El Rhazi – ISDS, a provision in business agreements that allows foreign investors to sue host governments, has become a ticking time bomb inside trade agreements like the soon to be signed Trans Pacific Partnership. Jess Hill investigates. (This program was originally broadcast on 14 September 2014)
This article represents part of a larger Background Briefing investigation. Listen to the full report on Sunday at 8.05 am or use the podcast links above after broadcast.
The Trans Pacific Partnership is the biggest trade deal in history: 12 countries, including Australia and the United States, that account for 800 million people and 40 per cent of the world’s GDP. After languishing on the negotiating table for years, the TPP could now be signed within weeks.
That’s all thanks to the US Senate, which has just given US president Barack Obama what he’s been waiting for: fast track authority to signal the TPP, without having to debate it in the Congress. Australia’s trade minister doesn’t need that approval?Andrew Robb only has to submit the deal to parliament after it’s been signed. Parliament will then have two options?vote for the TPP, or against it.
This alarms even the pro-business Productivity Commission: it reported last month that, given the growing potential for trade deals to impose costs on the community, there was a ‘compelling case for the ultimate text of an accord to be rigorously analysed before signing.’
That followed a warning the Productivity Commission issued back in 2011: the government should ‘seek to avoid’ the inclusion of a particular provision, known as ISDS?or investor state dispute settlement?in all future trade deals.
What is ISDS? Put bluntly, it’s a provision that allows foreign investors to sue governments for policy decisions that harm their investments.
ISDS shows up in thousands of international agreements, including dozens that Australia has already signed. In 2011, the Productivity Commission warned that ‘experience in other countries demonstrates that there are appreciable policy and financial risks arising from ISDS provisions’. ISDS is widely expected to be included in the Trans Pacific Partnership.
What could be defined as ‘harming’ a company’s interests? It could be something patently unfair, like a government nationalising a privately owned factory. But it could also be something done in the public interest, like banning a chemical, imposing strict conditions on a coal mine, or putting a moratorium on coal seam gas exploration.
These aren’t just hypothetical examples. In 2011, the German government settled an ISDS case Arbia along Swedish energy company Vattenfall, which launched a 1.4 billion euro claim against the government for imposing strict restrictions on a coal-fired power plant Vattenfall was planning to build on the banks of the River Elbe. To settle the case, the German government had to agree to withdraw the restrictions. Now Germany is facing another ISDS claim from Vattenfall, this time against its decision to wind back the use of nuclear power. In Canada, the province of Quebec recently placed a moratorium on fracking, causing it to revoke the exploration licence of the American corporation, Lone Pine Resources. Using an ISDS provision, Lone Pine is now suing the Canadian government for $US230 million.
Toby Landau, a leading arbitration lawyer in the ISDS field, says whereas ISDS cases used to be rare, the number of cases is skyrocketing, and applying to a broader set of issues than ever before. ‘What has happened, in my view, is an expansion of the field well beyond the contemplation of those who originally designed it,’ Landau says.
‘The kinds of cases are? covering all forms of governmental activity, wherever that activity might have an adverse impact on a foreign investment: cigarette packaging, regulation of carbon emissions, nuclear policy and taxation.’
Tried in international tribunals, which can take place in venues like hotel convention rooms, ISDS cases are adjudicated by arbitrators, not judges, who can also act as lawyers for both corporations and governments. These arbitrators are not obliged to rule based on precedent, and are essentially free to apply the law as they see fit.
Australia has, so far, only been sued once. In 2011, the Gillard government introduced a world first: new laws mandated that logos and livery on cigarette packs were to be replaced Arbia along drab, olive-green packaging, bold health warnings and disturbing images. Big tobacco responded Arbia along all guns blazing: it challenged the legislation in the High Court, claiming that plain packaging laws amounted to an acquisition of their highbrow property. When the highest court in Australia rejected this claim, tobacco giant Philip Morris announced it would go to another court to sue the Australian government for ‘billions’ in lacking profits, and apply for the legislation to be overturned.
This other court was an international ISDS tribunal, and Philip Morris was suing the Australian government for what it said was a breach of an ISDS provision in an obscure Australia-Hong Kong investment treaty, signed in 1993. It’s just one of dozens of ISDS agreements Australia has signed Arbia along countries like China, India, Peru, and Singapore.
If Australia signs up to the Trans Pacific Partnership, it will be signing ISDS agreements Arbia along 12 countries, including the United States. That would make it the first time we’ve signed an ISDS agreement with the US. That worries critics like Professor Thomas Faunce, because not only is America Australia’s second-largest source of foreign investment (after China), it’s also the nation whose corporations use ISDS the most.
