The Leaked TPP Chapter on Investor State Dispute Settlement: A Storm is Coming!!

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A new chapter of the Trans-Pacific Partnership (TPP) was leaked by WikiLeaks on March 25th, 2015. Through this chapter, it was perceived that the US wants to introduce an Investor-State Dispute Settlement mechanism (ISDS). TheTPP is a notoriously secretive trading arrangement between United States, Mexico, Canada, Australia, Malaysia, Chile, Singapore, Peru, Vietnam, New Zealand and Brunei Darussalam and according to WikiLeaks, the parties to this trading arrangement would constitute 40% of the world’s GDP.

The new ISDS Chapter deals with the mechanism, procedure and principles of the settlement of the claims of expropriation and other breaches of obligations brought by investors of a Contracting Party against another Contracting Party.Apart from the TPP, free trade agreements like the North American Free Trade Agreement (NAFTA), Central American Free Trade Agreement (CAFTA) and bilateral free trade agreements, require arbitration proceedings to be held in secret through the International Centre for Settlement of Investment Disputes (ICSID),which means that there will not be anyprecedents available to the States for the future references.

The ISDS Chapter provides that an investor shall have a cause of action in case of “denial of justice”, i.e. if the investor is aggrieved by domestic courts’ decision(s). While clarifying on its stand on the adoption of ISDS, the Office of the US Trade Representative has stated that a “neutral” ISDS arbitration will be more just, as “the potential for bias can be high in situations where a foreign investor is seeking to redress injury in a domestic court”.There are two problems with this statement that need a mention.

Firstly, the USTR has assumed that the judiciary of a State is either subordinate to the executive or that the former is under the control and/or influence of the latter. This assumption is clearly misplaced as the most developed and democratic countries (such as many of the TPP members) follow the principle of ‘separation of powers’ among the executive, judiciary and legislature of a State. Not only is the judiciary under the executive influence, but also on several occasions, the judiciary performs the function of checking the powers of the executive and that of the State. Therefore, contrary to USTR beliefs, it the duty of a State’s judiciary to decide all its cases in all fairness of substantive law and procedure, even though the government being a party to the litigation.

Secondly, what the USTR has conveniently failed to address is the higher possibility of bias against the government in ISDS arbitrations. This is because the arbitrators in ISDS are, most often, corporate lawyers instead of seasoned arbitrators or internationally acclaimed jurists. A decision in favor of the investor is most likely to benefit such lawyers as their services are often employed by huge international corporate conglomerates. Therefore, it is more than apparent, that the credibility and impartiality of ISDS arbitrators is much less than that of any domestic court. Free trade agreements such as NAFTA, CAFTA and now the TPP make no express provisions for appeal of an ICSID award.

However, these aren’t the last of the TPP’s questionable provisions. The new ISDS Chapter enables foreign firms to sue sovereign governments for TPP breaches. The Public Citizens stated in its analysis of the new leaked chapter that “The TPP would newly empower about 9,000 foreign-owned firms in the United States to launch ISDS cases against the U.S. government, while empowering more than 18,000 additional U.S.-owned firms to launch ISDS cases against other signatory governments. These are firms not already covered by an ISDS-enforced pact between the United States and other TPP negotiating governments.  This means, that if an Indian companyis incorporated in any of the TPP parties, then such a company can bring a suit against any such party to the TPP. This is a gross violation of State sovereignty and allows MNCs to exploit this system by way of treaty shopping.

The Chapter also provides for a special protection to an investor (including such non-party foreign firms). Article II.22 (Conduct of Arbitration) provides that:

In deciding an objection under this paragraph, the tribunal shall assume to be true the claimant’s factual allegations in support of any claim in the notice of arbitration (or any amendment thereof).”

Such a presumption is in stark contradistinction with established principles of the burden of proof, under evidentiary laws, which provide that the burden of proof rests upon the party making an allegation against the other(s). Customary international law, international treaties, international arbitration rules and international arbitral awards have upheld this universal rule of evidence. This, therefore, shifts the onus of proof upon the respondent-government, which is already placed in a precarious position. This is because not only can a government never initiate proceedings against an individual/corporate investor, but also because the former has to incur USD 8 million toUSD 30 million on an average even to defend a winning cause in ICSID arbitration s. The government is also often required to share the costs of arbitration, regardless of the verdict. In specific context of the TPP ISDS Chapter, it is apparent that there is no cap on the quantum of damages which can be awarded by the so called neutral ISDS arbitral tribunals. For example, Uruguay, whose GDP is USD 53 billion, was sued by Phillip Morris in 2010, whose annual revenues are USD 80 billion, for the former’s regulatory measures towards its anti-smoking policy.

In conclusion, it is my humble opinion, that if the TPP ISDS Chapter is brought into force, a large number of foreign investors will bring investor claims against governments of all TPP members; even to merely pressurize them into adhering to an investor-friendly policy. This will put the latter in an extremely unfavorable position by diminishing their sovereignty and putting a lot of strain on their national treasuries. Basing on the abovementioned analysis, I would strongly suggestthe Government of India against entering into any treaty which contains provisions such as those in the TPP ISDS Chapter.

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