arbitration arbitration arbitration arbitration

Part 1. Trade deals between states and the ISDS clause

Judge’s impartiality is the basic principle of justice

“For if a man had been originally the son of a king, or had a nature capable of acquiring an empire or a tyranny or sovereignty, what could be more truly base or evil than temperance–to a man like him, I say, who might freely be enjoying every good, and has no one to stand in his way, and yet has admitted custom and reason and the opinion of other men to be lords over him?” In this way Callicles in Plato’s Gorgias refers to Justice, answering to a pressing Socrates. This is one of the most famous dialogues in philosophy.

Today’s courts have been born in order to avoid this principle being risen to universal law. Who is more powerful, richer, politically more influential by his nature should never write laws exclusively to his own advantage or to get the upper hand just because more favoured than the others. For these reasons, an impartial court and judge are necessary conditions to settle disputes. In State Courts the sign “All are equal before the Law” stands out.

Justice, trade and international politics: a difficult web of relationships

What happens when a state, as part of a trade deal signed with another state, is sued? Who is authorised to judge? What does sanctions consist of? Who pays? Does state sovereignty turn out to be weakened or even compromised? Or perhaps, the consequent limitations are essential for the expansion of trade among countries? How can freedom of enterprise combine with democracy in a globalized world?

Nowadays, Callicles and Socrates would probably confront each other also on these topics. The TTIP (Transatlantic Trade and Investment Partnership) and the CETA (Comprehensive Economic and Trade Agreement) are two well-known agreements, heavily criticized by political activists and associations all over the world. At the heart of the controversy there are, among many, special courts, the so-called ISDS (Investor State Dispute Settlement) and its evolution ICS (Investment Court System), which was expressly created for the CETA. They are protective measures for investors, attached as a clause to international agreements.

Is alarmism justified, or is it mere ideological opposition to a major neoliberal conquest? This article is aiming at clarifying it.

The trade agreement among countries and the ISDS clause

This is what happens: a sovereign country has the power to sign a trade agreement with another country (or a supranational organization such as the European Union) to facilitate exchanges and trade, usually by cutting customs duties. Since the Seventies around 3000 deals of this kind have been struck, 1400 of which signed by states members of the EU.

In origin, the purpose of ISDS was to create a neutral space between the motherland, usually a European country, and the colony, in Africa or Asia, so not to leave entrepreneurial businesses settled in the colony to the mercy of dictatorial governments or regimes inspired by Marxism. Over time, in the context of these investment agreements, the states have agreed upon regulations on investment protection, which is on the treatment of foreign investors who settled in the territory of the contracting party. Governments bind each other to avoiding implementing administrative or legislative measures that may hinder capital movement. This means not to discriminate, instead to ensure an equal treatment, to pay a compensation for expropriation, to allow the investor to transfer freely his funds.

The ISDS clause permit investors to be assured against two form of expropriation: direct and indirect. In the first case, the jeopardy is nationalisation, in the second, any public measure able to damage an invesor’s interests, whose “legitimate expectations” -a vague definition which is understandable in different ways- are also protected. According to the data of the European Commission, in 2014 the states’ behaviour more contested by investors were: i) cancellations or alleged infringements of contacts and permits (at least 9 cases); ii) withdrawal or refuse of authorisations or permits (at least 6 cases).

The undermining of domestic courts

In an official document by the European Commission we can read: “The intention is to provide a neutral forum to solve disputes…Also, international agreements, including investment agreements, are based on international law and most often do not form part of the domestic legal system. As a result they cannot be invoked before domestic courts, (which are competent to rule on disputes brought on the basis of national law). This is the raison d’être for international tribunals, including for investment matters.” Each case concerning the ISDS clauses is heard by an arbitration court, which usually reports to the International Centre for Settlement of Investment Disputes, an international institution linked to the World Bank. The three arbitrators appointed are not judges, but lawyers, chosen one by each part and the third by mutual agreement. Yes, you have understood well: who judges is not impartial, but almost every time he is an “employee” of the companies that appeal against the state.

In relation to these mechanisms an actual “elite” of specialized well-known by the parties involved international arbitrators have been formed. Hearings are in camera and procedural documents are secret. The amount of compensations may not be revealed and investors can then appeal also to domestic courts. A key point is that States do not have the right to take legal action against privates; hence the guarantees go one-way, to investors’ exclusively protection.

Sky-high fees and states caught in a trap

It is not surprising then that the CETA is a EU’s attempt to “democratise” arbitration procedures. After all, if it is true that the majority of the proceedings ends in favour of the states, even when this happens, each part has to pay its own expenses whatever the outcome may be, with consequent disbursement of state money.

It seems that, in the end, the actual winner are the law firms representing the litigants. The main cost component, up to 82% of the total expenses of a judgement, is absorbed by legal assistance, where fees are around thousand dollars per hour! And if it is true that 10% of disputes started by investors concerns a state’s legislative production, it is also as much true that a trade agreement is always, at least potentially, a formidable deterrent.

What is more, the huge figures of the arbitration industry attract more and more real “institutional” investors (banks, insurance companies, hedge funds), who go side by side with the privates and finance the fees of the big law firms in exchange for a percentage on future profits.

Glaring example of cases promoted by privates

In 2012 the Swedish energy giant Vattenfall appealed to a ISDS court to claim 4,7 billion dollars from the German government, following Angela Merkel’s decision to give up on nuclear power after the Fukishima accident.

In 2016 the Aia court of international arbitration, in Netherlands, rejected, for lack of jurisdiction, Philip Morris’ move to take legal action against Australia, following the introduction by the government of Canberra in 2012 of the plain packaging law for cigarettes, in order to reduce the number of smokers. The tobacco multinational appealed to the court claiming that Australia’s decision impinge on trademark intellectual property.

In the second part we are going to analyse the ICS, the new guise of international arbitration, starting from the CETA. Is this real breakthrough or just an operation of maquillage?


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