Still rolling out the red carpet: The EU’s ISDS push for VIP corporate privileges

Despite the many ISDS-related injustices raised by the cases in this report, including in a number of European countries, the European Union (EU) wants to include broad ISDS-style corporate privileges in its trade deals with the rest of the world. It is also pushing for a World Court for Corporations to decide future investor lawsuits against states. The stories presented here, however, should serve as a strong warning of the dangers of such a corporate dream come true – as any of these cases would still be possible under the EU’s revised ISDS system.

In stark contrast to public opinion on the issue,1 the EU is a major champion of ISDS. It has finalised, or is negotiating, several trade and investment deals which include these far-reaching legal privileges for foreign investors (albeit under a new name: Investment Court System or ICS).2 In the context of ongoing global discussions about reforming ISDS, the EU also launched proposals to establish a new World Court for Corporations, formally known as the Multilateral Investment Court. This global court would rule on investor claims arising under future and existing investment treaties, for countries that acceded to it.3

Compared to the current ISDS regime, which we have seen in action in the ten cases in this report, the EU’s proposals contain a number of procedural improvements. For example, legal proceedings would be open to the public (rather than secretive as they frequently are today). The arbitrators deciding the lawsuits would be chosen from a pre-determined list agreed upon by the state parties to the investment agreement (and thus no longer hand-picked by the parties to the dispute, reducing some, but not all, concerns about their bias). The proposed Multilateral Investment Court would be staffed by permanent judges with a fixed salary paid for by member countries, compared to the current ad hoc panels of for-profit arbitrators whose earnings increase the more investors sue states – a strong financial incentive to side with the only party that can bring such claims, ie foreign investors.

The Multilateral Investment Court would transform… ISDS from an ad-hoc mechanism to a standing mechanism, risking to create new privileges and ‘rights’ for foreign investors.

International Trade Union Confederation4

However aside from these procedural improvements, the EU’s corporate rights approach does not resolve the deep-seated problems with ISDS. The system remains one-way, with only rights and no obligations for investors. It will continue to allow thousands of companies to circumvent national courts and sue governments via a parallel justice system, if laws and regulations undercut their ability to make money. It would still pave the way for billions of taxpayer’s money to be paid to big business. It could still curtail much-needed public interest policymaking to protect people, communities, public health and the planet. And it could still lead to rulings that directly contradict and undermine human rights and environmental law, or effective policies to avert climate chaos.

An analysis of the EU’s approach through the lens of five common ‘ISDS attack patterns’ seen in the cases presented here shows that under the new cover of the ICS and the Multilateral Investment Court, there is still the same old ISDS crusade against citizens and in favour of corporate interests.

ISDS attack #1: Lawsuits against decisions that protect the public interest

The EU’s revised ICS approach recognises the same wide-ranging ‘substantive’ rights for investors as in existing treaties, which have been the legal basis for investor attacks against legitimate government decisions to protect the environment, health and other public interests. Therefore, ICS – like the proposed Multilateral Investment Court, which will not change or reduce the ‘substantive’ investor rights either – is likely to pave the way for more attempts by investors to undermine public interest decisions, like the ones narrated in this report.5

This doesn’t change anything because the standards on the basis of which judgements are rendered remain the same.

Nigel Blackaby, arbitration lawyer with Freshfields law firm, on the EU’s ICS proposal6

One example of a particularly dangerous investment protection standard included in the EU’s ICS approach, is the right to “fair and equitable treatment”. Amongst other things, it protects investors from “arbitrariness” and “abusive treatment… such as coercion”, as well the “legitimate expectation” of an investor.7 While this may sound innocent, the lawsuits described in this report have been built on these very concepts. For example, in its ISDS threat against Colombia, Novartis argued that the government had violated the company’s “legitimate expectations” that patent rules would not change. In its suit against Romania, Gabriel Resources describes delays in the permit process for its Roşia Montană gold mine as a “coercive… abuse of power” and the involvement of the Parliament in the process as “arbitrary”.8 In the Copper Mesa case the arbitrators found that Ecuador had violated the fair and equitable treatment standard, because it had not assisted the mining company in its consultations with the local community.9

