Last month, the European Commission proposed reforms to the controversial investor-state dispute mechanism (ISDS), part of the EU-US trade deal known as the Transatlantic Trade and Investment Partnership (TTIP).

ISDS mechanisms, including the Commission’s ‘reformed’ ISDS proposal, let foreign investors sue the EU and Member State governments. These cases take place in front of specialised courts only open to foreign investors, where claims for compensation can run to billions of euros.

ISDS has important implications for the daily lives of people in the EU. ISDS, for example, can be used by foreign investors to challenge the revocation of a fracking permit following protests and new environmental studies.

This is a disconcerting development, especially because a US trade agreement containing ISDS would expose Europe to law suits from the country that uses ISDS the most. The same goes for the EU-Canada CETA treaty.

Considering the important implications ISDS has for Europe, its people and its trade partners, it is essential that governments ask themselves whether ISDS is legal in the first place. We have severe doubts that ISDS is compatible with EU law, as we show in our new study.

ISDS discrimates against EU companies and workers

Investor State Dispute Settlement is a discriminatory legal tool. It creates an alternative court system in which unaccountable corporate lawyers act as judges, that allows foreign investors to sue governments and the EU over any government action affecting their investments.

In doing so, ISDS allows foreign investors to sideline national courts and the European Court of Justice when suing governments over decisions based on EU law, and gifts businesses with a quick route to enormous legal damages.

At the same time, the mechanism discriminates against European citizens, workers and businesses as only foreign investors can use it in Europe. This is deeply unfair, and undermines the proper functioning of the EU and its internal market.

Moreover the decisions ariving out of the ISDS courts often defy justice. A number of such cases have now been assembled on a dedicated website, ISDS Corporate Attacks – and one of the most extraordinary is the 2006 case of US’s Occidental Petroleum Corporation (Oxy) against Ecuador.

Ecuador’s government terminated an oil concession after Oxy illegally sold 40% of its production rights without government approval – although the contract stated that sale of production rights without government pre-approval would terminate the contract.

Oxy then sued in an ISDS tribunal. It agreed that Oxy had broken the law, that Ecuador’s forfeiture of the firm’s investment was lawful, and that Oxy should have expected that response. But the tribunal then concocted a wholly new obligation for the government to respond proportionally to Oxy’s legal breach as part of the ‘fair and equitable treatment’ requirement.

It therefore ordered Ecuador to pay Oxy $2.3 billion compensation based on its estimate of the full amount of future profits that Oxy would have made, including from as yet undiscovered resources.

A simple check

If the EU proceeds with ISDS provisions in its trade agreements, not only does it and its member states risk judgments such as this one at massive cost to citizens, it also risks breaking its own laws protecting fair competition and the integrity of the European Single Market.

A simple legal check is readily available to avoid this looming threat. Under Article 218 (11) of the Treaty on the Functioning of the European Union, the European Court of Justice can be asked to determine whether an envisaged agreement or treaty is legal under EU law – and if it’s not, it may not enter into force:

“A Member State, the European Parliament, the Council or the Commission may obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties. Where the opinion of the Court is adverse, the agreement envisaged may not enter into force unless it is amended or the Treaties are revised.”

This simple procedure has already been used 24 times to stop the EU getting into trouble with other countries after an agreement has been signed. It is therefore very important to the United States and other EU trade partners as well.

A legal check is all the more the essential for the EU institutions, because they are legally bound to respect each other’s powers. Since the Commission, the Council and the Parliament are proposing to take away important powers from the European Court of Justice, it is vital that they consult judges on the legality of ISDS.

A pocketful of mumbles such are promises

The President of the Commission, Jean-Claude Juncker, promised that he will not accept “EU courts’ jurisdiction to be limited by special regimes that limit parties access to national courts or that allow secret courts to have the final say in disputes between investors and states.”

What’s more, the European Parliament wants “the jurisdiction of courts of the EU and of the Member States [to be] respected.” It is time for these institutions to live up to their promises and make their words credible by checking the legality of ISDS.

The request can also be made by EU member states – but it would take a bold state indeed to do this, and so arouse the ire of other powerful EU nations and institutions, especially the Commission itself.

Notably EU citizens and organisations like ClientEarth do not have the right to make such a request themselves – and so ensure that EU law is upheld. And when you stop and think about that is both astonishing and unjust. The law is not just there to be applied by the powerful as and when it suits them – but to protect all citizens even the most humble, and to hold even the most powerful to account.

EU leaders must assure us that they want to comply with the rule of law – and protect the interests of people over big business – by making a request on ISDS to the Court on our behalf.

The report: ‘Legality of investor state dispute settlement under EU law‘ is published by ClientEarth.

Laurens Ankersmit is a lawyer at ClientEarth.

More information: ISDS Corporate Attacks.

This article is an extended version of one originally published by ClientEarth.