10.6092/issn.2531-6133/6318
The European Union’s approach to ISDS is examined based on the available textual evidence in proposed or negotiated trade agreements. The evaluation focuses on three criteria: judicial independence, procedural fairness, and balance in the allocation of rights and responsibilities. Each criteria arises from concerns about the powerful and far-reaching arbitration mechanism at the core of ISDS and its role to decide the legality of sovereign conduct and allocate public funds to foreign investors. The main conclusions are that, in pursuing a massive expansion of ISDS in new trade agreements, the European Union has taken only partial steps on the issue of independence, has signalled but not carried through with steps on the issue of procedural fairness, and has not taken steps to balance investor rights with investor responsibilities or to ensure respect for the role of domestic courts.
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Gus Van Harten
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The European Union's Emerging Approach to ISDS: a Review of the Canada-Europe CETA, Europe-Singapore FTA, and Europe-Vietnam FTA
Text.Serial.Journal
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Articles & Essays
2016-09-20
2016-09-19
2016-07-19
2018-12-14
138-165
UBLR
Gus Van Harten
2016/09/20
10.6092/issn.2531-6133/6318
138
York University
2531-6133
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European Union
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165
The European Union's Emerging Approach to ISDS: a Review of the Canada-Europe CETA, Europe-Singapore FTA, and Europe-Vietnam FTA
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1
ARTICLES & ESSAYS                                                                    DOI 10.6092/issn.2531-6133/6318




The European Union’s Emerging Approach to ISDS: a Review of the
Canada-Europe CETA, Europe-Singapore FTA, and European-Vietnam
FTA

                                            GUS VAN HARTEN†


TABLE OF CONTENTS: 1. Introduction; 2. Response to the Lack of Judicial Independence in
ISDS; 3. Response to the Lack of Procedural Fairness in ISDS; 4. Response to the Lack
of Balance in ISDS; 4.1. Foreign Investor Rights, Without Responsibilities; 4.2.
Expansive Scope of Foreign Investor Rights and Protections; 4.2.1. Broad Access to
ISDS; 4.2.2. Expansive Version of Fair and Equitable Treatment; 4.2.3. Other Foreign
Investor Rights; 4.3. Affirmation of the Right to Regulate; 5. Conclusion.




ABSTRACT: The European Union’s approach to ISDS is examined based on the available
textual evidence in proposed or negotiated trade agreements. The evaluation focuses
on three criteria: judicial independence, procedural fairness, and balance in the
allocation of rights and responsibilities. Each criteria arises from concerns about the
powerful and far-reaching arbitration mechanism at the core of ISDS and its role to
decide the legality of sovereign conduct and allocate public funds to foreign investors.
The main conclusions are that, in pursuing a massive expansion of ISDS in new trade
agreements, the European Union has taken only partial steps on the issue of
independence, has signalled but not carried through with steps on the issue of
procedural fairness, and has not taken steps to balance investor rights with investor
responsibilities or to ensure respect for the role of domestic courts.


KEYWORDS: Foreign Investment; International Arbitration; Trade Negotiations; European
Union.




                                           UNIVERSITY OF BOLOGNA LAW REVIEW

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                                                    [VOL.1:1 2016]

          This article is released under the terms of Creative Commons Attribution 4.0 International License


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       1. INTRODUCTION

Investor-state dispute settlement (hereinafter ISDS) is an exceptionally
powerful form of international adjudication that regulates and disciplines the
legislatures, governments, and courts of countries for the main purpose of
protecting foreign investors. Treaties that allow for ISDS claims against
countries do so based on broadly-framed rights, without actionable
responsibilities, for foreign investors that are enforceable in non-judicial
arbitration processes. These processes are subject to limited judicial review
(in a jurisdiction usually chosen by the ISDS arbitrators) or to limited non-
judicial review by three arbitrators selected for each case by the World Bank
President or another default appointing authority. ISDS tribunals are
especially powerful because their awards and other decisions are enforceable
directly against assets of the losing country located in other countries; in this
respect, they are more powerful than other adjudicative forums, including
domestic and international courts, that involve the review of sovereigns.1
           To date, ISDS has been used to order public compensation mostly for
very large multinational companies and very wealthy individuals in a range
of regulatory areas. Compensation has been ordered by ISDS tribunals both
for general and for specific decisions taken by countries’ legislatures,
governments, or courts.2 The exclusive access to ISDS that is given to foreign
investors, especially companies and individuals more able to finance
expensive ISDS litigation, gives such investors a unique ability to influence
sovereign decision-making in their favour at the expense of those with
conflicting interests and no corresponding access to ISDS.
           ISDS was developed in the late 1960s and 1970s for the resolution of
foreign investor disputes regarding relations between developed and either
developing or transition countries or, alternatively, among developing or
transition countries. In contrast, ISDS has been agreed rarely among
developed countries, whose judicial systems have a stronger claim than ISDS

†
 Professor and investment law specialist at Osgoode Hall Law School. He received the William
Robson Memorial Prize from LSE, a doctoral fellowship from the Social Sciences and Humanities
Research Council of Canada, an Overseas Research Award from Universities UK, and a Research
Award from the Canadian International Development Agency.

1
    See GUS VAN HARTEN, INVESTMENT TREATY ARBITRATION AND PUBLIC LAW 117-119 (2007).
2
    See GUS VAN HARTEN, SOVEREIGN CHOICES AND SOVEREIGN CONSTRAINTS 52-54, 82-89 (2013).




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to attributes of public accountability, judicial independence, and procedural
fairness. Since the expansion and exploding use of ISDS in the 1990s, only
two contexts for ISDS have involved relations among developed countries.
The first is between Canada and the United States under the North American
Free Trade Agreement (hereinafter NAFTA). 3 The second, limited to the
energy sector, is among Western European countries under the Energy
Charter Treaty.4 Like most of the treaties that allow for ISDS, both NAFTA
and the Energy Charter were negotiated and concluded in the early or mid-
1990s before the major wave of ISDS claims against countries started in the
late 1990s. Yet NAFTA and the Energy Charter Treaty have generated more
ISDS claims than thousands of other treaties allowing for ISDS; together,
they account for about one quarter of all known ISDS claims.5 Therefore, it is
significant that governments, especially Washington and Brussels but also,
for example, Ottawa and Beijing are presently pushing for a further major
expansion of ISDS in the context of relations with and among developed
countries. By expanding ISDS in this realm, governments will enlarge by
several times the reach of ISDS tribunal power.6
         In this paper, I examine the available textual evidence in order to
assess the form of ISDS to which the European Union has given preference
since entering the field of ISDS. This textual evidence comes from four
proposed trade deals. The most significant is also the least evolved in
negotiation: the Europe-U.S. Transatlantic Trade and Investment Partnership
(hereinafter TTIP), for which a text for a TTIP investment chapter as
proposed by the E.U. is publicly available.7 For each of the other three

3
  North American Free Trade Agreement, U.S.-Can.-Mex., Dec. 17, 1992, 32 I.L.M. 296 and 605
(entered into force Jan. 1, 1994) [hereinafter NAFTA].
4
  Energy Charter Treaty (annex I of the Final Act of the European Energy Charter Conference)
Dec. 17, 1994, 34 I.L.M. 373.
5
  Based on data compiled by the author, 125 (32%) of 395 known treaty-based foreign investor
claims as of May 2015 were initiated under NAFTA or the Energy Charter Treaty. Of these 125, 71
were initiated under NAFTA and 54 under the Energy Charter Treaty, with 5 of the 54 initiated
under both the Energy Charter and a bilateral investment treaty.
6
  See infra notes 93-94 and accompanying text.
7
  European Union, Transatlantic Trade and Investment Partnership – Trade in Services, Investment and
E-Commerce – Chapter II-Investment, EU-proposed text of TTIP investment chapter, (Nov. 12,
2015),     http://trade.ec.europa.eu/doclib/docs/2015/november/tradoc_153955.pdf         [hereinafter
TTIP investment chapter]. See also European Commission, Public consultation on modalities for
investment         protection     and      ISDS      in    TTIP,       (Mar.        27,        2014),
http://trade.ec.europa.eu/doclib/docs/2014/march/tradoc_152280.pdf;         all    page      number
references are to the online pdf version in which the pages are not numbered [hereinafter TTIP
consultation text].




