TUC submission to European Commission's consultation on ISDS

Issue date
19 Jun 2014

1      The TUC represents almost 6 million workers and 54 affiliated unions from a variety of sectors. We welcome the opportunity to respond to the European Commission’s consultation on the investment chapter of TTIP, and ISDS in particular[1].

2      It has been argued that the TTIP has the potential to deliver significant economic gains for both EU and USA in terms of growth, employment creation and higher wages. Trade unions in both Europe and the USA have been open to the possibilities of a progressive TTIP, although we are sceptical about some of the more optimistic claims being made. Concerns have been raised around the potential impact on public services, environmental and labour standards, financial service regulation and other sectoral concerns, and the state’s ability to legislate in the public interest, as outlined in the written evidence the TUC submitted to the House of Lords Sub-Committee on TTIP in October 2014.[2] 

3      The TUC’s response to this consultation will not follow the specific questions outlined, as they present ways to improve ISDS and investment protection measures in TTIP. The TUC, like the ETUC and AFL-CIO, opposes any form of ISDS in TTIP.  Our response, therefore, will detail why ISDS is unnecessary in trade agreements and poses a serious threat to public services and states’ ability to legislate in line with citizens’ interest and wishes.

4      The TUC has concerns that the Commission is failing to properly engage with public concerns on ISDS by so narrowly defining the consultation in this way. 

5      In order to demonstrate that TTIP is a deal being negotiated for the public interest, the TUC calls on the Commission to consult with key civil society groups on all aspects of the negotiations, not just ISDS.  It is crucial the Commission consults with trade unions in the sectors under discussion in TTIP.

ISDS is unnecessary

6      The consultation document states that ISDS is needed because the rights of investors to be compensated for expropriation and operate free from discrimination or harassment ‘are not always guaranteed for foreigners or foreign companies’.  

7      A report from the LSE commissioned by the UK’s Department for Business, Innovation and Skills (BIS), however, states there is no evidence that US or EU investors face such discrimination. The report warns against the inclusion of ISDS in TTIP as it would lay the UK in particular open to costly legal challenges by investors and limit its ability to pursue public policy objectives.[3] 

8      BIS stated in a written Parliamentary answer to John Healey MP, that ‘the UK courts have recognised the right to property as a fundamental legal right since at least the eighteenth century’.  The answer also states that property rights are protected under the Human Rights Act 1998 which gives effect under UK law to the rights to property in the European convention on human rights and fundamental freedoms.[4]

9      Dr Lauge Poulsen noted in written evidence to the House of Lords Sub-Committee on TTIP in March 2014 that the UK in particular poses no threat for US investors as it is ‘a democracy with independent courts and strong legal protections for private property’.[5]

10   Foreign investors in the USA also already have legal protection provided by the fifth amendment of the US Constitution which states: “nor shall private property be taken for public use, without just compensation.” Any investor can use US courts to enforce this provision.[6]

11   The fact that the UK has not been sued through an ISDS procedure in the past is also not a credible argument for its inclusion in TTIP.  This merely shows that the British governments have refrained from signing investment treaties with large capital-exporting states. It can be seen that when Canada, another country not previously subject to ISDS proceedings, signed the North American Free Trade Agreement (NAFTA) with USA and Mexico, they found themselves the subject of several ISDS cases, several of which were successful.  Canadian companies also used ISDS to sue the US government successfully through ISDS provisions in NAFTA.[7]

12    An increasing number of countries are rejecting ISDS in their trade agreements. Australia insisted ISDS was excluded from the Free Trade Agreement they negotiated with the USA in 2005.  In 2013 South Africa cancelled a number of BITs partly due to the danger of ISDS.[8] Earlier this year, Indonesia announced it would be terminating more than 60 Bilateral Investment Treaties due to concerns about the threat ISDS posed to its public policy.[9]

13   There are a number of alternative protections for investors that can be built into trade agreements that could be used instead of ISDS.  The ETUC Resolution on EU Investment Policy calls for state-to-state mechanisms to be used for resolving disputes – as well as a requirement that domestic courts are used by investors filing claims of expropriation against states.[10] Companies could also take out individual insurance if they wish to have additional protection when they make a foreign investment.[11]

ISDS is inequitable and undemocratic

14   Inequality lies at the very foundation of ISDS as it privileges foreign investors over any other economic actors - domestic investors or interest groups such as consumers or workers – by giving them the right to access special courts for pursuing claims of expropriation.

15   ISDS cases allow investors to overrule democracy by overturning legislation that can be interpreted by lawyers as ‘expropriation’. Expropriation refers to a state action which threatens an investment – this can be either directly by seizing their property or indirectly through a damaging policy.

16   There is a worrying trend for companies to argue in ISDS cases that workers’ rights legislation constitutes ‘indirect expropriation’.  For example, the French company Veolia sued the Egyptian government through an ISDS procedure for increasing the minimum wage.  Meanwhile, the American steel company Nobel Ventures used ISDS in the US-Romania BIT to sue the Romanian government for failing to restrain workers from taking frequent strike action.[12] 

17   Companies have also used ISDS to challenge environmental policy. The Swedish company Vattenfall is currently suing the German government through ISDS for its policy to phase put nuclear energy.

18   The Commission states in this consultation document that ‘The EU  wants to make  it clear that non-discriminatory measures taken for legitimate public purposes, such as to protect health or the environment,  cannot  be  considered  equivalent  to  an  expropriation,  unless  they  are manifestly excessive in light of their purpose. The EU also wants to clarify that the simple fact that a measure has an impact on the economic value of the investment does not justify a claim that an indirect expropriation has occurred.’ 

