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8 Dec 2015

Ciara Dowd, Business & Human Rights Resource Centre

Winter is Coming: How TPP and TTIP threaten to chill positive developments in business and human rights

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We have seen slow but mostly steady progress in business and human rights in recent years, but with the release of the Trans-Pacific Partnership (TPP) agreement and the latest proposals for the Transatlantic Trade and Investment Partnership (TTIP), these trade agreements threaten to undo much of this good work.

One of the main concerns is the inclusion of investor-state dispute settlement (ISDS) provisions, which ultimately act as a vehicle to further skew investor-state relationships in favour of corporate power.  ISDS enables foreign investors to take claims against states when governments legitimately regulate for public interest reasons and where such measures have a negative impact on the value of the investment.  In these situations, the state must compensate for the lost profits, and often pay punitive damages on top.  There are many regulations which may be enacted to protect the public that would negatively affect the profits of a foreign investment.  For example, a state may wish to put a price cap on private water services to make clean water affordable.

It is difficult for governments to defend a legitimate regulation on the basis of international human rights law in ISDS.  The private arbitrators who sit on investment tribunals are not necessarily well versed in human rights law, and have avoided engaging in these defences by deeming them outside the remit of the dispute.  This was the situation in many cases taken against Argentina during the financial crises of the 1990s when utility services were privatised and people were unable to afford the private companies’ increased price of water.  In response to this, the government froze prices, which of course negatively impacted the value of the investments, and led to cases against the Argentine government in ISDS.  In many of these cases, the tribunals ruled that the government could not justify the price freeze on human rights grounds because human rights law was deemed not relevant to the dispute.

Human rights have also been excluded from the consideration of investment tribunals through the “sole effects” doctrine, which is interpretation tool for claims of indirect expropriation.  In these cases, investment tribunals need only examine the effects of a government regulation on an investment, with no consideration for the purpose, even if it is for public welfare.  Thankfully, this approach is less common and tribunals now often consider the purpose of the measure or the proportionality to its goal.  In the case of Methanex, California banned a gasoline additive that contaminates ground water, and a Canadian producer of this chemical sued for a loss in expected future profits.  The tribunal rejected this claim because the investor should have been aware that environmental regulation is constantly developing.

Governments may not wish to regulate for public interest issues for fear that they will be held liable for breaching an investment agreement.

Despite this positive step away from the sole effects doctrine, ISDS’ history of favouring investor rights still creates a regulatory chill. Governments may not wish to regulate for public interest issues for fear that they will be held liable for breaching an investment agreement.  This was the case in 2010, when the German government agreed to lower environmental requirements of a power plant rather than defend an ISDS claim taken by Swedish power company, Vattenfall.  Thus, ISDS threatens developments made by governments to protect human rights in the face of business activities.

Can “carve-outs” and independent judges help?

Given the business and human rights issues with ISDS, there is concern about its inclusion in the TTIP, the trade deal between the EU and the US currently under negotiation, and the TPP, another trade agreement which was recently concluded between the US, Mexico, Japan, and several other countries.

The state parties to these agreements have been seeking ways to address the concerns with ISDS.  The EU commission has recently proposed an international investment court to be included in the TTIP, to be comprised of judges instead of private arbitrators.  The proposal also includes a provision excluding public policy issues from the remit of the “indirect expropriation” clause, with the goal of limiting regulatory chill.  This means an investor cannot take a claim against a state for a regulation that negatively impacted the value of the investment if it was carried out to protect a public welfare objective.  This follows a trend in recent international investment agreements of including “carve-outs” for public interest issues.

The TPP also excludes public interest regulations from ISDS claims, and has an additional specific carve-out for tobacco regulations.  As tobacco regulations would already be included in the “health” aspect of the public interest exception, this is most likely a symbolic gesture and effort to placate fears arising from the case that Philip Morris is currently taking against Australia over plain cigarette packaging.

The TTIP proposals can carry on promising carve-outs and independent judges, and the TPP parties can pat themselves on the back for excluding tobacco related health measures from ISDS claims, but the problem goes deeper than any single issue.  It is structural.  At what point do the exceptions become so numerous that governments will question the legitimacy of ISDS?  Taxpayers should not have to compensate private investors on any occasion.  

Governments will avoid policies that could lead to a claim against them, even if they are in the public interest.

The risks associated with ISDS cannot even be justified by any real gains. Proponents argue that it will aid the flow of investment, because domestic courts are often biased against foreign investors, so they need the protection of an international tribunal.  It is highly unbelievable that any would-be investors cite corruption or weak governance as a barrier to investing in the EU or the US.  What constitutes a stable legal system if not these regions?  Studies have shown that there are little or no economic benefits to ISDS. 

Because corporations are able to sue states for using their sovereign right to regulate, governments will avoid policies that could lead to a claim against them, even if they are in the public interest.  The Vattenfall case demonstrates that even the EU is not immune to the regulatory chill of ISDS.  While these trade agreements might promise economic growth and prosperity, the cost is that citizens will live in a society where business and human rights policies are stagnated by the will of foreign corporations.