The EU Trade Commissioner Cecilia Malmström has released a concept paper that proposes handling private arbitration proceedings in line with regular court proceedings. Arbitration tribunals are an aspect of the free trade agreement, their function is to protect companies that see their rights threatened. Malmström also proposed to establish an international court to deal with investor protection, which the German Economics Minister Sigmar Gabriel (Social Democrats) demanded several days ago. These proposals seek to reduce the possibility of companies misusing such proceedings for their own ends. Private arbitration tribunals, which are supposed to give companies special protection, are an issue in negotiations for the free trade agreement TTIP between the EU and USA which have been running since 2013. Among other things, they would allow companies to sue for compensation if they lose their investments due to legislative changes or nationalization.
The Commission’s proposal is a reaction to persistent public criticism of arbitration tribunals. Almost 150,000 EU citizens spoke out against the tribunals in an online questionnaire that the EU Commission released last year. The leftist group in the European Parliament also opposes arbitration tribunals. They fear that companies can use the tribunals to undermine laws approved within the EU that go against their interests. That would threaten democracy in Europe.
Arbitration tribunals are well-established
Arbitration tribunals set the framework for arbitration proceedings, which have been a standard aspect of trade agreements between states since 1959. They are supposed to regulate relations between companies and states in the context of foreign direct investment. The idea first arose through a German initiative. Germany had negotiated a trade agreement with Pakistan. The countries agreed that companies could sue for compensation before an international tribunal if they were dispossessed. This measure aimed to create legal security and foster investment. These mechanisms were aimed in particular at countries with badly functioning legal systems, preventing them from seizing foreign companies’ factories on their territory without cause. Since then, over 1300 trade agreements have been approved worldwide that include this type of protection for foreign investors.
Until the 1990s arbitration proceedings were rare. Around 500 lawsuits were launched against states. Germany has only been sued twice, both times by the energy company Vattenfall. The first case ended with a settlement, the second case is ongoing. It concerns the German nuclear energy phase-out that was approved in 2011, which required Vattenfall to shut down two nuclear power plants. In the worst case, Germany will have to pay the company compensation for lost profits – when Vattenfall bought the nuclear plants, it assumed that they could run until the operation license expired. So far, most arbitration tribunal cases have been carried by EU companies against states on other continents.
Companies cannot annul laws or regulations through arbitration proceedings. They can only demand compensation if new regulations lead to a loss of investments. But critics argue that the possibility of compensation demands could prevent states from increasing environmental or health standards if they fear that foreign investors could sue them.
Those who oppose arbitration tribunals say that these proceedings are not necessary in states where the rule of law is well-established. They argue that national courts in the USA and EU offer enough protection because expropriation without cause is illegal. Opponents hope to eliminate these proceedings entirely.
Arbitration tribunals have also come under fire for lack of transparency. The parties in dispute usually name an arbitrator to decide on the claims. Business lawyers often take on this task. Before negotiations for TTIP began, the EU already announced that they would increase transparency in these proceedings. There have been no plans to eliminate private arbitration proceedings.
In her concept paper, Trade Commissioner Malmström has now proposed to make arbitration similar to court proceedings. The EU Commission plans to publish a fixed list of arbitrators named by the states. Ideally, these arbitrators should be professional judges. The initial plan was that companies and states could freely determine the arbitrators. There are also plans to introduce a system of appeals for arbitration judgements – another novel measure. Furthermore, the free trade agreement TTIP should stipulate that every state has the right to pass laws in the general public interest. No company should be able to launch a claim against these „public good laws“. „Publicly appointed independent judges are a stepping stone towards a permanent public commercial court“, says Viviane Reding, the former EU Justice Commissioner (Conservatives, Luxembourg).
According to critics, the Commission is still on the wrong path. Pia Eberhardt, a researcher at Corporate Europe Observatory (CEO), a non-governmental organization in Brussels, critizises the new proposal. „The fundamental question remains: why would we give extra rights to foreign investors in TTIP, threatening democracy, public budgets and our court system?“ National courts would provide enough protection for foreign investors.
Gabriel wants a public investment court
In February, the German Economics Minister Gabriel and six trade ministers from EU countries proposed a new model. Instead of improving private arbitration tribunals, they sought to establish an international investment court. Last week Gabriel presented a concrete plan. Initially, the investment court would deal with disputes between Europe and the US within the framework of TTIP if companies feel disadvantaged by new laws. Other countries that are not party to TTIP could later join the investment court.
Gabriel has support from the Social Democrats in the European Parliament. According to sources in the parliamentary Trade Committee, the parliament is currently preparing a resolution in which lawmakers reject EU plans for investment protection. Initial votes in various parliamentary committees have not produced majorities for the Commission’s plans.
EU Commissioner Malmström has described Gabriel’s idea of establishing an investment court as „interesting“. Malmström does not see a realistic chance of establishing a public court within the framework of TTIP. Accordingly, the Commission continues to support a private arbitration tribunal that would have new elements. In her position paper, she writes that these proceedings should be moved „closer to an established court“.
With her new proposal, Malmström seeks to achieve a compromise within the EU. She has set the long-term goal of establishing an international investment court. According to the Commission’s paper, the work towards that end „has already begun“. At the same time, she wants to prevent the TTIP negotiations from collapsing over the question of arbitration tribunals. The USA favors the well-tried solution of using private arbitrators. With this proposal, the Commission wants to regain the initiative in the debate on investment protection.
The EU wants to regain the initiative
It is unclear whether Malmström can convince the European Parliament with her initiative and whether lawmakers will support the Commission’s plans in a resolution they plan to pass in July. „So far, it appears the Commission is playing for time. If it made a serious effort now to establish a proper court with the USA, there could be a large majority“, says MEP Joachim Schuster (Social Democrats). Schuster is one of the lawmakers preparing the resolution in the Trade Committee. He remains skeptical as the Commission continues to support private investment protection outside of national legal processes. The Commission also does not want to change this in the trade agreement with Canada (CETA). The position paper only includes a vague reference to the idea of establishing an international investment court.
There has been no reaction from the US to these proposals within the EU. The US is negotiating on the basis of its own model treaties, which all stipulate private arbitration proceedings. But even there critics are beginning to voice their opinions. In a letter to President Barack Obama, several Democratic members of Congress spoke out against including investor arbitration proceedings in future trade agreements.