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TPPA: In Defence of Investor-State Disputes


As the next round of TPPA negotiations has come to Auckland, there has been increased chatter regarding the idea that the investor-state dispute mechanism in the proposed investment chapter should be scrapped. The investor-state dispute arbitration system, which has been around since the mid 20th century, has undergone recent scrutiny because of its perceived effects on government’s ability to legislate and regulate for the public good.

First emerging in bilateral investment treaties and now a mainstay of many modern free trade agreements, the investor-state dispute arbitration system allows a foreign investor (generally foreign corporations) to sue the government for any act taken which affects the value of the investment. It is meant to prevent direct expropriation by governments of a non-citizen’s investment. It has been expanded, through international common law and investment treaty language, to include indirect expropriation through regulations which directly affect the value of an investment.

In particular, many have expressed concerns that investor-state disputes have prevented governments from making environmental, public safety and health regulations to protect their citizens. The louder voices have called for an end for any treaty provision which would allow a private corporation to sue a government. Several national governments have followed suit, including most notably Australia, which has refused to agree to an investor-state dispute provision in the TPPA.

Yet, there is something troubling about a government’s refusal to agree to a dispute resolution provision in its investment treaties. While many governments feel that the foreign investor may seek redress in the national courts of the situs country, any litigator knows that there is true strength in the home-field advantage. In other words, most practitioners have no doubt that there is bias against a foreign corporation, albeit small, when it sues a government in the government’s own courts, regardless of the professed systematic judicial independence of that court. Thus, the international arbitration dispute resolution process is best suited to prevent this bias from interfering with the foreign investor’s rights of redress.

The counter-point to this argument is that the realm of investor-state arbitrations is actually very small in terms of its practitioners. There are only a handful of arbitrators, which sometime also act as counsel on cases over which they are not presiding. This brings up an argument that there is a conflict of interest in the arbitrators to decide in favour of the foreign investors and so encourage further investor-state arbitrations (which are always initiated by the foreign investor).

However, there is absolutely no empirical data supporting this argument. Further, Supreme Courts around the world have upheld and encouraged the idea of private arbitration and have dismissed the argument that arbitrators cannot decide a case fairly.

To be fair, there is a danger of a conflict of interest involved in this system. Nevertheless, the beauty of the investor-state dispute resolution system is that it is a product of treaty architecture. All of the concerns mentioned by critics of the system may be addressed through language in the treaty. While there have been forays into addressing these concerns by adding rider language, the overall architecture of the investor-state provisions repeats the language of past treaties note for note.

I believe that an overhaul of the treaty text to specifically address the concerns of the negotiating parties (and the public interest groups protesting against these treaties) is merited. Language that precisely and effectively creates a system in which foreign investors may still challenge truly expropriatory governmental actions while protecting the governments’ ability to regulate and protect public safety and health and the environment is a matter of drafting.

Australia, and countries with similar attitudes toward investor-state disputes, should rethink their position and not throw the baby out with the bath water. After all, Australian foreign investors need protection too.