by Szilárd Gáspár-Szilágyi
I. SETTING THE STAGE
In recent years ISDS has been on the lips of many politicians, academics, NGOs and even laymen, some of whom have recently ‘discovered’ that there is a mechanism through which foreign investors (often large multinationals, but not always) can bring claims against host-states before an international arbitral tribunal. The arguments in favour and against ISDS are plentiful, but one always catches my eyes. According to this argument (page 3), the EU does not need ISDS in its new free trade and investment agreements (FTIAs) with developed states, because the original rationale of this mechanism was to protect foreign investors from host‑state jurisdictions where basic tenets of the rule of law were not observed. However, trading partners such as the US or Canada have well‑functioning judicial systems that protect foreign investors; therefore, ISDS is not needed.
As a novice to the field of EU investment law, I must confess I am not yet fully convinced by the benefits of ISDS. Nevertheless, the afore-mentioned argument resonates with my previous field of research, concerned with the domestic enforcement of EU and US international agreements, and once again illustrates that there is often a disconnect between the international and the domestic enforcement of treaties.
I will not advocate for the ‘greater’ protection of foreign investors. Instead, I want to shed some critical light on the argument according to which foreign investors already enjoy high levels of protection in advanced domestic judicial systems. I will argue that the domestic protection of foreign investors is more complex. On the one hand, foreign investors can bring a claim before a domestic court against the host-state, invoking domestic standards of protection. On the other hand, they could also potentially bring a claim before the same domestic courts, relying on international standards of investment protection. As I will illustrate, the international and domestic levels of enforcement should not be treated as worlds apart and the interplay between the two can shape the strategies of the treaty negotiators and of the investors.
II. SOME CURSORY EXPLANATIONS
Some cursory explanations are needed before proceeding.
First, with regard to the judicial avenues foreign investors have against host-states, three come to mind: (a) bringing a claim before an investor-state tribunal; (b) bringing a claim before a domestic court, based on domestic and/or international standards of protection; and (c) private commercial arbitration based on a contract between the investor and the host‑State.
Second, the recent EU FTIAs with Canada, Vietnam, Singapore and the TTIP proposal all include investment chapters that are made up of three parts: (a) an initial part on what constitutes an investment and who qualifies as an investor; (b) a part on standards of investment protection and principles the host-state must ensure (MFN, FET, prohibition of all types of expropriation, etc.); and (c) the ISDS mechanism.
Third, as Semertzi has noted in 2014, recently concluded EU free trade agreements in some form or another are precluded from having ‘direct effect’ in the domestic (EU and MS) legal orders. The recent EU FTIAs are not any different and they all include a clause according to which the FTIAs do not grant rights to private parties and/or that they cannot be directly invoked before domestic courts (Article 30.6 CETA; Article X.19, Chapter 17, EU-Vietnam; Article 17.15, Chapter 17, EU-Singapore). Without going into a debate on what is meant by ‘direct effect’ (see here and here), for the purposes of this short piece the afore-mentioned clause shall be dubbed as a ‘no direct effect’ clause. This clause is very important since it prescribes the domestic effects of FTIAs vis-à-vis private parties. According to the CJEU, it shall only decide on the internal/domestic effects of EU international agreements, if the contracting parties have not done so (Air Transport Assoc. of America, para. 49). Since this has already been settled by the treaty parties in the recent FTIAs, it follows that foreign investors cannot rely on EU FTIAs before EU or MS courts to challenge EU or MS measures which are inconsistent with the FTIAs.
Fourth, whenever looking at domestic cases that involve international agreements, several factors are important to look at: the type of international agreement that is invoked, the party bringing a claim under the agreement, the measure against which the claim is brought and the court where the case is launched. Thus, claims can be brought to challenge both EU and MS measures before the CJEU or MS courts for their compatibility with various international agreements. Nevertheless, as Mendez has concluded, the CJEU resorts to ‘avoidance’ techniques when EU measures are challenged for their compatibility with international agreements and tries to shield EU law from international obligations, compared to a more lenient approach when MS measures are concerned. Furthermore, since foreign direct investment (FDI) falls under exclusive EU competence (Article 207(1) TFEU), the CJEU has the power to decide on the domestic effects of the investment protection provisions of EU international agreements (Slovak Brown Bear, paras. 30-32; but we need to wait also for Opinion 2/15, EU-Singapore), even if a case is brought against a Member State measure before a Member State court.
