This Chapter discusses issues relating to investment and Investor State Dispute Settlement (ISDS) in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP 11).
ISDS in particular remains a matter of concern to some participants in the inquiry. For example, Mr Jonathan Peter, like many other individuals, states:
The dispute resolution mechanisms (ISDS) of these recently proposed agreements are a serious threat to the sovereignty of member states, as it allows corporate interests to sue national governments in unelected offshore tribunals, without appeal to the domestic justice systems of the countries involved.
Nevertheless, the importance of Australian businesses being able to invest overseas easily, and for Australia to be seen as a safe and reliable location for foreign investment underpins Australia’s prosperity. The provisions of Chapter 9 of TPP 11 provide an important reassurance in this regard.
According to the National Interest Analysis (NIA), the TPP 11 will ‘provide a more predictable and transparent regulatory environment for investment.’
The TPP 11 is expected to liberalise investment regimes in sectors in which the TPP 11 Parties account for the majority of global investment. This includes energy, mining, telecommunications and financial services.
The TPP 11 should also encourage growth in foreign investment into Australia by liberalising the screening threshold at which private foreign investment in non-sensitive sectors are considered by the Foreign Investment Review Board (FIRB). The threshold for FIRB review will increase from A$261 million to A$1.134 billion.
The NIA notes that under the TPP 11, Australia retains the ability to screen investments in sensitive sectors to ensure they are not contrary to the national interest.
The TPP 11’s investment obligations contain, according to the NIA:
… high quality, modern rules governing the treatment of investors and their investments, balanced with robust safeguards to preserve the right of the Government to continue regulating in the public interest.
The Minerals Council of Australia (MCA) points out that, with a relatively small population, Australia has always relied on supplementing domestic savings with foreign investment to take advantage of investment opportunities.
TPP 11 investment provisions will, according to the MCA, help both inward and outward investment in Australia.
According to the MCA, there are a number of provisions in the TPP 11 that will support Australian outward investment, including that:
foreign investors and their investments cannot be treated less favourably than domestic investors and investments;
investments can only be expropriated for a public purpose, and must be compensated at the market value; and
foreign investors will be accorded a set minimum standard of treatment, including providing due process in court proceedings.
ActionAid is concerned that the investment provisions of the TPP 11 may unfairly discriminate against women, particularly in the less developed TPP 11 parties. ActionAid’s concerns are twofold:
the provisions enable international investors to purchase farming land from smallholders, who are predominantly women; and
the investment provisions may discourage a TPP 11 party from introducing affirmative action policies to support women in small business.
The Department of Foreign Affairs and Trade (DFAT) identified that there are provisions in the TPP 11 that permit a country to discriminate in certain circumstances. Articles 15.3 and 29.2 provide that in certain circumstances the application of the investment provisions can be circumvented to:
protect public morals, order or safety;
protect human, animal or plant life or health (including environmental measures necessary to protect human, animal or plant life or health);
protect intellectual property; and
protect goods and services of a person with disabilities, of philanthropic or not-for-profit institutions, or of prison labour.
Annex 15A of TPP 11 provides that the investment provisions do not apply to:
any form of preference to benefit small and medium enterprises;
measures to protect national treasures of artistic, historic, or archaeological value;
measures for the health and welfare of indigenous people; and
measures for the economic and social advancement of indigenous people.
Investor-State Dispute Settlement
Investor-State Dispute Settlement (ISDS) is an international arbitration procedure that is intended to be an impartial, law-based approach to resolving conflicts between countries and foreign investors.
From a country’s point of view, an ISDS scheme offers a number of advantages:
it provides a mechanism to resolve investment conflicts without creating country to country conflict;
it protects a country’s citizens who invest abroad; and
it provides foreign investors in a country with reassurance that the country will respect the rule of law in relation to their investments.
From a foreign investor’s point of view, ISDS is a more reliable mechanism for resolving disputes than the alternatives:
taking action in the legal system of the host country, which may not have laws to permit such an action, or may give certain institutions immunity; or
seeking the diplomatic assistance of the investor’s home country, which relies on the willingness of the home country to provide such assistance.
ISDS is now widespread and well established. The world’s first ISDS institution, the International Centre for Settlement of Investment Disputes (ICSID) was established in 1966. ICSID was established by an international convention to which Australia is a signatory, and operates under the auspices of the World Bank.
