Top Court Throws Out Corporate Sovereignty For All Trade Deals Within EU; Those Involving Other Nations Likely To Suffer Same Fate
from the ISDS-is-dying dept
Techdirt has been writing about what the world calls investor-state dispute settlement (ISDS) for over five years. But early on, we decided that the harmless-sounding initials “ISDS” didn’t really convey the seriousness of what was going on here. Instead, we’ve been using the phrase “corporate sovereignty“, because that is what ISDS is: an assertion that the rights of corporates can trump those of entire countries. That’s achieved by means of special tribunals that exist outside national legal systems, and which can effectively over-rule them. Many people think this is a really bad idea, and in an important new ruling, the EU’s top court has just agreed (pdf):
the Court concludes that the arbitration clause in the BIT [bilateral investment treaty] has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law.
The specifics of the case concern a dispute between a Dutch insurance company and the Slovak government:
In 2004 Slovakia opened its sickness insurance market to private investors. Achmea, an undertaking belonging to a Netherlands insurance group, set up a subsidiary in Slovakia with a view to offering private sickness insurance services there. However, in 2006 Slovakia partly reversed the liberalisation of its sickness insurance market, and prohibited in particular the distribution of profits generated by sickness insurance activities.
In 2008 Achmea brought arbitration proceedings against Slovakia under the BIT, on the ground that the prohibition was contrary to the agreement and had caused it financial damage. In 2012 the arbitral tribunal found that Slovakia had indeed infringed the BIT, and ordered it to pay Achmea damages in the amount of approximately €22.1 million.
This is a classic case of a government changing its policy, as governments often do, and a company demanding compensation as a result. What this — and the general theory behind ISDS — overlooks is that business is by its nature risky; profits are the reward for taking on risks successfully. Corporate sovereignty demands free insurance for foreign investors, guaranteeing that they will not lose out, whatever happens, without actually needing to pay for a formal insurance policy (which is in any case available for those that want such protection). That kind of guarantee is not something that members of the public ever get for free, so it’s not clear why corporates should either.
In this case, the Slovak government brought an action in a German court asking for the ISDS award to be set aside. The German court recognized that the case raised important general issues, and referred it to the EU’s highest court, the Court of Justice of the European Union (CJEU), for a ruling on the underlying law. The CJEU confirmed something that Techdirt and many others have pointed out for years — that the arbitration tribunal was outside the entire EU system of law:
by concluding the BIT, Slovakia and the Netherlands established a mechanism for settling disputes which is not capable of ensuring that those disputes will be decided by a court within the judicial system of the EU, only such a court being able to ensure the full effectiveness of EU law.
As such, it was incompatible with EU law, and therefore not valid. That’s great news for the Slovak government, and for other Member States that have been hit or threatened with huge corporate sovereignty penalties because of similar intra-EU BITs. But much more significant than the specific result is the general reasoning of the court. Given that the ISDS tribunal in the dispute between the Slovak government and the Dutch insurance company was outside the EU system of law, and therefore deemed illegal, it would seem that any similar arbitration tribunal considering corporate sovereignty cases would also be illegal under EU law. That would apply not just to those adjudicating disputes between EU countries and EU companies, but also to any trade deal that included ISDS. Potentially, then, the CJEU’s ruling means that every corporate sovereignty chapter in every EU trade deal is illegal, and unenforceable.
We should find out soon enough. In December last year, Belgium submitted a request to the CJEU asking it to rule on whether the European Union’s updated version of ISDS, the Investment Court System (ICS), was compatible with the EU’s core treaties. Since the ICS too is outside the EU’s main legal system, it’s hard to see how the CJEU could rule that it is compatible, assuming it applies the logic of the case discussed above. If the ICS falls, then ISDS will be effectively dead in the EU, and probably dying everywhere else.
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Filed Under: cjeu, corporate sovereignty, eu, isds, trade agreements
Comments on “Top Court Throws Out Corporate Sovereignty For All Trade Deals Within EU; Those Involving Other Nations Likely To Suffer Same Fate”
Making sense, who knew?
