Tom Moore looks at the US-EU free trade pact’s potential for arbitration
The rise of international arbitration has gone unhindered and under the radar, despite the proliferation of investor-state disputes that has seen investors sue governments for changing tax regimes, introducing austerity measures and implementing plain packaging for cigarettes. But negotiations over the Transatlantic Trade and Investment Partnership (TTIP) – a free-trade deal between the EU and US that will cover half of world trade – has changed that, throwing attention on a shift away from national courts and raising the potential for a boom in arbitration.
There are around 3,000 free trade agreements (FTAs) in existence that allow investors to sue states, with 200 claims currently pending before the main forum for bringing such disputes, the Washington DC-based International Centre for Settlement of Investment Disputes.
Currently, US investors bring disputes with European governments through national courts. That will change with an investor-state dispute settlement (ISDS) mechanism, proposed as part of TTIP, which will allow investors to refer matters to arbitration at either an existing institution or a new multilateral body.
If signed with an arbitration clause, the deal will be a huge boost to the market, which has already proved fertile ground for law firms, bringing in over $100m-a-year revenue for disputes heavyweights such as King & Spalding, Freshfields Bruckhaus Deringer and Wilmer Cutler Pickering Hale and Dorr.
TTIP has the potential to send more disputes to arbitration than any other trade pact, with $6.5trn worth of trade covered, and the modifications to the standard ISDS mechanism influencing how arbitration is carried out globally.
With so much at stake, transfer of judicial, as well as legislative, power from the state has sparked a fierce resistance that threatens its inclusion. Aidan Robertson QC of Brick Court Chambers said: ‘TTIP throws up whether arbitration as a tool is really appropriate and sends out an odd message that we don’t trust each other’s courts.’ Originally designed to encourage investors from developed nations with established rule of law to invest in politically unstable countries with immature legal systems, Robertson QC argues that the pact’s diversion of disputes away from national courts and into arbitration ‘isn’t anything to do with boosting business’ and that, ‘if countries were starting from scratch, you would not put it in’.
With the abolition of tariffs and standardisation of regulation between the two trading blocs, French concerns over the pact’s shift away from national courts has already seen provisions added to ensure that TTIP’s arbitration clause will not cover protectionist measures it enforces to guard its renowned film sector. However, many large industries will still fall under the agreement, with some insiders feeling that more moves to limit arbitration would lead to a tit-for-tat squabble with the US – leaving the deal looking more like a block of Swiss cheese.
Healthcare is the most controversial area that could see a barrage of disputes end up in the hands of arbitrators. With several EU members moving to privatise parts of their national health systems, European states could be on the receiving end of large claims from US pharma companies if attempts are made to reverse actions.
Such fears are fuelling the modification of an arbitration system criticised for its lack of transparency over issues in the public interest and the idea of mission creep, with many governments upset at how tribunals have expanded their remit to include claims that were not originally thought to be covered under their commitment to provide ‘fair and equitable treatment’ to investors protected by FTAs.
To counter these concerns, European Commissioner for Trade, Cecilia Malmström, has proposed an appeals mechanism not provided under existing international arbitration rules. Currently, while the losers of arbitration can seek to have an award annulled or set aside by a national court, Malmström’s plan for a multilateral court to hear award appeals would be a significant change to the current setup and set a new international standard. Plans for a fixed list of arbitrators will also move ISDS procedures closer towards a permanent court.
While Emmanuel Gaillard, founder and head of Shearman & Sterling’s international arbitration group, is against such a move as it would ‘be too cumbersome’ and come at ‘an enormous expense to the taxpayer’, EU negotiators are set on introducing an appeals mechanism to give states better protection against awards. Gaillard added: ‘I’m not excited about an appeal mechanism. It would lengthen the process to make lawyers richer and the losing party poorer.’
Instead, Gaillard suggests that states should be able to counter-sue investors under TTIP. Noting how FTAs are seen as ‘allowing investors to call the shots while states just pay the awards’, Gaillard has recommended allowing states to counter-sue investors if they don’t meet investment promises. ‘This would structurally rebalance the system so investor-state arbitration wouldn’t be a one-way street anymore,’ said Gaillard.
Whatever procedure is finally included in TTIP, it is arbitrators that are set to reap the rewards of the agreement, most likely at the expense of the local litigator.
tom.moore@legalease.co.uk