If the Trans-Pacific Partnership becomes an Agreement, New Zealand will become bound by a set of "Investor State Dispute Settlement" procedures. What are these, and why should anyone care?

I write this not knowing whether the Trans-Pacific Partnership will become an Agreement or merely a very long, stressful yet ultimately fruitless set of negotiations. I also write this with an admitted lack of expertise in the issue of international trade and economics. So I simply don't know whether the rosy promises about the TPP (maybe A) providing a real bump in economic growth are true. 

However, I do know a little bit about constitutional law and theory - that is, the sort of issues that arise when we ask how do, and should, we govern ourselves as a nation. It's in that capacity that I want to say a few things about the TPP (maybe A) and in particular the apparent inclusion in it of "Investor State Dispute Settlement" (ISDS) procedures.

(A quick note here. As with anything to do with international law, acronyms proliferate in discussions about the TTP (maybe A). Sorry about that!)

So, what on earth is an "ISDS procedure" when it's at home? Here's how the European Union describes it:

ISDS is a procedural mechanism provided for in international agreements on investment. Countries sign such agreements in order to set out ground rules when foreign companies invest on their territory, for example by building factories. ISDS allows an investor from one country to bring a case directly against the country in which they have invested before an arbitration tribunal.

In order to bring a case, an investor must claim that the Party has breached rules set out in the agreement. For example, an investment agreement will often say that a government can only take over or 'expropriate' (for example, nationalise) an investment if it pays adequate compensation to the investor.

If a country seizes an investment or passes new laws which make it worthless (for example, it suddenly bans a product produced in a factory owned by a foreign investor) and pays insufficient compensation, or none at all, the investor could use ISDS to bring a claim directly against that country, claiming a breach of the expropriation provision in the agreement and seeking compensation. 

That sounds relatively benign. It's just a way that countries can be kept to their promises to investors from other countries. The only time that an ISDS procedure would become an issue for New Zealand is if we go back on our word as given in the TPP (maybe A) and mistreat some investor from another country - which isn't something that a nice, orderly nation like New Zealand is likely to do!

That's certainly the message the New Zealand Institute of Economic Research provided to ExportNZ last month, when it produced a report that lead ExportNZ's Executive Director, Catherine Beard, to claim:

Arbitration is usually only needed in the case of rogue decisions by unpredictable governments. ISDS arbitration is primarily designed to stop extreme actions such as illegally confiscating or nationalising business assets.  New Zealand is not an extreme government.  We have good rule of law, strong institutions, a global reputation for fairness and lack of corruption and a strong interest in encouraging foreign investment. These factors combined mean New Zealand is unlikely to be targeted in investor-state disputes.

 (You can read the whole NZIER report here.)

It's also a message that John Key has repeated on a number of occasions in the House and elsewhere, to the effect that NZ has signed up to a whole range of these ISDS procedures with a bunch of countries over the years without ever having had an action brought against us under one. So if NZ now agrees to be bound by another ISDS provision under the TPP (maybe A), it's hardly adding anything new to the mix.

Except ... maybe not. Because there is perhaps a bit more to the picture than that.

For one thing, it is misleading to imply that existing ISDS provisions haven't had any impact on NZ's laws and policies. The Smoke-free Environments (Tobacco Plain Packaging) Amendment Bill currently is sitting on the House of Representative's Order Paper awaiting the outcome of an action brought against Australia by the Philip Morris cigarette company under an ISDS procedure. The Government specifically has stated that it will not enact this measure until it sees the outcome of that (and other) action - because if it passes the law and Philp Morris wins its ISDS claim, then NZ too will be vulnerable to a similar ISDS action. And we don't want to have to pay millions and millions of dollars in order to be allowed to take logos off cigarette packages.

So the question isn't just whether we've done something that attracts an ISDS challenge. It's also what have we not done out of fear that the procedure might be used against us. And, what might we not do in the future?

Furthermore, there's a fair amount of examples of successful actions being brought under ISDS provisions against other countries that have "good rule of law, strong institutions, a global reputation for fairness and lack of corruption and a strong interest in encouraging foreign investment." In a speech given late last year, the Chief Justice of Australia outlined some of them:

A quarter of all the arbitrations commenced in 2013 involved challenges to regulatory action by the Czech Republic and Spain affecting the interests of the providers of renewable energy. Environmental laws in Canada were also the subject of ISDS processes. Lone Pine Resources Inc instituted a claim against Canada last year in response to a moratorium imposed by Quebec on hydraulic fracturing (fracking), which led to revocation of the claimant's gas exploration permits. Windstream Energy LLC instituted a claim against Canada on the basis of a moratorium imposed by Ontario on offshore wind farms. The Swedish company, Vattenfall, is suing Germany under the Energy Charter Treaty over Germany's decision to phase out nuclear energy power plants.

