In recent years, investment tribunals in which foreign investors can sue states on the basis of trade and investment agreements, have become highly controversial. The system consists of two elements, which are usually included in trade and investment agreements concluded by the EU: far-reaching property rights that often go beyond what national laws and constitutions afford to property owners and the rights for foreign investors to challenge the government measures directly through a mechanism called investor-state dispute settlement (ISDS). This mechanism bestows three private investment lawyers, called arbitrators, with the power to force states to pay enormous amounts of compensation to foreign investors when they deem that their profits are affected by a law or governmental decision.
The system is designed specifically for foreign investors – domestic investors have no access to the investment tribunals. They have to rely only on domestic judicial processes if they are unhappy about regulatory changes, just like the rest of us. In the EU’s trade and investment treaties there is no obligation on foreign investors to use domestic courts first, if they want to challenge a government action, nor do they have to show that domestic courts would be unable to handle a particular case. This is contrary to customary international law and international human rights law, which requires the exhaustion of domestic remedies and privileges foreign investors over everyone else in society.
This lopsidedness of the system creates an in-built incentive for the arbitrators, who are hired on a case-by-case basis, to rule in favour of the foreign investor, because they are the only ones who can initiate new cases. Many arbitrators also work on the side as counsel in investment disputes, allowing them to interpret legal definitions in a way that might be helpful for their clients in a separate case. Together with the broadly-worded property rights in the trade and investment treaties this has allowed foreign investors to successfully attack many government measures, including attempts to protect sensitive environmental areas and vulnerable communities from mining or impose restrictions on coal fired power stations. And often the threat of an expensive investor law suit is used to intimidate governments and stifle policy in the making, something called “regulatory chill”.
The EU’s “reform” attempts
The European Commission reacted to the growing criticism of ISDS by re-branding it as Investment Court System (ICS) and giving states more influence over the selection of arbitrators as well as enhancing transparency and re-wording some of the controversial VIP rights given to investors. However, overall the Commission’s proposal amounted to cosmetic reforms and all the main flaws are still present as in the ICS (as included in CETA):
In the summer of 2016, the European Commission announced its plans to establish a Multilateral Investment Court, which is supposed to replace the ISDS and ICS clauses in existing and future trade and investment treaties. The main changes proposed are the inclusion of full time adjudicators and an appeal mechanism. Yet again, the court would not substantially change the investment treaty system. To the contrary, the proposal seems aimed at keeping many of the key features (and flaws) intact, effectively locking in investor privileges .
Learning from bad experience
Experience of settled ISDS cases tells us that this system does negatively impact regulatory standards. Two emblematic cases illustrate this threat very well:
ISDS facts and figures
Protecting people and planet – not corporations
There is no good reason to give corporations these special privileges. No clear evidence exists that investment treaties increase foreign investment – the purported aim for which they are signed in the first place. And studies have shown that foreign investors are generally treated more favourably than domestic firms. In short, there is absolutely no reason to include investor privileges in international agreements in the first place.
Friends of the Earth Europe is campaigning to stop the unfair investor privileges and opposes any trade agreement that includes and entrenches them (including the establishment of the multilateral investment court). We call for existing agreements with ISDS to be radically altered or terminated altogether. We believe such a mechanism threatens democratic institutions and seriously risks deterring governments from introducing regulations that protect people and the environment.
Instead of backing VIP rights for internationally operating companies, the European Union should support providing effective remedy to local communities when multinational corporations violate human rights and pollute the environment. They should do this by fully backing and constructively participating in the UN open-ended intergovernmental working group to develop a binding treaty on business and human rights.