Commission ISDS reform plan is an echo chamber of business views

“Instead of categorically rejecting arbitral proceedings, the current system needs to be improved.” (BDI)

“The EU will improve the ISDS mechanism.”

The ‘improvements’ avoid dealing with the two most fundamental flaws of investment arbitration: one, that it grants special rights to foreign investors, rights that no one else has. And two, that it surrenders to for-profit arbitrators with a vested interest in this privatised judicial system the judicial interpretation of these rights and the awarding of large compensation sums to be paid from public budgets.

“The overriding aim is to strike a balance between [the] adequate protection of foreign investors and the right of states to regulate.” (BusinessEurope)

“The objective of the EU is to achieve a solid balance between the protection of investors and the Parties’ right to regulate.” (question 5)

States’ “right to regulate” regarding the protection of the environment, public health etc. needs to be protected, for example, by integrating public policy exceptions known from the GATT regime. (BDI)

The EU will include “exceptions allowing the Parties to take measures relating to the protection of health, the environment, consumers etc.” (question 2)

The exceptions are narrowly drafted, placing a big burden of proof on governments to justify their actions. Is Australia’s plain packaging law for cigarette packs necessary to protect public health? Might there not have been other measures with fewer costs for Big Tobacco? It would be up to a tribunal of private lawyers with lack of accountability to decide. An easy hurdle to pass for investors.

The so-called substantive investor rights “need to be formulated more precisely, but without restricting the level of investment protection.” (BDI)

Business “supports the idea of a mandatory ‘code of conduct’ for arbitrators.” (BusinessEurope)

“The EU will introduce specific requirements in the TTIP on the ethical conduct of arbitrators, including a code of conduct.” (question 8)

This falls very short of real reforms to guarantee the independence and impartiality of arbitrators, such as security of tenure and a fixed salary. Existing codes of conduct have not prevented a small club of for-profit arbitrators from deciding on the majority of investor-state disputes, where they are able to pave the way for more arbitration business in the future with expansive, investor-friendly interpretations of the law.5

“It is important that measures to prevent investors from launching frivolous claims are also taken. Options to consider include a more thorough review of claims before proceeding to the arbitration phase.” (BusinessEurope)

“The EU will introduce several instruments in TTIP to quickly dismiss frivolous claims”, for example, through an “early and effective filtering mechanism.” (question 9)

The biggest pitfall of this reform: the filtering will be done by for-profit arbitrators, who will make a lot of money if claims go ahead. This conflict of interest might explain why not a single dismissal of a frivolous claim has occurred6 – even though some existing rules allow for that.

The introduction of the “loser pays” principle may also discourage frivolous claimants.” (BusinessEurope)

“To further discourage unfounded claims, the EU is proposing that the losing party should bear all costs of the proceedings.” (question 9)

This wouldn’t make any difference to deep-pocketed multinationals, which can pay the legal costs for such lawsuits out of petty cash.

We support “that an arbitral tribunal will only be able to decide on compensation and not on the repeal of a specific legislative measure.” (Cefic)

“An arbitral tribunal will not be able to order the repeal of a measure, but only compensation for the investor.” (question 5)

This won’t stop governments from ‘voluntarily’ repealing measures when a multi-billion-dollar lawsuit has been filed or threatened. The resultant chilling effect has arguably become the main purpose of investor-state arbitration.