These don't really sound like "extreme actions such as illegally confiscating or nationalising business assets". And what is more, as the Chief Justice goes on to discuss, these ISDS provisions can kick in even if a nation's courts already have found that the Government's actions are consistent with domestic law. In other words, they operate as a guarantee for the interests of international investors that is above and beyond anything available to domestic citizens or companies.

But still, overseas investment is good, right? And if (as the EU claims) we're only talking about protecting situations where "foreign companies invest [in our] territory, for example by building factories", then how much of an issue can it be?

Well, I've been lucky enough this year to have a very good student (hat tip Oliver Hailes!) who has just completed his LLB Hons thesis examining the wider constitutional implications of entering into the TPP (maybe A). With his permission, I'll quote some of his thinking on the matter:

Article 18 of the draft [TPP] text allows investors to file proceedings in a number of fora. The tribunal would comprise three arbitrators, one appointed by each of the disputing parties and a third presiding arbitrator appointed by agreement. Such tribunals are furnished with unlimited discretion to award monetary damages, restitution of property, as well as costs and attorneys’ fees. Moreover, the TPPA does not permit appeals from arbitral decisions. These ISDS provisions would apply to all states, with the possible exception of Australia, thereby carving open pathways for a swarm of new investors. The definition of “investor” covers anyone that “attempts to make, is making, or has made an investment” in a host state. “Investment” extends far beyond real property to include:

"… 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."

The draft text provides a number of examples: regulatory permits, intellectual property rights, financial instruments such as stocks and derivatives, “construction, management, production, concession, revenue-sharing, and other similar contracts,” and “licenses, authorizations, permits, and similar rights conferred pursuant to domestic law.”

So when we say that "foreign investment" will be protected by the TPP (maybe A)'s ISDS procedure, we most certainly aren't just talking about overseas companies building factories in NZ. The scope of their protected interests will go far, far wider than this - meaning that NZ Government decisions that impact on those interests will potentially be open to ISDS challenge. And what is more, the claim that because past ISDS procedures haven't been used against New Zealand, future such processes also won't be used is a bit questionable. As Oliver notes:

These expansive definitions become problematic when we consider the qualitative and quantitative differences between TPPA parties and earlier commitments. New Zealand is bound by ISDS clauses contained in agreements with China, South Korea, Malaysia, the Association of Southeast Asian Nations and Australia, Singapore,Thailand, and Hong Kong. By virtue of the TPPA, New Zealand would be notably exposed to investors based in the U.S. It is well reported that the U.S. is the most frequent home state of claimants under ISDS provisions. As at the end of 2014, approximately 130 claims had been initiated by U.S. investors, nearly twice as many as the second most litigious state. This statistic suggests the unparalleled resources enjoyed by U.S. investors would be readily deployed to secure a liberalised market across the Pacific.

So here's my thoughts. I have real concerns about the potential for this ISDS process to straitjacket future Government actions (including actions taken by Parliament after MPs are elected on an express promise to carry it out). That's because, once the ISDS procedures are in place, there will be very smart, well paid people whose job it is to make use of them to benefit the companies that pay their bills. And in spite of the reassurances currently being given, the ISDS procedures (and the TPP (maybe A) that they are a part of) of necessity contain a lot of vagueness that will be left to be clarified by future actions. So no-one, and I mean no-one, really knows how the agreement actually will play out in the future - because until that future happens, we won't know what sort of clever arguments and applications will get dreamed up for using them.

(Case in point - you think that when Australia agreed back in 1993 to put a ISDS procedure in its bilateral investment agreement with Hong Kong it ever thought "this might mean we one day have to pay a tobacco company hundreds of millions of dollars because we tried to stop people from starting to smoke?")

Which means that if we sign up to the TPPA (assuming the "A" becomes a reality), we are going to change how our country is run into something else. Maybe that change really won't be a big deal - maybe ExportNZ and John Key are right to say that ISDS's are not a problem for us. Or maybe it will be a big deal - maybe we will find ourselves reasonably frequently hanging on the decision of three private individuals who are deciding if we are allowed to have a policy in place without having to pay many millions of dollars to an overseas company. 

But you know what? I don't think anyone - and that includes the people currently negotiating the TPP - really knows either. Which worries me. Quite a bit.

Comments (10)

by Chris Webster on October 05, 2015
Chris Webster

Kia ora Andrew.

AMINZ released this statement today - excellent timing - which may add to the  discussions & aid our further learning on this TPP business - the full details of which we will not actually find out for 4 years..

Q: What is investor state arbitration or investor state dispute settlement?

A: Investor state arbitration or investor state dispute settlement (ISDS) is a process that gives an investor ‘a business’ the right to sue a foreign government for violating its rights. The process used is arbitration.

Q: Has NZ ever been sued by way of an agreement that includes an investor state arbitration clause?

A: No.