Would that the various trade representatives exhibit as much sense as this court does. Not terribly likely as they have coerced (aka paid for) positions to posit, and their corporate masters would not like it much, and might turn off the tap.
Wow
That’s a huge deal. Wonder how much was spent lobbying to get ISDS included in all these trade deals, and how confident they were it would survive in the courts.
Re: Wow -- Back after mere 18 month gap, it's KJ!
All of 15 comments since Oct 8th, 2013.
These rarely-commenting zombies ALL have uniform views that support the site but barely attract attention. Maybe they’re Canadian…
Say, “KJ”, IF you are same person as made the account in 2013, why has it been 18 months since you commented? That length of time for gaps occurs often, so you could shed some light on this… phenomena.
Kangaroo Court Disgrace
This is why POLTITICIANS SHOULD NOT BE PUT IN CHARGE OFF PASSING LAWS. Its SHAMEFUL that Important rules and reglulations could be changed on a whim, just by random people electing a different grovenment. WHERE IS THE CERTAINTY IN TEH BUSINESS ENVIORNMNENT? The whole world should ahve to be like America, where laws are set in stone and RESPECTED for what they are.
Re: Poe
/s ?
Re: Re: Poe
Obviously, you are unfamiliar with Mr. Big Content…
Re: Re: Re: Poe
Yeah, he’s hilarious! I’m nearly always clicking LOL on his posts. Us regulars are quite familiar with his stuff, but to a new visitor, he may sound like he’s serious.
Re: Re: Re:2 Poe
I will never understand how people can read things like “WHERE IS THE CERTAINTY IN TEH BUSINESS ENVIORNMNENT?” or, say, “Every Nation eats the Paint chips it Deserves!” and conclude that the poster is serious.
Re: Re: Re:3 Poe
Mr. Thad, welcome to the Internet, where posts like that have a 50-50 chance of being serious.
Unfortunately this write-up (and the write-up from the CJEU as well) aren’t very informative as to the details of this case.
From the sounds of it Achmea might have had a very strong case that Slovakia caused it damages. The reason being is that insurance tends to be heavily regulated. In particular there are usually laws that restrict:
o how much profit an insurance company can make
o how often and by how much they can change their premiums
o how often and how drastically they can change their coverage options
o and how they pool their risk.
All of these considerations go into choosing the rate the insurance company charges for its coverage. When Slovakia prohibited Achmea from distributing its profits what this really means is that it was preventing Achmea from pooling its risk over the entire population it serves and instead requiring it to separate its risk pools into 2 groups: Slovakia and not Slovakia. This has the effect of increasing the volatility (risk) for both groups (but probably more for the Slovakia risk pool). If at the same time Achmea was constrained by Slovakia laws from modifying its premiums or its coverage then it might have run into the problem that its premiums from the Slovakia group were not enough to cover its risks from the Slovakia group.
This is not to say that ISDS is a good thing. I think it is vile….but that Achmea may have also prevailed in a court of law, as well as their arbitration.
Re: Re:
The point of the ruling doesn’t seem to be if Achmea had a case or not, but rather the fact that he used an arbitration body outside of EU Law, making it invalid according to the EU Law.
He could always use a national court.
Just because ISDS or ICS (if the CJEU rules it out too) can’t be used doesn’t mean that investors can’t sue governments if they feel that their rights were wronged by their actions.
In fact, this whole ruling puts trade agreements themselves into doubt, depending on their nature:
“the Court concludes that the arbitration clause in the BIT [bilateral investment treaty] has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law.”
If any clause of an agreement has “adverse effect(s) on the autonomy of EU law”, it means that is incompatible with it.
Now, a question: would a trade agreement that requires governments get approval or something similar be incompatible with EU law?
That is, let’s say that before a government can pass environmental protection laws it has to consult/get approval of the investors before passing it.
