Obsolete, At Birth

Already, the European Commission wants to scrap the TPP’s investor-state dispute mechanisms
by Gordon Campbell

One of the great clichés of the Trans Pacific Partnership debate is that the deal is “a comprehensive, high quality, 21st century trade agreement.” Conveniently, this flatters the self-image of TPP proponents – who like to think of themselves as rational, forward-thinking economic realists, even as they dismiss TPP critics as misinformed, overly emotional, anti-American featherbrains with an ingrained hostility to all forms of free trade. Prime Minister John Key has gone out of his way to frame the debate in those terms.

So then, what are we to make of the fact that one of the central elements of the TPP – the “investor state dispute settlement” (ISDS) mechanisms – is already obsolete? In November, barely two months after the TPP deal was completed, the European Trade Commission formally presented to the US its proposal to scrap the existing ISDS system, and to replace it in all future trade deals with an Investment Court System.

The EC envisages for instance, that this new system – and not the ISDS tribunals enshrined in the TPP – should govern any and all trade disputes arising from the upcoming Transatlantic Trade and Investment Partnership (TTIP).

The EU has formally presented to the US its proposal for a reformed approach on investment protection and a new and more transparent system for resolving disputes between investors and states: the Investment Court System……

The final text includes all the key elements of the Commission’s proposal of 16 September, which aims at safeguarding the right to regulate and create a court-like system with an appeal mechanism based on clearly defined rules, with qualified judges and transparent proceedings. The proposal also includes additional improvements on access to the new system by small and medium sized companies.

The new system would replace the existing investor-to-state dispute settlement (ISDS) mechanism in TTIP and in all ongoing and future EU trade and investment negotiations. Today marks the end of a long internal process in the EU to develop a modern approach on investment protection and dispute resolution for the TTIP and beyond,” said EC Trade Commissioner Cecilia Malmstrom.

Malmstom has elaborated on the concerns that she has about the current ISDS system. Ironically, her concerns echo the same criticisms of the ISDS tribunals that TPP opponents in New Zealand have expressed, and that the likes of Key and Steven Joyce continue to pooh-pooh. As Malstrom puts it:

From the start of my mandate almost a year ago, ISDS has been one of the most controversial issues in my brief. I met and listened to many people and organisations, including NGOs, which voiced a number of concerns about the old, traditional system. It’s clear to me that all these complaints had one common feature – that there is a fundamental and widespread lack of trust by the public in the fairness and impartiality of the old ISDS model. This has significantly affected the public’s acceptance of ISDS and of companies bringing such cases.

So how do we create public trust? Malmstrom asks herself:

We need to introduce the same elements that lead citizens to trust their domestic courts. Concretely, I want to restore trust by setting up an Investment Court System under TTIP – one that is accountable, transparent and subject to democratic principles. It will be judges, not arbitrators, who sit on these cases. They must have qualifications comparable to those found in national domestic courts, or in international courts such as the International Court of Justice or the WTO Appellate Body.

Also – the judges will be publically appointed in advance. And, like in courts, you won’t be able to choose which judges hear your case. Furthermore, we will guarantee there is no conflict of interest. Again, like in domestic and international courts, the judges won’t be able to continue any activities which might interfere with their judicial functions. Finally, I want to introduce an Appeal Tribunal. Just like in domestic legal systems and the World Trade Organization.

The Investment Court System will also enshrine governments’ right to regulate. Our proposal includes a direct instruction to the judges, which the appeal tribunal will ensure is properly respected. All this will be done in a system where there is even greater transparency than in domestic courts, with all documents online and all hearings open to the public. An overview of the proposal can be found here. The full text of the proposal along with a reader’s guide is also available.

In other words, the European Trade Commissioner has heard, and shares, many of the same concerns that TPP opponents have voiced about the foreign investment mechanisms contained in the TPP. Moreover, the EC has formally proposed a means to resolve them. So… why should New Zealand – which has two years to ratify the TPP – rush into (a) ratifying an ISDS process that the European Commission has deemed to be faulty and (b) where an alternative system that resolves many of its faults is in train and which (c) is very likely to be included in the next cab off the global trade rank : the TTIP. Surely, even Phil Goff can see the wisdom of holding fire, and implementing what Malmstrom is advocating.

