compensation for an action that has been taken".[53] The Minister confirmed this position when he gave evidence to us: "ISDS can only be about compensation; it can be about nothing else".[54]

What should be included in ISDS provisions?

The State always pays

36. The World Development Movement has argued that under the ISDS proposals, States would be obliged to pay costs regardless of whether they won or lost an ISDS case.[55] We stress that it is not yet clear whether such provisions are being considered as part of the negotiation but we considered it important to ask other witnesses for their views on the desirability of such an approach. Elisabeth Roderburg, from BritishAmerican Business, did not think that the BAB had come to a conclusion on the issue, although its subsequent written evidence stated that:

    We are aware that in many domestic legal systems the 'loser pays principle' is an accepted discipline. It would not be unusual for the EU to follow a similar approach in TTIP.[56]

37. The IoD said that it was "one area that they are looking at under the areas they have identified for reform of ISDS",[57] while Sean McGuire from the CBI said that his organisation "could look at the possibility of making a loser pay principle for an ISDS".[58]

38. We also questioned Sir David Edward on this matter. He said that he had heard of the possibility of ISDS requiring that the State always pays, but added that this was not the case with ICSID as the ICSID convention and the ICSID rules state clearly that it is "for the tribunal to determine who shall pay the costs".[59]

39. It is disappointing that BritishAmerican Business, the CBI and the IoD are so cautious about signing up to a 'loser pays' principle in ISDS cases.


40. In its response to the initial Commission consultation, BritishAmerican Business was unambiguous in its view on frivolous claims: "We believe that TTIP should have no provisions on so-called "frivolous" claims".[60] However, when we questioned Ms Roderburg on the rationale for taking such a strict view she declined to give a view stating that she would "prefer that we get back to you in writing".[61] Supplementary Evidence from BAB restated the BAB's position as set out in its consultation response and argued that:

    We believe that improved ISDS provisions in TTIP should adequately qualify tribunals to distinguish between frivolous claims and the material ones based on the definitions used in the negotiated text. That should help to considerably discourage any attempt to bring a frivolous claim.[62]

41. By contrast, Lord Livingston was in favour of clauses to remove frivolous claims and argued that any treaty with ISDS clauses could have "mechanisms to try to kick out [frivolous claims] as quickly as possible".[63]

42. We recommend that should ISDS provisions be included in TTIP, that they include clauses to remove frivolous claims.


43. Sir David Edward said that the current criticism of TTIP in terms of the impact on States had some "basis or justification" as there had been cases between US corporations and some of the South American republics where disputes had arisen as a result of action taken by countries when faced with an economic crisis. In other words, investors had pursued States for compensation for regulatory change intended to address immediate economic difficulties. However, he argued that this would not have occurred had the bilateral investment treaty had a protective clause in that respect.

44. On the balance between the rights of the state and those of the investor, Lord Livingston said:

    I think it is a balance. […] The right to regulate should be the Government's right and the right to invest with the company, and I do not think we should have a situation where one trumps another. The right to regulate has to be in the sovereign Government.[64]

45. In terms of its impact on Government policy, the Minister was clear about the reach of ISDS:

    You cannot use ISDS to change Government policy. It cannot override. That is in the hands of sovereign Parliaments.[65]

He went on to say that assertions that TTIP would force publicly provided services into the private sector were "completely untrue".[66]


46. At the heart of many concerns about TTIP and ISDS is the impact it could have on of public services, and in particular the NHS. Many campaigners have argued that TTIP would open up the NHS to challenge by US private healthcare providers and inevitably lead to irrevocable privatisation.

47. In July 2014, the European Commission wrote to John Healey MP, the Chair of the All-Party Parliamentary Group on TTIP, setting out the Commission's view on the impact of TTIP on the NHS. The letter concluded:

    We can already state with confidence that any ISDS provisions in TTIP could have no impact on the UK's sovereign right to make changes to the NHS.

    I hope that this information clearly demonstrates that there is no reason to fear either for the NHS as it stands today, or for changes to the NHS in future, as a result of TTIP.[67]

48. While this response was helpful, it did not satisfy the concerns of all who held deep concerns about TTIP. For example, Keep Our NHS Public, a campaigning organisation wrote saying that the implication that the NHS could be "carved out" of the treaty did not go far enough because "any attempt to reverse the privatisation of the NHS" would allow US healthcare providers who have entered the NHS 'market' to "sue any UK government for expropriation, with the chance of winning compensation substantial enough to threaten the UK's financial stability".[68] On 11 December 2014, Jean-Luc Demarty, Director General for Trade, wrote to the Chair of the Health Committee responding to a series of questions on the impact of TTIP on the NHS. That letter went further than the response to Mr Healey and gave the following statement in respect of ISDS and publicly funded services:

    We explicitly exclude services supplied in the exercise of governmental authority: this exception is valid and is significant for a number of public services (e.g. justice, policing).

    Beyond this, in all its trade agreements the EU then takes a broad horizontal reservation which reserves the right to have monopolies and exclusive rights for public utilities in EU Member States at all levels of government.

