Investment and ISDS in the TPP

Of the 30 chapters in the TPP agreement, it is the chapter dealing with investment that has been most contentious. This is because, even though the TPP is a government-to-government treaty, it empowers a foreign private investor to sue a host government. Karina Yong explains the treaty's provision of an investor-state dispute settlement (ISDS) system which is the enabling mechanism for this extraordinary privilege.

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IN the past, free trade agreements primarily focused on the lowering of import tariffs among the parties to the agreement. This is not so with the current generation of trade agreements. The Trans-Pacific Partnership (TPP) agreement is no different. Out of 30 chapters in the TPP, only five deal with conventional trade issues. The devil is in the details, as they say, and of particular concern is Chapter 9 on investment and investor-state dispute settlement (ISDS). This chapter gives extraordinary rights to foreign investors and protection of their investments and profits. 

Under an agreement, only the actual parties to the agreement can sue each other. Thus, in a World Trade Organisation (WTO) agreement, where governments are the parties, only governments can sue each other. However, what is astonishing about the TPP is that, although it is a government-to-government agreement, it allows an individual foreign investor to sue the host government through the ISDS system. On the other hand, the agreement has no reciprocal provision which authorises the host government to initiate a claim against the foreign investor.

The ISDS system has been heavily criticised. United Nations Independent Expert on the promotion of a democratic and equitable international order, Alfred de Zayas, has called for the abolishment of ISDS. 'Over the past 25 years bilateral international treaties and free trade agreements with investor-state dispute settlement have adversely impacted the international order and undermined fundamental principles of the UN, State sovereignty, democracy and the rule of law.It prompts moral vertigo in the unbiased observer,' he noted.

'Far from contributing to human rights and development, ISDS has compromised the State's regulatory functions and resulted in growing inequality among States and within them,' the expert stated.1

Investment and the reasonable expectations of the investors

What are the issues pertaining to the investment chapter of the TPP?

1. The definition of 'investment' is so wide that it would extend the TPP's coverage of investor rights far beyond actual physical property to a complex variety of situations. Investment is defined as every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. A non-exhaustive list sets out the variety of forms an investment may take and it includes: an enterprise; shares, stocks and other forms of equity; bonds and the like and loans; futures, options and other derivatives; contracts in the nature of turnkey, construction, management, production, concession, revenue-sharing and such like; intellectual property rights; grants under a party’s laws of permits, licences, authorisations and such like; and 'other tangible or intangible’, movable or immoveable property, and related property rights, such as leases, mortgages, liens and pledges.2

As can be seen, intellectual property rights (IPRs) are also defined as investments. The consequence of including IPRs in the definition of investment is serious, particularly in terms of affecting access to affordable medicines. This is specifically dealt with under point 4 below.

Further, also included are investments which exist before the coming into force of the TPP or after, and national, state and local governments are bound by the provisions of the investment chapter.

Hence, 'investment' seems to cover every conceivable endeavour under the sun - no matter how remotely connected to the investment. Then there is the 'investment agreement', i.e., an agreement that is concluded after the date of entry into force of the TPP between the government and the foreign investor. The form of 'investment agreement'3 that may be enforced by way of ISDS covers many situations. It even includes contracts with the government granting rights:

 to a country's natural resources4  such as oil, gas, rare earth minerals, timber, gold and iron ore, and to explore, extract, refine, transport, distribute or sell these;

 to supply services on behalf of the party for public consumption for power generation or distribution, water treatment or distribution, telecommunications or such like;

 to undertake infrastructure projects, such as construction of roads, bridges, dams and pipelines, predominantly for public purpose.

The provisions are also wide enough to allow compensation claims even over failed attempts to make an investment. The qualifying criterion for attempting to invest is 'concrete action or actions to make an investment, such as channelling resources or capital in order to set up a business, or applying for a permit or licence’. A government's decision whether or not to approve a foreign investment can be subject to an ISDS challenge by an investor. Only four countries in the TPP have successfully excluded themselves from this serious impediment to a country's decision-making process: Australia, Canada, Mexico and New Zealand.5

2. 'Investor' is defined as such that it would allow companies from non-TPP countries to incorporate themselves in a TPP party and sue under the ISDS provision.

A non-party investor can sue if it can show that its enterprise has 'substantial business activities' in the territory of a party.6 If past decisions on similarly worded provisions are an indicator, this only requires it to station some staff in rented premises of a party (see the case of AMTO v Ukraine under the Energy Charter Treaty).7 This means that a non-party investor can quite easily channel investments through a party to take advantage of the extensive rights accorded to party-investors.