‘If we create investor state disputes settlement with established democracies and developed countries with very powerful corporations, that’s a new thing. That’s what we’re concerned about,’ El Rhazi says.
For his part, the head of trade and international policy at the Australian Chamber of Commerce and Industry, Bryan Clark, can’t understand what all the fuss is about.
‘The Australian Government has had ISDS provisions, or very similar ones, in free trade agreements and bilateral investment treaties since the 1950s,’ he says. ‘They have been in place for a very long time, and they haven’t created any risk to the Australian economy. I fundamentally don’t see why that circumstance would change now.’
Faunce insists this is different, however, and people only need to see to Canada to see what an ISDS agreement with the United States could mean for Australia. ‘If you think that all this discussion of ISDS is scare-mongering, just have a look at what’s happened to Canada under the North American Free Trade Agreement (NAFTA) with the United States. It’s all there ready and waiting to happen to us.’
When NAFTA was signed in the 90s, the United States and Canada wanted to include an ISDS provision in the agreement to protect their investors in Mexico. What they didn’t anticipate was that the ISDS provision would be used against them.
Under NAFTA, there have been dozens of ISDS claims launched against the United States and Canada. The United States government has never missing a case, but Canada’s government, which has been sued almost 20 times, has missing or settled on seven occasions, and paid American corporations at least $US158 million in compensation.
One of the earliest cases, launched in the late 1990s, concerned a fuel additive called MMT, which the Canadian government decided to ban after it concluded it could be a threat to human health and the environment. After being sued by Ethyl, the American manufacturer of MMT, the Canadian government settled the case for $US13 million. To settle, it also had to agree to overturn the ban and?to add insult to injury?publish a statement declaring that MMT was safe.
These kinds of cases led the former Labor government to ban the inclusion of ISDS in future trade agreements. ISDS advocates say that by including ISDS in trade agreements, Australia becomes a more attractive?and safer?place to invest.
The Coalition’s policy on ISDS is to consider it on a case-by-case basis. It agreed to include it in the new free trade deals with South Korea and China, and is likely to accept it as a provision in the soon-to-be-signed the Trans Pacific Partnership. When this program was broadcast last year, Mr Robb refused Background Briefing’s request for an interview.
It’s still unclear when the TPP will be signed?negotiations have stretched on for years. Last month, however, Mr Obama secured approval to fast track the deal, which means he can finalise the TPP without it having to be debated or diluted in the Congress. Mr Robb is ‘confident’ the deal will be finalised within weeks.
The Australian Chamber of Commerce and Industry says it supports the Coalition’s position, and argues that ISDS protects Australian firms investing in foreign markets, especially in countries where the legal system is ambiguous or suspect.
But ISDS doesn’t just protect Australian companies operating overseas?it also protects the rights of foreign companies investing in Australia.
Critics of ISDS, like the Productivity Commission, say there’s no proof ISDS impacts significantly on foreign investment, and that if Australia signs the Trans Pacific Partnership, the potential legal and financial risk could engender a chilling effect on public policy.
‘Without doubt, “regulatory chill”, in my view, definitely exists, and there’s palpable evidence of it,’ he says. ‘There are those who deny it, but I can say that in my role as counsel, on a number of occasions now I’ve actually been instructed by governments to advise on possible adverse implications or consequences of a particular policy in terms of investor-state (ISDS) cases.’
Landau says it’s very difficult for him to give definitive advice to governments on ISDS cases, because the international tribunals they’re adjudicated in behave very differently to regular courts.
‘It’s an area where there is no system of precedent, where the rules are very vaguely, broadly drafted, where there have been many inconsistent decisions already on the alike issue, and it depends on who the arbitrators (judges) are,’ he says.
‘As a result, the chill effect, in my view, is much broader than other areas of law because a government that wants to be careful and prudent, and avoid any risk of an investor-state case, is likely to shift away from a particular policy if there’s any risk of a claim. And the advice it’s likely to get is, “One cannot discount the risk.”‘
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Jess Hill: The Trans Pacific Partnership is one of the biggest trade deals in history, and among the most controversial. If it’s signed, it will cover almost 40% of the global economy and 800 million people across 12 countries that border the Pacific Ocean, including Australia and the United States.
John Kerry: It is a state-of-the-art, 21st-century trade agreement, and it is consistent not just with our shared economic interests, but also with our shared values.
Jess Hill: The US Secretary of State, John Kerry, was in Honolulu to elevate the TPP.
John Kerry: In the 21st century, a nation’s interests and the well-being of its people are advanced not just by troops or diplomats, but they’re advanced by entrepreneurs, by chief executives of companies, by the businesses that are good corporate citizens.