Wouldn’t that have an adverse effect on the autonomy of the EU law?
Re: Re: Wrong direction for permission seeking
That is, let’s say that before a government can pass environmental protection laws it has to consult/get approval of the investors before passing it.
Wouldn’t that have an adverse effect on the autonomy of the EU law?
I would say yes, and a clause like that absolutely should be gutted before a trade agreement was finalized, or at least ruled void later on when it became relevant. A government should never have to get permission from a private company to pass laws that might impact them, as that sets up the private company above the government. A company gets permission from the government to do something, not the other way around.
However, that wouldn’t be a problem with trade agreements in general, it would only be a problem with bad trade agreements that contain language that shouldn’t have been in there in the first place.
Re: Re: Re: Wrong direction for permission seeking
Well, my question was more of a rhetorical type than a real one.
Obviously, I was referring to the bad agreements that put corporate interests before public ones.
Trade agreements are like science: depending on who uses them, they can save lives or nuke whole countries into oblivion.
Re: Re:
When Slovakia prohibited Achmea from distributing its profits what this really means is that it was preventing Achmea from pooling its risk over the entire population it serves and instead requiring it to separate its risk pools into 2 groups: Slovakia and not Slovakia.
Really? I don’t think your logic works.
I read it that Achmea (Slovakia) were restricted in paying out a certain proportion of its profits as a dividend and leaving the company as being underfunded/undercapitalised in one of its operating sectors within Slovakia. ie Slovakia was restricting the company from potentially profiteering in Slovakia and subsidising other operations in other sectors/countries.
If the company was making a marginal profit from the sector which was being restricted then the company wouldn’t care a jot. Those profits would have little effect on the possible distribution that the company could make.
If the company was making a huge profit from the sector which was being restricted then the company would care because it would want to move those profits to subsidise other areas of the business (whether that is to prop up loss making operations in other sectors/countries or to pay out dividends to stock holders from the parent company).
This has the effect of increasing the volatility (risk) for both groups (but probably more for the Slovakia risk pool). If at the same time Achmea was constrained by Slovakia laws from modifying its premiums or its coverage then it might have run into the problem that its premiums from the Slovakia group were not enough to cover its risks from the Slovakia group.
If the company wasn’t making enough of a profit from its premiums to cover its risks in Slovakia then it wouldn’t have any profit to distribute. Clearly the company was making a profit otherwise it wouldn’t bother operating in Slovakia or it wouldn’t be complaining about lost profits.
I’ve actually wondered how ISDS determinations are enforceable at all, in the first place. What if the country says go stick it in your ear?
Re: Re:
Then the corporation will go to an international tribunal and sue the country for, well, getting in the way of their profits because of regulations.
Re: Re: Re:
Criminal interference with a business model.
What might discovery look like in a situation like this? I imagine the “sovereign corporation” would claim many reasons they are unable to provide the subpoenaed evidence, all of which would be lies.
Re: Re: Re: Discovery? Subpoenas?
What discovery? What subpoenas?
You seem to have confused arbitration tribunals with (especially) the American judicial system.
Re: Re: Re:
The insurance company sued because the government broke the contract and did not pay compensation. This happens between businesses. It’s not fair, and courts frequently award compensation. That’s what contracts are: they bind both parties to their agreement; if I agree with your to mow the grass of your front yard for $10, it’s not fair if you refuse to pay me until I cut your back yard grass without any extra compensation. If I had known I must cut the backyard, I would have charged more. This issue is not that I make money by cutting your grass, the issue is that when I make a price, I have to know what I need to do.
The problem in this case is the Slovak government changed the law to legalise their breach of contract. A tribunal not beholden to the Slovak government awarded compensation, but now this has been thrown out, so the insurance company got ripped off without compensation. It’s very short sighted to think this is a good thing.
