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 29 - 64
Witnesses
II: Jon Phillips, Acting CEO and Director of Corporate Affairs, Global Infrastructure Investor Association; Ruth Bergan, Director, Trade Justice Movement; and Ania Farren, Chair, Committee for Arbitration and Alternative Dispute Resolution, International Chamber of Commerce (UK)
Written evidence from witnesses:
Witnesses: Jon Phillips, Ruth Bergan and Ania Farren.
Q29 Chair: Welcome back to the International Trade Committee for our second panel this morning in our UK trade negotiations—investor-state dispute settlement—inquiry. We have three witnesses on this panel. I will start on my left with Jon Phillips—name, rank and serial number, sir—and we will move on from there.
Jon Phillips: Good morning, Chair. I am Jon Phillips, the acting chief executive of the Global Infrastructure Investor Association.
Q30 Chair: Thank you very much and thanks for coming. Ania Farren.
Ania Farren: Hi. I wear several hats. I am a partner at Fieldfisher, and I act as counsel in these types of arbitrations. I also sit as an arbitrator, as part of Arbitra. Today, I am here in my role as chair of the ICC UK Committee for Arbitration and ADR. You may be aware that the ICC is the institutional representative of more than 45 million companies in over 100 countries and also provides market-leading dispute resolution services.
Q31 Chair: Thank you. As we are talking about wearing several hats, I became aware only yesterday that in the House of Commons you used to have to wear a top hat when making a point of order and in Divisions. I saw pictures of Gyles Brandreth, no less, wearing a sort of stovepipe hat. That seemed very surreal, but I suppose there are many things that happen today in the House of Commons that will seem surreal in about 10 or 20 years, or in 10 or 20 days’ time.
Finally, without further ado and with no more of my tangents, Ruth Bergan.
Ruth Bergan: I am Ruth Bergan, director of the UK Trade Justice Movement.
Q32 Chair: Thank you all for coming this morning. My first question to the second panel is addressed to Jon Phillips in particular: why do investors need ISDS when they can have recourse to state-to-state dispute settlement, contract-based arbitration rights, redress in host countries’ domestic courts or commercial insurance against political risk?
Jon Phillips: Briefly, the Global Infrastructure Investor Association represents many of the leading investors from around the world in infrastructure. Many of my remarks today are specific to the infrastructure sector, as opposed to other asset classes.
Our members have investments in about 2,000 assets across 70 different countries around the world—just to give you some context. When we are making those investment decisions, the characterisation of infrastructure investment is usually large sums of money invested for a long period of time in stable, predictable policy and regulatory environments. That is the characterisation of infrastructure investment at its simplest.
ISDS is an important layer of protection and confidence provision. Clearly, it reduces the risk of unfair and discriminatory treatment. On the positive side, it increases investor appetite for investment in perhaps new and emerging markets, which is a good thing in our view.
As for the alternatives to ISDS, with domestic courts, there is a concern about the degree to which a level playing field would be available to the investor. I am not a lawyer, so apologies, but I would suggest that a domestic court is there to enact the law of the land that it exists in. If the law has been changed to allow a Government or state to make a particular decision that is contrary to the investment treaty, the domestic court is obliged to rule in favour of the law of the land in which it exists. So there are concerns about a level playing field on that particular route.
Chair: We are talking about the law of the land being changed in a particular way.
Jon Phillips: Indeed.
Q33 Chair: Would some of the concerns be about the actual courts, or would they be about politicians in the country changing the law to give the courts only one way to go?
Jon Phillips: Exactly that.
Q34 Chair: So it is the politicians, more than the courts, that investors might be worried about.
Jon Phillips: You might get more advice from Ania on this topic, but that would be my summary position.
On insurance, there is indeed the possibility of insurance protection for investors, but I think that that is a very expensive route for them, and it does not necessarily provide the certainty that investors are looking for. In order to secure the insurance protection that they are looking for, they would have to have a pretty wide-open policy, and the more open the policy, the more expensive it would be to cover all eventualities. As I said in my initial remarks, infrastructure brings with it a large price tag, so that is a very expensive solution to the problem—assuming that, as an investor, you can negotiate the cover that you believe to be necessary. There is no obligation on insurers to provide it.
