Arbitration clause in EU-Canada trade agreement

Arbitration clause in EU-Canada trade agreement


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An easy way to bypass democracy

BELGIUM- BRUSSELS – The year 2013 may well be a very challenging year for the European Parliament. A new trade agreement between the EU and Canada is expected to be concluded in the beginning of 2013 despite the fact that several problematic issues will be included in the agreement.  Amongst them the investor-state arbitration clause, which gives private companies the right to directly sue states in international tribunals.

The extent of the potential adverse effect of this clause on public health laws, to give just an example, is evident in the litigation between Philip Morris and Australia. The multinational tobacco company sued Australia relying upon a similar arbitration clause included in Australia’s 1993 bilateral investment treaty (BIT) with Hong Kong. The Tobacco Plain Packaging Bill, which passed the House of Representatives in 2011, introduced restrictions on the use of cigarette companies’ logos on cigarette packets and allow for more space for health warnings.  Philip Morris Asia Limited argued that the bill would deprive it of the value of its investment in trademarks and other intellectual property in Australia. Back to the EU-Canada trade agreement, this means that whatever the European Parliament decides on the Tobacco Directive, this law would be open to a judicial review not by the European courts but by an international tribunal and its implementation would be at stake. The tobacco industry would be able to annul our legislation and this is the easiest way to circumvent any law restrictions aiming at the protection of public health.
Another example is the case Ethyl vs. Canada that was judged according to a similar clause included in NAFTA. International and inter-provincial trade of the gasoline additive MMT was banned by Canada for health reasons and its interference with anti-pollution systems in automobiles. Ethyl, the manufacturer of MMT, sued in the international tribunal provided for in NAFTA and Canada settled. Under the terms of settlement, Canada paid approximately $16 million for damage to the investor’s reputation, issued a statement that MMT did not pose a health or environmental threat, and withdrew the ban.
The problematic nature of the arbitration clause is stressed by the impact assessment of the EU-Canada trade agreement, which was commissioned and financed by the European Commission. The impact assessment concludes that such a clause will not be beneficial environmentally, socially or even economically. Furthermore, it casts doubts as to the utility of the clause between developed countries given the strength of their existing institutional environments. On top of that, it underlines the great threat that it poses to freedom of legislators to legislate in the field of environmental and social policies. On the contrary, it suggests that the best option would be a state-state dispute settlement clause. 
As to the legal defence costs of a litigation, the impact assessment suggests that they could be particularly extreme, citing examples where EU Member States have had to pay 10-15 million USD in defending themselves under bilateral investment treaties. The rulings are decided by international tribunals mainly consisting of international law lawyers (arbitrators). These tribunals operate without the guarantees of the European judicial system (principle of impartiality), while there are no tools of judicial review (appeal) of their decisions. These arbitrators play multiple roles, which can give rise to conflicts of interest. They may sit as arbitrators or work as lawyers in the system (whether for governments or for investors).
The investor-state arbitration clause allows investors to target not only administrative decisions, which might affect their investments, but any law on social, environmental and economic matters. That means extreme costs for the Member States in times of budgetary restrictions. It undermines the very existence of the sovereignty to legislate for public interest purposes and weakens the ability of the legislators to make laws. States are sued and obliged to incur extreme legal defence costs. On top of that, they are bound to repeal law provisions and compensate investors by paying huge amounts of taxpayers money. 
Some extracts taken from the impact assessment are quite characteristic:“Regarding investor-state dispute settlement (ISDS) there is no solid evidence to suggest that ISDS will maximise economic benefits in CETA beyond simply serving as one form of an enforcement mechanism, just as state-state dispute settlement is also an enforcement mechanism. The policy space reductions caused by ISDS allowances in CETA would be enough to cast doubt on its contribution to net sustainability benefits. As such, the study’s assessment suggests that a well-crafted state-state dispute settlement mechanism might be a more appropriate enforcement mechanism in CETA than ISDS.“ Moreover, it suggests that the Commission should “consider excluding ISDS from CETA and instead use a state-state enforcement mechanism like that in the US-Australia FTA”.
The adverse effect of investor-state dispute settlement clause on environment and public health laws is already evident. In recent years, investor-state arbitration has become a powerful tool giving standing to private commercial entities to bring actions against states in order to circumvent any law restrictions. This clause if finally included in the EU-Canada trade agreement will end up to being an easy way to bypass democracy.
 
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