Oral evidence: Transatlantic Trade and Investment Partnership (TTIP), HC 804-iiTuesday 16 December 2014
Oral evidence, 16 December 2014.
Chair
Good morning and welcome. Thank you for agreeing to assist us with our inquiry. I understand you do not profess to be an expert on TTIP, but that you do have a huge body of experience in investor-state disputes.
Professor Sir David Edward
I would not say it was huge, but I have experience.
Chair
Okay. May I start with a general question and perhaps you can enlighten the Committee? What is the role of the International Centre for Settlement of Investment Disputes in assisting in investor-state disputes under international trade treaties?
Professor Sir David Edward
ICSID was set up under the auspices of the World Bank in the 1960s. As you know, the World Bank is concerned with promoting investment, particularly into the less developed countries. There was perceived to be a problem about investors having complaints about the way they were treated by the host countries. In particular, there were only two methods by which they could get remedies. One was to sue in the courts of the host country, which many considered to be unsatisfactory. The second was by invoking what is called diplomatic protection under international law, by which the country of the investor would seek a remedy under international law against the host country of the investment, and it was felt that it would be a good idea to create a system for conciliation and arbitration of these disputes. ICSID exists solely to provide the mechanism for conciliation and arbitration. It has certain rules, but they are rules relating to the mechanism of arbitration and conciliation. They do not lay down the basis of the dispute or how the dispute should be resolved. The member states of ICSID, the signatory states, each nominate a panel of arbitrators and a panel of conciliators. If a dispute arises that is submitted to the jurisdiction of ICSID, the parties will seek to nominate their own choice of arbitrators—one on each side, and then they choose a president—or, alternatively, a single arbitrator. In general, the procedure is consensual. Initially, it largely depends on the consent of the parties—the investor and the state—and ICSID only steps in if there is a failure in an agreement. That is the broad outline of what ICSID is about, but it is not the only mechanism for the resolution of investor-state disputes.
Chair
There seems to be, within the context of the TTIP debate, a great deal of emphasis put on the sort of secretive arbitration procedure that would exist in this particular area in the event of TTIP becoming a treaty and this particular element being incorporated into it. From your perspective, as someone who has been involved in arbitration, do you think that is justified?
Professor Sir David Edward
It is in the nature of arbitration not to be public. It is exceptional for any arbitration to be public. In ICSID arbitration, the fact of the ongoing arbitration is published with just the name of the dispute: such and such against somewhere else. To that extent it is public. The arbitral awards are not public unless the parties agree to them being made public. I have experience of it both ways, of the parties agreeing for it to be published—there is a huge ICSID website with the text of arbitral awards—and sometimes of the parties, or one party, objecting to it being made public.
Mike Crockart
I just want to ask you to expand a bit on that experience, the types of thing you have gone through and examples of where they have or have not been made public. What is the general flow of arbitration?
Professor Sir David Edward
I think that the publicity issue depends partly on whether it is the investor in question. I think it would be rare for an investor to object to publication, but it might object if it had lost spectacularly, particularly if there were severe comments—there usually are not—about the evidence given by an officer of the investing corporation. The investor then might not wish it to be made public. The defendant state might object if, for example, it has made an objection to jurisdiction and it has lost on that issue. It might then wish the decision not to be public in order not to encourage other people to follow the same route against it.
Mike Crockart
When you say an issue of jurisdiction, what sorts of thing do you mean?
Professor Sir David Edward
Well, does it fall within the jurisdiction of ICSID? Let me explain that. Most bilateral investment treaties contain, at the very beginning, a definition of who is to be considered an investor and what is to be considered an investment. The matter is only within the jurisdiction of an ICSID tribunal if there is an investor, as defined, and an investment, as defined. There can be a question as to whether the person or company is an investor. For example, in the case of human beings, a human investor cannot sue the state of which he or she is a national. A corporation can be a national of the host state but controlled by foreign nationals. Some investment treaties provide that, in that case, the fact that the corporation is a corporation of the host state does not necessarily mean that there cannot be an ICSID dispute. Questions can arise such as: is this company controlled by people who are not nationals of the host state? Does this constitute an investment? Was that payment made for the purpose of an investment or not? It depends very much on the four corners of the definition clauses, which are either very short or sometimes very detailed. So that would be an issue of jurisdiction.
Mike Crockart
You have outlined why some investors might not wish it to be public, but what is the general process then followed for the actual arbitration proceedings?