Finally, on state-to-state resolution, with your previous panel, you touched on the trading relationship that might exist between two states. In some cases, it might be a reasonable alternative, but the problem of diplomacy can get in the way. An investor would have to persuade their host state that the case was important enough for that state to put on the line its reputation and its relationship with the home state of the investment. That might not be a compelling or persuasive position for the host state. Diplomacy would undoubtedly be part of the mix in that consideration.
For those reasons, we would strongly favour ISDS provisions, as providing that confidence that we spoke about.
Q35 Sir Mark Hendrick: My question follows on from that, and I think it was touched on with the last panel, too. How important are ISDS provisions to investors when they are making investment decisions? You have touched on it already, but are they critical or are they game changers? What are the considerations?
Jon Phillips: I would say they are fundamental to an investor’s decision making, particularly as you are looking for new and emerging market opportunities for investment where the trading relationships may be less well established than with some of the countries that have been mentioned, where there are long-standing trading relationships and trust and confidence are high. Nevertheless, I think they are a fundamental point, irrespective of the market. I would go so far as to say that if investors have an opportunity to make an investment that is not a country-specific opportunity but could be in any number of jurisdictions, they will prioritise jurisdictions that have ISDS provision.
Q36 Sir Mark Hendrick: Perhaps I could give a hypothetical example. Let us say you wanted—I will use infrastructure as an example—to install a high-speed rail network in a developing country. Would ISDS be key to that agreement?
Jon Phillips: I haven’t come across such an example, but hypothetically that would sound to me absolutely the case.
Q37 Sir Mark Hendrick: What would the considerations be as to how you would couch that ISDS agreement?
Jon Phillips: I may look to my colleague Ania to help on the detail of that, if you will forgive me.
Sir Mark Hendrick: Ania, would you like to come in on that?
Ania Farren: As a lawyer, I advise clients all the time about investing in foreign jurisdictions. Absolutely, the existence of ISDS protections is something that investors would almost always ask about, to the extent that if there are not ISDS protections under existing treaties, they would look at restructuring the investments in order to get that kind of protection through jurisdictions where those treaties are in existence. It is very much a strong consideration. If you are investing millions of pounds out of your own pocket into a big project, you are obviously going to think about what happens if everything goes wrong. You will want to be able to have a risk assessment and know how you are going to protect that investment. These are real issues.
Q38 Sir Mark Hendrick: So an ISDS could possibly be a condition that you would put down before you went any further with the project?
Ania Farren: It is probably impractical to require a treaty to come into place to provide you with those protections, but you would certainly structure your investment to find ISDS protection; put it that way. It would also impact your decision as to whether to invest in that jurisdiction versus another jurisdiction where those protections are already in place.
Chair: Mention has been made of investment in rail. I know a man who works closely with this Committee who would want investment in South Western Railway, but I will leave that as it is.
Q39 Mick Whitley: Good morning, panel. My question is to Ruth. In written evidence to us last year, the Trade Justice Movement said that ISDS has been used against “all sorts of important environmental regulations” and “to challenge health provision, labour rights and other important regulations”. Can you give us some examples of that?
Ruth Bergan: I can. Can I start by giving a slightly different perspective on the importance of ISDS? Quite a lot of research suggests that what investors—I am not specifically talking about big infrastructure investors; I do not want to imply that I am speaking to that question—look at as their priorities are the existing infrastructure, the state of the labour market, proximity markets and availability of raw materials, and all those considerations are coming much higher up. In terms of how important this is to UK investors, it is interesting to note that only 16 UK companies have won cases. Compared to the thousands of companies that exist domestically and are investing internationally, it seems like quite a small proportion, given how important we are hearing that this is.
Q40 Chair: How many cases?
Ruth Bergan: I do not have those figures here, but I do not think it is a huge number.
To come to the point about stability for investors, I understand that as an investor it is something you would want to look to, but if you are investing in a developing country, by their very nature they are changing and developing their legal systems and policies. They are also responding to things like climate change, where quick changes to policy and new regulations are needed to respond adequately to the huge challenge that we face, so we would question the reasonableness of assuming endless stability for businesses. Domestic business cannot possibly expect that, and if Governments and politicians are making changes, we would want to question, if there is a good system for making those policies, why are international investors given that parallel system to challenge them?
On the cost of insurance, we all have to insure what we do every day. It is a strange argument to make that it would cost the investors too much, particularly when many of the investments are quite lucrative. That is just a quick response.
