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Foreign Affairs, Defence and Trade Legislation Committee

PERCIVAL, Mr Andrew, Member of the Executive of the International Law Section, Law Council of Australia

CHAIR: Welcome. Thank you for your submission. Would you like to make an opening statement?

Mr Percival : As you would have seen from our submission of 11 April, we do not support the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, particularly because it has a blanket prohibition against Australia entering any agreement that has in investor-state dispute resolution provision. We think that any such provision should be considered on its merits on a case-by-case basis rather than having a blanket prohibition. We do not understand the basis for the blanket prohibition. As far as I am aware, neither the bill nor the explanatory memorandum actually provides an explanation what benefit is sought or what mischief is sought to be addressed by the blanket prohibition, which makes it a bit difficult to address what the issues are.

CHAIR: I wonder if you would be good enough to assist us. There has been discussion on the timing of when a draft agreement should be made available. At the moment, it is signed off by cabinet. It then goes to the Joint Standing Committee on Treaties at which time the agreement is made public. There has been an argument to say that the community would be better served by a draft agreement being made public prior to signing with the capacity, presumably to be able to influence any changes that interested parties might be wanting to proffer. Could you give us the benefit of your thoughts on that?

Mr Percival : The Law Council is on record suggesting a system not quite as formal as in the US, where they have a variety of committees which address particular issues on free trade agreements on an industry basis, a services basis and on a foreign investment basis—there are a whole range of issues. But they are required to sign off on them at a fairly early stage before they go to the US Congress. We in the Law Council would think a similar sort of system, not necessarily as formal, but which would provide opportunities for stakeholders to provide an input into preferential trade agreements before they actually go before parliament or before cabinet so that there is an input and that they actually review them and ask: is this actually in the national interest? Is there a benefit?

On a personal level, Australia has entered into preferential trade agreements with the US; Singapore; Chile; and, more recently, Korea and Japan. There has been a lot of—if I can describe it as such—noise. There have been a lot of studies about what the benefits are. If I sit there and look at the anecdotal evidence, say, with the US free trade agreement, I ask: has it actually been of benefit? Has anybody actually reviewed it and said whether it is of benefit economically?

Senator WHISH-WILSON: No they have not is the answer.

Mr Percival : That speaks volumes. I am not saying that we should not be entering into free trade agreements with a particular country or with a range of countries such as with the Trans Pacific Partnership. But I think there needs to be some more formal input by stakeholders. I know that the Department of Foreign Affairs and Trade does have consultations with stakeholders. I suggest that is probably largely ad hoc. But it will be useful for parliament to actually have industry groups reviewing particular agreements and asking: is this or is this not in the national interest?

CHAIR: So the free trade agreement we had with the US at the time of the Howard government has no ISDS provision. Are you able to pass a view to the committee as to whether you think the agreement was richer or poorer or unaffected by the absence of an ISDS? Would that influence the observation you have just made or the question you have just asked that Senator Whish-Wilson has provided your advice on?

Mr Percival : I stand to be corrected but I think all the preferential trade agreements that Australia has entered into to date, and I suspect those it is contemplating entering into, do not contain investor-state dispute resolution provisions. They tend to be more a provision in bilateral investment treaties, which Australia is not entering into in any great rush at the moment. So I am not certain what the problem or the issue is. As to your question of do I think we are better or worse off for not having such provisions in our preferential trade agreements, I do not think it makes any difference whatsoever.

CHAIR: I think it was Department of Foreign Affairs and Trade that made the observation that the legislation we are considering at the moment, as we understand it, would apply to agreements already in force. Their concern was that if it was passed in the way in which it is currently before us, that that might actually prevent the Australian government or Department of Foreign Affairs and Trade in the future attempting to negotiate or renegotiate any ISDS provisions that there are in existing agreements. Would you care to comment on that? Do you think, from your reading of the legislation, that that is the case?