This in fact happened in the Philip Morris case against Australia's tobacco plain packaging laws. The tobacco giant Philip Morris is US-based but the US-Australia free trade agreement does not contain ISDS provisions. Philip Morris then rearranged its assets to become an investor in Hong Kong and proceeded to bring an action under the Hong Kong-Australia investment agreement which did contain ISDS provisions. It launched a suit against Australia alleging expropriation of its IPRs due to Australia's tobacco plain packaging laws.8

3. Foreign investors will be able to sue the host government even if there has been no takeover or seizure of an asset. They can demand compensation if new policies that apply to domestic and foreign firms alike impact upon their investments - by claiming under ‘expropriation’ when a government action reduces the value of the foreigner's investment or claiming under ‘minimum standard of treatment’ (MST) when the expected level of regulatory scrutiny changes and thereby undermines the investor's 'expectations' of how it should be treated.9 Under the TPP any policy change or even an attempt to change policy (by some initial concrete steps) after an investment is established, which an investor alleges affects its investment, can be challenged. This allows the use of the MST provision to freeze a country's laws to the time when the investor made (or concretely planned to make) the investment. In effect, there can be no new laws nor changes to existing laws adverse to the foreign investor.10

Expropriation: ‘Expropriation’ is defined in the TPP as direct expropriation as well as indirect expropriation. Under national law, compensation is only given for direct expropriation, i.e., when the government has actually acquired an asset. Under the TPP, however, indirect expropriation means that a claim can be made against the government if a government action reduces the value of a foreign investment, even when there has been no takeover or seizure of an asset. Indirect expropriation can arise when a government action interferes with ‘distinct, reasonable investment-backed expectations’ of the investor.11 As such, tribunals have ruled in favour of investors that claimed losses (including reduced expectations of future profits) due to changes to existing policies or the introduction of new government policies, measures and regulations. The tribunal decides what amounts to a 'reasonable' expectation and what amounts to expropriation on a case-by-case basis.

Minimum standard of treatment (MST): This clause in the TPP states that all covered investments shall be treated in accordance with customary international law principles, including fair and equitable treatment (FET) and full protection and security. MST/FET has been the most successful basis for investors' challenges of government policies in past trade agreements due to the manner in which the tribunals have interpreted the law. While the TPP does stipulate how customary international law principles are to be determined, past tribunals have ignored similar stipulations.12

Some tribunals have found FET violations for government regulatory actions that simply contradicted what investors argued were their 'reasonable expectations'. In Occidental Exploration and Production Co v Ecuador, the reasonable-expectations requirement meant that 'there is certainly an obligation not to alter the legal and business environment in which the investment has been made.'13 Hence, this provision has been interpreted by some tribunals as the need to provide the investor a stable legal and business framework or predictable investment environment. Investors have sued on the ground of non-renewal or change in terms of licences or contracts, changes in policies or regulations that investors claim will reduce their expectations of future profits, or when governmental action has gone against the level of regulatory scrutiny that an investor might have had when dealing with a previous government. The claims of unfair treatment can be 'practically limitless' in scope, according to a study by the UN Conference on Trade and Development (UNCTAD).14

Further, as pointed out by Gus Van Harten in his paper ‘Foreign Investor Protection and Climate Action: A New Price Tag for Urgent Policies’, an ISDS claim comes with a huge price tag - legal and arbitration costs are estimated at $8 million on average for both sides per case, with costs exceeding $30 million in some cases. Law firms can charge as much as $1,000 an hour. As an example, the Philippines has spent $58 million defending itself against one investor.15 One study found that even when governments win, they still have to pay their own costs in 70% of the cases.16 However, when investors win, they only have to cover their own costs in 40% of the cases.17 Some governments find the legal fees so unaffordable they are willing to settle the dispute by dropping their proposed law, as Uruguay was going to do for its tobacco control measures until Bloomberg Philanthropies funded their defence.18

The size of ISDS claims can have a chilling effect on the policies and regulations of the governments that face them. Also, the cost of bringing such claims would make ISDS effectively inaccessible to the great majority of small and mid-sized companies.

In 2005, a legal adviser to the Sri Lankan Ministry of Foreign Affairs stated: 'Sri Lanka believes that an expansive interpretation of regulatory measures could circumvent the national policy space, hindering the government's right to regulate, creating a risk of "regulatory chill", with governments hesitant to undertake legitimate regulatory measures in the public interest for fear of claims for compensation being preferred by investors.'