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agreements, a public text of the full agreement is available although the
agreements have not been finalized and each agreements is at somewhat
different stages in the process toward possible ratification. They are the
Canada-Europe Comprehensive Economic and Trade Agreement (hereinafter
CETA),8 the Europe-Singapore Free Trade Agreement (hereinafter Singapore
FTA),9 and the Europe-Vietnam Free Trade Agreement (hereinafter Vietnam
FTA).10
          My evaluation of the E.U. “model” of ISDS, as represented by these
proposed agreements, focuses on three criteria: judicial independence,
procedural      fairness,     and    balance     in    the    allocation      of     rights        and
responsibilities. Each criterion arises from concerns that have been expressed
about the use of ISDS — and, more precisely, the powerful and far-reaching
arbitration mechanism at the core of ISDS — to decide the legality of
sovereign conduct and to allocate public funds to foreign investors. 11 Two of
the criteria, independence and fairness, reflect elements of a judicial process
as characterized especially in contexts where judicial processes are used for
the final resolution of disputes about sovereign conduct. 12 The third criteria,
balance, is meant to convey a modest and formal idea of equanimity in the
allocation of rights and responsibilities as well as the notion of respect in
international adjudication for the role of other decision-making bodies,
especially domestic courts.
          The main conclusions of this assessment are that, in pursuing a major
expansion of ISDS, the European Union has taken partial steps on the issue of
independence, signalled but not carried out steps on the issue of procedural
fairness, and taken significant steps to affirm the state’s right to regulate but


8
     Comprehensive     Economic    and    Trade    Agreement,     Can.-EU,     Feb.   29,    2016,
http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154329.pdf [hereinafter CETA].
9
       Free      Trade      Agreement,     Sing.-EU,      ch.      9,      June     29,      2015,
http://trade.ec.europa.eu/doclib/docs/2014/october/tradoc_152844.pdf [hereinafter Singapore
FTA].
10
       Free      Trade      Agreement,      Viet.-EU,     ch.     1-7,       Dec.    2,      2015,
http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154210.pdf [hereinafter Vietnam
FTA].
11
   See Gus Van Harten, Investment Treaty Arbitration, Procedural Fairness, and the Rule of Law, in
INTERNATIONAL INVESTMENT LAW AND COMPARATIVE PUBLIC LAW 23 (Stephan W. Schill ed., 2010); Van
Harten, supra note 1, at 159-75.
12
   For an elaboration, see Gus Van Harten, The EC and UNCTAD reform agendas: Do they ensure
independence, openness, and fairness in investor-state arbitration?, in SHIFTING PARADIGMS IN
INTERNATIONAL INVESTMENT LAW: MORE BALANCED, LESS ISOLATED, INCREASINGLY DIVERSIFIED (Steffen
Hindelang, Markus Krajewski eds., 2016).




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not to balance investor rights with investor responsibilities or to respect the
role of domestic courts. On ISDS’s lack of independence, in particular, the
CETA, Vietnam FTA, and proposed TTIP investment chapter, but not the
Singapore FTA, incorporate significant though incomplete improvements. On
the issue of procedural fairness, the E.U.’s proposed TTIP investment chapter
text incorporated steps to address the lack of procedural fairness in ISDS, but
these steps were not included in any of the other three agreements, at least
two of which were subject to negotiation after the TTIP investment chapter
text was made public. On the issue of balance, none of the agreements
address the lack of balance in the allocation of foreign investor rights and
responsibilities in ISDS. Also, while the CETA has improved language on the
so-called right to regulate (a euphemism in international investment law for
the role of democracy, government, and judicial decision-making), all four of
the agreements have codified an expansive version – compared to the U.S.
approach – of the notoriously malleable foreign investor right to “fair and
equitable treatment”. Finally, on the issue of balance, none of the four
agreements addresses ISDS’ lack of respect for domestic institutions,
especially domestic courts. Rather, by relieving foreign investors of any
responsibility to demonstrate failings of domestic courts before bringing an
ISDS claim, all of the agreements are premised on an implicit assumption
that the courts in Europe and the other relevant countries fail systemically to
offer justice for foreign investors. Overall, these agreements indicate that the
European Union was originally prepared to accept a primarily U.S. approach
to ISDS, albeit now with significant variations that emerged after the
political debate about ISDS unfolded in Europe. The question remains
whether such variations in the CETA, Singapore FTA, and Vietnam FTA will
be maintained in the face of much stronger U.S. bargaining power in the
TTIP negotiations.



     2. RESPONSE TO THE LACK OF JUDICIAL INDEPENDENCE IN ISDS

To    be   judicially   independent,   ISDS    would   need   to     incorporate            the
conventional      institutional   safeguards    that   alleviate     concerns           about
unacceptable judicial dependencies, especially financial and economic. That




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is, it would need to ensure that ISDS adjudicators had security of tenure and
a set salary, that ISDS cases were assigned objectively to individual
adjudicators such as by lottery or rotation, that outside lawyering by the
adjudicators was prohibited, and that an independent judicial process was
available to resolve conflict of interest claims against adjudicators. These are
common features of domestic courts and other international tribunals that
resolve disputes involving sovereign conduct. Historically, ISDS has not
incorporated them, allowing instead for a for-profit adjudication based on an
hourly or daily rate, ultimate control by executive officials over case
assignments, allowance for outside legal work by ISDS arbitrators, and
referral of conflict of interest claims first to other arbitrators and then to
executive officials. The resulting lack of institutional independence in ISDS
provides a basis for reasonable apprehension of bias that taints ISDS
outcomes regardless of who they favour.13
            In its proposals of November 2015 for an investment chapter in the
TTIP, the European Union took a different approach to ISDS. This different
approach was then incorporated, in large part, as part of the Vietnam FTA of
December 2015 and the revised CETA of February 2016. In assessing how the
E.U.’s reforms impact the issue of independence, I focus on these two
agreements instead of the TTIP proposal because they are purportedly
finalized texts and thus more reflective of what the European Union appears
willing and able to achieve in actual negotiations with treaty partners.
            Most significantly, in the revised CETA and Vietnam FTA, steps were
taken to address the lack of independence in ISDS.14 ISDS adjudicators under
the CETA will be members of a roster with a reasonable degree of security of
tenure. There will also be more public accountability in their initial
appointment, albeit with a potentially driving role in appointment decisions
given to trade officials rather than higher-level publicly-accountable
decision-makers, and adjudicators will be assigned to cases through an
objective process of rotation. Furthermore, adjudicators will not be permitted
to work on the side as counsel in other ISDS cases although, remarkably, they
are not prohibited from working on the side as ISDS arbitrators, thus


13
     See Van Harten, supra note 11.
14
     See CETA, supra note 8, art. 8.27; see also Vietnam FTA, supra note 10, art. 12 of ch. II, sec. 3.




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apparently permitting a party to an ISDS dispute to appoint a CETA ISDS
roster member as an arbitrator in an ISDS dispute under another treaty and
to pay him or her directly and lucratively in that other context.15 This aspect
of the revised CETA – along with its language on the required or preferred
expertise of ISDS adjudicators and the potentially dominant role of trade
officials in appointments to the roster16 – suggests that a way may have been
cleared for the same small group of individuals who have dominated ISDS
decision-making so far, and leaned heavily toward expansive/ pro-claimant
investor resolutions of contested legal issues under investment treaties 17 – to
populate the CETA ISDS roster.
         More fundamentally, on the criterion of independence, ISDS under
CETA would still rely on an essentially for-profit model of ISDS adjudication
because the adjudicators are to be paid a daily rate, making them financially
interested in the frequency and duration of proceedings and thus dependent
in general on deep-pocketed investors as the most likely prospective
claimants to support growth of the ISDS industry. This aspect of ISDS has
been ameliorated to an uncertain degree in CETA by its incorporation of a set
retainer, of unknown value, for adjudicators alongside their daily rate of
compensation. Even so, the remunerative set-up remains inappropriate,
especially for determining such important matters as the legality of laws,
regulations, policies introduced by countries and the allocation of potentially
vast amounts of public money to private parties. Where only one side
(foreign investors) can bring the claims that trigger the appointment and
remuneration of ISDS adjudicators, the process still creates unacceptable
dependencies among the adjudicators and falls short of a judicial standard.
         In contrast, the Singapore FTA evidently has not been adjusted, as the
CETA     was,     to    incorporate       any    of    the    reforms      related       to     judicial



15
   See CETA, supra note 8, art. 8.30(1); see also Vietnam FTA, supra note 10, art. 14(1) of ch. II,
sec.3.
16
   See CETA, supra note 8, art. 8.27(4); see also Vietnam FTA, supra note 10, art. 12(4) of ch.II, sec.
3. In particular, each agreement limits the expertise or experience of ISDS arbitrators to the
fields of public international law, international trade law, and, especially, international
investment law.
17
   See Gus Van Harten, Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of
Investment Treaty Arbitration, 50 OSGOODE HALL L. J. 211 (2012); see also Gus Van Harten, Arbitrator
Behaviour in Asymmetrical Adjudication (Part Two): An Examination of Hypotheses of Bias in Investment
Treaty Arbitration, 53 OSGOODE HALL L. J. 540 (2016).




