Investor-state arbitration is a mechanism whereby foreign investors can directly enforce minimum international investment standards against host states through international arbitration proceedings.

Australia, after signing numerous investor-state treaties, has now taken a strong stance against investor-state arbitration in the Trans-Pacific Partnership (TPP) negotiations.

Prime Minister John Key last year dismissed any concerns that foreign investors could get special treatment in New Zealand as " far-fetched". This is questionable, as New Zealand is already party to several investor-state treaties.

Especially with the threat of litigation by tobacco companies, it is timely for New Zealand to focus on the trade-offs inherent in investor-state arbitration as it negotiates the TPP. This should be done, however, with a good grasp of the facts and a sense of perspective.

Concerns about investor-state arbitration

This issue has been stirred up by the release of an " Open Letter from Lawyers to the Negotiators of the Trans-Pacific Partnership Urging the Rejection of Investor-State Dispute Settlement" on 8 May 2012.

The letter is backed by well-meaning, and several well-known, signatories; most of whom are not especially well-informed about investor-state arbitration. The fact of the letter is welcome, as the issues are important. But the letter itself contains several overstatements and does not make a balanced contribution to the debate.

Signatory Bryan Gould, Vice-Chancellor of Waikato University and sometime New Zealand Herald columnist, fears that under cover of darkness New Zealand will sign up to an agreement that might "stop our Government (or any future government) from changing New Zealand law" while riding roughshod over our court system. His main concern, reflected in the letter, is that the investment arbitration system prioritises investor interests over the sovereign rights of states to regulate.

Putting concerns about investor-state arbitration into perspective

Professor Gould's concern should not be dismissed out of hand. The investor-state arbitration system is de-centralised, evolving and far from perfect. The key question, however, is whether its imperfections can be addressed by careful drafting, or whether the system is beyond repair.

Before approaching that question, it is important to emphasise that the TPP would not constitute New Zealand's initiation into the system. New Zealand included investor-state dispute resolution in its 2008 FTA with China, and did so again in its 2009 FTA with the 10 ASEAN countries (as well as separately with Malaysia). New Zealand also has historic investment treaties with China and Hong Kong. Foreign investors from those countries already have investment rights against New Zealand, and New Zealand investors have investment rights in those countries. Such rights could, especially in the event of political crises overseas, prove valuable to New Zealand investors.

To date, no investment claims have been filed against New Zealand (let alone succeeded). As in many other contexts, doomsday arguments should be taken with a grain of salt.

Techniques to reduce the risks of investor-state arbitration

The drafting techniques needed to reduce the risk of unwelcome decisions are well known to New Zealand's trade negotiators, who through the China FTA were careful to preserve New Zealand's regulatory discretion and autonomy, and to permit unmeritorious claims to be weeded out at an early stage.

Some further drafting improvements were made in subsequent FTAs. There is room for still further improvements. In particular, New Zealand's negotiators will be seeking to:

  • craft the investor-state obligations so that arbitrators are constrained from adopting surprising and expansive interpretations of substantive rights. Examples include a restricted most-favoured nation clause, the use of an expropriation annex (such as in the China-NZ FTA), and a more elaborate and narrow definition of the fair and equitable treatment obligation
  • negotiate safeguards to ensure that New Zealand retains the ability to make regulatory decisions to pursue public objectives, for example, by including exceptions clauses for matters such as public health, environmental protection and the Treaty of Waitangi (as was also done in the China-NZ FTA)
  • address the scope of measures to which investment rights attach, the identity of parties who may invoke those rights, and range and nature of interim and final orders which can be made by arbitral tribunals, and
  • ensure that investor-state arbitration remains an exceptional system, perhaps by requiring the exhaustion of local remedies before permitting access.

Conclusion

With appropriate safeguards in place, the fiscal risk represented by investor-state arbitration is not uncontrollable, and its magnitude should not be overstated. Accordingly, while there are reasons for caution in the TPP negotiations, it does not follow that the investment chapter must be a deal-breaker.

If successfully concluded, the TPP will drastically increase the international market access of New Zealand businesses, particularly in the United States. New Zealand businesses will also gain from the acquisition of investment rights in the TPP countries. To those who claim such rights can be of no importance, consider that Argentina only last month openly expropriated 51% of a massive Spanish oil concession contract. For our flagship export companies such as Fonterra, managing political risk in Asian and Pacific Rim countries is important, and enforceable investment rights are an important insurance policy.

A sense of perspective is needed at this juncture. The TPP represents an important opportunity for New Zealand. New Zealand's negotiators should be given the time and space to negotiate the best overall agreement they can. In doing so New Zealand must listen to what all stakeholders have to say, and can afford to have some bottom lines. At this stage, however, the case has not been made that rejection of investor-state arbitration must be one of those bottom lines.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.