Case examples of regulatory chill include:

 In the face of a $2 billion action against it by a Swedish energy giant, Germany had to dilute its environmental standards restricting the use and discharge of cooling water for a coal-fired power plant on the banks of the Elbe River, resulting in serious negative impacts on the river and its wildlife.19

 New Zealand is holding off its plans to implement plain packaging standards until the matter on the same issue between Philip Morris and Australia is resolved.20

 Indonesia was forced to water down regulations to ban open-pit mining in protected forest areas.21

 In Guatemala, internal government documents obtained through the country's Freedom of Information Act show how the risk of one of these cases weighed heavily on one state's decision not to challenge a controversial gold mine, despite protests from its citizens and a recommendation from the Inter-American Commission on Human Rights that it be closed down. Such an action, the documents warned, could provoke the company, owned by Canadian mining giant Goldcorp, to gain 'access to international arbitration and subsequent claims of damages to the state'. The mine was allowed to stay open.22

'Safeguards': Proponents of the TPP, on the other hand, claim that the agreement has sufficient 'safeguards' and 'carveouts' to balance narrow commercial foreign interests against the public interest, and to preserve the government's prerogatives in acting in the interest of public health, the environment or other areas in need of government intervention. Constant reference is made to Articles 9.6.4 and 9.15 and Annexes 9A and 9B in the TPP, substantially to say that the government's regulatory space is protected. However, the inadequacies of these measures are clear when we look at how previous tribunals have construed similarly worded provisions in other treaties.

Article 9.6.4 relates to MST. As stated above, MST is the ground most frequently used by investors under ISDS. Article 9.6.4 states that the mere fact that a party takes or fails to take an action that may be inconsistent with an investor's expectations does not constitute a breach of the article on MST, even if loss results. It has been suggested that this improved provision really addresses an irrelevant question. Robert Howse, a professor of international law at New York University who is currently writing a book on ISDS, said the problem with the new provision is that no finding of a violation of the MST obligation has ever rested solely on the fact that an investor's expectations were not met.23 Further, Article 9.6.4 now represents a codification of the wide interpretation to FET given by the tribunals. It in effect confirms that a governmental action that may be inconsistent with an investor's expectations can found a claim, so long as it is not the sole reason.

Todd Weiler, who has served both as an arbitrator in investment disputes and as counsel to investors, has stated, 'I can't recall any tribunal that, if you put this provision in that agreement, that the result would be different either way.' As explained by Howse, many cases that centre on an MST claim have examined whether a government made 'representations' to an investor that created certain expectations, and whether the government subsequently took some unfair or arbitrary action that was at odds with those representations. In cases where a tribunal finds a breach, it is not simply because the expectations were not met, but because the series of events led to a larger overall finding that the state acted in an unfair or arbitrary manner, he said. Howse further pointed out that the question should be less whether the investor had certain expectations, than whether the manner in which the government backs away involves some kind of impropriety.24 Failing which, it is submitted, we could still have a Bilcon v Canada situation on our hands.

In the case of Bilcon v Canada,25 the tribunal decided that a company refused permission to expand a quarry for environmental reasons did not receive fair treatment. The provincial and federal governments had rejected the proposal for the quarry following the recommendations of a joint review panel of experts that had carried out three years of extensive community consultation, hearings and review of documentation. While agreeing that the interference with the investors' economic expectations, standing alone, would not violate the FET obligation and was merely a factor to take into account, the tribunal attached significance to Canada's statements in the promotional materials to attract new mining investments to a region. The reasonable expectations thus created, ruled the tribunal, were frustrated when the federal and provincial officials denied the investors the environmental permits.

It is important to note that Bilcon chose not to sue under the domestic system, which did not provide for a damages claim. As pointed out by Lisa Sachs and Lise Johnson, respectively director of the Columbia Center on Sustainable Investment and head of Investment Law and Policy at the Columbia Center, the parties to the North American Free Trade Agreement (NAFTA) - the United States, Canada and Mexico - have all repeatedly clarified that ISDS is not meant to be a court of appeals sitting in judgment of domestic administrative or judicial decisions. Yet in Bilcon v Canada, the majority of the arbitrators paid only lip service to the NAFTA states' positions.26 (There was a 20-page dissenting judgment in Bilcon by Donald McRae.) 

Further down in the TPP, Article 9.15 says: 'Nothing in this chapter shall be construed to prevent a party from adopting, maintaining or enforcing any measure otherwise consistent with this chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.' However, this entire provision is rendered meaningless by the words 'otherwise consistent with this chapter'.