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independence.18 Rather, the Singapore FTA still contemplates the old ISDS
process – without security of tenure, set salaries, objective case assignment,
and prohibitions on outside ISDS counsel work – that create reasonable
suspicions of bias. Depending on the circumstances, these suspicions may
operate in favour of a country, a foreign investor, or another party. To
illustrate, ISDS arbitrators who lack security of tenure and seek repeat
appointments are financially dependent on whoever has the power to appoint
the arbitrators (where the foreign investor and sued country do not agree or
do not appoint). On this issue of default appointment authority, the
Singapore FTA designates an executive official, the Secretary General of the
World Bank’s International Centre for Settlement of Investment Disputes
(ICSID),19 as the appointing body. Yet it is inconsistent with judicial
independence to allow an executive official to choose who will decide an
adjudicated case in circumstances where the executive official knows who
has sued whom and in what context. Allocating appointing power in this way
gives an opportunity for the executive official to keep sensitive cases in safe
hands in accordance with the politics of the claim.
        In the Singapore FTA, the most significant step on independence is
the proposed incorporation of a code of conduct for ISDS arbitrators. 20 This is
a weak step due to the form of the proposed code, which would not
incorporate the institutional safeguards of independence mentioned earlier.
Indeed, the code would apparently not even stop ISDS arbitrators from
working on the side as ISDS lawyers, which is among the more obvious
contributions that a code could make. Additionally, the code would be policed
by an executive official based on case-by-case complaints filed by disputing
parties about alleged conflict of interest of individual arbitrators.21 This check
is inadequate in various ways. For example, it assumes that the disputing
parties would be able to uncover the outside counsel work of an ISDS
arbitrator, even though the existence and tribunal make-up of ISDS



18
    I refer to the June 2015 version of the Singapore FTA, supra note 9. The Singapore FTA
investment chapter may change significantly, as did the Canada-E.U. CETA, following legal
scrubbing and renegotiation.
19
   See Singapore FTA, supra note 9, art. 9.21(2).
20
   See Singapore FTA, supra note 9, annex 9-B.
21
   See Singapore FTA, supra note 9, art. 9.21(10).




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arbitrations can be kept completely secret under some treaties.22 Unless an
ISDS arbitrator under the Singapore FTA declares a potential conflict, an
affected disputing party would have no way of discovering the arbitrator’s
role as counsel.
        Unlike the CETA and Vietnam FTA, the Singapore FTA does not move
towards establishing a mandatory roster of ISDS adjudicators who would be
assigned    to   cases    objectively.    Instead,    in   the    Singapore        FTA,        the
contemplated roster does little to address ISDS’ lack of independence because
(a) the roster would not apply to all arbitrators appointed to each ISDS
tribunal, (b) an executive official would retain the power to choose who from
the roster is assigned to individual cases, and (c) the executive official would
be able to appoint individuals from outside the roster if the states parties to
the treaty did not agree on the roster’s membership. 23 For two decades, this
last loophole has helped foil a similarly weak roster in NAFTA’s ISDS
system.24
        Absent the safeguards of judicial independence, ISDS outcomes are
tainted regardless of other aspects of the treaty text or the personal integrity
of adjudicators. In essence, the Singapore FTA, and to a lesser extent the
CETA and Vietnam FTA, allow foreign investors to choose to remove
adjudicative power from domestic or European courts, by bringing an ISDS
claim, and reallocate it to a small group of ISDS adjudicators and executive
officials, none of whom are institutionally independent in the manner of a
domestic or international judge. This lack of independence remains a critical
issue in the CETA and Vietnam FTA and, more completely, in the Singapore
FTA.



     3. RESPONSE TO THE LACK OF PROCEDURAL FAIRNESS IN ISDS

ISDS is unfair for various reasons, including its lack of judicial independence.
Another key source of unfairness in ISDS is procedural. A basic principle of

22
   The problem of complete secrecy appears most acute in arbitration under the International
Chamber of Commerce (ICC) arbitration rules. See Gus Van Harten, A Total Lack of Transparecy,
CANADIAN LAW. (Oct. 24, 2011), http://www.canadianlawyermag.com/3912/A-total-lack-of-
transparency.html.
23
   See Singapore FTA, supra note 9, art. 9.21 (2) and (4).
24
   See NAFTA, supra note 3, art. 1124(4).




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fair process in adjudication is that parties whose rights or interests are
affected by the adjudication should have a right of standing in the
adjudicative process, to the extent of their affected rights or interests. 25 If an
affected party is denied the opportunity to seek standing, the adjudicator
would not hear all sides to the dispute and may be unable to consider
relevant facts and arguments. ISDS is fundamentally unfair because it does
not give this right of standing to all parties affected by the adjudication of
foreign investor claims. Instead, ISDS provides a right of standing only to the
foreign investor(s) bringing the claim and to the respondent country,
represented by its national government.26 No one else whose rights or
interests are affected by the foreign investor’s claim can have standing
regardless of the extent to which his or her rights or interests are affected.27
         In its proposal for a TTIP investment chapter, released in November
2015, the European Union took a partial but significant step to address this
procedurally unfair aspect of ISDS. The proposal included a right of
intervention for any party with a direct interest in the proceeding, albeit
limited to the option of supporting either the claimant investor’s or the
respondent state’s position.28 This proposal went a significant way to
addressing the lack of procedural fairness in ISDS. However, it did not find
its way into the Vietnam FTA of December 2015 or the revised CETA of
February 2016. Thus, there was evidently awareness of the issue within the
European Union and a choice made not to address the matter in subsequent
agreements. In addition, the European Union has through its subsequent
agreements presumably signalled to the United States that it is not firmly
committed to this particular reform.
         A weaker response to the problem of procedural unfairness, drawing
on the U.S. approach to ISDS since the early 2000s, has been to allow ISDS



25
   See GUS VAN HARTEN, GERALD HECKMAN, DAVID MULLAN, JANNA PROMISLOW, ADMINISTRATIVE LAW –
CASES, TEXT, AND MATERIALS 73-74 (7th ed., 2015).
26
   See CETA, supra note 8, art. X.3; Singapore FTA, supra note 9, art. 9.14(2)(a) (definition of
“disputing parties”); Vietnam FTA, supra note 10, art. 2 of ch. II, sec. 3 (definition of “disputing
parties”).
27
   For an indication of cases in which outside parties were affected by an ISDS proceeding, see
Van Harten, supra note 12.
28
   See TTIP investment ch., supra note 7, art. 23 (“The Tribunal shall permit any natural or legal
person which can establish a direct and present interest in the result of the dispute (the
intervener) to intervene as a third party…”).




