Of TPP's, ISDS's and the Constitution

If the Trans-Pacific Partnership becomes an Agreement, New Zealand will become bound by a set of "Investor State Dispute Settlement" procedures. What are these, and why should anyone care?

I write this not knowing whether the Trans-Pacific Partnership will become an Agreement or merely a very long, stressful yet ultimately fruitless set of negotiations. I also write this with an admitted lack of expertise in the issue of international trade and economics. So I simply don't know whether the rosy promises about the TPP (maybe A) providing a real bump in economic growth are true. 

However, I do know a little bit about constitutional law and theory - that is, the sort of issues that arise when we ask how do, and should, we govern ourselves as a nation. It's in that capacity that I want to say a few things about the TPP (maybe A) and in particular the apparent inclusion in it of "Investor State Dispute Settlement" (ISDS) procedures.

(A quick note here. As with anything to do with international law, acronyms proliferate in discussions about the TTP (maybe A). Sorry about that!)

So, what on earth is an "ISDS procedure" when it's at home? Here's how the European Union describes it:

ISDS is a procedural mechanism provided for in international agreements on investment. Countries sign such agreements in order to set out ground rules when foreign companies invest on their territory, for example by building factories. ISDS allows an investor from one country to bring a case directly against the country in which they have invested before an arbitration tribunal.

In order to bring a case, an investor must claim that the Party has breached rules set out in the agreement. For example, an investment agreement will often say that a government can only take over or 'expropriate' (for example, nationalise) an investment if it pays adequate compensation to the investor.

If a country seizes an investment or passes new laws which make it worthless (for example, it suddenly bans a product produced in a factory owned by a foreign investor) and pays insufficient compensation, or none at all, the investor could use ISDS to bring a claim directly against that country, claiming a breach of the expropriation provision in the agreement and seeking compensation. 

That sounds relatively benign. It's just a way that countries can be kept to their promises to investors from other countries. The only time that an ISDS procedure would become an issue for New Zealand is if we go back on our word as given in the TPP (maybe A) and mistreat some investor from another country - which isn't something that a nice, orderly nation like New Zealand is likely to do!

That's certainly the message the New Zealand Institute of Economic Research provided to ExportNZ last month, when it produced a report that lead ExportNZ's Executive Director, Catherine Beard, to claim:

Arbitration is usually only needed in the case of rogue decisions by unpredictable governments. ISDS arbitration is primarily designed to stop extreme actions such as illegally confiscating or nationalising business assets.  New Zealand is not an extreme government.  We have good rule of law, strong institutions, a global reputation for fairness and lack of corruption and a strong interest in encouraging foreign investment. These factors combined mean New Zealand is unlikely to be targeted in investor-state disputes.

 (You can read the whole NZIER report here.)

It's also a message that John Key has repeated on a number of occasions in the House and elsewhere, to the effect that NZ has signed up to a whole range of these ISDS procedures with a bunch of countries over the years without ever having had an action brought against us under one. So if NZ now agrees to be bound by another ISDS provision under the TPP (maybe A), it's hardly adding anything new to the mix.

Except ... maybe not. Because there is perhaps a bit more to the picture than that.

For one thing, it is misleading to imply that existing ISDS provisions haven't had any impact on NZ's laws and policies. The Smoke-free Environments (Tobacco Plain Packaging) Amendment Bill currently is sitting on the House of Representative's Order Paper awaiting the outcome of an action brought against Australia by the Philip Morris cigarette company under an ISDS procedure. The Government specifically has stated that it will not enact this measure until it sees the outcome of that (and other) action - because if it passes the law and Philp Morris wins its ISDS claim, then NZ too will be vulnerable to a similar ISDS action. And we don't want to have to pay millions and millions of dollars in order to be allowed to take logos off cigarette packages.

So the question isn't just whether we've done something that attracts an ISDS challenge. It's also what have we not done out of fear that the procedure might be used against us. And, what might we not do in the future?

Furthermore, there's a fair amount of examples of successful actions being brought under ISDS provisions against other countries that have "good rule of law, strong institutions, a global reputation for fairness and lack of corruption and a strong interest in encouraging foreign investment." In a speech given late last year, the Chief Justice of Australia outlined some of them:

A quarter of all the arbitrations commenced in 2013 involved challenges to regulatory action by the Czech Republic and Spain affecting the interests of the providers of renewable energy. Environmental laws in Canada were also the subject of ISDS processes. Lone Pine Resources Inc instituted a claim against Canada last year in response to a moratorium imposed by Quebec on hydraulic fracturing (fracking), which led to revocation of the claimant's gas exploration permits. Windstream Energy LLC instituted a claim against Canada on the basis of a moratorium imposed by Ontario on offshore wind farms. The Swedish company, Vattenfall, is suing Germany under the Energy Charter Treaty over Germany's decision to phase out nuclear energy power plants.

