International Trade Committee
Oral evidence: UK trade negotiations: Investor-State Dispute Settlement, HC 15
Wednesday 18 January 2023
Ordered by the House of Commons to be published on 18 January 2023.
Members present: Angus Brendan MacNeil (Chair); Mark Garnier; Sir Mark Hendrick; Anthony Mangnall; Lloyd Russell-Moyle; Martin Vickers; Mick Whitley.
Questions 1 - 28
Witnesses
I: Dr Joshua Paine, Senior Lecturer in Law, University of Bristol Law School; Professor Barnali Choudhury, Professor of Law and Director, Jack and Mae Nathanson Centre on Transnational Human Rights, Crime and Security, Osgoode Hall Law School, York University (Canada); and Professor David Collins, Professor of International Economic Law, City Law School, University of London
Witnesses: Dr Joshua Paine, Professor Barnali Choudhury and Professor David Collins.
Q1 Chair: Good morning and huge apologies to the panel for the late start. The Committee had a mountain of business to get through in private, hence the knock-on delay.
Today’s session is on UK trade negotiations and investor-state dispute settlement. We have two panels and both panels have three witnesses. The first panel is all virtual and the second panel will be with us in the room in person. Without further ado, I will ask each of our virtual panellists to introduce themselves—name, rank and serial number—starting with Joshua.
Dr Joshua Paine: Hi, I am Joshua Paine, senior lecturer in law at the University of Bristol.
Chair: Thank you for joining us this morning. Professor Choudhury?
Professor Choudhury: Good morning. My name is Barnali Choudhury. I am a professor of law at Osgoode Hall Law School in Canada, and an honorary professor at UCL.
Chair: Thank you for joining us. What time is it with you at the moment?
Professor Choudhury: It’s early—about five.
Chair: Around five. An extra special effort is much appreciated—thank you. Finally, Professor Collins.
Professor Collins: David Collins, professor of international economic law at City University of London.
Q2 Chair: Thank you all for joining us. To kick us off, Professor Collins—just generally for people who are looking at this maybe for the first time—what are investment protection provisions and why do they feature in international investment agreements? What is the background? Can you set the scene?
Professor Collins: There are about 2,500 international investment agreements. Traditionally, these were bilateral investment treaties, which meant that they only covered investment protections. Now they tend to feature as parts of free trade agreements—a chapter in a free trade agreement that includes things like tariff reductions and so on in other parts. The typical contents of an investment treaty are indeed these protections, as you describe them. It is really designed to protect an investor against political risks in foreign countries. These might be things like guarantees against expropriation without compensation, non-discrimination, protection against damage to physical assets and so on. Increasingly, some of the modern treaties are also including liberalisation provisions. That is really about market access and enabling a foreign investor to enter a country in the first place.
Traditionally, the old treaties, the classic BIT, only protected investors after they entered. You would usually look to a domestic statute that would contain lists of various sectors that investors were allowed to invest in. Nowadays, we are starting to see liberalisation provisions. In the text of the treaty, you would see things like non-discrimination in the pre-establishment stage, which puts the foreign investor on an equal footing with the local investor, and also investment protections, although, interestingly, some of the UK’s new investment chapters of free trade agreements are somewhat thinner on the classic protections. For example, they might not include a guarantee against expropriation without compensation.
Chair: Thank you very much. I want to move on to my colleague, Mick Whitley.
Q3 Mick Whitley: My question is to Professor Choudhury. What is the significance of fair and equitable treatment standards, in respect of investor-protection provisions in ISDS cases?
Professor Choudhury: Fair and equitable treatment is one of the most common standards of protection found in investment agreements. It is what I could call a ubiquitous standard of protection. It is actually found in about 95% of investment treaties.
It also happens to be one of the most controversial standards of protection, in part because the terms “fair and equitable treatment” are usually not defined in the treaties. That has given arbitral tribunals considerable leeway to interpret the standard.
For example, there have been cases in which the tribunals have found that fair and equitable treatment can consist of a number of different things, such as arbitrary contact, denial of justice, capricious conduct, lack of transparency, and conduct that breaches an investor’s legitimate expectations. In short, this standard of protection has been left rather open-ended by a number of different states, and it is, therefore, somewhat unpredictable.
