By Janet M Eaton, PhD, January 24th, 2014
A widespread and significant controversy has emerged on a global scale over investor rights and privileges and the Investor -State dispute mechanism found in the investment chapters of Free Trade Agreements [FTAs] and Bilateral Investment Treaties [BITS]. There are many reasons for the concerns over Investor -State including, what many critics see as, its unethical, unfair, undemocratic, unsustainable and even unconstitutional nature giving undue power to transnational corporations over governments and public policy, thereby placing profit before people and the environment. The UN Conference on Trade and Development (UNCTAD), the United Nations body responsible for dealing with development issues, particularly international trade, acknowledges huge flaws in the Investor State arbitration system:
Concerns with the current ISDS system relate, among others things, to a perceived deficit of legitimacy and transparency; contradictions between arbitral awards; difficulties in correcting erroneous arbitral decisions; questions about the independence and impartiality of arbitrators, and concerns relating to the costs and time of arbitral procedures." [1]
In general major flaws of Investor-State Agreements can be categorized as those relating to a) the unfair and unbalanced rules and rights of investors written into investment chapters and their open-ended interpretation, b) the undemocratic arbitrator selection process prone to conflict of interest and documented unethical behaviour, and c) the undemocratic and in some cases unconstitutional decision-making structure and process, outside of international law and the well-established judicial process of developed nations. [2]
Questions are being raised, research conducted and actions taken in opposition to Investor-State, by a growing number of constituencies including international institutes, agencies and centres, national and international NGOs, international networks, academics, lawyers, jurists, economists, intergovernmental organization, former MPs, foreign policy experts and trade negotiators and even a significant number of countries.
Martin Kohr, Executive Director of South Centre, an intergovernmental organisation of developing countries based in Geneva, Switzerland, after outlining a litany of concerns with Investor-State, in The World's Worst Judicial System, summarized the situation as follows:
Awareness of the problems in the agreements and the unfairness of its arbitration system are growing, and calls for reform are being made by more countries. [3]
Some countries, like Canada, the US and the European Union, are taking a reformist approach tweaking the language around Investor-State rules in an attempt to address issues in piecemeal fashion. A recent Carleton University Policy Brief on The Investment Provisions of the CETA [Comprehensive Economic and Trade Agreement between Canada and the EU] provides some insight into this approach. [4] However, because the entire process is fraught with systemic issues there appears to be little hope of tackling the associated problems through such a limited and fragmented approach. As the Transatlantic Statement on Investor- State in CETA, signed by more than 100 transatlantic civil society groups demanding the removal of the Investor-State chapter, states:
There is no way to tame this investor "rights" model. There is no comfort in claims by the [European] Commission or Canadian government that "frivolous" claims, or challenges to environmental policy, will be filtered out. Despite efforts in the North American Free Trade Agreement (NAFTA) to limit what kinds of government decisions might violate an investor's minimum standards of treatment or other investment chapter protections, Canada continues to face investor-state disputes attacking environmental measures that affect national and foreign investors in exactly the same way (e.g. a partial moratorium on shale gas extraction in Quebec). Likewise, we are not satisfied by efforts to limit the meaning of "indirect expropriation" so that legitimate public welfare objectives should be immune from investor challenges. The final determination is always made by the private investment tribunals themselves, and these unaccountable tribunals have a built-in bias toward the interests of multinational corporation.[5]
At the same time other countries are rejecting Investor-State and its dispute settlement mechanism and seeking alternatives. As was reported in an earlier August 2012 blog, by the author, Multiple States Rejecting Investor- State dispute Settlement, Australia, under Julia Gillard's Labor government, was one of a growing number of nations rejecting the Investor -State regime in bilateral investment and free trade agreements. India, South America, Bolivia, Venezuela and Ecuador, were also cited as beginning the process of rejecting Investor- State. [6] It should also be noted that Brazil did not sign the International Centre for Settlement of Investment Disputes [ICSID] convention nor has it signed BITS or FTAs with Investor-State agreements with other countries. [7]
India now has drafted an alternative investment agreement stipulating that foreign investors will not be able to challenge the legality of an unfavourable verdict from their Supreme Court and that they would have to exhaust remedies under local laws before seeking international arbitration under Bilateral Investment Protection Agreements (BIPAs). According to experts a change in the model text was necessary because the overall investment environment had undergone so many changes since the existing BIPA text was prepared. India is in the process of reviewing BIPAs with 83 countries. [8]