These don't really sound like "extreme actions such as illegally confiscating or nationalising business assets". And what is more, as the Chief Justice goes on to discuss, these ISDS provisions can kick in even if a nation's courts already have found that the Government's actions are consistent with domestic law. In other words, they operate as a guarantee for the interests of international investors that is above and beyond anything available to domestic citizens or companies.

But still, overseas investment is good, right? And if (as the EU claims) we're only talking about protecting situations where "foreign companies invest [in our] territory, for example by building factories", then how much of an issue can it be?

Well, I've been lucky enough this year to have a very good student (hat tip Oliver Hailes!) who has just completed his LLB Hons thesis examining the wider constitutional implications of entering into the TPP (maybe A). With his permission, I'll quote some of his thinking on the matter:

Article 18 of the draft [TPP] text allows investors to file proceedings in a number of fora. The tribunal would comprise three arbitrators, one appointed by each of the disputing parties and a third presiding arbitrator appointed by agreement. Such tribunals are furnished with unlimited discretion to award monetary damages, restitution of property, as well as costs and attorneys’ fees. Moreover, the TPPA does not permit appeals from arbitral decisions. These ISDS provisions would apply to all states, with the possible exception of Australia, thereby carving open pathways for a swarm of new investors. The definition of “investor” covers anyone that “attempts to make, is making, or has made an investment” in a host state. “Investment” extends far beyond real property to include:

"… every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk."

The draft text provides a number of examples: regulatory permits, intellectual property rights, financial instruments such as stocks and derivatives, “construction, management, production, concession, revenue-sharing, and other similar contracts,” and “licenses, authorizations, permits, and similar rights conferred pursuant to domestic law.”

So when we say that "foreign investment" will be protected by the TPP (maybe A)'s ISDS procedure, we most certainly aren't just talking about overseas companies building factories in NZ. The scope of their protected interests will go far, far wider than this - meaning that NZ Government decisions that impact on those interests will potentially be open to ISDS challenge. And what is more, the claim that because past ISDS procedures haven't been used against New Zealand, future such processes also won't be used is a bit questionable. As Oliver notes:

These expansive definitions become problematic when we consider the qualitative and quantitative differences between TPPA parties and earlier commitments. New Zealand is bound by ISDS clauses contained in agreements with China, South Korea, Malaysia, the Association of Southeast Asian Nations and Australia, Singapore,Thailand, and Hong Kong. By virtue of the TPPA, New Zealand would be notably exposed to investors based in the U.S. It is well reported that the U.S. is the most frequent home state of claimants under ISDS provisions. As at the end of 2014, approximately 130 claims had been initiated by U.S. investors, nearly twice as many as the second most litigious state. This statistic suggests the unparalleled resources enjoyed by U.S. investors would be readily deployed to secure a liberalised market across the Pacific.

So here's my thoughts. I have real concerns about the potential for this ISDS process to straitjacket future Government actions (including actions taken by Parliament after MPs are elected on an express promise to carry it out). That's because, once the ISDS procedures are in place, there will be very smart, well paid people whose job it is to make use of them to benefit the companies that pay their bills. And in spite of the reassurances currently being given, the ISDS procedures (and the TPP (maybe A) that they are a part of) of necessity contain a lot of vagueness that will be left to be clarified by future actions. So no-one, and I mean no-one, really knows how the agreement actually will play out in the future - because until that future happens, we won't know what sort of clever arguments and applications will get dreamed up for using them.

(Case in point - you think that when Australia agreed back in 1993 to put a ISDS procedure in its bilateral investment agreement with Hong Kong it ever thought "this might mean we one day have to pay a tobacco company hundreds of millions of dollars because we tried to stop people from starting to smoke?")

Which means that if we sign up to the TPPA (assuming the "A" becomes a reality), we are going to change how our country is run into something else. Maybe that change really won't be a big deal - maybe ExportNZ and John Key are right to say that ISDS's are not a problem for us. Or maybe it will be a big deal - maybe we will find ourselves reasonably frequently hanging on the decision of three private individuals who are deciding if we are allowed to have a policy in place without having to pay many millions of dollars to an overseas company. 

But you know what? I don't think anyone - and that includes the people currently negotiating the TPP - really knows either. Which worries me. Quite a bit.