ISDS: Obscure Free Trade Rules Turn Malignant – Part 2

Series: ISDS: Obscure Free Trade Rules Turn Malignant

From being an obscure clause originally designed to protect foreign investors from weak local legal systems, the Investor-State Dispute Settlement provisions embedded in many trade agreements are increasingly used by multinationals to bypass domestic legal systems.

Part 2 of the series lays out the major flaws of the ISDS regime and key liabilities faced by sovereigns, along with real cases faced Canada, Australia and other developing countries.

With the TransPacific Trade Partnership ever closer to getting passed by the US Congress, and with a rare opportunity of access to the political parties thanks to the upcoming federal election, what should Canadians do to ensure their social values and those of the political parties are aligned?

TPP protestor 2(image: Washington Post)

In Part 1 we described how the Investor-State Dispute Settlement (ISDS) mechanism contained in international bilateral and multilateral trade treaties, originally intended to protect foreign investors from weak domestic legal systems, have in the past decades turned malignant and mutated into a tool used by multinational corporations to challenge countries of the trade treaties when their corporate interests are threatened.

Part 2 outline the key liabilities which a country takes on when signing a trade treaty containing ISDS provisions.

Key Risks of ISDS

#1. ISDS preempts government sovereignty and undermines the rule of law

Summary: TPP/ISDS preempts government sovereignty and creates a parallel legal system capable of overriding and bypassing the domestic court decisions, including those made by the supreme courts of the land.

Under ISDS, a foreign corporation, feeling that it has been unfairly treated by a democratically enacted law – which is applied to both domestic and foreign firms, by the way – can take the complaint to a secret trade tribunal made up of a panel of three private sector attorneys. These attorneys, likely not domiciled in the country at issue and unaccountable to any electorate, have the power to contradict domestic court rulings and order governments to pay large sums of money in compensation.

In other words, when it comes to trade matters or any regulations which might be perceived by a corporation to adversely affect its interests, foreign corporations can circumvent a sovereign’s entire domestic legal system, including its supreme courts.

Think this is a fear monger’s hyped-up hypothetical situation not likely to happen to your country with a mature and competent legal system?  Below we present you some real life examples.

Exhibit A: Eli Lilly vs Canada

Outcome: $481 million, case pending

After determining that major pharmaceutical company Eli Lilly had presented insufficient evidence to show the benefits of its attention deficit hyperactivity disorder (ADHD) drug called Strattera, the Canadian courts invalidated the company’s monopoly patent rights for the drug. In Nov 2023, Eli Lilly initiated formal proceedings under NAFTA to challenge Canada’s standards for granting drug patents, claiming that the invalidations of a patent violated three special investor privileges granted by the agreement, and demands $481 million in compensation.

This case marks the first attempt by a patent-holding big pharma to use ISDS as a tool to push for greater monopoly patent protections, which increase the cost of medicines for consumers and governments.

The case is currently pending. See details here.


Exhitit B: RDC vs Guatemala

Outcome: $18 million

After concluding that US based firm RDC did not comply with local law, Guatemala initiated a legal process to consider revoking a disputed railroad contract with the company. While defending itself through the country’s legal system, RDC launched a Central America Free Trade Agreement (CAFTA) claim against the government.

The tribunal not only allowed the ISDS claim to move forward despite the unresolved domestic process, but opined that investors should be allowed to access extrajudicial investor-state proceedings before the conclusion of domestic legal processes.

The outcome: Guatemala lost the case and was ordered to pay $18 million to RDC for initiating a domestic legal challenge. (case details)


Exhibit C: Renco Group vs Peru

Outcome: $800 million, case pending

After having already granted two deadline extensions to US based Renco Group to comply with its contractual commitment to remediate environmental and health problems caused by its toxic metal smelting operation, Peru denied a request from the corporation for a third extension and ordered the plant closed pending compliance.

Renco Group launched a $800 million ISDS case against the country under the US-Peru FTA for not granting it a third extension. Renco’s tactic is to use ISDS not only to evade justice in Peru, but also in the US, where it has long sought to indefinitely delay Missouri based lawsuits seeking compensation for the Peruvian children victims.