On the cases, in the interests of time I thought that I would go into some detail on an environmental case and then touch more lightly on the health and labour rights cases. You might have come across Rockhopper v. Italy. Rockhopper is a UK oil company that took a case against Italy under the energy charter treaty, based on Italy banning the exploitation of oil and gas within 12 nautical miles of its coastline.
Rockhopper was recently awarded £210 million, having spent an estimated—this is not actually public—£33 million on the project. The remaining £180 million was for loss of future profits, and the company has stated publicly in comments by the CEO and in annual reports that it will invest the remaining £180 million in further oil exploitation off the coast of the Falklands. With this loss of future profit, I think it would be very nice if my employer, were I to be made redundant, offered me something based not only on the past 10 years of my work, but on the future 30 to 50 years of my lost employment. Also, Rockhopper used a third-party funder, which is something that concerns us. In this case, the third-party funder took 20% of the award, so about £40 million.
That is one example that surfaces quite a lot of the problems that we see in the system. We are particularly concerned about the energy charter treaty, as are a number of European countries.
To touch quickly on the health and labour rights cases, some obvious health cases are Philip Morris’s cases versus Australia and Uruguay, where it was challenging plain cigarette packaging. Philip Morris lost eventually, but one of our concerns is the cost to Governments of just defending such cases, which seems to be in the region of $5 million to $8 million per case.
There is also Achmea v. Slovakia. Achmea, based on an 8.5% share in a health insurance company, challenged the renationalisation of the system. Achmea was awarded €22 million, but that was set aside in 2018 by the European Court of Justice, based on the fact that it had banned intra-EU investor-state claims.
Finally, on labour rights, in Veolia v. Egypt, Veolia challenged an increase in the minimum wage. Egypt’s minimum wage had been low under Mubarak. Following the 2008 Arab spring, there was a popular demand for an increase in wages, so the hike was big and in terms of business stability that was probably viewed as a problem, but from the point of view of a worker, they were just getting what they were due having not had it given under a previous regime. Eventually, again, the Government won, but it took six years and the cost to Egypt is likely to have been in the millions of dollars.
What these cases point to is the policy chill impact, which I am sure you have come across. Various studies now say that Governments are looking actively at whether their policies are going to be challenged under ISDS, and they are holding back. In a big study from Canada, policymakers were saying that, frankly, they did not want to go ahead with policy that they thought would cost them in an ISDS case. Similarly, arbitrators report that countries approach them to test their policies and whether they are likely to be challenged.
Q41 Mick Whitley: We discussed earlier this morning what would be best put into an FTA and we were talking about things like modern slavery. Would you say that would be included in an FTA?
Ruth Bergan: In terms of the alternative to an ISDS system, there are a number of things that we would like to see as just part of the process for companies. This is about doing your due diligence before you make the investment: is the country going to be a good partner? It is also about working with local partners, looking at communities, looking at whether you can make investments that are going to benefit the local economy, and building those relationships. It is about better use of things like mediation before you go to ISDS. On the use of domestic courts, we have heard different views, but if you don’t think the domestic court system is going to be sufficient, maybe that is a reason to hold back on your investment rather than going ahead in a context where you view the domestic legal and political system as fundamentally flawed. Then, where needed, you would look to state to state. And that is already in place under FTAs.
Q42 Chair: Briefly, to pick up on a point from Lloyd Russell-Moyle, you mentioned something earlier about stability and a locking in, and I was wondering whether your argument was that as developing countries change from one stability to, presumably, another stability and another, ISDS can lock it into a stage of stability that prevents development.
Ruth Bergan: All countries need to change in response to the external and the domestic context, so we are going to have to change our regulatory systems in order to respond to climate change. You see that with the Netherlands. They have now banned coal-fired power stations, and ISDS cases are being brought or threatened against them. So it is not just developing countries; all countries need to evolve their legal systems, but developing countries are at a particular stage where they are relatively more likely to be introducing more new laws, like regulations around a minimum wage maybe or around health—this is just by their very nature—and so ISDS potentially could then become a brake on the development of those new laws and regulations.
Chair: Okay. Lloyd Russell-Moyle.
Q43 Lloyd Russell-Moyle: Ruth, in a written statement to the OECD last year, you said: “ISDS can undermine the rule of law.” You have talked a bit about a “policy chill”. Can you explain a bit more what you mean by that practically?
