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Changes in the air. Will TTIP change ISDS model?

maciej Posted in Investment Arbitration

On July 8, 2015 the European Parliament approved the recommendation to the European Commission regarding the Transatlantic Trade and Investment Partnership by endorsing the Lange report. In fact, they are guidelines for the European Commission to negotiate with the United States. The approval of these guidelines has taken place with a considerable majority of votes: 436 to 241 with 32 abstentions. It bodes well for the possibility of negotiating the final agreement.

Among the several controversies related to TTIP are investment arbitration system – or more broadly – investor-to-state dispute settlement (ISDS), emerging as one of the most vibrant topics of the debate. The current model of the ISDS based on arbitration was subject of a massive attack from various groups, mostly with a little knowledge of the practical results of a current system. In these circumstances no wonder that the position of the European Parliament, but also the Commissioner of Trade, Cecilia Malmström, leaves no doubt that the traditional system of investment arbitration will be modified. The Lange report states: “to replace the ISDS system with a new system for resolving disputes between investors and states which is subject to democratic principles and scrutiny, where potential cases are treated in a transparent manner by publicly appointed, independent professional judges in public hearings and which includes an appellate mechanism, where consistency of judicial decisions is ensured, the jurisdiction of courts of the EU and of the Member States is respected, and where private interests cannot undermine public policy objectives”.

Is this the end of investment arbitration as we know it? Is the idea behind those words to create an international court similar to the European Court of Human Rights in Strasbourg, with its significant budget, building, personnel, and professional judges? Of course it is difficult at this stage to speculate. After all, the Americans also need to agree on this. I believe that their attachment to the idea of arbitration is significantly stronger than in Europe. But there is definitely a change in mood in this regard. Investment arbitration grew up in an atmosphere of Washington consensus. The liberal economic model, which puts its hope in the free market and competition, became the basis for the economic policies proposed, and some say, imposed by the World Bank, on a number of countries, including Poland since the mid-90s. The Balcerowicz Plan is considered one of the most spectacular successes of the Washington consensus. The beginning of the 90s also brought a plethora of investment protection agreements (BIT). Almost all of them included an investment arbitration clause, according to the rules of the International Centre for Settlement and Investment Disputes (ICSID), an agency of the World Bank. In this climate, an arbitration, in which cases between investors and host states are settled by arbitrators selected by the parties, and their judgment is practically final, was somehow the result of the logic of the system. As a result of this system, panels of three arbitrators assessed the conduct of governments, parliaments, courts, but in consequence the conduct of entire countries. Suffice it to say that the biggest critic of Putin’s Russia has turned out to be the triple arbitration panel on Yukos case. It is understandable that the system is facing criticism. It should be noted that, in spite of criticism from a principle or ideological angle, this system fulfilled its role in practice. Among a huge number of judgments, only a few judgments were misguided.

But the position of Parliament and the European Commission on TTIP is not the only symptom of the pending changes. The European Commission in June launched a procedure against five European countries for conducting cases on the basis of the so-called European internal investment protection agreements (Intra-EU BITs). The Commission is of the opinion that those agreements are contrary to European law.

In regatta sailing the marker buoy plays an important role. The sailing is done in front of this buoy in one direction (down, or up the wind) and behind it the sailing takes place in the opposite direction. Are we quickly approaching the marker buoy in investment arbitration? Should we expect a radical change in the system? Time will tell. The climate has certainly changed and the World Bank has renounced the Washington consensus. The states, regulations, protection of national interests, protection of the interests of society, etc. These are the mantras of the present time. This climate is not suitable for three distinguished arbitrators to evaluate the activities of states from the point of view of the investor and the state, as if these two parties were equal partners.