Renco’s problems with lead pollution started, ironically, in the US long before Peru. In 2002, the US Department of Health and Human Services found 28% of the children living in the vicinity of the company’s smelter and 45% of the children living closest to the facility, had high blood lead levels, and declared the site to be “an urgent public health hazard”. The company settled a lawsuit in 2010 filed by the EPA and the State of Missouri alleging 48 counts of violations, and agreed to pay $65 million for toxic lead pollution cleanup and $7 million penalty for breaking at least nine environmental laws.

Fearing its history of violations in the State would diminish its chance of success in the Missouri based lawsuit against it on behalf of the Peruvian children, the corporation has attempted three times, unsuccessfully, to move the case to a federal court where it would not have to face a Missouri jury.

One week after starting the investor-state case against Peru in 2011, the company moved for a fourth time to have the case moved to a federal court. This time, the judge agreed to move the case, citing Renco’s new FTA case as cause for change. (case details)


If the thought that your legal system does not have final say on environmental, health, labor and other public interest issues which potentially ‘adversely affect international trades’ feels disconcerting, wait till you find out what makes up the trade tribunal and how it operates, which brings us to the issue of the structure of the secret trade tribunal.

#2. Secret tribunal structure breeds conflict of interest

Summary: From its composition, its selection process to the roles of the arbitrators, conflict of interests is structurally built into the secret trade tribunal.

Although we from time to time shake our heads in disbelief and wonder WTF semi-out loud when we hear court decisions which are contrary to what we believe is right/wrong, logical and rational, we still collectively have faith in our legal system and processes, and reasonably trust that our legal processes are transparent, the judges and attorneys are competent, have the requisite knowledge and experience to interpret laws within the context of our society and values, and that the presiding judges handle their cases absolutely free of any potential conflict of interest.

With such as a baseline, one would expect an international trade tribunal, which has the power to override any domestic legal system, to be at the very least as competent, transparent and free of potential conflict of interest as our domestic system.

Not so. Far from it, in fact.

A look at the arbitration tribunal structure would give you a pretty good indication of who drafted the ISDS section (hint: not the public).

  • Three-person tribunal composition – the dispute tribunal is made up of three private sector attorneys who most likely live outside of the jurisdiction under dispute, have little to no background or understanding of its domestic laws, need little regard to precedent and how they are interpreted and applied within the context of the local society, and, above all, unaccountable to any electorate.
  • How are these attorneys paid – unlike salaried domestic judges, these attorneys are paid by the hour, ranging from $375 to more than $700 an hour. The longer a case drags on, the more they get paid. If their paychecks rely on the number of hours they work on the case, what is the likelihood that even frivolous cases would come to their conclusions in a speedy manner, may I ask rhetorically?
  • Roles of judges – the ISDS system allows lawyers to rotate between roles, meaning a lawyer can represent a corporate client in an investor-state case against a government and a week later presides as a tribunal judge in another corporation-versus-sovereign dispute. In our legal system,a ethical issues raised by a chameleon  attorney going through a revolving door between a judge and plaintiff lawyer would likely result in a major scandal. Having extensive relationships with corporate clients, there are tremendous incentives for attorneys who serve on ISDS tribunals as judges to come up with fanciful interpretations of the rules and hand out outrageous compensations, in the process lining up his CV with big game trophy cases and giving himself an advantage to represent corporate clients in future ISDS cases.

What confidence would you have in your courts if the system allows judges to preside on drunk-driving-causing-death cases one day and be defence attorneys for drunk drivers the next day?

  • Tribunal selection process – under ISDS rules, only foreign investors can launch cases and also select one of the three tribunalists. Thanks to the aforementioned role switching provisions, this selection process provides yet another incentive for attorneys to come up with novel and expansive interpretations of investors’ rights while serving as ‘judges’ – the more creative the interpretations and higher the resulting award amounts, the more likely one would be picked by corporations to be on the panel the next time. This helps explain why a small number of attorneys – 15 of them representing 55% of all public ISDS cases – are repeatedly picked as tribunalists.

Those who dismissed these conflict of interest concerns would argue that there are conflict of interest rules and guidelines built-in to safeguard against such behaviors. However, such rules are vague in their wording and are rarely invoked in practice. The massive flaws inherent in the tribunal structure virtually guarantee that no amount of rules and guidelines would make the process free of conflict of interest. Just like a house built on quicksand, no amount of quality steel beams would redeem its structure integrity.