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adjudicators to grant amicus or limited “third person” status in ISDS. 29 This
step falls well short of meeting the criterion of a fair process because amicus
representation does not require an ISDS tribunal to give standing to persons
who have a direct interest in the proceeding. 30 Rather, it allows a party to
participate in the proceedings in a limited way, only as authorized (if at all)
by the arbitrators.31 Conventionally, amicus status was used to permit parties
with a useful perspective, but no legal interest, to assist the judge or other
adjudicators in understanding the party’s perspective. For ISDS to be fair, it
would have to ensure a right of standing for all affected parties regardless of
how useful the adjudicator thinks their perspective may be.32
          On this basis, the E.U.’s model of ISDS allows adjudicators to make
decisions that affect other parties — whether private actors or public entities
— without hearing from them. This unfairness could be addressed, as
proposed in the E.U.’s TTIP investment chapter of November 2015, by
requiring public notice of ISDS claims and allowing time for other affected
parties to apply for standing. In the case of the Vietnam FTA and revised
CETA, the partial fix proposed by the European Union for TTIP was omitted.
In all agreed texts of the European Union, therefore, ISDS is procedurally
unfair.



     4. RESPONSE TO THE LACK OF BALANCE IN ISDS

The discussion now turns from the process of ISDS to its overall design,
focusing on the formal allocation of substantive rights and responsibilities


29
   See Singapore FTA, supra note 9, art. 3 of annex 9-G. This step also appears to have been taken
in the CETA and Vietnam FTA by their incorporation of the UNCITRAL Rules on Transparency in
Treaty-based Investor-State Arbitration (art. 4) in CETA, supra note 8, art. 8.36 and
8.38(1)(b)(ii); Vietnam FTA, supra note 10, art. 20 of ch. II, sec. 3.
30
   See Patrick Wieland, Why the Amicus Curia Institution is Ill-suited to address Indigenous Peoples’
Rights before Investor-State Arbitration Tribunals: Glamis Gold and the Right of Intervention, TRADE, L.
& DEV’T 334, 344-5 and 359-60 (2011); see also Nigel Blackaby & Caroline Richard, Amicus Curiae:
A Panacea for Legitimacy in Investment Arbitration?, in THE BLACKLASH AGAINST INVESTMENT
ARBITRATION 253, 259-266 (Michael Waibel et al eds., 2010).
31
   In actual arbitrations, amicus representation has been used rarely and with significant
restrictions; see Wieland, supra note 30, at 341-4.
32
   See Eugenia Levine, Amicus Curiae in International Investment Arbitration: The Implications of an
Increase in Third-Party Participation, 29 BERKELEY J INT’L 200, 208-214 (2011); see also ALBERTO
SALAZAR, Defragmenting International Investment Law to Protect Citizen-Consumers: The Role of Amici
Curiae and Public Interest Groups 4-8 (Osgoode Hall Law Sch., Comparative Research in Law &
Political Econ., Working Paper No 6, 2013).




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and on the relationship between ISDS and domestic courts. To be balanced in
a broad sense, it is suggested that ISDS must incorporate responsibilities for
foreign investors that are actionable in the manner of their rights and affirm
the state’s right to regulate alongside the elaborate rights and protections
afforded to foreign investors. This is a formalized version of the notion of
balance because, with the exception of the clarity of the state’s right to
regulate, it does not avert to the content or extent of foreign investor rights
and responsibilities.33 To address in part this limitation of the analysis, I
offer in this section a closer assessment of the foreign investor rights
envisaged by the European Union in order to demonstrate their breadth and
potency. The assessment reveals that some aspects of the characterization of
foreign investor rights in the E.U.’s proposed or negotiated agreements are
sufficiently broadly framed as to go beyond the U.S. model of ISDS.


     4.1. Foreign Investor Rights, Without Responsibilities

In its conventional form, ISDS discriminates in favour of foreign investors
and against anyone else who is affected by an ISDS dispute involving a
foreign investor and the country against whom the investor has brought a
claim. Foreign investors obtain powerful rights and protections but, as a rule,
have no correspondingly actionable responsibilities to respect international
standards. To make ISDS more balanced in this formal sense, states would
need to allow for the use of ISDS to hold foreign investors accountable if they
flout labour, environmental, consumer, or other standards in situations
where domestic institutions do not offer an effective remedy.
         In its approach to ISDS, the European Union has taken no steps to
rebalance ISDS in this way in any of its proposed or negotiated agreements.
In each agreement, foreign investors would have special access to an
exceptionally powerful system of international adjudication — potentially
leading to billions of dollars in public compensation — to enforce their wide-
ranging rights, without responsibilities that can lead to a compensation
order against the foreign investor and that are enforceable in the same
process. The resulting imbalance is especially pronounced because none of


33
  For a cautious approach to the issue of foreign investor responsibilities, see PETER T.
MUCHLINSKI, MULTINATIONAL ENTERPRISES & THE LAW (2nd ed., 2007).




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the E.U.’s agreements require foreign investors to go to a country’s courts or
European courts before resorting to ISDS. That is, the agreements abandon
the usual duty to exhaust local remedies, where they offer justice and are
reasonably available, which applies customarily in international law and at
other international courts and tribunals where individuals can bring claims
against a country.34 Building on a Western European and North American
legacy of imbalanced ISDS treaties, the E.U.’s approach allows foreign
investors to bring ISDS claims against a country without going to the
country’s courts first, regardless of whether the courts offer justice. Put
differently, a foreign investor can bring an ISDS claim without any
requirement that the investor explain why it would be unfair to go first to a
country’s courts in order to resolve its dispute. By implication, the E.U.’s
approach and ISDS in general are based on the presumption that domestic
courts in all countries fail systemically to offer justice to foreign investors.
Similarly, these approaches operate from the premise that ISDS is
independent and fair in the manner of a proper court, which it clearly is not
for the reasons discussed earlier.
         Why should foreign investors be relieved of the usual duty to go to
domestic courts without having to show that the courts in question somehow
fail to offer justice? One may worry that domestic courts could take too long
or are in some other way inadequate to protect foreign investors. If that is a
pressing concern, why not replace courts with arbitrators for everyone?
Clearly, others — whether foreigners or a country’s own nationals — may
suffer as much or more than a foreign investor if courts do not offer justice.
The question itself points to the radical proposition lying behind ISDS: to
replace courts with a special and very powerful adjudicative system available
only to foreign investors.
         The issue of domestic courts also points to a larger question about the
balancing of rights and responsibilities. What if domestic courts are
inadequate to protect victims of foreign investors themselves? One can
imagine scenarios where a person or community suffers tremendously
because of a foreign investor’s misconduct. Yet such actors would be limited

34
  See, e.g., SILVIA D’ASCOLI & KATHRIN MARIA SCHERR, The Rule of Prior Exhaustion of Local Remedies in
the International Law Doctrine and its Application in the Specific Context of Human Rights Protection
(European Univ. Inst., Working Paper No. 02, 2007).




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to domestic courts, with no right to initiate an international claim and
receive an internationally-enforceable award of compensation. For example,
in the era of ISDS, a foreign national who has been tortured by a country’s
officials cannot bring an international claim against the country, at least
without going first to the country’s courts. 35 Yet the foreign national could
bring an ISDS claim if he or she owned assets in the state, thus qualifying as
a foreign investor, albeit only to the extent that the torture affected his or
her position as an asset owner. In contrast, if a foreign investor’s personnel
were to torture its domestic employees, with the collaboration of state
officials, none of the victimized employees could bring an international claim
against the company or its officers, or against the state itself, for failing to
protect them, without going first to domestic courts. This illustrates the
stark disparity in protection that ISDS offers to foreign investors in
comparison to other victims of misconduct.
         A    limited     starting     point     for    recognizing        foreign         investor
responsibilities and rebalancing ISDS would be to allow countries to bring
claims against a foreign investor that has initiated an ISDS claim against the
country, for the purpose of holding the foreign investor to minimum
international standards of conduct. This arrangement would remain formally
imbalanced because it would not give states a right, alongside foreign
investors, to initiate ISDS proceedings in the first place. Also, it would not
give rights to private parties who were harmed by a foreign investor and
denied justice in domestic courts. Despite these limitations, there is no sign
that even this step has been pursued by the European Union.
         In summary, ISDS is premised on a profoundly imbalanced elevation
of foreign investor rights and protections over the rights of everyone else.
The European Union has endorsed this imbalance by not stipulating
equivalently actionable responsibilities for foreign investors and by not
incorporating a duty to exhaust local remedies before the foreign investor
can bring an ISDS claim asserting its powerful rights. Moreover, as I explain




35
  See, e.g., Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or
Punishment art. 21 (c) and 22 (4) (b), GA Res. 39/46, annex, 39 U.N. GAOR, Supp. No. 51 at 197,
opened for signature Dec. 10, 1984, U.N. Doc. A/39/51 (1984), 1465 U.N.T.S. 85 (entered into force
Jun. 26, 1987).