Fifth, private claims before MS courts are launched according to MS procedures, while before the CJEU a private party can bring a case directly as an action for annulment (Article 263 TFEU), an action for failure to act (Article 265 TFEU) and an action for damages (Article 268 & 340 TFEU), or indirectly via the preliminary reference procedure (Article 267 TFEU).
Sixth, in the following sections four options are derived from the interplay between the international and domestic enforcement of EU FTIAs. When presenting the four options the following issues are discussed: (i) the optimal scenarios for investors and civil society. The Public Consultation on TTIP’s ISDS conducted by the EU Commission indicates a clear split between civil society’s rejection of ISDS and the business world’s approval of it. The optimal outcome for investors is if they have the possibility to bring a claim based on an EU FTIA before an investor‑state tribunal and before domestic courts, while the optimal outcome for civil society is if investors cannot bring an FTIA claim before any of the two judicial avenues; (ii) problems facing the domestic enforcement of ISDS awards; (iii) the need to keep the investment protection standards in the agreements or not.
This blogpost focuses on the domestic avenues of enforcement. This is in order to critically assess the argument that investors are provided high levels of domestic protection in the host entities.
III. FOUR DESIGN OPTIONS
EU negotiators have the following four options to choose from, depending on whether they would like to include or exclude ISDS (international enforcement) and ‘no direct effect’ clauses (domestic enforcement) in/from EU FTIAs.
|Options||ISDS||‘No D.E.’ Clause|
Option 1: Both ISDS and the ‘no direct effect’ clause are included
i. This option is not optimal for either the investors or for civil society, but would please the investors. It is preferred in the new EU FTIAs: ISDS is possible but private parties are precluded by the agreements from relying on them before domestic courts. Therefore, if the foreign investor chooses to bring a claim before the CJEU or MS courts in order to challenge MS or EU measures for their incompatibility with the investment protection standards laid down in the EU FTIAs, it will be denied the possibility to do so due to the ‘no direct effect’ clause.
The investor would thus need to change strategy before the domestic courts. The domestic courts might resort to consistent interpretation of the domestic measure with the international provisions but in case of a clear conflict between the domestic measure and the international agreement, consistent interpretation reaches its limits (AMS, para. 39). Furthermore, as I have previously argued, the application of the Fediol and Nakajima exceptions outside the field of WTO law was all but closed by the CJEU. Therefore, domestic courts are not an option for investors if they want to directly invoke the investment protection standards of the FTIAs. The investors could still rely on MS and EU law provisions on the prohibition of discrimination, expropriation without compensation etc. However, standards such as FET are hard to find in domestic law.
In light of the above, the investor would probably prefer to resort to ISDS or private commercial arbitration.
ii. Another consequence of the ‘no direct effect’ clause is that it might hamper the enforcement of future ISDS awards. According to the CJEU (FIAMM and Fedon, paras 128-129), the decisions of an international body, which concern the compatibility of a domestic measure with an international agreement, which does not grant privately enforceable rights, shall also not be able to grant such rights to private parties. This is an area in which scholarship has recently commenced and more research is needed on the interplay between the domestic enforcement of ISDS awards in the EU legal order, the domestic enforcement provisions under the New York Convention and the ICSID Convention.
iii. In this scenario the FTIA’s investment protection standards need to be kept because they form the basis of the claim brought before the investor-state tribunal.
Option 2: ISDS is included but the ‘no direct effect’ clause is not
i. This is the optimal scenario for investors and the worst one for civil society. In this scenario ISDS is included, but the contracting parties have not decided on the domestic effects of the agreement (as has been the EU practice until very recently). Therefore, it will be up to the CJEU to decide on the effects of the investment protection provisions of the FTIAs, because FDI is an area of exclusive EU competence. However, as explained, the CJEU will be more eager to allow for private party enforcement of international agreement against MS measures but will resort to ‘avoidance’ techniques when EU measures are concerned.