#3. Arbitrary compensation amounts

Summary:  A government can be ordered to compensate a foreign corporation for the loss of ‘expected future profits’.

If a foreign corporation convinces an ISDS tribunal its case against a government, it can demand, under foreign investor rights not available to domestic firms, compensation on the ‘expected future profits’ that the domestic law allegedly impedes.

Under such logic, tribunals have ordered sovereigns to pay more than $3.6 billion to foreign corporations under the US free trade agreements and bilateral investment treaties for discriminatory toxics bans, land-use rules, regulatory permits, water and timber policies and more. Meanwhile, in the 19 pending claims under U.S. FTAs alone, foreign firms are demanding $38 billion for environmental, energy, financial regulation, public health, land-use and transportation policies.

Inflation over the years also witnesses typical compensation awards balloon from merely millions 15 years ago to hundreds of millions in a single case.

To wit:

Exhibit D: Occidental versus Ecuador

Outcome: $2.4 billion

In 2012, the state-investor tribunal under the US-Ecuador Bilateral Investment Treaty ruled against Ecuador in a case involving the country’s termination of an oil concession after Occidental’s sale to another firm of 40% of its production rights without government approval, despite a provision in the concession contract stating that sale of Occidental’s production rights without government pre-approval would terminate the contract.

The two out of the three tribunal attorneys used reasoning that the third tribunalist called “so egregious in legal terms and so full of contradictions, that I could not but express my dissent”. The panel handed Ecuador a total penalty of at least $2.4 billion which included backdated compound interest, post-award interest and half of the tribunal costs.

This is the amount that Ecuador spends on health care each year for almost half of its population of 14 million. The sum amounts to 16% of the country’s external debt, or 11% of all goods exported annually. This case was the largest investor-state award handed out by a tribunal at the time and intensified sovereigns’ growing concerns about the investor-state dispute resolution system. (Case details)

Decisions by these extrajudicial panels of private sector attorneys, when they contradict domestic court rulings, including even those in which countries’ supreme courts interpret domestic constitutions and laws, are not subject to any substantive appeal.

#4. ISDS neuters the rights of sovereigns to enact domestic policies

Summary: ISDS forces governments to enact or roll back domestic environment, health, labor or other public interest policies.

Although there are no provisions in ISDS which would require a country to lower their levels of regulations, the regime, however, would directly deter a country from enacting stronger levels of regulation, fearing that such actions would draw investor-state lawsuits against them. The risks of lawsuits are especially high and are increasingly used by corporations against domestic environment, health, labor and other public interest policies.

Exhibit E: S.D. Meyers versus Canada

Outcome: $6 million, law repealed + apology

When Canada closed its border to trade in toxic PCBs in 1998, a NAFTA panel ordered the Canadian government to pay US firm S.D. Meyers over $6 million plus interest and compensation for their lost business opportunities. The government repealed the ban, issued an apology and paid to settlement. (case details)


Exhibit F: Metalclad versus Mexico

Outcome: $15.6 million

A Mexican municipal government’s denial of a construction permit for the building of a toxic waste facility and the governor’s later declaration of an ecological preserve on the site were ruled to be NAFTA-illegal expropriations by a NAFTA tribunal. The Mexican government was ultimately ordered to pay California-based Metalclad company $15.6 million in compensation – a large amount relative to Mexico’s environmental protection budget. (case details)


Exhibit G: Mesa Power Group versus Province of Ontario

Outcome: $746 million, case pending

Mesa Power Group, a U.S.-based corporation owned by Texas oil magnate T. Boone Pickens, filed a $746 million suit in 2011 to challenge a green jobs program of the government of Ontario. The provincial government’s green jobs program incentivizes clean energy production by paying preferential rates to solar and wind power generators that source their equipment locally. Mesa Power Group claimed that the successful program had prohibitive rules, taking particular issue with the buy local stipulations. The corporation alleged that such requirements violate its NAFTA-enshrined rights to most favored nation treatment, national treatment, and fair and equitable treatment. (case details)


Exhibit H: Dow Chemical versus Province of Quebec

Outcome: settled with no payout

U.S. Dow Chemical Company, filed a NAFTA Chapter 11 claim for losses it alleged were caused by a Quebec provincial ban on the sale and certain uses of lawn pesticides containing the active ingredient 2,4-D. Quebec and other provinces banned the ingredient as an environmental precaution, and responses to public comments suggested about 90% popular support for the pesticide bans.

