3 Investor State Dispute Settlement |
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.
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 ISDSalready
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
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".
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.
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.
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.
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,
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
· the relationship between domestic judicial
systems and ISDS; and
· the review of ISDS decisions through an
The Commission concluded that this further consultation
would help it develop "concrete proposals for the TTIP negotiations".
ARE ISDS PROVISIONS NECESSARY?
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.
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?
Frances O'Grady concluded by saying that the simple
approach would be to "scrap" ISDS.
According to Allie Renison, the IoD would also support a trade
deal without ISDS clauses.
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.
Elisabeth Roderburg, speaking for BritishAmerican Business, said
her organisation had not "taken a stand" on ISDS.
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.
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".
The Minister confirmed this position when he gave evidence to
us: "ISDS can only be about compensation; it can be about
What should be included in ISDS
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.
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
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.
37. The IoD said that it was "one area that
they are looking at under the areas they have identified for reform
of ISDS", while
Sean McGuire from the CBI said that his organisation "could
look at the possibility of making a loser pay principle for an
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
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".
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".
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.
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".
42. We recommend that should ISDS provisions be
included in TTIP, that they include clauses to remove frivolous
RIGHT TO INVEST VS RIGHT TO REGULATE
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
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.
He went on to say that assertions that TTIP would
force publicly provided services into the private sector were
NHS AND PUBLIC SERVICES
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.
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".
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,
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.
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.
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.
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.
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 servicesincluding
the NHSwill 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 presentand the right to expand
them in the futureis 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
European Commission consultation
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",
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".
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.
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".
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
· 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
See evidence from 38 Degrees and World Development Movement, etc. Back
page 4 Back
page 4 Back
Q272 to 276 Back
Oral Evidence taken by the European Scrutiny Committee on Thursday
26 February, Q63 Back
BritishAmerican Business, TTI13 Back
BritishAmerican Business (TTI13 ) Back
BritishAmerican Business (TTI13 ) Back
Keep our NHS Public (TTI09) Back
Oral Evidence taken before the European Scrutiny Committee on
26 February 2015 HC (2014-15)1084 Back