In terms of the evidence gathered during the inquiry, the time since the completion of the inquiry into the original TPP has enabled the collection of significantly more information on ISDS than was previously available to the Committee.
The TPP 11 retains the ISDS provisions of the original TPP with the exception that their application to investment agreements and investment authorisations has been suspended.
This will not significantly change the ISDS provisions from Australia’s perspective because these authorisations had already been excluded from application to Australia by Annex 9-H of the original TPP.
A further change is the suspension of the minimum standard of treatment protection with respect to investments in the financial services sector.
Disputes under ISDS provisions of the TPP 11:
… must involve breaches of the substantive investment commitments governments make under the relevant trade agreement such as the commitments in the TPP-11 not to expropriate property without adequate compensation or not to discriminate against foreign investors compared to domestic businesses.
ISDS provisions vary across the range of agreements in which they are contained, but there is a constant framework at the core of all ISDS schemes.
To bring an ISDS case, a foreign investor must believe that an arbitrary or capricious action of the host Government has caused them to lose their investment.
ISDS cases are heard by a tribunal of three: one appointed by the investor, one appointed by the country, and a third agreed by both parties.
The cases can be either public or private.
The role of the tribunal is to review the host Government’s actions to determine if those actions were arbitrary or capricious:
They are essentially conducting what has been described in some ways as global administrative law. They are reviewing the process that led to the law being passed. They are reviewing matters such as whether the reasoning that informed the passage of the law was sufficiently conveyed to the public and the affected investors, whether it was arbitrary, whether it was capricious and whether it was disguised expropriation. Those are the points they are considering.
This is an important point: an ISDS tribunal cannot overturn domestic laws and regulations. The tribunal can only require an investor be compensated for the loss of the investment.
In other words, if a Government wishes to pursue regulation it believes is in the national interest, it can do so regardless of the outcome of any related ISDS cases, noting that there may be costs incurred.
A number of important safeguards are built into the rules guiding ISDS, making this one of the most protective treaties in terms of its protections for legitimate regulation.
Australia will retain the TPP Tobacco Control Notice under Article 29.5 which will prevent ISDS challenges to Australia’s tobacco control measures.
In addition, Australia has listed a series of non-conforming measures covering a range of existing public policies, legislation and regulations.
According to the MCA, the TPP 11’s ISDS provisions cannot be used to challenge Australian public policies in such areas as environmental protection, health care, education, social services, welfare policy, government service delivery, cultural and heritage protections and conservation policies.
According to Dr Luke Nottage, Professor of Comparative and Transnational Business Law at the University of Sydney, there is good evidence that ISDS, including the new procedural rights contained in the TPP 11 version of ISDS, has contributed to a rise in foreign direct investment worldwide.
Dr Nottage points out that:
Encouraging investors to make and maintain investments in reliance on investment treaty protections is also better than leaving them to ‘manage’ them eg through bribery.
The Australian Council of Trade Unions (ACTU) does not support trade agreements that contain ISDS provisions.
The ACTU submission states:
These provisions mean that when Australian governments make new laws or policy in the interests of Australian people, foreign investors can sue our government in international tribunals if they consider those laws harm their investments or disadvantage them in some way.
The ACTU uses the example of the North American Free Trade Agreement (NAFTA) ISDS experience as a basis for arguing that ISDS provisions result in significant costs to countries that are party to these provisions.
The MCA’s submission points out that ISDS’ opponents tend to use examples of ISDS cases undertaken using provisions in older agreements, such as NAFTA, to which Australia is not a party.
The Mineral Council’s submission also points out that ISDS provisions are already in place between Australia and all TPP 11 countries except Canada.
A significant body of evidence was provided to the Committee about the scope and outcomes of ISDS cases. The Committee heard from organisations and individuals with specific technical or sectoral expertise in trade agreements.
Dr Kyla Tienhaara, Visiting Fellow at the School of Regulation and Global Governance, Australian National University, points out Canada and Australia have very similar economies, levels of Government and regulatory frameworks, which makes a useful comparison possible.
While the ISDS provisions in the TPP 11 and NAFTA are not the same, Dr Tienhaara argues that the ISDS provisions in these agreements are sufficiently alike to permit ISDS claims of the sort brought against Canada under NAFTA to be brought against Australia under the TPP 11.
