What Happens When State Becomes The Enterprise In ISDS?

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    We can certainly expect new moves for the U.S. regarding investment treaties, but what does this all mean for the investor-state dispute settlement regime at large?

    Although President Trump's administration has pulled the plug on the Trans-Pacific Partnership and wishes to renegotiate the North American Free Trade Agreement, there is no evidence that Trump is against ISDS clauses themselves. We may gain insight into his future approach toward ISDS through one example involving an investment arbitration left on the White House's table. The example is that of TransCanada which served a request for arbitration on the previous administration for its delays surrounding permits.

    Foreign investor TransCanada applied for a permit for the Dakota Access Pipeline and the Keystone XL pipeline. The previous administration approved the permit for the Dakota Access Pipeline but halted its construction because of the Standing Rock Sioux Tribe’s claim that the pipeline threatened drinking water and their cultural sites. As for the Keystone XL pipelines, its approval was delayed for around seven years and then denied due to environmental concerns. This caused TransCanada to commence an investment arbitration against the U.S. seeking US$15 billion in damages.

    Trump, by way of signing executive orders in late January, invited TransCanada to reapply for the permit. Trump’s order of Jan. 24, 2017, sets out that new pipelines as well as retrofitted, repaired pipelines must be manufactured in the U.S. It has more recently become apparent that TransCanada’s Keystone XL project would be exempt because it is already being built. The White House has not yet confirmed whether the Dakota Access project, nearing completion, is also exempt.

    Trump’s negotiation with TransCanada is not without controversy as environmentalists and other advisers would prefer to see him negotiating their terms into the deal, i.e. minimizing the impact and risk to those in the direction of the pipelines and to the U.S. people in general. Although, while his terms and priorities in the negotiation can be scrutinized, the approach of resorting to negotiation rather than engaging in a long and expensive battle in arbitration can be commended or at the very least should not be controversial.

    Take, for example, Australia. Australia is said to have spent over AUS$50 million in defending the Phillip Morris investment arbitration claims. One could question whether negotiation, mediation or conciliation would have resulted in a faster and more economical outcome, even considering the fact that Australia won at the stage of jurisdiction/admissibility. However, Australia's approach was standard. Many governments have the legal resources to inject into a full-blown battle. States tend to be more litigious and are less willing to engage in conciliatory means of resolving disputes. Trump, in contrast, is challenging this norm with a very business-minded approach to disputes.

    Also, notably, Rex Tillerson, who Trump appointed as secretary of state, is the former CEO of ExxonMobil. While in the position of CEO, Tillerson had his own unfortunate run-ins with ISDS. While other corporations negotiated with the Venezuelan government so that Venezuela could obtain majority stakes in those oil ventures, ExxonMobil and ConocoPhillips resorted to international arbitration. ExxonMobil commenced the investment arbitration seeking US$16.6 billion in damages. During the arbitration it was reportedly offered US$1 billion in compensation by Venezuela and in the end was awarded US$1.6 billion by a very esteemed tribunal. As if Tillerson was not already disheartened enough with the ongoing delay on the enforcement of ExxonMobil’s $1.6 billion dollar award, surprisingly in March, the award was partially annulled by the ICSID annulment committee as the tribunal was deemed to have manifestly exceeded its powers in ignoring the limitation of the compensation clause of the agreement, which fell under the BIT, and instead applying customary international standards of compensation. ExxonMobil was only left with US$188 million to enforce. What’s more, the annulment committee took over two years to render its decision, which could have only attracted more risk and instability for the business during that period.

    Now, in his position of secretary of state, Tillerson will be much more cautious. In 2013, while CEO of ExxonMobil, he actually signed a letter along with 164 other business leaders in support of the U.S. approving the Keystone XL pipeline, which was sent directly to the previous administration. It is therefore not any wonder that Tillerson as secretary of state has encouraged Trump to steer clear of the arbitration against TransCanada. The choice to negotiate and generally facilitate foreign-investment instead reflects a shift toward a business-minded approach vis-à-vis ISDS by the U.S. Whether this will have a ripple effect on other governments is yet to be seen.

    Given the U.S. government’s recent business-minded approach, it would be wise for Trump to ensure that ISDS clauses in U.S. investment treaties also contain support for conciliatory measures, by way of multitiered clauses in their agreements (clauses involving multiple layers of requirements to negotiate, mediate or conciliate before proceeding to arbitration). Even though multitiered ISDS clauses require detail and should be thought through carefully, they can be used to achieve meaningful, effective, efficient and less costly solutions for both parties in ISDS if carried through consciously.

    Trump’s business approach is consistent with his ingrained negotiation-focused and business history. Well before becoming the president of the U.S., Trump stated that he favors trade in principle, but that “free trade’s only good if you have smart representatives … It’s not good if they haven’t read ‘The Art of the Deal.’” Although this statement seems somewhat incongruous out of context, we can learn a great deal about Trump's approach from it. The book he refers to in that quote is his 1987 book on business negotiations published shortly after he successfully took over the reconstruction of the Wollman Memorial Skating Rink in Central Park. That particular project had been stalled by New York City’s government for six years, costing the government US$12 million. It took Trump six months to complete it with a budget of just US$3 million. According to Trump, “It was a simple, accessible drama about the contrast between governmental incompetence and the power of effective private enterprise.” Has the U.S. government become his private enterprise?

    There is little doubt that Trump’s business-minded approach to investments has consistently informed and will continue to inform his every move as president. Nevertheless, in any dispute between a foreign investor and a state, the state arguably has a moral obligation to its people to be meticulous in making sure that the people's interests are accounted for in any negotiation, conciliation or mediation as the case may be. If Trump is implementing his corporate attitude in his negotiations regarding ISDS in the name of the state, then he must consider that even the enterprise has social and corporate responsibility, and such obligations should not and cannot be ignored.

    —By Stephanie Hunt, Corrs Chambers Westgarth


    Stephanie Hunt is an arbitration lawyer with Corrs Chambers Westgarth in Melbourne, Australia.
    Source: Law360, New York (March 28, 2017, 11:17 PM EDT)

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