FFII | 21 December 2016
Multilateral investment court would impede measures on climate change
By Ante Wessels
DRAFT
The EU commission has launched a consultation on a multilateral investment court (MIC). This short note is the attachment to my draft submission. This note is public domain. (Blog, PDF)
Mankind faces an existential threat: climate change. The data is disconcerting and shows our societies are not on top of the issue. Further reforms are needed; some of these reforms will harm vested interests. This note argues that a multilateral investment court, in contrast with domestic law systems and the European human rights system, would give investors too generous possibilities to claim compensation. This would make reforms more or even too expensive, cause regulatory chill, and thus impede measures on climate change. 1
A multilateral investment court would lock in greater exposure, larger scope and the “highest possible level of legal protection and certainty”. Furthermore, due to inherent systemic issues with specialised and supranational courts a multilateral investment court would create a high risk on expansive interpretations of investors’ rights.
A multilateral investment court would strengthen investments vis-à-vis democracy and fundamental rights. This undermines our values and ability to respond to crises.
Table of Contents
1 “Highest possible level of legal protection and certainty”
2 Specialised courts tend to interpret expansively
3 Development of supranational investment protection outside of democratic scrutiny
4 Greater exposure and scope
5 Lock in
6 Continued influence of special interests
7 European Convention on Human Rights
8 Conclusion
1 “Highest possible level of legal protection and certainty”
The EU commission intends to give foreign investors the highest possible level of legal protection and certainty. The multilateral investment court would operate on existing bilateral investment treaties and future agreements like the EU trade and investment agreements with Canada, Singapore, and Vietnam. 2
The existing investment treaties are mostly very open. Investor-to-state dispute settlement (ISDS) tribunals have expansively interpreted “nearly every provision found in investment treaties”. 3 Tribunals even went beyond levels of protection offered by domestic courts. 4 5
The future EU agreements will provide a similar level of protection. 6 The EU-Canada CETA mandate stipulates “the highest possible level of legal protection and certainty”. 7 The mandate for the EU-US TTIP aims at the “highest standards of protection that both Parties have negotiated to date”. 8
The proposals for EU trade and investment agreements codify expansive interpretations. For instance, regarding the fair and equitable treatment standard, arbitrator Todd Weiler said:
“I love it, the new Canadian-EU treaty… we used to have to argue about all of those [foreign investor rights]… And now we have this great list. I just love it when they try to explain things.” 9
Over 110 scholars commented in a joint submission to a consultation that this approach may have very little effect on expansive interpretations. 10 Over 100 law professors criticised the “vague substantive standards” in the EU-Canada CETA trade agreement text and stated:
“Investment protection constitutes a subtle shift of power towards individual and already influential commercial actors as it weakens the consideration of public interests and restricts democratic change.”
On regulatory chill they noted:
“This could in turn lead to a regulatory chill, as governments might refrain from regulatory measures in the public interest due to the threat of investment arbitration and the high damages it entails. Under existing treaties, investors have used this leverage to effectively interfere in democratic policy changes. This problem is not to be underestimated, as poor and wealthy countries alike have proven to be susceptible to this pressure.”
Furthermore, the right to regulate clause in proposed EU treaties is ineffective. A government has the right to regulate and to change the legal and regulatory framework, but the clause does not protect against unlimited backward looking damages including expected profits and interests. 11 This approach avoids neither making reforms more or even too expensive, nor regulatory chill. The EU-Canada CETA interpretative instrument, which was added before signing, does not change this. 12 13
2 Specialised courts tend to interpret expansively
The EU commission’s proposal creates a high risk on expansive interpretations of investors’ rights. Justice Heydon noted that specialist courts and tribunals
“tend to become over-enthusiastic about vindicating the purposes for which they were set up”.
The developments regarding patents provide a clear example. Specialised courts and chambers have interpreted patent rules expansively. Brian Kahin wrote regarding developments in the US:
“The Federal Circuit quickly became a champion of its specialty, making patents more powerful, easier to get, harder to attack, and available for a nearly unlimited range of subject matter.”