If we want a TPP that is truly a high quality, comprehensive, 21st century deal the answer is obvious : we should wait for as long as is possible within the two year window open to us, and seek to incorporate the Investment Court System within it. ( Probably, the US Congress won’t be voting to ratify the TPP until 2017.) That wouldn’t make the TPP an ideal document, or even a very good deal for the wider public. But it would improve it, and it would help to remove one of the central, entirely valid public objections to it. At the very least, we should not be rushing into rubber-stamping a deal whose most contentious feature is outmoded and out of step with where trade policy is now headed, via the upcoming TTIP. In the meantime, Key and Joyce should stop badmouthing the New Zealanders who feel concerned about ISDS. Because it is Key and Joyce who are pushing an out-of-date measure that was never fit for purpose.

Throughout the debate on the TPP, there have been claims and counter claims about whether ISDS mechanisms do pose a threat to this nation’s sovereignty. Proponents point to previous trade deals containing ISDS provisions that have not – yet – resulted in threats to sovereignty. These ‘so far, so good’ responses are illogical – in that they don’t follow the same logic that we pursue in areas such as arms proliferation, where we pre-emptively try to minimise the dissemination of potential dangers, rather than waiting for them to blow up in our face before deciding to act.

In that respect, surprisingly little of the sovereignty debate on the TPP has mentioned the precedents that exist in ISDS case law, which give ample reason for concern about the ability of nation states to remain able to regulate in the public interest. The rest of this article will cite some of the relevant precedents.

1. Actions against government’s regulating for environmental reasons.

Example : Bilcon of Delaware Inc v Canada et al.

One of the most contentious areas of ISDS case law is the extent to which countries can be held liable after

(a) giving investors every indication that a project would be welcome and would proceed, but then

(b) backtracking after factors such as the environmental impact (and the political reactions to it) have been assessed. Ultimately, it all hinges on the extent to which the early representations made by the host state (or region) are deemed to have aroused ‘legitimate expectations’ among the investors that then qualify them for compensation if the project is subsequently quashed.

Obviously, countries (and needy regions) routinely make rosy overtures to investors before the full implications (and the environmental impacts and political blowback) of the project become known. Not all of these enticements render the host country legally liable. Yet one can readily imagine the likes of John Key or Murray McCully or Steven Joyce promising the moon to a wealthy prospective foreign investor in New Zealand’s oil exploration or mining sectors, and then ordering public servants to make it happen. Any rash promises (that the permit system will be no problem etc) can return to bite a host country, in court. Because under certain conditions, such enticements generate ‘legitimate expectations’ under the ‘fair and equitable treatment’ standard. The question becomes one of just how specific, and just how unambiguous those enticements must be in order to land the host country in multi-million dollar trouble.

The relevant cases here are Waste Management v United Mexican States, Parkerings-Compagniet AS v Republic of Lithuania, and Sampra Energy International v the Argentine Republic. In that last case, the ruling confirmed that the ‘ legitimate expectations’ rule applies ‘when the investment has been attracted and induced by means of assurances and representations.’ The 2015 case that put major heat on the TPP negotiators to reach a consensus wording about when and how ISDS provisions should apply was Bilcon v Canada, a case taken under the NAFTA trade deal. In a majority opinion delivered last March, the courts found that Canada had to pay compensation to US investors who had been planning to build a quarry in Nova Scotia – that is, until regional and federal panels vetoed the quarry on the grounds that it would damage the environment and would ‘breach core community values.’ A Toronto Globe and Mail article on the Bilcon case can be found here.

This ruling now lays Canada open to a $300 million damages suit. It came just one month after Canada was ordered to pay $US17.3 million in compensation to Exxon Mobil (and its joint partner) after an ISDS panel ruled that the provinces of Newfoundland and Labrador had violated NAFTA by imposing research requirements retro-actively onto offshore oil producers, as part of a benefits package to the local regions adjacent to where the oil was being extracted. Good law, or a case of ‘corporate bullying’ being richly rewarded?