In 2012, South Africa was re-examining its policy on Investor-State disputes and had refused to renew BITs with several EU countries. In September, 2013, the South African Trade and Industry Minister, Rob Davies, stated that South Africa would continue to protect foreign investment, but would do so through a legislative framework rather than through 'old-style, dated, antiquated bilateral investment treaties'. He reported that BITs entered into by South Africa and many other countries in the mid-1990s were poorly drafted and exhibited a range of serious flaws. He also noted that South Africa had notified the Embassy of the Kingdom of Belgium of its intention to terminate its trade agreement on September 7, 2013. On June 20, 2013 South Africa notified the Embassy of Spain of similar intention. [9] Finally on November 3rd Trade Minister Davies announced the new Promotion and Protection Investment Law. The bill recognises inherent weaknesses in international investment agreement arbitration by promoting a sound, open and transparent legal framework for the protection of investments in line with the constitution. [10] The bill diminishes the rights of investors in bilateral treaties in three important ways. a) In the event of expropriation, investors are no longer assured of compensation at full market value, but in line with the constitution, which says compensation must be "fair and equitable". It must consider both market value and a range of public interest concerns, such as redress for the past. b) The bill removes the obligation on the government to enter into international arbitration in the event of a dispute. Investors can ask the Department of Trade and Industry to facilitate mediation or can approach the courts for relief. c) The bill removes a provision contained in most bilateral investment treaties, that investors are entitled to "fair and equitable treatment". This is commonly used to provide investors with an avenue to contest new legislation or regulation that alters, in a prejudicial way, the conditions under which investments are made. [11]
In the South East Asian Pacific region, where 12 countries from both sides of the Pacific including Australia, New Zealand, Japan, Malaysia, Singapore, Brunei, and Vietnam are engaged in negotiating the Trans Pacific Partnership Agreement (TPPA), political opposition to Investor-State is building amongst parliamentarians, powerful professional associations, business sectors, unions, civil society organizations and the public.
In the early stages of negotiation Japan's Prime Minister Abe's Liberal Democratic Party parliamentary majority set a condition for Japan's TPPA participation that the deals not include Investor-State enforcement. [12] Kyla Tienhaara, a Research Fellow at the Regulatory Institutions Network, Australian National University and Patricia Ranald, a Research Associate at the University of Sydney and Convenor of the Australian Fair Trade and Investment Network (AFTINET) think it's possible that Australia's stand against the ISDS might encourage countries like New Zealand and Vietnam, which have in the past claimed exemptions from ISDS provisions (e.g. in the ASEAN-New-Zealand Australia Free Trade Agreement), to take a similar position. [13] Meanwhile, Malaysia is undertaking a cost benefit analysis and Industry and Trade Minister Mustapa says if the cost benefit analysis indicates that it is not in their interest then definitely they will take serious note of the study. [14] Most recently, Malaysia declared it will not be a mere "yes man" in the ongoing Trans-Pacific Partnership Agreement (TPPA). Prime Minister Najib said Malaysia will take a firm stand and perform a "domestic process" -- to explain the agreement to the Cabinet; to the people of Malaysia; and to debate the agreement in Parliament before making a decision on the matter. The Prime Minister stated that the domestic process was adopted because the agreement touched on certain issues relating to the country's sovereignty including the rights to determine domestic policies, intellectual property rights, investor-state dispute settlements, government procurements, state-owned enterprises, environment and labour. [15] Malaysia already has a predisposition towards rejecting Investor- State in trade agreements having recently signed a Free Trade Agreement with Australia [MAFTA] , without an investor state mechanism. [16]
In Latin America, the adverse impact of excessive Investor-State arbitral awards has led the resource-rich countries of Bolivia, Ecuador and Venezuela to withdraw from the ICSID and from existing BITs. And Argentina is now considering doing the same. [17]
According to the Third World Network:
These costly litigations, which to a greater extent have been settled favouring private interests from the North, not only affect the fiscal capabilities of the States and pose a serious challenge to their national jurisdiction -- and, ultimately, the exercise of their very sovereignty -- but also, they alienate citizens from their common and agreed-upon democratic set of rules. [18]
The most significant development in Latin America in regard to Investor-State rejection is taking place at this time under the leadership of Ecuador. Twelve Caribbean and Latin American countries met this past May in Guayaquil, Ecuador to establish a major alternative to the Investor-State Dispute Settlement system. Seven of the twelve countries [Ecuador, Bolivia, Cuba, Nicaragua, Dominican Republic, St. Vincent and Grenadine and Venezuela] have adopted a declaration agreeing to establish a permanent "Conference of States" to deal with challenges posed by transnational companies, especially Investor-State challenges and the remainder [Argentina, Guatemala, El Salvador, Honduras and Mexico] are considering joining. This "Conference of States" will coordinate political and legal actions and disseminate information on legal disputes and other information to the public. They also established an Observatory which will analyse investment dispute cases, reform the present arbitration system, suggest alternative mechanisms for fair mediation, coordinate between the judicial systems of Latin American States, ensure the enforcement of domestic judicial decisions in investment disputes, and advise governments in their negotiations on contracts with transnational corporations. They also supported the setting up of a regional arbitration centre to settle investment disputes between corporations and States as an alternative to ICSID, based at the World Bank in Washington DC, which was viewed by the conference participants as being biased in favour of investors. Finally they have said they will take their model to all the G77 countries and China for their consideration [19].