The European Patent Office’s boards and boards of appeal caused a similar development in Europe. 14 Investor-to-state dispute settlement provides an other example of expansive interpretations:
“widespread expansive interpretations of nearly every provision found in investment treaties”. 3
Furthermore, WTO dispute settlement tribunals have encroached on the public interest. 15 Note that mandates stipulating the highest possible level of legal protection and certainty legitimise expansive interpretations and so risk strengthening the expansive tendency of a specialised court.
3 Development of supranational investment protection outside of democratic scrutiny
The supranational level lacks effective instruments to correct expansive interpretations. In contrast, states do have these instruments. The US is dealing with the expansive interpretations of the Federal Circuit court (noted in the section above) in two ways. US Congress took legislative steps and the Supreme Court stepped in to reverse the patentability of software. Both instruments to correct expansive interpretations – legislative process and general supreme court – are not available at the supranational level. Supranational courts fall outside of democratic scrutiny. As a result the development of supranational investment protection would fall outside of democratic scrutiny.
It would also fall outside of supreme court scrutiny. An MIC would perpetuate the unfairness of investor-to-state dispute settlement: foreign investors – and only foreign investors – have the right to bypass domestic legal systems and have, depending on interpretation, greater substantive rights 4, without correspondingly actionable responsibilities. 16 The rights of others are not guaranteed, including their fundamental rights. Referring to guaranteeing the full legal rights of others, the German Magistrates Association noted regarding the (earlier) ISDS / Investment Court System text:
“The creation of special courts for certain groups of litigants is the wrong way forward.”
Josef Drexl’s remarks on a Unified Patent Court are relevant for an MIC as well. He mentions that the US Supreme Court stepped in to reverse the Federal Circuit court’s expansionist interpretation and notes that specialised patent law courts may be weak in taking into account the broader societal implications of patent protection and therefore be more likely to develop a pro-patent bias. He warns against placing the Unified Patent Court outside of the EU legal order:
“This is of particular concern in the case of the Unified Patent Court, which will have to convince patent applicants and patent owners to opt into the new system especially during the first years of its existence. In the light of such risks, and especially in the light of the need to guarantee full respect of the fundamental rights, to prevent the CJEU from interpreting the rules of the UPC Agreement could easily amount to a mistake of historic dimensions.” 17
Both issues – have to convince litigants to opt into the new system especially during the first years of its existence and the need to guarantee full respect of the fundamental rights of others – are relevant for an MIC as well. The MIC will have to compete with domestic courts in attracting foreign investors.
The supranational level only has limited instruments to reverse expansive interpretations. The parties to an agreement can change the agreement or issue an interpretative declaration. These approaches, however, take the consent of all parties. Moreover, NAFTA’s interpretative declaration did not stop expansive interpretations. 13
The development of supranational investment protection would fall outside of democratic scrutiny; an MIC would not guarantee full respect of fundamental rights. A multilateral investment court would strengthen investments vis-à-vis democracy and fundamental rights. This undermines our values and ability to respond to crises.
4 Greater exposure and scope
A multilateral investment court would, in combination with new (trade and) investment agreements, expand exposure as it would expand coverage of foreign investments. 18 Furthermore, in cases based on EU (trade and) investment agreements, the MIC’s judgments would also include EU decisions. Investors would be able to claim damages based on EU-wide expected profits. These can be prohibitively high; this would undermine the independence of EU authorities. The inclusion of EU decisions is also important for intellectual property rights 19 and data protection 20.
5 Lock in
In contrast to existing investment treaties, EU trade and investment agreements and a multilateral investment court agreement would lock in EU and member states. EU member states ratified stand-alone investment treaties. States can withdraw from them, or renegotiate them. The possibility of doing the former gives leverage to do the latter. Governments, harmed by their investment treaties, can act. An interesting option is to first rewrite a treaty with mutual consent to remove the treaty’s afterlife (sunset clause), and then withdraw from it.
In contrast, EU member states can’t withdraw from agreements concluded by the EU. In addition, we cannot expect the EU to withdraw from these agreements. The EU will be locked into the highest possible level of legal protection and certainty. The court would be able to provide expansive interpretations and maximise its power, as long as it doesn’t act so outrageously that the EU withdraws from the agreement.
6 Continued influence of special interests
Offensive interests – the interests of investors – have frustrated meaningful reform of investor-to-state dispute settlement. EU and member states’ proposals, such as the earlier Investment Court System proposal, were insufficient. 21 We can expect the influence of special interests to continue and to weaken the multilateral investment court’s design and functioning.
