The TTIP, Investor-State Dispute Settlement, and the Future of International Investment Law in the EU and Norway

By Daniel Friedrich Behn, Postdoctoral Fellow, PluriCourts

The Transatlantic Trade and Investment Partnership (TTIP), once completed, will be the largest bilateral free trade agreement in the world. Its sheer size, and the parties involved – the EU and the US, has led to a significant public debate about its potential impact on Europe and its neighboring trading partners such as Norway. This short piece will focus specifically on the provisions relating to the protection of foreign direct investments (FDI) in the TTIP and how negotiations regarding this part of the TTIP will affect the larger debate on the future of international investment law in Europe and Norway. One of the key provisions currently being negotiated, and to which there has been a heated discourse among its advocates and detractors, is something called investor-state dispute settlement (ISDS). ISDS is a provision that, if included, would allow foreign investors (i.e. US investors investing in the EU and EU investors investing in the US) to sue the state hosting their investment for alleged violations of its obligations under the TTIP. While there has been significant focus on this part of the TTIP negotiations, it is neither a debate specific to the TTIP nor a new idea. ISDS (also called investment treaty arbitration) is an actively practiced area of international law with over 3000 bilateral and multilateral investment treaties in force around the world; treaties that have given rise to nearly 600 disputes to date (most of these cases coming in the last 20 years).

In general, investment treaties provide investors with a number of substantive rights (i.e. no expropriation without compensation) on the protection of their investments in the state hosting those investments. These treaties also typically provide an investor with a mechanism for enforcing these substantive rights through arbitration. The novel part of this legal order has been in the granting of adjudicative rights to private parties that allow them to bring an arbitration  claim against a sovereign state. For example, state-to-state arbitration has existed for centuries, and while less infrequently practiced today, it was a primary means for resolving interstate legal disputes in the 19th century. Likewise, international commercial arbitration is a heavily practiced area of law with thousands of disputes being adjudicated (mostly based on contracts between commercial entities) around the world at any given time. What is unique to investment treaty arbitration is that it is a hybrid form of adjudication that blends these two types of dispute settlement. But in a way, ISDS is not an anomaly. The development of regional human rights courts, such as the European Court of Human Rights, demonstrates the case where an individual (or company) is granted a mechanism for enforcing their rights against a state where the state has violated its obligations under an international treaty.

While investment treaty arbitration is clearly a part of the current international law landscape, there is some alarm that has been expressed by those looking at ISDS in the context of the TTIP for the first time. There is concern that if ISDS is included in the TTIP, US investors will be able to sue EU Member States in cases where their investment has been diminished due to regulatory changes made in the public interest. For example, there is currently a case where Phillip Morris has brought an arbitration against Australia over Australia’s decision to require plain packaging on tobacco products. Phillip Morris argues that such a requirement is a violation of its rights under an international investment agreement. Another example is a case where an energy company, Vattenfall, is suing Germany over its decision following the Fukushima disaster to phase out nuclear power production by the year 2022. Vattenfall argues that the phase- out program will violate Germany’s obligations under the Energy Charter Treaty by negatively affecting Vattenfall’s investment in two nuclear facilities in Germany.

These two cases provide rather exceptional examples (and are the most frequently cited cases by those opposing ISDS in the TTIP) of how ISDS is being used when a company does not agree with regulatory changes that the country hosting their investment has made. However, it is important to note that netiher of these cases have been decided yet, and it is unclear whether the investors will prevail. Even under investment treaties, states have the sovereign prerogative to make regulatory changes in the public interest so long as they are not made in an arbitrary or discriminatory manner. Nevertheless, the premise can be alarming. The idea that Phillip Morris or Vattenfall would even have such rights to bring suit in these cases has caused significant public concern.

In the context of the debate on the inclusion of ISDS provisions in the TTIP, some have asked why these rights should be extended to foreign investors given that both EU Member States and the US are considered to be strong ‘rule of law’ states with independent judiciaries capable of resolving disputes with foreign investors. For example, the US-Australia free trade agreement specifically chose to not include ISDS for exactly this reason. But this issue of whether domestic judiciaries are capable of rendering justice to foreign entities is only one part of the reasoning on the function and purpose of ISDS. There are three other important reasons – one historical, one contemporary, and one specific to the TTIP – as to why the EU and US might want to sign an investment protection treaty with ISDS.