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below, the European Union has in key respects taken an exceptionally
expansive approach to foreign investor rights.


     4.2. Expansive Scope of Foreign Investor Rights and Protections

The E.U.’s approach, in the proposed TTIP and in the CETA, Singapore FTA,
and Vietnam FTA, is based on broadly-framed foreign investor rights and
protections. Some of the major features of this approach are outlined in this
section, beginning with the breadth of the access to ISDS that is allowed for
foreign investors and followed by the flexibility of the language that is used
to define the core rights of foreign investors.


     4.2.1. Broad Access to ISDS

The E.U.’s approach has been to define the concept of “investment” broadly,
consistent with a U.S. model of ISDS. The definitions proposed for the TTIP
and adopted in the CETA and FTAs are wide-ranging, giving access to ISDS to
asset owners in general. The definitions are not limited, for example, to
“investment” in the sense of capital committed to a risky venture with an
expectation of profit or some identifiable contribution to the host country’s
economy.
         Among the E.U.’s agreements, there are modest variations on this
point. For example, the Singapore and Vietnam FTAs’ definitions of
investment specifically include “goodwill” and thus are broader on paper
than the CETA’s definition, which does not. 36 Even so, based on the record of
ISDS awards, these textual differences are not as significant as they may
appear because other aspects of the definition of investment have been used
by arbitrators to capture broad notions of asset ownership. In particular, the
CETA definition incorporates the elastic concept of “[e]very kind of asset that
an investor owns or controls, directly or indirectly” and the Singapore FTA
definition includes “every kind of asset which is owned, directly or
indirectly, or controlled, directly or indirectly, by investors”.37

36
   See Singapore FTA, supra note 9, art 9.1(1); Vietnam FTA, supra note 10, subsec. 4(p)(vi) of art.
entitled “Objectives, coverage and definitions” of ch. I; see also CETA, supra note 8, art. 8.1
(definition of “investment”).
37
   See Singapore FTA, supra note 9, art 9.1(1); Vietnam FTA, supra note 10, subsec. 4(p)(vi) of art.
entitled “Objectives, coverage and definitions” of ch. I; see also CETA, supra note 8, art. 8.1
(definition of “investment”).




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The E.U.’s approach is also expansive because it has expressly limited use of
the so-called Salini criteria.38 These criteria were adopted by early ISDS
tribunals and applied subsequently to orient and limit the concept of
investment in investment treaties. The European Union has adopted aspects
of the criteria, but only as an optional reference point instead of a
requirement for tribunals to consider.39 To illustrate, the CETA applies only
to any asset “that has the characteristics of an investment, which include a
certain duration and other characteristics such as the commitment of capital
or other resources, the expectation of gain or profit, or the assumption of
risk”;40 while the Singapore FTA applies to any asset “that has the
characteristics of an investment, including such characteristics as the
commitment of capital or other resources, the expectation of gain or profit,
the assumption of risk, or a certain duration”. 41 Based on this language, in
the CETA, tribunals are required to consider one mandatory characteristic
only — “a certain duration” — and the other three Salini criteria are listed
merely as examples for tribunals to consider. The Singapore and Vietnam
FTAs are even more flexible because they list all four of the Salini criteria
merely as examples for tribunals to consider.42
         Thus, the European Union has moved away from past approaches to
ISDS that applied the Salini criteria as mandatory and cumulative elements of
the concept of investment. Also, the European Union has dropped entirely
one of the Salini criteria: the requirement that an asset, to qualify as an
investment, must contribute to the development of the host country’s
economy. By diluting the criteria in these ways, the European Union has put
aside limited constraints on the concept of investment that were developed
by some ISDS tribunals. In doing so, the European Union effectively has sided

38
   See Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco, ICSID Case No. ARB/00/4
(Jul. 23, 2004), 42 I.L.M. 609, para 52. See also Fedax NV v Republic of Venezuela, ICSID Case No.
ARB/96/3 (Jul. 11, 1997), 37 I.L.M. 1378, para 43.
39
   See Omar E. García-Bolívar, Defining an ICSID Investment: Why Economic Development Should be
the       Core     Element,       INVESTMENT         TREATY    NEWS       (Apr.      13,    2012),
http://www.iisd.org/itn/2012/04/13/defining-an-icsid-investment-why-economic-
development-should-be-the-core-element/.
40
   See CETA, supra note 8, art. 8.1 (definition of “investment”).
41
   See Singapore FTA, supra note 9, art. 9.1(1). The Vietnam FTA’s definition is essentially the
same as the Singapore FTA’s on this issue: see also Vietnam FTA, supra note 10, subsec. 4(p) of
art. entitled “Objectives, coverage and definitions” of ch. I.
42
   See Singapore FTA, supra note 9, art. 9.1(1). The Vietnam FTA’s definition is essentially the
same as the Singapore FTA’s on this issue: cf. Vietnam FTA, supra note 10, subsec. 4(p) of art.
entitled “Objectives, coverage and definitions” of ch. I.




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with other ISDS tribunals that chose not to apply the Salini criteria or that
treated them as guidelines instead of requirements.43 In either case, the
European Union has endorsed an approach that favours foreign investors,
especially large multinationals and very wealthy individuals who are the
most able to finance claims, at the expense of the regulatory domain of
states. Put differently, when faced with different views among ISDS tribunals
on the scope of the definition of investment, the European Union opted to
codify the more investor-friendly approach.
         Linked to the issue of access to ISDS, the CETA, Singapore FTA, and
Vietnam FTA take modest steps to limit ISDS forum-shopping. In particular,
the agreements permit an investor to bring a claim only if the investor has
“substantial” or “substantive” business operations in its “home” country
(i.e. in the jurisdiction of which the investor claims to be a national under the
treaty).44 This limitation on forum-shopping is modest because it does not
require the investor to have its headquarters or main base of operations in
the home country. Instead, ISDS claims can be brought by multinational
companies or individuals with multiple nationalities so long as the company
or individual has a sufficient level of business activity in the relevant
jurisdiction under the treaty, even if that jurisdiction is not the primary or
dominant place of business.


     4.2.2. Expansive Version of Fair and Equitable Treatment

In its approach to the vague and, for states, financially risky foreign investor
right to “fair and equitable treatment”, the European Union appears
committed to expanding the power of ISDS adjudicators. The E.U.’s
codification of an expansive element, developed by ISDS arbitrators in the
past, as part of the right to fair and equitable treatment goes beyond the U.S.




43
  See García-Bolívar, supra note 39.
44
  See CETA, supra note 8, art. 8.1 (definition of “enterprise of a Party”); see also Singapore FTA,
supra note 9, art. 9.1(4); see also Vietnam FTA, supra note 10, subsec. 4(c) of art. entitled
“Objectives, coverage and definitions” of ch. I.