As University of Vienna legal expert Stefan Dudas has pointed out, the Bilcon finding against Canada was all the more important given the ‘abundance’ of ISDS treaty disputes worldwide that are related to the mining sector. “ There are more than 130 cases registered with ICSID [World Bank}alone that deal with oil, gas and mining disputes, and broken promises by host state officials is a recurring issue.” The Bilcon firm successfully argued that Nova Scotia and Canada had shifted the goalposts on the environmental standards for the quarry after the company had responded to their welcoming noises, and Bilcon further alleged that this change of heart had been politically driven.

In his minority dissent, as reported in the Toronto Globe and Mail article cited above, University of Ottawa law professor Donald McRae counter-claimed that the Bilcon ruling represents a ‘significant intrusion’ into domestic jurisdiction, and would ‘create a chill’ among environmental review panels that will now be reluctant to rule against projects that would cause undue harm to the environment, or to human health.

Dudas, while sympathetic to the investors, reaches a not dissimilar conclusion about the Bilcon outcome :

[It] confirms that host State representations, assurances or promises aimed at persuading a specific investor to make an investment commitment may give rise to reasonable expectations that can result in, or at least serve as starting point for a breach of the international minimum standard of treatment if the State does not live up to its word….. While one may understand the desire of capital-importing states to attract foreign investments….a lesson to be learnt from past experience is that encouragements to invest by state officials should not be taken lightly, especially when environmental-law concerns are at stake.

So how does this relate to the TPP? Last September, the influential US Congressman Sander Levin wrote a well publicised memo seeking re-assurance that TPP negotiators would devise language to shut the stable door on the ISDS provisions, in order to ensure (a) that the Bilcon findings could not be repeated and (b) that the burden of proof was shifted onto the investor, by requiring them to prove that any damage done to their ‘realistic’ profit expectations had truly been due to ‘arbitrary’ changes of policy by the host country.

Unfortunately, such sensible safeguards have not been built into the final TPP text – and safeguards that were contained in a leaked 2012 TPP draft of the ISDS provisions have now been dropped. Certainly, some side issues have been addressed. Tobacco health policy by governments has been exempted from ISDS challenge, and frivolous suits will be harder to bring – yet the ambit of what can be subject to ISDS challenge has actually been expanded. Financial regulation will now be subject to ISDS. This means that – for example – the government’s discretion to regulate the marketing of the kind of toxic instruments that created the GFC only six years ago, will henceforth be liable to ISDS challenge. Also, under the finalized TPP, the World Trade Organization rules on the creation, limitation or revocation of intellectual property rights will be ISDS-actionable. Before now, this wasn’t the case.

The list goes on…under the final TPP text, no requirement has been placed on disgruntled foreign investors to first seek redress in the New Zealand courts before launching their ISDS actions. As a consequence, foreign firms will be free to bypassd our courts and shop around overseas for an ISDS tribunal with a track record of sympathy for their grievances. Even when governments win, they will remain be liable for ISDS tribunal costs, which as Public Citizen has pointed out, currently average around $US8 million per case. Crucially, the burden of proof in ISDS cases has not been shifted in line with the Levin memo.

It is easy to see why multinational corporations – having just had their powers to challenge, punish and intimidate sovereign governments via the ISDS tribunals whose reach has just expanded by the TPP – would be hostile to the more impartial and more transparent judicial system that Malmstrom and the European Commission is proposing to replace the ISDS tribunals. Obviously, any future court cannot allow itself to be shackled by the narrow and flawed precedents set by that system.

In the coming weeks and months, John Key and his fellow travellers (eg, Phil Goff ) should explain why they would want to rush to ratify the TPP and the ISDS provisions it contains, when a fairer system that’s better able to allay public fears, is already waiting in the wings.

Footnote : Here are some other cases that illustrate how the ISDS procedures pose a genuine risk to the sovereign right of governments to rule in the public good. Much of this subsequent information comes from Pia Eberhardt’s July 2014 report “Investment Protection At A Crossroads” published by Friedrich Ebert Stiftung, a think tank associated with the Social Democratic Party (SPD). Since December 2013, the SPD has been part of a grand coalition led by Angela Merkel. Where I can, I’ve updated Eberhardt’s paper.