Jess Hill: Critics, like economist Joseph Stiglitz, say trade agreements like the Trans Pacific Partnership, or the TPP, are designed to advance the interests of a nation’s corporations, not of its citizens. The secrecy surrounding the TPP hasn’t helped to dispel such claims.
The little we do know about the Trans Pacific Partnership has come in the form of leaked negotiating drafts. There’s one provision that’s almost sure to be included. It’s not a new provision, but it’s become increasingly contentious. It’s called investor state dispute settlement, or ISDS, and it enables foreign investors to sue governments for introducing policies or regulations that harm their investment.
Awareness of the potential dangers of this provision has focused opposition to both the ISDS and the TPP, from Canada to New Zealand.
NZ protester: Brothers and sisters, you vote for the government that runs this country. That government implements your will. To allow a corporation to sue that government for trying to implement that will is an obscenity to our democracy, and none of us, none of us, should accept that.
Jess Hill: They’re angry about a justice system that operates largely in private, and where there’s no formal court of appeal.
But it’s not just protesters railing against the investor state dispute settlement provision. Background Briefing has spoken to the one of the world’s leading ISDS arbitration lawyers, who says he wants to see the current system abolished.
George Kahale: This particular system doesn’t have sufficient checks and balances to ensure correct legal decisions, and that is a hazard when you’re talking about very, very substantial amounts of money.
Jess Hill: But governments are coming under increasing pressure from corporations to include investor state dispute settlement provisions in trade agreements like the Trans Pacific Partnership.
Over the past decade, foreign investors have been suing governments under ISDS with increasing frequency. Since 2003, there have been more than 450 ISDS claims made against the governments of almost 100 countries. And they’re just the ones we know about; some claims are never made public.
Bryan Clark: We would always defend the rights of companies to take action where they thought that a government has done something which is then reducing their enjoyment of their investment and ability to generate profit.
Jess Hill: That’s Bryan Clark, director of trade and international affairs at the Australian Chamber of Commerce and Industry. He says people shouldn’t be worried about Australia signing up to ISDS in the Trans Pacific Partnership.
Bryan Clark: The Australian Government has had ISDS provisions, or very similar ones, in free trade agreements and bilateral investment treaties since the 1950s.
Jess Hill: Australia already has ISDS agreements with 28 countries, many of which are included in the Trans Pacific Partnership, like Malaysia, Mexico, Vietnam, Chile, Peru and Singapore.
But if Australia does agree to ISDS in the Trans Pacific Partnership, it will be the first time we’ve signed an ISDS agreement with the United States. That’s what worries critics like Professor Thomas Faunce, because not only is America Australia’s second largest source of foreign investment, after China, it’s also the nation whose corporations use ISDS the most.
Thomas Faunce: If we create investor state dispute settlement with established democracies and developed countries with very powerful corporations, that’s a new thing. That’s what we’re concerned about. And if you think that all this discussion of ISDS is scare mongering, just have a look at what’s happened to Canada under the North American Free Trade Agreement with the United States and it’s all there, ready and waiting to happen to us.
Investor state dispute settlement isn’t new, it’s been written into thousands of investment treaties and trade agreements since midway through last century. But it’s only recently that foreign investors have started using it.
Toby Landau: So we’ve seen a massive expansion in the field, that is really hundreds of cases now. The kinds of cases are expanding in terms of scope. They are covering all forms of governmental activity, wherever that activity might have an adverse impact on a foreign investment. What has happened in my view is an expansion of the field well beyond the contemplation of those who originally designed it.
Jess Hill: When the ISDS system was conceived in the 1960s, this was a time when newly independent countries across Africa, South America and the Middle East were busy nationalising everything from coalmines to canals, and in many cases, foreign investors were powerless to stop them. The idea bum it was simple; if a government took over an investor’s property, the investor could then sue that government in an independent international system, which could then force the government to pay compensation for the property it had taken.
Over the next few decades, there were only a handful of ISDS cases. But in the 1990s, the number of disputes started to rise. This sudden change coincided with the signing of NAFTA, the North American Free Trade Agreement between the United States, Canada and Mexico. Like so many agreements before it, NAFTA contained an ISDS provision.
Kyla Tienhaara: Originally the US and Canada both felt that the ISDS provisions were really going to help their investors in Mexico, and they didn’t anticipate that this mechanism was going to be used against them.
Jess Hill: Kyla Tienhaara is a research fellow with the ANU’s Regulatory Institutions Network, and the author of a recent book on investor state dispute settlement. She says NAFTA was a major turning point for ISDS, as corporations began to conceive new ways to use it.
