Is there a Need for Investor-State Arbitration in the Transatlantic Trade and Investment Partnership (TTIP)?

Abstract

The European Commission has recently argued that “[t]he reason ISDS [investor-state dispute settlement] is needed in TTIP [the currently negotiated Transatlantic Trade and Investment Partnership between the EU and the US] is that the US system does not allow companies to use international agreements like TTIP as a legal basis in national courts. So European companies – and especially SMEs - will only be able to enforce the agreement through an international arbitration system like ISDS.” 1 This is so far the only substantive argument that the Commission has forwarded for justifying the inclusion of ISDS in the TTIP. The need for justification arises on a number of points. Not only has there been mounting public opposition to the inclusion of investor protection and especially ISDS in the TTIP negotiation. 2 There is also academic evidence suggesting that the inclusion of ISDS in the free trade agreement with the US would, on balance, not be advantageous for the EU. 3 So far, no traditional capital exporting country has concluded a bilateral investment agreement with any other capital exporting countries (“North-North” BITs). 4 The traditional purpose of BITs has been used to secure outgoing investments into countries with administrative and judicial systems perceived as less reliable and thus presenting political risk of undue regulatory intervention in private economic activities. In their free-trade agreement of 2004, Australia and the US have abstained from including ISDS in the chapter on investment protection explicitly because of “the fact that both countries have robust, developed legal systems for resolving disputes between foreign investors and government”. 5 This logic has also inspired the European Parliament in May 2013 to vote unanimously (exempting only the MEPs who reject ISDS altogether) for a clarification that, in general, future EU investment agreements should include ISDS only “[i]n the cases where it is justifiable”. 6 In the context of the TTIP negotiation (just as the CETA negotiations with Canada), the question is then whether the administrative and judicial systems developed in the EU and the US have to be considered insufficient for protecting legal rights of foreign investors who disagree with regulatory intervention and seek legal remedies. Whereas the Commission does not suggest any short-comings in the EU legal system, it does point at the US legal system as a risk for EU investors: EU investors would not be able to enforce substantive rights granted in the TTIP against US public authorities in US courts. Accordingly, these substantive rights of EU investors could only be enforceable if the TTIP also granted them the right directly to bring actions against the US government in international arbitration. This claim has far reaching consequences: it is also the justification for accepting that, in return, US investors will be able to bring their claims against EU member States and the EU in international arbitration – and thereby avoid having to pursue their remedies in the EU court system like any EU investor would have to. It is therefore worth analysing