New Report Outlines Extent of ISDS Use in Nafta and Warns of 'Dangers' for EU

Governments in Canada and the EU could face a "corporate litigation boom" as a result of the free trade agreement between two.

A new report warns that the Comprehensive Economic and Trade Agreement (Ceta) "could dangerously thwart government efforts to protect citizens and the environment".

Canada has been sued 35 times by US investors since 1996 under the terms of the North American Free Trade Agreement (Nafta), using the controversial investor-state dispute settlement (ISDS) clause.

Canada's local and national governments lost on six occasions, with investors claiming €121m, and governments incurring legal costs of €223.4m in legal fees, according to Trading Away Democracy, a new report authored by opponents to the deal.

The authors say that Ceta grants more rights to corporations than Nafta and would leave authorities on both sides open to legal proceedings from multinational companies.

ISDS is the tenet of international trade law that allows an investor the right to take a foreign government to dispute settlement proceedings, usually when the host state violates the rights granted to the investor.

Opponents of ISDS claim that it will leave governments vulnerable to legal action from corporations over loss of profits, thus endangering local level legislation and public services. They oppose the fact that it upholds verdicts reached in secretive tribunals, bypassing established court systems.

The report says that by offering investors protection under "legitimate expectations" and offering them "fair and equitable treatment", the deal allows them to "fight regulatory changes, even if implemented in light of new knowledge or democratic choice". This, they claim, supersedes the investor rights given in Nafta – the free trade agreement between Canada, the US and Mexico which came into effect in 1994.

Official EU documents, however, say that "Ceta sets new, precise standards on investment".

"Legitimate public policy measures taken to protect health, safety or the environment do not constitute indirect expropriation, except in the rare cases where they are manifestly excessive in light of their objective," reads the documentation.

Aggressive claimants

According to the United Nations Conference on Trade and Development (Unctad), the "three investment instruments most frequently used as a basis for ISDS claims have been NAFTA (51 cases), the Energy Charter Treaty (42) and the Argentina-United States BIT (17)".

US investors are by far and away the most aggressive claimants in ISDS cases, followed by the Netherlands, the UK, Germany and Canada. The most frequent respondents are Argentina, Venezuela, the Czech Republic and Egypt.

Often, the cases are brought after changes in legislation are seen to hurt investors. Such was the case when the Czech Republic eliminated feed-in tariffs for renewable energy providers in 2013, inviting seven new ISDS cases that year.

Companies which have successfully sued the Canadian government as part of Nafta include Cargill, and ExxonMobil. The biggest winner was forestry giant AbitibiBowater, which claimed C$130m in compensation in 2010 after local government in Newfoundland and Labrador expropriated its assets.

Of the cases pending, perhaps the highest-profile is that of Lone Pine Resources v the government of Canada, whereby the US oil and gas exploration company is suing the Canadian government for $250m in damages, after the Quebec government introduced a moratorium on fracking, thereby impacting the licenses the company had paid for in the province.

International trade experts argue that it would be difficult to move away from the current tribunal-led system of ISDS.

"It's true that the system is setup where there's no public court. If you were to have that there'd have to be an international treaty to that effect. The treaties we're dealing with date back a long time and now it's difficult to get international agreement on a new treaty," Andrew McDougall, an arbitration partner at law firm White & Case told IBTimes UK.

In a world of such a patchwork of legal systems, not every national judicial system has a similar level of reputation, he said, with arbitration offering a level of "independence and impartiality" that cannot be guaranteed everywhere in the world.

However, even high-powered officials are now voicing their concerns on whether such a system should be applied in bilateral trade agreements between the most advanced legal and economic trading blocs in the world.

In a speech to a plenary session of the European Parliament, the European Commission President Jean-Claude Juncker said: "My Commission will not accept that the jurisdiction of courts in the EU Member States be limited by special regimes for investor-to-state disputes. The rule of law and the principle of equality before the law must also apply in this context."

ISDS has been removed from the negotiations between the EU and US on the Transatlantic Trade and Investment Partnership (TTIP) pending the results of a public consultation and amid opposition from senior officials in France and Germany.