Foreign corporations could take action against Australia over laws that drag down profits under proposed provisions in the draft Trans-Pacific Partnership agreement.
Baker & McKenzie special counsel Jo Delaney (pictured) told Lawyers Weekly that the Trans-Pacific Partnership Agreement (TPP) may open the door to more claims by multinationals against Australia if the government agrees to certain provisions.
The TPP is being negotiated in secret by 12 Pacific Rim countries. Documents released by WikiLeaks in March revealed that Australia is opposed to the investor-state dispute settlement (ISDS) provisions, which have been included in the draft agreement.
“The draft is still being negotiation,” said Ms Delaney. “Nothing is set in stone. None of the draft chapters of the TPP have been formally released.”
ISDS provisions allow companies to bring a claim against a country for breaching investment protections in trade treaties or agreements.
This means if a country suddenly cancels a project, enacts a law that substantially decreases profits or nationalises assets belonging to a foreign company from a TPP state, it could be forced to pay damages.
The upside is that Australian companies active in other TPP states are also granted these investment protections and can enforce them if necessary through ISDS, Ms Delaney said. A key benefit is that Australian companies can use these provisions when investing in developing countries.
Historically, damages have ranged from millions to billions of dollars, with a US$50 billion decision against Russia last year setting the record.
Australia has only had one claim brought against it under an ISDS provision. A Hong Kong subsidiary of tobacco company Philip Morris is currently challenging Australia’s plain packaging law.
Philip Morris is claiming that Australia’s laws breach the investment protections in the Australia-Hong Kong bilateral investment treaty and constitute an expropriation of its foreign investments.
“The Phillip Morris case is definitely testing the boundaries,” Ms Delaney said. “But these disputes are in the press all the time in other parts of the world and have been for the past 20 years or so. It's not really a new thing.”
However, this case came as a shock to Australia and coincided with a decision by the Gillard government to reject further ISDS provisions in trade deals.
“That was the position of the Gillard government. The Coalition government has indicated that they will consider ISDS on a case-by-case basis,” said Ms Delaney.
The draft TPP agreement indicates that Australia is the only negotiating country opposed to the ISDS provisions, but Ms Delaney said she would be “very surprised” if the TPP were concluded without these protections.
“It generally is the position of the US that they would like to have investment arbitration provisions in there.”
Striking a balance
It is possible to safeguard a nation’s interests while also including ISDS provisions in a trade agreement, according to Ms Delaney.
Countries may be able to sidestep these disputes by making exceptions for laws relating to areas such as public health, the environment, as well as regulatory objectives.
These public interest exceptions have been “carved out” of the draft TPP published by WikiLeaks.
States can also protect themselves by providing a certain and predictable legal and regulatory framework in accordance with these treaties, Ms Delaney continued.
This means transparency and engagement with stakeholders through consultation is crucial to avoiding disputes.
“This may prevent states from unilaterally changing the law in a manner that has a detrimental impact on foreign investors," she said.
Nations v corporations
ISDS provisions have a long history in international treaties, according to Ms Delaney.
They can be found in Australia’s free trade agreements with China and South Korea as well as around 3,000 investment treaties worldwide.
“[ISDS provisions] are actually incredibly common,” Ms Delaney said. “During the 1990s the North American Free Trade Agreement (NAFTA) was entered into between the US, Canada and Mexico.
“It contained an investment chapter similar to investment chapters now included in FTAs [and] it included ISDS.
“So from about the late 1990s you started to see more investment arbitrations being commenced against the US. From then on, there was an exponential growth of these arbitrations.”
ISDS provisions are designed to protect foreign investors when a state interferes with the investment by, for example, physically seizing the investor's private property or suddenly changing regulations, unfairly impacting a foreign business.
“There has been a bit of a backlash against [ISDS] by a number of states that had claims against them, particularly states like Bolivia, Venezuela and Ecuador,” said Ms Delaney.
These countries have a 'habit' of appropriating foreign assets, she said. Foreign companies that may have invested millions or even billions of dollars in building up an asset often look to recoup losses by bringing claims under ISDS provisions.
But even though many cases brought by foreign companies are fair, there have certainly been cases that have caused “general outrage”, Ms Delaney said.
Concerns were raised, for instance, by the use of ISDS provisions to seek damages from the Argentine government following the economic crises of the early 2000s.
About 40 claims were made by foreign companies when the government froze soaring water, gas and electricity bills in an attempt to deal with the effects of mass unemployment and poverty.