Sovereign risk fears around TPP are overblown

Secrecy around investor state dispute settlement clauses in the Transpacific Partnership has stoked concerns. AAP Image/NewZulu/Peter Boyle

Two aspects in the ongoing negotiations for the multi-lateral trade deal, the Trans Pacific Partnership, have caused some consternation in the media. The first is the secrecy with which the negotiations have been conducted. The second is the possible inclusion of a mechanism for resolving disputes under the TPP known as investor-state dispute settlement, or ISDS.

It has been suggested that the secrecy around ISDS inclusion is to avoid revealing that ISDS provisions might dramatically erode national sovereignty and hand more power to multinational corporations, at the expense of governments.

It’s also been claimed that the ISDS provision would effectively neuter state sovereignty and render national governments unable to legislate in the public interest, particularly on health and environmental issues, without opening themselves up to massive suits by multinational corporations.

Yet a sober analysis of the actual terms of the TPP, as recently leaked by WikiLeaks, suggests these fears are significantly overblown.

What is ISDS?

Investor state dispute settlement is used to settle disputes between states and private companies who invest in various states and is largely modelled on international commercial arbitration, which resolves disputes between private trading entities.

International commercial arbitration allows parties to appoint their own arbitrators, rather than relying on the judges of a national court. It also has a robust framework that enforces any award (analogous to a judgement of a court) made by that arbitral tribunal.

Awards are enforced through the widespread adoption of UN laws known as the UNCITRAL model law. This is given force of law in Australia by the International Arbitration Act 1974 (Cwth).

Additionally, arbitral awards are enforced by the widely adopted New York Convention on Recognition and Enforcement of Arbitral Awards. This means parties to an international dispute can confidently expect any award made by an arbitral tribunal will be enforceable in the courts of the jurisdiction in which the other party holds their assets.

It is important to recognise that the same does not necessarily hold for determinations made by national courts. That is, in the absence of an express bilateral or multilateral agreement between nations to recognise each other’s courts judgements, the enforcement of a foreign judgement is often a vexed affair.

For example, the UK courts recently refused to enforce a US judgment relating to insolvency and have made enforcement of Australian judgements in their courts more difficult.

In the early days of international trade, ISDS agreements reflected a concern that some of the states involved in trade agreements did not have particularly sophisticated courts, or lacked judicial independence. A good example is Thai courts which have routinely refused to enforce awards made against their national government.

This concern is still warranted. However even if all of the parties to the TPP possessed sufficiently sophisticated and independent domestic courts, allowing private investors access to those courts would essentially be reinventing the wheel.

Instead of this, the ISDS provision in the TPP largely piggybacks on the existing system for the enforcement of foreign arbitral awards, principally by adopting the New York Convention.

Some commentators have suggested the fact that ISDS determinations might be confidential - as are many international commercial arbitration - is a problem. I agree that there is no good policy rationale for confidentiality when it comes to disputes with a state, as opposed to disputes between private entities. Fortunately, the TPP deals with this issue specifically by requiring hearings and awards by ISDS tribunals to be made public.

Other commentators have suggested the mere existence of these “private judges” raises the possibility of bias or corruption. But the whole purpose of an ISDS is to avoid the perception of bias on behalf of national courts which might be hearing suits against their own national government.

Additionally, any ISDS tribunals awards are ultimately enforceable by the national courts in the place where the assets of the losing party are held. The New York Convention provides robust mechanisms to enforce the award so that courts cannot decline to enforce an award merely because they disagree with it.

Article V of the Convention allows a court to decline to enforce an award where perception of bias exists, as was the issue in Excelsior Film TV srl v UGC-PH. In that case the French Supreme Court refused to enforce the award on grounds of bias relating to one of the arbitrators.

What about national sovereignty?

The broader question still remains: to what extent will the ISDS undermine the nation’s capacity to legislate in its national interest? The ISDS provisions only allow an investor to sue a state for expropriation. Expropriation only occurs where the state effectively seizes the assets of a private corporation, without compensation. The Australian government already lacks capacity to expropriate without compensation - made famous by Australian film, ‘The Castle’.

Some have suggested that the loss of future profits might constitute expropriation. Yet current provisions of the TPP explicitly excludes this interpretation:

“The economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred.”

Additionally, the TPP carves out a broad capacity for governments to legislate without fear of suits:

“Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations, except in rare circumstances.

Much has been made of the tobacco companies’ suits against Australia’s plain packaging regime, using ISDS provisions in the Australia Hong Kong free-trade agreement.

But merely because someone sues does not mean they are going to win. The US has been sued under the ISDS of the North America Free Trade Agreement (NAFTA) dozens of times; not one of those suits has been successful.

Secondly, and without wishing to appear sympathetic towards the merchants of death in the tobacco industry, the Australian government accepted money to register trademarks, then refused to allow those trademarks to be used; so the recouping of money would be reasonable.

Further damages for consequential loss or loss of profits are simply beyond the scope of the expropriation power, and are unlikely to succeed. This approach is more reflective of the state of the tobacco industry than objective legal fact. The TPP discourages inappropriate suits, by proposing to award all costs against those who bring a frivolous claim.

Secrecy - sinister or practical?

Lastly, on the question of secrecy. The TPP has taken years to negotiate and despite President Barack Obama’s bullish predictions will probably drag on for a while yet. Discussing early drafts is less useful, given much of it may change.

Additionally, Australians are acutely aware of the lobbying capacity of vocal industries - as exemplified by the truly extraordinary campaigns waged by the mining industry against the carbon and mining taxes. Multiply the potential media blitz by all potentially affected industries across 12 countries and add in years of negotiation and you get some indication as to why open negotiations are functionally impossible.

Indeed, multilateral trade agreements are frequently negotiated in closed sessions and ultimately Parliament will debate whether Australia agrees to be bound by the terms of the TPP.

This is not to suggest that there are no potential pitfalls in the TPP. I remain acutely concerned about the intellectual property provisions, particularly for biotech, pharmaceutical and genetic patents.

These risks need to be weighed against the potential advantages of the TPP; an exercise rendered all the more difficult by the government’s tendency to significantly overstate the economic benefits of free trade agreements,as noted by economist Greg Jericho.

Nevertheless, much of the commentary surrounding the ISDS provisions misunderstands how and why they were adopted. Those who are critically concerned about risks to Australia’s sovereignty could read the actual provisions of the agreement in the sober light of day.