Investor-State Dispute Settlement: Human Rights vs. Corporate Profits

By Cassandra Knapman, J.D. candidate, University of Western Ontario

In late 2016, long-running negotiations on the EU-Canada Comprehensive Economic and Trade Agreement (CETA) came to a shuddering halt when a small French-speaking region inside Belgium refused to add its signature to the deal. Wallonia, which for complex political reasons needed to sign off on CETA in order for Belgium – the lone holdout – to join, had objected to the inclusion of an Investor-State Dispute Settlement (ISDS) mechanism. Such mechanisms permit companies to sue states for alleged discrimination against foreign investors, although in practice they have long been criticised for undermining domestic regulations.

Wallonia’s reluctance about the mechanism reflected, in part, the criticism that these mechanisms cause states to trade human rights protections for investor money, a concern that has been echoed by UN Special Rapporteurs and scholars.[2] After a flurry of negotiations, Wallonia extracted an agreement to exclude the relevant ISDS sections from the provisional application, pending an opinion from the European Court of Justice as to their compatibility with existing European treaties.[3]

According to proponents, ISDS is intended to protect investors from adverse state action and supplement domestic dispute resolution systems.[4] It permits corporations to sue the foreign nations in which they do business for discriminating against or expropriating their business ventures.[5] These claims are sent to arbitration before the applicable judicial body outlined in the relevant treaty, with arbitrators typically chosen by the parties involved.[6] Under CETA, the proposed judicial body is the Investment Court System.[7]

Arbitration is an expensive process and traditionally requires each party to pay its own fees, regardless of the outcome. Alongside the costs of the arbitration, successful arbitration for the investor typically results in a monetary penalty against the state.[8] A study of eighty-two ISDS cases found the average monetary award for investors to be 10.4 million USD.[9] While the majority of international treaties do not allow arbitration decisions to permanently annul or infringe on domestic laws, arbitrators often order certain actions by the state, such as preliminary injunctions.[10] Alongside the costs and potential payouts, states are concerned that successful arbitration by investors will discourage future investment.[11]

One of the main critiques of ISDS is that it causes states to avoid passing more stringent legislation on human rights, labour, or the environment for fear these could trigger investor claims.[12] Some states have rescinded or watered down legislation challenged by investors before their claims proceed to arbitration. An example is Germany’s relaxation of pollution controls in response to arbitration claims from Swedish nuclear company, Vattenfall.[13] Canada has also conceded human rights protections to avoid arbitration.[14] For instance, in 1998 Canada backed down from a proposed ban of a neurotoxic fuel additive, after an American company sued the government under NAFTA. As part of a negotiated settlement, Canada was forced to issue a statement declaring that the company Ethyl’s MMT additive was not dangerous to public health or the environment.[15] This statement directly contradicted many studies warning of the environmental and health risks of the additive.[16]

According to a report by several UN Special Rapporteurs, ISDS mechanisms have penalized states for enacting legislation on issues such as “food security, access to generic and essential medicines, and reduction of smoking … or raising the minimum wage” among other human rights concerns.[17] As the effects of ISDS ultimately affect the rights and protections of individuals, arbitrations have also been criticized for their lack of transparency and their failure to allow public participation.[18] These concerns have led to states either hesitating or refusing to enter into treaties with ISDS clauses, including CETA.[19]

In developing CETA’s ISDS, the parties, including Canada, attempted to address these criticisms. They clarified the meaning of “fair and equitable treatment” of investors, which is usually not defined and so its interpretation has been left to tribunals.[20] Since tribunals have no formal system of precedent and are often composed of different members for each hearing, the meaning of “fair and equitable treatment” has varied by dispute.[21] Without a consistent definition, it is difficult for states to ascertain whether they have provided investors with “fair and equitable treatment.” Building on interpretations commonly used by international tribunals, CETA defines “fair and equitable treatment” to refer to discrimination on protected grounds, loss of due process or access to legal proceedings, arbitrariness and abusive treatment.[22] This stricter definition appears to provide for greater predictability of arbitration outcomes, and may also decrease investor claims by limiting what is included as unfair and unequal treatment by the state.

In addition to clarifying the language of ISDS, CETA’s provisions aim to introduce greater objectivity, certainty, and transparency into the arbitration process. CETA incorporates the UN Convention on Transparency in Treaty-based Investor-State Arbitration to allow for greater transparency in the arbitration process.[23] Furthermore, the arbitration process is made more objective by the introduction of the Investment Court System (ICS).[24] The ICS will have a standing arbitration panel to hear all ISDS claims made under CETA.[25] The panel members are appointed for five to ten-years by the CETA Joint Committee. During an arbitration, arbitrators must demonstrate independence from those involved in the dispute.[26] The ICS also maintains an appellant body to review arbitration decisions and ideally create greater consistency in arbitration decisions.[27] Greater objectivity and consistency should allow states to better foresee the outcome of arbitration and thus decrease the number of states self-limiting human rights legislation to avoid unknown arbitration outcomes. Lastly, CETA alters the rewards available as a result of ISDS arbitration such that the unsuccessful party pays all costs of arbitration. Moreover, should the state lose the arbitration, only monetary awards can be assigned.[28] These changes in arbitration awards will hopefully limit the negative effects that ISDS can have on human rights.