If you can’t see why this is a problem, imagine uou were a insurance company bidding for the next tender, now completely exposed to the Slovakian government breaking the contract without any compensation. You won’t be quoting $10 to mow the grass the second time. Who pays for this increase in risk? Slovakian citizens.
Re: Re: Re: Re:
What contract? The insurance company set up a subsidiary in Slovakia. They didn’t have a contract with the Slovakian government to provide insurance or anything like that. They were just a business that set up there looking to make money.
The government changed their laws, as governments have the legal authority to do, and suddenly the insurance company wasn’t able to distribute the profits they were making, so they sued.
Where in any of that did you get the idea that Slovakia somehow ripped off this insurance company?
Re: Re: Re:
The ISDS is the international tribunal that corporations go to, therefore if the country chooses to ignore it there really isn’t any where else to go unless the countries own court system recognises that the ISDS process is valid. In which case you could sue the government in its own federal courts to force them to conform to the ISDS ruling.
If, however, the nations national courts reject the entire ISDS process, which is exactly what happened here, then there are ecomonic tactics that the corporation can undertake, depending on the size of the corporation, the size of the country being targeted, and so on.
For example, a corporation has a factory in a tinpot country that provides 50% of the countries GDP/foreign exchange/employment has a huge lever over the government, it could pull its operations out entirely, destroying the economy of the country.
Or, if it doesn’t have that big a lever, it could persuade other corporations or countries to engage in ecomonic sanctions.
Finally, if the foreign companies in general are unhappy with the results, the country ignoring ISDS rulings, then it could create a doubt about the safety in investing in that country, and future trade deals may not eventuate. No new investments happen. Just like if a country declares bankruptcy and cancels all foreign debt it owes.
Re: Re: Re: Re:
Not exactly. ISDS ("Investor-State Dispute Settlement") is the name of the process. Tribunals can be convened under a number of different rule systems, or even none, depending on the agreement between the parties.
Yes, there is. The enforcement mechanism is well defined by the New York Convention.
Re: Re:
Possibly the corporate army would then invade.
Re: Re:
“Then we will be very, very angry with you. And we will write you a letter, telling you how angry we are.”
Re: Enforceability
ISDS awards are enforceable because most countries, including the two involved in this dispute, are signatories to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958. This means that the claimant could go to a court in another signatory country, and seek enforcement in that country. It would be granted. The claimant could then seize assets of the state in that country.
Re: Stick it in your ear
Most countries are a signatories to the New York Convention (Convention on the Recognition and Enforcement of Foreign Arbitral Awards). The country would not be in a position to decline payment. The claimant would go to another country that was also a signatory, and get a court order, based on the arbitral award, to seize assets of the country to expunge the debt.
No corporate sovereignty? Damn, blue boy is really not going to like this.
Re: THANKS for keeping the screen name alive, FOUR YEARS after,
its owner stopped using it! Feeble little snowflake, so in fear and awe of mere text that you have to not only advertise the unused name, but FLATLY LIE about that person’s views! Sheesh! What are you, 13? STILL, for at least FOUR years now, severely arrested development?
Re: Re: THANKS for keeping the screen name alive, FOUR YEARS after,
no pretty sure you’ve had severly arrsted development for more than 4 years.
Re: Re: Re:
There are plenty of case studies for readers to look at.
As for an allusion to another person’s age, you’re not one to be throwing stones. Not when you live in a castle of glass.
Re: Re: THANKS for keeping the screen name alive, FOUR YEARS after,
Well you could log in using another name and we would call you by that (dumb) name. But until then you’re Little Boy Blue Balls Common Law The 3rd.
Ah Brexit, we leave EU just as ISDS gets dropped. I bet Rees Mogg loves isds.
about time this absolute rip off con was sent down the toilet where it belongs!! hopefully, everywhere else will do the same thing!!
Note that the just-signed CPTPP does include ISDS provisions. See for example https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/cptpp/tpp-and-cptpp-the-differences-explained/
Re: " CPTPP does include ISDS" -- Happily, not for the US of A.
