Law Speak - A ‘toxic’ clause to note

BIG Tobacco companies are up in arms – against a government no less. The Australian government had the audacity to introduce a law requiring tobacco companies to use plain-packaging for their cigarette packs. No brands. No ads.

British American Tobacco of Dunhill fame filed an action against the Australian government on the very day the law was passed. Followed closely by Imperial Tobacco (think ‘Peter Stuyvesant’) and Japan Tobacco International.

This was “trying to acquire our valuable intellectual property without compensation” – they complained. The Australian High Court ruled that there was no such acquisition of property for the Australian government’s benefit – and dismissed the action.

The Australian government was in fact implementing one of the recommendations of the World Health Organisation to battle addiction to smoking. The substance was killing some 15,000 of its people every year. The president of the Australian Council on Smoking and Health hailed the court decision as “a massive win for public health”.

It was the first country in the world to introduce this kind of law.

And Big Tobacco could not let this happen to its corporate profits.

Already it had taken legal action against a third world country, Uruguay, for US$25 million in lost revenues because of strict tobacco restrictions requiring health warnings on a large part of the packets, and restricting sale to only one brand variety. Other tobacco giants made similar complaints against other countries such as Norway.

So Big Tobacco got together and initiated action at the international level – to prevent the Australian government from continuing with this law.

On the very day the Australian court announced its decision Philip Morris sued the Australian government using an obscure 1993 Hong Kong-Australia investment treaty. A provision in the treaty allowed companies in these countries to sue a government for harm to their investment.

Philip Morris is a US-based company. It could not sue under the US-Australia Free Trade Agreement because there is no “investor can sue” clause (or the “investor-state dispute settlement” clause). Public opposition kept it out of the agreement.

So Philip Morris rearranged its assets and registered as a Hong Kong investor. It filed the suit – which is pending.

What is the relevance of all this to Malaysia?

Well, we are negotiating a free trade agreement: the Trans-Pacific Partnership Agreement (TPPA). It is promoted by the US. The other countries include Australia, New Zealand, and five other Asia-Pacific countries bordering the Pacific Ocean. Rumour has it that the US is adamant that a similar provision must be in the treaty – allowing the investor the right to sue the government if its investment is “harmed”.

The negotiations are shrouded in secrecy. Negotiators, and even the public invited to “town hall” meetings, have to sign a non-disclosure agreement. If they disclose the contents they are liable to be proceeded against.

Global corporations are insisting that such a provision be embedded in trade treaties. And experience teaches that they usually get their way.

Now, the upshot is that if there is such a clause in the TPPA that Malaysia signs, then we can end up in the same hot pot. For taking any measures to protect our peoples’ health, ensure a safe environment and such like.

Our case will be decided by an international arbitration panel comprising a group of largely foreign lawyers who alternate between being “judges” in the dispute as well as advisers in trade matters to governments.

Three top law firms – Freshfields (UK), White & Case (US) and King & Spalding (US) – dominate handling 130 investment treaties in 2011 alone. Just 15 arbitrators nearly all from the North have decided 55% of all known investment treaty disputes.

Incidentally, the tobacco giants also funded Ukraine, Honduras, and the Dominican Republic to file a complaint against Australia in the WTO for violating the TRIPS (Trade-Related Intellectual Property Rights) Agreement. The cases have yet to be heard.

Let’s see what happened in another developing country: Ecuador. This time the Big Oil boys were involved – Chevron, which bought over the Texaco oil giant. For 26 years, Texaco’s oil drilling operations dumped billions of gallons of toxic water and dug hundreds of open-air oil sludge pits in Ecuador’s Amazon, poisoning the communities of some 30,000 Amazon residents, including the entire populations of six indigenous groups (one of which is now extinct).

I have seen for myself the capital city Quito’s roads freshly “tarred” with oil sludge; and families bathing in blackened-water streams.

After a two decades-long court battle, the Ecuadorian Court awarded the afflicted indigenous communities US$9.5 billion – desperately needed for clean-up and health care costs.

Chevron, worth US$231 billion, refuses to pay. It wants Ecuador (an US$84 billion economy) to pay. Chevron says it is absolved of liability because its predecessor Texaco signed an agreement with Ecuador in 1998 after a clean-up. The indigenous plaintiffs said the clean-up was a sham and didn’t exempt third-party claims.

Having failed in the national courts, Chevron has turned to an “investor-state enforcement system” in the bilateral investment treaty (BIT) between Ecuador and the United States.

So three private sector lawyers sit in an extrajudicial tribunal under this trade agreement with the power to overrule and block any decision of the country’s courts. There can be no clearer violation of a country’s constitution!

The tribunal ruled that the rights of private parties to sue Chevron were waived by the agreement – an argument already rejected by Ecuador’s highest court.

This then is at stake for Malaysia and its judiciary and the constitutional separation of powers if any such clause appears in the TPPA. A private tribunal can override a national court decision and even prevent affected people from suing for loss. Can the executive, through this treaty, impair the constitutional rights of the judicial arm of the government?

Several developing and key developed countries have revolted against any such provision in trade agreements. South Africa, Indonesia and Bolivia withdrew from their trade agreements because of huge claims by big corporations; Indonesia was sued for US$3 billion by a British oil company.

Germany now refuses to be part of any agreement that the European Commission (EC) is negotiating with the US if it has such a clause. It also will not sign the free trade agreement that the EC concluded with Canada on behalf of the 28 EU states because it contains this clause.

A Swedish company had sued Germany for billions in lost profits arising from its decision to phase out nuclear power.

Russia too was held liable to pay the biggest award ever of US$50 billion to the oil company Yukos, which the Russian government nationalised. The case was brought under a similar investor-to-state arbitration clause in the Energy Charter Treaty (ECT) in 2005.

Although Russia tried to get out of the ECT (which it had yet to ratify), it was held liable under a provisional application clause. So, although Yukos was a Russian corporation with its majority held indirectly by a group of Russian tycoons, it took advantage of the fact that the company was incorporated in Gibraltar, with some 15% shares owned by American and European institutional investors. And sued under a foreign “investor can sue state” clause – under the 1999 Russian Law on Foreign Investment.

The ultimate question is: will Malaysia sign a TPPA with a clause which even the trade commissioner of the EC, and the conservative Financial Times, called “toxic”?

More importantly, will the public and Parliament accept a clause that would forever impair our sovereign right to safeguard our environmental, health and other policies without external “trade” pressures and obligations?

Gurdial is Professor at the Law Faculty, University of Malaya. Comments: letters@thesundaily.com