TWN Info Service on Finance and Development (Feb16/01)
24 February 2016
Third World Network

EU's new ICS would bring ISDS back from the dead
Published in SUNS #8185 dated 22 February 2016

Geneva, 19 Feb (Kanaga Raja) - The Investment Court System (ICS) proposed by the European Commission for all of the EU's ongoing and future investment negotiations to get around the massively unpopular Investor-State Dispute Settlement (ISDS) system, would still empower corporations to sue governments over measures to protect the environment, health, workers and other public interests, according to a just released new report.

According to the report, the proposed ICS does not put an end to ISDS. Quite the opposite, it would empower thousands of companies to circumvent national legal systems and sue governments in parallel tribunals if laws and regulations undercut their ability to make money.

It would pave the way for billions in taxpayer money being paid out to big business. It could curtail desirable policymaking to protect people and the planet. And it threatens to lock EU member states forever into the injustices of the ISDS regime, said the report.

"In a nutshell, the proposed โ˜new' ICS is ISDS back from the dead. It's the zombie ISDS."

The report, titled "The zombie ISDS: Re-branded as ICS, rights for corporations to sue states refuse to die", was released by some 17 civil society organisations in 11 European Union countries. The full report is at URL below: (

They are Corporate Europe Observatory (CEO); Association Internationale de Techniciens, Experts et Chercheurs (AITEC); Attac Austria; Campact; ClientEarth; Ecologistas en accion; Forum Umwelt & Entwicklung; Instytut Globalnej Odpowiedzialnosci (IGO); PowerShift; Seattle to Brussels Network (S2B); Traidcraft; Transnational Institute (TNI); Umanotera; Vedegylet; Vrijschrift; War on Want; and 11.11.11.

According to the report, investor-state cases have mushroomed in the last two decades from a total of three known treaty cases in 1995 to a record high of over 50 new claims filed annually in the past five years. 2015 saw the absolute record high of 70 new ISDS cases.

Globally, it said, 696 investor-state disputes were counted as of 1 January 2016, against 107 countries, but due to the opacity of the system the actual figure could be much higher.

Seventy-two per cent of all known cases filed by the end of 2014 were against developing and transition countries. But lawsuits against developed economies are also on the rise - in 2015, Western Europe was the world's most sued region.

Investors have triumphed in 60 per cent of investor-state cases where there has been an actual decision on the merits of the case, whereas states have โ˜won' only 40 per cent of the time (even though there isn't anything states can win because they only ever get awards against them).

The report found that award figures may reach up to ten digits. The highest known damages to date, US$50 billion, were ordered against Russia, to the former majority owners of oil and gas company Yukos.

The main financial beneficiaries have been large corporations and rich individuals: 94.5 per cent of the known awards went to companies with at least US$1 billion in annual revenue or to individuals with over US$100 million in net wealth.

According to the report, the last two decades have also seen a number of multi-million-dollar claims against the alleged damage to corporate profit of legislation and government measures in the public interest.

"Developed and developing countries on every continent have been challenged for financial stability measures, bans on toxic chemicals, mining restrictions, anti-smoking legislation, anti-discrimination policies, environmental impact assessments and more."

The report cited several examples of investor-state lawsuits:

* Corporations versus public health - Philip Morris vs. Uruguay: Since 2010, Philip Morris has been suing Uruguay on the basis of its bilateral investment treaty with Switzerland. The tobacco giant challenges compulsory large-scale health warnings on cigarette packs and other tobacco control measures designed to reduce smoking, arguing that they prevent it from displaying its trademarks, causing substantial losses. Philip Morris demands US$25 million in compensation from Uruguay.

* Corporations versus action on climate change - TransCanada vs. the US: In January 2016, Canadian pipeline developer TransCanada announced its intention to sue the US on the basis of the North American Free Trade Agreement (NAFTA) over President Obama's rejection of the contested Keystone XL oil pipeline from Canada's tar sand fields to refineries in the US. The project, which according to environmentalists, would increase CO2 emissions by up to 110 million tons per year, had faced massive citizen opposition. TransCanada wants a stunning US$15 billion in damages.