An instrument the parties to a multilateral investment court agreement would have is vetting the judges they appoint. The EU won’t have influence on the judges other parties nominate / appoint. 22 In other parties climate change denialists may be in power. Furthermore, within the EU, and especially in trade departments, offensive interests play a major role. This would have an effect on vetting judges. ISDS arbitrators, responsible for expansive interpretations, may reappear as MIC judges / “judges”. 23 24
7 European Convention on Human Rights
In contrast to an MIC, the European Convention on Human Rights leaves states a wide margin of appreciation. This gives states better possibilities to respond to a crisis. 25
8 Conclusion
A multilateral investment court would lock in greater exposure, larger scope and the “highest possible level of legal protection and certainty”. Furthermore, due to inherent systemic issues with specialised and supranational courts a multilateral investment court would create a high risk on expansive interpretations of investors’ rights. It would make reforms more or even too expensive, cause regulatory chill, and thus impede measures on climate change.
A multilateral investment court would strengthen investments vis-à-vis democracy and fundamental rights. This undermines our values and ability to respond to crises.
Footnotes:
1 An MIC does not solve the issues mentioned by Van Harten, An ISDS Carve-out to Support Action on Climate Change, page 3.
2 Inception Impact Assessment, option 5, page 6; See also Discussion paper Establishment of a multilateral investment dispute settlement system, section 3.1.
3 Statement of Concern signed by over 110 scholars; Since this statement, the material provisions did not change substantively; Statement of Concern about Planned Provisions on Investment Protection and Investor-State Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP) (see section General assessment)
4 Two examples. First, the Dutch Raad van State’s Administrative Jurisdiction Division (Netherlands’ highest general administrative court) is very restrictive regarding legitimate expectations; see for instance decision 201113437/1/R2, 20 juni 2012. In contrast, ISDS tribunals have interpreted legitimate expectations in a broad way. Lise Johnson and Lisa Sachs, The TPP’s Investment Chapter: Entrenching, rather than reforming, a flawed system; page 5, on the Bilcon award: “Under that approach, a tribunal identifies what it considers to be reasonable or legitimate expectations – which may have been generated by a wide range of even non-binding government conduct and need not rise to the level of actual ‘rights’ – and then strictly scrutinizes government actions or inactions to determine whether the investors’ expectations were wrongly frustrated”. Secondly, enforcement agencies have limited resources. They have discretionary power: they are allowed to act in some cases and skip others. ISDS tribunals have seen the exercise of such discretionary power as discrimination. This undermines the effectiveness of enforcement agencies. See, idem, page 9. See also Gus Van Harten, Matthew C. Porterfield, Kevin P. Gallagher, Investment Provisions in Trade and Investment Treaties, The Need for Reform.
5 As an example of the relationship between changes to the regulatory environment and investment protection under existing treaties, see Roger Alford, Brexit and Foreign Investors’ Legitimate Expectations.
6 Also note the most favoured nation clause; Van Harten: “Another example of ambiguity in the CETA arises in Article 8.7(4), which gives foreign investors a right to ‘most-favoured-nation’ (MFN) treatment. As framed in the CETA, this ‘me too’ clause may potentially be used to import into the CETA, from other investment treaties of an EU member state or Canada, foreign investor rights that are even broader than those in the CETA.”
7 CETA mandate paragraph 26a
8 TTIP mandate paragraph 22
9 Quoted by Public Citizen, page 1; video at CATO institute
10 Statement of concern, answer to question 3.
11 For the EU-US TTIP proposal, see Van Harten, page 4; FFII, section 2.1 Ineffective right to regulate; S2B, section The “right to regulate” has not been preserved. The EU commission vacated the right to regulate in the proposed trade agreements with Canada and Vietnam. See also Transport & Environment and ClientEarth, Comprehensive Economic and Trade Agreement (CETA) and the environment, page 18.
12 See Van Harten and The Council of Canadians.
13 The CETA interpretative instrument is much less precise than the NAFTA interpretative declaration, which did not stop expansive interpretations. Compare the NAFTA interpretative declaration with Lise Johnson and Lisa Sachs, page 5, on the Bilcon award.