I want the Committee to know that some states have decided to try to constrain tribunals’ interpretation of fair and equitable treatment by either tying it to the minimum standard of treatment under international law, or some treaties have actually decided to define what is meant by fair and equitable treatment. Canada’s model treaty, which was revised in 2021, actually provides a definition for fair and equitable treatment. It lays out the different standards that would be consistent with fair and equitable treatment.
Q4 Mick Whitley: How many times are these treaties invoked?
Professor Choudhury: How many cases? I have done a study on that. It’s been used in 83% of all investor-state arbitrations. This is a very important standard of treatment. I would call this the lynchpin of protection for investors.
Chair: That’s quite precise—83%. Sir Mark Henrick, you wanted to come in.
Q5 Sir Mark Hendrick: Just to follow up on Mr Whitley’s question, it sounds to me like it can mean anything you want it to mean. The fact it has been used in 83% of these agreements tells me that it is being used quite conveniently by one or both parties to get round rules that would otherwise be quite constraining. Is that the case?
Professor Choudhury: Yes. Just to explain, it is not used by both parties. It is used only by investors. It is the investors that are making claims that fair and equitable treatment can consist of all of these different types of standards. If you don’t define it, it is left to the arbitral tribunal to interpret what is meant by it. I urge the Committee that, when you are doing these things, you should think about defining, if you want to use fair and equitable treatment in UK treaties.
Q6 Sir Mark Hendrick: Are there more moves nowadays to ensure that there is a definition agreed between the investor and the state they are investing in beforehand, rather than leaving it to chance that something happens afterwards and they try to invoke it then?
Professor Choudhury: Yes, exactly.
Sir Mark Hendrick: Thank you.
Q7 Chair: So, the equitable treatment standards do not apply equally to both sides?
Professor Choudhury: Yes. I don’t want to steal my colleagues’ thunder, but all these standards of protection apply only to investors. The investors are going to be the ones who are going to rely on the standards of protection. It is the host state—so, it is you guys, the UK Government—that is going to be offering the standard of protection to foreign investors.
From your perspective, you want to constrain the amount of protection that you offer to these foreign investors, but you have to be careful about that. Of course, when British investors go abroad, they will also benefit from these standards of protection. A really large standard of protection will benefit a British investor when in a different country.
Q8 Chair: Thank you. If we could turn now to Dr Paine. What are the indirect expropriation provisions in international investment agreements? What is the significance in ISDS cases?
Dr Joshua Paine: Historically, these treaties have been designed to protect investors against expropriation without compensation. Specifically, they are designed to ensure that if an expropriation occurs, the investor is entitled to receive, essentially, compensation based on the market value of the relevant investment.
Turning to indirect expropriation, which you mentioned, that is where there has not actually been any transfer of title in the property to the state, so the state has not gone to occupy the investment physically, but the investor argues that the state’s measures nevertheless have an effect equivalent to expropriation. Indirect expropriation, as you might guess, has been much more controversial because of its ability to capture regulatory measures, essentially, and there has been significant concern about that in the past one to two decades.
Q9 Chair: Can you claim that a windfall tax, for example, might be indirect expropriation?
Dr Joshua Paine: There have been claims that tax measures, among other things, constitute an expropriation—for example, in the mining sector. I can follow up with the Committee bilaterally about tax measures specifically, but generally I should flag that a tax measure has to get close to almost 100% taxation before it can be considered indirect expropriation. The indirect expropriation standard is harder for investors to establish than the FET—fair and equitable treatment—standard that you have just heard about. Indirect expropriation requires that measures are equivalent to an expropriation, so that they cause the investor to lose control and use of the investment.
Coming finally to the cases that you were talking about on the fair and equitable treatment standard, although indirect expropriation is also invoked frequently, the success rate is much lower for such claims, because you have to show that you have substantially been deprived of the investment, as I said. You might like a specific example from the case law, or a set of cases.
Your Committee is probably aware that several tens of cases have been brought against European states in relation to reduction in incentives for renewable energy. In those cases, investors have claimed on both fair and equitable treatment, and indirect expropriation, but all successful claims were based on the fair and equitable treatment standard that you heard about, because essentially the finding has been that the measures do not have a significant enough effect on the investment to count as an indirect expropriation. In short, indirect expropriation does not capture the scenario where the investor continues to control and is in charge of the investment, but there has just been a loss of profitability due to the relevant measures.