Despite these apparent improvements, many remain critical of the CETA approach. Belgium – or to be more accurate, Wallonia – lists “arbitrator remuneration,” “ability to seek external employment,” and “selection and dismissal” amongst its concerns that the ICS will not function as an independent and objective judicial body. Critics are also concerned that despite CETA’s additional environmental, labour, and human rights protections, ISDS arbitration will continue to deter states from instituting further such legislation.[32]

While CETA has taken steps to address concerns related to ISDS, critics remain concerned about how the ICS will function in practice and whether the additional protections will actually limit negative arbitration effects on domestic human rights legislation. However, depending on the decision of the European Court of Justice, the current ISDS mechanism may never be put into practice.

Whatever form the dispute resolution system between investors and states under CETA ends up taking, it is clear that human rights must outweigh investor profits.

CK

[1] “CETA Belgian Request For An Opinion From The European Court Of Justice” (6 September 2017), Kingdom of Belgium, Foreign Affairs, Foreign Trade and Development Cooperation, online: <https://diplomatie.belgium.be/sites/default/files/downloads/ceta_summary.pdf>. [Belgium]

[2] “Investor state dispute settlement (ISDS): Background”, Business & Human Rights Resources Center, online: <https://business-humanrights.org/en/investor-state-dispute-settlement-isds/investor-state-dispute-settlement-isds-background> [Resource Center]

[3] Ibid.

[4] Ibid.

+ Organisation for Economic Co-operation and Development Investment Division, “Investor-State Dispute Settlement” (16 May 2012), Organisation for Economic Co-operation and Development, pg 13, online: < http://www.oecd.org/investment/internationalinvestmentagreements/50291642.pdf >.

[5] “The Arbitration Game”, The Economist, (11 October 2017), online:< https://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration>. [Economist]

[6] “The Basics”, ISDS Platform, online: <http://isds.bilaterals.org/?-the-basics->.

[7] J. A. VanDuzer,” Investor-state Dispute Settlement in CETA: Is it the Gold Standard?” online: (2016), C.D. Howe Institute at pg 9 – 16 <https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary%20459.pdf>. [CD Howe]

[8] Organisation for Economic Co-operation and Development Investment Division, “Investor-State Dispute Settlement” (16 May 2012), Organisation for Economic Co-operation and Development, pg 24-25, online: < http://www.oecd.org/investment/internationalinvestmentagreements/50291642.pdf >. [OECD]

[9] European Commission, “Investor-to-State Dispute Settlement (ISDS) Some facts and figures” (12 March 2015) European Commission, pg 8, online: < http://trade.ec.europa.eu/doclib/docs/2015/january/tradoc_153046.pdf >.

[10] CD Howe, supra note 7.

OECD, supra note 8.

Resource Center, supra note 10.

[11]Resource Center, supra note 10.

[12] Ibid.

[13] Ibid.

[14] Ken Traynor, “How Canada Became a Shill for Ethyl Corp.” (July 1998), Canadian Environmental Law Association, online: <http://www.cela.ca/article/international-trade-agreements-commentary/how-canada-became-shill-ethyl-corp>.

[15] Ibid.

MMT is methylcyclopentadienyl manganese tricarbonyl and has been linked to heavy metal poisoning.

[16] Ibid.

[17] Alfred de Zayas, Catalina Devandas Aguilar et al, “UN experts voice concern over adverse impact of free trade and investment agreements on human rights” (2 June 2015), Office of the United Nations High Commissioner for Human Rights, online: <http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=16031>. [OHCHR]

[18] Resource Center, supra note 10.

[19] Economist, supra note 5.

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] OHCHR, supra at note 12.

[24] CD Howe, supra at note 7.

[25] Ibid.

[26]Ibid.

[27] Ibid.

[28] Ibid.

[29] Belgium, supra at note 1.

[30] CD Howe, supra at note 7.

Scott Sinclair and Stuart Trew, “Why progressives oppose Canada-EU trade deal”, Toronto Star, (22 September 2016) online: <https://www.thestar.com/opinion/commentary/2016/09/22/why-progressives-oppose-canada-eu-trade-deal.html>. [Sinclair]

[31]Sinclair, supra at note 24.

[32]Ibid.