* Corporations versus environmental protection - Vattenfall vs. Germany I & II: In 2009, Swedish energy multinational Vattenfall sued the German Government, seeking 1.4 billion euros in compensation for environmental restrictions imposed on one of its coal-fired power plants. The case, based on the Energy Charter Treaty (or ECT, an international agreement for cross-border co-operation in the energy industry), was settled after Germany agreed to weaken the environmental standards. In 2012, Vattenfall launched a second lawsuit via the ECT, seeking 4.7 billion euros for lost profits related to two of its nuclear power plants. The legal action came after Germany decided to phase out nuclear energy, following the Fukushima nuclear disaster.

* Corporations versus black empowerment - Piero Forsti and others vs. South Africa: In 2007, investors from Italy and Luxembourg sued South Africa over its Black Economic Empowerment Act, which aims to redress some of the injustices of the apartheid regime. It requires, for example, mining companies to transfer a portion of their shares into the hands of black investors. The dispute (under South Africa's bilateral investment treaties with Italy and Luxembourg) was closed in 2010, after the investors received new licenses, requiring a much lower divestment of shares.

* Corporations versus the environment and community values - Bilcon vs. Canada: In 2008, US concrete manufacturer Bilcon sued Canada on the basis of NAFTA over the rejection of a proposed quarry, following an impact assessment warning of potential adverse social and environmental effects. In 2015, Canada lost the case. Two of the arbitrators ruling on the claim considered the impact assessment as arbitrary, frustrating Bilcon's expectations and therefore violating NAFTA. The third arbitrator disagreed strongly, calling the ruling a "significant intrusion into domestic jurisdiction" and warning that it "will create a chill on the operation of environmental review panels". How much compensation Canada will have to pay is yet to be decided, but it could climb as high as US$300 million even though the project never reached the construction stage.

* Corporations versus action against financial crises - investors vs. Argentina: When Argentina froze utility rates (energy, water, etc.) and devalued its currency in response to its 2001-2002 financial crisis, it was hit by a flood of nearly 30 investor lawsuits and became the most-sued country in the world under investment arbitration. Big companies like Enron (US), Suez and Vivendi (France), Anglian Water (UK) and Aguas de Barcelona (Spain) demanded multi-million compensation for revenue losses. So far, Argentina has been ordered to pay a total of US$900 million in compensation for its financial-crisis-related measures, with several cases still ongoing.

* Corporations versus communities and the environment - Gabriel Resources vs. Romania: In 2015, Canadian mining company Gabriel Resources sued Romania via two of the country's bilateral investment treaties. The lawsuit concerns Gabriel's planned open pit gold mine in the historic village of Rosia Montana. It was halted when Romanian courts annulled several permits and certificates required for the project, following strong community resistance against the mine's potentially disastrous environmental and social impacts. According to media statements, Gabriel could demand up to US$4 billion in compensation.

* Corporations against fracking moratoria - Lone Pine v. Canada: In 2011, the Government of the Canadian province of Quebec responded to concerns over water pollution by implementing a moratorium on the use of hydraulic fracturing (โ˜fracking') for oil and gas exploration. In 2012, the Calgary-based Lone Pine Resources energy company filed a NAFTA-based investor-state lawsuit, challenging the moratorium. Lone Pine, which filed the case via an incorporation in the US tax haven Delaware, is seeking US$109.8 million plus interest in damages.

The report noted that sometimes, the threat of an expensive dispute has been enough to freeze or delay government action, making policymakers realise they would have to pay to regulate. Canada and New Zealand, for example, delayed anti-smoking policies because of threatened or actually filed investor lawsuits from Big Tobacco.

As the number of investor-state disputes has grown, investment arbitration has become a money-making machine in its own right. Today, there are a number of law firms and arbitrators whose business model depends on companies suing states. Hence, they are constantly encouraging their corporate clients to sue - for example, when a country adopts measures to fight an economic crisis.

Meanwhile, sitting as arbitrators, investment lawyers have been found to adopt investor-friendly interpretations of the corporate rights in trade and investment deals, paving the way for more lawsuits against states in the future, increasing governments' liability risk.

"Speculative investment funds, which have recently started helping fund investor-state disputes in exchange for a share in any granted award or settlement, are likely to even further fuel the boom in arbitration," the report warned.

