EU commission ISDS proposal a threat to democracy and civil rights

FFII | 20 September 2015

EU commission ISDS proposal a threat to democracy and civil rights

Ante Wessels

The European Commission has published its investor-to-state dispute settlement (ISDS) reform proposal for the EU-US trade agreement under negotiation (TTIP).


The commission’s proposal institutionalises discrimination. It gives foreign investors – and only foreign investors – the right to exit domestic legal systems and use supranational adjudication to challenge government decisions. Supranational adjudication places the development of law outside democratic oversight.

On the positive side, the proposal removes a relic: unfair procedural advantages for the United States. However, the proposal contains a loophole and fails to protect policy space.

The proposal would create perverse incentives. The adjudicators would be paid per day worked, without prohibition on outside remuneration. This creates perverse incentives to give foreign investors value for money as only foreign investors can start cases. The proposal doesn’t provide certainty that this will ever change.

Societies have to be able to change course, for instance to reform copyright or to effectively protect privacy. The proposal would place (for-profit) supranational investment adjudicators above democracies. The adjudicators would assess whether democratic decisions are arbitrary from a foreign investment protection point of view. This creates major risks for democracies and civil rights.

Furthermore, the commission undermines any possible positive element in its reform proposal as it intends to add old ISDS to the trade agreements with Canada and Singapore, giving foreign investors the possibility to route their investments into the EU through these countries.

The right approach is to improve weak aspects of domestic legal systems. This provides equal access to the law and doesn’t remove democratic oversight of the development of law. Investors can take out political risk insurance for additional certainty.


Appeal tribunal

The proposal adds an appeal tribunal. This may give more transparency and consistency, but does not take out inherent issues, such as the development of law taking place outside democratic oversight, and specialised adjudication having a natural tendency to become expansionist.

Outside democratic oversight

Supranational adjudication places the development of law outside democratic oversight. It lacks a legislative feedback loop – democracies’ ability to change rules that do not work out well. It lacks workable instruments to correct expansive interpretations of investors rights which limit states’ policy space.

Lock in

The commission’s proposal would lock in the EU and member states. Unlike EU member states’ stand alone investment treaties, it is practically impossible to withdraw from trade agreements, and renegotiating them takes the consent of all the other parties involved.

Perverse incentives

Specialised adjudication has a natural tendency to become expansionist. In addition, the adjudicators will be paid for their task at least 3000 US dollar for each day worked (page 18, article 9(14) refers to ICSID rules). This creates perverse incentives to accept frivolous cases, let cases drag on, let the only party that can initiate cases (foreign investors) win to stimulate more cases.

The retainer fee and other fees and expenses may be permanently transformed into a regular salary (page 18, article 9(15)). This would take out the perverse incentives. However, there is no certainty this will ever happen. Such a change takes the consent of the other parties. A party may opt to continue to be an investment routing hub by not agreeing with this change. Investments routed through this country would continue to benefit from the perverse incentives.

It is also uncertain how the tribunals’ case law would look like – how our societies would look like – by the time the perverse incentives are removed, if that ever happens.


The proposal obscures the most favoured nation (MFN) loophole. ISDS arbitrators import clauses from other, including older, treaties. This way improvements in newer treaties are lost. In the EU-Canada trade agreement (CETA) text the commission solved this for procedural rules, but not for substantive rules.

The ISDS reform proposal for TTIP refers to an MFN chapter which is not included in the published text. The commission does not report a change; we have to assume that the loophole would still be available.

The CETA textpage 156, article X.7.4 excludes ISDS procedures provided for in other international investment treaties and other trade agreements. However, the exclusion of substantive obligations contains the condition “absent measures adopted by a Party pursuant to such obligations”. This creates a risk that the (for-profit) adjudicators would interpret local laws as implementations of treaty obligations, and use the old very open investment treaties. This way substantive improvements would be lost.

See commission proposal, page 11, article 1 and page 9, ANNEX II: Public debt, point 2 for the references to an MFN chapter.

Right to regulate

Commission proposal, page 3, article 2(1) formulates a right to regulate:

“The provisions of this section shall not affect the right of the Parties to regulate within their territories through measures necessary to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity.”

