Australia's Embrace of Investor-State Dispute Settlement: A Challenge to the Social Contract Ideal?

Abstract

This paper explores the origins of investor-state dispute settlement (ISDS) treaties and their implications for the Australian social contract. This analysis includes how and why ISDS emerged in NAFTA, was rebuffed with the failure of the Multilateral Agreement on Investment (MAI), and became incorporated into most subsequent bilateral US trade and investment agreements. The paper considers Australia’s exposure to ISDS — first through using it in bilateral investment agreements in nations with inadequate governance mechanisms to support the rule of law, then turning against it when a multinational tobacco company tried to use the mechanism to overturn scientifically endorsed, democratically approved and constitutionally validated tobacco plain packaging measures. The paper concludes by exploring the hypothesis that an alternative governance vision can be achieved in which the system of investment arbitration and trade law is made coherent with presumptively more democratically legitimate normative systems such as constitutional and international law.

A central part of the hypothetical social contract ratified by the Australian Constitution is that our nation will be governed democratically by a rule of law, with its implicit predictability, certainty and accountability. Australian taxpayers (through their governments) have invested an enormous amount of time and resources in creating a system of governance predicated on the capacity of a non-corrupt judiciary to decide on disputes by fairly interpreting laws promulgated in advance in public. Foreign corporations operating in Australia benefit from such an equitable governance structure. Indeed, it is one of the primary reasons they invest here. Australia regularly ranks very highly in rule of law rankings of nations around the world. Australia does not need ISDS to create a society in which its citizens can prosper and flourish. This is even more likely to be the case as new generation food and fuel technologies such as artificial photosynthesis become globally deployed.

In June 2013 the UNCTAD issued a report on reforming investor-state dispute settlement which highlighted concerns including a ‘perceived deficit of legitimacy and transparency,’ ‘contradictions between arbitral awards,’ ‘difficulties in correcting erroneous arbitral decisions,’ ‘questions about the independence and impartiality of arbitrators’ and ‘concerns relating to the costs and time of arbitral procedures.’ Recommendations for reform included (1) Promoting alternative dispute resolution (2) Tailoring the existing system to have a stronger transparent and consistent rule base (3) Limiting investor access to ISDS (4) Introducing an appeals facility and (5) Creating a standing international investment court.

To become democratically legitimate ISDS proceedings such be open to the public, transcripts of all proceedings freely available and decisions reported. Investors must be prohibited from structuring their investments through intermediary countries with the sole purpose of benefiting from their ISDS mechanism. Yet another reform option would be to allow States to bring actions against corporations under ISDS. Such cases could arise as counter-claims in actions where corporations have initiated ISDS claims. Such actions would be heard before tribunals with a much broader potential membership than investment lawyers. They would include people with public health, environmental and human rights law expertise.

A far-reaching reform would be to abandon ISDS and the use of trade and investment arbitrators as a means of dispute resolution altogether and return to State-State arbitration proceedings before transparent international courts. Mechanisms should be created whereby ISDS impacts on federal governance arrangements in particular should be publicly assessed and debated. Likewise, a wide-ranging whole of government and public debate is required to provide legitimacy to any ‘carve-out’ provisions applied to allegedly soften the social and environmental impact of ISDS. It will be difficult for, for example, Australia to convince our Asian neighbours to invest significant resources in creating rule of law conditions including a non-corrupt judiciary if that legal system is likely to be disregarded by foreign corporations in any major dispute.

ISDS obligations in the TPPA should not be treated as if they have equivalent perpetual status (subject to democratic referenda) as the Constitutional provisions that centrally frame the social contract of a democracy. In the interim, International and Constitutional law should affirm that as a matter of general international law, a non-discriminatory regulation for a public health, educational or environmental sustainability purpose that affects a foreign investor or investment is not deemed expropriatory and compensable by damages; their right to make any term of this agreement, particularly those affecting their sovereign democratic right to protect public health and the environment, conditional upon the passage of legislation debated in parliament. Australia should ensure that experts with public health, environmental and human rights expertise are capable of serving on ISDS panels and that ISDS rights include the capacity for counter claims by States where investments have damaged public health or the environment or are likely to. An Australian stance to reform ISDS may pave the way for important public policy initiatives toward environmental sustainability in areas such as financial reform (including a global financial transactions tax) and energy security. In particular, government policy makers and regulators considering banning the activity of a multinational corporate in circumstances of scientific uncertainty about public health or environmental consequences by using the precautionary principle, should not have to double guess at what level the standard of proof they might then apply could also trigger a challenge to such precautionary regulatory action by a multinational corporation under the ISDS system.

Keywords: Investor-State Dispute Settlement, Investment Agreements, Trade Agreements, Social Contract, Public Goods

JEL Classification: H51, I18, L32