Next is Annex 9A, which seeks to define customary international law in an effort to limit the manner in which the MST provision has been used. However, this is the same wording as was used in the annex of the investment chapter of the Central America-US Free Trade Agreement (CAFTA). This was tested in two cases brought by investors and both times the investment tribunal failed to consider this annex and instead interpreted 'fair and equitable treatment' broadly and the governments lost.27

In relation to expropriation, Annex 9B(b) states that non-discriminatory health, safety, environmental and other public interest regulatory actions do not constitute indirect expropriations but even these can indeed be challenged as expropriations in 'rare circumstances'. This opens up the possibility of such regulatory actions being subjected to challenges by the investor which ad hoc tribunals will decide on a case-by-case basis. Further, as Sanya Reid Smith points out in her paper 'Potential Human Rights Impacts of the TPP', assuming that the ISDS tribunal does actually take the annex into account, the limitations therein still do not seem to be sufficient to safeguard all regulatory actions that TPP governments may need to take, including for human rights reasons.28

The TPP does contain a corporate social responsibility (CSR) provision. However, parties to the TPP have to merely encourage their investors to voluntarily incorporate CSR principles into their internal company policies. No sanctions are proposed for their failure to do so or to implement any policy it declares. Nor does a party have similar reciprocal rights under the TPP to sue the corporation for investments that have gone bad or that compromise the rights of people and the environment of the country.

4. Foreign private investors will be able to enforce World Trade Organisation (WTO) provisions on intellectual property via the ISDS mechanism, thereby restricting the policy space to ensure access to affordable medicines.

As investment is defined to include IPRs, private foreign corporations can now claim against the government for policies that affect their IPRs (for example, a policy to ensure affordable medicines). Without this provision, claims of any violation of IPRs under the WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) cannot be instituted by private corporations against governments, as WTO rules can only be enforced when one government formally challenges another government before a WTO tribunal. In addition, the governments that signed the TRIPS Agreement deliberately included ambiguous language in the treaty to grant flexibility to each government to interpret the terms in line with domestic needs. The danger now lurks, however, of a foreign investor restricting the use of such flexibilities through the ISDS system. In one such case, Canada relied on TRIPS flexibilities to revoke pharmaceutical company Eli Lilly's patents. Eli Lilly then instituted an ISDS action against Canada for a total of $500 million under the 'fair and equitable treatment' provision in NAFTA's investment chapter.29

5. The TPP limits the right to impose the very performance requirements that ensure foreign direct investment (FDI) will add value to the local economy, such as requirements on equity ownership, establishing joint ventures with local investors, technology transfer and the use of local content.

What is an investment agreement if not for foreign direct investment? Developing countries expect the TPP to increase FDI, which in turn is supposed to bring increased economic development. However, inward FDI does not necessarily correlate with increased economic growth. Commentators have pointed out that: 'A hands-off approach to FDI, as to any other form of capital, can lead to more harm than good. FDI policy needs to be embedded in the overall industrial strategy in order to ensure that it contributes positively to economic dynamism. Channelling and shaping FDI and related activities to support overall industrial development objectives require that the state have sufficient space to enforce performance requirements on the operations of foreign investors.'30

Subject to the sectors and activities that countries list in the schedule to Annex II, and the limited exceptions under Article 9.9.3 and 9.9.4, there are a large number of performance requirements that a government cannot impose on an investor of a party as well as a non-party.31 These include requirements on transferring a particular technology, a production process or other proprietary knowledge to a national.

As an example, in Malaysia, one of the parties to the TPP, technology transfer is in fact entrenched in several international treaties (such as the Convention on Biological Diversity) to which Malaysia is a party. However, this TPP provision will in fact reverse the obligation of the parties under those treaties.

The prohibition on imposing certain performance requirements does not prevent a party from adopting or maintaining measures, including environmental ones, that are necessary to secure compliance with the party's laws and regulations. But this is negated by the provision that the laws and regulations must not be inconsistent with the TPP.32 Performance requirements are also allowed by the TPP when these are measures necessary to protect human, animal or plant life or health.33 This provision is more restrictive for government than its counterpart in the WTO's General Agreement on Tariffs and Trade (GATT) 1947 [Article XX(b) of GATT], while another comparable provision34 is narrower than its counterpart in GATT [Article XX(g) of GATT], which provides for WTO members to take measures relating to the conservation of exhaustible natural resources. Given that 43 out of 44 attempts to employ GATT Article XX in disputes before WTO dispute settlement panels have failed, this does not bode well for the successful use of the more restrictive TPP exceptions.