The formulation is very weak. The article 2(1) language, “shall not affect” is a non-legal formulation, merely expressing the hope that ISDS will not affect policy space. The (for-profit) adjudicators could argue that paying damages afterwards does not preclude adopting legislation before that, does not affect the right of the Parties to regulate. They can comfortably overlook chilling effects. Furthermore, article 2.1 contains the condition: “necessary to achieve legitimate policy objectives”. This gives the adjudicators intrusive discretionary power.

Compare the article 2(1) language with article 2(3) “shall not constitute a breach of the provisions of this Section”. This is much stronger.

Intellectual property

Copyright and patent law need reform. International agreements, like the TRIPS agreement, limit policy space. Expansive interpretation of international treaties would further limit our policy space.

The commission proposal contains a broad definition of investment which includes intellectual property rights (patents, copyright, etc; page 1 and 2 (x2, g)). Page 5, article 5 includes indirect expropriation.

Article 5(6) reads:

“This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, to the extent that such issuance is consistent with the Agreement on Trade-Related Aspects of Intellectual Property Rights in Annex 1C to the WTO Agreements (‘TRIPS Agreement’).”

This would give supranational (for-profit) investment adjudicators discretion to interpret and decide on compliance with the TRIPS agreement (while the WTO has its own (state-state) dispute settlement mechanism). This changes the dynamic, as private parties have less constraint than states in starting cases. And there is a difference between seeing intellectual property rights as innovation stimulants and seeing them as assets.

Article 5(7) reads:

“For greater certainty, the revocation, limitation or creation of intellectual property rights to the extent that these measures are consistent with TRIPS and Chapter X (Intellectual Property) of this Agreement, do not constitute expropriation. Moreover, a determination that these actions are inconsistent with the TRIPS Agreement or Chapter X (Intellectual Property) of this Agreement does not establish that there has been an expropriation.”

This would give supranational investment adjudicators discretion to interpret and decide on compliance with TRIPS and Chapter X (Intellectual Property). Inconsistency would, in itself, not establish expropriation, but could establish expropriation if conditions in ANNEX I: Expropriation (page 9) are not met, for instance “legitimate public welfare objectives”, or if measures are deemed “manifestly excessive” (point 3).

Moreover the exceptions only relate to expropriation, not to the fair and equitable (FET), national, and most favoured nation treatment standards.

See also Sean Flynn, “How the Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions” and “TTIP Stakeholder Statement: Protect IP from ISDS“.


For the effect ISDS may have on privacy see section 3.1.1 Privacy of the FFII submission to the EU commission’s consultation on investor-to-state dispute settlement (ISDS).

Further remarks

Fair and equitable treatment

Commission proposal, page 4, article 3 contains the often abused FET standard. Article 3(4): a specific representation does not have to be in writing, this opens the possibility to start cases based on oral promises.

Stabilisation clause

Commission proposal, page 3, article 2(2):

“For greater certainty, the provisions of this section shall not be interpreted as a commitment from a Party that it will not change the legal and regulatory framework, including in a manner that may negatively affect the operation of covered investments or the investor’s expectations of profits.”

A change of law itself would no (longer) be ground for damages. However, a discriminatory or manifestly arbitrary change of law could still be ground for damages under FET, expropriation, national treatment, or most favoured nation treatment.

Umbrella clause

Commission proposal, page 7, article 7, “Observance of written commitments” is a so called umbrella clause. It gives the adjudicators competence to rule over contracts.

Massive claims

Presently one percent of US investments in the EU are covered by ISDS; this led to nine cases. Adding the commission’s proposal to a trade agreement with the US would extend coverage to 100 percent of US investments, this can lead to lots of cases. The highest award up till now is 50 billion dollar.

Public debt

Commission proposal, page 9, Annex II on public debt limits states’ ability to default and gives creditors leverage as the exception is conditional. This may prejudice the eurozone’s ability to solve financial crises.

Page 16, article 7(1): automatic consent to arbitration.

Page 20, article 11:

“The Judges of the Tribunal and the Members of the Appeal Tribunal shall be chosen from persons whose independence is beyond doubt.”

However, the proposal itself creates perverse incentives and specialised adjudication has a natural tendency to become expansionist.

Page 21, article 13(2) mentions

“and other rules of international law applicable between the Parties”

This may open the door to investment adjudicators interpreting all kind of treaties and possibly adding enforcement to treaties without (strong) enforcement themselves – but only for the benefit of foreign investors.

Page 21, article 13(5) mentions binding interpretations. However, arbitration tribunals did not always follow such binding interpretations. They are the final instance.

source: FFII