By Don Quijones of Spain, UK, and Mexico, editor at Wolf Street. Originally published at Wolf Street
In a surprise move, the European Union’s top court has ruled that Investor-State Dispute Settlement (ISDS) clauses contained within almost 200 bilateral investment treaties (BITs) between EU member countries violate EU law, casting doubt on such deals as well as others struck by the bloc as a whole. ISDS clauses allow foreign investors or corporations to sue governments for passing laws or regulations that could undermine the value of their investments.
The Court of Justice of the European Union (ECJ) found that an award of damages to Dutch-based insurer Achmea from Slovakia under a bilateral investment treaty inherited from former Czechoslovakia contravened EU law since the arbitration tribunal that made the ruling was “not a court of a member state.” As such, it had no power to refer matters to the ECJ, the highest court of the EU.
“The arbitration clause in the BIT has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law,” the court said.
The ruling could have widespread repercussions, not only for EU-based investors seeking redress for changes in government regulation that affect their bottom line but also for investors from outside the bloc. In total 196 BITs between EU members contain such clauses, some concluded between western EU countries to protect investments of their companies in former Soviet countries before the latter joined the EU.
ISDS cases do not get heard in a court of law, under the scrutiny of a judge and/or jury, but rather in front of arbitration panels made up of three professional arbitrators — one representing the company, one representing the country and the other chosen by the first two to sit as president of the panel. None of these arbitrators are trained judges; they are very handsomely paid private individuals, often representing some of the biggest international corporate law firms, mostly from the U.S. and Europe.
In recent years, ISDS has become such a toxic concept that even Beltway institutions such as the Cato Institute have called for its purging from future trade agreements — an idea that appears to be supported by US Trade Representative Robert Lighthizer and could even be applied to a newly negotiated NAFTA agreement.
Europe is already halfway there, but not everyone’s on board. The Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland and Romania have all came out in Slovakia’s defense against Achmea, as has the European Commission. By contrast, the governments of Germany, France, the Netherlands, Austria and Finland believe that the clause at issue and, more generally, clauses of a similar kind used in the 196 BITs currently in force between EU Member States are perfectly valid.
Besides dividing Europe, the ruling could also pit the EU, which is in the process of developing its own multilateral investment court, against powerful international arbitration tribunals that will be determined to protect their racket, including the International Centre for Settlement of Disputes (ICSID), which is part of the Washington-based World Bank. If the EU prevails, the cancellation of the investment dispute clauses could end up costing corporations and investors billions of euros in lost compensation.
A case in point is the cascade of lawsuits brought by dozens of European and other international investors against the Spanish government over its decision to withdraw a raft of renewable energy subsidies between 2011 and 2013.
The lucrative taxpayer-funded subsidies had triggered a stampede of investors and companies, domestic and international, into the sector. But when the financial crisis began biting hard, the Zapatero government announced a cut of 30% to the subsidies. When the conservative Popular Party came into office, it deepened the cuts. With the honey jar withdrawn, renewable energy consumers and companies suddenly saw their funds wither. Many projects collapsed.
While thousands of Spanish investors lodged appeals with the nation’s Supreme Court, a group of large foreign businesses took the case to international arbitration, often through EU-based affiliates in the Netherlands and Luxembourg. Fifteen businesses that had invested in Spanish solar energy lodged their first international claim, using the Energy Charter of the United Nations Commission on International Trade Law (UNCITRAL).
They were joined by a further 20 investors, including sovereign funds, German municipalities, and a Canadian civil service pension fund. Even major Spanish companies such as Abengoa and Isolux presented compensation demands, arguing that their solar energy plants belonged to affiliates in the Netherlands and Luxembourg.
At one point Spain was the focus of so much legal action that it climbed to third place in the global leader board of nations facing Investor-State Dispute Settlement (ISDS) suits, just behind two notorious bugbears of international capital, Venezuela (24 complaints) and Argentina (20). It already has two rulings against it, to the tune of some €128 million. The total settlement could have reached €7.5 billion — enough to seriously impinge the government’s already strained finances.
But then Brussels came to the rescue by arguing that awarding legal damages to European investors could be construed as State aid and would therefore be illegal. [As an aside, it’s curious how the billions of euros of free debt gifted to Europe’s biggest corporations as part of the ECB’s corporate bond buying program never qualify as illegal State aid…]
Now, in its new ruling, the ECJ has set a very important precedent. Put simply, EU-based investors, including international investors operating through an EU-based affiliate, will no longer be able to sue European countries through international tribunals. Instead, they will have to go through European courts.
Given the deep flaws and inadequacies of the ISDS clause, which essentially enables foreign investors to ride roughshod over domestic laws and regulations, the ECJ’s decision to invalidate it, at least as a mechanism to settle disputes between EU companies and Member States, is a long-awaited step in the right direction. If Brussels decides to go the whole hog and apply the ruling to the trade treaties it strikes as a bloc, it could spell the beginning of the end for ISDS. By Don Quijones.
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i very much hope this is the beginning of a trend. it’s a big step for brussels to go the whole hog, though.
And they say that irony is dead.