6.         The TPP grants the foreign investor pre-establishment rights. This means that these investors can enter and establish themselves in the host country on terms no less favourable than what the country accords to its local investors, as well as acquire, expand, manage, operate and dispose of their property. This makes it more difficult for the host state to screen and reject the entry of investments and investors from the other countries signing the agreement.

7.         The foreign investor is enabled to freely transfer capital into and out of the country as well as repatriate its profits. This places limits on the regulation and control of capital flows by the host state. The only country exempted in the TPP is Chile, which can adopt measures to ensure currency stability with some conditions. It can establish restrictions or limitations on capital movements to or from Chile as well as related transactions.35

The provision on freedom of capital flows is perceived to have a negative impact. Even the International Monetary Fund (IMF) now recognises capital controls as a legitimate policy tool for preventing or mitigating financial crises.36 Just early last year US Federal Reserve economists publicly supported capital controls as they can 'lead to significant welfare improvement'. Many noted economists worldwide have declared their open support for such controls37 - to no avail, it appears, as the TPP still embeds the requirement for free capital flows in its provisions.

TPP proponents claim that the requirement has been mitigated by two safeguards. But these safeguards are restricted to remedying balance-of-payments and external financial difficulties and 'exceptional' macroeconomic problems.38 No other policy objectives, such as to prevent destabilising asset bubbles, are allowed.

Secondly, the safeguards are temporary and must be phased out progressively. Anything requiring a more permanent resolution (such as actions on capital inflows designed to avoid balance-of-payments and other macroeconomic problems) is prohibited, so balance-of-payments problems can only be tackled once they've occurred.

Thirdly, permitted controls must be terminated within 18 months. Extensions may be secured for additional periods of a year, but one-half of the parties can overrule this request.39 It should be noted that Malaysia extricated itself from the 1997 East Asian financial crisis by maintaining such controls over 10 years.

Fourthly, it is the ISDS tribunal that decides when such safeguards over capital controls will apply, thereby taking the power away from central banks (the only concession being for situations relating to application of laws relating to bankruptcy, securities trading, criminal offences, financial reporting and compliance with court orders; and for the application of laws relating to social security, public retirement or compulsory savings programmes).40

8. The 'most favoured nation treatment' (MFN) standard requires that a host state treat the investor or investment of another member state as favourably as any other investor or investment of another state, whether or not that other state is a member of the TPP.

As leading arbitration lawyer George Kahale III pointed out, many provisions in the TPP investment chapter may be an improvement on previous trade deals. However, all this hard work could be for nothing because of another provision: 'Why would you spend so much time and effort doing a great job in negotiating narrow provisions to this treaty, when you have a "most favoured nation" (MFN) clause?'

Essentially, an MFN clause is tantamount to a classic wipeout move. Arguably, it would enable foreign corporations from TPP states to make a claim against the host state based on the provisions inany other trade deal signed by that host state, no matter which country it was signed with. That means it does not matter how carefully the TPP is drafted; foreign investors can cherry-pick another treaty the host state has signed and sue the government based on the provisions included in that treaty. Kahale has described MFN as 'a dangerous provision to be avoided by treaty drafters whenever possible' because it can turn one bad treaty into protections 'never imagined for virtually an entire world of investors'.41

The TPP does contain a clarification in Article 9.5.3: 'For greater certainty, the treatment referred to in this Article does not encompass international dispute resolution procedures or mechanisms, such as those included in Section B [on ISDS].'

What the above means is that procedural rules are excluded, but not substantive investment rules. This seems to imply that no action can be brought if the MFN provision is violated. Whether the fears expressed earlier are well founded awaits adjudication by an ISDS tribunal. In any event, the investor can still proceed with actions claiming violation of the MST/FET provisions, citing in support (among other matters) the favoured treatment accorded to others. Hence, claimants will be able to import substantive rules from older, even more investor-friendly investment treaties.

9. Non-conforming measures (NCMs): Each country's new NCMs are set out in a schedule in Annex II.42 Generally, in the context of the investment chapter, the obligations which a party may be excused from fulfilling are specified. These relate to national treatment, MFN, performance requirements (or part), and the appointments of senior management and board of directors.

Significantly, the TPP does not excuse TPP governments from having to abide by some provisions that have been noted for restricting governments' policy space, namely: minimum standard of treatment and fair and equitable treatment, expropriation and free capital flows.