Ruth Bergan: There are a number of ways in which bilateral investment treaties and ISDS can undermine the rule of law in host countries. As we have discussed, most of the UK’s bilateral investment treaties don’t require companies to exhaust local remedies, for example, so you sort of remove the possibility of developing an understanding of international investment, and the ability of domestic courts to develop their own processes in respect of that.
Lloyd Russell-Moyle: So it is not a fair and equitable treatment of domestic and international, because international has a different course of action from domestic.
Ruth Bergan: Another point is that domestic companies have to rely on the local legal system and there is evidence that when international investors use the ISDS system, they win significantly more cases than is the case when companies bring cases in domestic systems; they also receive awards that are significantly bigger than is likely under domestic systems. This huge financial threat can create incentives for Governments to prioritise the concerns of foreign investors over more domestic companies. So yes, that creates a big potential imbalance.
Some of the national treatment provisions within bilateral investment treaties—this goes beyond the specific ISDS clause—duplicate existing laws that already offer international investors the same treatment as domestic investors. And on most favoured nation, we have already heard about treaty shopping. Investors will structure their investment to benefit from a treaty, and most favoured nation allows you to pick the most favourable treaty. It makes the system very unpredictable for local Governments.
A lot of treaties are very vaguely worded; the UK’s 96 bilateral investment treaties are a good example of this. What you then have is a system where arbitrators have to interpret a vaguely worded treaty with very little guidance about the broad implications. Often, they come from a commercial law background and do not have training in things like human rights and so on, and therefore we are asking them to adjudicate on things like labour law, health law and health policy without necessarily the expertise that they need to do that.
Q44 Lloyd Russell-Moyle: In terms of policymakers, you said that it has a chilling effect. Does it sometimes even have the effect of striking things down, or Governments refusing to support certain things?
Ruth Bergan: That is what we have heard. Obviously, it is difficult to show a thing that has not happened, but there is research, particularly from Canada, that shows policymakers saying quite clearly that they have put the brakes on policy because they have known that there is a threat of a potential case. There was also evidence from various countries that when Philip Morris was taking its cases against Australia and Uruguay, countries held back on introducing plain packaging for cigarette packets.
Lloyd Russell-Moyle: They are like a nightmare, these things. Thank you very much.
Q45 Mick Whitley: My question is to Ania. ISDS provisions often designate a forum or a set of rules for arbitrating disputes between foreign investors and a host state. Could you explain how the arbitration process works when a dispute is raised by an investor?
Ania Farren: Yes, absolutely. Could I just start with a general comment in response to what we have just heard? It is a shame that most of the questions are coming from an assumption that ISDS is somehow a bad thing for the UK. From my perspective, ISDS is good for the UK. Let’s remember that UK investors have billions of pounds-worth of investments abroad. If we are just looking at CPTPP countries, UK investments are worth over £100 billion. Those investments will be protected by ISDS provisions. There are many more cases brought by UK investors against foreign states than are brought by foreign investors against the UK—there has only been one such case, and the UK was successful in that.
In response to the regulatory chill point, there is no clear evidence that that is the impact of ISDS provisions. If we look, for example, at the fossil fuel issue in relation to ECT, let’s remember that in order to move to renewable energy, we are going to require an enormous amount of investment in the renewable energy sphere. The availability of ISDS protections under ECT may well be the motivating or key factor for investors to make those necessary investments, so there are two sides to the coin, as it were; the majority of cases brought under ECT are actually by those making investments in renewable energy, so there are two sides. I would just like to make that general point.
In relation to your specific question—sorry for the slight digression, but I wanted to give some background—in investment treaties, whether bilateral or multilateral, there are these dispute resolution provisions, which are similar to dispute resolution clauses in contracts. They usually provide for various options for the investor to bring arbitration under several different forums. The most popular would be under the ICSID forum, but then there are also possibilities for ad hoc arbitrations under the UNCITRAL rules. The ICC is also often such an option, and the investor can choose which of these options available under the bilateral treaty to pursue. They can bring an arbitration directly against the state by sending in what we would call a request for arbitration, setting out the claims.
Q46 Mick Whitley: The amount of compensation awarded to investors in ISDS cases can be very substantial.
Ania Farren: Yes.
Mick Whitley: So how are these sums arrived at by arbitration forums?
Ania Farren: In terms of their being substantial, that is true. They range from zero to the many millions. Again, to put it into perspective, if we look at an average, tribunals tend to award something like 36% of the amounts claimed, so even though large amounts may be claimed, those amounts are usually reduced by tribunals. Also, investors are often less successful than states, so damages are awarded in under 50% of cases.