Mr Percival : I was a bit surprised by your comment. I was looking at the legislation, which says 'must not honour after the commencement of this act enter into an agreement' and that would presumably include an amendment to an existing agreement—speaking as a lawyer—because that would be on agreement of itself. So if there was an agreement such as a bilateral investment treaty which included an ISD provision and there was a proposed amendment to it, this would prohibit that amendment. Whether that is a good or bad thing would depend, in my view, and should be assessed on its merits, not as a blanket prohibition. It would depend on what the amendment was—it may have actually nothing to do with the ISD provision at all.

My view and the Law Council's view on ISD provisions goes back to each one needing to be considered on it merits. Having a blanket prohibition restrains what can and cannot be done. As I just mentioned, if we have a bilateral investment treaty with an ISD provision and we sought to amend it, which may have been of benefit to Australia, this provision would prevent us from doing so.

Senator WHISH-WILSON: You expressed some concerns about the process and how we could improve it. I think we all agree that we can improve trade processes. So when you say, 'Each case should be assessed on its merits,' how do we know whether these things are being assessed on their merits when the process is secretive and not subject to scrutiny?

Mr Percival : Certainly there is a concern with various agreements—and I will not just restrict it to preferential trade agreements—because they are usually done on a confidential basis so the stakeholders, which includes the business community, do not really know what is being negotiated until it is actually signed and gets ratified. As I said, I think the US process is a bit different and there is a bit more transparency. I do not see a reason why there should not be a similar level of transparency in Australia. That does not mean that it needs to be published in the newspapers but there could be committees that could review it. You could have the Business Council of Australia or similar sorts of bodies such as the Australian Industry Group having their input to it and signing off to government saying they think is a good idea or not a good idea.

Senator WHISH-WILSON: We are certainly having that process now through JSCOT and through this inquiry, but it has already been signed.

Mr Percival : The next point I was going to make is that when it goes to the committee on treaties, it has already been signed.

Senator WHISH-WILSON: That is right.

Mr Percival : I was asked whether I would like to make a submission on preferential trade agreement with Japan through the Law Council. My attitude to that was: well, it has been signed, it is not going to change so there is not point.

Senator WHISH-WILSON: For your information, the Senate did pass a motion and an order for the production of documents to have this process changed but the government did not believe it was in the national interest. We tried.

Mr Percival : I respect that. I do not actually have the Law Council submission that we did provide on this issue. I am happy to obtain a copy of it or an extract from it to provide to the committee if that would be of help.

Senator WHISH-WILSON: Thank you. We are seeing a process in Europe where they, especially around investor-state dispute settlement, are open to public consultation for three months. We saw a number of legal experts such as yourself provide input into that process. We have also heard evidence here today that the carve-outs from the exceptions that we have seen in the Korean free trade deal are inferior to what we have already seen in a deal signed yesterday between Canada and Europe. Obviously, there are ongoing discussions around other trade deals. Coming back to my question: how do we know that these ISDSs are in the public interest or in the national interest when we do not open it to scrutiny?

Mr Percival : To me, it depends who you are negotiating with and which countries. If you are entering into an agreement with countries such as the US, Singapore, Japan or Korea, I note they have got robust legal systems. It is probably not so much an issue. In other countries it may be more of an issue, but again I would be saying that, for an Australian investor in those countries, is there a benefit? That would need to be assessed. For entities investing into Australia, Australia has a fairly robust legal system. They are not going to get a hell of a lot more benefit than they otherwise would out of our legal system.

Senator WHISH-WILSON: Given your comments, are you surprised or do you know why Korea was so insistent on having an ISDS included given Japan and obviously the US accepted it was something that we were—

Mr Percival : I do not know.

Senator WHISH-WILSON: You do not have any insights into that?

Mr Percival : I have worked in Korea. I have never had a problem there. I do not know why the Koreans would. You would have to ask DFAT that.

Senator WHISH-WILSON: I could use a slightly emotive question, but it is a realistic one. I was reading in your submission, in the annex, that you cover roughly 60,000 members across your society who are lawyers. How do you think they would feel about, for example, the High Court being challenged, even after what we saw with the Philip Morris case—it has gone through all the stages of the best legal system that we have, it has produced an outcome, and that has been challenged through these international ISDS clauses. How would most lawyers feel about that instinctively, that even the High Court of Australia could be challenged by a foreign corporation seeking profits?

