September 21, 2014

Stanton A. Glantz, PhD

Chief justice of Australia raises concerns about investor-state provisions of free trade agreements as threat to democracy

The chief justice of the Australian Supreme Court, RS French, gave a thoughtful speech entitled "Investor-State Dispute Settlement — A Cut Above the Courts?" to the Supreme and Federal Courts Judges' Conference on 9 July 2014.  It is well-worth reading by anyone interested in how investor-state provisions of free trade agreements are undermining democracy.
Here is the intorductory section:

The High Court of Australia and the Egyptian Court that recently sentenced Al Jazeera journalists, including Australian Peter Greste, to long terms of imprisonment, have something in common. Along with many other courts, their decisions may be called into question in arbitral proceedings under investor-state dispute settlement ('ISDS') processes. This paper concerns the use of those processes by private investors to bring claims against countries which are parties to bilateral investment treaties ('BITs') or free trade agreements ('FTAs'). Its focus is on the tension that can exist between those arbitral mechanisms and the legitimate functions of the legislative, executive and judicial branches of governments.

Arbitral tribunals set up under ISDS provisions are not courts. Nor are they required to act like courts. Yet their decisions may include awards which significantly impact on national economies and on regulatory systems within nation states. Questions have been raised about the consistency, openness and impartiality of decisions made in ISDS arbitrations. A briefing paper prepared by the European Parliamentary Research Service in January 2014 pointed to a number of concerns raised by a range of observers which include:

• vague formulation of major treaty provisions leaving a wide range of interpretations open to arbitrators;
• loopholes which enable abuses such as nationality shopping by companies which create subsidiaries abroad specifically to take advantage of the agreements;
• lack of transparency with varying degrees of secrecy attaching to arbitral processes depending upon the institutions or rules which are applied;
• a relatively small pool of arbitrators — arbitrators appointed to ISDS arbitrations are said to be mostly male (95%) and from Europe and North America;
• role-swapping by arbitrators who appear from time to time as counsel in ISDS cases;
• the high cost of ISDS arbitrations — estimated by OECD as averaging about $8 million each;
• associated with the high cost and potentially high awards, a growing phenomenon of third party funding of claims by banks, hedge funds and insurance companies in exchange for a share of the proceeds ranging from 20% to 50%;
• absence of effective review or appeal processes;
• inconsistency in decisions on similar provisions.

Those concerns are reflected in an enormous body of literature on the topic of ISDS. Before considering that process further, it is useful to get some idea of the number of agreements and of investment disputes in which it is applied.

The full speech is available here.

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