The TTIP: The largest trade deal in history

Investor-state dispute settlement (ISDS) awards are subject to very limited review by national courts or ad hoc tribunals. With that in mind, the EU parliament has proposed a more robust ISDS clause for inclusion in the Transatlantic Trade and Investment Partnership (TTIP) agreement, which would allow for judicial review of awards.

The European commission has suggested this should be in the form of a new permanent investment court system for TTIP disputes, which would include an appellate court. However, this would mean sacrificing the finality of arbitral awards, which is one of the main attractions of ISDS, and it remains to be seen how the US will react to this suggestion, given the uncertainty it would introduce in disputes referred to the court pursuant to the TTIP.

Divisive negotiations

The TTIP is a series of trade negotiations with the ultimate goal of finalising and implementing, possibly by the end of 2015 but more likely in 2016, a mutually beneficial trade agreement between the US and the EU. The negotiations have been divisive ever since they began in June 2013, and have caused public outcry in relation to a number of issues, notably the proposed inclusion of a clause permitting ISDS. ISDS has been criticised for, among other things, its private nature and lack of access to judicial review (although there are circumstances in which judicial review is available in respect of awards arising out of ISDS).

The inclusion of a traditional ISDS clause in the TTIP agreement would allow US investors in the EU and EU investors in the US to bring arbitration proceedings in a neutral forum against the state hosting their investment in respect of any alleged breaches of the standards of treatment that apply to them by virtue of the agreement. This system has the advantage of allowing foreign investors to side step the domestic courts of the host state of the investment, in which they may not be sure of a fair hearing.

ISDS has been attacked by many commentators as a secretive and obscure system that allows corporations to bring claims against states, usually for very considerable sums, outside the supervision of domestic courts and without affording the state in question any opportunity to appeal the decision. Historically, the corporations employing ISDS have often been large-scale multi-nationals, and the states involved either poor or developing. This picture is, however, changing.

Replacing the ISDS

Recently, the tenth round of US-EU negotiations on the TTIP agreement took place in Brussels. They commenced only days after the European parliament voted for the TTIP to have what was described as a new system to replace the ISDS system 'for resolving disputes between investors and states.' The key features of the new system, as set out in the text in which it was proposed, are that it would be 'subject to democratic principles and scrutiny, where potential cases are treated in a transparent manner by publicly appointed, independent judges in public hearings and which includes an appellate mechanism'.

Critics have referred to this alternative mechanism as 'ISDS lite' and commented that the proposal is not necessarily a complete abandonment of ISDS. Most recently, the European commission has suggested in draft text, which has yet to go before the US in a formal proposal, that a new investment court system should be created to decide disputes arising under the TTIP. The proposal envisages a tribunal of first instance and an appeal tribunal, which would likely be jointly funded between the EU and US. At present, the EU appears to be waiting for a formal proposal from the US regarding ISDS; the inclusion of ISDS provisions is said to be strongly favoured by the US negotiating team, and so it remains to be seen what shape they will ultimately take. This will depend upon the extent to which the parties are willing to sacrifice finality to address concerns about openness and the availability of judicial supervision.

Despite concerns over the absence of appeals and/or judicial review for investor-state arbitration awards, there are, on occasion, ways to contest them.

Challenging awards

In the case of an International Centre for Settlement Investment Disputes (ICSID) award, which national courts are supposed to treat as binding and enforceable as if they were a final decision of their own courts, a party can make an application for annulment of an award to an ad hoc tribunal only on certain, extremely limited bases under article 52(1) of the ICSID Convention. These are:

(b)That the tribunal has manifestly exceeded its powers;

(c)That there was corruption on the part of a member of the tribunal;

(d) That there has been a serious departure from a fundamental rule of procedure; or

(e)That the award has failed to state the reasons on which it is based.

Clearly, annulment of an ICSID award will be available only exceptionally.