It noted that the growing number of corporate lawsuits has raised a global storm of objection to investment treaties and arbitration. Public interest groups, trade unions, small and medium enterprises, and academics have called on governments to oppose investor-state arbitration, claiming it fails basic standards of judicial independence and fairness and threatens states' responsibility to act in the interest of their people, economic and social development and environmental sustainability.

Concerns have also been raised about the glaring absence of investor obligations and the imprecise language of many treaties, opening the floodgates to expansive, pro-investor interpretations of corporate rights by private tribunals.

Proponents of free markets and trade, such as the right-wing US think tank Cato Institute, too, have joined the opponents' camp criticising that "the ISDS approach of providing ... protections only for foreign investors... is akin to saying in a domestic constitution that the only rights we will protect are those of wealthy property owners."

Germany's largest association of judges and public prosecutors (with 15,000 members of a total of 25,000 judges and prosecutors in the country) has recently raised similar concerns about granting exclusive rights and pseudo-courts to foreign investors, calling on legislators to "significantly curb recourse to arbitration in the context of the protection of international investors".

The report pointed out that some governments, too, have realised the injustices of investment arbitration and are trying to get out of the system. South Africa, Indonesia, Bolivia, Ecuador, and Venezuela have terminated several bilateral investment treaties (BITs).

South Africa has developed a domestic bill that does away with some of the fundamental and most dangerous clauses in international investment law. So does India's new model investment treaty. Indonesia, too, seems to be moving in a similar direction.

And in Europe, Italy has withdrawn from the Energy Charter Treaty (ECT) - a multilateral treaty created after the Cold War to integrate the energy sector of the former Soviet Union into Western markets - notably after having been hit and threatened with ECT-based claims in the renewables sector.

According to the report, at a time when both the number of super-sized investor lawsuits and the types of policies being attacked are surging, and more and more governments are trying to change or exit from the investment arbitration system, an even bigger threat looms on the horizon.

A number of mega-regional treaties involving close to 90 countries are currently under negotiation, which threaten to massively expand the ISDS regime, subjecting states to an unprecedented increase in liability.

In this context, the report cited the Trans-Pacific Partnership (TPP) between 12 Pacific countries including the US and Japan; the Regional Comprehensive Economic Partnership (RCEP) under negotiation by 16 Asia and Pacific economies; the Tripartite Free Trade Agreement (TFTA) which is being negotiated by 23 African economies; a number of bilateral deals, including the US-China and the EU-China investment treaties; and the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US.

A recent analysis estimated that while all existing investment agreements cover only 15-20 per cent of the global investment flows, these new treaties would increase this coverage to approximately 80 per cent, multiplying the risk of governments being sued as a result of public policy measures.

"TTIP alone would dwarf all of the existing treaties allowing for investor-state dispute settlement. For example, in one fell swoop, it could multiply the number of US-based corporations that could challenge European environmental, health, and other public safeguards in international tribunals by a factor of eleven."

The report charged that in the wake of massive public concern over ISDS, the European Commission is using a new acronym - ICS or the investment court system - to re-brand and give cover to a massive expansion of the same much-loathed regime.

The extent of the opposition to the once-arcane ISDS became clear in early 2015, when the Commission published the results of a public consultation on the rights of foreign investors in the EU-US TTIP trade deal currently under negotiation: over 97% of the record 150,000 participants had rejected the corporate privileges.

The outcry came from a broad and diverse camp, including businesses, local and regional governments, elected representatives, academics, trade unions and other public interest groups.

Even more people, over 3.3 million Europeans, have signed a petition against TTIP and the already concluded EU-Canada Comprehensive Economic Trade Agreement (CETA) "because they include several critical issues such as investor-state dispute settlement... that pose a threat to democracy and the rule of law".

Criticism had also mounted in EU member states and the European Parliament. Parliaments in the Netherlands, France, and Austria, for example, had adopted resolutions raising serious concerns about investment arbitration in TTIP.

So when, in autumn 2015, the European Commission presented a revised proposal for all of its ongoing and future investment negotiations (including TTIP), it went for a new label.

Instead of "the old, traditional form of dispute resolution" which "suffers from a fundamental lack of trust", Trade Commissioner Malmstrom promised "a new system built around the elements that make citizens trust domestic or international courts".