Furthermore, the exemption is also circumscribed by its precise wording; anything else not explicitly listed (perhaps because it was not contemplated or foreseen) is subject to the obligation of conforming to the TPP. This is the effect of the 'negative list' approach of the TPP - anything not specifically excluded remains part of the TPP rubric. This has serious implications as any new sector or activity will automatically be included in the TPP's obligations. The fact that certain areas - like tobacco - need to be specifically excluded implies that the general safeguards will not prevent cases from being pursued in respect of other public interest areas not specifically excluded.

ISDS - the enforcement mechanism of the investment chapter

ISDS was originally included to protect investors from arbitrary expropriation and to ensure non-discriminatory treatment for foreign investments by judiciaries that were not considered fully independent from their governments. Simply put, its purpose was to encourage investment in countries with weak legal systems. This is, however, unnecessary in relation to the parties to the TPP. As US Senator Elizabeth Warren pointed out in an opinion piece, countries in the TPP are hardly emerging economies with weak legal systems.43 For example, Canada, Australia, Japan and Singapore have well-respected legal systems that multinational corporations navigate every day. And where investment is in a country with a weak legal system, the investor should just buy political-risk insurance.

Too wide a scope

Originally a claim could be made under ISDS for direct taking away (expropriation) of the business of the investor, for example, when a government nationalised an enterprise or industry. Now, as stated above, claims for indirect expropriation mean that ISDS attacks can be made even against government actions and policies related to financial instruments, intellectual property, regulatory permits and more. These fears have actually been borne out in ICSID decisions on similar provisions in past trade agreements. ICSID - the International Centre for Settlement of Investment Disputes - is the international arbitration tribunal at the World Bank where most ISDS claims have been filed.

Chilling effect on state regulatory powers

As stated above, since the government can be sued before an international tribunal, it will be difficult for a government to make new policies, as it cannot predict whether certain policies it wishes to introduce or change are allowable, since it is uncertain or unpredictable how a tribunal will view them. This will affect a wide range of policies at the core of socio-economic development, including policies on investment, equity shares, financial flows, capital controls and financial stability, health and safety, the environment, intellectual property and access to medicines and educational materials, and government procurement.

ISDS is investor-biased

A few lawyers (mainly American and European) monopolise the investment arbitration business, and they act as lawyers in one case and arbitrators in other cases. Many of their firms are also known to seek and encourage investors to take up cases. In one known case, one of the arbitrators was a member of the board of directors of the parent company of the investor that took up the case. Yet the review panel ruled that the decision would remain and there was no need for the case to be heard again by another panel.

No appellate mechanism or consistency

The decision of the tribunal is final, as there is no appeal mechanism. Thus a country involved in an arbitration case has to accept the decision, including the award, if any, even if it is dissatisfied with the decision and the reasoning behind it. As there is no system of precedent or accountability to a higher court, the tribunal decisions are often seen as arbitrary and have been known to contradict each other in similar cases.

Exorbitant awards and costs

Countries have to pay exorbitant legal and arbitration costs averaging over $8 million per dispute and exceeding $30 million in some cases. The Philippines spent $58 million defending two cases against a German firm.44 Many of the ISDS claims have tended to be very high in recent years, running to even billions of dollars. Awards are usually lower, but some recent ones have also been very high, such as the $2.3 billion award granted to an American oil company against Ecuador.45 The ability to enforce these awards through seizure of assets owned by the government and located abroad makes ISDS a very powerful tool.

Bypassing the judiciary

Unlike the local investor, the foreign investor can completely bypass domestic courts. As happened in the Occidental Petroleum-Ecuador case,46 a foreign investor can relitigate an entire claim before an international arbitration tribunal if it is unhappy with the outcome of a case at the domestic level. Under the TPP, the investor can bring a claim before domestic courts, then appeal if a decision goes against it, but if unhappy with the way things are going, it can then file a 'discontinue' waiver and start a claim under ISDS before an international tribunal.47 Or the foreign investor can choose to bypass the domestic court process entirely while dragging the host government before an international investment tribunal to litigate its claim.

This waiver provision does not apply when the investor is charged in a national court for violating a law. If it loses the case against it before the domestic court, it can file an ISDS claim which may ultimately overrule the decision of the local court. This happened in a suit brought by Lago Agrio villagers in Ecuador against oil giant Chevron for massive contamination of the Amazon. To avoid paying damages awarded by Ecuador's highest court, Chevron filed various actions in the US and finally an ISDS claim - in which the tribunal suspended enforcement of the multi-billion-dollar domestic court ruling even before it decided on whether it had jurisdiction to hear the claim.48

This highlights the constitutional and other objections about the serious undermining of the defining role of national courts in a democracy which vests power in three separate branches of government - the executive, the legislature and the judiciary. In this case the three-member panel in effect ordered the government of Ecuador to violate its own Constitution, interfered with the independent judiciary and stopped the court's ruling in what would amount to a breach of Ecuador's constitutionally enshrined 'separation of powers' - a legal concept that was probably not foreign to the panellists. Many commentators have deprecated this vast power of the ISDS system as unconstitutional. 

