Adam Feldman Legal Editor Lex et Orbis

Trade Arbitration: Foreign Corporations vs. Pressing Governmental Objectives (Pt. 1)

There are potential benefits to alternative dispute resolution mechanisms, specifically Investor-State Dispute Settlement (ISDS) provisions. ISDS provides foreign corporations with the option of an arbitration panel to settle disputes when governmental policy discriminates against their activity. The provisions signal a safe investment environment, mooting fears of expropriation or burdensome legislation.

ISDS convenes specials panels usually made up of three lawyers who represent the state, corporation, and a third-party that is mutually agreed upon. These legitimate aims must be balanced with respect for state sovereignty and environmental policies.

Multinational companies now nimbly navigate through ISDS clauses, even going as far as buying firms in jurisdictions where they apply simply to gain access to them. Arbitrators are paid $600-700 an hour, giving them little incentive to dismiss cases immediately. The secretive arbitration process and the lack of any requirement to follow precedent allows for creative but unpredictable adjudications. These concerns need to be counterbalanced with the value of ISDS. Investors and states can benefit from the advice of independent neutral parties that rise above national interests to resolve issues and arrive at outcomes that are fair.

Dispute settlement provisions are integral components to most international trade treaties. They affect Canada because of commitments under the North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), and its sister agreement, the Comprehensive Economic and Trade Agreement (CETA). It is important not to repeat the mistakes of ISDS under the new treaties, specifically TTIP and CETA.

NAFTA and TPP utilize ISDS; both treaties outsource dispute resolution to arbitrators whose decisions are final. Bypassing local legal systems, ISDS provisions impinge on state sovereignty. Future treaties need to concede the importance of certain pressing and legitimate legislation (i.e. health, environmental). If a piece of policy is sufficiently important then only a domestic court should be able to uproot it.

The inability to appeal current ISDS decisions is also problematic. Unlike the Canadian legal system where a questionable decision may be corrected on appeal to a higher court, ISDS decisions, however flawed, are set in stone. These troubling aspects have not received due attention by the public.

Modern trade agreements are primarily meant to protect Foreign Direct Investment. ISDS arbitration takes place when there is friction between foreign corporations and host states. The panel that settles disputes has sweeping powers, as evinced by the overbroad ISDS language. Each case exists in a vacuum because of the absence of an appeal body. Without an archive of decisions and settlements, it is difficult for parties to predict the outcome of disputes and avoid costly litigation. The legal doctrine of stare decisis, where past cases help foretell future ones, is of little help in ISDS.

Lawyers, and this may be news to many, are not perfect. Yet the decisions of these arbiters can impact the lives of citizens and environments for many generations. Punitive awards, as those imposed through ISDS, can burden governments and force them to abandon important domestic programs. Under the current ISDS framework, states can at best hope for neutral outcomes. They have no ability to counter-sue foreign companies within the ISDS framework.

To clarify, ISDS provisions are not symmetrical. Foreign corporations can sue governments but governments cannot initiate lawsuits. Legally, investors are not parties to the treaties and therefore cannot be in breach of it, but it should be conceded that States can bring lawsuits against corporations through their own domestic courts.

Nonetheless, governments give up a degree of sovereignty by allowing corporations to bypass their courts in preference of arbitration panels. New treaties should require foreign corporations to first exhaust local courts before bringing cases to an arbitration panel. Foreign corporations should have the onus of proving they cannot get a fair trial in those courts before moving onto ISDS.

The sovereignty that states give away under ISDS is not counterbalanced in any meaningful way. Countries should think twice before signing any new trade deals that include the existing ISDS framework. Also, current agreements should be modified when they are up for renewal.

Many observers are rightfully concerned about ISDS. The arbitration system may have a regressive impact, coming at the cost of a government’s ability to protect itself. The prospect of a lawsuit can stifle parliamentary initiatives in areas related to public health, environmental protection, and human rights. Indeed, opponents of ISDS argue that investor claims, or merely the threat of a lawsuit, may affect a state’s sovereignty. Risk-averse lawyers in government will continue to caution ministers from passing legislation addressing legitimate public concerns.

Arbitration bodies, as those created under ISDS, are most valuable in countries where there is no rule of law. Countries like Canada, however, need to recalibrate their approach.
In my following article, I will discuss specific arbitration decisions that have affected Canada’s sovereignty and security. There will be a discussion about what Canada, and other NATO countries, should learn from these cases, and how future provisions relating to trade disputes should be drafted. Particular attention will be given to the coming Canada-EU free-trade agreement.

Photo courtesy of Deval Kulshrestha (WikiCommons).

Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.

Adam Feldman is completing his Juris Doctor (J.D.) at Osgoode Hall Law School. Mr. Feldman graduated from the University of Western Ontario with an Honors Specialization in History (B.A.). Prior to commencing legal studies, Adam worked in politics; he managed a campaign for the interparty nomination race, and later as a Constituency Assistant for a Member of Provincial Parliament (Ontario). He is passionate about the intersection of trade, security, and international relations. Adam Feldman speaks Polish, Russian, and French.