“Investor-State” Disputes in Trade Pacts Threaten Fundamental Principles of National Judicial Systems

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Free trade agreements (FTAs) and bilateral investment treaties (BITs) impose obligations on host governments to provide foreign investors with new privileges, but few if any social or environmental obligations are required of the investors. Disputes can be brought over alleged
violations of these new rights, including the right to demand compensation for domestic policies that investors claim reduce the value of their investments. These disputes take place through an “Investor-State” dispute mechanism, which empowers foreign investors to bypass domestic courts and sue governments for cash damages in international tribunals.

This mechanism elevates individual corporations and investors to equal standing with agreements’ signatory governments, empowering corporations to directly enforce public treaties. Foreign corporations not only circumvent sovereign immunity protections, but are empowered to sue governments to challenge domestic laws and regulations outside of domestic courts.

Opposition has been growing to the inclusion of these investor-state dispute powers in the TransPacific Partnership (TPP) agreement, currently being negotiated among nine countries (Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the United States and Vietnam, with Canada, Japan and Mexico seeking to join). The United States has made it clear that it expects the TPP to include an Investor-State dispute mechanism based on the US Model BIT used in recent US FTAs, which is in turn based on the Investment Chapter 11of the North American Free Trade Agreement (NAFTA). The US investor enforcement provisions have counterparts in other countries’ BITs, creating a parallel system of privatized justice that is becoming increasingly controversial. The Australian government has taken a stand against accepting the application in Investor-State dispute mechanisms in future FTAs, including the TPP.

The definition of ‘Investment’ in FTAs and BITs is much broader than the real property rights and other specific interests in property that are typically protected under domestic property rights law. This includes regulatory permits and licenses; financial instrument such as futures, options, and derivatives; intellectual property rights; procurement contracts between a state and a foreign investor; and concessions to natural resources granted by a national government to a foreign investor, as well as vague terms such as “assumption of risk” and “expectation of profit.” As well, the standard definition of an “investor” as a person or legal entity that makes an investment has not required that person or entity’s actual business activities or commitment of capital in the host country to be substantial or involve actual substantial business activities.

Vaguely worded provisions that guarantee foreign investors a “minimum standard of treatment”, including “fair and equitable treatment,” open the door to Investor-State claims over a wide range of government measures that are otherwise permissible under nations’ Constitutions and legal systems. Despite broad support for the principle that the investor protection standards contained in investment agreements should not provide foreign investors with greater rights than those enjoyed by national investors, the current standard permits tribunals to do just that.

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