Q10 Chair: In a way, as a first safety net, people have indirect expropriation; if not caught by that, they fall though a little further, but can use the fair and equitable treatment net, and you are saying that that is a big net, in which they can catch more.
Dr Joshua Paine: In commentary, it is often referred to as “expropriation-lite”—fair and equitable treatment—because it is easier to establish, yes.
Chair: There is always a wag with some appropriate comment on that. Thank you. It is now a great pleasure to bring in Anthony Mangnall.
Q11 Anthony Mangnall: Thank you, Chair. You are kind, as ever. Professor Choudhury, thank you very much for being with us. May I ask quickly about this idea of a binding multilateral treaty on business and human rights, which is being proposed through the UN? Do you have any thoughts or comments on that, or on how it would work in practice?
Professor Choudhury: That is a great question. I do not know how to say this without being pessimistic, but I do not think that a multilateral treaty on business and human rights is going very far. It has been negotiated since about 2011, and we have not had much progress on that account. Possibly, countries are working together to come to some sort of resolution on the accord, but I would urge this Committee not to focus on the multilateral treaty. Rather, if you are interested in business and human rights issues in investment treaties, which is a great, great area, you should include those provisions specifically in the treaty itself.
Q12 Anthony Mangnall: Thank you; it is helpful to get an update on that. Can I ask you about investor obligations? Can you explain a little to the Committee what they are and how useful they are in terms of providing a counterbalance to investor protection rights?
Professor Choudhury: Sure. Investment treaties usually are seen only as vehicles to protect foreign investors when they invest abroad. For that reason, it is usually only host states that bear obligations under the treaties; investors don’t actually bear any obligations, for the most part. But this has led to some problems, one problem being what you have already referred to. Obviously, there have been some human rights issues. There have also been other issues with environmental damage, or corruption, fraud and forgery. To counter some of these problems, some states are now thinking about ways to reallocate the power asymmetry between states and investors, and they are doing so by introducing investor obligations.
There are varying types of these obligations. Some are very low in terms of stringency: they would say, “We ask that foreign investors voluntarily engage in” certain conduct like respecting labour or human rights standards. Other treaties ask the foreign investors to employ their “best efforts” to do things like address climate change or engage in corporately socially responsible behaviour. Very few treaties actually impose hard obligations on investors: they would say something like, “Investors shall not manage an investment in a way that contravenes human rights obligations.”
Some treaties also specify consequences for investors that fail to adhere to their obligations. One of the things that you could think about doing is saying that the home state could hold a foreign investor civilly liable for any acts relating to their investment in the host state that cause significant damage. Or you could bar a foreign investor’s access to arbitration if it fails to adhere to its obligations. Or you could have the tribunal take into account an investor’s failure to adhere to its obligations when the tribunal is determining compensation for an arbitral award. Finally, you could use an investor obligation as the subject of a counterclaim that the UK Government could raise against a foreign investor. That is something that I think Professor Collins will speak to.
I think the key for this Committee to remember is that investor obligations are a better way for the Government to provide better governance over foreign investors in the host state and are a way for the UK Government to reallocate its power vis-à-vis a foreign investor.
Q13 Anthony Mangnall: There are mechanisms in place to try to avoid things going to arbitration. It is probably an unfair question to ask whether you can give a figure for how many disputes end up in arbitration rather than being resolved through co-operation, mediation or some other mechanism.
Professor Choudhury: I don’t have that kind of data in front of me. Part of the problem is that—I don’t know whether you know this—a lot of these things are done in secrecy, so we don’t even have full data on these kinds of issues.
Q14 Anthony Mangnall: Finally, when you have a country that has done something like we have in the United Kingdom, which is introduced the Modern Slavery Act—it is generally viewed as a landmark in what it has achieved—and we look to amend it, how does something like that have a significant impact on an agreement that has been signed if another country hasn’t got to the same level and the inclusion of it? What would happen, when we look to amend it, improve it or update it with new terms, to the agreement that has already been signed?
