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C. Explanatory memorandum by Mr Geraint Davies,
rapporteur for opinion
(open)
Committee Opinion | Doc. 14255 | 25 January 2017
Human rights compatibility of investor–State arbitration in international investment protection agreements
Committee on Social Affairs, Health and Sustainable Development
A. Conclusions of the committee
(open)The Committee on Social Affairs, Health and Sustainable Development has examined the report prepared by the Committee on Legal Affairs and Human Rights. It has a number of reservations with regard to the merits of the proposed Investment Court System (ICS), which is meant to gradually replace the Investor–State dispute settlement (ISDS) clauses in the “new generation” of trade agreements involving European countries and eventually also in the “older” trade and investment treaties. In the view of the Social Affairs Committee, the proposed ICS does not remove many of the central problems inherent in the ISDS system.
The committee considers that the main danger of the Investor–State arbitration systems in both ISDS and ICS is that investor rights “to make a profit” tend to prevail over public policies protecting human rights, in particular social rights such as workers’ rights, and protection of public health and the environment. Unlike the proposed investment protection provisions in the “new generation” trade agreements which have the enforcement mechanism through the proposed ICS, States’ policies to protect the public interest have no equivalent mechanism and could be trumped by the proposed ICS, the successor of ISDS.
The committee considers both ISDS clauses and a permanent, multilateral ICS as unnecessary in developed countries such as the United States, Canada and member States of the European Union as foreign investors are already protected by existing public and contract law. It therefore puts forward a series of amendments intended to reflect its conclusions in the draft resolution presented by the Committee on Legal Affairs and Human Rights.
B. Proposed amendments
(open)Amendment A (to the draft resolution)
At the end of paragraph 3, add the following sentence:
“However, foreign investors in the European Union are already protected in three ways – by the European Court of Human Rights, European law and domestic law.”
Amendment B (to the draft resolution)
At the end of paragraph 4, add the following sentence:
“However, the European Court of Human Rights and European law also protect foreign investors in Europe and no cases have occurred where these, alongside domestic contract and public law, have allowed discriminatory practices against inward investors.”
Amendment C (to the draft resolution)
At the end of paragraph 5.1, add the following sentence:
“, but the primary investor in the vast majority of these cases has been the European Union in smaller third countries that do not have the triple-lock investor protection of the European Court of Human Rights, European law and domestic contract and public law;”
Amendment D (to the draft resolution)
At the end of paragraph 5.2, add the following sentence:
“the parties do not normally have the right of appeal, the tribunals can be inconsistent in their verdicts and may not respect the doctrine of precedent;”
Amendment E (to the draft resolution)
At the end of paragraph 5.3, add the following sentence:
“. There is a number of competing arbitration systems that have not had the benefit of transparent iterative evolution like the delivery of justice in public law in mature democracies;”
Amendment F (to the draft resolution)
At the end of paragraph 5.4, add the following sentence:
“. However, international trade between the European Union, Canada and the United States is well established with existing protections;”
Amendment G (to the draft resolution)
After the first sentence in paragraph 6.1, insert the following sentence:
“However, foreign investors in Europe are already protected – by the triple-lock system of the European Court of Human Rights, European law and domestic law. The proposed ICS”
Amendment H (to the draft resolution)
At the end of paragraph 6.1, add the following sentence:
“Once implemented, such arrangements would persist for twenty years without being open to change or improvement by the European Parliament or member States, irrespective of whether judgments and financial penalties were in conflict with the imperatives of public health, environmental sustainability and rights at work;”
Amendment I (to the draft resolution)
At the end of paragraph 7, add the following sentence:
“However, the Assembly considers that, in developed countries such as the United States, Canada and member States of the European Union, ISDS clauses and a permanent, multilateral ICS are unnecessary to protect foreign investors.”
Amendment J (to the draft resolution)
In paragraph 8, at the end of the third sentence, add the words:
“which should be limited to a reasonable time frame”.
