TPPA gives jurists food for thought

Jane Kelsey                 In May 2012 more than 100 eminent jurists, largely from New Zealand, signed an open letter expressing concern about the investment and investor-state dispute arbitration provisions in the proposed Trans-Pacific Partnership Agreement (TPPA).
  • Professor Jane Kelsey, University of Auckland

The agreement has been formally under negotiation since March 2010 and currently involves twelve countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. There have been repeated missed deadlines for its conclusion. The latest, the end of this year, seems unlikely to be met for several reasons.

Negotiations on four chapters that deal with medicines, copyright and the Internet, environment and state-owned enterprises are in disarray.

The budget breakdown in Congress has raised doubts about the ability of President Obama to secure ‘fast track’ authority that would require Congress to vote the agreement up or down. The idea that US politicians could pick apart a ‘final’ agreement should make the other countries in the TPPA unwilling to conclude the deal.

In a number of countries there also is mounting political pressure on governments. One reason is the collective decision of the parties not to release the text until it is signed and to withhold background documentation for a further four years. That reverses a hard-fought trend to greater disclosure of working documents that allows for detailed analysis of their implications, including at the World Trade Organization. Parliamentarians from the US, Malaysia and most recently the new Labour leader David Cunliffe have expressed concern about the difficulty of assessing the implications of the TPPA for key areas of public policy under 
such secrecy.
Another issue is the potential impact of the agreement on states’ autonomy to determine their own domestic policies and regulation. The TPPA has attracted particular attention because it is not an ordinary free trade and investment agreement. It has been promoted as a 21st century agreement that will reach further ‘behind the border’ than any previous free trade or investment agreement. It is expected to have 29 chapters or major sections, very few of which involve old-fashioned trade. Most of them aim to ‘discipline’ the content and process of governments’ public policy and regulatory decisions in a wide range of areas, from smokefree laws and mining to financial regulation and procurement contracts.

In practice, the combination of chapters would give foreign governments and well-resourced foreign companies much greater influence than they currently have over countries’ domestic decisions, and would marginalise competing national priorities, advocates and agencies, including Parliament and the courts.

Those who are not familiar with these international agreements might draw analogies to the proposed Regulatory Responsibility Bill. This caused a furore for several reasons. One was the inclusion of a property rights rule on regulatory takings. This is similar, although not identical, to the indirect expropriation provision that is found in international investment agreements, and in the leaked investment chapter of the TPPA. A complementary protection guarantees a vaguely worded ‘minimum standard of treatment’. These rights are conferred by the treaty itself and are enforced by the investor against the state through international arbitration, rather than through domestic courts.

The use of this investment enforcement mechanism has skyrocketed in recent years. According to the United National Conference on Trade and Development (UNCTAD) the number of known international investment disputes has reached an all-time high, with 58 new cases being lodged 
in 2012.

Recent disputes have challenged governments’ actions relating to mining, medicines, privatisations, climate change mitigation, vulture funds, PPP contracts, private water concessions, and tobacco control. The US is the source of 24% of disputes. New Zealand has relatively few of these agreements, which makes the TPPA with the US especially ominous.

The investor’s first goal is usually to get the government to back down and to chill future decisions that might otherwise not be in their favour and, if that fails, for the government to agree to settle, given the costs and legal uncertainties.

The Organisation for Economic Cooperation and Development (OECD) estimates the average cost of a dispute is US$8 million; some have exceeded US$30 million. Tribunals can award compensation for lost value and loss of future profits, with compound interest – in a recent case Occidental Petroleum was awarded $1.76 billion against Ecuador, the biggest award ever, plus $589 million in compound interest. The OECD observed in 2012 that compensation claims of hundreds of millions, or sometimes billions, of dollars have the potential to seriously affect a respondent country’s fiscal position.

Both the OECD and the UNCTAD have aired concerns about problems of legitimacy that confront the international investment arbitration process. Tribunals are criticised for being ad hoc and secretive, with no binding precedent or appeal structure. Arbitrators are mainly drawn from global law firms that also act for investors who bring such disputes. Outcomes are unpredictable and perceived to be disproportionately pro-investor.

A number of countries are actively reconsidering their exposure to these processes. Argentina faces claims totalling $65 billion, which arise from the successful measures taken to address a financial crisis in 2001. In January this year Argentina announced it would withdraw from the World Bank facility, the International Centre for Investment Disputes (ICSID). The chief legal advisor to Argentina’s Treasury describing ICSID as a tribunal of butchers that only rules in favour of multinational companies.

The Australian government, which has signed relatively few investment agreements, has declined to take on any further obligations to allow investor-initiated arbitration. 
This position was first taken during negotiations of the Australia US Free Trade Agreement by the Howard Liberal government, and was continued into the Labor government’s negotiations on all its free trade and investment agreements, including the TPPA. The new Liberal government has said it will approach the issue case by case, but so far is holding firm on the TPPA.

The leaked text of the investment chapter of the TPPA showed New Zealand has not followed Australia’s lead. Yet New Zealand’s recently concluded agreement with Taiwan made submission of an investment dispute to arbitration subject to the government’s consent.

There is a second parallel to the Regulatory Responsibility Bill. An important motivation for many of the jurists to sign the open letter in 2012 was concern over the intrusion of investor-state arbitration on domestic courts. The implications are different from concerns about the role of the courts under the Bill, but they are equally serious.

An unprecedented claim for CAD$500 million that was recently lodged by US pharmaceutical company Eli Lilly under the North American Free Trade Agreement (NAFTA) has caused reverberations among the judiciary, patent lawyers and the public health community. Patents are defined as an ‘investment’. The drug company claims that Canada has breached its rights under the Chapter 11: Investment of NAFTA, which is the model for the TPPA.

The impugned actions are two decisions of Canada’s Supreme Court. The court upheld separate appeals that invalidated patents for two drugs because the patent claim had not disclosed evidence to support their promised utility, as required by Canada’s domestic ‘utility’ doctrine. Eli Lilly is not only challenging the invalidation of its two patents, but the entire legal doctrine developed under Canadian jurisprudence.

To support its claim that Canada failed to provide a minimum standard of treatment, the pharmaceutical company says the judicial doctrine is novel, when compared to other countries, and undermines the investor’s ‘most basic and legitimate expectations of a stable business and legal environment’. It is also claiming direct and indirect expropriation (takings) using tortuous arguments about Canada’s international law obligations. Finally, it makes the extraordinary claim of discrimination on the grounds that it would not have been required to meet those standards under US or European Union law.

The affront in the legal community about such claims is compounded by the US refusal to allow the general exception for ‘necessary’ public health measures to apply to the investment chapters of its agreements. That is reportedly also its position in the TPPA. Even if the exception did apply it would not guarantee protection, because it has many provisos and must be established as a defence to a legal challenge. Similar problems would apply to the comfort words that are often pointed to as restraining the room for investment tribunals to go off on legal frolics of their own. The reasons are well explained by Brook Baker’s commentary on the Eli Lilly case in Issue 4, volume 4 of the Investment Treaty News, September 2012.

Most members of the profession have probably been content to let international trade and investment agreements float by in the assumption they do not have implications for what they do. If that ever was the case, it certainly is not now. There is an urgent need for lawyers – and indeed judges - to start asking questions about what is happening in the TPPA negotiations, and not be fobbed off with assurances that it will not affect them or our domestic legal system.  

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