Law Speak - ISDS awards are no small matter

"NEGOTIATE for better terms" (Letters, Nov 19) raises several points in reference to my article, "TPPA, the rakyat and democracy" (Law Speak, Nov 2). Particularly targeted is my concern of the ISDS – the investor state dispute settlement provision in the TPPA. Let me deal with the main points raised.
ISDS as a form of dispute resolution has been around for some time, particularly in international trade agreements
Yes, this is true. Indeed it appears in several international investment treaties, perhaps more than 3,000. But it has been heavily criticised. Why? Because experience with the way these clauses have been interpreted shows its deleterious effects on the country sued and its citizenry. As recently as June this year a UN experts group concluded that "the experience of decades related arbitrations conducted before ISDS tribunals … demonstrates that the regulatory function of many states and their ability to legislate in the public interest have been put at risk".
Look at the examples – to pick a few: Germany had to dilute its environmental standards in the face of a US$2 billion action against it by a Swedish energy giant restricting the use and discharge of cooling water for a coal-fired plant on the banks of River Elbe, with disastrous impacts on the river and its wildlife. The same company also launched a US$4.6 billion action when Germany phased out nuclear power plants following the Fukushima disaster. Argentina had to pay over a billion US dollars in compensation to international utility companies – for freezing the high energy and water bills to protect its people.
You see, the point is that the reach of the TPPA for which a government can be sued is extraordinarily far reaching. A foreign (and not a local – so much for fairness!) company can sue if its investment is not only directly, but indirectly, affected. This stretches way beyond the usual taking away of a company's physical assets. The mere adverse effect on the economic value of an asset suffices to ground a claim – even if the physical investment is intact. It is wrongful to even impair a foreign corporation's expectation of profits.
So if a government wants to increase the minimum monthly wage of workers in the country, it has to think twice because it could be sued for affecting the company's labour costs and reduce its projected profits (Egypt was sued by a French multinational for doing precisely this); or to change the law out of adverse environmental concerns (a multinational is suing Ecuador for action related to the massive contamination of the Amazon). Australia is being ISDS-sued by a tobacco giant for introducing plain packaging laws for cigarettes as a health measure recommended by the World Health Organisation.
The amounts being sued for, and awarded, run into millions if not billions. Ecuador is still paying off the US$2 billion awarded against it in an ISDS suit. A UN experts group decries that the ISDS problem has been aggravated by the "chilling effect" that intrusive awards have had, when States have been penalised for adopting regulations for example to protect the environment, food security, access to generic and essential medicines, and reduction of smoking or raising the minimum wage.
A suit can also be brought for a violation of the TPPA's minimum standards and the fair and equitable treatment (FET) provisions. "Reasonable expectations" of the FET' requirement under the US-Ecuador bilateral investment treaty was adjudicated as "an obligation not to alter the legal and business environment in which the investment is made". A company refused permission to expand a quarry for environmental reasons was held not to receive FET in a case brought by Bilcon against Canada. So its wide interpretation is what makes it particularly threatening. Bilcon is now seeking US$300 million in damages. The most successful investor claims (74%) are based on violation of the minimum standard and FET.
International treaty obligations
It is true that a country subscribing to an international treaty must then bring its laws in line with its international obligations. So we become a party to a convention and then introduce new, or change existing, laws.
But an ISDS award may be such that a government is effectively required to abandon or change its laws or regulations. And pay out billions. (Their awards can bankrupt or cripple a country – the highest against Russia for US$50 billion.) All this based on what an ad hoc three-member arbitration panel decides. The ISDS gives this panel the power to review all actions of government, all decisions of the courts and all laws and regulations passed by an elected Parliament. Without any restriction; nor appeal procedure.
A dissenting member of the arbitration panel in the Bilcon case warned that the ruling in that case represents a "significant intrusion" into domestic jurisdiction" and will "create a chill" to thwart governmental action against projects that would cause undue harm to the environment or human health.
Safeguards of the process
The letter touts the safeguards of the ISDS process. Let's examine these.
Listed are such matters as: need to consult and mediate before filing a claim; claimant must prove the losses claimed; the claimant can preliminarily object to frivolous claims; and a limitation period of three and a half years to bring an action. These are safeguards? These procedural rules exist in just about every – even nascent – justice system in the world. They are preliminary to an action being brought.
What the letter studiously avoids is an assessment of the ISDS as a systemic innovation destined to virtually replace an entire judicial system with regard to a broad range of social, economic and legal matters with wide implications for a country, its institutions and people. The chief justice of Australia, Robert French 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".
The letter also fails to assess the make-up of the panel, its decision-making process and its reach. Three private lawyers are appointed – one each by the parties and a third chosen by both the appointees. The lawyers are private sector lawyers not accountable to anyone. It is well-known that a high percentage act today for a corporation, and tomorrow sit as arbitrators deciding a case – a veritable "revolving door".
A 2012 study published by Corporate Europe Observatory and Transnational Institute states that just 15 arbitrators, nearly all from Europe, the US or Canada, have decided 55% of all known investment-treaty disputes. This small group of lawyers sit on the same arbitration panels, act as both arbitrators and counsels and even call on each other as witnesses in arbitration cases. Their fees runs into millions.
This patent conflict of interest infects the adjudication process providing an incentive for them to rule for the corporations if they want to continue to get lucrative corporate business; and, perhaps, explains some of the startling "creative" decisions.
Elementary ethical and conflict rules – required for even small-time professional bodies – are non-existent. Is this the hallmark of "neutrality" the letter advocates?
The TPPA's investment chapter states a commitment to "provide guidance" on "a future voluntary code of conduct for arbitrators". Are these vacuous phrases the basis which inspired the letter to propose that we should now "argue for clearer and fairer conditions for the use" of the ISDS – especially well after the mould of the TPPA's ISDS has been firmly cast?
So, criticisms of the ISDS are grounded, not in the fact that it is an "intrinsic evil", as alleged, but for the several reasons adumbrated – none of which the letter directly addresses.
Gurdial is professor at the Law Faculty, University of Malaya. Comments: letters@thesundaily.com