Mr Percival : I would think that they would regard it as part of the international legal process.

Senator WHISH-WILSON: I will read you a quote that was in a submission that we received from AFTINET. It is a quote from Juan Fernandez-Armesto, who is a key arbitrator for Spain in the European trade deal. He said:

When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all. Three private individuals are entrusted with the power to review, without any restrictions or appeal procedure, all actions of the government, all decisions of the courts and all laws and regulations emanating from Parliament.

That is referenced in the submission. Do you agree with those simple concerns around the structure of ISDSs and legal processes?

Mr Percival : It depends on how you structure them.

Senator WHISH-WILSON: That was going to be my next question: whether you could think of ways to get around those points to restructure the process.

Mr Percival : I would go back to what I just said: it depends on how you structure them. It does not surprise me that you can go to an arbitral body. We have international commercial arbitration between companies which operates worldwide. There is a New York convention on it. There are some exceptions as to when you can go to court and challenge the arbitral proceeding—the actual outcome. There are some exceptions to that. The system works well. I am curious as to why, at a commercial level between companies, international commercial arbitration works very well as an alternative to normal legal proceedings in courts. Nobody has an issue with it.

Senator WHISH-WILSON: Between governments and companies? Is that a more sensitive—

Mr Percival : I do not see a necessary reason why it should be any more sensitive.

Senator WHISH-WILSON: Perhaps because there are issues of public concern, like the environment. It could be labour standards or public—

Mr Percival : When you start getting into public health, animal health, plant welfare and the environment, there are carve-outs in GATT, and there should be preferential agreements, which would be carve-outs from the ISD provisions.

Senator WHISH-WILSON: You mentioned when you are speaking—and it is a valid point—that you did not feel there was enough background in the explanatory memorandum as to why the Greens had brought this bill to parliament, and I accept that. You obviously understand the issues and the concerns. In relation to the carve-outs you mentioned, have you reviewed the document that the JSCOT received last week from 100 legal academics questioning whether the carve-outs would work?

Mr Percival : No, but I am happy to do so.

Senator WHISH-WILSON: I would appreciate that. It looks like these clauses are moving towards carve-outs and being improved. New information is taken into account. As I said, there are 170,000 submissions into the ISDS in Europe. It would be great if you could have a look at that. The 100 academics, who are all legal experts like you, raise significant concerns.

Mr Percival : I am happy to have a look at it, but I probably maintain that GATT has been around for a long time and it has had the carve-outs for public welfare, animal welfare, plants. There are always those exceptions to those sorts of concerns about sovereign power.

Senator WHISH-WILSON: The Philip Morris case is one that we have focused on here, and how there have been changes to the Korean deal to try to prevent that from happening again. We heard evidence today that it is certainly not going to prevent strategic litigation by companies; because ISDS exists, nothing will be able to prevent them from bringing forward strategic litigation. Carve-outs cannot preclude litigation.

Mr Percival : No. They can only preclude the success of the litigation.

Senator WHISH-WILSON: Potentially, I hope. We also heard evidence today that it is understood in the legal community that in the Philip Morris case they are taking a strategic action through this ISDS to make a global statement, because a number of other countries are now looking at plain packaging. The money they are putting into this is pretty irrelevant compared to the potential damage to sales.

Mr Percival : Again, I could not comment on that particular litigation. I am not familiar with it, apart from what I have read in the newspapers. The thing that always worries me is that, if you take a particular case and use that as an example, it may be relevant for that particular case but you may be doing yourself harm in a different way because you have not foreseen—

Senator WHISH-WILSON: Unintended consequences.

Mr Percival : unintended consequences. As a professional commercial lawyer, the thing that always worries me is that, when we draft agreements, we are trying to legislate through contracts for the future. Often it is very difficult to see what the consequences are going to be. That is my concern here. I would have thought it is better if there is an ISD provision in a particular agreement, and I think there should be more transparency—I agree with that—and it should be assessed on its merits. I would assess it on a case-by-case basis to see what it says rather than try and have a blanket prohibition, where we do not know what the consequences are going to be.