The new talk in town was โ˜ICS': the โ˜Investment Court System' - a system that allegedly would "protect the governments' right to regulate, and ensure that investment disputes will be adjudicated in full accordance with the rule of law," as European Commission Vice President Timmermans claimed.

"The problem is, when you examine ICS it looks like ISDS has risen from the grave," said the report, adding that what the EU is proposing simply copies in many ways the arbitration proceedings of the past.

For example, investor-state lawsuits under TTIP would still operate under the usual ISDS arbitration rules. And the so-called โ˜judges' deciding the cases would be paid according to the most common schedule of fees used in ISDS proceedings - with a lucrative US$3,000 per day.

Indeed, with the exception of some procedural improvements - an enhanced selection process of arbitrators (re-labelled โ˜judges') and the establishment of an appellate chamber - the โ˜new' ICS essentially equals the โ˜old' ISDS system which can be found in existing investment treaties and the current text of the proposed EU-Canada CETA.

"The ICS proposal contains the same far-reaching investor rights that multinationals have used when demanding multi-billion Euros in compensation for public health and environmental policies. As a result, it contains the same serious risks for taxpayers, public interest policies, and democracy as the โ˜old' ISDS system."


According to the report, the EU proposal for an ICS would empower tens of thousands of companies to sue.

The European Commission's latest proposal for investment protection, which applies to all of its ongoing and future trade negotiations, would allow foreign investors operating in the EU and EU-based investors operating abroad to circumvent national legal systems and file lawsuits in international tribunals - whenever they think that state actions violate the far-reaching โ˜substantive' investor rights that the EU proposes.

In the context of TTIP alone, tens of thousands of companies would be potential claimants. According to research by US-consumer group Public Citizen, a total of 80,000 companies operating on both sides of the Atlantic could launch investor-state attacks if the EU proposal was to be included in TTIP.

"So, the EU proposal would significantly expand the reach of the current ISDS system."

The EU's proposal contains the same wide-ranging so-called โ˜substantive' rights for investors as existing treaties, which have been the legal basis for investor attacks against perfectly legitimate and non-discriminatory government policies to protect health, the environment, economic stability, and other public interests.

The report further said that the EU proposal paves the way for billions of taxpayers' money to be paid to corporations. Once an investment tribunal finds that a state has violated the investors' super-rights - and being found to be in breach of just one of them is enough - based on the EU proposal, it could order vast amounts of public money paid to compensate the investor.

"As there is nothing in the text that puts limits on how much a company can sue for, the multi-million and billion lawsuits already on the table around the world are set to continue. They can wreak havoc with public budgets, and can be enforced by seizing state property in many countries around the world."

The report said that while under the new EU proposal, investment tribunals could not order governments to reverse or rewrite a law, it doesn't take much to imagine how, by empowering multinationals to claim eye-watering sums in compensation for public decisions, the investor rights could make politicians reluctant to enact desirable safeguards for public health, social well-being, privacy, and the environment if those are opposed by big business.

"Indeed, there is already evidence that proposed and adopted laws on health and environmental protection have been abandoned, delayed or otherwise adapted to the wishes of big business because of expensive corporate claims or the threat of litigation."

The EU proposal would allow foreign corporations to challenge everything that sovereign nations can do: laws passed by Parliaments, actions by governments and court rulings that allegedly harm their investments - from the local to the federal and even European level.

"In a nutshell, the EU proposal would establish a supreme pseudo-court that would trump all courts of EU member states and the European Court of Justice. But this pseudo-court would be exclusively accessible to foreign investors and its only purpose would be to protect their investments and profit expectations."

The report further charged that the dispute settlement process proposed by the EU is not judicially independent, but has a built-in, pro-investor bias.

Lawsuits would be decided by a tribunal of three for-profit arbitrators (now re-labelled โ˜judges' by the EU) with vested interests. Unlike judges, they would not have a fixed salary, but be paid per case - with a lucrative US$3,000 per day, on top of a monthly retainer fee of 2,000 euros per month. So, they would earn more fees as more foreign investor claims were brought.