Amendment K (to the draft resolution)
Reformulate paragraph 9 to read as follows:
“The Assembly therefore calls on the European Union not to pursue, in their ongoing and future negotiations of international investment agreements with developed countries, including the Transatlantic Trade and Investment Partnership (TTIP), the establishment of an ICS to gradually replace traditional ISDS mechanisms. It regrets the inclusion of the ICS in the recently signed Comprehensive Economic and Trade Agreement (CETA) with Canada. CETA and TTIP must only be agreed if they are in line with human rights and the rule of law, and should in particular:”
Amendment L (to the draft resolution)
At the beginning of paragraph 9.1, insert the following words:
“ensure that legal proceedings around investment continue to”
Amendment M (to the draft resolution)
In paragraph 9.2, replace the words “such human rights as the” with the words:
“human rights, including social rights,”
Amendment N (to the draft resolution)
Reformulate paragraph 10.1 to read as follows:
“in the creation of an ICS, ensure that the above human rights and rule of law considerations are fully taken into account and that the final judgments of the existing system of public and commercial law consistent with European Court of Human Rights and European law are promptly and fully implemented at the national level;”
Amendment O (to the draft resolution)
Reformulate paragraph 10.5. to read as follows:
“review whether any existing ISDS clauses in international investment agreements that they have entered into are eligible for change and if so, assess their appropriateness and bring them into line with the best practices foreseen for the future ICS.”
C. Explanatory memorandum by Mr Geraint Davies,
rapporteur for opinion 
(open)1. The report submitted to the
Parliamentary Assembly by the Committee on Legal Affairs and Human Rights
mainly reviews the various flaws and drawbacks in the ISDS mechanism,
making proposals for improvements to the future ICS so as to safeguard
human rights and the rule of law. I see many problems with regard
to the proposed ICS.
1. ICS: is it necessary?
2. First and foremost, I believe
that there is no need for creating the proposed ICS because domestic
and European Union law already creates an environment in which investors
can do business subject to consistent, just, and predictable laws.
For example, property is already protected from uncompensated and/or unreasonable
expropriation by the domestic law, European law and the European
Convention on Human Rights (ETS No. 5, “the Convention”) (Protocol
No. 1 (ETS No. 9). Moreover, all individuals are protected from discrimination
by domestic law, European Union law and the Convention. The existing
protections can be enforced in national and European Union courts
and before the European Court of Human Rights by foreign investors
in the same way as they can be by the citizens of the State.
3. Creating a separate level of law, accessible only to foreign
investors, is only necessary if the objective is to give foreign
investors different rights compared to citizens. The architects
of ISDS/ICS have yet to identify what aspects of domestic/EU/Court
law are deficient, how the proposed treaty provisions will remedy
those deficiencies, and why the deficiencies should be remedied
only for foreign investors and not for citizens. The idea of giving
a revolver instead of a rifle for transnationals to shoot democracies
is hardly a “compromise”. Indeed, the commercial interests and investment
of European enterprises abroad are sufficiently well protected by
the courts of host countries, notably the developed ones.
2. An obvious lack of consistency
4. Secondly, I am concerned about
the lack of consistency, as ICS introduces an appeals level but
it does not, however, introduce a doctrine of precedent. The purpose
of appeals courts is to clarify points of law so that the law is
predictable and subjects can regulate their behaviour accordingly.
If the lower tribunals are not bound by the decisions of the appeals
tribunal then they cannot perform this function. The appeals tribunal
is reduced to the role of giving investors a second “bite of the
cherry” if they lose at first instance.
5. Investment protection law will remain less predictable than
domestic law (which, even in civil law European States, is subject
to the binding jurisdiction of the European Union courts). This
lack of predictability causes issues such as regulatory chill in
which governments are incentivised against making decisions that might
compromise the interests of investors if a suit is brought against
them.
3. ICS failure to address the substantive problems of investment protection provisions
6. Thirdly, objections to the
investment chapters in the Transatlantic Trade and Investment Partnership (TTIP)
and the Comprehensive Economic and Trade Agreement (CETA) are not
limited to the form of the dispute settlement mechanism. The more
significant objections concern the substantive provisions of the agreements,
which grant investors greater rights against governments than those
that are granted to citizens. The provisions in the European Union’s
proposal for the TTIP investment chapter go some way to addressing this
issue by specifying and limiting the breadth of the “expropriation”
and “fair and equitable treatment” provisions and reaffirming the
“right to regulate” in the body of the text.
