WA Today | 29 Aug 2014
Trade treaties expose Australia to costly litigation, experts warn
’It is a complete reorganisation of sovereignty.’
Australia risks getting swept up in a wave of litigation by foreign corporations wishing to sue over unfavourable domestic laws, experts warn, after the government rejected a bill to ban controversial trade agreements.
Business groups have backed the government’s decision as good for investors, but the Greens and trade-law specialists warn the little known "investor-state dispute settlement" clauses inserted into treaties pose a serious threat.
They say they have already cost the government unknown sums in its fight with Philip Morris over plain-packaging laws, currently making its way through international arbitration courts in The Hague.
They now say they could cost the government further millions after Labor reversed its promise to oppose the provisions following the action from Philip Morris.
A Senate committee on Wednesday rejected the bill to ban ISDS clauses from future treaties, put forward by Greens senator Peter Whish-Wilson.
The clauses allow a foreign company to sue a government if it believes its laws have harmed its profit.
The rejection of the bill follows a warning by High Court Chief Justice Robert French that the provisions have the potential to challenge the power-base of the High Court and create uncertainty among litigants.
It also comes as the government negotiates one of the biggest trade deals in Australian history, the Trans-Pacific Partnership, which includes ISDS clauses.
ISDS clauses were originally put in place to safeguard the interests of companies operating in countries that lacked rule of law. However, health organisations and environmental groups argue they pose a threat to regulation that protects a country’s citizens’ best interests.
According to the United Nations Conference on Trade and Development, the number of ISDS cases internationally has doubled in the past 10 years to 568, with claimants from the EU and United States accounting for 75 per cent of cases.
The disputes are filed through international arbitration courts that have been criticised for their lack of transparency, and there is no right to appeal.
Professor Thomas Faunce, at the Australian National University College of Law, has described the provisions as an "affront to the rule of law".
"You have these foreign stakeholders influencing - quite openly - the policy of our society," he says. "It is a complete re-organisation of sovereignty in our country."
On Wednesday, the Senate standing committee on foreign affairs, defence and trade, chaired by Labor senator Chris Back, rejected the Greens bill on the grounds that Australia had more to gain by remaining "engaged" with the international investment law system.
It said the risks to Australian sovereignty were "overstated".
"A blanket ban on ISDS would impose a significant constraint on the ability of Australian governments to negotiate trade agreements that benefit Australian businesses," it said.
"The current case-by-case approach to ISDS is in Australia’s long-term national interest."
The decision comes as Philip Morris continues to challenge the High Court of Australia’s decision on plain-packaging laws.
Philip Morris launched the proceedings through an ISDS provision in a treaty that Australia and Hong Kong signed in the early 1990s.
Senator Whish-Wilson says the rejection of the bill leaves Australia open to more cases like Philip Morris.
"These deals are being used more and more frequently," he says. "The carve outs and exceptions that are supposed to reduce the risk of the public interest being impacted by corporate litigation hasn’t worked."
The OECD estimates the average cost of arbitration cases arising from investor-state disputes is $8 million for each case.
The government has refused to reveal how much money it has spent fighting the plain-packaging case, arguing it might provide a tactical advantage to the tobacco industry.
In its May budget papers it said spending on plain-packaging litigation was not for publication, but said it would continue to provide further funding to defend international legal proceedings against "tobacco companies" generally.
The Department of Health revealed in a Senate estimates hearing in June that it continued to receive freedom-of-information requests from other cigarette companies regarding the 2011-12 High Court case.
It would not reveal, however, whether this had forced the government to increase its legal provisions.
In the committee’s report on Wednesday, Labor senators said the inclusion of ISDS provisions in treaties was "unnecessary" but that it was not desirable to "radically constrain the executive’s treaty-making power" in the manner proposed by the bill.
It represents a shift in position after the Gillard government declared it would never enter into another ISDS provision after the Philip Morris case.
A briefing paper by the European Parliamentary Research Service in January raised a number of concerns about ISDS provisions, including the fact that they enabled "treaty shopping" by companies wanting to take advantage of bilateral deals.
It also pointed to the high cost of arbitrations, the lack of transparency and the growing phenomenon of third-party funding of claims by banks, hedge funds and insurance companies in exchange for a share of the proceeds.
But the Australian Chamber of Commerce and Industry says a ban on ISDS provisions would prevent Australian companies from being able to protect their international interests.
"Companies are always entitled to pursue their commercial interests, and should be able to do that," ACCI’s director of trade and foreign affairs, Bryan Clark, says.
Arbitration lawyers, which benefit financially from the cases, say Australia could benefit from greater corporate litigation.
"We have a great opportunity to position ourselves as the Switzerland of the Asia Pacific," Albert Monichino, QC, an arbitration lawyer at Owen Dixon Chambers, said.
Australia is party to 21 bilateral investor treaties, all of which contain ISDS provisions. It is also exposed to ISDS provisions through four out of seven of its free-trade agreements.
Professor Faunce says the provisions sent the wrong message to developing countries as Australia invests more heavily in Asia.
"We’re moving into an Asian century where we want to promote the rule of law," he says.
"Not only are we saying we don’t trust the rule of law - we’re saying we don’t trust it in our own country. It’s a profound statement in our lack of confidence in our own government."