Both parties would be submitting expert evidence on the specific subject of the damages or the level of compensation, so there would be experts appointed by both sides—the investor and the state. There would be written submissions made by those experts, and the arbitrators have an opportunity at an oral hearing to ask questions of those experts. They would make a determination on the level of compensation based on the expert evidence presented.
Q47 Chair: Just a wee small point: the data I got earlier from Ruth Bergan was that 16 cases had been successful. I think—I am looking around the Committee staff—that was from about 70 cases. You could argue, if you were a cynic, and I am trying to be a cynic here, that 54 were obviously unsuccessful to various degrees. Could it be said that they were being brought to intimidate? Why were 54 not successful?
Ania Farren: Going back to the original point, a lot of the negative press about ISDS is the assumption that investors bring claims that are not always successful. As you can see, that is not the case. First of all, not that many cases are brought in comparison with the number of investors, because these things are brought as a matter of last resort. States are successful more often than investors, as you can see from the figures. Some claims have validity and others do not. That is just the way it is. Few claimants would spend the amount of money necessary to bring a claim simply to, as it were, intimidate a Government. It is just the case that some claims will pass the threshold, but others will not. It does show, or put into perspective, the criticisms that are made; these claims are not always successful.
Chair: Thanks for that answer. I interrupted the game of Lloyd Russell-Moyle and Mick Whitley ping-pong, so I will go back to Lloyd.
Q48 Lloyd Russell-Moyle: Thank you. Ania, you said that they protect and encourage investments. Do you have any comparative data—this is a genuine question because I have not seen it—around where investments increase or, like for like, are greater where an ISDS is in place, compared with where there is an equivalent trade deal without an ISDS? We have trade deals where there is no ISDS that have other mechanisms of redress, including local mechanisms on state-to-state disputes. I do not think anyone argues that there should not be such mechanisms, but is that data available?
Ania Farren: I am not an economist, but I have read multiple studies. There are arguments that there is no clear evidence, but many studies suggest that there is an encouragement of foreign investment of up to 30% where there are ISDS provisions in the relevant treaties.
Q49 Lloyd Russell-Moyle: It would be great if either we or the Clerks could delve into that, because the crux of the matter is the benefit versus the potential disadvantage. How do you respond to the view that ISDS arbitration forms have excessive discretion and are costly, opaque, inconsistent and lacking in independence and impartiality? It is not like a normal court system where I can go and listen to the judgments that are being made, and the next judgments must be based on the same rationale, is it?
Ania Farren: That is quite a few criticisms all in one question, so I will try to address them.
Chair: That is a machine-gun approach to criticism.
Ania Farren: In terms of a lack of transparency, that criticism has been taken on board and addressed to a great extent by existing institutions. In fact, in an ICSID arbitration, for example, people can watch a hearing, unless the parties have some specific objection. Many of the awards are becoming publicly available and details—for example, of the arbitrators sitting in the cases—are now being published, so there is greater transparency to address that particular concern.
Q50 Lloyd Russell-Moyle: The ICC, which you are from, says that it keeps secret the details of all individual ISDS cases that it deals with; on the website it states that “your business remains nobody else’s business…ICC’s lips are always sealed”. That hardly sounds like a move towards more transparency; it sounds like you are flag-waving the opposite and that you want to ensure that nobody knows any details.
Ania Farren: The starting point and the interesting thing is that parties to arbitration often want confidentiality, and that is on the part of not just investors, but states as well—
Q51 Lloyd Russell-Moyle: I am sure they do, but what about the greater good? Often, victims of crime and criminals would both rather these things were dealt with in court privately, but we understand that there is a greater good.
Ania Farren: As I said, moves have been made by the ICC to make things more transparent. For cases after 2016, information on arbitrators and so on is published. Party names are not published, unless there is consent of the parties, but awards can be published in an anonymised way. For awards after 2019, the presumption is that the ICC court can publish an award in its entirety two years after notification. Equally, with ICSID, most of the awards are actually publicly available and, if the parties do not consent, they are available with the relevant party names taken out. They are redacted, as it were. In some cases, even submissions are made available. So the ICC has made moves to make things more transparent.