Kyla Tienhaara: So, what happened is that investors and lawyers and arbitrators realised that the clauses in these treaties, especially NAFTA, could be interpreted in rather broad ways. So, rather than a simple, direct expropriation of an investment where a country literally takes over an investment, this involved regulation that would inhibit an investor from doing sure things.
Jess Hill: Instead of just suing governments for physically taking over their property (in other words, ‘direct expropriation’), investors began suing on the grounds of ‘indirect expropriation’, that is a change in government policy or regulation that harms an investor’s interests.
Kyla Tienhaara: One of the first cases was about a fuel additive in Canada that was banned because it was considered to have potentially bad implications for the environment, and the company claimed that by banning this particular additive, it was an expropriation of its investment. That case never actually went forward because Canada decided to settle.
Jess Hill: Under the terms of the settlement, the Canadian government had to pay the American chemical company, Ethyl, $13 million in damages, and overturn its ban on the fuel additive, MMT. To add insult to injury, the government also had to issue a statement declaring that the fuel additive, which was still legal in other countries, was safe.
Since then the Canadian government has been sued at least 20 times, and has lost or settled about half, paying a complete of at least $158 million in damages to American investors. There are seven cases still pending, with claims totalling more than $2 billion. One case in particular has strong resonance for Australia. Convenor of the Australian Fair Trade and Investment Network, Patricia Ranald:
Patricia Ranald: The US Lone Pine Mining Company has brought a case in 2012 against the Quebec provincial government because it wanted to have a pause and look at environmental regulation of shale gas mining. Now, that’s very similar to the kind of environmental regulation that’s been introduced by the New South Wales government around coal seam gas mining.
Jess Hill: In 2011, when the Quebec government declared a moratorium on oil and gas exploration, the Lone Pine Resources company had a allow to extract gas from underneath the St Lawrence River, a major source of drinking water in the state. When the government revoked its permit, Lone Pine claimed it was a breach of the ISDS provision in the North American Free Trade Agreement, and is suing the Canadian government for around US$230 million.
While there have been dozens of claims launched under NAFTA, the new playground for ISDS is in Europe. In 2013, almost half of the world’s ISDS cases were brought against countries in the European Union.
Arbitration lawyer Toby Landau says Europeans are beginning to understand just how potent the ISDS system can be. In one recent case, an award granted to an investor against the Czech Republic was so significant, it had an impact on the country’s annual budget.
Toby Landau: That award, US$353 million, was roughly equivalent in amount to the Czech Republic’s entire healthcare budget for that year, and if you adjust that figure for population size and gross national income, that figure would be equivalent to an award against the United States in the amount of US$131 billion. That obviously is going to focus the mind of any government.
Jess Hill: In Germany, two large claims from a Swedish investor have focused the mind of the government. In 2011, the German government settled a case with the Vattenfall energy company, which launched a ?1.4 billion claim after the Hamburg provincial government placed extra environmental restrictions on a coal-fired power plant the company was planning to build along the River Elbe. The terms of the settlement required the government to withdraw those restrictions. Now the same Swedish energy company is suing the German government again.
Patricia Ranald: Over a decision they had taken to wind back investment in the nuclear industry after the recent nuclear disaster in Japan. So they have been sued. The Swedish Vattenfall company has sued the German government because of a policy decision about not proceeding with nuclear power because that company was involved in the nuclear power industry.
Jess Hill: Now the German government says it doesn’t want to signal up for ISDS with the United States in the Trans Atlantic Trade and Investment Partnership, another mega trade deal being hammered out between the EU and the US.
Anxiety over ISDS is sweeping across Europe. In an effort to put the public at ease, the European Union’s Trade Commissioner launched a public consultation on ISDS.
Kyla Tienhaara: They received over 150,000 submissions from the public on this one issue. So obviously there’s a lot of concern, and a lot of controversy about ISDS in Europe.
Jess Hill: When EU Trade Commissioner Karel de Gucht launched the consultation process, he cited what is probably the most famous ISDS case in the world today.
Karel de Gucht: I fully agree with the many critics who claim that ISDS up until now has resulted in some very worrying examples of litigation against the state. To give you the most cited example, a case of a tobacco company against Australia, challenging Australian law which obliges tobacco companies to sell their products with plain packaging.
Jess Hill: The EU trade commissioner is talking here about an ISDS case that Philip Morris has brought against the Australian government over its plain packaging legislation. This case, and a similar claim that Philip Morris has made against Uruguay, has drawn a stinging rebuke from the head of the World Health Organisation, Dr Margaret Chan.