Nothing in the ICS system would stop tribunals from ordering compensation to corporations for new laws and regulations in the public interest either. Quite the contrary: while the ICS text on the right to regulate states that countries cannot be ordered to compensate investors for withdrawing subsidies, it does not rule out such orders for regulations “to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity”.10 In other words, the EU, its member states and trading partners will be free to regulate as they wish – but like in the cases portrayed in this report, any new law or regulation could potentially cost them billions in taxpayer money somewhere down the road, as investors continue to have the right to demand compensation.

ISDS attack #2: Legal backdoor assaults on court decisions

Courts have played an important role in the cases described in this report. The luxury golf resort in the city of Dubrovnik in Croatia and the toxic Roşia Montană gold-mine in Romania were both halted after domestic courts found that permits had been granted illegally. In Colombia, several mines were stopped when the Constitutional Court banned extractive activities in the parámos ecosystem. All these rulings, which aimed to tackle corruption or to protect the environment, are now being sidelined and potentially undone by ISDS tribunals.

Such legal backdoor attacks on domestic court rulings would still be possible under the EU’s ICS approach. It would allow foreign investors to challenge everything and anything that sovereign nations do, including performing the most basic democratic functions of governance: companies could legally question laws passed by Parliaments, actions by governments and court rulings that allegedly harm investments.11 An ICS tribunal – and the future Multilateral Investment Court – would be able to overrule all EU member state courts, the European Court of Justice and the courts in EU partner countries, if it found that one of these courts’ rulings violated the far-reaching substantive investor rights (see ISDS attack #1). But unlike these national courts, ICS tribunals and the Multilateral Investment Court would be accessible only to foreign investors. And their sole purpose would be to protect investments and profit expectations.

The EU’s reformist idea concerns predominantly the institutionalisation of the system.

Ivaylo Dimitrov, arbitration lawyer with Arnold & Porter Kaye Scholer law firm 12

ISDS attack #3: Corporations claiming compensation for loss of imagined future profits

In ISDS challenges, investors often claim damages not just for the money that they allegedly spent on a project, but also for lost future profits: Rockhopper wants up to US$350 million from Italy – more than seven times the money spent on exploring the Ombrina Mare oil field; Razvoj Golf and Elitech claim US$500 million from Croatia – nearly four times the money invested in the Dubrovnik luxury golf resort; Eco Oro demands US$764 million from Colombia – over three times more than it spent on the Angostura gold project; and Gabriel Resources wants a staggering US$5.7 billion from Romania – eight times more than its alleged investments in the Roşia Montană mine, and a figure equivalent to 2.7 per cent of Romania’s gross domestic product.

Nothing in the EU’s recent agreements which include the ICS corporate rights would prevent or even temper such outrageous claims. While the EU-Canada trade deal CETA, for example, states that “monetary damages shall not be greater than the loss suffered by the investor”,13 arbitrators regularly consider expected future profits as part of such a “loss” and thus include this in the calculation of compensation. Clear text explicitly stating, for example, that compensation may not exceed the amount of capital invested by the company involved, is missing in both the EU’s recent investment protection agreements as well as its Multilateral Investment Court proposal.

This context puts a “huge price tag” on political decisions, as investment law expert Gus van Harten put it14 – and makes it potentially very costly for politicians to change course on policy issues or bring in new legislation in response to public demand. In turn such a system also creates a strong risk of regulatory chill, as we have seen in the case of the French law aiming to end dirty fuels (which was turned into its opposite after Vermilion’s ISDS threat), Colombia’s attempt to break the patent monopoly on a cancer drug to reduce its price in the interest of public health (which was abandoned after an ISDS threat from Novartis) and in the case of the Roşia Montană gold-mine in Romania (where the government, after being hit by a multi-billion ISDS claim, now appears to be rolling back on halting the project).

