CPTPP Treaty with ISDS now an Existential Threat to New Zealand
My submission of 17 August 2018 to the Foreign Affairs, Defence and Trade Committee of the New Zealand Parliament (‘the Committee’) on the Trans-Pacific Partnership Agreement (CPTPP) Amendment Bill (‘the Bill’).
Thank you for the opportunity to submit to the Foreign Affairs, Defence and Trade Committee (‘the Committee’) on the Trans-Pacific Partnership Agreement (CPTPP) Amendment Bill (‘the Bill’) (progress of the bill, latest text).
As is justified below, I submit that the Committee should report back to the House of Representatives of the New Zealand Parliament (‘the House’) that the CPTPP treaty (‘the Treaty’) (treaty text) has become an existential threat to New Zealand as a sovereign nation and, therefore, the bill should not be advanced, and the treaty should not be ratified.
This submission is made notwithstanding that the Ministry of Foreign Affairs and Trade (MFAT) has already published a National Interest Analysis (NIA) on the treaty dated March 2018, and further notwithstanding that the Committee then examined the treaty and published an International Treaty Examination of the CPTPP (‘the examination’), dated May 2018. As I read it, the Committee in its examination appears to have accepted the findings of the NIA without reservation or variation.
Even so, I submit that the potential consequences of New Zealand ratifying and joining the treaty have deteriorated so much in recent times that — without in any way implying any criticism of either the NIA or the examination — it is appropriate and indeed the duty of the Committee to issue a revised recommendation, now against the New Zealand Government ratifying the CPTPP treaty.
The alarming new developments concern the Investor State Dispute Settlement (ISDS) provisions of the treaty, in Chapter 9: Investment.
It is therefore appropriate to present a timeline of some relevant events and analyses around the ISDS mechanism, both in general and specifically relating to its implementation in the CPTPP treaty, as follows.
On 8 May 2012, an open letter (‘the letter’) was published from more than 100 jurists from New Zealand and other countries then engaged or potentially engaged in the treaty negotiations, including some of their most eminent lawyers. The letter was addressed to the negotiators of the treaty — then known as the Trans-Pacific Partnership or ‘TPP’ — and called for the exclusion from the treaty of the rights of foreign investors to sue governments directly using the ISDS mechanism.
The letter states: “the expansion of [ISDS provisions] threatens to undermine the justice systems in our various countries and fundamentally shift the balance of power between investors, states and other affected parties in a manner that undermines fair resolution of legal disputes.”
The letter concludes with: “WE THEREFORE CALL UPON all governments engaged in the TPP negotiations to follow Australia’s [then] example by rejecting the Investor-State dispute mechanism and reasserting the integrity of our domestic legal processes.”
Included in the signatories of the 2012 letter were now-prominent MPs in New Zealand’s current government: Winston Peters (now Deputy Prime Minister and, then and now, Leader of the New Zealand First party), Andrew Little (Labour Party, formerly Leader of the Opposition, now Justice Minister), and Eugenie Sage (NZ Green Party).
In a 9 July 2014 speech (full text .pdf), Robert French, Chief Justice of the Australian High Court, warned: “Arbitral tribunals set up under ISDS provisions are not courts, nor are they required to act like courts, yet their decisions may include awards which significantly impact on national economies and on regulatory systems within nation states.”
At the time of the letter and of French’s speech, the draft text of the treaty was still secret. The text of the treaty was finally released to the public on 6 November 2015.
Soon after publication, the eminent international arbitration lawyer George Kahale III — chairman of the world’s leading legal arbitration firm: Curtis, Mallet-Prevost, Colt & Mosle LLP — responded in the Guardian newspaper on 10 November 2015 with a severe warning about the then newly public investment chapter of the treaty. He criticized both ISDS in general as well as its specific implementation in the treaty text.
Taking the general criticisms first, the Guardian article stated: “The problem with ISDS is not just that corporations can sue governments, said Kahale, but that its entire legal framework is fundamentally flawed.” Kahale called the ISDS provisions “weapons of legal destruction”.
