10 reasons why Europe and America DO NOT need business v state dispute rules

Alarm bells on ISDS are ringing this loud for a reason: ISDS allows foreign firms to bypass domestic courts and sue governments (hence citizens, through taxes) directly in private trade tribunals if they feel that a government’s action can unfairly diminish future returns on their investments.

Until recently, ISDS provisions mostly featured in bilateral state-to-state investment treaties, and were designed to offer investors protection from actions by governments in countries with legal systems perceived to be poorly developed.

The European Commission has never finalised a trade agreement between the EU and third countries with ISDS. Currently 19 out of 28 EU member states, representing 93% of the EU economy, do not have ISDS provisions with the US. The nine [2] that do only cover 7% of the EU’s GDP.

To date there are nine known claims in the EU-US relationship, all led by US investors. The majority of the claims involve investment in the primary sector: oil, gas and mining. [3]

In its consultation the European Commission is trying to make ISDS look a bit more acceptable by changing a few things here and there as to how proceedings would works. In our submission we point out why none of these changes addresses any of the fundamental flaws of the system.

For clarity’s sake, here’s our top-10 reasons why excluding ISDS from TTIP is the only right way forward.

1. ISDS introduces the ‘fright to regulate’ which is bad for people and the planet. The all-encompassing result of the flaws of the ISDS system – outlined further below – is that governments will feel a sword of Damocles hanging over their heads when they plan public-interest regulations on companies. The European Commission’s argument that nothing in ISDS affects the ‘right to regulate’ is beside the point. The threat of a costly legal dispute with a very uncertain outcome will act as a deterrent for many governments to protect citizens or the environment.

2. ISDS uses citizens’ money to bail out corporations for risky investments: In total TTIP would enable 75,000 companies to seek damages from EU and US governments (hence citizens, through taxes). [4] Although ISDS became a regular feature of investment treaties in the 1960s, claims have ballooned over the past decade: 57 known new cases were launched in 2013 alone.

3. ISDS grants special rights to foreign investors over everybody else. Only foreign investors can use ISDS panels; domestic ones, let alone normal citizens, have to keep using the regular legal system.

4. ISDS upsets legal systems, introducing arbitration on legislation. Dispute settlement systems in normal treaties seek to resolve conflicts directly related to the treaty. ISDS, in contrast, allows companies to sue government for any legislation they deem unfair or inequitable that is developed after the treaty; effectively introducing arbitration on legislation. ISDS does not even require ‘exhaustion of local remedies’ – further undermining democracy and the rule of law. ISDS is not intended as a last resort should all other legal routes fail; it is explicitly designed to take place outside the normal legal systems.

5. ISDS is not bound to legal precedent, ignoring the ABC of international law and introducing further uncertainty: The lack of case law in ISDS has led to inconsistent arbitral decisions with different legal interpretations of identical or similar treaty provisions, further increasing uncertainty and fear referred to in point 1.

6. ISDS is the only international dispute settlement giving rights to corporations instead of states: Dispute settlement procedures in other international treaties are state-state – even the World Trade Organisation dispute settlement is state-state.

7. EU-level ISDS has never been impact-assessed:  ISDS is a new EU level policy that can result in billions of euros flowing from EU citizens to foreign corporations in the future. Despite this, the European Commission has not bothered to prepare an impact assessment on it, in dire contradiction with its own guidelines, [5] and just started to insert it in trade agreements it started to negotiate after the Lisbon treaty.

8. ISDS proceedings take place out of the public eye: ISDS cases are held behind closed doors and are fully confidential, even if cases being disputed involve matters of public interest.

9. ISDS is unnecessary. Even almost without ISDS, the EU and US already trade gargantuan volumes: Both blocs barter around €1.6 billion ($2.2 billion) [6] in goods and services every day, with more than €2.6 trillion ($3.5 trillion) in two-way direct investment per year [7] – all this with only one-third of EU countries (or 7% of EU’s GDP) covered by ISDS. Apparently investors already place significant trust in the regular legal systems.

10. Better alternatives exist: whereas ISDS is a subsidy, from the public purse, for activities at risk from tighter regulations, risk insurance is offered by a host of private providers but also for example by the Multilateral Investment Guarantee Agency (a division of the World Bank) and others. [8]

These 10 flaws are so intrinsic to the very system of ISDS that a reform – as proposed by the European Commission – simply cannot address them.

Europe needs to follow the lead of countries like Australia, Brazil and India, and ditch ISDS instead of imposing it to the 93% of the EU economy that has so far deemed it unnecessary.

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