7. This does not, however, solve the underlying issue. While
there is a separate level of law for investors, there will always
be an incentive for special treatment. If the “expropriation” and
“fair and equitable treatment” provisions are truly subject to the
“right to regulate” then they offer no substantive protections beyond
those in domestic law, in which case they are unnecessary. If they
are necessary, then it must be because they offer something beyond
domestic law, in which case they are privileging the interests of
investors over those of citizens.
8. European efforts should be concentrated on continuing to use
existing legal frameworks of public and contract law to protect
both the investor and the public interest as regards public health,
the environment and social rights. Indeed, whilst the investment
protection provisions in the “new generation” trade agreements have
the advantage of the proposed mechanism of enforcement through the
ICS, the sustainable development provisions have no equivalent mechanism.
The same applies to concerns about safeguards concerning public health
and social rights. European countries should continue making good
use of the precautionary principle to put public safety first without
fear of being subjected to legal action in arbitration courts for
compensation.
4. The issue of equal access
9. Fourthly, the current proposals
for creating the ICS do nothing to address the cost of investment arbitration.
This means that small and medium-sized enterprises will be unlikely
to benefit from the ICS because the financial risk of bringing a
suit and losing will be too great. Indeed, in many cases even the
cost of winning (bearing in mind that claimants must make substantial
outlays, usually over a period of several years, before seeing damages
or costs) will be too great. ICS, like ISDS, is therefore likely
to remain reserved only for the most wealthy investors in practice.
5. Inequality of arms
10. Finally, creating a special
level of law, with a powerful and effective enforcement mechanism,
elevates the interests of investors beyond other, important, interests.
Measures to protect, for example, the environment, health, or labour
rights do not benefit from a mechanism equivalent to ICS. Even if
the substantive rights given to investors are only the same as those
accorded to others, the existence of a specific enforcement mechanism,
reserved for investors, provides a greater incentive for governments
to consider the interests of investors than to consider other interests.
The very existence of a separate level of law and a separate enforcement
mechanism, regardless of their content, privileges the interests
of investors over the interests of any other party.
6. Concluding remarks
11. In conclusion, I am convinced
that investors already receive ample protection, so the case for
ICS is based on a false assumption considering that investors need
additional protection from discrimination. In fact, investors are
already protected in triplicate in the European Union by the European
Court of Human Rights, European law and domestic law. There are
no cases in the European Union where investors have been successfully
discriminated against and therefore no evidence to support the need
for an ICS here. Such cases have only occurred outside the European
Union where this “triple-lock” protection is not in place.
12. The European Convention on Human Rights protects both property
and people against discrimination; so the introduction of the ICS
represents discriminatory protection in favour of the investor not
available to either citizens or to the democracies that represent
them. Therefore, under the ICS, investors and citizens would not
be treated equally under the law and this is in conflict with the
principle of the rule of law. Citizens and investors in the European
Union, the United States and Canada are protected by established
systems of public law and contract law. These would be trumped by
proposed arbitration panels, and the proposed appeal system would
not follow the doctrine of precedent so that if arbitrary decisions
were made by the arbitration panel that were overruled in appeal,
they could still be repeated in the future. The introduction of
the ICS for these countries would be both unnecessary to protect
investors and in conflict with the rule of law, human rights and
democracy.
13. In addition, the ICS would also give investors disproportionate
powers to use against the interests of human rights, democracy and
the rule of law, and there are many cases, to suggest that such
powers would be exercised. In such cases, the same investor powers
proposed for ICS have been used in its predecessor ISDS to undermine
the public good – including undermining laws to protect the environment,
public health and rights at work – when laws potentially reduce
the profit of investors. Therefore, the ICS would subjugate democracy,
human rights and the rule of law on the false pretext of investor
protection. ICS represents a fundamental shift away from democracy
in favour of transnational corporate power and should not be included in
any transatlantic trade agreement, including CETA and TTIP.