SEPT 30 — This opinion is not written to justify or oppose the TPP. Instead, it is written with the intention to clarify the role of ISDS in the debate of whether Malaysia should continue its discussions of the TPP or not.

Introduction

The TPP is a multilateral trade agreement that has been undergoing years of negotiations in shrouded secrecy between participating governments (the United States and 11 other States including Malaysia). One of the many reasons the Malaysian government has been asked to withdraw from the TPP negotiations is due to the ISDS provisions. Specific reference is made to the case involving a tobacco company, Phillip Morris which had brought an action by way of the ISDS provisions contained in two Bilateral Investment Treaties (“BIT”) (Hong Kong-Australia and Switzerland-Uruguay BIT) against both Australia and Uruguay, in a matter relating to anti-smoking measures taken by the respective Governments.

What is ISDS?

Investor-State Dispute Settlement (“ISDS”) provisions grant foreign investors the right to use dispute resolution mechanisms against a host state in the event that a foreign investor’s rights as provided for by the Treaty or Agreement concerned are breached. In the present case,  vis-à-vis the TPP.

The case of Phillip Morris v. Australia; v. Uruguay

The Phillip Morris cases have been misused time and again to instill fear into the minds of the public via inappropriate interpretation and the dissemination of inaccurate information. The fear which permeates from these cases is founded on the belief that a State’s sovereignty is lost as ISDS robs a State from the ability to promulgate policies and laws for the benefit of its country.

Firstly, these cases are pending arbitration and an award hasn’t been rendered. It may very well be decided in favour of the Respondent States.

Secondly, an action invoked under the ISDS provisions does not seal the fate of the State in surrendering its sovereignty to investors. ISDS provisions create a level playing field for both the claimant investor and respondent state. The ISDS provisions commonly provides for any dispute against the host states to be resolved by way of arbitration (subject to the mode of resolution of dispute-commonly arbitration; and the procedural rules concerned). As such, a State would be able to appoint an arbitrator of its choice as would the investor. The State’s arguments and submissions would then be taken into equal account as how the Investor’s view would.

Thirdly, the argument that such actions taken against States often incur great financial costs fails to consider the financial benefits that the existence of an ISDS provision brings to the country. Bluntly put, opponents of the ISDS are arguing for an impossible situation where Malaysia reaps all the benefits of foreign investment while not assuming any risks, in this case, an undertaking that Malaysia will participate in proceedings brought by foreign investors in the event that any of the foreign investors rights under the Treaty/Agreement are been breached by the State.

Further, considering that the doctrine of binding precedent as applied in our domestic courts does not exist in international arbitration, the outcome of the Phillip Morris is limited in applicability. Hence, even if, Phillip Morris succeeds in those two cases, the decision will not bind future arbitral tribunals. Accordingly, the resounding quotation of the Phillip Morris cases should not send shivers down the spine and be a basis to shy away from ISDS provisions.

ISDS Provisions Exists in Various other Trade Agreements

Today, opponents of the TPP often cite ISDS as a new and revolutionary mechanism/provision. This is most misleading since ISDS provisions exists even from the 20^th Century and is today commonly found in various trade agreements around the world. It is derived from the notion that States must be held to account for breaching its obligations owed towards investors under a trade agreement. More recently, it was featured in ASEAN Agreements (such as the ASEAN Comprehensive Investment Agreement and the ASEAN-Australia-New Zealand Free Trade Agreement) of which Malaysia is a State party to and of course, ISDS provisions also exists in a litany of other BITs involving Malaysia. Malaysia has also previously submitted itself to several investor-state disputes at the International Centre for the Settlement of Investment Disputes (“ICSID”), and is a signatory to the ICSID Convention 1965.

ISDS is a friend not a foe

Rarely do opponents discuss how ISDS provisions protect Malaysian investors who invest in States which have entered into such Agreements with Malaysia (containing ISDS provisions). It ought to be known that ISDS provisions apply to investors from both Contracting Parties (in the present case, Malaysian investors in the US and US investors in Malaysia). To eliminate ISDS provisions would be detrimental to Malaysian investors, as they would be left with little or no legal recourse. ISDS provides certainty to foreign investors (and Malaysian Investors in foreign countries) that there is an avenue for legal recourse available to them in the event that their rights under the trade agreement are breached. An example of such a situation involving a Malaysian entity would be the case of Telekom Malaysia v. The Republic of Ghana, where Telekom Malaysia in 2003, invoked the ISDS provisions in the Ghana-Malaysia BIT, and brought Ghana to arbitration.

Reform the substance of the TTP instead of removing ISDS

Foreign investors invoke ISDS provisions when the host state breaches a substantive obligation under the treaty. As it is in the Phillip Morris Cases, the allegation by the company is that Australia breached certain obligations under the Australia-Hong Kong BIT. To prevent such an occurrence, one should look at amending the substance of the trade agreement not the ISDS provisions. Hence, removing ISDS from TPP or opposing TPP on the basis of the existence of ISDS provisions is indeed a misdiagnosis and is negligent altogether.

Malaysia can draw inspiration from the example of the European Union which had made strides in addressing concerns of ISDS limiting a State’s sovereignty. In the Comprehensive Economic and Trade Agreement (“CETA”) entered into between EU and Canada as well as the EU-Singapore Free Trade Agreement, it is explicitly mentioned that both parties “…preserve[s] their right to regulate and to achieve legitimate objective policy objectives, such as public health, safety, environment…”. Further, these agreement recognised the finality of the State parties interpretation of the rules, instead of leaving that to a tribunal. This grants greater authority to States and would address the concerns flowing from the Phillip Morris cases.

Conclusion

The arguments for and against TPP are vast and many. However, opposition on the basis of the existence of ISDS provisions should not be one of those reasons to reject the TPP. ISDS has been maliciously opposed in the public domain and had been misused by opponents of the TPP to instill fear into the minds of the public. If ones concern is that States may loose the ability to promulgate laws and policies for the benefit of the people, the argument should be directed to altering the substance of the TPP and to better improve the procedural context of the ISDS provision, not to reject ISDS altogether.

If one is true to the cause of rejecting ISDS, one should also call for the extreme measure for Malaysia to withdraw from all other Bilateral and Multilateral Agreements already containing ISDS provisions. To adopt a selective view questions the motive of such arguments surrounding ISDS and TPP.

Ultimately, ISDS not only protects foreign investors, but also Malaysian investors in foreign countries. Additionally, it most certainly provides security, and certainty for investors to invest in Malaysia, contributing to Malaysia’s economy and growth. It is also commonly found in various trade agreements and most importantly, it is consistent with principles of international law that foreign investors have recourse for a State’s breach of its obligations.

* Shaun Kang was previously counsel at an international organisation handling ISDS cases.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.