The first reason has to do with the original intent or rationale for investment treaties, which was envisioned as a ‘grand bargain’ whereby a capital-importing state agrees to provide investors from a capital-exporting state with special protections as a means of promoting and encouraging investment in the capital-importing state. The basic premise was that if a capital-importing state could provide enforceable international guarantees to foreign investors, it would lead to increased flows of FDI in the country. While the empirical evidence on whether investment treaties actually affect FDI flows remains open to debate, this function of investment treaties continues to be touted by its advocates. In the context of the TTIP, the EU and the US are both capital-importers and capital-exporters. This means that the rationale has to be examined from both sides. Will ISDS and international investment protection increase US investment in the EU and EU investment in the US? From the EU side of the negotiations then, one might ask the question whether increased FDI from the US is needed or desired; and whether EU investors need or desire additional protections when investing in the US.  

The second reason – a more contemporary one – on why the US or the EU would be interested in providing enforceable international legal protections to foreign investors relates to ideas of good governance and the promotion of the rule of law in general. The rationale here is that enforceable international treaties can be used as a means of creating a strong international rule of law that in turn can promote the evolution of the rule of law and good governance practices at the domestic level; and that this can assist in creating a stable and predictable investment climate. One can see this rationale being used in the context of regional human rights courts. One function of these courts is to assist in the adjudication of individual human rights violations; but another function is also to promote reforms to domestic judiciaries and the rule of law in states subject to the jurisdiction of these international courts. For the TTIP, the US and the EU need to consider whether reciprocal international standards on the treatment of foreign investors is something that is needed. The answer to this question is likely to have very little to do with the TTIP specifically and is more likely to be part of an overall debate as to whether states need more or less economic harmonization in the age of globalization.

The third reason on why the EU or the US might be interested in including investment protections with ISDS into the TTIP is very specific to the EU’s current position in the overall debate on the worthiness of international investment treaties. While the EU has had competence over the negotiation of international trade agreements for a long time, their competence over FDI and investment treaties is new. Since the Lisbon Treaty came into force in 2009, the EU has competence over FDI as a part of its common commercial policy. This means that the EU will now be the primary negotiator for new international agreements on investment protection. The investment chapter of the TTIP is a primary example of this new competence. However, the EU has also recently negotiated a free trade agreement (including a chapter on investment) with Canada; and there are ongoing negotiations with China, India, and Singapore as well. In addition to future agreements, the EU also has the task of dealing with the 1200 investment treaties that have been signed between Member States and third countries. It is still unclear as to what will happen to these treaties in the long run; but in any event, the EU is now actively engaged in the development of international investment law. For these reasons, the TTIP negotiations represent an important signal in regard to future agreements that the EU signs. Regardless of whether the EU Commission believes that ISDS is critical to the TTIP, it may pursue its inclusion as a part of an overall strategy in developing a coherent policy on investment treaties and ISDS going forward. 

Given these distinct rationales for ISDS and investment treaties in general, and the TTIP specifically, it is not a foregone conclusion that ISDS is needed in the context of the TTIP. Regardless of outcome in the TTIP negotiations, however, is it is likely that these negotiations will have some impact on Norway; albeit indirectly (as Norway is not a direct party to the negotiations). If the TTIP is successful in the inclusion of ISDS and other investment protection rights for investors, Norway could theoretically be placed at a comparative disadvantage vis-à-vis the EU. If the ‘grand bargain’ rationale highlighted above is valid, then one might assume that US investors would choose to invest within the EU instead of Norway in situations of like circumstances. A second indirect effect might be that Norwegian investors seeking to invest in the US could leave Norway and set up entities within the EU in order to take advantage of investment protection rights under the TTIP. A third, and possibly the most influential, indirect effect on Norway is the signaling function that a TTIP with ISDS could mean for the future of investment treaty negotiations in Norway. Currently, Norway has 15 investment treaties in force. However, in recent years, Norway has not pursued new negotiations. The successful completion of the TTIP could have the effect of both restarting new investment treaty negotiations in Norway; and influencing the design of these investment treaties as well.

Tags: Investment By Daniel Friedrich Behn
Published June 4, 2014 9:12 AM - Last modified July 28, 2018 10:04 PM
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