Investor State Dispute Settlement: Storm in a China Cup?

Friday 21 November 2014 @ 10.37 a.m. | Judiciary, Legal Profession & Procedure | Legal Research | Trade & Commerce

Recently, The Age reported that there may be an underlying trap in the newly signed Free Trade Agreement (FTA) between Australia and China. The recently signed agreement has to date been kept very confidential when it comes to details of its content but the revelation that the agreement between China and Australia signed on Monday (17 November 2014), contains Investor State Dispute Settlement (ISDS) provisions, having the potential to allow Chinese corporations to sue the Australian government if changes in Australian law can be shown to have harmed or damaged their Australian investments, has caused some questions to be raised by the Federal opposition and the Greens.

It is reported that the Federal Government has been asked if the ISDS provisions would allow Chinese investors, including state-owned enterprises, to "take action" against the Australian government if their profits were harmed. An example given of where an ISDS clauses could be used by a Chinese corporation was with respect to future changes to the renewable energy target (RET) or carbon farming schemes which could give rise to liabilities under the ISD mechanism?

The Federal Government's response to this through senior Liberal Senator Eric Abetz is reported as being that the ISDS clauses can be found in 20 similar international trade agreements and even in those agreements in which the former Federal Labor government had negotiated.

Is the Inclusion of the ISDS a Cause for Concern?

The Conversation in a recent article on the Australia /USA  FTA points out that the inclusion of an ISDS provision "is significant" because the clause:

". . . gives authority to major corporations to challenge laws made by those elected to do so in the nation’s best interest in international courts of arbitration."

And as to why that could be of concern - as the article goes on to point out such international arbitration could be viewed as:

“ . . . a privatised justice system for global corporations”.

A situation none would regard as desirable in a democratic society.

The Conversation goes on to discuss the issues around Plain Packaging of Tobacco and the way in which Philip Morris sought to use the ISDS in the Australia/ USA FTA to defeat the legislation in the High Court, making the point that:

"This claim was made despite the fact that this law was made by a democratically elected Parliament and had been deemed legitimate by the nation’s highest court."

Why ISDS provisions were Introduced?

The ISDS provisions are said to have been introduced into foreign trade agreements decades ago to protect corporate investors and their investments, particularly in countries perceived to lack a strong legal system, through the use of International Courts and Arbitration. An example, of how this might work would be where investments were seized or nationalised by a rogue state or dictatorship, then the ISDS authorises the foreign state investors to bypass the domestic legal systems and have their case heard by an external party such as an International Court or Arbitrator, and such body, could order the upholding of the investor rights and state duties contained in the international trade agreement.

Has the Original Purpose Remained?

The Conversation points out that in recent times the number of cases being brought on for international arbitration has increased, with 58 cases being lodged in the last year. These numbers are said to be the highest ever brought in a year, and more than a third of those said to have initiated in developed nations with a rule of law and not the scenario envisaged originally for such provisions.

So is Concern Over the FTA between China and Australia - a Storm in a China Cup

The Age quotes Dr Kyla Tienhaara, from the Regulatory Institutions Network at the Australian National University, as saying that mechanisms like the ISDS

". . . had been used by corporations in the past to challenge legitimate public policy measures – such as Australia's tobacco plain packaging laws – and there was no reason why the mechanism in the China-Australia FTA could not be used for similar reasons."

The inclusion of the ISDS in the China/Australia  FTA agreement also means the FTA with Japan will as Dr Tienhaara also points out, will need to be reviewed, because that agreement required that if an ISDS mechanism was included in an FTA with China then Japan would like to have one in its FTA with Australia as well.

The Federal Government defends criticism of the ISDS saying it was "benign" and would allow Australians to invest in China "with greater confidence" - pointing out that the provisions applied in Australia's favour as well, and indicating the ISDS ". . . contained strong safeguards to protect the Australian Government's ability to regulate in the public interest and pursue legitimate welfare objectives in areas such as health, safety and the environment, . . "

The nature of the safeguards and their strength is not known given the text of the FTA remains secret and cannot be scrutinized by the public. Certainly, it is clear that a corporation has a wide scope to challenge government actions under an ISDS and that the issue is not a minor one, and as The Age reports:

"Investor state dispute settlements are not the appropriate forum for companies to sue governments. These things should happen under the existing democratic processes and court systems that we have."


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