"In a one-sided system where only the investors can sue, this creates a strong systemic incentive to side with them - because as long as the system pays out for investors, more claims and more money will be coming to the arbitrators. An empirical study of 140 investment treaty cases until May 2010 indeed reveals that arbitrators have vastly extended foreign investors' rights through expansive interpretations of the law."

Re-labelling the ISDS system a โ˜court system' and the new arbitrators โ˜judges' as the European Commission is doing is a serious misnomer. It can never be a true court as long as foreign investors are the only ones who can file lawsuits and as long as the tribunals will not be taking into account environmental protection, human rights or other non-corporate considerations that a regular judge usually has to balance, said the report.

It further argued that the EU proposal would risk to eternalize the ISDS. Several countries around the world are currently getting out of investment agreements, which have proven too costly for them. But while many existing treaties could be terminated at any time, it will be practically impossible to exit from the extra rights for foreign investors once they are enshrined in a larger trade pact as proposed by the European Commission.

"So, rather than putting an end to the ISDS-system as we know it, the EU's investment protection agenda threatens to forever lock EU member states into a legal regime where private profits trump the public interest and democracy."

Unlike Red Riding Hood, people in Europe and in countries to whom the EU is currently proposing the ICS shouldn't be fooled, said the report.

"The ICS is as dangerous for taxpayers, policies in the public interest and democracy as the โ˜old' and much-loathed ISDS system. It is arguably even more threatening - because it could forever lock EU member states into a legal regime where private profits trump the public interest and democracy."


The report went on to cite seven key reasons to oppose the proposed ICS in EU trade deals:

(1) The ICS would empower tens of thousands of corporations to sue governments over measures to protect the environment, health, workers and other public interests.

(2) Under the ICS, billions in taxpayer money could be paid to compensate corporations, including for missed future profits that they hypothetically could have earned.

(3) The ICS is a sure-fire way to bully decision-makers, potentially curtailing desirable policymaking, for example, to tackle climate change, social injustice or economic crises.

(4) The ICS would give exceptionally powerful rights and privileges to foreign investors, without any obligations and without any evidence of wider benefits to society.

(5) Since only investors can sue under the ICS system, there is an incentive for the arbitrators to side with them as this will bring more lawsuits, fees and prestige in the future.

(6) There are severe doubts that the ICS is compatible with EU law as it sidelines European courts and is fundamentally discriminatory, granting special rights to foreign investors only.

(7) The ICS risks forever locking us into a legal straightjacket, as it will be practically impossible to exit from the investor privileges as a part of larger trade deals, let alone a multilateral investment court.

In a nutshell, said the report, the system is fundamentally ill-suited to deal with the key challenges of our current historical moment and of the future. In a time when all attention should be focused on averting a global climate catastrophe and the next economic crisis, there is simply no space for agreements that would make many solutions to these problems illegal.

"Existing treaties that allow private companies to sue governments over laws that impinge on their profits - from tough anti-pollution regulations to stricter rules for banks - should be abolished. Plans for supplemental corporate bills of rights in proposed treaties such as TTIP and CETA should be axed. And so should be the proposal for a world supreme court exclusively for corporations. They are all wildly dangerous for democracy as we know it."

[Meanwhile, in a separate presentation on 11 February in Washington DC, at the National Press Club panel on the proposed inclusion of ISDS in the Transpacific Partnership accord, Lise Johnson, Head of Investment Law and Policy, Columbia Center on Sustainable Investment (hereafter ILPC Center), has said including the ISDS in the TPP would be a case of "entrenching and expanding a failed experiment in economic policy".

[In the presentation, Johnson said investment treaties around the world and the ISDS mechanism is nothing new, "the first investment treaty with ISDS was actually not concluded until the late 1960s. Investment treaties with ISDS were not widely negotiated until the 1990s, and ISDS claims only really emerged in earnest in the late 1990s and early 2000s. There are thus, only roughly 15 years of experience with this mechanism.

["It is a failed experiment because it does not appear to have achieved three of the commonly stated objectives of the mechanism: it has not led to increased investment flows, nor to a set of predictable international legal rights for investors, nor to an increase in the rule of law in host countries."

