The Transatlantic Trade and Investment Partnership (TTIP) is a bilateral trade agreement currently being negotiated between the United States and the European Union.  

If it ever sees the light of day (and the politics on both sides of the Atlantic are complicated), it will be a broad free trade agreement (FTA) with 24 chapters on, among other things, market access for goods and services, and regulatory standards across a number of industries.  TTIP’s proposed investment chapter is, however, among the most closely watched.  The European Commission released a draft of it on 16 September 2015 (the Commission Draft), which is interesting for two reasons.  

• There is increasing public debate surrounding what protections a state should afford to foreign investors, and what rights investors should have if those protections are breached.  The Commission Draft is a modern and nuanced response to this debate from a (quasi-)State party; and 
• The approach taken by the EU in the TTIP negotiations will likely be a good guide as to how the Commission will approach other FTAs that it is negotiating with (among others) Japan and China.  

It is important to understand from the outset what the Commission Draft is not.    

First, it does not represent the final EU negotiating position.  Instead, it is the Commission’s draft, which will undergo review by the European Parliament and the Council (i.e. the Member States).  It is, however, broadly consistent with proposals aired over the past few months by, among others, the European Parliament, France and Germany.  It seems, therefore, to reflect current thinking in Europe.  

Secondly, still less is the Commission Draft the final form of TTIP.  A number of the proposals made in the Commission Draft may not find favour with the US (most notably, the idea of an ‘investment court’).  We know this because it departs from the model US bilateral investment treaty (BIT) and what we understand that the US agreed to in the newly concluded Pacific Rim free trade agreement – the Trans-Pacific Partnership (or TPP).  The signing of TPP, and an outline of its terms, have been announced but its final text has not yet been made public.   

Nevertheless, the Commission Draft represents an important development in the current debate surrounding investor-State dispute settlement (ISDS) in two key respects: first, for the innovations it proposes with respect to the substantive protections available to investors; and, secondly, for its proposed dispute resolution system which, if maintained, represents a substantial departure from the ISDS procedures found in most investment treaties in force today, including the recently-concluded TPP.   

Proposed investment protections  

Anyone who has read a traditional BIT will be familiar with the format: a preamble, followed by about 15 short articles over half a dozen pages.  This practice has evolved in recent times, however.  The ever-growing number of investment treaty claims, and the body of case law these have produced, have led states to become more sophisticated in defining precisely what substantive protections and procedural rights they agree to offer to foreign investors.  The Commission Draft is the latest step in this evolution.  It provides detailed specifications of the rights of investors (and qualifications to those rights) over nearly 40 pages.  These pages contain a number of innovations, and only the highlights can be identified here.  

Notably, the Commission Draft goes further than most BITs to date in giving express recognition to a State’s right to regulate.  Traditional BITs have granted investors broadly drafted and largely unqualified protections (such as the well-known right to fair and equitable treatment, among others).  States have complained that these protections have compromised their ability to regulate in pursuit of legitimate policy objectives.  By contrast, the Commission Draft (in Article 2(1)) provides that the investor protections in TTIP “shall not affect the right of the Parties to regulate within their territories to achieve legitimate policy objectives”.   

This provision (and others associated with it) marks a departure from the FTAs that the EU has negotiated recently with Singapore and Canada.  Interestingly, though, it is understood that the TPP – to which the US, but not the EU, is party – similarly recognises a ‘right to regulate’.  It is not clear exactly how this provision would co-exist with the more conventional investment protections included in the Commission Draft.  One possibility is that the ‘right to regulate’ will amount to a defence that a State would be entitled to raise in response to a claim that it breached a treaty standard, namely that it was regulating to achieve a legitimate policy objective. It remains to be seen how the ‘legitimacy’ requirement will be interpreted and the extent to which it will yield results that are different from the ‘bona fide, non-discriminatory regulation’ exception (generally limited in principle to cases of indirect expropriation, but sometimes given broader application) that already exists.  

The investment protections in the Commission Draft are otherwise broadly consistent with the texts negotiated by the EU with Singapore and Canada.  The general trend represented by these texts is that the bar for a successful treaty claim is being raised.  This is perhaps most evident in the Commission’s approach to the fair and equitable treatment standard.  This standard, on which investors have most often relied successfully in treaty claims, has been criticised by some opponents of ISDS for lacking a clear definition.  Article 3 of the Commission Draft seeks to address this by presenting a closed list of situations that would amount to a breach.  These set a high threshold for investors to surmount, referring to “manifest arbitrariness” and “targeted discrimination on manifestly wrongful grounds”, among other things.  While these standards have parallels under customary international law, their precise scope will only be clarified as claims are decided under them. 