As more than 130 US law professors declared in a March 2015 letter to Congress and the US President: 'ISDS threatens domestic sovereignty by empowering foreign corporations to bypass domestic court systems and privately enforce terms of a trade agreement. It weakens the rule of law by removing the procedural protections of the justice systems and using an unaccountable, unreviewable system of adjudication.'49 This followed a letter to similar effect signed by former judges, law professors and prominent lawyers.50

Other commentators point out that other countries have withdrawn or threatened to withdraw from the ICSID Convention because of perceived biases in ISDS. South Africa has started terminating existing bilateral investment treaties (BITs) with countries like Belgium, Luxembourg, Germany and Switzerland.51 In March 2014, Indonesia announced plans to terminate more than 60 BITs with countries such as China, France, Singapore and the UK; it has in the meantime terminated its BIT with the Netherlands, taking effective force from July 2015.52

Conclusion

Parties must rethink their decision to sign the TPP. More than anything else, it has been recognised by UNCTAD that 'the current state of the research is unable to fully explain the determinants of FDI, and, in particular, the effects of [international investment agreements (IIAs)] on FDI'. UNCTAD delivered that synopsis alongside its own study finding that 'results do not support the hypothesis that [IIAs] foster bilateral FDI.'

Further, a study done by Public Citizen and Global Trade Watch in 2014 showed that while countries bound by ISDS pacts have not seen significant FDI increases, countries without such pacts have not lacked for foreign investment. Brazil, for example, has consistently rebuffed IIAs with ISDS provisions, yet remains the world's fourth most popular destination for FDI and the leading destination of FDI in Latin America, where most other countries have signed numerous pacts with ISDS terms.    

Karina Yong was a legal practitioner focusing on the areas of administrative, constitutional, defamation and environmental law in Malaysia. In recent years she has taken a keen interest in the impact that Malaysia's trade relations has on these areas of law, and she is currently a legal consultant for the Third World Network.

Endnotes

1     http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.as

       px?NewsID=16650&LangID=E

2     Article 9.1

3     Article 9.1

4     Does not include land, water or radio spectrum

5     Annex 9H

6     Article 9.14

7     See http://www.italaw.com/sites/default/files/case-documents/ita0030.pdf

8     Andrew Probyn, 'Tobacco giant sues Australia', 28 July 2015, https://au.news.yahoo.com/thewest/a/29064155/tobacco-giant-sues-australia/

9     Article 9.7.1. See also Annex 9B-3.

10   See Lori Wallach, '"Fair and Equitable Treatment" and Investors' Reasonable Expectations: Rulings in US FTAs & BITs Demonstrate FET Definition Must Be Narrowed', Global Trade Watch, 5 September 2012

11   Annex 9B-3

12   Annex 9A; Teco Guatemala Holdings v Guatemala, ICSID Case No. ARB10/23, 19 December 2013, https://icsid.worldbank.org/apps/icsidweb/cases/Pages/casedetail.aspx?caseno=ARB/10/23

13   See Lori Wallach, '"Fair and Equi-table Treatment" and Investors' Reasonable Expectations: Rulings in US FTAs & BITs Demonstrate FET Definition Must Be Narrowed', Global Trade Watch, 5 September 2012

14   http://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf

15   http://corporateeurope.org/sites/default/files/publications/profiting-from-injustice.pdf

16   http://www.iisd.org/pdf/2011/dci_2010_stakes_of_states.pdf

17   http://www.iisd.org/pdf/2011/dci_2010_stakes_of_states.pdf

18   Robert Stumberg, 'Safeguards for Tobacco Control: Options for the TPPA', American Journal of Law & Medicine, 39 (2013): 382-441

19   Nathalie Bernasconi, 'Background Paper on Vattenfall v. Germany Arbitration', International Institute for Sustainable Development, 2009, http://www.iisd.org/sites/default/files/pdf/2009/background_vattenfa ll_vs_germany.pdf

20   http://www.turanga.org.nz/sites/turanga.org.nz/files/Kelsey%20Trade%20Law%20Tobacco%20Control