Professor Sir David Edward
The proceedings begin with a request for arbitration. That is, normally speaking, by the investor. In legal theory, the bilateral treaty agreeing to arbitration is considered to be an offer to arbitrate. That offer is accepted when the investor makes a request for arbitration; that it constitutes consent. At that point, the defendant state can raise a preliminary objection to jurisdiction or, in a relatively recent addition to the ICSID Convention, on the grounds that the application is manifestly without legal merit. So you can start off with an objection. At that stage, the arbitral tribunal would have to consider that. Assuming that you have a preliminary issue of jurisdiction, the parties will exchange what are called memorials, in which they set out their position in writing. They annex to their memorial factual exhibits—letters and so on—and legal exhibits, which are copies of treaties, copies of previous cases, opinions of lawyers and so on. It is normally a ping-pong with two goes: memorial for one side and then answer, reply and rejoinder. After that, the arbitral tribunal can decide the matter without a hearing, but it will normally have a hearing. If there is no jurisdictional issue or if it is agreed that jurisdiction should be heard at the same time as the merits, the same procedure applies—written pleadings, two goes each side and then a hearing. An advantage of that process in a multinational and multilingual situation such as TTIP, given that many of the European member states are not English-speaking by nature, is that it is a written procedure. It is extremely difficult to conduct the kind of procedure that we are used to in the courts of the common law countries, in countries which have no tradition of that kind of procedure.
Mike Crockart
Surely, that then means that it will extend the amount of time it will take.
Professor Sir David Edward
Not necessarily, because, as you probably know, big commercial disputes can take ages in the courts, both in America and in Britain; and the hearings in ICSID tribunals normally take a week. They are just for clarifying points and giving people the last—
Mike Crockart
From start to finish?
Professor Sir David Edward
Yes, from start to finish.
Ann McKechin
You have mentioned about how arbitration is normally held in private, Sir David. There has been criticism about the ISDS process and I just wondered, in terms of your experience of disputes facilitated by the ICSID whether or not, for example, if the written pleadings were made public or the transcript of the evidence was made public, do you think that would improve the process? Or, because people have criticised multinational companies for dominating these processes, do you think it would actually eliminate the process?
Professor Sir David Edward
If you are an arbitrator, you have to keep quite a lot of shelf space for this. The pleadings and exhibits are huge. The transcript of the hearing would be absolutely meaningless if you had not looked at the files. So the chances of the public or the media really trawling through all this to find something interesting would be extremely small. But it is of the nature of arbitration that these things are not revealed. On the other hand, having said that, the awards normally set out in considerable detail what the position of each party is. An award will typically begin by saying who the parties are, what the procedure has been, what the essence of the dispute is, what position people have taken on each issue, to the extent of 60 to 80 pages, sometimes. That which is essential to a public understanding is almost inevitably there, but it is not there unless the parties agree that it should be public. Put it this way: nothing is impossible if there were to be an agreement in TTIP that the awards of the arbiter or tribunal should be public. It would be perfectly possible to provide that.
Ann McKechin
And your view that the one advantage of arbitration is that the speed of dealing with the very complex cases, which these inevitably are, is likely to be better than if you tried it through—
Professor Sir David Edward
It’s not Jim Clark speed by any standards, but then nor is normal commercial litigation.
Ann McKechin
I am just wondering whether, compared with normal commercial litigation, it offers any—
Professor Sir David Edward
Let me say that I have just been asked to fix a date for a hearing in December 2016, and the pleadings are just beginning. So the timetable is fixed in advance, but the parties normally have three, four or five months for each stage of it.
Ann McKechin
Are there any limits on the legal costs and resources available to either side in these types of case?
Professor Sir David Edward
No. I have heard it said that TTIP might have a provision that the state always pays. Well, that is not the case with ICSID arbitrations, unless the parties so agree; but in the ICSID convention and the ICSID rules, it is for the tribunal to determine who shall pay the costs. Another point to mention is that when ICSID arbitration begins, because the ICSID infrastructure is not heavily financed by the World Bank, each party is normally required to put up a sum of money—an equal sum on either side—for the costs of the procedure. At the end of the day, the tribunal decides who shall bear the cost.
Ann McKechin
It does appear that a small business will never go through the process given, as you say, the costs and the time and the outlays. This arbitration will only involve very large entities.
Professor Sir David Edward
I think a small business will hesitate about litigating in the United States and possibly also in Europe. Special provisions could be made for cases of small value, but that might be a thing worth putting in.