Proposed investment court system 

While the treaty standards in the Commission Draft are of interest, the most striking innovation is procedural.  Almost all existing investment treaties (including the EU’s proposed FTAs with Singapore and Canada) provide for claims by investors for breaches of treaty to be submitted to an arbitral tribunal.  The Commission Draft makes two striking proposals: first, to replace arbitral tribunals with a new ‘investment court’ staffed by judges appointed by the EU and US; secondly, for the possibility of appeals to an Appeal Tribunal. 

Tribunal of first instance 

These proposals are not unexpected and they follow similar ideas aired by France, Germany and the European Parliament earlier this year, reflecting the growing (and largely misplaced) public perception that investor-State arbitration amounts to private justice rendered by unaccountable corporate lawyers for corporate interests.  The Commission’s stated ambition is to create “a public justice system – just like those we’re familiar with in our own countries”.

Thus, the Commission proposes a Tribunal of First Instance consisting of 15 judges appointed by an as-yet unspecified “Committee” for a six-year term, renewable once. Among the 15 judges, there must be (i) five nationals of a Member State of the EU; (ii) five US nationals; and (iii) five nationals of third countries (with one of each sitting on a panel in each case).  The judges must “possess the qualifications required in their respective countries for appointment to judicial office, or be jurists of recognised competence”. The judges must have “demonstrated expertise in public international law” and it is “desirable” that they have expertise in international investment or trade law and ISDS. 

The fear of the investor community has been that an ‘investment court’ would represent state interests to their detriment, and deny them ‘buy-in’ to the process that the current arbitration system gives them.  An important test, therefore, of the credibility of any investment court will be as to the identities of the judges.  At this stage, their likely profile remains unclear, although it seems most likely that at least a substantial number will be retired national court judges.

The proposed new investment court is not, however, a complete departure from the prevailing investor-State arbitration system.  Apart from the identity of the individual decision-makers, some familiar aspects of investor-State arbitration remain.  In particular, claims would still proceed at ICSID or under the UNCITRAL Arbitration Rules.  This hybrid approach leaves a number of important questions unanswered, including how investment court (not to mention appellate) proceedings would work within the framework of the ICSID Convention, and whether investment court ‘awards’ would benefit from the enforcement regime of the New York Convention.  Whilst it seems likely that the answer to the latter question is ‘yes’ (based on Article I(2) of the New York Convention), the answer to the former question is at present much less clear.  

Appeal tribunal 

Another complaint about ISDS has been the perceived inconsistency and unpredictability of decision-making.  There have long been calls for an appellate mechanism as a remedy for this.  The response in the Commission Draft has been a proposal for a permanent Appeal Tribunal for TTIP.  It would be composed of six members, including two nationals of a Member State of the EU, two US nationals and two nationals of third countries (with one of each sitting on a panel in each case), each of whom will have a six-year term.  The grounds of appeal would be limited to: (a) an error of law; (b) a manifest error on the facts (including relevant domestic law); and (c) the grounds for annulment of an award under the ICSID Convention, to the extent not covered by (a) and (b). 

If implemented, this Appeal Tribunal would only be a step towards consistent decision-making in TTIP cases.  It would have no jurisdiction to hear appeals from the many cases under other investment treaties.  The potential for divergent interpretations of investment protection standards remains.  That is why the Commission is committed to exploring the possibility of a broader appellate mechanism for investment disputes generally. 

Some have objected that an appellate mechanism would make an already lengthy and costly process even longer and still more costly.  To its credit, the Commission Draft seeks to set time limits for cases to address this point: a first instance award should be rendered in 18 months, and an appeal should be concluded within 180 days. 

Conclusion 

Some of the proposals in the Commission Draft are radical.  Nevertheless, they largely deserve to be taken seriously.  The proposals described above are simply selected highlights.  Other proposals, not explored here, include: 

• On the substantive side, provisions dealing specifically with the consequences of subsidies being removed, the precedence of EU state aid rules and the exclusion of ‘negotiated’ sovereign debt restructuring.  These are all responses to recent cases involving EU Member States. 
• On the procedural side, (less innovative) provisions setting forth ethical rules for judges, procedures for the early strike-out of weak claims; requirements for the provision of third party funding to be disclosed; and rules allowing orders for security for costs (unlikely to be welcomed in the US). 

Not all of these proposals will withstand negotiations with the US.  In particular, it is unclear what the US’s attitude will be to the proposed investment court, given that the recently-concluded TPP offers the more familiar arbitration mechanism for resolving investment disputes.  Even if agreement can be reached with the US on a policy level, a number of issues remain open, including the mechanism for appointing judges, the inter-relationship between the ‘court’ and the arbitration-like procedure it is expected to follow, and the regime for enforcing the decisions of the ‘court’ and the appeal tribunal.