The following is the text of the 9th Annual Canada-United States Law Institute Distinguished Lecture given at Western University Faculty of Law by Ian Laird on November 16, 2015.
TABLE OF CONTENTS I. Introduction II. Where Are We Now? Or "How ... is This Possible?" A. Substantive and Procedural Objections III. TPP--Where From Here? Arbitration versus Court--Which Will Prevail? IV. Conclusion I. INTRODUCTION
The Trans-Pacific Partnership Agreement ("TPP") is an ambitious trade, services, and investment treaty on which final agreement was reached by the twelve parties from the Asia-Pacific region on Monday, October 5, 2015. (1) The parties completed negotiations during the Canadian federal election, and at the beginning of the U.S. presidential primary process. The agreement is not likely to be signed and ratified for well over a year from the completion of negotiations. In the meantime, there will continue to be heightened political debate about TPP's costs and benefits. One of the more heated areas of discussion will be the main topic of this paper: the TPP chapter on Investor-State Dispute Settlement ("ISDS"). (2) In asking whether the TPP is an example of "promise or peril" for Canada, the debate around ISDS will likely play a role. (3)
The new Liberal Government in Canada has promised a vigorous review of TPP in Parliament before ratifying it. (4) U.S. presidential candidate Hillary Clinton has said that she opposes TPP. (5) Senator Elizabeth Warren has warned that ISDS involves "rigged, pseudo-courts" (6); while President Obama has responded by saying "those arguments are made up." (7) Even comedian John Oliver has brought ISDS into popular culture in his recent commentary on Philip Morris's investment arbitration claim against Australia over tobacco plain packaging regulations. (8)
During TPP negotiations, another groundbreaking trade agreement that has been under consideration between the United States and the European Union ("EU") is the Transatlantic Trade and Investment Partnership ("TTIP"). Combined, the members of TPP and TTIP represent almost sixty-four percent of the world's Gross Domestic Product. (9) The ISDS has also been equally contentious, if not more so, during the negotiation of TTIP.
The long and winding path to the ISDS provisions in these treaties is in many ways a story grounded in the earlier experience and debate surrounding Chapter 11 of the North American Free Trade Agreement ("NAFTA"). Both sides of the current debate use NAFTA to support or critique TPP and TTIP. The first part of this paper makes a small contribution to addressing the question, how did we get to where we are now with ISDS? We will take a short tour of some vignettes from the last fifteen years of NAFTA experience with ISDS. We will see some of the origins of the debate about the legitimacy of ISDS that continues to inform the current TPP and TTIP discussion.
In the second part of this paper, the arbitral model for dispute settlement in TPP is contrasted with the new proposal of the EU for an international investment "court" in TTIP. The United States has taken its NAFTA experience and produced an investment chapter in TPP rooted in the values and procedures of international arbitration. In contrast, we see a dramatic, new proposal by the EU to include in TTIP a purported court-based model that seeks to repudiate the arbitration model. The justification for this change is based on the accusation that the current arbitration model is illegitimate. We will examine the legitimacy debate, comparing the arbitration and court models.
WHERE ARE WE NOW? OR "HOW ... IS THIS POSSIBLE?" (10)
What are the roots of this so-called "legitimacy" debate surrounding ISDS? First, what does it even mean to be legitimate? The word "legitimate" is most properly used as a synonym for lawful. (11) In the public realm, for a policy to be legitimate, there needs to be a broader sense of acceptance grounded in understanding and familiarity of that policy by the general public and key stakeholders.
How is this critique of legitimacy applied in the ISDS context? ISDS purports to be an independent, adjudicatory process. From a procedural point of view, ISDS has been effectively held to a standard by its critics based on the familiar procedures and mechanisms of domestic courts. Fundamentally, the parties to a legitimate adjudicatory process must be satisfied that justice is done, and it is seen to be done. In the United States, this process is broadly called due process, while in Canadian law schools we talk about natural justice. Regardless of whether fundamental principles of procedure are followed, no judicial-styled process can be considered legitimate if the parties and other key stakeholders are not supportive of the process--whatever the result for the individual parties. Perception counts a great deal. The particular parties may not be happy with the final result, but they should accept the fundamental fairness of the process that led to the result.