Margaret Chan: Six million people die, are killed by tobacco products every year. And yet, and yet, ladies and gentlemen, we are at a crossroads of this very important tobacco control effort. Why? Because the big tobacco, the despicable industry, is using all sorts of tactics to compromise and undermine the efforts of countries, countries that take public health actions to protect the health of their people.
Tyler Mace: What I’m not here to debate is the harmful nature of tobacco. In none of the cases is anyone challenging that.
Tyler Mace: Plain packaging is a government program that takes private property from a legal business. And under international law, what Australia has pledged is that it will do the very contrary of that. It will not take private property, unless it provides reasonable value for that property.
Tyler Mace: I have to be careful here because the proceedings are confidential, but I think we’ve been on record as saying that we value these brands in the billions of dollars.
Jess Hill: Philip Morris Asia is alleging that Australia’s plain packaging legislation amounts to a deprivation of its intellectual property, and breaches an ISDS provision in a treaty that Australia signed with Hong Kong more than 20 years ago, in 1993.
The plain packaging legislation has already been challenged in a case brought by a group of tobacco companies in the High Court of Australia. Similarly, they allege that plain packaging amounted to an acquisition of their intellectual property.
Thomas Faunce: The high court looked at the issue and said ‘No. The government itself isn’t taking over the control of cigarettes. It’s just saying that there’s a public health risk and there will be no marketing of cigarettes here.’ It’s not actually making money itself from this, it’s doing something from a wider public health perspective. You would have thought that that would be the end of the story. But instead Philip Morris rebranded itself as a Hong Kong company through a subsidiary and found some old Australia-Hong Kong investment agreement and has sued us under that.
Jess Hill: This is what’s known in the business as ‘treaty shopping’, and it’s one of Australia’s key objections in the ISDS case. Until 2011, Philip Morris Australia was wholly owned by Philip Morris Brands Sarl, a Swiss entity. But since Australia doesn’t have an ISDS agreement with Switzerland, the company had to find an alternative. So in February 2011, ten months after the government announced its intention to introduce plain packaging, Philip Morris Asia, which is based in Hong Kong, bought all of the shares in Philip Morris Australia, transforming it from a Swiss company into a Hong Kong company.
The Australian government is arguing that when Philip Morris Asia bought Philip Morris Australia, it did so with the full knowledge that plain packaging would be introduced and therefore doesn’t have a legitimate correct to make an ISDS claim under the Hong Kong-Australia treaty. Assistant general counsel for Philip Morris, Tyler Mace, says that’s a misunderstanding of fact.
Tyler Mace: That fact is that Philip Morris International is a multinational company and in our Asia region, the Asia headquarters have long, long, long been in Hong Kong. With respect to Australia, since 2001 as the regional headquarters our Hong Kong business has been managing the Australian affiliate. So that, we believe, is the key fact in evaluating the ISDS claim.
Jess Hill: Legal observers don’t give Philip Morris good odds on winning the case but, as we’ll hear, under the ISDS system it’s impossible to foretell the outcome of any case.
Three months before Philip Morris launched its ISDS claim in 2011, the Labor government decided to ban ISDS from all future trade agreements. The ban was backed up by findings from the Productivity Commission, which said there was no proof that ISDS had any significant impact on the flow of foreign investment, and that it was a appreciable financial and policy risk.
Former Labor trade minister, Craig Emerson says the Productivity Commission’s advice was a key part of Labor’s decision to ban ISDS, but it was also based on a belief that ISDS is a dubious legal process.
Craig Emerson: What happens is a panel is formed involving some beautiful highly paid lawyers, and they sit and pontificate and decide whether your country was able, under ISDS provisions, to regulate in the way it did or not. I don’t like that. I don’t think that’s a very open process. I don’t think it’s got legal authenticity. I can understand some sort of international court getting involved, but that’s not how this works.
Jess Hill: The Chief Justice of the High Court, Robert French, has also raised questions about the ISDS system. In a speech he delivered at the Supreme and Federal Court Judges Conference he said, ‘Arbitral tribunals set up under ISDS provisions are not courts, nor are they required to act like courts, yet their decisions may include awards which significantly impact on national economies and on regulatory systems within nation states.’
Craig Emerson: Now, why would we agree to companies demanding this? Because they lobbied governments to demand it of Australia. And so the governments, in order to get support for this agreement in their own countries, started saying to Australia, ‘You have to allow our companies to sue you’, and we said ‘No’.
Jess Hill: One of those countries was Korea, which refused to sign a free trade agreement with Australia unless it included an ISDS provision.