Professor Choudhury: That is pertinent. I think one of the problems that you are raising here is that your domestic law doesn’t necessarily fall into the pertinent standards of protection in an investment treaty. So, aside from regular requirements, you guys could put in a requirement—an investor obligation—that at least says that a foreign investor has to adhere to domestic law in the UK. One would think that that is naturally assumed, but we have seen cases in which it is not. And that would require them to adhere to the Modern Slavery Act. But the requirements of the Modern Slavery Act or the beauty of the Modern Slavery Act does not, in and of itself, reflect itself in these treaties. That is why it is really important, in my opinion, for you to actually put standards about the Modern Slavery Act, or human rights standards, specifically into the treaty.
Q15 Anthony Mangnall: Sorry, I just want to push this a bit more. There is a big contention here. The Modern Slavery Act deals with supply chains in this country; that is what the Act is specifically focused on. But there is a good conversation at the moment about whether we amend section 54 of the Modern Slavery Act to include investments made by businesses based in the United Kingdom, to make sure that their investments aren’t going anywhere towards anything that is promoting or using modern slavery. If you had the Modern Slavery Act written into an agreement, with both parties agreeing to sign it and to support it, what happens to all the other parties when you then amend it in this country? Do you have to go back through and amend all these things? Or do you just do it as it stands when you sign the first agreement?
Professor Choudhury: No. You could say, for example, that the Modern Slavery Act 2015, which is the provision that you put into the agreement right now, is subject to future amendments. You could put that into the treaty. In that sense, you would not have any issues.
Q16 Anthony Mangnall: Thank you very much for clarifying that.
Professor Collins, can I just ask about counterclaims? Some states make counterclaims in response to investor claims under international investment agreements. How do they work and to what extent do they counter-balance investor protection rights?
Professor Collins: Counterclaims have long posed as a way of rebalancing the system. Without them, as has been pointed out already, the system is designed such that only the investors can ever bring claims and the states otherwise can only ever defend them. So the only way, really, for a state to win, as it were, is through a counterclaim mechanism.
There are a few problems here. Ultimately, you have to look at the text of the relevant instrument—the treaty—to see whether or not consent to a counterclaim is contemplated. Some of the treaties have express reference to it. The CPTPP, for example, references counterclaims. Most of them don’t, so then you have to infer that the investor has consented to having a counterclaim. Part of the problem here is that if you look at the jurisdiction of investor-state dispute settlement arbitration tribunals, they are typically only extended to the international obligations—that is to say, what is in the investment treaty. As has been pointed out by Professor Choudhury, these are one-sided instruments. There are no obligations on the investors upon which a claim could be based.
So, what the states would really be trying to do would be basing a claim on their domestic legal system. If you look at the text of the jurisdiction of the ISDS in the treaty, you will find that probably most cases would not be held to include domestic law. Even if it were able to, and even if you were able to infer that you could build a clause of action on domestic statute against the investor, you have the connectivity problem. This is the requirement that the counterclaim has to be connected to the original claim that the investor has brought against the state. That can be quite difficult to demonstrate. ICSID in its arbitration roles in particular demands that this connection requirement is established. It can’t be a stand-alone claim. It has to be in relation to the subject matter, to the initial claim that the investor brought.
Some of the other institutional roles don’t require this. UNCITRAL doesn’t expressly require the connectivity requirement. Some of the other ones—the ICC and CIETAC—don’t require this. It seems as though there is sort of a recognition, particularly among UNCITRAL, to elaborate—to enlarge the capacity for counterclaims to be brought.
Generally speaking, they haven’t been a tremendous success for states. Of the roughly 30 or so claims that we have, only a very small minority have been successful, partly because of the jurisdictional issue over the consent problem, partly because of the lack of connectivity to the original claim. Even when you do have success, and there is only a very small number of treaty-based counterclaims that have been successful, you have the problem then of quantifying the damages. Obviously, states are not profit-making businesses like investors are, so this idea of lost profits becomes a bit more tenuous. It is even more problematic when you think of non-market economies trying to in some way quantify and put a pound sign, as it were, on the losses that they have suffered.
What you really need if you want a stronger capacity for counterclaims to be brought is to put it in the text of the treaty that counterclaims are expressly contemplated, including for things like domestic law, but then of course you expose yourself as a country to the risk of having these claims brought against you.
Q17 Anthony Mangnall: Is it wishful thinking to think that it will ever actually be written into the body of the text? Surely the liability is so significant that, from a country’s perspective, it would not want to write it in because there could be any manner of things that would go wrong.