1. ISDS actions against governments seeking to phase out nuclear plants. Example : Vattenfall v. Germany (II):

Aberhardt’s precis : ‘Since 2012, the Swedish power company Vattenfall has been suing the German government on the basis of investment protection rules in the multilateral Energy Charter Treaty. Vattenfall wants over 3.7 billion euros in compensation for the decommissioning of the Krümmel and Brunsbuttel nuclear power plants in the context of the German nuclear phase-out following the Fukushima disaster. Both of these fault-prone reactors were already offline when the German parliament passed the law to phase out nuclear power.’

My footnote : a previous case brought against Germany by Vattenfall was settled via an agreement by the Germans to water down their environmental permit system, in favour of the corporation. The settlement of this previous Vattenfall case is summarised here:

The Vattenfall I Dispute Case (2009–2011) Regarding Environmental Regulations Applying to the Coal-Fired Power Plant Hamburg-Moorburg In 2009, the company Vattenfall filed its first complaint against the German federal government with the ICSID in Washington, D.C. This was the first (known) investor-state arbitration procedure against Germany. At issue in that case was the construction of a new coal-fired power plant in Hamburg-Moorburg, situated on the River Elbe. The Hamburg Environmental Authority had issued a licence imposing water quality standards, which, according to Vattenfall, made the whole investment project “unviable.“ The corporation argued that the environmental permit violated the provisions set out in Part 3 of the Energy Charter Treaty regarding the promotion and protection of investments and proceeded to file a compensation claim against Germany of about €1.4 billion, plus arbitration costs and interest. The dispute between Germany and Vattenfall was settled in the spring of 2011, with Germany agreeing to a watered down environmental permit in favour of the corporation.

It should be noted that this watering down of government regulation occurred even though the claim that Vattenfall had suffered damage had been rejected by the ISDS panel.

2.ISDS actions against governments seeking to regulate to limit the environmental damage caused by fracking

Example : Lone Pine v. Canada:

Aberhardt summary : ‘The oil and gas company Lone Pine has been suing Canada since 2012 for $250 million in Canadian dollars in damages. Because of the danger of environmental destruction posed by fracking, the province of Quebec issued a moratorium on the controversial deep drilling technique and in this context revoked a number of drilling licenses. Lone Pine is headquartered in Canada, but it is suing the country through a letterbox company in the US tax haven of Delaware based on the investment protection provisions in the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico.

My footnote : this case seems to be ongoing. This confidentiality order issued in March 2015 and the subsequent redactions perfectly illustrate the difficulty in the public gaining any transparency about the ISDS tribunal procedures, even though the public may end up footing the bill.

3, ISDS actions against governments seeking to regulate to ensure water protection

Example : – Pacific Rim v. El Salvador:

Aberhardt : ‘Since 2009, the mining company Pacific Rim has been conducting a lawsuit against a mining moratorium in El Salvador based on the investment protection rules in the Central America Free Trade Agreement (CAFTA) between the United States and several Central American countries. The moratorium was imposed following massive popular protests against environmental destruction and water pollution from mining activities. Because Pacific Rim cannot open its planned gold mine »El Dorado« as a result, the corporation wants 301 million US dollars in compensation for the loss of the expected profits, hence about 1 per cent of the gross domestic product of the country. Pacific Rim is headquartered in Canada (which is not a party to CAFTA) and is conducting its action through a subsidiary in the US state of Nevada.’

My footnote : a January 2016 Counterpunch article on the fracking/water protection issues in North America with respect to ISDS can be found here.

4. ISDS actions to limit corporations having to pay compensation for environmental crimes

Example : Chevron v. Ecuador:

Eberhardt : “Since 2009, the US multinational oil company Chevron has been suing Ecuador on the basis of the United States-Ecuador investment agreement, because it had been sentenced by Ecuadorian courts to pay 9.5 billion US dollars in compensation to indigenous communities for massive environmental pollution – wrongly, according to Chevron. To date, the three-man tribunal which is hearing the case has found in favour of the corporation and has called upon the government of Ecuador not to carry out the sentence. The fact that Ecuador has rejected this by appeal to the separation of powers in its constitution is now being interpreted by Chevron as a violation of the standard of »fair and equitable negotiation« in investment law – for which Chevron is in turn seeking compensation.”