Since 2006, 27 ISDS cases have been brought against Canada under NAFTA. In addition, the bulk of cases brought against Canada have concerned regulatory decisions rather than unlawful expropriation.
Dr Tienhaara points out that ISDS cases can be brought against any level of Government. For example in Canada, ISDS cases have been brought against Provincial and Territorial Governments (equivalent to Australia’s State and Territory Governments).
Dr Tienhaara discusses a number of ISDS cases brought against Canada as a result of regulatory decisions by various levels of Canadian Government:
In 1997, the Canadian Government prohibited the import and use of Methyl-cylcopentadienyl manganese tricarbonyl, a fuel additive believed to be a neurotoxin. Canada’s was one of the first governments to prohibit the additive, adopting regulation based on the precautionary principle. Ethyl Corporation, an importer of the additive, launched an ISDS case which caused the Canadian Government to revoke its prohibition. The additive has since been removed from the market on health grounds;
In 2008, an aggregate firm called Bilcon brought an ISDS claim against the Canadian Government and the Government of Nova Scotia after a quarry proposal was rejected following an environmental assessment. The ISDS tribunal found for Bilcon on the basis that a higher standard of environmental review was applied to Bilcon’s project than had been applied in the past. The outcome had the perverse effect of allowing a foreign investor a remedy that was not available to Canadian investors. When a similar case was later brought against the Canadian Government, the United States and Mexican Governments intervened to argue that the Bilcon tribunal had made an error in interpreting NAFTA; and
Lone Pine, a shale gas developer, brought an ISDS case against the Government of Quebec because that Government had revoked fracking rights in the St Lawrence lowlands because a significant number of the gas wells in that region were leaking methane. Lone Pine’s argument is that the Quebec Government’s closure of the wells was a result of public pressure rather than a scientific assessment of the issues.
Public Services International (PSI) highlights another Canadian ISDS case, involving health care. Eli Lilly brought a case against the Canadian Government after the Canadian Government declined a patent application for a medicine on the grounds that the company could not adequately demonstrate that the medicine delivered the benefits promised. Eli Lilly challenged not only the facts of the drug’s efficacy, but the right of the Canadian Government to make a decision on the basis of the evidence of the drug’s efficacy.
The Public Health Association of Australia notes that the tribunal in the Eli Lilly case found in favour of Canada, but that the victory did not extend to closing the possibility of another ISDS case along similar lines in future.
Dr Tienhaara states that, as a consequence of the 27 ISDS cases involving Canada, the Canadian Government now has significant experience in dealing with ISDS cases.
The Committee believes it would be in Australia’s interests to learn from Canada’s experience so as to limit future costs of ISDS cases.
Dr Nottage provided analytical results from a database of 541 ISDS cases, which permits a useful insight into the outcomes of these disputes.
Of the 541 disputes, 147 were won by the claimant (the investor), and of these 132 provided both claimed and awarded amounts.
According to Dr Nottage, a 2012 Organisation for Economic Cooperation and Development (OECD) scoping study on ISDS found that the average cost of ISDS arbitration was US$8 million.
The OECD study found that costs were high and there were efforts underway to reduce them. The study also found that the rules for allocating the costs were very flexible and a source of uncertainty for claimants and respondents.
The OECD found that the largest cost component is the fees and expenses incurred for legal counsel and experts. These are estimated to be on average 82 per cent of the costs on an ISDS action, with arbitration fees amounting to 16 per cent of the costs.
A more extensive study was conducted by Matthew Hodgson and Alistair Campbell. This study also includes data up to the end of 2017.
This study found the average cost of ISDS was around US$6 million plus tribunal costs of about US$1 million.
Average costs can be skewed by a small number of very high costs. The median cost determined in the Hodgson and Campbell study is US$3–3.6 million.
Dr Nottage also provides advice on the amounts claimed in ISDS cases compared to the amounts awarded. This information reflects only on ISDS cases were an investor has won because these are the only cases in which both a claim and an award are made.
Of these cases, the median award was 17 per cent of the median claimed.