As the leading free trade critic in the US, Public Citizen's Lori Wallach, stated following the above conference in Ecuador where she had been a presenter:
Last week's conference adds another dash of momentum to this growing global push to ditch this rather radical regime. [20]
These Latin American States, that are part of the push to reject Investor-State, are all developing countries that have suffered at the hands of multinationals from the North through the growing number of claims with enormously high settlements against their governments. They are also States that have rejected Neoliberalism and which have left of centre governments.
Amongst the nations rejecting Investor -State, Australia, under the Gillard government was unique in being the first developed nation and Neoliberal government to outwardly reject Investor-State as part of their trade policy. And as Dr Patricia Ranald was quoted as saying in a prominent Australian newspaper:
Australia is the only country to have successfully resisted the US insistence on ISDS clauses in its trade deals. [21]
The Gillard Labor Government was defeated by Tony Abbott's Conservatives in the fall of 2013 and although his government has noted it will not be bound by Gillard's trade policy on rejection of investor state he has been quoted as saying that "foreign corporations wanting to sue Australian governments will have to cool their heels." He also noted that Australia's negotiating position on the Trans Pacific Partnership Agreement [TPPA] would remain the same despite an election commitment to overturn the blanket prohibition on ''investor-state dispute settlement'' provisions. [22]
The Gillard Government's Trade Policy's rejection of Investor-State is being widely discussed, critiqued and lauded in a number of papers, articles and blogs. Some of these writers have asked whether the Gillard government's rejection of Investor-State policy could be a model for the world and for Canada.
Origin of this blog:
This blog is an extract from a longer paper entitled Australia's Rejection of Investor-State, from AUSFTA to the Gillard Government's Trade Policy and the implications for Canada which in addition provides background information on Investor-State provisions and decision- making process; offers insight into how and why the former Labor government of Australia came to its decision to reject Investor -State in its 2012 Trade Policy Statement; and considers whether Australia's policy of Investor-State rejection should be an option for Canada. [23]
Addendum
It is worth noting that since the above paper was posted on the web, the European Commission decided to reconsider it's approach to Investor-State. According to Inside US Trade:
In a rare move, the European Commission has decided to freeze talks with the United States on the investment provisions of the Transatlantic Trade and Investment Partnership (TTIP) for three months while it conducts a public consultation on how the deal should approach investment, according to an EU official. [24]
Significant in this development is the link with Australia's concern with Investor-State and one of its primary reasons for rejecting Investor-State in the 2012 Trade Policy Statement of Julia Gillard's Labor government i.e. the Philip Morris Investor-State case against Australia's groundbreaking plain-packaging laws, the world's first legislation to remove branding from cigarette boxes. According to James Paniche, a journalist with ABC Radio National, on extended leave in Brussels:
The Philip Morris case placed this legal provision front and centre of the debate, leaving the European Commission scrambling to allay the fears of the public and deal with the media backlash. [25]
REFERENCES:
[1]] Reform of Investor-state Dispute Settlement: In Search of a Roadmap . UNCTAD IIA Issues Note Report No 2 June 2013 http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf
[2] Janet M Eaton. Australia's Rejection of Investor-State, from AUSFTA to the Gillard Government's Trade Policy and the implications for Canada. December 31, 2013. http://www.commonfrontiers.ca/Single_Page_Docs/PDF_Docs/Jan08_14-AUSFTA-...
[3] The World's Worst Judicial System? Martin Kohr. South Centre South Bulletin 74 July 5, 2013 http://www.southcentre.int/south-bulletin-74-5-july-2013/
http://www.bilaterals.org/spip.php?article23592
[4] Armand de Mestral and Stephanie Mullen. The Investment Provisions of the CETA. Carleton University Policy Briefs October 2013 http://labs.carleton.ca/canadaeurope/wp-content/uploads/sites/9/CETD_CET...
[5] Transatlantic statement opposing dangerous investor "rights" chapter in CETA
http://canadians.org/sites/default/files/statement-corporate-giveaway-11...