I will move on to all the other criticisms. On the inconsistencies, which I think is the main criticism levelled at ISDS, I agree that inconsistency is not ideal. As with any system, we want to provide stability and confidence in the system, but some inconsistency has to be expected because, as we heard earlier, there are over 2,500 different BITs and every BIT has slightly different wording. There is also no right of appeal to ISDS decisions. There are limited rights to challenge—for example, on the basis of serious procedural breaches, but not on the substantive points. In the Queen Mary study of ISDS, which was taken in May 2020, at least 78% of the respondents believed that there is scope for reform to provide greater consistency. Practitioners have been looking at what the best way of doing that is.
If we look at the more modern treaties—we were discussing the CPTPP earlier—one very easy, or very clear, way of providing for greater consistency is simply to have clearer treaty drafting. Again, that was discussed in greater detail earlier. Actually, the inconsistent decisions that are being spoken about are on a number of clearly defined issues, so if we make the treaty clearer and more specific about addressing those particular issues, we are doing away with the scope for inconsistency.
Various other options are being looked at. The UNCITRAL working group is looking at the establishment of an advisory centre, which will collate information and provide advice. There are then the more far-reaching or controversial proposals, such as the multilateral investment court, which we can talk about in more detail, if that is of interest.
Q52 Lloyd Russell-Moyle: I am sure that a question on the multilateral investment court will come up. Why, fundamentally, should an international investment company be able to bypass domestic justice that everyone else would have to go through? In any other sphere—human rights is a good example, as I have to pursue my human rights case in the domestic courts first. It is quite right that there is an international backstop to that if I feel that I have been wronged here. Why doesn’t ISDS operate like every other piece of justice operates, where it is a backstop rather than the first, only and final option—and as you quite rightly say, the failure to have an appeals system also causes problems on all sides?
Ania Farren: Again, let us start by understanding that we are also looking at how UK investors will be protected abroad. We are lucky to have a fantastic court system here that is efficient and competent, but that might not be the case in every jurisdiction where UK investors are making their investments. The No. 1 reason why ISDS is a good system for these kinds of investment is neutrality, and Jon has already referred to that. We are talking about usually very significant investments and highly politicised disputes and the investor will simply not have the confidence in the local court system to be treated fairly when we are talking about a high-value dispute that has been politicised.
Q53 Lloyd Russell-Moyle: Ruth, I can see that you seem to have a differing view. It is important that we hear the differing views, so that is fine. Do you want to come in?
Ruth Bergan: That therefore means that we do not trust the legal systems of Canada, who have been hit by very high numbers of cases based on things such as banning fracking and the addition of toxic additives to petrol; that we do not trust the courts in the Netherlands; and that we do not trust the courts in Germany. This is not just a question of systems that we do not trust. It seems a little implausible to argue that it is all about providing stability in unstable contexts.
Q54 Lloyd Russell-Moyle: I did not trust the courts in Russia, but still under the human rights system you had to go through the domestic courts and then you could go to the European courts.
Ruth Bergan: I do not think it is a good argument for not at least trying out the domestic courts, giving them a chance to understand the mechanisms and then moving on to a different forum.
Q55 Lloyd Russell-Moyle: Ruth, is there any kind of international arbitration investor-to-state that you think is acceptable, or is your line that you just do not want investors ever to be able to have international arbitration?
Ruth Bergan: I cannot see a reason why private investments should be insured by taxpayers in a third country. In a way, that applies more than anything to developing countries, where you do not have significant revenues available. Yes, it will be unstable but are we asking people in that country to fund that risk—to support it? It also is market-distorting because you have this additional parallel system. So, under the logic of investment in free trade agreements, it does not really work as a system. I think that the best system is what I have set out: companies should do their due diligence and then use the systems available to everyone else.
Q56 Chair: Just as a devil’s advocate point of view, is this greater than saying that you do not trust the courts? There are all sorts of biases—we all accept that there are biases around in life. It may be that the courts of Canada may be more biased towards Canadians than the UK, perhaps. It is not an infallible system. Is this not putting in an extra degree to ensure some sort of safety or security for people?
Ruth Bergan: If a free trade agreement exists, you would therefore have state-to-state dispute available. There would already be that other system available where necessary.
Chair: I would pursue this longer, but time is an issue and I have to bring in Sir Mark Hendrick.
Sir Mark Hendrick: Mine is a bit of an aside, really.
Chair: If it is a brief aside, that’s fine.