An interesting feature of ISDS is that the issues raised in investment arbitration are frequently of highly charged political nature. This feature is not present in the issues raised in international commercial arbitration (which shares many procedural similarities with ISDS). Generally, non-court dispute mechanism between two private parties, like mediation or commercial arbitration, does not lead to objections by outside stakeholders. In contrast, in ISDS, when public policy and taxpayer money is at stake, the community of stakeholders is greatly increased and hence the public scrutiny is also heightened.
A number of vignettes from NAFTA Chapter 11 decisions, rendered in the late 1990s and early 2000s, demonstrate the debate over the legitimacy of investment arbitration in the NAFTA context. Much of the NAFTA debate is similar to the TPP and TTIP discussions. Let us start in early 2002, after a small number of NAFTA Chapter 11 cases were launched against the United States:
BILL MOYERS: You write that Chapter Eleven is a ticking time bomb in the politics of globalization. Why?
WILLIAM GREIDER (NATIONAL AFFAIRS CORRESPONDENT, THE NATION): Because I think the public  will be shocked and quite confused, if any of a number of cases, whether it's Methanex or Loewen, or some of the others, manage to win damages against the United States. People at first are gonna say, Huh? What is that about? And then, as it's explained to them, they're gonna say, we didn't sign on for that. That's not what we think about as a global trade agreement. And then the education process is quickly gonna turn into anger, I believe. (12)
Moyers's report emphasized the lack of public knowledge about Chapter 11 and its "secret courts," a characterization made repeatedly. The report described NAFTA Chapter 11 as an attack on the "public laws that protect our health--and our environment--even to attack the American judicial system." (13) It also mentioned the possibility of public rebellion a number of times, and the general surprise about the arbitral process and its standards was pervasive in the PBS story. Demonstrated in a dramatic style, the report concluded that NAFTA Chapter 11 is illegitimate.
The Loewen v USA NAFTA arbitration was portrayed as a big surprise in Moyers's report because the conduct of U.S. courts was challenged under international law standards. The legal audience understands that the principle of denial of justice, specifically referenced in TPP, is a well-established legal standard under customary international law. (14) In 2002, the U.S. media and public were clearly surprised that such international standards exist. The two were even more surprised that under NAFTA process and remedy, U.S. courts could be held accountable. The idea that state responsibility, properly attributed to domestic courts as organs of a State was very contentious. From a public policy point of view, Moyers questioned the legitimacy of arbitration under NAFTA Chapter 11.
Another notable player in the questioning of NAFTA Chapter 11 was the U.S.-appointed arbitrator in the Loewen arbitration against the United States. In 2004, after the completion of the arbitration, Judge Abner Mikva (15) candidly admitted his own initial shock of the NAFTA arbitration model and the international standards included. In his own words:
Not only did I not know about it [NAFTA Chapter 11], I would venture that most of the members of Congress who voted for NAFTA had no idea that there was an arbitration procedure in it or how far that arbitration procedure extended ... No one ever talked about arbitration or investment disputes ... It didn't sound too radical until I realized that the dispute that this Canadian company Loewens was talking about involved the judgment of the highest court of the state of Mississippi ... They were asking this arbitration panel to review the judgment of the Mississippi Supreme Court. (16) Not only was Judge Mikva plainly unfamiliar with the arbitration model, he was unsupportive of any international tribunal holding U.S. courts to account. The Mississippi courts, by Judge Mikva's own admissions, were then known as "tort heaven ... and judges and juries [w]ere conditioned to give very[,] very large judgments." He goes on to describe the Mississippi court's conduct against Mr. Loewen and his company as "the most god awful trial I have ever read about. It was incredible." (17) Regardless of this finding, Judge Mikva convinced the other tribunal members, while taking credit for "saving American citizens several hundred million dollars," to dismiss the claim on a controversial jurisdictional ground. (18)
The U.S. government officials, defending the Loewen claim in 2000, closely examined the argument that no U.S. court, even Mississippi's, should be the subject of an international arbitral claim. These officials were as surprised as Judge Mikva that NAFTA provided an international remedy for denial...