19   While this intention is welcome, the TUC does not believe these protections are adequate. It is already known that measures to present so called ‘frivolous’ claims have not been successful as a claim has to be without legal merit to be regarded as frivolous.[13]  International lawyers that take on ISDS cases are skilled in interpreting trade agreements to craft legally sound cases that portray policies as expropriation.[14] Even the right-wing US-based Cato Institute argues ‘ISDS is ripe for exploitation by creative lawyers’ and is unnecessary in TTIP.[15]

20   And while ISDS further allows foreign investors to undermine democratic legal systems of states as ISDS claims are pursued in special international courts by a small elite of specialist lawyers who work for international commercial law firms.   Just 15 arbitrators have decided 55% of all known ISDS cases.[16] While the Commission has proposed a ‘code of conduct’ for arbitrators in ISDS cases, this does not escape the fact that the tribunal process bypasses national legal systems and clearly invites conflict of interest issues when only a small elite group of arbitrators can serve in ISDS tribunals.

21   While the Commission proposes to make ISDS hearings more transparent, it still states the procedure will work within UNICITRAL rules which can limit public access to hearings for ‘logistical reasons’ and withhold information that ‘would jeopardise the integrity of the arbitral process’.[17] The legal process would therefore not be properly democratically accountable to those who would be affected by its judgements.

Danger to public services

22   The USA has the largest amount of foreign direct investment (FDI) in the UK. In 2011 alone US FDI in the UK came to $40 billion.  A large amount of this FDI is in public utilities.  The LSE study commissioned by BIS warned against including ISDS in TTIP as the public sector has been particularly prone to ISDS claims in the past.  Poland and Slovakia have both been sued by investors for bringing parts of their health services back into public control.[18]

23   In the UK, there is a danger that if a future government were to bring parts of the National Health Service back into public ownership by overturning the Health and Social Care Act (2012), it would be prone to challenge through ISDS by American companies that have significant investment in the NHS.  In addition, ISDS mechanisms could be used by US companies to litigate against tighter regulation of the UK’s growing for-profit education sector. 

24   States that have been sued through ISDS also have dramatically less resources to invest in public services and public policy objectives. The law firm Allen & Overy puts average costs at slightly over $4 million per party and it is frequently more – Slovakia had to pay $22 million to the Dutch health insurer Achmea as compensation in an ISDS cases.[19]  Meanwhile an ISDS case over media ownership in the Czech Republic obliged the Czech government to pay an investor $354 million in compensation which was the equivalent of the entire country’s health budget.[20]

‘Chilling effect’

25   When ISDS is present in trade deals, governments have scrapped potential policies that they fear will trigger an ISDS claim – described as the ‘chilling effect’ on policy making.  For example, the government of New Zealand withdrew laws on plain cigarette packaging after Phillip Morris sued Australia through ISDS for introducing similar laws. The government of Canada, meanwhile, revoked a ban on hazardous waste exports to the USA as it feared this would be subject to an ISDS claim. [21] 

26   These are dangerous precedents that make clear the presence of any ISDS mechanism in TTIP is enough to alter the behaviour of states away from the pursuing the public good and democratically mandated policies and towards more investor-friendly liberalisation of services.

Conclusion

27   The TUC opposes all forms of ISDS in all existing trade agreements and all future agreements due to the threat it poses to public policy making, labour and environmental standards.

 

[3] J. Bonnitcha, J.Webb Yackee, L.Skovgaard Poulsen,’The Costs and Benefits of an EU-US Investment Protection Treaty’  p.37, see http://www.italaw.com/sites/default/files/archive/costs-and-benefits-of-an-eu-usa-investment-protection-treaty.pdf

[5] See evidence by Dr Lauge Poulsen to House of Lords Sub-Committee on TTIP, p.121 http://www.parliament.uk/documents/lords-committees/eu-sub-com-c/TTIP/TTIPwrittenevidencevolumeFINAL.pdf

[8] Previously, the South African government was sued by an Italian mining company for its Black Economic Empowerment laws which were enacted to address the legacy of labour market left by Apartheid.  See: http://www.project-syndicate.org/commentary/joseph-e--stiglitz-on-the-dangers-of-bilateral-investment-agreements#HjPF1AydqhH3C8TZ.99  

[11] Further alternatives to arbitration for investor-state disputes can be found in the UNCTAD report (2010) at http://unctad.org/en/docs/diaeia200911_en.pdf

[12] J Vogt, ‘Trade and Investment Arrangements and Labor Rights’ in Corporate Responsibility for Human Rights Impacts: New Expectations and Paradigms Eds. Lara Blecher, Nancy Kaymar Stafford, Gretchen Bellamy,

[13] See Stew Trew, May 2013, ‘Revised EU Mandate Seeks To Prevent 'Frivolous' Investor-State Claims’ Inside Trade https://groups.google.com/forum/#!topic/canada-eu-ceta/ZWMCxkXXb4g

[19] J. Bonnitcha, J.Webb Yackee, L.Skovgaard Poulsen,’The Costs and Benefits of an EU-US Investment Protection Treaty’  p.37, see http://www.italaw.com/sites/default/files/archive/costs-and-benefits-of-an-eu-usa-investment-protection-treaty.pdf

[21] Bonnitcha, Webb Yackee, Skovgaard Poulsen, p.39 - 40