Q57 Sir Mark Hendrick: We talk about states like they are homogeneous, but countries such as Canada and the Netherlands are fairly well developed and prosperous, and other states are developing and quite poor. Ania said that you don’t get companies coming along and bullying these states, saying, “We want ISDS or else.” I understand that point, but doesn’t it depend on which state you are dealing with and on whether it has the legal system, the infrastructure and the financial wherewithal if a challenge is brought?
Jon Phillips: Does it not also depend on the nature of the investor? As I say, I am here to represent the views of infrastructure investors, and typically they are investing pension fund money. The beneficiary of that investment is you and I. We have pension savings, and they are being invested, either directly or through fund managers. I don’t think it is unreasonable for there to be a degree of protection for the people making investment decisions on behalf of their constituents to ensure that investment is ultimately protected from unreasonable, discriminatory, unfair treatment. At the end of the day, that is what the ISDS is there to do.
I am not in a position to take issue with Ruth’s examples—there have clearly been some outliers and poor behaviour—but we have to be careful not to throw the baby out with the bathwater. What we have in place is an internationally accepted framework, based on the best legal minds trying to create a level playing field where states agree between each other that they are happy that a dispute resolution is in place. Investors can then decide whether their confidence is sufficiently addressed to commit long-term capital into that country. It is not unreasonable to expect therefore that, having made that decision, they should not have the rug pulled from underneath them some few years later.
That is not to say that there is not the possibility of transitionary arrangements when it comes to things like climate change, which are clearly important, but we are in danger of missing the fundamental point here. Investment in these jurisdictions is generally seen as a very good thing—a very welcome thing—by the host state, which is desperate to become attractive to private capital, because it helps it improve its existing infrastructure and build new infrastructure. We are talking about creating a level playing field and an environment to make that attractive, with an independent arbitration process for the very few occasions when that falls away.
Chair: Thank you for that point. Time is starting to niggle me, because things happen around this place at midday on a Wednesday.
Q58 Mick Whitley: This question is to the whole panel. To address deficiencies in the ISDS, the EU has developed the investment court system, and it is also proposing a multilateral investment court. How acceptable and how workable are those ideas?
Ruth Bergan: I feel like I have answered that question to some extent. They don’t address the new iterations of ISDS. They deal with some of the problems around the arbitration system itself—secrecy and the movement of arbitrators between different roles—but they don’t address the fundamental issue, which is that there is parallel system available to only one set of actors, and that we are using taxpayers’ money to insure private risk. I think we should be looking to alternatives, including those proposed by Brazil, India and South Africa.
Ania Farren: In the view of the majority of those using the systems—78% of respondents to the Queen Mary survey said this—ISDS is the best solution for resolving disputes between investors and states. The problem with the multilateral investment court is that very many states are not in favour of it because of the cost issue—who will foot the bill?
Equally, both states and investors like the idea that in investor-state arbitrations they have the option to select one of the arbitrators. In the multilateral investment court system, these judges will come from a roster appointed presumably by the states, so the parties will no longer have that option. So, we have the problem of who will foot the bill, and how that roster will work. If you look at the WTO appellate court, there are problems with that system, so impasse has been reached as to how the new roster of judges is appointed. It is subject to the influence of particular states, as it were. Actually, there is still the neutrality issue.
Mick Whitley: A quick response, Jon?
Jon Phillips: I have nothing to add. It is somewhat technical.
Q59 Anthony Mangnall: Quickly, and sorry to be so brief, means have been developed to mitigate the impact of ISDS on host states’ right to regulate, notably the carving out of whole sectors—tobacco, fossil fuels—from ISDS provisions in investment agreements. Jon, how acceptable and how effective is that?
Jon Phillips: To clarify, if we mean by a carve-out that any new investment under that particular sector would be given the same protection, then depending on the sector and what you are trying to achieve from the agreement, I guess that is not unacceptable. It becomes unacceptable if the carve-out seeks to include historical investment in that sector. That would be unacceptable, but if you are trying to change the investment appetite for investment in a certain country, perhaps because you want to encourage green or renewable energy infrastructure, as opposed to fossil fuel infrastructure, it would not seem unreasonable to me at least to carve out new fossil fuel investments, because you are trying to encourage renewable energy investment—just don’t penalise investments made historically, when the protections were previously in place.
Anthony Mangnall: Ania, would you like to make any comment?
Ania Farren: It seems the best way to address particular concerns—for example, in the case of the ECT. Some states have simply withdrawn from the ECT, but it seems preferable in fact to have a carve-out for fossil fuels.
