Is it the beginning of the end for “Investor-State Dispute Settlement” clauses that have become toxic to democracies?
By Don Quijones, Spain, UK, & Mexico, editor 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 often thought that the ECJ was one of the critical factors in driving many reactionary Tories in the UK into the Brexit mania. Britain is a de facto elected dictatorship, as Parliament has all the powers of a legislature combined with those of a monarch, with the ability to effectively change the “constitution” at will. The ECJ was always seen by British elites as a check on their untrammeled power. Breaking free from its jurisdiction seems to have been very important to powerful players in the British ruling elite. This was why I was so ambivalent about Brexit–sovereignty is important, but given the constellation of forces in the UK, sovereignty for whom?
What nonsense. No sovereign state is sovereign if it’s most fundamental disputes can be referred to an external politically controlled court.
The UK RULING ELITE don’t want Brexit. See House of Lords, BBC, Civil Service Mandarins, Cameron, Blair, Brown, Major, all x-PMs.
You are wrong.
I think James Levy is right. However, I also think the UK ruling elite is not a monolithic bloc. The people quoted by Caradoc are those who have done well out of the EU, or believe the UK has done well ourt of the EU, and Rees Mogg, May etc. are those who think they will do well outside of the EU. Then there is the City of London (which has a massive influence on UK government), which doesn’t want EU regulation, and also doesn’t want Brexit.
The WTO is also a form of external political control. No man is an island.
I think blanket comments like “You are wrong.” are unhelpful. It is perfectly possible to be right in some aspects and wrong in others. Surely, these comments are here to try and tease out the most likely possibilities.
I can see what you’re saying @Caradoc and, on the surface, it would appear that you are correct viz. the elites NOT wanting Brexit.
However, in this instance I’m with @JamesLevy. If the elites didn’t want Brexit, it wouldn’t have happened. Simple. Democracy has now gone the way of the dodo and all we sheep can do is hang onto the fragile tatters with our ground down teeth.
Global trade is the modern house of Babel
It´s about time SOMEBODY stood up against this ridiculous concept. Governments must be allowed to do what they see as proper and businesses have simply to adjust or get out. Since when did goddam businesses and their profits become more important than the nation state?
not sure if im reading this correctly,but, it sseems like policy changes happen a lot; so its not guarantee. why should corps be able to sue over policy change? tge last oil bust in the US showed this quit nicely; if oil drops, globally, the Canadian sand oil is no profitable. Who to sue?
Bravo ECJ!!!!!!!!!!!!!!!! I was wrong in thinking a!l EU and IS institutions had become utterly corrupt. Take that banksters and corporate wage-slave masters!
International corporate-written trade agreement suppress sovereignty by overriding local environmental and labor laws. Corporation seek to nullify democracy. They hate that people have a voice thru their government. This ruling is a giant blow for democracy, and will be attacked viciously by the corporate rulers and their lackey politicians.
Let me add: For the last 25 years, the corporate globalists have been seeking to override national and local laws by pushing international trade agreements that threaten local governments with lawsuits and compensation if environmental laws restrict corporate profits. Thus do corporations rule over popular democracy. This ruling is a smashing blow against supranational corporate rule. It gives me hope for democracy.
You don’t often read good news on blogs such as this. Fingers crossed it doesn’t stall but goes the whole hog!
Investors should always remember that when push comes to shove, governments have the power to change the rules of the game while it is being played!
Turf wars
There is no black-and-white solution here, as both governments and corporations can be corrupt and ignore people’s interests. I agree with Tommy: this armwrestling is simply a power struggle between foreign and domestic parasites.
And you can see which party wins where by observing which countries are supporting or opposing previous policies.
It would seem that all the illegal means corporations have used to subvert governments, like bribery, fraud, and extortion, have only made them hungrier. So it comes as no surprise that corporate types would want to legalise their subversion so they can finally have total control, leaving everybody else defenseless and captive.
To be sure, the last thing they want is to be taxed at all, because that amounts to aid and comfort of the enemy. Better to deny governments any means to fight back and make them weak enough to drown in a bathtub. It’s an explicit goal in some circles.
My opinion seems to be widely shared.
Still, all this may seem a bit trivial in view of other existential threats promoted by corporatists. The list is rather long. Runaway global heating, for example, is already off to the races, and the only people who can do anything about it seem dead-set determined to accelerate it as fast as they can so as to optimise their short-term profits, since there seems little prospect of any long-term profits, given the expected results of their policies.
[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…]
Perhaps as Nobody has decided/tried to use them as a basis for a TARIFF. YET.