Client Alerts

Germany opposes the inclusion of investor-state dispute settlement provisions in EU-U.S. free trade agreement

Volterra Fietta Client Alert
11 April 2014

Since July 2013 the European Union (“EU”) and the United States (“U.S.”) have been negotiating the Transatlantic Trade and Investment Partnership (the “TTIP”), a comprehensive investment and trade agreement that would create the largest free-trade area in history. On 14 March 2014 Germany announced its opposition to the inclusion of investor-state dispute settlement (“ISDS”) provisions in the TTIP. This announcement signals a more critical approach to ISDS mechanisms, a view that is shared by several other EU Member States. While this resistance to ISDS may be at odds with the mandate granted to the European Commission, it may still influence the negotiations and lead to a limited ISDS mechanism in the TTIP.

Background

The TTIP is intended to create new business opportunities by liberalising regulatory standards and trade and by increasing foreign direct investment between the U.S. and the EU. Through the TTIP, the EU and U.S. seek, among other things, to enhance the legal certainty for U.S. and EU companies engaged in international trade and foreign direct investment in those territories.

The substantive investment protections in the TTIP are likely to be the typical investment protections, including a prohibition on illegal expropriation of investments and guarantees of fair and equitable treatment of investments. Such substantive protections are made effective through ISDS provisions, which grant foreign investors the right to bring arbitral proceedings against a host State to seek compensation for violations of the applicable treaty. This right has become a common feature of investment chapters in free trade agreements and of bilateral investment treaties.

Through the Treaty of Lisbon (signed in 2007), the EU Member States transferred competence over foreign direct investment policy and rule-making, including ISDS, exclusively to the European Commission. On 14 June 2013 the Council of the European Union (the “EU Council”) adopted a mandate and issued directives for the European Commission to negotiate the TTIP. The mandate includes the negotiation of ISDS provisions in the TTIP.

Once the TTIP negotiations are completed, both the European Parliament and the EU Council will have to decide whether to approve the terms of the TTIP. EU Member States represented in both the European Parliament and in the EU Council have the final say in whether or not to approve the terms of the TTIP. If approved, the TTIP would become legally binding on the EU. Germany’s opposition to the ISDS provisions in the TTIP (and its significant “soft” power in affecting policy in the EU) could influence the final terms of the TTIP.
Germany’s opposition to the ISDS mechanism

On 14 March 2014, at the end of the fourth round of TTIP negotiations, Germany said it would seek the exclusion of ISDS provisions from the TTIP, even though it had originally approved the mandate given to the European Commission to negotiate the TTIP, which specifically included ISDS. This announcement by Germany signals a change in its traditional and long-standing support of ISDS provisions in bilateral investment treaties. It followed the European Commission’s announcement that it would suspend the TTIP negotiations to launch a 90-day public online consultation. The online consultation has been open to all European citizens since 27 March 2014.

Several explanations for Germany’s opposition to the inclusion of ISDS provisions in the TTIP have been put forward. First, according to a statement of the junior economy minister to the Bundestag (the national Parliament of Germany) on 12 March 2014, “from the perspective of the [German] federal government, U.S. investors in the EU have sufficient legal protection in the national courts”. Similarly, EU investors in the U.S. benefit from protection in U.S. courts. This trust in European and U.S. domestic court systems may explain in part Germany’s insistence that there is no need for an additional mechanism to provide recourse to arbitration. Furthermore, there are already bilateral investment treaties between the U.S. and nine EU Member States which provide for recourse to international arbitration (namely, between the U.S. and each of Bulgaria, Croatia, Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania and Slovakia).

Second, Germany’s announcement may be a result of its recent experience as a respondent in international arbitral proceedings brought by foreign investors. In 2012, Swedish power company Vattenfall brought a claim against Germany under the ISDS mechanism in the Energy Charter Treaty (the “ECT”), in response to Germany’s closure of Vattenfall’s nuclear power stations after the tragedy in Fukushima, Japan. Vattenfall had previously brought a separate claim against Germany, which was settled in 2011. In that earlier dispute, Vattenfall had challenged the environmental restrictions that affected a €2.6 billion coal-fired power plant under construction along the banks of the Elbe River. Germany’s recent opposition to ISDS may be a result of its attempt to limit its exposure to such costly arbitral proceedings.

