From a document just released by the European Commission, entitled "A new start for investment and investment protection":
4. What is the EU doing to improve investment protection rules?
The Commission’s aim is to bring improvements on two fronts (1) to clarify and improve investment protection rules and (2) to improve how the dispute settlement system operates. Such improvements will address the concerns raised that investment protection rules may negatively impact states’ right to regulate. They should, amongst other things, ensure that companies cannot successfully bring claims against states’ regulatory policies when these are taken for public policy reasons.
1. Clarifying and improving investment protection rules
All of the EU’s Free Trade agreements clearly confirm, as a standing principle, the Parties' right to regulate and to pursue legitimate public policy objectives such as social, environmental, security, public health and safety, and the promotion and protection of cultural diversity. This principle will apply to investment protection provisions included in EU agreements as well.
In addition, in EU trade agreements the key investment protection standards are drafted in a detailed and precise manner, in particular making clear that the States' right to regulate is preserved.
In this context clarifications to two key provisions are made:
- Firstly, 'indirect expropriation' is one of the most controversial provisions in the investment protection system. Indirect expropriation is when government measures, while not directly taking property away, have the effect of doing so (e.g. the removal of a license required to operate a factory). This provision has been used by some investors to challenge public authorities’ bans for health reasons of chemical products or the introduction of new stricter environmental legislation. Future EU agreements will provide a detailed set of provisions giving guidance to arbitrators on how to decide whether or not a government measure constitutes indirect expropriation, thus aiming at preventing abuse of the system.
In particular, when the state is protecting the public interest in a non-discriminatory way, the right of the state to regulate should prevail over the economic impact of those measures on the investor. These much needed clarifications will make sure that companies cannot be compensated just because their profits have been reduced through the effects of regulations enacted for a public policy objective. The Commission has negotiated provisions with Canada and Singapore which makes this clear, and the language will also be included in future agreements.
-Secondly, the standard of 'fair and equitable treatment' – very frequently invoked by investors – is not clearly defined in international law. As a result, tribunals have had significant leeway in interpreting this in a manner that has been seen as giving too many or too few rights to investors. In EU agreements, the standard will set out precisely which actions are not allowed. This will include issues such as manifest arbitrariness, abusive treatment (coercion, duress or harassment), or failure to respect the fundamental principles of due process. These elements of 'fair and equitable treatment' are precisely defined in the Canada and Singapore texts, and will also be defined in future EU treaties.
Would such changes satisfy the critics, without offending the business interests who lobby for investor state? Or will they be insufficient to resolve the critics' doubts, while also losing the support of the business groups? That question may be easier to answer once we've seen some draft text.
