By Emma Clancy.

This week the European Parliament voted to ratify the EU-Singapore free trade agreement, and voted separately to ratify the EU-Singapore Investment Protection Agreement. The investment agreement includes an investor-state dispute settlement (ISDS) mechanism, which is why it was voted on separately. Irish MEPs from Fine Gael were among those who voted to endorse the introduction of an ISDS with Singapore.

The ISDS mechanism, in its current form, will allow private companies to sue national governments for compensation for loss of expected future profits in response to government actions that impact on the company’s activities – in private offshore tribunals that comprise three lawyers with the power to award damages.

The action by tobacco giant Philip Morris against the Australian government over its introduction of plain packaging for cigarettes in 2010 has become the most infamous and emblematic example of the ISDS in action, though the company lost the case in 2017.

The vote on the Singapore agreement marked the second time that the European Parliament has endorsed the inclusion of an ISDS mechanism in an EU-wide free trade agreement. While MEPs voted to reject an ISDS mechanism in the – now stalled – Trans-Atlantic Trade and Investment Partnership (TTIP) with the US in 2015, the Parliament later voted to ratify the investment court system included in the free trade agreement between the EU and Canada (the Comprehensive Economic and Trade Agreement, or CETA) in 2017.

However, two landmark rulings by the European Court of Justice (ECJ) have slowed the implementation of the ISDS mechanism in the so-called new generation of free trade agreements, which aim to remove ‘non-tariff barriers’ to trade.

In an opinion of the full court on the Singapore agreement in May 2017, the ECJ found that the ISDS mechanism was not solely a competence of the EU Commission and, as a result, any EU agreement including such a mechanism also needed to be ratified individually by each national parliament of EU member states, in addition to being ratified by the European Parliament.

As a result, both CETA and the investment protection agreement with Singapore will be required to be ratified by the national parliaments of all EU member states before they can come fully into force. The EU Commission has dealt with this setback by ‘provisionally applying’ the overwhelming majority of the provisions in CETA while the ratification process is ongoing, and by splitting the Singapore free trade agreement into two separate treaties.

Following the ECJ opinion on Singapore, the court issued a further opinion in March 2018, which found that the ISDS mechanism in the bilateral investment agreement between Slovakia and the Netherlands “has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law”. The opinion stated that ISDS “remove[s] from the jurisdiction of their own court, and hence from the system of judicial remedies” disputes that may concern the application of EU law, and that the trade dispute tribunals may not ensure “the full effectiveness of EU law”.

Now we are in the bizarre situation of ISDS mechanisms included in agreements between two member states of the EU being deemed to be incompatible with EU law by the ECJ, but being legal in treaties struck by the EU with third parties.

In September 2017, the Belgian government sought an opinion of the ECJ on CETA, which has not been fully concluded yet. The decision to seek a court opinion was a compromise struck between the central Belgian government the regional government of Wallonia, which threatened to block the ratification of CETA and therefore prevent it from coming into force.

But in a bad sign for opponents of the use of secret corporate courts, the ECJ’s Advocate General issued a non-binding opinion on 29 January, which argued that the inclusion of an ISDS mechanism in CETA was compatible with EU law. The opinion of the full court has not yet been issued, so it remains possible (but unlikely) that the final opinion will be that the inclusion of ISDS mechanisms in EU free trade agreements is incompatible with EU law.

Challenging legislation made in the public interest

The investor-state dispute settlement mechanism was first introduced into trade agreements and treaties in the 1950s, ostensibly to protect investors from outright government expropriation of their land or factories. It was rarely used until the 1990s when the US-led surge in free trade agreements made it a more readily accessible option for multinational corporations. According to the UN Conference on Trade and Development (UNCTAD), there has been more than a ten-fold rise in reported cases 2000.

By the start of 2018, the number of publicly known ISDS claims had reached a total of 855; but the real figure could be far higher as some cases may be kept entirely secret, with no record whatsoever of the existence of a claim or dispute. In 2017, 65 new cases were initiated by corporations against 48 states under bilateral investment treaties. Of these, the damages awarded to corporations (in the cases where these details have been reported), range from US$15 million to $1.5 billion.

An ISDS mechanism is now included in more than 3,000 trade agreements around the world, around 2,700 of which are bilateral investment agreements and the remainder of which are trade treaties.

Canada, which entered into an ISDS agreement with the US through the North American Free Trade Agreement (NAFTA), expected that its investors would be enabled to sue the US and Mexican governments, but was unprepared for the series of cases brought against it by US corporations, which have led it to pay out at least $219 million in compensation or settlements and incur unrecoverable legal costs of $95 million. Outstanding cases against Canada include damages claims of $6 billion.