       %20Report.pdf

21  SOMO, Both ENDS, Friends of the Earth Netherlands and Transnational Institute, 'Socialising losses, privatising gains', January 2015

22   http://www.theguardian.com/business/2015/jun/10/obscure-legal-system-lets-corportations-sue-states-ttip-icsid

23   'TPP Investment Language Aims to Tighten Standard for MST Breach', 12 November 2015, http://myinforms.com/en-gb/a/19063593-tpp-investment-language-aims-to-tighten-standard-for-breach/

24   Ibid.

25   PCA Case No. 2009-04, Award on Jurisdiction and Liability, 17 March 2015

26   http://www.globaljustice.org.uk/blog/2015/apr/30/eyes-wide-shut-isds-implications-bilcon-vs-canada-case

27   http://www.citizen.org/documents/RDC-vs-Guatemala-Memo.pdf, http://www.citizen.org/documents/rdc-vguatemala-rebuttal.pdf and the TECO case in http://www.citizen.org/documents/investor-state-chart.pdf

28   Sanya Reid Smith, 'Potential Human Rights Impacts of the TPP', Third World Network, 2015, http://twn.my/title2/FTAs/General/TPPHumanRights.pdf

29   http://www.citizen.org/documents/investor-state-chart.pdf

30   Kinda Mohamadieh and Manuel F. Montes, 'Throwing Away Industrial Development Tools: Investment Protection Treaties and Performance Requirements', in Investment Treaties: Views and Experiences from Developing Countries, South Centre, 2015

31   Article 9.9

32   Article 9.9.3(d)(i)

33   Article 9.9.3(d)(ii)

34   Article 9.9.3(d)(iii)

35   Annex 9E

36   S. Reddy, 'IMF Eases Its Blanket Opposition to Capital Controls', Wall Street Journal, 3 December 2012

37   These include: Jagdish Bhagwati of Columbia University, former IMF officials Olivier Jeanne of Johns Hopkins University and Arvind Subramanian (formerly of the Peterson Institute for International Economics, now chief economic adviser to the government of India), Nobel laureate Joseph Stiglitz, Harvard University economics professors Ricardo Hausmann and Dani Rodrik, and Jose Antonio Ocampo (former executive secretary of the UN Economic Commission for Latin America and the Caribbean, and former Colombian Minister of Finance). Public Citizen, 'Secret TPP investment chapter unveiled', pp. 13-14, http://www.citizen.org/documents/analysis-tpp-investment-chapter-november-2015.pdf.

38   Public Citizen, 'Secret TPP invest-ment chapter unveiled', p. 14, http://www.citizen.org/documents/analysis-tpp-investment-chapter-november-2015.pdf

39   Article 30.3(e)

40   Article 9.8.4, as clarified by footnote 22

41   http://www.theguardian.com/business/2015/nov/10/tpps-clauses-that-let-australia-be-sued-are-weapons-of-legal-destruction-says-lawyer

42   Article 9.11.2. The NCMs are placed in two separate annexes: (i) Annex I, which allows the continuation of existing NCMs (local government measures do not have to be listed); and (ii) Annex II, which allows new NCMs to be adopted in the sectors listed or existing ones to be modified in a way that would otherwise violate the obligations even more.

43   https://www.washingtonpost.com/opinions/kill-the-dispute-settlement-language-in-the-trans-pacific-partnership/2015/02/25/ec7705a2-bd1e-11e4-b274-e5209a3bc9a9_story.html

44   http://corporateeurope.org/sites/default/files/publications/profiting-from-injustice.pdf

45   http://www.citizen.org/documents/oxy-v-ecuador-memo.pdf

46   http://www.citizen.org/documents/oxy-v-ecuador-memo.pdf

47   Article 9.20.2(b)

48   http://www.italaw.com/cases/257

49   'Law professors' letter opposes potential trade agreement provisions that could allow multinational corporations to bypass US courts'. A copy of the letter is available at http://bit.ly/1KX6WYB.

50   For more on ISDS, please refer to Martin Khor, 'A Summary of Public Concerns on Investment Treaties and Investor-State Dispute Settlement', in Investment Treaties: Views and Experiences from Developing Countries, South Centre, 2015.

51   http://www.iisd.org/itn/2014/08/11/aron-broches-and-the-withdrawal-of-unilateral-offers-of-consent-to-investor-state-arbitration/

52   http://www.lexology.com/library/detail.aspx?g=2a596886-3ad2-464b-a510-ab3b0cff503b

*Third World Resurgence No. 303/304, November/December 2015, pp 16-23