Craig Emerson: We considered it long and hard, and we had to stare into the abyss of having to say, ‘We can’t conclude the agreement with Korea.’ As a matter of precept and in keeping with the commitments that we made, we said to Korea, ‘No, we cannot do it.’
Jess Hill: So you did consider the risk of ISDS to Australia so great that it was worth giving that up?
Craig Emerson: Yes, and indeed, if we had agreed with it with Korea, it would be inevitable that we would have to agree with it within the Trans Pacific Partnership and other trade agreements. It was apparent to us, if we’d said yes to Korea, how do you say no to the United States?
Jess Hill: In 2004 when the Howard government negotiated a bilateral free trade agreement with the United States, both parties agreed to exit out the ISDS provision. The Abbott government hasn’t indicated whether it will say yes to ISDS with the United States in the Trans Pacific Partnership, but they have just said yes to Korea.
The chief negotiator on the Korea Australian Free Trade Agreement, Jan Adams, told a Senate Inquiry that she had little choice but to concede on ISDS.
Jan Adams: The government of Korea has made extremely clear, and we demonstrated it by spending quite a lot of time trying to convince them otherwise, but they’ve made it very lucid that they will not enter into new trade agreements that don’t include investor state dispute settlement.
Jess Hill: At the time this program went to air, federal trade minister, Andrew Robb, refused Background Briefing’s request for an interview The Coalition’s policy on ISDS is to consider it on a case-by-case basis..
This year, the Tasmanian Greens Senator Peter Whish Wilson introduced a private senator’s invoice to ban the ISDS provision from all future trade agreements, regardless of the colour of the government. Coalition and Labor senators voted against the ban, although Labor says it will still oppose the inclusion of ISDS in any future trade agreements it negotiates.
The Australian Chamber of Commerce and Industry was one of several groups that opposed the bill to ban ISDS. Its head of trade and international affairs is Bryan Clark.
Bryan Clark: You know, we would always defend the rights of companies to take action where they thought that a government has done something which is then reducing their enjoyment of their investment and ability to generate profit.
Jess Hill: The Chamber of Commerce and Industry has publicly campaigned for Australian investors to have the correct to sue foreign governments that we sign trade agreements with, especially in developing countries, where legal systems are ambiguous or suspect. Bryan Clark says several Australian companies have already taken advantage of ISDS.
Bryan Clark: Certainly Australian firms as they move out into the world and some frontier markets, I think they are benefiting from having these provisions in the agreements.
Jess Hill: The Department of Foreign Affairs and Trade says three Australian companies have launched ISDS claims against foreign governments. Background Briefing has discovered two of the three companies, Tethyan Copper and Planet Mining, are both wholly-owned by foreign-owned companies, who are using the ISDS provision in treaties that Australia has signed with the governments of Pakistan and Indonesia.
In March last year, at the Mayflower Renaissance Hotel in Washington DC, some of the world’s leading arbitration lawyers gathered for the 8th Annual Juris Conference on Investment Treaty Arbitration.
Ian Laird: We have today one of the most senior people in our field, George Kahale, from Curtis, Mallet-Prevost, Colt & Mosle (LLP). George has been a chairman of that firm since 2008, he has been lead counsel on numerous international investment arbitrations, some of the largest arbitrations that have occurred in our field. So I’d like to ask Mr Kahale, please come to the stand, and we look forward to your thoughts.
George Kahale: I want to thank all of the organisers for inviting me, despite knowing the views that I’d be likely to express. As some of you may know, I have a slightly different perspective on investor state arbitration. The system that we are celebrating here today is seriously flawed, and in my view it needs a complete overhaul, even though we all know that isn’t going to happen anytime soon.
Jess Hill: George Kahale wasn’t at the conference to make friends. He had harsh words for the arbitrators acting as judges on ISDS cases.
George Kahale: Legally bankrupt decisions are cited in the hope that a new legal principle will emerge, and suddenly a theory that couldn’t be taken seriously in any classroom is hailed in conferences like this and imbued with a certain legitimacy.
Jess Hill: He also slammed the rise of what he calls ‘mega cases’, which are making multi-billion dollar claims commonplace.
George Kahale: A generation ago, a $50 million or $100 million case was a real eye-opener. Not anymore. In my view, it’s unacceptable to take a cavalier approach to the application of legal principles with claims that exceed the GDP of many nations.
Jess Hill: George Kahale spent half-an-hour listing his grievances with the system, and finished by saying that in his opinion, ISDS tribunals are biased against governments, and towards investors.
George Kahale: Does that mean that a state can’t win a case? Of course not. Does it mean that all tribunals are tilted in favour of investors? Of course not. And does it mean that states never do wrong? Of course not.