Anthony Mangnall: Anything you want to add, Ruth?
Ruth Bergan: Just that it seems incredible to me that we should need a carve-out for the right to regulate for states that have agreed to this. I think someone mentioned it, but on a carve-out for public welfare measures, I find that an incredible notion—that you would need to have that in order to make the system work.
Q60 Chair: Jon and Ruth, we heard from the previous panel that the UK and others are attempting to carve out fossil fuels from the ISDS provisions in the energy charter treaty. That is proving contentious. How would you advise the Government to proceed, Ruth?
Ruth Bergan: We now have eight countries, including Germany, the Netherlands and France, withdrawing from the energy charter treaty. I think that the UK should join them to look at a sensible withdrawal from that treaty. They are taking that step because they have found it to be incompatible with their climate ambitions. The modernisation is highly unlikely to go forward without the key supporters of the process—we have heard that Japan opposes it, which has already watered down some of what was hoped for.
I don’t think it is particularly relevant to carve out protections in your own territory—that defeats the point—and we already have Greg Hands on record saying that the UK cannot sustain an unreformed version of the energy charter treaty, so in a way I think we have already committed to withdraw if the modernisation does not go ahead. The energy charter treaty has just proven itself to be hugely problematic. We have the umbrella organisation for the renewables sector in the European Union saying that it supports withdrawal. I think it is time that the UK thought seriously about that.
Q61 Chair: How would you respond to that, Jon? What would you advise the Government to do?
Jon Phillips: I would advise the Government to be at the forefront of attempts to reshape the ECT. There must be a workable way to meet our future green energy requirement and encourage that investment. It is important, as I said in a previous answer, that protections that are in place for historic investments are retained for a certain period of time. But ultimately, investors want an ECT that works. For it to work, it needs to have the support of the major states.
Chair: Did you want to come in, Ania?
Ania Farren: An important point is that if the UK were to withdraw, it would be bound by the sunset clause for another 20 years in relation to fossil fuel investments. If it stays at the forefront of modernisation, the new provisions will only bind the UK for another 10 years. Ironically, withdrawing makes us bound for longer than staying and being part of the modernised treaty.
Q62 Chair: Okay. Thank you. I have a final question for Jon, Ania and Ruth. How important do you think it is that the UK’s accession to CPTPP includes signing up to the agreement’s ISDS provisions?
Ruth Bergan: You know what I’m going to say. The UK should be looking to sign side letters to exempt itself from ISDS, as well as cancelling its existing bilateral investment treaties with partners.
Q63 Chair: Could you not argue that the side letters will be doing much the same as ISDS will be doing?
Ruth Bergan: The side letters are to exempt itself from ISDS.
Q64 Chair: Which will presumably give investors some other protections—or is there just no investor protection at all? The letters could say anything, so it would be up to you whatever you want to put in your side letters.
Ruth Bergan: You exempt yourself from ISDS, and then you look at other mechanisms to support investment that do not include ISDS.
Chair: To support all protected investment.
Ruth Bergan: To protect investment. You follow the process that I have just outlined.
Chair: Fair enough.
Ania Farren: I think I have already mentioned that UK investments in the relevant countries are worth over £100 billion, so ISDS protections absolutely make sense. As a general point, post Brexit, we should be looking at encouraging investment, and making the UK an attractive place for international arbitration is only a good thing, in order to encourage further investment.
Jon Phillips: I would just add that if the UK does not have an ISDS reciprocal arrangement with some of those trading nations, we will be less competitive as a destination for inward investment, and that would be at a time when the US and the EU bloc are racing ahead with investments, particularly in the renewable energy space and new technologies in that area. We would be putting ourselves at a disadvantage by narrowing the opportunity for investment from some countries in that particular treaty.
Chair: Thank you. As a final point, on the 54, I mentioned some of the ISDS cases and the 16 that were successful. Of the 54, we do not know who settled out of court, who went nowhere or whatever, but it is interesting to know.
I thank you all for arguing your corners very well and very successfully this morning. It will certainly give us a lot of food for thought and a lot of the examples given, and points made, are worthy in themselves. I note Ania Farren’s point that 78% of investors are happy with ISDS, according to the Queen—
Ania Farren: The Queen Mary 2020 study on ISDS.
Chair: I thank all three of you for coming this morning, giving your time and, as I said, putting across your points of view strongly and forcefully from your respective positions.