Professor Collins: As I mentioned, in CPTPP there is a reference to counterclaims. The more pressing issue is the one about whether or not breaches of domestic law could be actionable substantively from a counterclaim. That is the more contentious issue. I think that very few arbitration tribunals would be willing to infer that without that express phrasing in a treaty.
Chair: I now turn to the incisive and forensic Lloyd Russell-Moyle.
Q18 Lloyd Russell-Moyle: That is maybe wishful thinking. Question 6 is to Dr Paine. Some of the international investment agreements include carve-outs for different sectors, such as tobacco. We know that there has been some discussion about carve-outs for fossil fuels, although that is unsuccessful as of yet. What are the advantages and disadvantages to this approach, and are carve-outs successful in protecting certain areas?
Dr Joshua Paine: Essentially, carve-outs are provisions that remove certain measures, often from the scope of ISDS procedures in the treaty. They can also remove a category of measures or particular sectors from particular investment protection obligations in the treaty, or from the scope of the treaty as a whole. As you mentioned, in the last five to seven years there has been quite a creative use of carve-outs from ISDS to try and protect certain kinds of regulatory measures. For example, Australia and Singapore in their treaty practice in the past five to seven years have repeatedly in FTAs—although not in all their FTAs—used carve-outs that either cover measures concerning tobacco control or are more broadly designed to protect public health. They remove that category of measures from ISDS.
As your question also hinted at, as well as having a carve-out defined by the purpose of the Government measures, or the kind of measures covered, you can have a sectoral carve-out. The obvious example there would be proposals for a fossil fuel carve-out, given climate change challenges.
What are the advantages of carve-outs? The potential advantage of carve-outs is that they can insulate sensitive areas or sectors from challenge in ISDS—for example, if the Government can, at the time of negotiating the treaty, already see a risk of ISDS claims in relation to certain categories of measures. In litigation, carve-outs have often been treated as a preliminary issue. The question of whether or not the carve-out applies, and therefore excludes access to ISDS, is typically addressed first before the merits of the claim are addressed.
In terms of thinking about the effectiveness of carve-outs, the Committee should also be aware that some carve-outs create a dedicated process in the treaty that gives the treaty parties a role in controlling the application of the carve-out to specific investor claims. For example, many tax carve-outs give the tax authorities of the treaty parties, jointly, the ability to control the application of the carve-out to specific investor claims. If you do not design a process whereby the treaty parties have some role in the application of your carve-out, then the question of when the carve-out applies to a specific investor claim will be decided by ISDS tribunals, as part of determining their own jurisdiction.
Q19 Lloyd Russell-Moyle: So to be clear, is what it says in the treaty, “There is a carve-out on this, and it will be the parties that decide whether the carve-out covers this, not the ISDS tribunal”?
Dr Joshua Paine: Carve-outs vary a little bit, but there will be an initial provision in the carve-out that just describes the content of the carve-out, and then there will be sub-paragraphs that create the process to control the carve-out. I can give you a concrete example. A really innovative carve-out is found in the China-Australia FTA, which includes a carve-out from ISDS that can cover non-discriminatory public welfare measures. The carve-out gives each treaty party when they are a respondent in investor-state claims the ability to issue a notice to the other treaty party that they want consultations, because they think that that public welfare carve-out applies. If the other treaty party agrees—the investor’s home state—then the treaty parties can issue a determination that then binds the ISDS tribunal.
Similarly, for example, tax carve-outs will often require that the investor submits their claim to the tax authorities of the two treaty parties, who then have a period in which to consult. If they jointly agree—if the investor’s home state agrees—then that determination can, for example, prevent the claim from going forward.
You asked about the disadvantages of carve-outs. One potential problem with carve-outs is that they are, in a sense, selective and inflexible. They will only address the category of Government measures or the sector that you actually name in the carve-out. Many would suggest that they are not a substitute for careful thinking about the substantive standards that you are including in investment treaties and whether they are balanced standards.
Lloyd Russell-Moyle: That is useful. Thank you.
Q20 Sir Mark Hendrick: My question is directed towards Professor Choudhury. Some of the EU’s recent international investment agreements include provision for an investment court system—ICS—and this has been carried over into the UK’s roll-over agreement with Canada. How viable is the ICS as a way of addressing the controversial aspects of ISDS?