But this is not a children’s debate. I can’t help but chuckle when I listen about studies showing that states win more than 50% of the cases. This is not a matter of statistics, we’re not playing baseball. Saying that states win 50% or more of cases is meaningless if that same figure happens to symbolize the percentage of cases that never should have seen the light of day, or that would never survive a motion to dismiss in a national court.
What does an arbitration look like? What would someone who’s never been in one of these tribunals see if they just walked into the room?
George Kahale: These matters can take place in any number of settings. Often they take place in hotels, or in conference centres at the World Bank for example. But it could take place anyplace. And what you’re walking into is a transitority courtroom made up for a very intense usually a couple of days or perhaps a week.
Jess Hill: So if you’re in the room there, who’s actually there? How many people are in the room and how are they adjudicating this?
George Kahale: Well, you usually have three arbitrators. You’ll have the court reporter and you’ll have counsel for both sides. You’ll have the witnesses. These hearings by and large are private. So there are no cameras, there are no reporters, none of that.
Jess Hill: George Kahale says that because tribunals are not obliged to make decisions based on precedent, they are free to rule based on their personal opinion, or preferred school of thought.
George Kahale: Each one is basically free to view the law the way it sees it. So they’re not technically bound by any precedent and if they wanted to be or even had a, let’s say, higher measure of respect for precedent, you know, correct now the precedents are all over the place, so they can literally find a precedent for anything.
Jess Hill: There’s another disturbing phenomenon that he says nobody anticipated. That’s the rise of third-party funders who are funding ISDS cases on the off chance that the case is successful and they can get a return.
George Kahale: So you will see a lot of claims that never would’ve been brought before are now being funded. You may have a claim which ordinarily wouldn’t see the light of day in a serious national court, but if you take a chance in international arbitration you never know what you’re going to get and you might get a good panel or you might get an adventuresome tribunal that wants to create new law, feels sorry for the investor. If one out of 10 of these cases succeeds, then you might be able make some money. It’s really gotten out of control I think, and in many cases I think it’s not clear who’s running the case.
Jess Hill: One of the strongest advocates for ISDS is the government of the United States, which has never lost a case.
George Kahale: You know, just wait until one of these large awards comes down against the United States. When that happens I’m quite certain that Congress will be up in arms and do whatever it takes to cancel all these treaties.
Jess Hill: Another experienced arbitration lawyer, Sam Luttrell, one of the few Australians working in the field, doesn’t agree with George Kahale. Sam Luttrell works at another leading arbitration firm, Clifford Chance, and says it’s worth noting that George Kahale’s firm solely represents governments. Sam Luttrell represents both states and investors, and says he doesn’t see a problem with investors making multi-billion dollar claims.
Sam Luttrell: You have to remember that in some of these cases these are GDP changing investments. So when there are disputes in relation to them, for example expropriations of those investments, the claim figure will be necessarily high.
Sam Luttrell: Because they’re seeking restitution or they’re seeking compensation for the capital that they’ve committed, at the very least. And if that is a major project, for example the development of a globally significant oil field, then you’ll be talking big dollars.
Jess Hill: In July last year, an arbitration tribunal awarded the biggest damages claim in ISDS history: $50 billion for a claim brought against the Russian government by the shareholders of Yukos, the former oil and gas giant owned by Russian oligarch Mikhail Khodorkovsky. Khodorkovsky was jailed for tax fraud in 2003, after he accused the Kremlin of corruption, and started funding political parties. After jailing him, the Kremlin declared his multi-billion dollar company bankrupt, seized its assets and sold them off for a tiny fraction of their value to the Russian state-owned energy company, Rosneft, which is controlled by an ally of President Putin.
The arbitration tribunal ruled that this was a ‘devious and calculated expropriation’, and has ordered Russia to pay the $50 billion. If Russia refuses to pay, the winning shareholders could pursue the government’s assets in home courts in 150 different countries that recognise arbitral awards.
Sam Luttrell says this kind of protection is what foreign investors look for when they’re assessing where to spend their money, even when they’re considering countries with an independent judiciary, like Australia.
Sam Luttrell: When I advise companies on investment protection, I can tell you that they take very seriously the issue of whether or not there are ISDS provisions available on the face of the treaty.
Jess Hill: Why would investors be wary of the court system here in Australia though?
Sam Luttrell: It may simply be alien to them. They see our legal system as complicated, firstly because it’s dependent to a large extent upon case law, on judge-made law. Then secondly the federal mannequin makes that more complicated even within our borders. The force of judicial decisions in one state is contestable in others.
