There has been a lot of talk recently about the extent to which trade agreements limit sovereignty and restrict legitimate government activity, such as the protection of public health or the environment. This criticism has been levelled most strongly at a feature in some trade agreements known as “investor-State dispute settlement” (or ISDS).
ISDS is a mechanism that permits investors to bring international arbitration claims against governments for breaches of international investment rules. Successive New Zealand Governments have included ISDS in recent trade agreements, including agreements with China, Malaysia and ASEAN.
The protection of rights of investors is nothing new. A number of the key investment rules are reflective of customary international law. This means that those rules are owed to foreign investors regardless of whether they are included in a trade agreement. Many other investment rules simply reflect obligations that have been in place for many years in respect to international goods and services trade.
ISDS changes the way that these rules can be enforced. Investors that have ISDS rights do not need to rely on their government to bring a claim on their behalf in another international arbitration forum or pursue what avenues they have open to them in domestic courts. Instead, they are able to seek their own remedies through international arbitration.
Some ask why this is desirable. New Zealand consistently ranks well in international surveys of ease of doing business, investment protection, transparency and corruption. In most cases it will be easier, less time consuming and more cost-effective to bring a claim in the New Zealand courts than it would be through an international tribunal. But in many of the countries that New Zealand investors operate in, this situation does not exist. It is not uncommon for investors to be faced with lengthy delays and bias in domestic proceedings aimed at the protection of their property rights. In extreme cases, corruption or political interference may make it impossible for investors to seek effective remedies through domestic courts.
New Zealand investors make an important contribution to our economy. They range from large companies and emerging entrepreneurs that employee large numbers of New Zealanders, to New Zealand superannuation funds, and to ordinary Kiwis who want to invest overseas. ISDS provides any investor, or group of investors, with the ability to pursue remedies for breaches of mutually agreed rules in forums that are fair, effective and impartial.
Like any proceeding that involves the government being open to challenge, including proceedings before local courts or in other types of international tribunals, there are risks that legitimate regulatory activity will be affected if rules are applied more broadly than was intended. One response to this is to restrict the availability of ISDS. An alternative approach is to clarify the applicable rules.
This is exactly what has happened in investment treaty practice. Governments, recognising that in some rare cases investment tribunals have reached interpretations that were not intended, have adapted the rules in investment treaties and adopted new approaches in those and subsequent treaties to clarify the scope of the obligations imposed and to limit the possibility for unintended interpretations.
New Zealand has paid close attention to these outcomes and the practice of other countries in the development of its own investment treaty practice. In order to address risks that a disgruntled investor could seek to use ISDS to bring illegitimate claims against the Government, New Zealand has sought and included provisions which:
The development of these approaches is recognition by successive New Zealand Governments that investor rights are not absolute and need to be balanced against the legitimate interests of governments to be able to regulate for legitimate public purposes. Achieving this balance has been critical in the trade agreements New Zealand has negotiated and those under negotiation like TPP.