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model or, for that matter, Canada’s past approach. 45 It therefore seems clear
that the Commission pressed for this expansive shift.
         As background, the concept of fair and equitable treatment is the
most widely-invoked right in treaty-based ISDS.46 Arbitrators have been
creative in giving different readings — usually expansive — to the concept.47
In the North American approach to ISDS since the early 2000s, an effort was
made to rein in ISDS arbitrators by limiting the concept to the meaning that
is customarily associated with the minimum standard of treatment in
international law.48 This attempt to rein in ISDS arbitrators has had only
limited success, since the 2000s, as arbitrators subsequently adopted the
interpretive device of relaxing the standard of proof a foreign investor must
satisfy — when arguing for an expansion of the customary international
minimum standard — by relieving the investor of the usual onus to provide
evidence of state practice and opinio juris in support of an evolution of
customary international law.49
         Compared to the North American effort to constrain ISDS arbitrators
on this point, the European Union has taken a more expansive tack. None of
the E.U.’s proposed or negotiated agreements restrict ISDS adjudicators to
applying the customary international minimum standard. Instead, the E.U.’s
agreements allow ISDS adjudicators to apply some of the leading expansive
versions of fair and equitable treatment adopted in ISDS tribunal decisions
since the late 1990s.50 Thus, the European Union has endorsed a key feature
of ISDS arbitrators’ creative            expansion of foreign investor rights and
protections. This part of E.U.’s approach is perhaps the most important

45
   Canada’s treaties providing for ISDS have followed the U.S. approach by clarifying, since the
early 2000s when the issue was raised in response to early NAFTA awards, that fair and
equitable treatment is limited to the meaning of the minimum standard of treatment in
customary international law. That said, in some of Canada’s treaties, this clarifying language is
undermined by a most-favoured-nation treatment loophole. See Gus Van Harten, The Canada-
China FIPPA: Its Uniqueness and Non-Reciprocity, 51 CANADIAN YEARBOOK OF INT. L. 3, 27-34 and
Annex 1 (2013).
46
   See Van Harten, supra note 2, at 101-103.
47
   See Van Harten, supra note 2, at 102.
48
    See Free Trade Agreement, Dom. Rep.-Cent. Am.-U.S., art. 10.5(2), 19 U.S.C.S. § 4011
(LexisNexis, 2005).
49
    See Matthew C. Porterfield, A Distinction Without a Difference? The Interpretation of Fair and
Equitable Treatment Under Customary International Law by Investment Tribunals, INVESTMENT TREATY
NEWS (Mar. 22, 2013), https://www.iisd.org/itn/2013/03/22/a-distinction-without-a-difference-
the-interpretation-of-fair-and-equitable-treatment-under-customary-international-law-by-
investment-tribunals/
50
   See Van Harten, supra note 2, at 102.




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example of how the European Union has varied from the U.S. model and, in
this case, the European Union chose a more investor-friendly, expansive
direction.
       The E.U.’s approach to fair and equitable treatment is also expansive
because it defines that concept using a list of components.51 The list is
essentially the same in each of the E.U.’s agreements. It includes the
components of denial of justice, fundamental breach of due process, manifest
arbitrariness, and abusive or bad faith conduct. The CETA and Vietnam FTA
add the further component of targeted discrimination on manifestly
wrongful grounds. Any single component on the list can give rise to a breach
of the fair and equitable treatment standard and, in turn, an order of
compensation for the foreign investor.
        By using this list-based approach to describe fair and equitable
treatment, the E.U.’s approach might appear to limit the range of definitions
that ISDS adjudicators can give to the overall right. Yet the E.U.’s agreements
have a loophole; to varying degrees, they do not make it clear whether the
list of the components is exhaustive.52 For example, the CETA does not state
that the right to fair and equitable treatment is breached “only” when a
component on the list has been breached. 53 This lack of precision gives an
opportunity for ISDS adjudicators to supplement the list by reading novel and
expansive components into the right to fair and equitable treatment, as they
have done frequently since ISDS claims began to explode in the late 1990s.
       Perhaps most importantly, the European Union has taken an expansive
approach to fair and equitable treatment by incorporating into the right a
foreign investor’s “legitimate expectations”. The notion of legitimate
expectations, as an arbitrator-created part of the right to fair and equitable
treatment, is among the most novel and expansive features that arbitrators
have added to ISDS. Often, they have relied on the notion of legitimate
expectations to justify awards of compensation for foreign investors. In the
E.U.’s agreements, the idea of legitimate expectations is incorporated in


51
   See CETA, supra note 8, art. 8.10(2); see also Singapore FTA, supra note 9, art. 9.4(2); see also
Vietnam FTA, supra note 10, art. 14(2) of ch. II.
52
   See CETA, supra note 8, art. 8.10(2); see also Singapore FTA, supra note 9, art. 9.4(2) and (3); see
also Vietnam FTA, supra note 10, art. 14(2) and (3) of ch. II.
53
   See CETA, supra note 8, art. 8.10(2).




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different ways. For example, the Singapore FTA is more expansive than the
CETA and Vietnam FTA on this point because the Singapore FTA includes
legitimate expectations as part of the list of components of fair and equitable
treatment,54 whereas the CETA and Vietnam FTA allow arbitrators to consider
legitimate expectations when applying the listed components of fair and
equitable treatment.55 Even so, all of the E.U.’s agreements are more
expansive than the United States’ and Canada’s approach because they invite
ISDS adjudicators to perform a flexible analysis of the foreign investor’s
expectations that enhances the regulatory and financial risks of ISDS for
states.


     4.2.3. Other Foreign Investor Rights

Other aspects of the E.U.’s approach to foreign investor rights mostly track
the U.S. model. For example, the E.U.’s proposed or negotiated agreements
include foreign investor rights to full protection and security, 56 compensation
for losses57 and for expropriation,58 and free capital transfers.59 The
agreements do not vary markedly in these respects60 and the rights in
question are typical of a U.S. model.
          To illustrate further, the E.U.’s approach to the right to full protection
and security follows the U.S. model by limiting the concept to the physical
security of foreign investors and their investments.61 The E.U.’s approach
likewise includes a clause, consistent with the U.S. model, precluding ISDS
adjudicators from finding a breach of full protection and security or fair and


54
   See Singapore FTA, supra note 9, art. 9.4(2)(e).
55
   See CETA, supra note 8, art. 8.10(4); see also Vietnam FTA, supra note 10, art. 14(6) of ch. II.
56
   See CETA, supra note 8, art. 8.10(1); see also Singapore FTA, supra note 9, art. 9.4(1); see also
Vietnam FTA, supra note 10, art. 14(1) of ch. II.
57
   See CETA, supra note 8, art. 8.11; see also Singapore FTA, supra note 9, art. 9.5; see also Vietnam
FTA, supra note 10, art. 15 of ch. II.
58
   See CETA, supra note 8, art. 8.12; see also Singapore FTA, supra note 9, art. 9.6; see also Vietnam
FTA, supra note 10, art. 16 of ch. II.
59
   See CETA, supra note 8, art. 8.13; see also Singapore FTA, supra note 9, art. 9.7; see also Vietnam
FTA, supra note 10, art. 17 of ch. II.
60
   One significant variation is that a carve-out from the right to make free capital transfers in
the Singapore FTA, supra note 9, art. 9.7(2), appears broader than the comparable carve-out in
the CETA, supra note 8, art. 8.13(4), and NAFTA, supra note 3, art. 1109(4), because, in the
Singapore FTA, the carve-out includes exceptions on social security, public pensions, and
taxation.
61
   See CETA, supra note 8, art. 8.11(5); see also Singapore FTA, supra note 9, art. 9.4(4); see also
Vietnam FTA, supra note 10, art. 14(4) of ch. II.




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equitable treatment based on an assessment that a country has breached a
provision elsewhere in the trade agreement or in another international
agreement.62 Like the approach taken in the U.S. model, these clauses
constrain aspects of the adjudicative discretion in ISDS against a backdrop of
expansive interpretations by ISDS arbitrators. Even so, they still carry a
complex but significant risk due to the foreign investor right to most-
favoured nation (hereinafter MFN) treatment.63
         Furthermore, in the Singapore FTA and Vietnam FTA, but not the
CETA, the European Union has negotiated an “umbrella clause” as part of the
suite of rights for foreign investors. An umbrella clause is far-reaching
because it incorporates a host country’s other obligations into the foreign
investor’s rights at the treaty level and thus subjects those other obligations
to ISDS.64 For example, the Singapore FTA states that a country must not
“frustrate or undermine” a specific and clear commitment in a contractual
obligation owed to a foreign investor.65 This version of an umbrella clause is
more limited than umbrella clauses in some other treaties, but it is still
potentially very expansive because it allows ISDS to be constituted as a
parallel enforcement system for the state’s contracts with foreign investors.
This aspect of the Singapore and Vietnam FTAs also goes beyond the most
commonly invoked example of the U.S. model, NAFTA, which does not have
an umbrella clause, although many U.S. bilateral investment treaties include
such clauses.66 On this point, the E.U.’s approach in its FTAs demonstrates
further that the European Union has accepted an expansive version of foreign
investor rights.