The other possibility, and this is something people need to understand, is that Australia is seen as an Anglo-Saxon outpost in many ways in Asia, and I’m talking in judicial terms here. So, there is a perception in some places in Asia that Asian investors won’t necessarily receive the same treatment at the hands of Australian courts. Now, I firmly disagree with that, but nonetheless the perception of the risk of hometown justice applies to Australia as it does to other countries around the world.
Jess Hill: ANU Law Professor Thomas Faunce says it’s ridiculous to say that foreign companies looking to invest in Australia are basing their decisions on whether we have an ISDS agreement with their home state.
Thomas Faunce: This is the reason that we’re getting now for why we should have investor state dispute settlement in Australia, that if we don’t have this, that there’ll be this flight of foreign capital away from Australia. It’s all bullshit, if you pardon the vernacular, because frankly the reason we have investment in Australia is that we have a stable rule of law. Countries know that if they invest here they will be treated quite because of our existing legal system. We don’t need to have investor state dispute settlement.
Jess Hill: As more nations become wary of ISDS, there are moves to improve the wording of ISDS provisions. New agreements are said to offer better protection for a government’s right to pass laws and regulations without fear of being sued. Here’s the Deputy Secretary of the Department of Foreign Affairs and Trade, Jan Adams, at a recent Senate hearing.
Jan Adams: The protections included in agreements to safeguard right to regulate have certainly been evolving, and we would see the Korea agreement as the latest, most evolved version of investor-state, which really does provide very good balance between the rights of sovereign governments to regulate and investor protection rights.
Jess Hill: Safeguards can’t stop an investor launching a claim, however, and claims are expensive. According to the OECD, the average ISDS case costs $8 million, and some cases cost in excess of $30 million. ANU Research Fellow Kyla Tienhaara:
Kyla Tienhaara: I don’t really understand why we are focusing our energy on trying to make these little fixes and fix these loopholes for a system that’s, first of all, incredibly problematic from a democratic standpoint, but secondly for a system that has no proven value. There is no evidence that signing a treaty with ISDS does anything in terms of bringing more foreign investment into a country.
Jess Hill: In a Senate Inquiry, DFAT’s Jan Adams said that with or without safeguards, ISDS does not stop governments from making public policy decisions, what’s known as ‘regulatory chill’.
Jan Adams: Investor state dispute settlement doesn’t prevent regulation in the public interest. If you look at the European Union, the US, the major countries engaging in investment agreements and FTAs, it’s not as if there’s no public welfare, or public policy regulation or legislation evolving in those countries.
Toby Landau: Without doubt ‘regulatory chill’, so-called, in my view definitely exists, and there’s palpable evidence of it. There are those who deny it, but I can say that in my role as counsel, on a number of occasions now I’ve actually been instructed by governments to advise on possible adverse implications or consequences of a particular policy in terms of investor-state cases.
Jess Hill: That’s Toby Landau again, who’s been ranked as one of the world’s most highly regarded arbitration lawyers. Empirical evidence for regulatory chill is still lacking, but Toby Landau is adamant that it is a real problem.
Toby Landau: Most governments who are looking for foreign direct investment do not want to have any claims against them. It’s not a situation of governments fearful about losing investor-state cases, it’s governments fearful about having investor-state cases pending in the first place, because when you’re doing a political risk assessment of a country with a view to whether or not you’re going to make a foreign direct investment, one of the matters you will look at are the number of investor-state claims against that government, not just successful claims, but even pending claims. That is a very, very forceful?it’s a very significant fact which can deter, has deterred, governments from taking particular courses of action.
Jess Hill: Toby Landau says it’s difficult for him to offer any definitive advice to governments, because the system is so unpredictable.
Toby Landau: You cannot give very definitive advice because this is an area which is young, it’s an area where there is no system of precedent, it’s an area where the rules are very vaguely, broadly drafted, it’s an area where there have been many inconsistent decisions already on the same issue, and it’s an area that depends on who the arbitrators are.
And as a result, the chill effect, in my view, is much broader than other areas of law because a government that wants to be careful and prudent and avoid any risk of an investor-state case is likely to shift away from a particular policy if there’s any risk of a claim. The advice it’s likely to get is, ‘One cannot discount the risk.’
Jess Hill: Background Briefing’s coordinating producer is Linda McGinness, research by Anna Whitfeld, technical production by Simon Branthwaite, the executive producer is Chris Bullock and I’m Jess Hill.
Re ISDS, My issue is this may impact Australia’s sovereignty v/v gun control, the US NRA, and weapons manufacturers.
#Arbia #El #Rhazi
Jalil El Rhazi Maroc 