The EU even encourages such regulatory chill: its trade deals state that investment tribunals “shall reduce the damages” when there has been “a repeal or modification of the measure” at stake.15 In other words: if states give in quickly to corporate demands, and roll back attempts to legislate in the public interest, they will be rewarded by the ICS system with less punitive damage awards.

ISDS attack #4: Rich financiers speculate on injustice by funding ISDS claims

Half of the ISDS cases in this report feature third-party funding. The lawsuits of Kingsgate vs Thailand, Copper Mesa vs Ecuador, Gabriel Resources vs Romania, Rockhopper vs Italy and Eco Oro vs Colombia are all financed by speculative funders, who cover the claimant’s legal costs in exchange for a sizeable cut of the payout if the case is won.

The value of third-party funding to actors other than funders and some claimants has not yet been made clear, while the risks are increasingly apparent.

Brooke Guven and Lise Johnson, Columbia Center on Sustainable Investment16

Third-party funding has been criticised as an “exploitation mechanism” which “gives a small class of investors even more resources to pursue unbalanced claims against constrained states”.17 While proposals to ban such funding of ISDS claims are gaining traction, the EU’s recent agreements with countries like Canada, do not ban it, simply requiring the disclosure of such funding arrangments.18 The EU’s negotiation mandate for the Multilateral Investment Court is also completely silent on the issue.

In other words: the speculation on injustice will continue under the EU’s ICS approach, seeing funders with extremely deep pockets fuelling and enabling speculative investor claims and driving up defence costs for states, who have no equivalent funding mechanism. The only difference will be that the public will know a little bit more about the funding arrangements for such claims.

ISDS attack #5: No acknowledgement of affected communities, no place for human rights

One of the most fundamental problems with ISDS is that it is a one-way system that provides only rights to investors, with no balancing obligations. Affected communities cannot use it to sue companies that violate their human rights or cause them financial or other damage, and as we have seen they do not even have the right to be heard in the ISDS system. This grave injustice does not change whatsoever in the EU’s proposals.

Several communities affected by the issues which are the subject of the ISDS disputes in this report attempted to be heard in the proceedings – but to no avail. Arbitrators have turned down requests by communities close to the Santurbán mine in Colombia and the Roşia Montană mine in Romania as well as by indigenous peoples living on ancestral land at the heart of two disputes against Zimbabwe. These communities documented and offered evidence of human rights violations by the claimant companies, and of how certain tribunal decisions could further violate their rights. But the arbitrators found human rights to be inapplicable and irrelevant to the disputes, and denied the petitioners the right to make their arguments.

The EU proposal for a Multilateral Investment Court mentions the “possibility of submitting third party interventions”, a strikingly non-committal clause.19 The ICS rules in recent EU trade deals, too, allow for “amicus curiae briefs” by “non-governmental persons”.20 But the conditions governing such submissions are extremely restrictive (for example, a brief would have to be sent to the tribunal within 10 days of its establishment – a completely unrealistic deadline), making the procedures seem almost deliberately designed to be impossible for communities to follow. And, as under the existing agreements which enabled the cases in this report, the arbitrators are in any case not obliged to even deal with the arguments sent to them by impacted communities.21 The EU approach is thus far from anything close to full participation of affected communities in ISDS proceedings, or from holding investors accountable for their human rights abuses – the kind of meaningful ISDS reforms that are required, and have been proposed by numerous academics and UN human rights experts.22

The current reform proposals, which are limited in scope and nature, can only offer superficial solutions to symptoms of the fundamental flaws in the ISDS system.

An open letter on ISDS by independent UN human rights experts23

What is more, there is no mention of human rights anywhere in the EU’s investment protection provisions, or in its proposal for a Multilateral Investment Court. Formulations that would make it clear that investor rights must not trump human rights, or that exclude ISDS claims that challenge laws in the public interest are missing, too. Disappointingly, and despite public outcry across Europe, the EU’s revised approach to ISDS changes very little when it comes to tackling the negative effects that it can have on human rights.

