When the text of the Trans-Pacific Partnership was finally released last Friday morning, many supporters and detractors went straight to one of its most controversial provisions: so-called investor state dispute settlement (ISDS). This provision, opposed by Labor and the Greens in Australia, gives foreign investors the power to sue the Australian government for introducing legislation that harms their investment.

Andrew Robb, the Australian trade minister, was quick to defend the agreement from its detractors. He lauded Australia’s efforts to secure significant exemptions, which he said would make it impossible for foreign corporations to sue the Australian government for enacting environmental policy. “It’s a trade agreement which looks at issues relating to trade that can affect public policy in the environmental area … It does provide safeguards, the best safeguards that have ever been provided in any agreement in this regard.”



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Robb said critics were just the usual suspects “jumping at shadows”, “peddling lines they’ve been peddling for years without having a decent look at what’s been negotiated”.

But George Kahale III is not one of the usual suspects. As chairman of the world’s leading legal arbitration firm – Curtis, Mallet-Prevost, Colt & Mosle LLP – his core business is to defend governments being sued by foreign investors under ISDS. Some of his clients are included in the TPP, and he says the trade minister’s critics are right: “There are significant improvements in this treaty, but they do not immunise Australia from any of these claims. If the trade minister is saying, ‘We’re not at risk for regulating environmental matters’, then the trade minister is wrong.”



Speaking via Skype from his office in New York, Kahale thumbs through the investment chapter, pointing out the critical loopholes that leave Australia wide open. “The one where all the discussion should be focused is 9.15,” he says, referring to one of the “safeguards”. “That’s a very nice provision, which I imagine the trade minister points to as, ‘We’ve really protected ourselves on anything of social importance.’ I think that’s nonsense, frankly.”

Here’s what 9.15 says: “Nothing in this chapter shall be construed to prevent a party from adopting, maintaining or enforcing any measure otherwise consistent with this chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.”

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This entire provision is negated, says Kahale, by five words in the middle: “unless otherwise consistent with this chapter”. “So at the end of the day, this provision, which really held out a lot of promise of being very protective, is actually much ado about nothing.”



Kahale says many provisions in the TPP investment chapter are a vast improvement on previous trade deals. But he says all this hard work could be for nothing because of another provision. “Why would you spend so much time and effort doing a great job in negotiating narrow provisions to this treaty, when you have a ‘most favoured nation’ clause?”



This is where things get a little technical. Essentially, an MFN clause is tantamount to a classic wipeout move. It would enable foreign corporations from TPP states to make a claim against Australia based on the ISDS provisions in any other trade deal Australia has signed, no matter which country it was signed with. That means it does not matter how carefully the TPP is drafted: foreign investors can cherrypick another treaty Australia has signed, and sue the Australian government based on the provisions included in that treaty. Kahale has described MFN as “a dangerous provision to be avoided by treaty drafters whenever possible” because it can turn one bad treaty into protections “never imagined for virtually an entire world of investors”.

Including an MFN clause in the TPP was a “major mistake”, Kahale argues, and another reason Australia is still wide open to being sued for legislating to protect the environment.



If you are curious about what this might look like, take Germany, for example. The German government has had two claims brought against it by the same corporation, Vattenfall, a Swedish energy company.

First, Vattenfall sued the government for €1.4bn over the Hamburg provincial government’s decision to place extra environmental restrictions on a coal-fired power plant the company was planning to build along the river Elbe. To settle this case, Germany had to remove the restrictions.

In 2012, Vattenfall announced it was suing the German government again, this time over its decision to phase out nuclear power after the Fukushima nuclear disaster. This was in breach of its contract to allow the company to build and operate nuclear power plants, claimed Vattenfall, which has lodged another claim against Germany, reported to be worth €4bn.

Billion-dollar claims are becoming the norm, says Kahale, citing a recent case in Ecuador, where the government now owes more than $1bn to the multinational oil company Occidental. “That is a huge number for Ecuador! From my reading of the facts, and my reading of the decision, terrible mistakes were made. The decision was 2-1 to begin with, with a very strong dissent. Now you can be sure, if they’d had a different panel of arbitrators, that could just as easily have been 2-1 the other way.”

The problem with ISDS is not just that corporations can sue governments, says Kahale, but that its entire legal framework is fundamentally flawed. ISDS claims are not heard in a standing court staffed by independent judges. Instead, claims can proceed in ad hoc courtrooms – a hotel room, for example – by three arbitrators hand-picked by the parties. Unlike a traditional court of law, these arbitrators are not obliged to refer to precedent and, since their decisions are not open to appeal, they are free to rule according to their personal opinion. The arbitrators can also be severely conflicted, says Kahale, because they may act as a judge one day and as a lawyer for a party the next.

Kahale’s criticisms have been echoed by Robert French, the chief justice of Australia’s high court. In a speech last July, he said: “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.”



Kahale believes the ISDS system is so badly flawed it should be abolished, and started again from scratch. Australia, he warns, should think very carefully before signing up to it in the TPP.



“What I would say to Australians is that while the system is in the state it’s in right now, signing any new treaty is a very serious mistake. You have to weigh the benefits against the burdens. Somebody at some point might be able to explain to me where all the benefits are, but I certainly haven’t seen any.”