The mechanism has repeatedly been used to directly challenge legislation by democratic governments made in the public interest. After NAFTA, the Canadian government banned a fuel additive, MMT, due to it having been found to be a risk to human health and the environment. It was sued by US MMT manufacturer Ethyl for a loss of expected future profits and settled the case for $13 million. The settlement included not only a payout but an obligation on the Canadian government to rescind the ban and publicly declare that MMT was safe.

In an intellectual property case, US drug corporation Eli Lilly sued Canada under NAFTA over its laws that require the patentability of a medicine to be proved before a patent is granted – a law with the public policy goal of ensuring accessibility to affordable medicines.

In another case under NAFTA, Canada is being sued by US company Lone Pine Resources for $230 million for the declaration by the Quebec government of a moratorium on oil and gas exploration in 2011. The moratorium resulted in the revocation of Lone Pine’s permit to frack gas from underneath the St Lawrence River, which was an essential source of drinking water in Quebec.

Under NAFTA, Canadian companies made 19 claims against the US in total, while US companies brought 39 cases against the Canadian government. This ISDS mechanism between the US and Canada is to be eliminated in the new NAFTA (US-Mexico-Canada Agreement, or USMCA, signed in November 2018), while the ISDS with Mexico will be replaced with a new process that requires the exhaustion of remedies in the normal domestic courts before corporate arbitration can begin.

Despite the fact that the Canadian government has been sued 41 times under NAFTA, and lost several significant cases brought against it by US companies, it was Canada that ardently supported the retention of the ISDS between the US and Canada in the USMCA negotiations.

Argentina was sued by more than 40 corporations after it took action to devalue its currency and freeze energy and water bills in the wake of its 2001 financial crisis. Compensation orders against Argentina for these actions reached $1.15 billion by 2008. In Ecuador, after the government cancelled Occidental Petroleum contracts for illegally breaching contractual terms, the US oil company was awarded $1.77 billion. Ecuador, Bolivia and Venezuela have now withdrawn from the World Bank’s investor dispute mechanism and withdrawn from many bilateral investment treaties that contain an ISDS mechanism.

In response to the Arab Spring in 2011, the then Egyptian government conceded an increase in the minimum monthly wage from $56 to $99 – only to be sued in June 2012 for almost $100 million by French corporation Veolia, which objected to having to pay its Alexandria bus station workers more.

In 2011, Swedish energy corporation Vattenfall claimed €1.4 billion in damages from Germany for placing environmental restrictions on a coal-fired power plant the company was building in Hamburg. The government settled – lifting the restrictions. After the Fukishima nuclear disaster, the German government made a decision to phase out nuclear energy. The same Swedish company, Vattenfall, sued under ISDS again in 2012 – this time for €3.7 billion for the loss of profits in its two nuclear power plants.

The examples go on.

If successful, the EU-led drive to apply ISDS provisions to the new-generation free trade agreements it strikes with third parties will result in an exponential rise in ISDS claims, where taxpayers are forced to shoulder the cost of the risks associated with foreign direct investment.

Regulatory ‘chill’

As objectionable as the socialisation of risk taken by powerful multinational corporations is, the direct power these corporations are seizing over public policy is far more disturbing.

A 2013 ‘fact sheet’ on TTIP from the European Commission declares: “Including an ISDS mechanism in an investment agreement will not make it more difficult for the EU or its Member States to pass laws or regulations.” It states that the EU is working to ensure that “genuine regulations and laws are consistent with investment agreements”, a statement that begs the question – what exactly is a genuine regulation or law? Does the Commission get to decide on behalf of member states which laws passed by democratic governments can be maintained and which can be discarded in the interests of multinational investors?

In an attempt to convince EU citizens that member states would retain the right to regulate under TTIP, the fact sheet continued: “A country cannot be compelled to repeal a measure: it always has the option of paying compensation instead.”

Well – that’s reassuring.

Discussing the impact of NAFTA, a former Canadian government official was quoted in The Nation as saying: “I’ve seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years.” These included pharmaceuticals, chemicals, patents and pesticides. “Virtually all of the new initiatives were targeted and most of them never saw the light of day.”

World-leading ISDS lawyer and Essex Court Chambers barrister Toby Landau QC said that this so-called regulatory chill exists “without doubt”, adding that in his role as counsel, “on a number of occasions now I’ve actually been instructed by governments to advise on possible adverse implications or consequences of a particular policy in terms of investor-state cases”.

As to achieving ‘regulatory coherence’ in the new generation of free trade agreements, business associations believe it would save everyone time if they were allowed to just write regulations for governments. In the lead-up to the opening of TTIP negotiations in 2013, the US Chamber of Commerce and BusinessEurope demanded a seat at the table with regulators “to essentially co-write regulation” in an October 2012 joint statement.

The ISDS provisions that offer the highest success rate for multinationals are the “fair and equitable treatment” commitment and the “minimum standard treatment” guarantee. According to Public Citizen, in 74 per cent of cases where US investors were successful, the fair and equitable treatment provision was used.