ISDS and public policy
Dr Elizabeth Thurbon, Associate Professor in International Relations and International Political Economy at the University of New South Wales, notes:
The revised agreement … does [not] assuage concerns that regulatory carve outs will be sufficiently robust to protect governments seeking to regulate for social or environmental purposes.
The Australian Fair Trade and Investment Network (AFTINET) maintains that the claims made by DFAT that ‘specific policy areas are carved out or excluded from certain ISDS claims’ are inaccurate and misleading:
These exclusions or carveouts are listed in Annex 2 to Chapter 9 on investment, but they only apply to specific articles in the investment chapter. They do not apply to any of the ISDS provisions.
The National Tertiary Education Union (NTEU) argues that:
…these reservations do not apply to expropriation and compensation and therefore are not a protection against ISDS claims where a company has suffered a loss on investment.
This is not an entirely accurate reflection of the provisions of the TPP 11.
Article 9.16 of the TPP 11 states:
Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.
In relation to Australia, Annex II states:
Australia reserves the right to adopt or maintain any measure with respect to the provision of law enforcement and correctional services, and the following services to the extent that they are social services established or maintained for a public purpose: income security or insurance, social security or insurance, social welfare, public education, public training, health, child care, public utilities, public transport and public housing.
The provisions in Annex II apply to all the provisions in Chapter 9A under which an investor might use ISDS provisions (that is, Articles 9.4, 9.5, 9.10 and 9.11) except the provision relating to nationalisation or appropriation of an investment (Article 9.8).
However, Article 9.8 does not prevent a Government from nationalising or appropriating an investment. The provisions allow nationalisation and appropriation for a public good and with due process of law, provided appropriate compensation is paid to the investor.
Appropriate compensation is defined in the article as ‘equivalent to the fair market value of the expropriated investment immediately before the expropriation’.
However, the Public Health Association of Australia (PHAA) does point out that the statement ‘any measure otherwise consistent with this Chapter’ effectively permits ISDS cases to be brought over whether a measure is consistent with the Chapter.
Analysis of ISDS cases to date has given rise to a theory called ‘regulatory chill’, which relates to governments deciding not to pursue regulation in the public interest as a result of ISDS.
The concept of regulatory chill was also subject to discussion amongst inquiry participants.
Dr Tienhaara believes that the potential regulatory chill has been underestimated by the Australian Government.
Dr Tienhaara notes that law firms involved in ISDS are actively advertising the use of ISDS as a method of preventing ‘wrongful regulatory change.’
Dr Tienhaara identifies a number of factors that might contribute to regulatory chill, pointing out that governments generally have multiple motivations for adopting policy measures. The factors include:
while governments may have one view of what constitutes bona fide measures, the case law indicates that other actors in the ISDS process often have diverging views about where the line between reasonable and unreasonable regulation should be drawn; and
governments often have a distorted view of the likelihood of success should they apply a body of regulation, and may be reluctant to risk a negative outcome because of the potential cost of ISDS cases.
However, Dr Nottage also notes that the risk of regulatory chill in Australia has been seriously negated by the result of the outcome of the Philip Morris ISDS claim against Australia’s plain packaging tobacco laws. The claim was dismissed by the ISDS tribunal with costs awarded to Australia.
The Committee notes views expressed by many submitters regarding the need for transparency in ISDS cases.
Claims made under the TPP 11 must take place in an open and transparent manner.
In relation to the transparency of ISDS cases, Dr Nottage notes that of the 506 known concluded ISDS cases, 62 per cent were public and 38 per cent were confidential. Around 85 per cent of cases where either the investor or the state have won are fully public, and most of the rest are partly confidential.
Confidential cases are more likely to involve early settlements, where a final outcome is not reached.
Dr Nottage identified four levels of confidentiality in ISDS cases: strictly confidential, where basic information such as who won the case is not known; confidential, where the victor in a case is known but the merits and the final award are confidential; partly confidential, where the victor and the level of the award is known; and public, where the case is fully public.
Unequal access to dispute resolution
During the inquiry, a new theme emerged amongst those opposed to ISDS provisions. The argument states that ISDS favours foreign investors over local investors by permitting a means of relief to foreign investors that is not available to local investors. For example:
… our local corporations and loyal businesses do not get offered the same rights !! These ‘trade agreements’ and their dispute ‘tribunals’ actually favour [foreign] corporations over local industry and citizens.
