Published in The Star, Tuesday 16 December 2014
Recent public opinion concerning Investor State Dispute Settlement (ISDS) provisions, including those discussed in recent negotiations of the Trans Pacific Partnership Agreement (TPPA), centres on a number of issues. Notwithstanding, an objective analysis of the system and the need for a paradigm evolution is essential before there can be criticism of a system that has provided the modern legal framework for foreign investment across the globe.
The concept of ISDS was originally introduced to ensure foreign investor protection and transparency over their investments while protecting the rights of the State. It quickly gained prominence amongst investors as it provided foreign investors the right to sue a foreign government and meaningful protection against concerns arising from sovereignty. United Nations Conference on Trade and Development (“UNCTAD”) has 518 reported investment arbitrations arising from ISDS provisions and also suggests that many other proceedings are currently unreported owing to provisions of confidentiality. The objective behind the process was to ensure legitimacy, neutrality and expediency in the resolution of disputes.
Investment arbitration is prohibitively expensive for most parties to represent anything but a last resort. Despite the costs, concerns still arise given the ambit of issues dealt with by ISDS provisions, including the interpretation of State sovereignty and public policy. Most of the criticism seems to stem from a deep rooted fear of loss of sovereignty and the perception that ISDS provisions provide for unfettered rights of Investors. However, it is important to understand these problems arise from the nature of foreign investment itself and not solely due to the ISDS clause in the treaty. It is international law that places limits on a state’s exercise of sovereignty. ISDS provisions merely provide the forum for resolving disputes where an alleged breach of that international law has taken place.
Free Trade Agreements and Investment agreements with host countries are all part of a future that envisages economic liberalization. Despite countries crying foul over the same, it is evident that international investment is the way forward for liberalization of the economy and for growth of a country’s domestic economy. It is telling that the economies that have consistently withdrawn their support of ISDS provisions represent interventionist economies, as opposed to those that are considered free trade economies. Respect for international law and seeking to improve on the existing system is the right approach to ensure sustainable economic development of all countries, while protecting legitimate domestic concerns.
A noteworthy example of successful investor-state dispute resolution provisions can be identified within investment treaties between ASEAN member nations. In March 2012, the ASEAN Comprehensive Investment Agreement (“ACIA”) took effect. This treaty provided for investor protection through measures such as fair and equitable treatment of investors, most-favoured nation treatment and also freedom of operation for foreign investors within the host state. Under the ACIA investors are permitted unilaterally to commence a claim against an ASEAN host state. It also provides for dispute resolution through various forums which includes the International Centre for Settlement of Investment Disputes (“ICSID”) or other institutions such as the Singapore International Arbitration Centre (“SIAC”) and the Kuala Lumpur Regional Centre for Arbitration (“KLRCA”). This option of providing the parties the right to choose the nature, form and venue of arbitration instils faith in the ISDS in both investors and the host countries. This also makes it feasible for parties to try other approaches such as mediation, negotiation and conciliation before resorting to arbitration.
Recognising the importance of such flexibility, the Kuala Lumpur Regional Centre for Arbitration has signed a MoU with ICSID whereby KLRCA will be the venue for ICSID disputes that arise in the region. This will allow disputes linked to the region to be heard locally should they be referred to ICSID. In addition, a recent workshop conducted at the KLRCA sought to educate legal stakeholders on the workings and advantages of using ICSID as a preferred institution for settlement of investment disputes. It is through such education that both sides in foreign investment will boast greater awareness of their rights and obligations under international law.
There is no escaping a system of alternate dispute resolution in BITs. Investors are not and should not be comfortable being restricted to the domestic judicial system of a country, particularly in jurisdictions lacking a neutral and sophisticated judiciary. Even in countries that do boast such a framework, the court process is not necessarily best suited to resolving transnational disputes of international law. And where they are, ISDS provisions are capable of requiring, as they often do, disputes to go through local legal procedures before arbitration can be sought. International law and international arbitration in itself has evolved to address such concerns and provide a uniform, neutral and transparent forum to states and parties alike. Hence, the best alternate available to us is to tailor make the system to address the needs of both parties without negating either’s concerns. Transparency and accountability are likewise areas that can be improved upon in the resolution of investor-State disputes. Notwithstanding, Alternate Dispute Resolution is the most effective way forward to address these problems and resolve such disputes effectively.
Of the free economies that are reconsidering the parameters of ISDS, Australia and Germany are commonly cited as being critical of its workings. Germany’s reluctance stems from its latest loss resulting from new German governmental policies applied retrospectively. The question in this case is not usurping sovereign rights as much the basic question of law which is the applicability of law. In any event the likely outcome is not a move away from ISDS but an evolution of the provisions relied upon.
Australia was forced to reverse its position in order to successfully complete trade negotiations with South Korea. Others countries, including the British and the Czech have expressed opposing views that ISDS provisions should be included and that improvements to the current system will form a model for future trade and investment agreements. The European Federation for Investment Law and Arbitration (“EFILA”), counting both states and investors among its members, has argued the case of ISDS. It posits that the ISDS mechanism is a necessity, however for the success of ISDS provisions there must be improvement. This includes widening the pool of independent and impartial arbitrators, as well as clarifying the freedom provided to the Tribunal to interpret treaty obligations. It is not accurate to state that the EC and Europe at large are up in arms towards the ISDS or that they consider it “toxic”, as claimed by Martin Khor in his article dated 24 November 2014.
The Trans Pacific Partnership Agreement is looking to evolve on existing trade arrangements and build a comprehensive system of standardization for all future trade and investment agreements.
The protection afforded to Malaysian investors under the ISDS provisions from political interference is greatly beneficial given their expanding global reach. Foreign investors prefer Malaysia owing to its neutral and transparent system of handling foreign investors. The Malaysian economy continues to rapidly develop in part due to such measures. Given proper protection of matters of public policy, including environment, health and welfare, Malaysia will stand to benefit greatly from both the ISDS provisions and the TPPA itself.
As the global economy continues its transition to free trade and sustainable development a consistent, coherent and neutral system which brings about accountability, stability and transparency is needed to moderate parties’ rights and obligations. Sustainable development of economies is the future and one cannot ignore the role of ISDS provisions in this regard. ISDS must evolve but cannot be eradicated to achieve sustainable development within the country and globally.
Winds of change are indeed blowing through trade and investment treaties and ISDS mechanisms. But those winds denote paradigm shifts going forward, such as widening the pool of arbitrators and clearer definition of states’ rights and obligations. ISDS provisions in agreements such as TPPA only serve to ensure a predictable foreign investment environment, a necessity in the modern era of global economic integration.
Datuk Professor Sundra Rajoo
Kuala Lumpur Regional Centre for Arbitration