62
   See CETA, supra note 8, art. 8.10(6); see also Singapore FTA, supra note 9, art. 9.4(6); see also
Vietnam FTA, supra note 10, art. 14(7) of ch. II.
63
   The risk is that an agreement’s limiting provisions for other foreign investor rights can be
undermined by the agreement’s approach to (MFN) treatment. The CETA, for example, uses
qualified language when it purports to preclude the importation into the CETA — using the
principle of MFN treatment — of additional substantive rights of foreign investors in treaties
with third states. For a more detailed explanation of the point see G. VAN HARTEN, Comments on
the European Commission’s Approach to Investor-State Arbitration in TTIP and CETA 10-11, 20, 25
(Osgoode Hall Law Sch. of York Univ., Working Paper No. 59, 2014).
64
   See Singapore FTA, supra note 9, art. 9.5(5); see also Vietnam FTA, supra note 10, art. 14(5) of
ch. II.
65
   Singapore FTA, supra note 9, art. 9.5(5).
66
    Katia Yannaca-Small, Interpretation of the Umbrella Clause in Investment Agreements, in
INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS 115 (2008).




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Another example of the E.U.’s willingness to accept an expanded version of
foreign investor rights arises from its approach to ISDS and financial
services. Compared to NAFTA, the CETA expands the role of ISDS in the
agreement’s chapter on financial services. 67 This expansion leads to a
complex interaction between the CETA’s investment and financial services
chapters, a close analysis of which is beyond the scope of this paper. The key
is that the CETA goes beyond the North American model, as captured by
NAFTA, which extends ISDS to its chapter on financial services to a lesser
degree than the CETA does.68 As a result, the CETA expands states’
obligations when regulating financial institutions by importing more foreign
investor rights — including fair and equitable treatment and full protection
and security — from the investment chapter into the financial services
chapter.69 In this respect, the CETA is a win for global banks at the expense
of financial regulators and anyone whose interests the regulators protect.70
        In other areas, the E.U.’s approach is not as expansive as the U.S.
model. An example is the U.S.-devised                     prohibition on performance
requirements       for    foreign     investors.     A   prohibition      on      performance
requirements typically blocks countries from requiring foreign investors to
use local goods or local suppliers, or to transfer technology, as conditions for
being allowed to invest in a country. The prohibition on performance
requirements in NAFTA, for example, has been used successfully by U.S.
companies to resist research and development requirements in Canada’s
offshore oil sector.71 In the U.S. model, the prohibition on performance
requirements is subject to ISDS and state-state enforcement.72 The CETA, by
comparison, has a prohibition on performance requirement that is subject to



67
   See CETA, supra note 8, art. 13.2(3) and (4).
68
   See NAFTA, supra note 3, art. 1401(2).
69
   See CETA, supra note 8, art. 13.2(3) and (4).
70
   The CETA and FTAs also have special provisions on foreign investor rights in the context of
debt restructuring or a monetary crisis: see, e.g., CETA, supra note 8, annex 8-B; see also
Singapore FTA, supra note 9, artt. 9.7(3) and 17.9; see also Vietnam FTA, supra note 10, annex on
Public Debt. An analysis of these provisions is beyond the scope of this paper, although they all
raise the broad concern that sovereign decisions during a financial crisis would continue to be
subject, to varying degrees, to review in ISDS.
71
   Mobil Investments Canada Inc. and Murphy Oil Corporation v. Canada, No. ARB(AF)/07/4,
ITALAW (Ont. Sup. Ct. May 22, 2012).
72
   See, e.g., NAFTA, supra note 3, art. 1106.




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state-state enforcement only, not ISDS.73 On this issue, the CETA resembles
the substantive obligation in the U.S. model but does not allow for its
enforcement in ISDS.
         In addition, the CETA includes market access rights for foreign
investors by including the terms “establishment”, “acquisition”, and
“expansion” in the list of investment activities to which the treaty’s national
treatment obligation applies.74 By comparison, the Singapore and Vietnam
FTAs limit national treatment to post-establishment activities of foreign
investors.75 Each agreement also has extensive reservations and schedules
that remove some activities from the obligation to provide no less favourable
treatment to foreign investors than what is provided to domestic investors. 76
In this way, the European Union went further in its market access
commitments in the CETA than in the Singapore or Vietnam FTAs. Even so,
the European Union did not go as far in any of the three agreements as the
U.S. model would typically go by including market access rights and
subjecting them to ISDS. To illustrate, in the CETA, market access is limited
to state-state dispute settlement77 whereas in the Singapore FTA it is stated
that the investment chapter applies to investments “made . . . in accordance
with the applicable laws”, which is a conventional device for excluding
market access rights.78
         The E.U.’s agreements, again following the U.S. model, also expressly
authorize the states parties to issue interpretations of the treaty that are
binding on ISDS adjudicators. 79 This mechanism is potentially useful to rein
in arbitrator adventurism. That said, it has been available for over 20 years
under NAFTA and has been used only twice.80 Due to the degree of
governmental mobilization and consensus that is required to implement the


73
   See CETA, supra note 8, art. 8.5.
74
   See CETA, supra note 8, art. 8.6(1).
75
   See Singapore FTA, supra note 9, art. 9.3(1); cf. Vietnam FTA, supra note 10, art. 3(2) of ch. II.
76
   See, e.g., CETA, supra note 8, art. 8.15; see also Singapore FTA, supra note 9, art. 9.3(2); Vietnam
FTA, supra note 10, art. 3(3) of ch. II. A comparative analysis of these reservations and schedules
is beyond the scope of this paper.
77
   See CETA, supra note 8, art. 8.4.
78
   See Singapore FTA, supra note 9, art. 9.2(1).
79
   See CETA, supra note 8, art. X.27(2); see also Singapore FTA, supra note 9, art. 9.22(3).
80
   See NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions (Jul. 31,
2001),http://www.international.gb.ca/trade-agreements-accords-commercieux/topics
domaines/disp-diff/NAFTA-Interrpr.aspx.




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mechanism, it is not an effective limit to ISDS adjudicator power. Other
aspects of the CETA and FTAs also indicate, as discussed earlier, that the
European Union accepts key aspects of ISDS arbitrators’ past expansive
interpretations of foreign investor rights, especially for the notion of
legitimate expectations as part of the right to fair and equitable treatment.


     4.3. Affirmation of the Right to Regulate

ISDS is imbalanced because it delivers wide-ranging and highly-enforceable
foreign investor rights with corresponding responsibilities for countries. The
essence of these responsibilities is the profound obligation of states to
submit to ISDS adjudicator power and pay compensation as ordered by the
adjudicators, where a majority of the tribunal decides the state did not, for
example, treat a foreign investor fairly and equitably, live up to the
investor’s legitimate expectations, pay enough compensation after denying a
permit or introducing a regulation, refrain from treating local investors more
favourably than foreigners, or allow a foreign investor to transfer capital in
or out of the country.81 On the other hand, treaties allowing for ISDS typically
lack a clear (or any) affirmation of the state’s right to regulate as a counter-
balance to foreign investor rights and protections. Investment treaties could
affirm     this    right     of    the    state    effectively,    alongside        the      state’s
responsibilities.82 That is, the right could be described clearly in the treaty,
without broad or ambiguous limitations, so as to limit the state’s obligations
as a whole concerning protection of foreign investors.83 Yet the treaties rarely
if ever do so.
         As a response to this lopsided situation, the E.U.’s approach has
incorporated into the CETA and Vietnam FTA a broadly worded clause that
affirms the right to regulate.84 This clause gives the ISDS adjudicators — if so
inclined — an interpretive device to weigh foreign investor rights against the

81
   See, e.g., CETA, supra note 8, art. 8.6, 8.10, 8.12, and 8.13.
82
    See J ANTONY VANDUZER, PENELOPE SIMONS & GRAHAM MAYEDA, INTEGRATING SUSTAINABLE
DEVELOPMENT INTO INTERNATIONAL INVESTMENT AGREEMENTS: A GUIDE FOR DEVELOPING COUNTRIES 287-
398 (2012).
83
   See, e.g., Convention for the Protection of Human Rights and Fundamental Freedoms, Nov. 4,
1950, Eur TS 5 and 213 UNTS 222 (entered into force Sept. 3, 1953); see also Final Act of the
United Nations Conference on Trade and Employment: Havana Charter for an International
Trade Organization, U.N. Conference on Trade and Employment, U.N. Doc 1948 II.D.4.1 (1948).
84
   See CETA, supra note 8, art. 8.9(1); see also Vietnam FTA, supra note 10, art. 13bis of ch. II.