NOW you see it’s stupid, even suicidal for nations to get entangled in “free trade” agreements. — EVEN the EU agrees with little old ME against Masnickian Corporatism-Uber-Alles!
Re: Re:
I’m personally glad that the U.S. dodged that bullet. The Fight For The Future and Electronic Frontier Foundation guys did an awesome job at making sure that the TPP became politically toxic to support. Best of luck to Canada, Vietnam, Japan, and the rest of the CPTPP countries in their new corporation-run trading bloc.
Re: Re:
As I point out in my own coverage (https://www.freezenet.ca/top-eu-court-rules-isds-laws-trade-agreements-illegal/ ) This is an EU court ruling. It only impacts trade agreements with European members. To my knowledge, the TPP doesn’t have a member. However, there are other trade agreements like CETA that this will definitely have a direct impact on.
In short, as long as a trade agreement has European members, then the ISDS provisions are seemingly neutered (barring further rulings in other countries of course)
Re: Re: Re:
Yeaaahhh… one down, more to go: I want to see something similar happen to procurement clauses that threaten to force the privatisation of tax-funded services.
The details don't matter, it's the arbitration outside of LAW.
I’m only repeating some cogent comment above, because that is the KEY and overwhelmingly GOOD point here.
It appears that minion and I agree, but I think that’s only because Techdirt Corporatists took no clear position though HOPED that this beyond horrible globalist country-wrecking ISDS notion would actually be accepted.
But it’ll be back; globalists never give up: world domination is their only real goal since have everything else could ever want.
Why Germany?
What’s Germany’s involvement, apart from being physically between the Netherlands and Slovakia? How do they have jurisdiction?
Re: Why Germany?
From what I’ve looked up, it’s not actually a court, but a tribunal of arbitrators. Each side selects an arbitrator, and a third arbitrator is either agreed upon by both parties, their arbitrators, or “the World Bank, the International Bureau of the Permanent Court of Arbitration, or a private chamber of commerce.” These arbitrators then decide the case.
So in this instance, I suppose it’s probably the fact that Germany is physically between the Netherlands and Slovakia (and potentially because it is larger than either of them) that is why the tribunal was held there.
If someone has better information, please correct me, because I’ve just got secondary evidence I’m guessing upon.
Re: Why Germany?
The arbitration tribunal had its seat in Germany, by agreement with the parties. Thus, the Slovak government went to the courts in Germany when they sought to annul the award.
The phrase "socialize risks, privatize profits" gets thrown around a lot these days, for good reason.
A very hollow victory
So, let me see if I understand. The company entered into a contract, and did not take insurance or increases prices against the Slovakian government changing the contract without compensation, because there was a mechanism to stop this risk. Then, the Slovak government broke the contact without compensation, and the mechanism to protect the company has been ruled invalid.
It is very lazy not to consider the consequences of this. Companies will either increase their charges to the government, or withdraw, and less competition will also mean the government must pay higher prices. And when we say “the government”, we mean the citizens. They are the ones who pay through higher prices to insure against the sovereign risk of dealing with Slovakia, a risk that businesses have now rudely discovered they are not protected against.
If you are Slovakian and plan on being alive for more than a couple of years, this is not a good outcome, this is a bad outcome. Avoiding this bad effect is why people created the ISDS concept.
Think about it: There is no point relying on national courts to enforce a contract with that national government when the government is superior to the court; the court enforces the law, but the government makes and changes the law, so the government and the company are not equal partners to contracts.
The intention of these tribunals is to lower the risk of contracting with unstable governments, and it’s now completely obvious why they were created.
I don’t see what there is to celebrate in this. The tax payers save Eur 22m, but this is basically stolen from the company via a legalised breach of contract. It’s a nice little win, but can you really imagine there are no consequences for future contracts?