Senator WHISH-WILSON: On the second page of your submission, you state:

… the Law Council considers that, in some circumstances, the inclusion of ISDS provisions in agreements … can provide investors with a level of certainty … As such, the inclusion of ISDS provisions in agreements could enhance foreign investment, whereas a blanket prohibition … would likely discourage investment in Australia.

I am just wondering what evidence you base that on, because it has been made pretty clear to us today that, except for a study that Professor Nottage is working on in Sydney, which has not been done yet, all the evidence so far shows that there are no benefits from ISDS.

Mr Percival : I was actually relying on Professor Nottage.

Senator WHISH-WILSON: Yes, I think he has got an opinion already, but the study is underway.

Mr Percival : Again, he is part of the Law Council and this is his particular area of interest, so we do take note of his views.

Senator WHISH-WILSON: But, as it stands now, the Productivity Commission, the UK government and a number of studies have looked at this—even the Cato Institute, the Tea Party institute in the US—and have come out and said, 'There are no benefits to these; just get rid of them.' I just wanted to put that on record. I was interested in where you got that statement from. Thank you.

Senator GALLACHER: Mr Percival, from listening this morning and reading your submission, I suppose that, over a long period of time—say if we go back 25 years—there have been governments that have ruled it in and ruled it out; there have been bilateral agreements with it in; and there have been free trade agreements with it in. I think you say in your submission that, over all of that, it should have been done on a case-by-case basis. That is essentially what has happened, isn't it?

Mr Percival : I do not know whether that is actually correct, without having gone back and looked at why particular governments ruled it in and ruled it out, and ruled it in and ruled it out. My particular view was—and probably I was thinking in my mind of preferential trade agreements as opposed to bilateral investment treaties—to look at what has been negotiated with whom and does it make sense to include it or not include it. I think, as we have just heard here, probably Korea is the only party—I am not certain why Korea insisted on it. Most preferential trade agreements I am aware of would not include an investor-state dispute settlement provision. It is usually state to state.

Senator GALLACHER: That is on the basis that there are competent jurisdictions or resolution mechanisms to deal with it, without the ISDS?

Mr Percival : Yes. But that is not to say that, in a particular case, there might not be a good reason for it. All I think the Law Council is saying is that, when looking at these agreements, rather than having a blanket prohibition, look at them on a case-by-case basis and, if there is no compelling reason to include it, do not.

Senator GALLACHER: There was mention made this morning of a labour relations case involving Veolia and the Egyptian government. I just had a quick look at that over lunch. That involved a 75 per cent increase in the minimum wage in a country. Is that likely to trigger an investor-state dispute—if you contract at 400 Egyptian pounds a month, then you get a new government and they decide that the minimum wage is now 700 pounds a month?

Mr Percival : I would not have thought so, but, again, it comes down to how you draft the investor-state dispute provision.

Senator GALLACHER: But, with those sorts of arrangements where foreign companies invest in Australia and employ people or whatever, there is never a challenge on how the industrial relations systems works, is there, normally?

Mr Percival : No. Again, I would say that, if you looked at Australian companies investing in, say, Japan, you would not find that, if there is a change in their industrial relations system or something similar, they are going to be looking at an investor-state dispute. As I said earlier on, countries we have close economic relations with tend to have robust legal systems.

Senator GALLACHER: I have also read some stuff which says that the US has never lost an ISDS case.

Mr Percival : I would not comment on that.

Senator GALLACHER: You do not have any experience about resolved cases?

Mr Percival : Not involving the US. I suppose my area of expertise tends to be more with the WTO, and the US has certainly lost cases there.

Senator WHISH-WILSON: I would probably question that. My understanding is they have only won 30 to 40 per cent.

CHAIR: We could give you some homework to do by next Wednesday, Senator Whish-Wilson; you can also investigate and report back to the committee, as Mr Percival is going to do!

Mr Percival : I would actually be surprised if they had a 100 per cent success rate.

Senator GALLACHER: Do the trading situation of a country, its need for foreign capital and its legal system—those three competing things—predicate whether you need an ISDS or not?