Does that mean we are safe?

http://www.scoop.co.nz/stories/PO1510/S00076/investor-state-arbitration-and-the-tppa.htm

by Megan Pledger on October 05, 2015
Megan Pledger

If we sign and we find out that it gives us a bum deal, can we get out of it?

 

by Murray Grimwood on October 06, 2015
Murray Grimwood

Megan - that's the only question. The answer has to be 'yes'.

At the end of the day, the only ways corporates can overrule national governance - and this is what these agreement are ALL about - are corruption and/or force. Bribery and/or guns.

You can secede, but expect to live under permanent threat and ostracism thereafter.

This is a play by the powerful, for 'what's left' of planetary resources and opportunities. A no-limit game where the highest bidder can bluff the others every time. It will go until they realise they've fed the card-table through the fireplace in an effort to stave off the cold. In short, their system is only about piling up proxy while it ignores externalities.

That they needed to go there at all, suggests the Limits to Growth constraints are starting to bite. Exponential rate-of-change will do the rest; this is a short-term party.

We have to look ahead now - beyond the collapse of the system this agreement parasites upon, the one in permanent trouble now (TPP is a symptom, the same way Climate Change is a symptom). We need new leadership waiting in the wings with new answers.

by mikesh on October 06, 2015
mikesh

Presumably the provisions would also apply in respect of investments made before the agreement was signed.

by gregfullmoon on October 06, 2015
gregfullmoon

Thanks Andrew for a balanced and reasoned piece on ISDS. We in NZ suffer the chilling effect as you identify in respect to the Australian plain packaging dispute with Philip Morris Tobacco.

Chris the AMINZ Scoop piece appears to me self serving. There are a number of reports that point to the collusion and trough feeding of international arbitrators, Profiting from Injustice and Mining for Profits are but two reports highlighting the problems with ISDS:

https://www.tni.org/en/briefing/profiting-injustice

http://www.ips-dc.org/mining_for_profits_update2013/

Yes Mikesh the TPP ISDS provisions would apply to all covered investments regardless of when they were made.

The whole thing is all the more serious now as we contemplate a Multilateral Agreement as settlement arising from the Paris COP21 climate change conference in December 2015.

On the question of environmental protection, no mention is made of climate change mitigation. This is ludicrous in a supposed 'Gold Standard' agreement for the 21st Century, especially one being negotiated at this point in history very near the December 2015 Paris COP21 meeting.

The public and health industry concern at the rapacious behaviour of Big Tobacco has apparently forced the negotiators hands to allow a carve out of plain packaging tobacco products legislation, from attack through the Investor State Dispute Settlement (ISDS) clause of the Investment Chapter. What similar protection is offered the 12 nations Government's from the equally rapacious fossil fuel corporations, in respect to measures to mitigate climate change, which might affect their profitability?

In relation to the new renewable energy economy that we all desire - what protections are provided to ensure that proactive government action to support renewable energy developments, are not to suffer from mendacious disputation by corporations arguing against government subsidy?

And notwithstanding anything Murray says about the gloomier future pressing in, any chance at a resilient future will be be a major victim of a bad case TPP.

Absent NZ and Global government will to regulate, climate change mitigation is doomed.

Our agricultural produce economy relies on predictable weather and climatic conditions. Sell out to big corps exacerbates problems down the track and look to the track record!

Adaption to changing climate absent mitigation, spells ongoing costly disaster management, with its associated upsets, fatalities and losses.

Absent the elimination of ISDS provisions altogether, this article raises the concern:  http://canadians.org/isds-climate-change

'Corporations have used ISDS to challenge governments over 600 times, and in numerous cases these challenges are clearly related to health or environmental decisions by governments'.

The report, An ISDS Carve-Out to Support Action on Climate Change, is offered to governments and negotiators as a way to resolve this conflict. In it, Gus Van Harten, Osgoode Hall professor, legal scholar and internationally recognized authority on investment law, outlines how a multilateral agreement on climate change could include a safeguard against the risk of ISDS lawsuits that target climate change action by governments.

Would the NZ Government support such a carve out?

Is this a credible fall back given the ISDS position taken in TPP and proposed in the TTIP and TISA. We are making a big rod for our backs.

The TPP is all about corporate rights to the detriment of human rights.

Most recently the UN's Special Investigator for Human Rights Alfred de Zayas, made a report on the 17th September to The United Nation's Commission on Human Rights (UNCHR) recommending the rejection of investor state dispute settlement (ISDS) arbitration tribunals as an anathema to states' human rights commitments. This ought inform any state who wish to maintain human rights standing. From the links below:

Report of the United Nations Independent Expert Alfred de Zayas today urged the UN system and Governments across the world to radically reform the international investment regime by putting an end to free trade and investment agreements that conflict with human rights treaty obligations. In his full-length report* to the Human Rights Council, he also called on States “to conduct human rights, health and environmental impact assessments before and after entering into bilateral and multilateral investment agreements.”

