News & Views

INVESTOR STATE DISPUTE SETTLEMENT UNDER TPP-11

Posted on 18th December 2018


One of the continuing controversies surrounding the proposed Trans Pacific Partnership minus the USA or TPP-11, is its Investor-State Dispute Settlement (ISDS) provision. Although much of this concern arose from fears that large multinational corporations (particularly US based ones) could use this mechanism to pressure smaller nations into giving concessions and special treatment for big businesses, the fears continue despite the US no longer being a participant in this pact. 

Some quarters dislike the ISDS becaue they see it as a means by which powerful foreign corporations could hold a nation to ransom by forcing governments to arbitrate claims for loss of profits if local laws affect their business prospects. These concerns are also shared by people in other countries outside Malaysia including developed ones, such as Australia.

Arbitration or litigation involving governments in itself is not new. Governments that breach their legal duties are taken to task by private and public interests all the time, so there is nothing particularly significant about a foreign corporation being allowed to sue the Malaysian government if in fact it had breach its treaty or other legal commitment that affected the rights and interest of private parties. 

Investors cannot arbitrate under the ISDS for mere loss of profit. It will be necessary to show that the host nation has breached an investment principle under the treaty such as by nationalising an investment without compensation or denying due process in court which are in any case international legal norms that Malaysia does and should adhere to. 

It is also argued that the ISDS erodes Malaysian sovereignty and the power of our Parliament to enact its own laws. In the context of international obligations, a nation subscribing to an international agreement should also be obliged to amend domestic laws to be in line with its international commitments. Proponents of this argument would seem to suggest that it is alright for Malaysia to subscribe to international treaties whilst failing to conform its domestic laws to the standards to which it has subscribed internationally. The argument also seems misplaced because the TPP-11 recognises the right of members to protect public welfare (itself a broad concept) particularly in areas of health and the environment. The TPP-11 does not remove the sovereign right of Malaysia to enact its own laws nor will it interfere with the independence of the judiciary which will continue to rule on matters of Malaysian law, nor nullify any part of a Malaysian court judgment.

ISDS as a concept and a form of dispute resolution has been around for some time, particularly in international trade agreements. There are no less than 7 FTAs signed by Malaysia (including those with ASEAN) that contain ISDS provisions. Therefore, to object to the TPP-11 on the ground that it provides for ISDS is somewhat disingenuous as this is neither novel nor exclusive to the TPP-11.

There are also other safeguards within the TTP-11 such as:

  • There are provisions on mandatory consultation and mediation before a suit can be launched.
  • A claimant must prove losses suffered arising from a breach of the TTP-11 and must shoulder the burden of proof.
  • There are procedures for raising preliminary objections to discourage frivolous claims and claimants must pay legal fees and reasonable costs to the host government.
  • No claims may be allowed after more than 3 and half years.

Private arbitration has been accepted as an efficient and fair means of resolving disputes in many areas once considered the exclusive domain of courts, and there is no reason why international disputes should not also be settled by well qualified experts, appointed through a transparent process. It could be a way of avoiding any perceived bias of having a claim against a government determined by its own national courts. Malaysia’s international commitments are in any case outside the jurisdictional boundaries of domestic courts.

Given the many other benefits that the TPP-11 could bring for Malaysia, objections to the ISDS should be more constructive by advocating clearer and fairer conditions for its use. Conflicts can also be managed with greater vetting and by imposing stringent guidelines for the qualification of arbitrators.

It would be a shame to use the ISDS procedure as a basis for objecting to what may yet prove to be an extremely beneficial treaty arrangement for Malaysia with advantages such as bringing Malaysia’s political culture on par with the best international norms.

LOONG CAESAR