Re: A very hollow victory
Is your full name Tim Worstall by any chance? I’ve seen that corporatist hack make the same arguments supporting ISDS back when he wrote for Forbes. The fact of the matter is this: Government sovereignty and duty to citizenry should outweigh promises and contracts with corporations. The people sitting in Parliament/Congress change with the times, and therefore the laws and regulations change as well. Corporations know this. The idea that they need to be compensated for the government trying to do its job is ridiculous.
Re: Re: A very hollow victory
No, it’s not Tim Worstall, who I’ve never heard of. There is some old advice about focusing on the logic, not the person. “Corporatist hack”! I work for myself and I am not a professional writer of anything except computer code.
I’m just pointing out the poor logic in the article, which seems really obvious to me. If this is a victory for the people of Slovakia, it’s a Pyrrhic victory. They will pay for it.
Here is the worst part:
” “That kind of guarantee is not something that members of the public ever get for free”.
Actually, this kind of guarantee is exactly what contract law provides for, all the time. You enter into a contract, both parties are locked in. The “rule of law” concept is one of our great achievements and underpins most everything we do.
ISDS is an attempt to extend that guarantee to companies dealing with governments. A government is an unusual party to deal with because they control the law that the other party relies on to enforce the contract, and there is always the nightmare possibility that the government will breach your contract and simply make it legal by changing the law with retrospective effect. Like what happened here.
: “This is a classic case of a government changing its policy, as governments often do, and a company demanding compensation as a result.”
Fact check: governments of stable countries almost never make retrospective changes, because they completely destroy trust for anyone dealing with the government, domestic or international. They are even reluctant to make retrospective changes to criminal law, on the grounds of natural justice.
The basis for a company demanding compensation is not because of hurt feelings, rather it can only be for a demonstrated breach of contract, which as I said is normal practice, regardless of who the breaching party is: me, you, Donald Trump or the Government of Slovakia.
contract law: if one party breaches the contract, the other side seeks compensation. That’s normal for contracts. You enter into a deal with certain assumptions and agreements locked down, and it’s not allowed in normal contract law for the more powerful partner in the deal to changes things later without making compensation.
Quoting again: ” What this — and the general theory behind ISDS — overlooks is that business is by its nature risky; profits are the reward for taking on risks successfully. Corporate sovereignty demands free insurance for foreign investors, guaranteeing that they will not lose out, whatever happens, without actually needing to pay for a formal insurance policy (which is in any case available for those that want such protection).”
I think this statement is mostly correct, but businesses do not expect that anything at all can happen. You can’t contract to build a roof made with tiles, and then have the owner decide that at your cost the roof must be made of gold bricks. This promise of fairness is exactly what the idea of ISDS guarantees. The objective is to allow cheaper contracts, ie better value for citizens. It’s similar to the Euro: investors no longer need to worry that fringe governments are going to suddenly devalue their currency.
The author of this article accuses the Dutch company of not “taking out insurance” against the risk of the government changing the law.
This is close to being stupid.
How could you do this, if there is nothing to constrain the government from making any changes it wants? I’d love to see the insurance company that could price that risk, it’s open ended.
But even if such a policy existed, the Dutch company would do only one thing: recover this new cost through higher charges to the Slovak government, which of course means ‘passed on the citizens’.
The Dutch company, and everyone else dealing the Slovakia, didn’t until now increase their prices because they expected not to face this risk. But now …
In future, if this court ruling stands, this risk is horribly real, and future contracts with the Slovakian government will be more expensive, meaning higher charges or higher taxes for Slovakians. There is a cost to allowing free-of-charge breaches of contract, and the cost is borne 100% by the Slovakian people (in future, right now the cost of this particular incident is borne by the shareholders of the Dutch firm).
But it’s a case of fool me once, fool me twice, a Pyrrhic victory.
Overall, there is a sense in this article of conspiracy and outrage, that supra-government arbitration panels are an anti-democratic assault. Actually, they are an attempt to solve a real problem which imposes real costs, so it seems to me. For sure they are not perfect, but neither are they a conspiracy of world government or whatever.