14 David Kappos, after the US Supreme Court stepped in to reverse the development: “You can get software patents allowed in both China and Europe that aren’t allowable in the US anymore.” Software patents despite the exclusion of programs for computers as such from patentability under the European Patent Convention, article 52.
15 Public Citizen, Only One of 44 Attempts to Use the GATT Article XX/GATS Article XIV “General Exception” Has Ever Succeeded: Replicating the WTO Exception Construct Will Not Provide for an Effective TPP General Exception; see also K. Irion, S. Yakovleva and M. Bartl, Trade and Privacy: Complicated Bedfellows? How to achieve data protection-proof free trade agreements
16 See, for instance, Van Harten, ISDS in the Revised CETA: Positive Steps, But is it the ‘Gold Standard’?; Over 100 law professors, Legal Statement on investment protection and investor-state dispute settlement mechanisms in TTIP and CETA; and Over 220 Law and Economics Professors, letter to US Congress. The right approach is to improve weak aspects of domestic legal systems. Domestic legal systems can combine equal access to the law with democratic scrutiny of the development of law. Investors are not obliged to invest in countries with weak legal systems. This may create an incentive for states to improve their legal system. Further alternatives are contracts, state-state arbitration and insurance. The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, offers insurance for political risks. If problems arise, they are very effective in settling them. This approach does not have any of the problems an MIC would have. Companies can also take out commercial political risk insurance. Also note the related “The consultation document comes up with one additional argument: that the rights each party grants to its own citizens and companies ‘are not always guaranteed to foreigners and foreign investors.’ The claim is unsubstantiated. Even if it is accepted, there is no obvious reason why the incorporation in TTIP of a simple norm of non discriminatory legal protection and equal access to domestic courts could not address the problem perfectly adequately.” (Statement of Concern, General assessment)
17 quoted at FFII
18 As an example, current agreements between the US and EU member states cover only 1 percent of the total US FDI stock in the EU (UNCTAD).
19 See Sean Flynn, TTIP Stakeholder Statement: Protect IP from ISDS; Sean Flynn, How the Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions; Pratyush Nath Upreti, Can Investors Use the Proposed Unified Patent Court for Treaty Shopping?; IAReporter, Investigation: As Colombia Pushes for Cancer Drug Price-Cut and Considers Compulsory Licensing, Novartis Responds with Quiet Filing of an Investment Treaty Notice; Peter K. Yu, The Investment-Related Aspects of Intellectual Property Rights. Note the article overlooks arbitrator bias and unfair procedural advantages for the US (page 50), the weaknesses in TPP’s “right to regulate” clause (page 24) (compare Van Harten, page 7), and uses old damages numbers in footnote 102 (compare Van Harten, pages 2-6); FFII, section 3.1 Intellectual property; FFII, EU commission goes into denial mode regarding effect ISDS on software patents; FFII, UPC and ISDS: who would have to pay the damages awards?
20 FFII, Broken data protection in EU trade agreements, section 5
21 See for instance the statement by over 100 law professors; German Magistrates Association, Opinion on the establishment of an investment tribunal in TTIP; and European Association of Judges, Statement from the European Association of Judges (eaj) on the proposal from the European Commission on a new Investment Court System.
22 On nomination and appointment see options in Discussion paper, section 3.5.
23 The Discussion paper mentions “previous experience in international investment law”, paragraph 33.
24 Associations of judges (one, two) noted that the earlier Investment Court System proposal (used in EU-Canada CETA and other FTA proposals) is not compatible with the Council of Europe’s Magna Charta of Judges.
25 Under the European Convention on Human Rights (ECHR) the right to property is enshrined in article 1 of Protocol 1: “Protection of property (1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. (2) The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.” (emphasis added) The formulation “as it deems necessary” gives the member states a wide margin of appreciation. As a human rights court, the European Court of Human Rights will also be aware of the effects its decisions may have on other human rights. In contrast to the European human rights system, the commission’s MIC proposal (a) does not require exhaustion of local remedies, (b) does not provide access to the mechanism for all, but only to foreign investors, (c) does not guarantee full respect of fundamental rights (d) provides wide discretion to supranational adjudicators, (e) does not provide a wide margin of appreciation to states, (f) perpetuates the unfairness of ISDS, and (g) provides unlimited backward looking damages including expected profits and interests. For the “right to regulate”, see the main text.
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