Of course, this somewhat echoes the appraisals of the 100 jurists in the 2012 letter and of Chief Justice French, albeit now expressed in more colourful terms.
It is these fundamental flaws in ISDS that were already of grave concern to legal experts by 2015 and that have since become exponentially more exploited up until the present day, as is discussed further below.
But first I will draw the Committee’s attention to two of Kahale’s more specific criticisms in the Guardian article that concerned the 2015 implementation of ISDS in the treaty.
Regrettably, these offending provisions remain intact in today’s CPTPP treaty and they would make New Zealand even much more vulnerable should we enter into the CPTPP treaty.
Kahale drew attention to Article 9.15 of the TPP, which was being represented as purportedly providing protection against the ISDS provisions whenever new legislation was motivated by environment, health, or other public interest objectives. However, as the Guardian article states: “This entire provision is negated, says Kahale, by five words in the middle: “unless otherwise consistent with this chapter”. “So at the end of the day, this provision, which really held out a lot of promise of being very protective, is actually much ado about nothing.””
I note for the benefit of the Committee that, regrettably, Article 9.15 is essentially unchanged, though now as Article 9.16, in the current version of the treaty. Therefore, contrary to what is still routinely claimed, it is also the case that no effective public interest protections apply in the current CPTPP Investment chapter.
For the convenience of the Committee, Article 9.16 of the current CPTPP is shown here as Fig. 1, with the five words highlighted that, as explained by Kahale and reprised in the figure caption, negate the purported public interest protections.
Kahale further warned, in the 2015 Guardian article, of the ‘most favoured nation’ provision in the treaty as, “a dangerous provision to be avoided by treaty drafters whenever possible.” He pointed out that it allows investors, instead of abiding by the ISDS terms of the CPTPP treaty, to substitute in ISDS terms from any other investment agreements that the treaty nation has signed, and thereby to cherry pick the terms that are the most unfavourable for the responding treaty nation.
The Committee should be aware that, unfortunately, the same ‘most favoured nation’ provisions apply in the current version of the treaty, despite admissions of their dangers from both Prime Minister Jacinda Ardern and Trade Minister David Parker.
Now returning to the general situation with ISDS, a dangerous evolution in the frequency and size of ISDS claims was already becoming evident by 2015.
The 2015 Guardian article reported that: “billion-dollar claims are becoming the norm, said Kahale, citing a then recent case in Ecuador, where the government owed more than $1bn to the multinational oil company Occidental.”
In an April 2016 interview, Kahale added that, “The combination of hugely inflated damage claims and inherent bias against states in the system makes [ISDS] dangerous,” and warned that,“too many [investment provisions] have been entered into without serious analysis,” given the evolving hazards from ISDS and the potential for them to become progressively more dangerous.
To the Committee, I accept that the general state of ISDS activity until then was available to MFAT to have been assessed within their NIA. However, Kahale has much more recently reported on dangerous new developments in ISDS: in an academic paper titled “Rethinking ISDS” and dated February 2018, and in a follow-up talk given in April 2018 and titled “ ISDS: The wild, wild west of international law and arbitration.”
Again to the Committee, I submit that these alarming new developments in ISDS are in large part too recent to have been adequately assessed either in the NIA or in this Committee’s examination. Also, they pose too much of a risk to New Zealand for this Committee to not assess them now.
It is clear from reading Kahale’s 2018 articles that the much greater menace of ISDS in 2018 results from the combination of three diseases of ISDS that are new and/or whose consequences have recently worsened. They are:
- The unfairness and lack of credibility of the ISDS process;
- The advent of the ISDS ‘megacase’ with claims up to many billions of dollars; and
- The new phenomenon of third party funding for ISDS disputes by ‘litigation speculators’.
Concerning the lack of credibility of the ISDS process, in his 2018 talk Kahale recounted two examples of ISDS cases that were literally based around forgeries but that anyway proceeded without consequence for the investor.
One of the ISDS forgery cases was for a billion dollar plus claim and, in the other, the claimant anyway obtained a small award. The latter caused Kahale to note dryly that, “while forgery is not a good thing, it isn’t necessarily fatal to an ISDS claim.”