Is there any redeemable value in a watered-down version of ISDS as a pressure-release valve or does the idea need to be scrapped entirely? I’m just about finished with Daniel Yergin’s book The Prize: The Epic Quest for Oil, Money & Power and it seems like, realistically speaking, another alternative for investors to protect investments is by overthrowing governments (like in Iran or Venezuela) with the help of intelligence agencies. Maybe not so much here inside the EU right now, but I can imagine that it’s still viewed as a viable tool anywhere where multinational corporations have more power than national governments.
If investors are worried about political risk, I guess they can buy insurance. Just like they do for other risks. It is not the responsibility of government to guarantee risk free returns on capital.
Additions to the original text in bold.
Why on earth If you and me, individual persons that invest in education, health and many other costs necessary to get/apply/do a job, have NO guarantee of getting such a job, and will NEVER see a compensation for those losses –unemployment benefits don’t count since those are extracted from your salary while you are working–, while companies MUST be compensated under any circumstances?
Corps are people.
All people are equal.
Some people are more equal than others.
I was way behind the curve in even knowing such outlandish agreements existed in part because I had the naive notion that investment had risks. Foolish I know. Risk is for the “little people”. ISDS cannot disappear soon enough.
I found it intersting that the more powerful states such as Germany, France, the Netherlands, Austria and Finland seem to want to continue with ISDS clauses whereas the smaller nations the Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland and Romania came out against this. Could it be that the corporations based in the former states find them useful to twist the arms of smaller states?
The self-appointed ‘courts’ used to decide over ISDS clauses were a bad joke in any case and have been a pox on countries worldwide. You may as well have a man refused employment at a new company sue that company for the lifetime of wages that he would have earned if he had not been refused employment. They are what they are – a tool for corporations to break and make irrelevant the will of countries at little cost to themselves.
Conversely, Since Germany et al. host those corporations, is in these countries is where they concentrate their lobbying positions, probably under menace of moving headquarters away.
How are Netherlands, Austria and Finland bigger than Spain and Italy?
I strongly dislike the ISDS but I think that it sucks for the working classes and is good for capital, I don’t see a clear advantage for one nation or the other.
Maybe it depends on the lobbying and political circumstances of the individual countries, but it seems like in general places with capital might tend to be pro-ISDS and places without should be against.
There was a high-profile case here recently where a Swedish company sued Germany for an ungodly amount, so German interests can be both victims and beneficiaries.
“Maybe it depends on the lobbying and political circumstances of the individual countries, but it seems like in general places with capital might tend to be pro-ISDS and places without should be against.”
It would seem so. If you compare foreign direct investment stocks (FDI) (with the caveat that these count all foreign investment, not just between EU countries), you can see that all of the pro-ISDS countries are (technically were) also net investors
Of the anti-ISDS countries only Italy is a net investor, all the others received more FDI that they provided and, except Spain, by large amounts.
Hi MisterMr, the Netherlands have a large number of very pro-investor investment treaties, so many multinationals have mailbox companies in the Netherlands to take advantage of these treaties. The Netherlands are not only a tax haven, but also an IIS claim paradise. All this makes the Netherlands one of the largest investor-countries in the world.
“They are what they are – a tool for corporations to break and make irrelevant the will of countries at little cost to themselves.”
I would just alter “will of countries” to “the will of a sovereign nation and its people”- merely to highlight the gravity of the insult to a nation.
Hi Rev Kev, yes, it is as you suggest. You could read Gus van Hartens “Arbitrator behaviour” (part 1 + 2) which shows that investors from powerful capital-exporting countries have higher chances of winning an IIS-case. But if the USA are the defending state, the foreign investor has less chance of winning.
I remember a photograph of Presidents Ford, Carter, Reagan, George HW Bush, and Clinton taken together who were all extolling the necessity of passing NAFTA. Was there any discussion of the ISDS clause seriously compromising US legal sovereignty at the time? Our whole legal system was subverted including local, state and US levels. Was the legality of loss of legal sovereignty ever contested in Federal court? Did five presidents forget to do their due diligence?
In the early 1990s Perot was the highest profile free trade opponent. NAFTA/trade was the main topic of the 1992 presidential debates. I don’t remember Perot’s “sucking sound” arguments against NAFTA and similar trade agreements mentioning the ISDS clauses.
I read the English translation of the decision. The court ruled that the Arbitration Panel, or court, must be a part of the EU court system, if suing an EU member country. If the panel was not an EU court, then the decision is not binding.
Does that mean ISDS is dead, or just removed from non-judicial, non EU court, arbitration into EU courts?
It is dead in practice because the arbitration system is really really corrupt and won’t deliver the desired results in a proper court system. Decisions are secret, non appealable, and regularly inconsistent.
See details:
https://www.nakedcapitalism.com/2015/03/the-administrations-dishonest-response-to-elizabeth-warrens-attack-on-secret-investor-arbitration-panels-in-trade-deals.html
“Given the deep flaws and inadequacies of the ISDS clause, which essentially enables foreign investors to ride roughshod over domestic laws and regulations …”
Obligatory “Those are not flaws, but features” comment.
So the question is now. Why are Germany, France, the Netherlands, Austria and Finland for the ISDS clause? This needs to be made more public in these countries.