Ann McKechin
One other criticism has been that the clauses potentially have a chilling effect on a state’s ability to regulate, because they are afraid of the burden of costs and the risks. With greater levels of litigation coming through this process in recent years, that has begun to—
Professor Sir David Edward
That has been said particularly about some of the issues mainly between US corporations and some of the South American republics and a few countries elsewhere. The view being that, when faced with an economic crisis, the Government concerned have to decide what to do in the general public interest. The argument is that they should not be faced with a multi-billion claim for damage caused by measures to solve a crisis. That is the typical issue. Actually, there are some awards like that. The criticism has some basis or justification, but to some extent, it is because the bilateral investment treaty on which the claim is based does not have a protective clause in that respect. I did have one case where I was a member of what in the ICSID procedure is called an annulment committee, which is the nearest thing to an appeal. One of the issues was the interpretation of the investment treaty and whether the measures taken by the defendant state were necessary in the public interest. The arbitral tribunal had interpreted the word “necessary” according to normal international law and the annulment committee—this is public—said that it had got it wrong, because the word “necessary” was in the bilateral treaty and should therefore be interpreted in the context of the treaty. Therefore, the annulment committee quashed the award in favour of the American corporation against Argentina. It is perfectly true, however, that some of the South American republics have given notice of withdrawal from the ICSID system, because they feel that they are being put upon. The contrary argument—I am not making a political point—would be that they caused the mess in the first place.
Chair
Can I just intervene at this point? I would welcome your opinion on the idea that when a corporation does invest, you can do without the ICSID procedure as they should just insure themselves in the market for any eventualities that take place. Have you any views on that?
Professor Sir David Edward
They could do, yes; but they can do so at the moment. Given the extraordinary variations that could arise, it would be very difficult to write an insurance policy that would cover them at a tolerable premium.
Chair
Have you any evidence of this taking place?
Professor Sir David Edward
No. That is just off the top of my head.
Mr Bain
Some of the NGOs have argued that ISDS clauses would require a state to pay costs even if the company was to lose the case. From what you said in answer to the previous question, I take it that in your experience that is not the case.
Professor Sir David Edward
Well, it is certainly not the case in ICSID. ICSID is quite explicit that it is for the tribunal to decide who pays. Of course, it is always possible that the treaty on which the arbitration is based provides that the defendant state will always pay the costs. So you always begin with what the interstate treaty provides. That is what gives you the legal basis. The interstate treaty can provide whatever the states decide, so they vary very considerably, these investment treaties. Additionally, the parties to the arbitration can make an agreement. For example, assuming that there is a great issue of principle that the state wishes to have resolved and agrees to go to arbitration with corporation X to get an answer that will apply in all future cases, they might agree that the state should pay because it is a test case. That, again, is purely off the top of my head. It may be true that the current drafts of TTIP provide this, but I do not have any evidence for that.
Mr Bain
How have some of the previous treaties that you have seen managed to avoid vexatious or frivolous claims being brought by commercial interests against states?
Professor Sir David Edward
There was no express provision in ICSID until relatively recently. Now, as I said before, the defendant state can ask for the request for arbitration to be dismissed straight away on the grounds that it is manifestly without legal merit. There have been two cases, I understand, where that has happened, so there is provision under the ICSID system. There would not necessarily be that provision if the parties chose to go to a different form of arbitration. They are not required to come to ICSID unless the bilateral treaty provides that it will be done under ICSID procedure.
Paul Blomfield
Sir David, you may have heard the previous witness—
Professor Sir David Edward
A little, yes, I did.
Paul Blomfield
You may have heard him make the point that ISDS provisions are important in relationships where there is no symmetry between legal systems—indeed, a number of witnesses in evidence that we have received made that point—but that really is not the case between the UK and the EU, where there are properly developed legal systems. Why, then, would ISDS provisions be necessary in a trade agreement between the EU and the US? Or maybe you agree that they would not be?
Professor Sir David Edward
I don’t know what the provision will be, but for the moment I will assume that it would be a claim by an American investor against an EU member state. You have 20-plus EU member states, of which only two belong to the common-law system. They are the United Kingdom and Ireland. All the others have different legal systems. Some of them are perceived as less reliable than others, so you can imagine that perhaps there would be a reticence among US investors to sue in some of those countries. From my experience as a judge in Luxembourg, the other but so far unspoken of problem is language, because the witnesses of the defendant state may not be able to give evidence in English, which would be the normal one between the UK and the US. Let’s suppose that all the host state documents are in Estonian or Romanian. A UK/US common-law-style investigation would be extremely difficult because you would have to have interpreters, and I can tell you that conducting legal process through interpreters is extremely difficult.
Paul Blomfield
I can understand that that may well be difficult, but the problem has been successfully navigated in the European Court, hasn’t it?
Professor Sir David Edward
At colossal cost.