Turning now to the new ISDS megacases that exploit the fundamentally flawed ISDS process, it can be inferred from Kahale’s 2018 reports that the claim amounts have by now exploded to the extent where even a single claim could potentially pose an existential threat to a country the size of New Zealand.
Kahale’s 2018 paper states: “The fact is that there is a marked bias in the system against states. This unsatisfactory situation has become downright dangerous with the advent of the megacase. In the early days of ISDS, billion-dollar claims were pie in the sky. These days they are commonplace. The Yukos cases against Russia [with references provided in the article] are an extreme example, with staggering claims of around US$114 billion and awards totaling in excess of US$50 billion, by far the largest in the history of arbitration.”
And then, even more explicitly: “what makes ISDS especially dangerous is not just the matters of principle at issue, but the sheer magnitude of the claims… we are talking about claims the size of which has never been seen before anywhere… the point is that these types of awards are not only shocking; they constitute a real threat to international peace and security.”
Continuing on the theme of megacases in a flawed process as “downright dangerous” for the states, Kahale stated in his April 2018 talk: “Why do I say dangerous? Because we have something posing as a developed legal system in which billion dollar claims created out of thin air have become commonplace and, believe it or not, actually have a chance of success. We’re talking about claims that can bust the budget of most countries, not a laughing matter, claims that in too many cases would be laughed out of court in any mature and reputable legal system.”
As if that wasn’t already enough, the combination with the third and newest of the worsening ISDS diseases — the rise in litigation speculation — must surely be determinative in warning New Zealand away from joining the CPTPP treaty with ISDS, as follows.
In his talk from April this year, Kahale said: “There’s a relatively new phenomenon called third party funding that has increased the danger posed by ISDS exponentially… a significant percentage of investment claims are now sponsored by third party funders… third party funding is more about making money than obtaining justice, and the well-known deficiencies of ISDS are precisely what make ISDS fertile ground for funders.”
Concerning the dire potential consequences for New Zealand, Kahale then made it completely explicit why joining the CPTPP would essentially paralyze the New Zealand Government from introducing any new legislation (with my added emphasis):
“Imaginative counsel can construct [a ‘fair and equitable treatment’] claim out of virtually any set of facts, provided there is some governmental action in the picture, and any number of experts can be lined up to calculate the millions or even billions in profits that the business would have made if only it had been treated fairly by the host state.”
In summary then, I submit that the threat from ISDS has been shown to have recently become intolerable even when assessed on its own, and regardless of concerns and/or merits around other parts of the treaty.
This Committee should report back to the House that, due to recent deterioration in the situation around ISDS, a responsible New Zealand Government should not, and cannot, ratify the CPTPP treaty.
Thank you for your consideration of this submission,
Bruce J. King
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My articles on the TPPA:
UPDATED on 2019–01–22: Canada, Australia, New Zealand, Singapore, Mexico, Japan, and now Vietnam, have recently fallen under a TPP Federal Government — 7 November 2018
To the Rt Hon Jacinda Ardern, Prime Minister of New Zealand: please call a national referendum on the CPTPP treaty — 25 October 2018
New Zealand’s democracy hangs by a thread as Parliament’s consideration of TPPA treaty enters its final day — 24 October 2018
We have one hour! Or New Zealand will be overthrown by a Trans-Pacific Partnership (TPP) Super-Government — 23 October 2018
We have 5 hours to save New Zealand from overthrow by a Trans-Pacific Partnership (TPP) super-Government; here’s how — 23 October 2018
How New Zealanders can win a referendum on the (CP)TPPA treaty — 9 October 2018
CPTPP Treaty with ISDS now an Existential Threat to New Zealand — 18 August 2018
Superb upcoming anti-TPPA events in New Zealand — 25 January 2016
BREAKING: release of full text of Trans-Pacific Partnership Agreement (TPPA) fuels concern over potential loss of sovereignty for TPPA member countries — 5 November 2015
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