    In addition, the EU retains very broad sectoral reservations in its trade agreements for public services (public education, public health and social services, and water). This means that public authorities at all levels do not have to treat foreign companies or individuals the same way as EU ones and do not have to provide access to their markets.[69]

49. When he gave evidence to us, the Minister reconfirmed and supported this position:

    I fully support the EU on this matter. We are at one. There is nobody saying otherwise. I do not understand where this notion that it is going to be otherwise comes from. The EU is saying the same; the US is saying the same; the British Government is saying the same. The NHS will not be affected and nobody is asking for it to be.[70]

50. Kate Ling, Senior European Policy Manager, NHS European Office, NHS Confederation described the letter of 11 December as "reassuring letter" and confirmed that it went further than the response to the John Healey letter:

    I think it makes it quite clear that […] publicly funded health services should be reserved, so that is helpful and reassuring. I think, also, the Commission's recent efforts at greater transparency with regard to negotiations are helpful, though they could perhaps still go a bit further, and their recent response to the public consultation on ISDS. There is an awful lot to play for there, and it is still, obviously, very unclear whether or not ISDS will form part of the final TTIP agreement, and if it does, what sort of ISDS provisions they will be. The clear implication of the Commission's latest document is that if there are ISDS provisions, they will, hopefully, be very different ISDS provisions from the ones that have been seen in previous trade agreements.[71]

However, Kate Ling cautioned that it was difficult to give a definitive view in the absence of a text and that more information was necessary in order to make a more accurate assessment of the impact.[72]

51. It is impossible for us to make a definitive statement until a final text of the draft provisions are published although we welcome the repeated statements given by both the European Commission and the UK Government that public services—including the NHS—will be unaffected by TTIP. However, we are aware that not all campaigners will accept these statements at face value. We recommend that the Government, in its response to the Commission's consultation, ensures that an unequivocal statement protecting public services at present—and the right to expand them in the future—is set out in any ISDS provisions. We further recommend that those draft provisions are made public, in advance of final decision, so that they can be subject to public scrutiny.

European Commission consultation on ISDS

52. Earlier in this section we noted that the European Commission is currently consulting Member States on ISDS. This next stage of the consultation offers an opportunity for Governments to further improve or amend the relevant clauses. Lord Livingston told us that the Government would take "an open view about what is contained within ISDS clauses",[73] and that the consultation would offer the opportunity to see "what further things we might include in the agreement with the US, in terms of making sure that these concerns are assuaged".[74] The Minister noted that the recent trade agreement with Canada (CETA) provided a good starting point in terms of refining ISDS provisions. "CETA had a lot of steps forward. We are now looking to see what CETA plus might look like and whether we can create the right standard of a future ISDS agreement.[75]

53. However, when he was questioned by the European Scrutiny Committee on the consultation Lord Livingston said that while the UK would "contribute via the Council and give our views and feedback on ISDS in general" there was "not going to be a formal response to the EU".[76]

54. By undertaking to consult with Member States, the European Commission has given EU Countries the opportunity to reshape the negotiating mandate on ISDS clauses. We have yet to be convinced of the need for ISDS provisions in TTIP. The UK Government and the EU must demonstrate that the advanced legal institutions of the EU and the US cannot protect foreign investors before any ISDS is considered in the TTIP.

55. Should ISDS provisions be included in TTIP, we believe that the following conditions will need to be necessary:

·  the inclusion of clauses to dismiss frivolous claims;

·  the exclusion of any clauses which would require the State to pay in all outcomes and a presumption that the loser should pay; and

·  the inclusion of a statement the right to regulate by Sovereign Nations take precedence over an investors right to invest is placed at the heart of ISDS provisions.

56. We are deeply concerned by the Minister's statement that there will not be any formal response by the Government to the European Commission's consultation on ISDS with Member States. It does not give the impression that the Government is treating seriously the concerns that have been raised about the range or use of such clauses and serves only to fuel the existing scepticism held by opponents of TTIP. It also has the potential to leave the UK on the margins of any debate to better frame ISDS negotiations. We recommend that the Government produces a formal response to the consultation exercise and for it to be published at the same time it is submitted to the European Commission.

37   Q368 Back

38   Q111 Back

39   Q197 Back

40   Q197 Back

41   See evidence from 38 Degrees and World Development Movement, etc. Back

42  Back

43  Back

44 page 4 Back

45 page 4 Back

46   Q265 Back

47   Q32 Back

48   Q34 Back

49   Q272 to 276  Back

50   Q49 Back

51   Q278 Back

52   Oral Evidence taken by the European Scrutiny Committee on Thursday 26 February, Q63  Back

53   BritishAmerican Business, TTI13 Back

54   Q377 Back

55  Back

56   BritishAmerican Business (TTI13 ) Back

57   Q285 Back

58   Q44 Back

59   Q207 Back

60  Back

61   Q294 Back

62   BritishAmerican Business (TTI13 ) Back

63   Q385 Back

64   Q387 Back

65   Q377 Back

66   Q388 Back

67  Back

68   Keep our NHS Public (TTI09) Back

69  Back

70   Q389 Back

71   Q316 Back

72   Q328 Back

73   Q369 Back

74   Q365 Back

75   Q369 Back

76   Oral Evidence taken before the European Scrutiny Committee on 26 February 2015 HC (2014-15)1084 Back

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Prepared 25 March 2015