How to Sue a Nation: Corporation v. Country

As the death bells knell for the Trans Pacific Partnership (TPP), a multilateral trade agreement which was (eventually) opposed by every serious US Presidential candidate, many enraged netizens are left hanging with fervent opinions about their country’s obligations to foreign investors.

Over the course of this election, America decided that Investor State Dispute Settlements, or ISDS, just weren’t quite its style.

And given America’s litigiousness, if you listened closely enough you would be able to hear Canada’s sigh of relief.

ISDS provisions in trade agreements allow investors to initiate independent and private tribunals challenging governments that directly or indirectly expropriate them. That is, if a foreign investor has been unfairly or not at all compensated for laws or executive activity that damages their business, they can bring a case against that government. This safety-net of investment security is particularly intended to benefit developing nations, which rely on the promise of accountability and investor-friendly policies to entice foreign investors.

It is ordinarily one-way, with governments unable to launch their own claims, and in many cases is not a process of any overarching legal institution.

Opponents of the mechanism attack this instantaneous case-by-case nature of ISDS as legally spineless. The arbitrations are characterised as dealings behind closed doors, as unscrutinised discussions between select and biased lawyers with millions of taxpayer-dollars at stake.

Some of the international agreements that provide ISDS are trade treaties such as the North American Free Trade Agreement and Trans Pacific Partnership, but the majority are bilateral investment treaties. These are designed to fairly adjudicate government and corporate agendas.

Australia also has the (mis)fortune of being involved in arguably the most renowned arbitration involving ISDS: Philip Morris Asia Limited (Hong Kong) v. The Commonwealth of Australia.

Fortunately the Phillip Morris case worked as ISDS ought to, although as tends to be the case, was in arbitration for longer than the case warranted. On 23 February 2011, Phillip Morris Asia (PMA) acquired the two Australian Subsidiaries of Phillip Morris International (PMI), an American “big tobacco” multinational. This enabled Phillip Morris to use ISDS provisions in the 1993 Australia-Hong Kong Bilateral Investment Treaty to demand compensation for the expropriation of business profitability caused by the Gillard government’s plain packaging reforms. The tribunal ruled unanimously against PMA’s jurisdiction to have its claim heard, and argued the windy process of acquisitions used to trigger the arbitration was an abuse of process.

The anti-ISDS tide has also struck Australian shores. In discussing the ISDS provisions of the TPP Penny Wong, the ALP’s spokesperson for foreign affairs, has reflected the Labor party’s long-standing hesitance towards the mechanism. She suggested that the Opposition would not have the country signed into any more free trade agreements (FTAs) including the provision, and that it would attempt to negotiate the provision out of any existing trade deals. Meeting halfway however, the party platform clarifies that:

While this process is underway, Labor in government will work with the international community to reform ISDS tribunals so they remove perceived conflicts of interest by temporary appointed judges, adhere to precedents and include appeal mechanisms.

In October 2014, The Economist newspaper published the article ‘The arbitration game’, issuing a warning about ISDS rhetoric that the US Election established to be retrospectively worth noting. A similar article from that same month challenges the demands that ISDS pushes onto nations to “give up some of their sovereignty”.

The Australian and American governments’ websites confirm their support for ISDS, although support for the TPP has notably faded from one of them since November 9th.  The respective governments suggest that ISDS has been working sufficiently, and that the criticisms: informality, lack of transparency, questionable legal validity, and high-cost arbitrations, are merely the side effects of poorly written provisions, and are not due to any inherent flaws in the provisions themselves.

Critics of ISDS often meet in the middle ground, conceding that certain provisions are particularly poorly written and that the mechanisms can be improved. If one thing about the ISDS debate is clear, it is that this is the middle ground that governments must too meet in.

It is incumbent on the Australian Government to ensure that in all its negotiations, Australian citizens feel secure. It needs to ensure its ability to legislate good policy, both social and environmental, will not be restricted by free trade agreements or bilateral investment treaties. And then it needs to express this, convincingly.

If progress is to be made in fair and just international arbitration, the Government needs to balance public faith with investor confidence. Perhaps it ought to heed a lesson from America, and take the public faith part more seriously.

Luke Thomas is a West Australian student who has interned with local politicians. He expresses his patriotism with Australian Afternoon tea.


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