[Speaking in the context of the US, she underlined that currently, the US has only an investment treaty with one major capital exporting state, Canada, meaning that only a relatively small share of foreign direct investment in the US - roughly 10% - is currently protected by a treaty with ISDS. With the TPP, the percentage of covered investment will more than double; and if the trend continues in the TTIP as well, the amount of covered FDI in the US will rise significantly to approximately 70%, and along with it, the US's exposure to costly litigation and liability.

[Referring to the oft-repeated US administration's claim that the ISDS has not cost the US anything so far, and that it was yet to lose an ISDS case, Johnson said in this instance the past cannot be counted on to predict the future. In the cases it has defended, the US has had near misses in which even the government officials working on the case thought the Government would lose.

["One explanation given for why arbitrators have been reluctant to rule against the US is that, if the US were to lose, it would back away from the system to the ultimate detriment of the arbitrators and counsel who make their living from ISDS cases," Johnson said, adding, "thus, at least while the future of ISDS felt uncertain, it has been in the best interest of arbitrators to take it easy on the US."

[Recent decisions also reflect "significant delegation of authority" under ISDS to arbitrators to interpret and apply the treaty, without any meaningful review or opportunity to appeal the arbitrators' decisions. "The tribunal in a recent case against the US, for example, stated that although all three NAFTA states unanimously agreed that the treaty meant โ˜X', it didn't consider itself bound to that interpretation and proceeded to disregard it." This shows that there is no guarantee that tribunals will interpret treaty provisions in a way consistent with the US's understanding of what treaty obligations mean.

[Fourth, the US has also lost on key issues (in the ISDS arbitrations), resulting in an expansion of exposure to future claims and damages. And, irrespective of data on wins and losses, the ISDS system is fundamentally flawed: it creates a privileged and powerful system of protections for foreign investors that is inconsistent with, and erodes, the power of domestic law and institutions.

[Dismissing the USTR's defence of ISDS, on the basis that the standards of protection investors receive under it mirror, but do not go beyond, the protections provided under US domestic law, Johnson said there are two key problems with that assertion. One, it is not correct that investment treaties do not provide foreign investors any greater rights than under domestic law.

[The ILPC Center, after undertaking significant research comparing the protections under domestic law with those under investment treaties, "conclude that the protections provided under investment treaties in fact give foreign investors greater rights than they or anyone else have under domestic law."

[In fact, this seems to be why TransCanada, suing the US government over its denial of the permit for the Keystone project, is pursuing its major claim for $15 billion through the NAFTA as opposed to through domestic litigation.

[Moreover, ISDS allows investors to challenge actions of officials at any level of government - local, state, and federal - and conduct by any branch - executive, legislative and judicial. The fact that a measure is entirely consistent with domestic law is no defense or shield against liability.

[The ISDS gives private arbitrators the power to decide cases that, at their core, are merely questions of domestic constitutional and administrative law dressed up as treaty claims. Instead of recourse through local, state or federal domestic institutions, investors are able to take their claims to a panel of party-appointed international arbitrators and ask them to determine the bounds of proper administrative, legislative, and judicial conduct.

[In permitting foreign investors to bring claims against the government before international arbitrators, there is no "meaningful appeal" against a wrong finding of law or facts; the decision-makers in ISDS are free of the requirements of independence, impartiality, and high ethical standards that are mandatory for US judges; in domestic litigation, if a court issues a decision, inconsistent with legislative intent, the legislature can pass a law correcting that decision; the legislature, however, has no power to undo or otherwise override an ISDS decision; the procedural rules and remedies are significantly different depending on whether an investor brings its claims through ISDS or through domestic courts, with meaningful impacts on the government's potential exposure to claims and liability; and, even if the law looks similar, it is not the same. For example, although the TPP incorporates what superficially looks like the US's test on regulatory expropriations, tribunals are not in any way bound to apply that test in the same manner as US courts.

[Fundamentally, supranational adjudication - where the decisions of a supranational body can penetrate deep into a domestic society - is rare and raises a host of complex legal and policy questions. "Much more consideration of these issues is important before we inadvertently dilute constitutional protections, weaken the judicial branch, and outsource our domestic legal system to a system of private arbitration that is isolated from essential checks and balances. This is not to say that supranational adjudication has no place in the American legal system, but rather that ISDS is an extreme, discriminatory and unnecessary version that will have undue negative effects on our domestic law and institutions."

[For text of presentation, see