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safeguarding of regulatory space for legislatures, governments and courts.
Both the CETA and Vietnam FTA are worded in clearer terms than the
comparably weak clause proposed by the European Union for the TTIP
investment chapter.85 Their affirmations of the right to regulate are an
important improvement over the omission of the right in earlier versions of
the CETA and a step toward formal balance in ISDS, even though none of the
E.U.’s agreements take steps to establish actionable responsibilities for
foreign investors.
         In contrast, the Singapore FTA follows the usual ISDS model by not
affirming the right to regulate in the investment chapter. Instead, the right
is noted in aspirational preambular and other chapters of the FTA, signaling
that the right is affirmed only for purposes of FTA chapters other than the
investment and financial services chapters. In particular, in the Singapore
FTA, the right to regulate is affirmed in the agreement’s chapters on services
and the environment,86 creating an inference that the right was intentionally
excluded from the FTA’s separate investment and financial services chapters.
The Singapore FTA thus falls well short of balancing the right to regulate,
even in a formal sense, against the state’s responsibilities to protect foreign
investors.
         Yet the European Commission has claimed that the approach to ISDS
in the Singapore FTA and earlier versions of the CETA safeguards the right to
regulate through a series of textual clarifications drawn mostly from the
post-2000 U.S. model of ISDS.87 For example,88 the CETA had (and still has)
moderating language for the foreign investor right to generous compensation
for regulations that are viewed by the arbitrators as indirect expropriation. 89
This language supports the state’s regulatory discretion as weighed against

85
    See TTIP investment ch., supra note 7, art. 2(1). See also G. VAN HARTEN, Key Flaws in the
European Commission’s proposals for foreign investor protection in TTIP 4-5 (Osgoode Hall Law Sch.
of York Univ., Working Paper No. 16, 2016).
86
   See Singapore FTA, supra note 3, art. 8.1(2) and art. 13.2.
87
   See, e.g., TTIP consultation text, supra note 7, at 2.
88
    The other main examples relate to the CETA and Singapore FTA’s language on fair and
equitable treatment, which is discussed in more detail below, and to the use of exceptions,
reservations, and carve-outs. For a discussion of why the Commission’s approach to these issues
is problematic or misleading, from the perspective of balancing the state’s right to regulate, see
Gus Van Harten, Reforming the System of International Investment Dispute Settlement, in ALTERNATIVE
VISIONS IN THE INTERNATIONAL LAW ON FOREIGN INVESTMENT: ESSAYS IN HONOUR OF M. SORNARAJAH 103
(Chin Leng ed., 2016).
89
   See CETA, supra note 8, annex 8-A; see also Singapore FTA, supra note 9, annex 9-A; see also
Vietnam FTA, supra note 10, annex on expropriation.




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the state’s obligation to compensate for direct or indirect expropriations,
although it has major limitations.90 For example, the moderating language
does not apply to all foreign investor rights in the treaty, including the one –
fair and equitable treatment – that is most frequently used by arbitrators to
order public compensation for foreign investors. The E.U.’s approach also
maintains interpretive power in the hands of ISDS adjudicators who have
very rarely accepted principles of generalized balancing to limit foreign
investor rights by reference to the right to regulate or rights of other actors. 91
If the Commission wanted to affirm the right to regulate, it would have to do
so clearly for all foreign investor rights and protections and in all areas of
state decision-making.
         Lastly, there is a notable innovation in the CETA relating to the right
to regulate. The CETA has a novel clause on arbitrators’ power to order
compensation for foreign investors. It is stated that, when calculating
monetary damages against a country, the arbitrators shall reduce the
damages to account for “any . . . repeal or modification of the measure”. 92 In
this way, the CETA appears to endorse expressly the incentives for states to
change their decisions, in order to appease foreign investors who have
brought an ISDS claim, as a means to limit the state’s exposure to liability at
the    hands   of   ISDS    adjudicators.     Put   differently,    this     CETA         clause
acknowledges and appears to be a step toward institutionalizing the dynamic
of regulatory chill in ISDS.



      5. CONCLUSION

The European Union has demonstrated that it is willing to accept a deeply
flawed form of ISDS based on the conventional model pushed by Western
European countries and the United States in their relations with developing
and transition countries. That model of ISDS lacks judicial independence,
procedural fairness, and formal balance in the allocation of rights and
responsibilities.

90
    See, e.g., GUS VAN HARTEN, SOLD DOWN THE YANGTZE: CANADA’S LOPSIDED INVESTMENT DEAL WITH
CHINA (2015).
91
   See Van Harten, supra note 2, at 89-104.
92
   CETA, supra note 8, art. 8.39(3).




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In the revised CETA and Vietnam FTA, but not the Singapore FTA, the
European Union has taken partial but significant steps to address the lack of
independence in ISDS. The European Union also moved in the proposed TTIP
investment chapter to address in part the lack of fair process in ISDS, though
it did not follow through with these proposed changes in the CETA or the
Vietnam FTA. Furthermore, the European Union has adopted broadly-framed
foreign investor rights based mostly on the U.S. model and on an especially
expansive version of the frequently-invoked right to fair and equitable
treatment. These broad rights are not accompanied by                                equivalently
actionable responsibilities for foreign investors or by a requirement that
foreign investors resort to domestic courts, where they offer justice, before
bringing an ISDS claim. As a more positive but still limited step toward
formal balance, the state’s right to regulate is affirmed in the investment
chapter of the CETA and the Vietnam FTA (but not the Singapore FTA).
         Viewed alongside the proposed TTIP, the E.U.’s approach in these
other agreements should be understood as an effort to expand massively the
role of ISDS in state decision-making.93 The pending expansion of ISDS can
be illustrated approximately by considering the scope of the foreign-owned
assets currently covered by ISDS. Using the U.S. economy as a proxy, for
example, TTIP alone would extend ISDS coverage of foreign direct
investment (FDI) by about 300%, compared to current coverage under
existing U.S. treaties allowing for ISDS. That is, TTIP would cover 50 to 60%
of inward and outward FDI of the United States, whereas current treaties
cover 15 to 20%. Besides TTIP, other treaties pursued by the European Union
or the United States — especially the CETA and Trans-Pacific Partnership –
would expand ISDS to a point where it covers the great majority of FDI in the
world.
         Domestic investors and citizens and other foreign nationals are
disadvantaged in ISDS, relative to foreign investors. They face the usual risks
of democracy, regulation, and courts in the usual ways: by taking part in the

93
   These approximate figures were calculated based on existing investment treaty coverage of
country-by-country inward and outward FDI flows for the U.S. in 2012 from the data provided in
Organization for Economic Cooperation and Development [OECD], StatExtracts: FDI flows by
partner country, http://stats.oecd.org/Index.aspx?DataSetCode=FDI_FLOW_PARTNER. The
figures do not account for the possibility of forum-shopping by foreign investors which is
difficult to measure and handled in different ways by arbitrators and existing treaties, but which
could expand existing ISDS coverage.




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democratic process, by lobbying or protesting, by buying insurance, by
bargaining     for    strong    dispute     settlement     clauses     in    contracts          with
government, or by going to court. Foreign investors can still do all these
things too, but with ISDS they have the added weapon of an exceptionally-
powerful right to sue countries at the international level. Any proposal to
grant special privileges, backed by public funds, to a group of economic
actors — here, typically the largest and wealthiest in the world — calls at
least for a compelling justification based on clear evidence of public benefit.
The absence of this justification and evidence has been a key omission in
European Union’s current pursuit of a greatly expanded role for ISDS.94




94
   The most important agreements in this expansion would be the pending U.S.-led Trans-
Pacific Partnership (TPP), the proposed TTIP, a proposed E.U.-China bilateral investment treaty,
the CETA, and, for Canada, the Canada-China Foreign Investment Promotion and Protection
Agreement (FIPA), which entered into force in 2014.




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