UNCTAD has calculated that of all known investor-state disputes, 42 per cent were won by the state, 31 per cent were won by the investor, and 27 per cent were settled – typically regarded as a win by the investor in terms of a financial or legislative reward. There is no limit on the amount that can be awarded to a corporation, and the average cost of running a case is $8 million.

So how do these tribunals actually work?

They are ad-hoc tribunals convened by the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL) dispute mechanism. Three private lawyers are selected from a roster to arbitrate – one appointed by the investor, one by the state, and one that is agreed by both parties.

They meet in hotels or conference centres for a few days or a week, according to leading US ISDS lawyer – and fierce critic of the system – George Kahale. The proceedings are often kept secret and there are no public disclosure requirements.

Many lawyers alternate between representing major corporations in cases against governments and being ‘judges’ in ISDS tribunals. They do not earn a flat salary, as judges do in most countries, but rather earn more money the more tribunals they sit on. Incredibly, there is no requirement to follow precedent – the findings and the sum awarded are entirely at the discretion of the panel of corporate lawyers.

In its analysis of the Investment chapter of the Trans Pacific Partnership leaked by Wikileaks in 2015, Public Citizen outlines this extreme conflict of interest: “Since only foreign investors can launch cases and also select one of the three tribunalists, ISDS tribunalists have a structural incentive to concoct fanciful interpretations of foreign investors’ rights and order that they be compensated for breaches of obligations to which signatory governments never agreed.” An investor-friendly tribunalist clearly has a higher chance of being selected by corporations to sit on future tribunals.

Resistance to corporate courts

In response to the mass movement across the EU against the TTIP and CETA agreements, the EU Commission has proposed to develop a ‘multilateral investment court’ at the United Nations level, with an appeal mechanism and full-time adjudicator, which it argues would improve the transparency and reliability of the rulings of the ad-hoc tribunals.

But no matter how the Commission tries to re-package, spin and sell the investor-state dispute settlement clause, the fact remains that this provision will give multinational corporations the right to make claims against elected governments for enacting policies they don’t like.
However they dress it up, such a mechanism still provides corporations with the power to sue governments that implement policies that may impact on their expected future profits, and be awarded damages; it still amounts to corporate justice and socialised risk.
In any case, the Singapore investment agreement includes a traditional ISDS mechanism, and a commitment that if such a multilateral investment court is established in the future, the parties will use it to resolve disputes.

The popular movement that responded to the prospect of the TTIP agreement opening up EU governments to claims by US corporations has receded somewhat, as the likelihood of reaching agreement on TTIP with the Trump administration is slim to nil. But mass opposition to secret corporate courts, and many of the other negative aspects of the EU’s free trade agreements, remains.

Demonstrations against CETA have mobilised millions of people across Europe. More than half a million people have signed a WeMove.EU petition against provisions for secret corporate courts being included in the EU’s trade agreements.

In the Irish state, the Seanad adopted a cross-party resolution rejecting CETA in October 2016, with Fine Gael voting in support of adopting CETA, and Fianna Fáil abstaining.

The Irish state is one of the few states around the world that has never included an ISDS mechanism in any of its bilateral investment treaties to date, making the Fine Gael position of supporting the EU’s free trade agreements that include an ISDS all the worse, because it marks a fundamental departure from decades of foreign and investment policy for the state.

Ratification of these agreements will mean that this, and any future Irish government, will have to take into consideration the potential impact of all new legislation on foreign corporations. Any new law that may impact on an investor’s profits can be challenged in one of the above-described tribunals, and damages awarded or the legislation scrapped.

But a single ‘no’ vote in any EU state parliament will be enough to scupper these plans. It will be up to civil society, left parties, environmentalists and the trade union movement to demand a vote against ISDS in the Dáil on the CETA and Singapore agreements.

Emma Clancy is editor of Irish Broad Left. Follow her on Twitter @emmaclancy123.

3 Replies to “EU endorses corporate power grab through secret investment courts”

  1. An example of these so-called courts “It has finally come to pass. An African country has been sold, lock stock and barrel by its leaders to European corporations. Mozambican government officials negotiated a secret loan agreement with Credit Suisse, BNP Paribas and VTB Capital for $2 billion. The loan was executed in the form of government guaranteed bonds bought by the lending banks. The country’s GDP at the time was $16 billion. Ostensibly the loan was for a tuna-fishing project but has now turned out, on the admission of the officials concerned, to be a loan mostly for military equipment.

    The guarantee gives British courts “exclusive jurisdiction to resolve any disputes arising out of [ …] this warranty” and Mozambique renounces “any immunity which it or its property or income may enjoy in any jurisdiction.”

    Military equipment not being an income generating asset, Mozambique had no means of making the first interest payment of $60 million in January 2017. It defaulted on the loan. As a result, the IMF has suspended the next tranche of $283 million credit to the country. Other development partners have followed suit and the currency has collapsed.”

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