Thus, the chances of successfully invoking the FTIA provisions before domestic courts against MS measures are higher than doing so against EU measures. This means that in case of EU measures the investor might prefer to resort to ISDS instead of EU judicial remedies. In case of MS measures or if the CJEU has a more open approach when EU measures are concerned, the investor will be able to invoke the FTIA protection standards against the domestic measures. Nevertheless, the question arises whether certain domestic courts, which might have never been confronted with international investment law, will possess the relevant know-how to interpret international investment provisions. As is well known, such terms as FET have caused heated debates among investment lawyers and investors might doubt whether domestic fora are capable of properly understanding how these terms should be interpreted.
ii. With regard to ISDS awards, the chances of their domestic invocation are quite high if the FTIAs are deemed to have ‘direct effect’.
iii. In this scenario the FTIA’s investment protection standards need to be kept because they form the basis of both the ISDS and the domestic claim.
Option 3: ISDS is not included but the ‘no direct effect’ clause is
i. This would be the optimal scenario for civil society, NGOs and parts of academia. Nevertheless, this is the worst scenario for investors. In this case ISDS is lacking and investors are precluded from relying on the FTIAs before domestic courts.
This scenario is similar to Option 1, with the difference that the investor cannot resort to ISDS. Thus, the investor would most probably resort to the less transparent commercial arbitration.
ii. In this scenario the domestic effects of ISDS awards do not arise.
iii. The investment protection standards included in the FTIAs are unenforceable via ISDS or domestic courts. Therefore, negotiators should simply not include them, unless state-to-state arbitration remains a possibility.
Option 4: Neither the ISDS clause, nor the ‘no direct effect’ clause are included
i. This option is not optimal for either the investors or for civil society, but would please civil society. This scenario is similar to Option 2, without the possibility to resort to ISDS. Thus, the reliance on the investment protection standards of the FTIAs before domestic courts is conditioned by the tactics employed by the CJEU, depending on whether a MS or an EU measure is challenged.
ii. In this scenario the domestic effects of ISDS awards do not arise.
iii. The FTIA’s investment protection standards can be kept because investors have the chance to invoke them before the domestic courts. Nevertheless, the issue of whether some domestic courts have the know-how to interpret these standards arises.
IV. SOME FOOD FOR THOUGHT
In this short exposé it is impossible to account for all factors (length of proceedings, amount of obtainable compensation, etc.) influencing an investor’s choice of forum for adjudication or the choice of treaty negotiators to include international and/or domestic enforcement mechanisms. Nevertheless, it shows that the argument, according to which the investors are sufficiently well protected domestically in developed entities, needs to be more nuanced. The domestic protection of foreign investors covers a more complex situation that involves not only reliance on domestic standards before domestic courts, but also the possibility or not to rely on international investment protection standards before the same courts and the option to use other available avenues. These considerations can in turn influence the choices of treaty negotiators and of foreign investors.
If the EU insists on including investment protection standards in its FTIAs, but is willing to give up ISDS, then the question arises whether there is still a need to spend time negotiating complex standards of investment protection. In case the lack of ISDS is coupled with a ‘no direct effect’ clause, then the inclusion of such international standards is a redundant exercise. Investors will have to choose between relying on domestic law before domestic courts, lobbying their home-state to launch state-to-state dispute settlement or to use the less transparent private commercial arbitration. Given the length of domestic proceedings coupled with the impossibility of invoking international standards, and the difficulty to convince the home-state to further their case, the likelihood is high that the investors will choose commercial arbitration.
On the other hand, if the EU insists on including investment protection standards in its FTIAs, but keeps ISDS, then the incentives of the investor not to rely on domestic courts are fairly high; especially, if the presence of ISDS is couple with a ‘no direct effect’ clause.
This short piece will form the basis for further research into the necessity or not for investment protection standards and ISDS in EU FTIAs, by thoroughly taking into account the domestic avenues of enforcement and their influence on the choices of treaty negotiators and investors.