After five other provinces followed Quebec’s lead and banned the pesticide, Dow decided to settle with Canada in a deal that left the bans intact and required no taxpayer compensation to the corporation. However, the settlement required Quebec to state, “products containing 2,4-D do not pose an unacceptable risk to human health or the environment provided that the instructions on their label are followed.” Dow portrayed the statement as acknowledgement that the contested pesticides were safe. (case details)


Exhibit I: Ethyl Corp versus Canada

Outcome: $13 million, ban repealed

In 1997 the US chemical company challenged a Canada-wide ban on import and trade of the gasoline additive MMT, a suspected neurotoxin also banned by US law in reformulated gasoline. Following a preliminary judgement against Canada, the government repealed the ban, issued an apology and paid a $13 million out-of-court settlement.


Exhibit J: Mobile Investment versus Canada

Outcome: compensation TBD and accumulating

Having already lost its case in Canadian courts, oil giant Exxon Mobile filed a suit under NAFTA against Canada’s guideline requiring energy companies to invest in research and development in Newfoundland and Labrador. The amount to be awarded is still to be determined, while damages continue to accrue, after a tribunal ruling in favor of the investors.


Exhibit K: AbitibiBowater versus Province of Newfoundland and Labrador

Outcome: $130 million

Although AbitibiBowater was to be compensated with what the Province of Newfoundland and Labrador deemed as fair price after the pulp and paper company closed its last mill in the province in 2008 and the provincial government enacted legislation to return its timber and water rights to the Crown and expropriate some of its lands and assets associated with water and hydroelectric rights, the firm launched a lawsuit under NAFTA. The suit was settled out of court in which the provincial government paid $130 million to the firm, the largest NAFTA-related settlement to date.


Exhibit L: St. Marys versus Province of Ontario

Outcome: $15 million

In 2011, the provincial government of Ontario issued a zoning order preventing a site from turning into a quarry near Hamilton after concerns over the groundwater from residents nearby grew. The Canadian subsidiary of St. Marys took the provincial government to NATFA court claiming unfair discrimination. The parties settled and the company withdrew its claim after receiving $15 million from the government.


Exhibit M: Vattenfall versus Germany

Outcome: $4.6 billion

After a decision to shut down some old reactors and speed up efforts to phase out nuclear energy in the wake of the 2011 nuclear accident in Japan, Swedish nuclear operator Vattnfall filed a claimed against Germany for past and future losses to the tune of $4.6 billion. (details).  This came after the same company successfully used another ISDS case to push Germany to roll back environmental requirements for a coal-fired power plant it owned.


Exhibit N: Gabriel Resources versus Romania

Outcome: lawsuit just launched

The saga of this latest case dates back to 1997 when the Canadian mining corporation intended to develop Europe’s largest gold and silver mine with a plan involving the resettlement of 2,000 inhabitants and the levelling of two pretty valleys. The plan ran into formidable local opposition, which witnessed massive protests of 30,000 people over several Sundays.

On the eve of an parliament vote on an exclusive law designed to permit the mine in early 2015, Gabriel’s CEO threatened with a $4 billion ISDS claim if the law did not passed. The threat backfired and drew even more demonstrations from all over Romania. Faced with massive protests, the parliament was unable to pass the law.

Gabriel has just filed a ISDS claim against the country as a result. As we speak, the company is busy cherry picking the best jurisdiction whose investment protection agreement would give it the most advantage. (details)


Exhibit Q: Bilcon versus Province of Nova Scotia

Outcome: Canada ruled against $300 million claim

In the face of significant community opposition and subsequent to the recommendations of a joint federal-provincial environmental review panel, an application for a basalt quarry and marine terminal development project in Digby, Nova Scotia by Delaware registered concrete company Bilcon was rejected due to environmental concerns.

The company filed a $300 million lawsuit under NAFTA claiming that it has been unfairly treated. In March 2015 a two-person majority panel ruled in favor of the company. A dissenting member of the panel warned that the ruling represents a “significant intrusion” into domestic jurisdiction and will “create a chill” among environmental review panels that will be reluctant to rule against projects that would cause undue harm to the environment or human health. (details)

The federal government plans to appeal the ruling as of this writing.