Paul Blomfield
So presumably that experience could translate—
Professor Sir David Edward
Well, into arbitration. You are normally operating only in two languages. In the example that I was talking about, of an American corporation and Argentina, we had English and Spanish interpreters present and all the pleadings were submitted in both languages. You only have to have two languages going, but normal court procedures in the member states do not normally provide for interpreting.
Paul Blomfield
But I—
Professor Sir David Edward
It is perfectly true that the UK and the US have comparable legal systems, but it is a wholly false comparison to say that the UK and the US have comparable legal systems and therefore the EU and the US have comparable legal systems, because they don’t, and moreover the EU has, what, 20-plus languages? Written procedure is far more efficient where there is a language problem.
Paul Blomfield
I think we can understand the language problem, but I guess that it is not beyond the wit of an agreement to resolve it. I think the argument was not that the legal systems are comparable, but that the legal systems in the EU are developed and sophisticated legal systems and therefore there is an opportunity, through those systems, for disputes to be resolved without the need for ISDS provisions.
Professor Sir David Edward
That is true, but remember that in middle and Eastern Europe the legal systems have been coming out of the dark ages of the Communist system. They have been doing so at a fair speed, but there is still a problem about the legal system in some of these countries. I am not going to be specific, but there is a problem, and they are most likely to be the host state for an investment.
Chair
William, you wanted to ask a supplementary question.
Mr Bain
Yes, thank you. Ultimately, if there is an agreement, it will be between the United States and the European Union, and we know that the ultimate legal authority for determining disputes involving issues of EU law within the European Union is the European Court of Justice. One issue that we have put to witnesses in other sessions is that by creating a separate process you potentially undermine the rule of EU law, because you divert some issues that ultimately would properly be resolved by the ECJ into a special process that may not be binding on all the EU member states in any case. Do you see some serious theoretical problems with having ISDS clauses, given the very special nature of the European Union law that has been created by the treaties?
Professor Sir David Edward
The answer is yes. It is possibly overcome-able by providing in the treaty that an arbitration tribunal under TTIP ISDS can have the power to make a reference to the Court of Justice for a ruling. That kind of ruling is not unknown in the United States. The curious thing is that it works the other way there: the United States federal courts can ask state courts for a ruling on the state law that is applicable, but not the other way around. Still, the procedure is known. The difficulty is that it could add up to two years to the procedure. Nevertheless, there is always the possibility that a decision of an arbitral tribunal could, in some fashion, on a technical issue such as state aid, public procurement or something like that, be inconsistent with EU law. I do not know what protection the Commission is seeking for the coherence of EU law. Of course, if you are talking about the United States, again, if you have had an investment in one of the states, the law of that state might not be the same as federal law.
Chair
Paul, I think you wanted to come back in on that.
Paul Blomfield
That was helpful, but I want to push a little further on the existing position, drawing on your experience as a European Court judge. What provisions exist under EU law to protect US companies that wish to invest in the EU?
Professor Sir David Edward
There are international provisions about fair treatment, but normally, if a US investor wishes to invest in an EU member state, there will be a bilateral treaty between the US and that state. So it already exists, but it is piecemeal, so to speak. One of the concerns of the Commission has been to bring this very variegated system under a single umbrella, because, under the Lisbon Treaty, the Commission has for the first time been given competence in relation to foreign direct investment, so they are wanting to bring it clearly within the common commercial policy.
Paul Blomfield
But as you said in your answer to William, that could be done through the European Court—it need not necessarily be done through an ISDS arrangement.
Professor Sir David Edward
No, because currently arbitration tribunals are not able to get a ruling from the European Court on EU law.
Paul Blomfield
But that might be a provision of TTIP.
Professor Sir David Edward
TTIP could provide for that. I am not entirely sure, but it probably would not require a treaty amendment to give the EU Court jurisdiction in that issue, as long as it was provided for in the TTIP agreement.
Paul Blomfield
Thank you. You said earlier that most of the potential disputes would be US corporations against EU countries, but—
Professor Sir David Edward
No, I said ‘if’ it’s in that direction. If it is a US corporation investing in Europe, the probability is that the investment will be into the middle European and Eastern European countries rather than, for example, the UK, but not necessarily.
Paul Blomfield
Although there has been lots of experience of those sorts of case.
Professor Sir David Edward
Sure.
Paul Blomfield
I just wonder what the protections are under existing US law to protect European companies wishing to make an investment.
Professor Sir David Edward
Well, they could sue in the US court or they could go to arbitration under their bilateral treaty the other way around. The experience of foreign corporations in some of the US courts is said to be unhappy.