In the case of non-ICSID awards, a slightly broader approach applies. Here there are two avenues leading to potential judicial review by domestic courts:

• Disputing parties may seek to set aside the award in the seat of the arbitration under their domestic laws; and
• Under the New York Convention, disputing parties may resist recognition and enforcement of the award on the grounds specified in section 5. These grounds include that the competent authority in the country where recognition and enforcement is sought finds that the subject matter of the dispute is not capable of settlement by arbitration under the law of that country or based upon a public policy decision of that country. Enforcement of the award may also be refused if the matters in the dispute are beyond the scope of the submission to the arbitration.

BG Group v Argentina

An example of such a challenge is provided by the March 2014 US Supreme Court judgment in BG Group v Argentina, in which BG Group, a UK company and an investor in Argentina's gas industry, brought a non-ICSID Convention claim against Argentina under the expropriation and fair and equitable treatment provisions of the Argentina-UK Bilateral Investment Treaty (BIT).

The tribunal awarded BG Group $185m in damages. Argentina then filed a motion to vacate the award through the courts in Washington DC (as this was the arbitral seat) on the basis that the arbitrators had exceeded their powers, given that a clause in the BIT required the exhaustion of domestic remedies. The case reached the US Supreme Court, which ruled with a 7-2 majority that the tribunal had not exceeded its powers, and the award was accordingly enforced.

As we have seen, while judicial review of some awards arising out of ISDS is available, it is extremely limited, and it is not difficult to see why a version of ISDS that allows for such review is being mooted for inclusion in the TTIP agreement. If it is adopted and perceived to be an acceptable compromise between fairness and transparency on the one hand and certainty on the other, this could herald a change more generally in the way ISDS provisions are drafted. SJ

Miranda Rushton is a senior associate and Jennifer Harvey a paralegal at Carter-Ruck

www.carter-ruck.com

'The hysteria surrounding ISDS in TTIP is forcing policy makers in Europe to act'

In response to the highly politicised campaign to have the ISDS clauses removed from the TTIP, European Commissioner for Trade Cecilia Malmström recently announced the long-awaited draft negotiation text for its investment protection regime. This presses ahead with the aim of establishing a new investment court system, which would replace arbitrators with publicly appointed judges and introduce an appeals mechanism for disputes.

While the backlash against ISDS could be seen as opposition to free trade attacking the Achilles heel of what would be the largest trade deal in history, as it involves the removal of regulatory barriers and tariffs worth an estimated €300bn a year to the global economy, its ramifications have radical implications for the nature of the global investment protection regime going forward. The sheer size of the deal meaning the investment protection regime adopted could set a global standard.

ISDS is genuinely a system that has served citizens and states well, allowing investors to bring claims against a state before an internationally constituted, neutral arbitral tribunal. The existing network of 14,000 European BITs – all of which include ISDS – promote investment and provide good protection to many European investors. For example, the UK itself has negotiated 94 BITs, the majority of which include ISDS provisions, with no ISDS challenge succeeding against the UK.

The EU proposals significantly change the current arbitration system by removing party autonomy, eroding the right of each party to nominate a suitably qualified arbitrator with the required expertise in international investment law. They will see the claimant (investor) effectively excluded from having any say as to the appointment of the judges, while the states, which are at the same time respondents in the proceedings, can ensure that only persons who are to their liking are elected as judges.

The proposals must be viewed with serious concern, as they use the smokescreen of the current debate rather than any evidence of experience to mount a power grab and fundamentally transform ISDSs. Institutions such as the Washington DC-based ICSID, a member of the World Bank Group, and the Permanent Court of Arbitrations (PCA) in The Hague already facilitate legal dispute resolution and conciliation between international investors. They have the infrastructure in place and could easily be entrusted with the necessary tasks without having to create a completely new body from scratch.

The hysteria surrounding ISDS in TTIP is forcing policy makers in Europe to act. On the whole, the current system works to the satisfaction of both states and investors alike. Questions remain about how the integrity of a permanent investment court will be guaranteed and who will foot the bill to establish such a court. The EU must explain why it thinks it necessary to create a new system from scratch, one that has serious questions to answer about its autonomy and sustainability.

Lord Goldsmith QC is a member of the Chartered Institute of Arbitrators (CIArb) and a managing partner at Debevoise & Plimpton

@CIArb

www.ciarb.org