Perhaps the cases attracting the most but otherwise little coverage from mainstream media go to the perpetual poster child of corporate greed over the well being of its product consumers – the tobacco industry.

Present Philip Morris

Exhibit O: Philip Morris versus Australia and Uruguay

Outcome: decision pending, $50 million in legal fees alone for Australia

After enacting plain packaging policy to further curb cigarette smoking, the government of Australia found itself in a lawsuit from Philip Morris. By shifting its headquarters to Hong Kong, the tobacco giant uses the investor-state dispute settlement provisions of a bilateral treaty between the two jurisdictions to sue the government, claiming that plain packaging measure constitutes an expropriation of its Australian investments in breach of the Hong Kong Agreement. The case is expected to cost Australia $50 million defending itself in a secretive international tribunal in Singapore. That cost would quickly balloon if the country finds itself on the losing end of a preliminary judgement expected in September 2015. (details from The West Australian)

If $50 million sounds like hardship to even Australia, the case for the small South American country of Uruguay is much more dire. For enacting to increase the size of the health warnings on cigarette packs and clamping down on tobacco companies’ use of sub-brands like Malboro Red to falsely promote theirs as safe products, the country, whose GDP of $53 billion, got the wrath of the same tobacco company (annual revenue $80 billion) which sued under the terms of a bilateral trade agreement between Uruguay and Switzerland where it recently moved from the US. Years since it started in 2009 and millions of litigation costs later, the case is still in the hands of ISDS tribunals. (details)

The increasing use by foreign corporations of ISDS to challenge legislations enacted by various levels of governments designed to protect their citizens and environments have resulted in forcing many governments to embarrassingly perform about-face rollbacks of such legislations, or at a very minimum spend millions of taxpayer money defending themselves in court.

Worse still, the mere threats of lawsuits under ISDS and the potential cost of litigation – on average $8 million per case – often sends enough chill down the governing bodies contemplating going down that path.

Case in point.

Exhibit P: Canada’s plan for plain packaging policies for cigarettes

When the country started to consider enactment of plain packaging policies for cigarettes to curb smoking in 1994, the tobacco industry threatened to file an investor-state claim under NAFTA, claiming the policy would constitute an expropriation worthy of hundreds of millions in compensation in a letter sent by RJ Reynolds to the Canadian House of Commons. Canada never followed through.

A similar planned introduction of plain cigarette packaging in New Zealand in 2013 was similarly delayed as the country’s Ministry of Health decided to wait for a tribunal decision on the investor-state case active at the time between Philip Morris and Australia.


#5. Provincial and local governments have no standing

Summary: Provincial and municipal governments have no standing to defend state and local policies that are often challenged in ISDS cases.

Faced with increasing challenges by foreign corporations on their domestic policies including local land use decisions, state environment, public health policies, adverse state court rulings, and state and municipal contracts, states and municipalities are caught in a precarious position that they cannot defend themselves but have to rely on the federal government to do the job.

Whereas a federal government might be able to claim some of the legal fees it incurs in the case of a successful trial, there is no formal arrangement or guarantee that expenses incurred by sub-federal governments are compensated.

Little wonder that state and local governing bodies have expressed strong opposition to US investor-state provisions which threaten their autonomy. For them, the best outcome out of any investor-state litigation is that they escape with only having to pay legal expenses.


Given the potentially far reaching impact to the people and society under the ever more encompassing ISDS regime with the TPP (or TTIP for that matter), there is no justifiable reason for a government – any government – to not make public the details of the pact so that proper debate can be conducted by the public most affected by it.

Our government needs to articulate to the people why it is ok and necessary to allow private tribunals made up of private sector lawyers who switch heads between ‘judges’ and ‘lawyers’ to have the power to override our country’s legal systems, including our highest courts.

It is not ok for individual parliamentarians to blindly tow party lines and rubber-stamp the treaty. What has come under threat, in addition to the abdication of sovereignty, is no less than our health, environment and our societal well being.

In Part 3, we urge what actions Canadians should take to take advantage of the rare opportunity of access to politicians afforded by the upcoming federal election.

References and further reading:

Investor State Dispute Settlement (ISDS)

This article is part of the Investor State Dispute Settlement (ISDS) in-depth topic. Get a crash course and read the latest developments on this topic.


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