Professor Choudhury: Let me talk to you first about how ISDS works. ISDS works by parties appointing arbitrators. This has led to some problems. We have had issues where an arbitrator has been a judge in one case and then counsel in another case, and it seems that when drafting an arbitral award as a judge, they have tried to progress positions that they would otherwise be putting forward as counsel in another case. We have had some problems with consistency in arbitral awards. We have had some conflicting decisions and interpretations of standards of protection that vary from award to award, in part because ISDS does not have an appeal mechanism.
For that reason, some states have been thinking about the introduction of the investment court system, which would mean that we would not be using ad hoc arbitrators any more. Rather, the court is designed to be staffed by permanent judges. They are appointed by a joint committee of states, rather than the parties. There are also strict independence and impartiality requirements that are imposed on these judges. The decisions of the court would be subject to an appeal before an appellate body.
As you mentioned, the roll-over agreement between the UK and Canada already contemplates the idea of an investment court system, although I remind you that the investment court system has not actually been formally introduced yet. The EU also has the possibility of these kinds of court systems in some of their agreements—for example, with Canada, Singapore and Vietnam.
There is some merit to having this kind of system, because it addresses the shortcomings of ISDS, but there are other alternatives that this Committee might want to think about in terms of just ISDS or the investment court system. One of the things you could think about doing is introducing state-to-state arbitration, or you could think about introducing co-operation and facilitation provisions, which Brazil uses. For these kinds of treaties, if there is a foreign investor who is unhappy with one of the regulatory standards put together by the host state, they can go to an ombudsperson whose job is to mediate the dispute. If that doesn’t take care of the issue, there is a joint committee that can rule on the matter. If that joint committee cannot resolve the dispute either, you can finally turn to state-to-state arbitration.
Q21 Sir Mark Hendrick: Clearly, you have looked at alternatives to the ICS mechanism. Obviously, you have highlighted that, with the arbitration of ISDS, there are times when the arbitrators are on one side, and the next minute they are on the other side arguing in the opposite direction. My question was: how viable is the ICS itself? You say that it has not been used or implemented properly yet, but potentially do you think it has a lot of merit and a future, given what it was intended for? Should we look at that, rather than just the alternatives that you posed?
Professor Choudhury: I think you can use the investment court system. It addresses a number of shortcomings of ISDS, so in that sense it is a viable mechanism; it just hasn’t been introduced yet. It is a bit difficult for me to talk about its viability when this proposal has been in consideration for a number of years, and yet it still hasn’t been formally introduced by the EU, which is pushing it. It is up to the Committee to decide whether you would like to be part of this if it actually happens, but I want to reiterate to you that there is a number of other options that are already in place that you could rely on in future UK investment agreements.
Sir Mark Hendrick: Thank you.
Chair: Thank you very much. I call Martin Vickers.
Q22 Martin Vickers: My question is for Professor Collins. The European Commission is pursuing the idea of a multilateral investment court, and you told us in your written evidence that you thought that was “implausible”. Why is that?
Professor Collins: I stand by that statement. I do think it is implausible. Particularly in the era of geopolitics that we are in now—we see the difficulties that the World Trade Organisation Appellate Body is having—I can’t see the Americans ever supporting it. They haven’t taken part in any of the consultations on the multilateral investment court.
I have a problem with the idea of one body of judges—one standing body of experts—adjudicating 2,000-plus treaties. The phrasing and the wording that affect the legal understanding of the principles are consistent, but when you are looking at over 2,000 instruments, it seems unreasonable to have one body of experts that would be able to understand the implications of the wording of all of them. For a multilateral investment court to work, you would need to have a multilateral investment treaty, and of course that has failed as well. There were many attempts to do that—most recently, about 20 years ago. I am not sure who the judges would be, and I am almost sure that there would be issues about who they are and what their expertise is, and you would have questions about funding.
The Americans are not interested, and the Chinese don’t seem to be interested, because China primarily seems to be concerned with the correctness of individual decisions, rather than the system or the regime of international investment law. They want each decision to be accurate, so they are less interested in the legitimacy conundrum that the EU is preoccupied with.
