Speeches and Articles

Should lawyers fear TPP? Probably not, says Gary Judd QC

24 May 2012

Note: This is a longer version of an opinion piece published in the NBR on 25 May.

John Bowie’s Briefcase (May 11) refers to the open letter from Jane Kelsey and other lawyers concerning "investor-state" dispute resolution provisions which they fear might be included in the Trans-Pacific Partnership (TPP) free trade agreement. Bowie asks whether these provisions are "another malevolent act of US corporate control …or are we seeing things that don't exist?"

I read the open letter to find out exactly what was being said and whether there was a proper basis for the fears. There isn’t.

Like any negotiations with economic or commercial implications FTA negotiations have to be confidential. Given that, it may be fair enough for fearful critics to seek to make a pre-emptive strike, but if they are to be taken seriously they should rely on the best evidence and review it dispassionately. As their concern appears to be fear of what the US may be demanding, the best evidence would seem to be the most recent example of an American FTA —Korea/US FTA or KORUS — which entered into force on 15 March 2012.The relevant provisions are Chapter 11 Investment, specifically Section B: Investor-State Dispute Settlement.

These KORUS provisions, although different in matters of detail, are not in concept different from the provisions of the NZ-China FTA. So if the feared provisions of the TPP are the same as those in KORUS, any criticism would have to apply equally to the China-NZ FTA. Or is it a point of material distinction for the legal letter writers that the latter agreement is with China whereas the TPP negotiations include the US?

In addition to failing to observe the best evidence of what the US may actually be seeking, the letter writers fail to consider the context within which the investor-state dispute resolution provisions operate.

In the NZ-China FTA, just as in KORUS, these provisions are found in Chapter 11. Section 2 “Investor-State Dispute Settlement” permits any legal dispute, arising under Chapter 11, between an investor of one Party (i.e., an investor who is within the territory of China or NZ) and the other Party, directly concerning an investment by that investor in the territory of that other Party, to be submitted to conciliation or arbitration by the International Centre for the Settlement of Investment Disputes (ICSID), or arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL).

In KORUS the provisions relate to disputes giving rise to a claim that a Party (Korea or the US) has breached (1) an obligation under Section A, or (2) an investment authorisation, or (3) an investment agreement. Obligations under Section A relate in the main to discriminatory treatment (treating investors differently from local firms) and expropriation (seizure of assets) which are not what the open letter writers aim at. The letter writers refer rather to the definition of "covered investments" which they correctly say extends well beyond real property. This is the source of their alarm.

But “investment” is defined in much the same way in both FTAs. In the NZ-China FTA it is "every kind of asset invested, directly or indirectly, by the investors of a Party in the territory of the other Party including, but not limited to ...", followed by a list of specific items much as in Article 11.9 of KORUS. KORUS defines a "covered" investment as meaning an investment (as defined) that is in existence as of the date of KORUS' entry into force or established, acquired, or expanded thereafter. Presumably this is to clarify that it doesn't apply retrospectively to investments which ceased to exist before KORUS’ entry into force.

It is necessary to define "investments" for the purpose of knowing whether a claim arises out of an investment authorisation or an investment agreement. If it doesn't, it will not be subject to the dispute resolution provisions (unless it relates to an obligation under Section A). An investment authorisation is an authorisation that the foreign investment authority of a Party grants to a [covered] investment or an investor of the other Party. A footnote records the Parties' recognition that, as of the date of KORUS' signature, neither party had a foreign investment authority that grants investment authorisations. That means it is the investment agreement aspect which is material to the open letter.

An investment agreement is an agreement between the national authority of a Party and, effectively, a business within the territory of the other Party, which is making an investment in the territory of the first Party. National authority means an authority at the central level of government. So there has to be an organ of the central government which has made an agreement with someone from the other country who has made an investment in reliance on the agreement.

If TPP contains the same sort of provision, and as it is investments from the US which are causing concern for the letter writers, a relevant investment agreement would have to be an agreement between an organ of the New Zealand Government and an American investor. The context which the letter writers ignore is that there would be no such agreement unless the New Zealand Government chose to enter into it and the New Zealand Government would only enter it on terms acceptable to it. If having made such an agreement, the New Zealand Government then breaches it, the rule of law which the letter writers strongly support and their desire that the fair resolution of legal disputes not be undermined, requires that there be an effective means of resolving the dispute. Like the NZ-China FTA (and as I explain below, as already sanctioned by New Zealand law), KORUS refers such disputes to the ICSID or to arbitration under the UNCITRAL rules.

Unless the parties otherwise agree, the tribunal comprises three arbitrators, one appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. The governing law, which the tribunal must apply, will be the law specified in the investment agreement, or as the disputing parties may otherwise agree. If no law is specified, it will be the law of the respondent. In a claim arising out of an agreement between New Zealand and an American investor, the governing law would be New Zealand law unless New Zealand, either in the allegedly breached agreement or later, agreed to some other law being the governing law.

By the Arbitration (International Investment Disputes) Act 1979 the New Zealand Parliament passed legislation "to implement an international Convention on the settlement of investment disputes between States and nationals of other States" i.e. we adopted the Convention which established the ICSID and agreed to submit to the jurisdiction conferred on the ICSID by the Convention. Thus New Zealand law already makes provision for investment disputes between New Zealand and nationals of other states to be submitted to the conciliation or arbitration of the ICSID. Article 25 of the Convention states that the jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre.

So the mechanisms for referring disputes between New Zealand and the national of another State, including the US, are already part of New Zealand law and have been for a long time.

Also, the UNCITRAL rules for arbitrations are with minor refinements incorporated in our Arbitration Act 1996.

Mediation and arbitration are increasingly being employed within New Zealand as alternative dispute resolution mechanisms, not the least because they are often seen as faster, more efficient and more effective means of resolving disputes. 

These methods of dispute resolution, with specific legislation for resolution of disputes between New Zealand and the nationals of other countries, already form part of the fabric of the rule of law in this country. Yet the letter writers treat the possibility of the TPP having similar provisions as KORUS and the NZ-China FTA as having sinister connotations and as an affront to New Zealand's judicial system.

John Bowie is right to question whether we, or more accurately some of us, are seeing things that don’t exist.

 Gary Judd QC, is former Chairman of ASB and Ports of Auckland and member APEC Business Advisory Council 2009-2012 and current member NZ US Council Advisory Board.

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