The ISDS wolf in the ICS sheep’s clothing

We cannot know how potential future ICS claims against the EU, its member states or trading partners would be decided – or how a Multilateral Investment Court would rule. But it is nevertheless pretty clear that the investor rights as proposed by the EU would not prevent cases like those presented in this report from being filed in the future. The name change from ISDS to ICS and the Multilateral Investment Court have not led to the much-needed paradigm shift away from VIP legal rights for the rich. Instead the EU’s procedural improvements amount to little more than putting a sheep’s disguise on the ISDS wolf that still lurks beneath.

If domestic courts are good enough for the rest of society, why are they not suitable for corporations?

Guy Taylor, Global Justice Now24

  1. For an overview of criticism of ISDS in the EU, see: Corporate Europe Observatory, TTIP investor rights: the many voices ignored by the Commission, 3 February 2015.
  2. The EU has concluded agreements with ICS provisions with Canada, Singapore and Vietnam. Negotiations with other countries are ongoing, including China, Myanmar, Indonesia, Mexico and Japan.
  3. European Commission: The Multilateral Investment Court project. For a critical assessment of the initiative, see: S2B, CIEL and RLS: A World Court for Corporations. How the EU plans to entrench and institutionalise investor-state dispute settlement, November 2017.
  4. ITUC: Reforming the ISDS at the United Nations Commission on International Trade Law (UNCITRAL) – a note for the positions of trade unions, 13 March 2019.
  5. CCPA et al: Investment Court System put to the test. New EU proposal will perpetuate investors’ attacks on health and environment, April 2016.
  6. Quoted in Eric Frei: Schiedsrechtsexperte: TTIP-Gerichtshof würde wenig ändern, Der Standard, 2 November 2015.
  7. See articles 8.10.2 and 8.10.4 of the CETA agreement between the EU and Canada.
  8. Gabriel Resources Ltd. and Gabriel Resources (Jersey) Ltd.: Claimants Memorial, 30 June 2017, para 682 d.
  9. Copper Mesa Mining Corporation vs The Republic of Ecuador, Award, 15 March 2016, para 6.8.4.
  10. Article 8.9.1 and 8.9.4 of the CETA agreement between the EU and Canada.
  11. Under the CETA agreement between the EU and Canada, for example, the following measures can be challenged by investors: “a law, regulation, rule, procedure, decision, administrative action, requirement, practice or any other form of measure by a Party” (chapter 1, article 1.1).
  12. Ivaylo Dimitrov: Challenges in Front of the Successful Evolution of the FDI Protection Regime: EFILA Annual Conference, Kluwer Arbitration Blog, 11 February 2019.
  13. Article 8.39.3 of the CETA agreement between the EU and Canada.
  14. Gus van Harten: Key Flaws in the European Commission’s Proposals for Foreign Investor Protection in TTIP, Osgoode Legal Studies Research Paper Series, No.139, 4.
  15. Article 8.39.3 of the CETA agreement between the EU and Canada.
  16. Brooke Guven and Lise Johnson: The Policy Implications of Third-Party Funding in Investor-State Dispute Settlement, CCSI Working Paper, May 2019, 38.
  17. Frank J. Garcia: The Case Against Third-Party Funding in Investment Arbitration, Investment Treaty News, 30 July 2018.
  18. Article 8.26 of the CETA agreement between the EU and Canada.
  19. Council of the European Union: Negotiating directives for a Convention establishing a multilateral court for the settlement of investment disputes, 20 March 2018, para 13.
  20. Annex 29-A of the CETA agreement between the EU and Canada, para 43.
  21. Ibid., paras 44 and 46.
  22. See, for example: Letter of UN human rights experts to UNCITRAL working group III, 7 March 2019; Open Letter on the Asymmetry of ISDS by academics, 13 February 2019.
  23. Letter of UN human rights experts to UNCITRAL working group III, 7 March 2019.
  24. Global Justice Now: New ISDS is “little more than putting lipstick on a particularly unpopular pig”, 12 November 2015.