The leaking of a key Trans-Pacific Partnership document by Wikileaks this week suggests Australia may side with the US on some key issues including the insertion of an Investor-State Dispute Settlement (ISDS) clause into the agreement, despite Andrew Robb having previously indicated some ambivalence on the issue.

The inclusion of an ISDS provision is significant because the clause gives authority to major corporations to challenge laws made by those elected to do so in the nation’s best interest in international courts of arbitration.

What is wrong with that? Well, the Democracy Centre has called such international arbitration “a privatised justice system for global corporations”.

ISDS processes were introduced into trade agreements decades ago to protect investors and their investments in countries lacking a strong system of law.

For example, if investments were expropriated or nationalised by a rogue state or dictatorship, the ISDS authorised foreign state investors to bypass domestic legal systems and have their case heard by an external party. The external arbitrators could order the upholding of investor rights and state duties contained in an international trade agreement.

But over the past ten years the number of disputes taken to international arbitration has risen dramatically, and disputes have been lodged by corporations against countries with robust domestic legal systems.

Plain packaging challenge

When the Australian government introduced plain packaging laws in Australia “to improve public health”, Philip Morris tobacco and others launched a challenge to the laws in the Australian High Court. When they were unsuccessful there, they lodged a claim at an international arbitration via an ISDS clause contained in a trade agreement with Hong Kong. This claim was made despite the fact that this law was made by a democratically elected Parliament and had been deemed legitimate by the nation’s highest court.

This clause is only available to corporations and not to citizens of the nations who are party to the agreement. One tribunal judge reportedly said, with regard to the clause:

When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all … Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.

The Phillip Morris case exemplifies the way corporations are now arguably abusing the original purpose of the ISDS clauses. In the past year the number of cases being brought for international arbitration has increased, with 58 cases being lodged - the highest ever brought in one year. More than a third (36%) of those came from developed nations with a rule of law.

Laws protecting public health are not the only laws able to be challenged. The inclusion of an ISDS clause in the TPPA could, for example, allow a corporation like Metgasco to sue the state at international arbitration. Metgasco is currently challenging NSW laws protecting human and environmental health from risks associated with Coal Seam Gas drilling.

Metgasco chief executive Peter Henderson has attacked the state government’s laws for being ambiguous, resulting in losses to the company that it may seek [compensation for](http://www.theaustralian.com.au/national-affairs/coal-seam-gas-group-metgasco-wants-compo-for-lost-drilling-income/story-fnaxx2sv-1226752389167?sv=2feda0409b5f06b93154f88178bbab1f](http://www.theaustralian.com.au/national-affairs/coal-seam-gas-group-metgasco-wants-compo-for-lost-drilling-income/story-fnaxx2sv-1226752389167?sv=2feda0409b5f06b93154f88178bbab1f).

If a case like this were to go to international arbitration, the state government would likely be required to provide evidence that the laws would protect human and environmental health from the risks posed by CSG mining (difficult to prove). If unsuccessful, there is a possibility that the government would have to provide compensation to Metgasco and/or allow it to mine as it wished.

Public interest test

The NSW government has a right and duty to make such laws in the public interest, particularly when little evidence about the potential harms of new technologies and industries like CSG mining on human and environmental health is known. The ISDS mechanism arguably limits the legitimate role of government and preferences private over public interest in a way previously unseen.

The threat of ISDS can act as a disincentive to governments to make laws protecting public and environmental health. This threat acts as a ‘hidden’ cost of the inclusion of the clause. The threat of having the dispute dealt with at international arbitration, for which large sums of compensation might be awarded, is just one cost, but not implementing those laws is arguably an even greater cost (ie costs associated with smoking).

It imposes other costs in the form of, for example, limiting access to affordable medicines via the imposition of increased intellectual property privileges sought by pharmaceutical companies and the potential for disputes over matters including pharmaceutical patents and other property disputes, which should be resolved by our domestic courts.

And this perhaps highlights the greatest “hidden” cost of all - the potential cost of a limit to or loss of state sovereignty, democracy and the right for the government of a state to make and apply laws in the nation’s interest and not just in the interest of wealthy and powerful corporations.

In order to protect against this, Australia should continue to stand firm and reject the inclusion of an ISDS in the TPPA.

This is the first piece in our series on the Trans-Pacific Partnership.

Read the other pieces:

Multilateral, regional, bilateral: which agreement is best?

The Trans-Pacific Partnership and Australia’s right to know

Trade pact would make internet services more expensive

IP trade negotiations a prescription for harm