Third, ISDS has been the subject of significant criticism in the German national press, perhaps in part as a result of its recent experience as a respondent State in investment arbitrations. This is augmented by reports arguing that investment-treaty arbitration is jeopardising the protection of human rights and the environment.

Germany is not alone in its opposition to the inclusion of ISDS provisions in the TTIP. On 10 March 2014, then French trade minister, Nicole Bricq, also stated her opposition to the inclusion of such provisions in the final EU-U.S. free trade agreement. Concerns about an increased threat of litigation are shared by consumer and environmental groups on both sides of the Atlantic.

These concerns may be a product of the increase in ISDS proceedings against EU countries. ICSID statistics indicate that although investors’ claims against States in Western Europe are relatively rare (comprising 2% of cases registered or administered as of 31 December 2013), such claims have increased in recent years. For example, five claims against Spain have been registered with ICSID since 2012 and the first ICSID claim against Belgium was brought in 2012.

The entry into force of the ECT contributed to the increase of investor-State claims against European countries. Of the 51 cases listed on the Energy Charter website (which were brought before various international tribunals) 25 were filed against an EU Member State. Of those 25 cases, 11 were filed against one of the “old” EU Member States that were members of the EU when the ECT was signed (namely, two cases against Germany, one case against Italy, and eight cases against Spain). In the same way that the ECT facilitated new claims against European States (like that of Vattenfall against Germany), a new free trade agreement which includes ISDS provisions may open the door to investors’ claims against other EU Member States.

Commentary

It is unlikely that Germany’s announcement will lead to the exclusion of ISDS provisions from the TTIP. Both U.S. chief negotiator Dan Mullaney and his EU counterpart, Ignacio Garcia Bercero, have publicly defended the inclusion of ISDS provisions in the TTIP. Mr Mullaney stated that “a comprehensive 21st century trade agreement should include appropriate protections for investors […] and that does include ISDS”. And the results of public consultations in the U.S. in 2009 were supportive of a strong investor protection regime. Mr Bercero emphasised that ISDS was part of the negotiating mandate approved by all EU Member States, including Germany.

However, Germany’s announcement adds to the increasing scepticism and resistance among many EU actors to the inclusion of ISDS provisions in the TTIP. For example, a March 2013 report adopted by the European Parliament Committee on International Trade stated that, generally, the inclusion of ISDS mechanisms “should be a conscious and informed policy choice that requires political and economic justification”. Similarly, in May 2013, the European Parliament expressed caution in respect of ISDS provisions, endorsing them only “in cases where it is justifiable”. Furthermore, the EU Commissioner for Trade Karel De Gucht is reported to have stated that he would be in favour of removing the ISDS provisions from the TTIP if the U.S. were agreeable to that proposal. Although the U.S. remains steadfast in its determination to retain ISDS provisions in the TTIP, the announcement of Germany and statements of EU organs that are critical of ISDS provisions may impact the negotiations and the form that the ISDS provisions ultimately take in the TTIP.

The decision on ISDS provisions in the TTIP will not only impact the TTIP itself, but also influence future negotiations of investment protections with other States. The EU and the U.S. have both commenced negotiations with China regarding the protection of investments. The EU is also involved in the negotiation of a free trade agreement with Canada and has recently commenced talks on a bilateral investment treaty with Myanmar. The outcome of the current negotiations on the TTIP may influence the nature of ISDS provisions in those future investment agreements.

Regardless of the precise effect that it may have on other international trade and investment agreements, it is unlikely that Germany’s (and other EU Member State’s) concerns over ISDS provisions will cause the EU to cease from including ISDS provisions in international investment agreements (either bilateral investment treaties or free trade agreements with investment chapters). Also, Germany has not indicated that its policy change will mean that it will terminate or withdraw from the more than 100 existing international investment agreements currently in force. Those agreements, with investment protections and ISDS mechanisms, will continue to be an important factor for investors to consider when they structure their investments or when they are faced with a dispute.