[6] Janet M Eaton. Multiple Countries Rejecting Investor State Dispute Settlement. April 12, 2012. http://www.sierraclub.ca/en/main-page/multiple-countries-rejecting-inves...
[7] Nicolas Boeglin. 2013. ICSID and Latin America: Criticisms. withdrawals and regional alternatives (to investor-state) http://www.bilaterals.org/spip.php?article23378&lang=en
[8] India to draft model treaty on MNCs' mediation rush by Deepshikha Sikarwar, ET Bureau Aug 9, 2013, 06.27AM IST http://m.economictimes.com/news/economy/policy/government-to-draft-model... ;
India, Canada trade pact likely by year-end. SME Times News Bureau | 14 Sep, 2013 http://www.smetimes.in/smetimes/news/top-stories/2013/Sep/14/india-canad...
[9] South Africa terminates its bilateral investment treaty with Spain: Second BIT terminated, as part of South Africa's planned review of its investment treaties. Herbert Smith Freehills Arbitration Notes http://hsf-arbitrationnotes.com/2013/08/21/south-africa-terminates-its-b...
Davies: Flaws led to end of EU trade pacts . By Babalo Ndenze. Business Report. August 1 2013. http://www.iol.co.za/business/news/davies-flaws-led-to-end-of-eu-trade-p...
[10] Arbitrators of trade treaties do justice a disservice (re Investor-state arbitration from a South African Perspective) by Seth Nthai, November 19 2013,
http://www.bdlive.co.za/opinion/2013/11/19/arbitrators-of-trade-treaties...
[11] Investment bill marks shift in SA's trade policy . By Carol Paton, Nov 4th.
http://www.bdlive.co.za/business/trade/2013/11/04/investment-bill-marks- ...
[12] Trans-Pacific Partnership: What End Game? (No End in Sight ...)
Eyes on Trade Blog Public Citizen. October 03, 2013 http://citizen.typepad.com/eyesontrade/2013/10/index.html
[13] Kyla Tienhaara and Patricia Ranald. Australia's rejection of investor-State Dsipute settlement: Four Potnetial Contributing Factors. July 12, 2011
http://www.iisd.org/itn/2011/07/12/australias-rejection-of-investor-stat...
[14] Malaysia: Government To Conduct Cost Benefit Analysis On TPPA http://www.bernama.com.my/bernama/v7/bu/newsbusiness.php?i d=973067
[15] M'sia will not be mere 'yes man' in TPPA negotiations, says Najib . Bernama | Updated: October 08, 2013 http://english.astroawani.com/news/show/msia-will-not-be-mere-yes-man-in...
[16] Disputing against States (Australia , 19 August 2013) - Ashurst
www.ashurst.com/doc.aspx?id_Content=9460
[17] A Rethink of Investor-State Dispute Settlement By Munir Maniruzzaman, University of Portsmouth, for ITA] Kluwer Arbitration Blog http://kluwerarbitrationblog.com/blog/2013/05/30/a-rethink-of-investor-s... ; The World's Worst Judicial System by Martin Kohr. 2013-07-05 . ALAI, América Latina en Movimiento http://www.alainet.org/active/65408
[18] Third World Network. Latin American states form alliance to tackle investment treaties http://www.twnside.org.sg/title2/FTAs/info.service/2013/fta.info.247.htm ;
[19] Latin American States Form Alliances to Tackle Investment Treaties . Third World Network [TWN] SUNS # 7576 April 30, 2013 http://www.twnside.org.sg/title2/wto.info/2013/twninfo130408.htm ;
12 Latin American Governments Gather to Confront Extreme Investor Privileges Regime. Public Citizen's Eyes on Trade Blog on Globalization and Trade. May 1, 2013. http://citizen.typepad.com/eyesontrade/2013/05/last-week-13-latin-americ...
[20] Latin American Governments Gather… Ibid
[21] Abbott: Open For Business and Multinational Lawsuits . September 20, 2013.
http://www.theglobalmail.org/feature/abbott-open-for-business-and-multin...
[22] Peter Martin . Trade treaty stance the same, despite promise. Sydney Morning Herald. September 23, 2013
http://www.smh.com.au/business/trade-treaty-stance-the-same-despite-prom...
[23] Janet M Eaton. 2013. Ibid
[24] EU Says It Will Hit 'Pause' On TTIP Investment Talks Pending Public Debate . Jan uary 21st, 2014 https://groups.google.com/forum/#!topic/canada-eu-ceta/YKWMrBVtzXk
[25] James Panichi. Philip Morris, Australia and the fate of Europe's trade talks . posted January 13th, 2014 http://bilaterals.org/?philip-morris-australia-and-the