“Over the past decades free trade and investment agreements have had adverse impacts on the enjoyment of human rights by interfering with the State’s fundamental functions to legislate in the public interest and regulate fiscal, budgetary, labour, health and environmental policies,” said Mr. de Zayas, the first UN Independent Expert on the promotion of a democratic and equitable international order”

http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=16439&L...

Full report: http://www.ohchr.org/EN/HRBodies/HRC/RegularSessions/Session30/Documents...

All this in the context of the 70th session of the UN and its 2030 Development Goals, to which all the TPP nations signed on only last month:

https://sustainabledevelopment.un.org/post2015/transformingourworld

Which say:

The Goals and targets will stimulate action over the next fifteen years in areas of critical importance for humanity and the planet:

People

We are determined to end poverty and hunger, in all their forms and dimensions, and to ensure that all human beings can fulfill their potential in dignity and equality and in a healthy environment.

Planet

We are determined to protect the planet from degradation, including through sustainable consumption and production, sustainably managing its natural resources and taking urgent action on climate change, so that it can support the needs of the present and future generations.

Prosperity

We are determined to ensure that all human beings can enjoy prosperous and fulfilling lives and that economic, social and technological progress occurs in harmony with nature.

Peace

We are determined to foster peaceful, just and inclusive societies which are free from fear and violence. There can be no sustainable development without peace and no peace without sustainable development.

Partnership

We are determined to mobilize the means required to implement this Agenda through a revitalised Global Partnership for Sustainable Development, based on a spirit of strengthened global solidarity, focussed in particular on the needs of the poorest and most vulnerable and with the participation of all countries, all stakeholders and all people.

Perhaps someone is playing a trick on us?

by Nick Gibbs on October 06, 2015
Nick Gibbs

"But you know what? I don't think anyone - and that includes the people currently negotiating the TPP - really knows either. Which worries me. Quite a bit."

Still I bet you sleep soundly tonight even with the TTPA hanging over our heads. It will be interesting to see if Labour can back this, especially as Pharmac has been saved. I hope they decide to support it.

by Andrew Geddis on October 06, 2015
Andrew Geddis

Still I bet you sleep soundly tonight even with the TTPA hanging over our heads.

Yes. 12-year-old Highland Park has that effect.

by Shaun on October 06, 2015
Shaun

A legitimate criticism of the ISDS provisions is their contemporary purpose, in contrast to why they were originally formed.  Under the TPP, they are likely to be used to intimidate governments away from legislation that threatens the investor's commercial interests (for example, as explained in this article):

http://www.nytimes.com/2015/07/01/business/international/us-chamber-work...

Even with the news that tobacco will be carved out of the TPP, removing the rights of the industry to sue governments, it still doesn't account for the other examples given as reasons for opposing the agreement, and the role these interests had in promoting the Trade Promotion Authority in the first place.  

It will be interesting to see how Congress representatives who received Chamber of Commerce money to fast-track Trade Promotion Authority now respond when the TPP is voted on.  For the sake of these other issues, it would be great if they withdraw their support. 

Even if TPP survives, it doesn't remove the threat of those creative lawyers who will find avenues for legal action, and the nature of the offshore tribunals provides little comfort.   This is a point made by a submitter to the Australian Senate, and also in an NGO forum:

https://www.youtube.com/watch?v=i4-AkFPsBVo
https://www.youtube.com/watch?v=HEk6jJIjPsI

You mention the Australian Chief Justice, who has voiced concerns over how domestic law would relate to ISDS procedures.  One important question: why is ISDS required if investors can have recourse through established legal frameworks?  

For example: the Australian High Court 2012 ruling on plain packaging that Mr Key hardly seems to have acknowledged.  His assurances at the weekend about NZ never being sued under previous agreements surely mean he would enact this legislation without waiting for the outcome of the later case against Australia.

 

by Nick Gibbs on October 06, 2015
Nick Gibbs

@ Andrew,

"12-year-old Highland Park has that effect."

Sláinte.

by David Crosswell on October 07, 2015
David Crosswell

I'm afraid it means a little more than that.

The current Philip Morris action against the Australian government is fighting to negate the plain packaging law that the Australian government passed in order to effect positive effect within the Australian social context, especially in regard to limiting potential for young people in picking up the smoking habit.

So, what we have is the attempt to negate the authority of government to pass legislation, protecting the health of the people that elected them into office to perform that very function: a negation of sovereignty.

There is much more to this deal than meets the eye, what very little of it does meet the eye, but for mine, when only 5 chapters out of 29 deal with trade, I wouldn't call that a trade deal.

It will take a while for the worms to work their way out of the woodwork with this one, I predict, but when they do, they'll be singularly unpleasant ones.

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