Paul Blomfield
And has that been at state or federal level?
Professor Sir David Edward
Both. I have very limited experience of this, but I remember one case involving a South American country where the issue was whether the US courts had jurisdiction on an issue that, on the face of it, only concerned nationals of that South American country. The court in New York asserted jurisdiction on the plain ground that it was well known that the courts of the South American country were corrupt and unreliable. If I have given the impression that investment is always likely to be that way, that is not so. TTIP is worthless for the EU unless it promotes the possibility of investment going west rather than east. Under the existing arrangement, the bilateral treaty between whichever country it was and the United States would provide for arbitration anyhow.
Paul Blomfield
Thank you very much.
Mr Walker
You mentioned the existing bilateral treaties with various countries and the United States. Do you know what proportion of EU members have bilateral treaties with the United States?
Professor Sir David Edward
I was told that it was all of them.
Mr Walker
That is interesting. Within existing investor-state dispute mechanisms, do you feel there is any disparity of power between the state and companies?
Professor Sir David Edward
Put it this way, if it is a large corporation with a pocket deep enough to employ one of the highly specialised US law firms, they could be at an advantage compared to a state with limited resources and a governmental system that cannot produce an efficient defence. I have had experience of a South American country where the equivalent of the Attorney-General changed in the middle of a particular stage of procedure. They claimed to have to start again because he or she had to be briefed and give instructions before any document could be launched. Most of the states tend to employ these specialist law firms anyway.
Mr Walker
If we are talking about states when we are looking at TTIP, in this case the EU and the US, they are both resourced sufficiently enough that they can afford pretty good lawyers themselves.
Professor Sir David Edward
One would expect so.
Mr Walker
But do you think there are any procedural safeguards, or is there any particular approach that could be taken to dispute resolution, to make sure that the companies are not given a disparate position versus state, and vice versa?
Professor Sir David Edward
My experience, although it is not vast, is that the arbitral tribunals attempt to be utterly fair and give both sides complete opportunity to state their case, even—some people would say—to a rather extravagant extent. It is not, in my experience, common for arbitrators to say, “We’ve heard enough about that. We don’t want to hear any more.” No, you must let them put forward every point they wish to put forward. Normally, the courts with which I’m used, except the European Court—the British courts—would be much more ready to cut them short.
Mr Walker
That, potentially, partly explains the length of procedures at the arbitration process.
Professor Sir David Edward
Yes, but remember that that is also true of domestic arbitration. Domestic arbitration can be extremely slow.
Mr Walker
In a bilateral agreement such as TTIP, is it clear who is actually the state in this case? You mentioned, obviously, that various EU states will have bilateral treaties with the US and under the current system they would be the state engaged. If TTIP were to come into force, is it your understanding that the role of the state, and therefore the potential liability to costs, would sit with the member state or the EU as a whole?
Professor Sir David Edward
Nobody knows this in detail, but my understanding is that the purpose of TTIP, vis-à-vis the United States, is to replace all bilateral treaties between member states and the United States by a single treaty, which ensures the coherence of the EU position. At the moment, the EU—the institutions of the EU—does not have a proper locus standi; there is no standing before an arbitral tribunal. Sometimes the arbitral tribunal allows the Commission to make submissions. The idea, I think, is to have a coherent system and that would supersede all the bilateral treaties of the member states with the United States.
Mr Walker
Out of interest—I appreciate you may not know the answer to this—do you know when the UK’s bilateral treaty with the US was last looked at or updated?
Professor Sir David Edward
No idea.
Mr Walker
Potentially, it would be worth us having a look at that, because obviously its quality, or otherwise, would have a bearing on whether this is in our interests.
Professor Sir David Edward
Go to www.worldbank.icsid.org and you will find a link to all the bilateral treaties.[2]
Mr Walker
Thank you.
Chair
Any further questions? No. That concludes our questions. Thank you once again for helping us with our inquiry. I should state, as I do to most panellists, that if we feel there is a question we should have asked you, we will write and will be grateful for a response.
Professor Sir David Edward
Please feel free.
Chair
Similarly, if there is anything that you feel that you should add to any comments that you have made, we will be happy to receive it.
Professor Sir David Edward
I hope I have been able to be helpful. There is a limit to experience.
Chair
No, I think you have been very helpful indeed. Oral evidence: Transatlantic Trade Investment Partnership (TTIP) HC 804-ii 26 [1] Note by witness: figure corrected to €120 billion [2] Note by witness: https://icsid.worldbank.org/apps/ICSIDWEB/resources/Pages/Bilateral-Investment-Treaties-Database.aspx