My footnote. On January 20, 2016, a District Court of Justice panel in the Hague found in favour of Chevron on its counterclaim for a $106 million arbitration award against Ecuador. The International Court has not yet ruled on the central $9.5 billion claim. Ecuador is appealing the arbitration decision.

Clearly, this case should be special interest to Maori in their role as kaitiaki over customary rights, in the event of an oil spill. Ecuador is not only being denied compensation for the pollution damage that its indigenous communities have suffered at the hands of Big Oil, but it has been successfully counter-sued by Chevron for the way it went about bringing its suit.

5.ISDS actions against governments trying to regulate to protect their banking systems.

Example : Poštová Banka & Istro-kapital v. Greece:

Eberhardt : “The Slovak Poštová Banka and its Cypriot shareholder Istrokapital have been suing Greece since 2013 on account of the haircut on the country’s sovereign debt. In 2010, Poštová Banka had bought Greek government bonds at a knockdown price. When Greece was negotiating a reduction of the debts with its creditors two years later, the bank opposed the haircut. The legal basis for the action is provided by bilateral investment agreements between Greece and Slovakia and between Greece and Cyprus. The level of damages demanded is not known.”

My footnote : In mid 2015, a court ruling found in favour of Greece, in a ruling that largely turned on the different treatment of loans and bonds under the relevant treaties.

Again, this ruling should be of interest to New Zealand, given the widening of the TPP’s ambit to include financial regulation.

6.ISDS actions to prevent governments from regulating to raise the minimum wage

Example : Veolia v. Egypt:

Eberhardt summary : “Since 2012, the French utility company Veolia has been suing Egypt based on the bilateral investment agreement between France and Egypt for an alleged breach of a contract for waste disposal in the city of Alexandria. The city had refused to make changes to the contract which Veolia wanted in order to meet higher costs – in part due to the introduction of a minimum wage. In addition, according to Veolia, the local police had failed to prevent the massive theft of dustbins by the local population. According to media reports, Veolia wants 82 million euros in compensation.

My footnote : as far as I can tell, this case is still pending. But there is a more extensive account of the case – and that is more sympathetic to Veolia – available here.

7. ISDS actions to prevent governments acting reverse the illegal privatisation of state assets Example : – Indorama v. Egypt:

Eberhardt summary : “Since 2011, the Indonesian textile group Indorama has been suing Egypt because an Egyptian court ordered the re-nationalization of a textile factory that had been privatized – according to the court, unlawfully – under the Mubarak regime. The judgement had been preceded by a strike and occupations by textile workers calling for the re-nationalization of the company and for better working conditions and wages. (Perry 2011)

My footnote : this case was finally settled in July 2015. The company claimed $150 million as compensation; the settlement awarded them $55 million.

8. ISDS actions to prevent governments from regulating to ensure cheaper medicines.

Example : Eli Lilly v. Canada:

Eberhardt : “The US pharmaceutical company Eli Lilly has been conducting an action since 2013 against Canada’s patent law on the basis of the investor protection in NAFTA, because Canadian courts had declared two of its patents on medicines void. The patents for Strattera to treat attention deficit and hyperactivity disorder and Zyprexa to treat schizophrenia were revoked because the promised benefit had not been adequately demonstrated in a short test phase with a small number of test persons. Eli Lilly wants 500 million US dollars in compensation and is also attacking Canadian patent law, according to which a patent is granted only if the promised benefits of an invention can be adequately proven at the time of the patent application.

My footnote : the progress of this case can be followed here.

The latest manoeuvre – a belated jurisdictional challenge – suggests that Canada is running out of options to avoid another defeat under NAFTA.

9. ISDS actions to prevent governments from regulating in favour of environmental protection – Example : Renco v. Peru:

Eberhardt : “ Because the mining company Doe Run had not satisfied the promised environmental protection measures at a metal smelting plant in the town of La Oroya in the Peruvian Andes, the government revoked its operating licence. As a result, the corporation has been conducting a lawsuit since 2011 based on the bilateral United States-Peru free trade agreement through its US parent, the Renco Group, for 800 million US dollars in damages. Environmental organizations have repeatedly declared La Oroya to be one of the most polluted places in the world…”

My footnote: the outcome in this case seems to be still pending.