Without the Americans and the Chinese, you are missing a big chunk of the global economy. It ultimately comes back to just being an EU project, which does not make it that much different from the ICS, which Professor Choudhury was talking about. The EU is pursuing that project in its various free trade agreements, so we will see how that unfolds.
Martin Vickers: Right, so no future for that. Chairman, back to you.
Chair: Very interesting. It sounded good, but it looks like there is not the international involvement. It is a great pleasure to turn to my esteemed colleague, Mr Mark Garnier.
Q23 Mark Garnier: Dr Paine, can I talk to you about climate change? It seems like there are vested interests trying to use ISDS to block action against climate change. How likely is it that we can stop those vested interests doing that?
Dr Joshua Paine: There is a significant risk that, essentially, fossil fuel investors can use ISDS and investment treaties that already exist to challenge climate mitigation measures and to move the cost of those measures to the public taxpayer. In a sense, you do not need to take my word for this: there are real illustrations of it in the cases and in treaty practice that I can point you to. In the past five years or so, we have already seen the first small wave of cases that directly challenge climate change measures: for example, two cases challenging the Netherlands’ phase-out of coal-fired power that were brought under the Energy Charter Treaty, and a couple of cases in the North American context.
Importantly, though, the risk that I want to highlight to the Committee is also reflected in actual treaty-making practice. For example, within the modernisation process for the Energy Charter Treaty that your Committee is probably aware of, the EU and the UK essentially secured an agreement to remove treaty protection for new fossil fuel investments in their territories after 2023, with a phase-out period for existing investments. Similarly, if you look at some of the recent EU treaties like the EU-Chile FTA that was updated at the end of last year, or the interpretive statement that Germany developed with the European Commission about CETA—the Canada-EU agreement—as part of Germany ratifying CETA, there are provisions in those agreements that now explicitly try to address the risk that investment protection chapters could be used to challenge climate mitigation measures.
Just to finish off, in terms of your question about how likely it is that the UK and others can stop this as treaty makers, I can go into this in more detail if you are interested, but essentially, there are significant legal questions. For example, with the Energy Charter Treaty modernisation, questions have been raised about whether that modernisation process is satisfactory, but there are also legal uncertainties about the alternative of, for example, agreeing with treaty partners to terminate these treaties, given that many of the treaties involved include a survival clause. I can go into those legal difficulties if you want more around how we would stop this, but I might stop there in the interests of time.
Q24 Mark Garnier: That is very interesting. I understand, or I hear, that the UK pushing for this fossil fuel carve-out is seen as being highly contentious. Is that because of the vested interests that are trying to maintain their ability to push back on it?
Dr Joshua Paine: I am not aware that the UK published its own negotiating strategy in the Energy Charter Treaty modernisation, but the EU did publish its text proposals during the negotiations, and the EU proposal was for a carve-out that would remove treaty protection from new fossil fuel investments in the territories of all parties to the Energy Charter Treaty—over 50 different states.
That was apparently opposed by various countries that have, for example, fossil fuel investors who hold their nationality; for example, Japan was reportedly against that fossil fuel carve-out in the Energy Charter Treaty. The compromise solution was that the EU and the UK have only removed treaty protection from new investments in their own territories, but the treaty will still protect new fossil fuel investments in all of the other energy charter treaties besides the EU and the UK.
Mark Garnier: That is really helpful. Thank you.
Q25 Chair: Dr Paine, there are questions about the use of ISDS—about confidence in the other party and whatever—and perhaps we want to touch on those. Basically, how easily could the UK, as an acceding party, opt out of the ISDS provisions in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and how would that interact with the existing UK investment agreements with CPTPP parties?
Dr Joshua Paine: As a matter of treaty law, there is no legal problem with the agreement of side letters with potentially each of the CPTPP parties. That would exclude ISDS between the UK and those parties. As a matter of treaty law, the side letters essentially have the character of a treaty between the UK and whatever the other party is to the side letter. That alters the terms of TPP between the UK and that other treaty party.
In terms of how likely is it that the existing CPTPP parties would agree to side letters with the UK—this was implicit in your question—excluding ISDS, my short answer would be that if the UK were to seek side letters excluding ISDS with all of the existing CPTPP parties, I would expect that many, if not all of them, would agree to those side letters. I can point you to some concrete evidence of why that might be the case.