Dr Elizabeth Thurbon points out that:
… ISDS provisions violate the principle of National Treatment and Non- Discrimination enshrined in Australia’s WTO obligations (and indeed in the obligations of its other [trade agreements]). They do so by discriminating against local firms. Specifically, ISDS provisions give foreign investors more rights than local firms by extending the right to sue national governments for ‘indirect expropriation’ to foreign firms alone.
Finally, the ACTU submission raises the issue of foreign investors being able to access ISDS remedies, while local investors are not able to.
Potential improvements in ISDS
Some participants in the inquiry discussed a range of changes to the ISDS process that could be implemented in future agreements. The potential improvements suggested are:
an appellate mechanism for ISDS tribunal decisions envisaged in TPP 11 Article 9.23.11;
the code of ethics for ISDS arbitrators envisaged in Article 9.22.6; and
the use of precedent in ISDS decisions.
An appellate review mechanism is being increasingly advocated by those unhappy with the inconsistencies in traditionally structured one tier ISDS tribunals.
At present, ISDS tribunal decisions are final and binding. As discussed above in relation to the Bilcon ISDS case in Canada, final and binding ISDS decisions that are outside the scope envisaged for an ISDS mechanism by the negotiating parties can occur.
Dr Luke Nottage observes that there was no effort to add an appellate review mechanism when the TPP 11 was renegotiated, even though future agreement on this is envisaged in TPP 11 Article 9.23.11.
The TPP 11 also contains an Article (9.22.6) which requires the development of guidance or a code of ethics for ISDS arbitrators before the treaty comes into force.
Dr Nottage notes that implementing these provisions:
Would go a long way towards assuaging public concerns about ISDS …
Dr Kienhaara points out, however, that the TPP does not make the proposed code binding.
Finally, Dr Tienhaara criticises the fact that tribunals ruling on ISDS cases do not create precedents. Tribunals consequently do not have a base of previous decisions to guide their consideration of ISDS cases.
Dr Tienhaara points out that ISDS cases involving oil, gas and mining are likely to increase as a result of the Paris Climate Agreement. Meeting the Agreement’s commitments globally will require that a third of the planet’s oil reserves, 80 per cent of coal reserves and half the gas reserves are not exploited.
The use of ISDS as a mechanism for protecting industries that might be impacted by climate change policy is also identified by Friends of the Earth as a concern.
Dr Tienhaara point out that when governments begin curbing fossil fuel investments, a possible result is a company involved in the exploitation of these resources will attempt to recover potential losses using ISDS provisions.
Experts in ISDS who submitted to the Committee, both those in favour and those opposed to ISDS, support an appellate mechanism for ISDS cases.
It might also be worth Australia advocating for the use of precedent in ISDS cases, as this will at least provide a degree of clarity as to what to expect from ISDS tribunal decisions.
The Committee’s Report 165 on the original TPP noted that if Australia entered into a treaty with ISDS provisions in it, Australia should expect to be subject to ISDS cases and should plan accordingly.
Participants in the inquiry have also expressed the concern that Australia will be subject to ISDS claims. For example:
I expect the number of global corporations that could be involved with us through this TPP-11 could be huge, in view of all of the countries involved in this massive agreement and the fact that covers almost all aspects of trade and services. This complexity increases the risk of the ISDS legal provision being used against us for compensation in the future, in my opinion.
Since the publication of Report 165, the Australian Government has indeed been subject to another ISDS claim. The United States based company APR Energy Holdings Ltd has lodged a claim in relation to the alleged expropriation of several power generation turbines.
APR leased the turbines to another company, Forge Group, which used the turbines as security for a loan from the ANZ bank. APR lost ownership of the turbines after the ANZ appointed receivers to Forge Group
The case has been lodged under the terms of the Australia-US FTA (AUSFTA), even though AUSFTA does not contain an ISDS provision giving it direct rights to arbitration. The company is relying on AUSFTA’s most-favoured-nation clause, drawing on Australia’s consent to arbitration in the Hong Kong-Australia bilateral investment treaty, to argue that it can launch a case under the Hong Kong treaty.
The potential improvements discussed above: an appellate mechanism; a code of ethics for ISDS arbitrators; and the introduction of precedent, light the way forward for ISDS.