There are five existing CPTPP parties where the UK does not have an existing ISDS relationship. Those are Australia, New Zealand, Canada, Japan and Brunei. For Australia, New Zealand and Canada, it is already quite clear from developments in the roll-over programme and the FTA space that those treaty parties do not want ISDS with the UK. As you know, the FTAs between the UK and Australia and New Zealand do not include ISDS, and in the UK-Canada continuity agreement, the ISDS mechanism is suspended for three years while there is a review of investment protection issues. The UK’s negotiation objectives include specifically not having an ISDS mechanism.
Just to finish my answer, you asked about existing BITs that the UK has. That is crucial. The UK has existing BITs with ISDS that are in force with six of the CPTPP parties—Singapore, Vietnam, Chile, Malaysia, Mexico and Peru. It is important that the UK considers the interaction of those pre-existing BITs with any application of the CPTPP chapter between the UK and those parties. Otherwise, even if you achieve a side letter excluding ISDS on the CPTPP—say, with Singapore—you will be left with ISDS under a much older, more dated and frankly less satisfactory investment treaty than is currently in place.
I suggest to the Committee that the precedent you might look to is a number of side letters Australia agreed with CPTPP parties that terminated pre-existing BITs between Australia and those parties on the entry into force of CPTPP between Australia and those parties.
Q26 Chair: Do Canada, New Zealand or Australia have an agreement with the other CPTPP parties where they have carved out ISDS altogether? From what you are saying, it seems that where there is confidence and trust, you operate on that level; where there is less of it, you have ISDS; and where things are really not being thought about at all, you have bilateral investment treaties. Do I have that right? Could you comment on the veracity of that and on my earlier point about ending the deal with no ISDS with all the parties?
Dr Joshua Paine: From my understanding, to address your point about the carve-outs—not focusing on the UK; between the original CPTPP parties—at the time of negotiating CPTPP, New Zealand sought carve-outs from ISDS with all 11 treaty parties. New Zealand achieved side letters with five of the CPTPP parties. Of the states you mentioned, New Zealand has a side letter excluding ISDS between New Zealand and Australia, so there is no ISDS under CPTPP or any other treaty between New Zealand and Australia. New Zealand did not achieve a side letter with Canada, so New Zealand does currently have ISDS under CPTPP with Canada.
Just to mention Australia, the New Zealand-Australia relationship is another one you might want to look at. Even before CPTPP, New Zealand and Australia had excluded ISDS under an earlier multilateral FTA. In the ASEAN-Australia-New Zealand FTA, New Zealand and Australia have a specific side letter that excludes the effect of the investment chapter in the ASEAN-Australia-New Zealand FTA between Australia and New Zealand. That is essentially because those states have taken the view that ISDS would not be an appropriate mechanism between them, given the trust they have in each other’s domestic courts.
Q27 Chair: Time is against us, but there a couple of final points I want to raise. It is almost as if you are saying to a partner, if you don’t trust them very much, let’s have ISDS.
Secondly, the European Union places the European Court of Justice between states, so you don’t need stuff like ISDS. There is a common framework agreed. Is it possible to say that ISDS is sort of a less-developed form of the European Court of Justice scenario?
Dr Joshua Paine: On your first point, I think it is fair to say that states partly approach this thinking about whether they would have confidence for their own investors going abroad in the courts of another state. Historically, there has been an argument, when states might not have confidence in the treaty party’s courts, that that might be a reason why they seek this additional and alternative level of international treaty-based protection.
Your final question was on the European Court of Justice. I think it is really important that your Committee notes that existing ISDS is not really institutionally comparable at all to the European Court of Justice. As you have heard, the arbitrators are currently appointed on an ad-hoc basis for the particular case. Many of them are practising lawyers who also practise as counsel, and they come in and out for each case. The tribunal is appointed on a case-by-case basis.
Q28 Chair: Thank you. It is interesting to hear about states not having full trust in each other’s courts, given that each and every state holds up their own courts as being paragons of unbiased virtue.
I thank all three panellists for joining us this morning, and I particularly thank Professor Choudhury—it is now 6 am, so you have a whole day ahead of you up there in Canada. You have brought a lot of knowledge to the Committee this morning and we are grateful.