Mr Percival : I would not say the three things. I would certainly be looking at the legal system and what are the sovereign risks that are involved there. That would provide an informed evaluation as to whether you would want an ISD. You might then turn around and say that the people or the companies or the entities that are going to invest in that particular country are big and large and ugly enough to look after themselves, so you might not want one. Again, that is what I am getting back to—that sort of evaluation is case by case. To get back to the senator's comments, if we have increased transparency on this I think there will be a more informed discussion as to what factors should be taken into account.

Senator GALLACHER: Some evidence we heard this morning was that there has been a proliferation of cases and that there are international legal firms 'rent seeking'. What is the Law Council of Australia's view on that? Is it just a normal part of trade relationships or is there a growing jurisdictional business growing out of this ISDS?

Mr Percival : As a member of the Law Council, I am not aware of a growing jurisdiction, certainly not in Australia. I could not comment on whether it is happening overseas. It is a bit difficult to say these days because a number of Australian law firms are now international law firms with a presence in the US and the UK. What they may be doing over there may be a bit different to what is happening in Australia. But, certainly from an Australian perspective, I do not see it.

Senator GALLACHER: My understanding is that there has been a 25-year history of 'rule it in and rule it out' free trade agreements. Given that, has there been any standout period in that time where it has been to Australia's detriment not having an ISDS?

Mr Percival : Not to my knowledge.

Senator GALLACHER: So your submission is that it is case by case, really. It is just on the merits of each individual—

Mr Percival : Yes, case by case. Again, going back to the senator's point, if there was increased transparency in the process by which these agreements are reached I think there would be a more informed evaluation not only of the ISDS but of other provisions in the agreements, which I think would be in the national interest.

Senator GALLACHER: In the Korean free trade agreement, given the maturity of both legal jurisdictions and the maturity of the trading relationship, did Korea simply want an ISDS provision and it did not worry us and so we gave it to them?

Mr Percival : Again, I do not know why the Korean government pushed for it. Do I see a detriment from Australia's point of view in agreeing to it? No. There are other provisions in that particular free trade agreement which make absolutely no difference to trade between our countries. I sit here as a legal practitioner. I have flown in and flown out of Korea and practised legal services there for the benefit of Korean companies. I have probably ignored whatever their rules are about the provision of legal services. I have no idea what the Korean free trade agreement provides for legal services. I doubt whether it advances them considerably. But, again, it goes back to the fact that we are not part of the negotiations.

Senator GALLACHER: Australian honey producers wish they were because they are still suffering a 250 per cent tariff.

Mr Percival : I suspect that sugar producers would have a similar sort of view on the US free trade agreement.

CHAIR: A witness this morning made the observation that, in their view, the arbitration system is flawed in the sense that rather than the arbitration being through a judicial process and appointed judges it actually involves players in the game. The point made was that they could be a claimant one week and an arbitrator the next week. I am going to ask for your opinion on that. The second point this person made was that arbiters are paid on an hourly basis and so therefore there is the potential for these to be very long, drawn-out processes, whereas if they were more akin to what we would understand as a judicial process that would not be a factor. Can you comment on the arbitration system and whether or not it could be or should be more closely aligned to what we would understand to be a more normal judicial process here.

Mr Percival : I am surprised by the comments. It depends on how you select arbitrators. You can have a single arbitrator. As you commented, they may be an arbitrator one week and assisting somebody else in an arbitral proceeding the next week. I do not think that necessarily reflects on his or her professionalism as an arbitrator. Often in arbitral proceedings you will have three arbitrators—one selected by each side and a third selected by the two arbitrators that have been appointed. So you can actually get a pretty good arbitral panel. Probably in an investor-state that is the model one would aim for.

Arbitrators tend to be former judges or senior counsels, at least in Australia. So I would be amazed if it reflected on their professionalism. Certainly in what I have been involved in they have been very professional. Yes, you are entering into a different sort of proceeding, but it is very much akin to a judicial proceeding in terms of the process, the diligence and evidence that is before it.

CHAIR: We were told that in the Phillip Morris case an agreement had been reached that Singapore will be the jurisdiction in which that arbitration takes place. What I would understand from the response that you have made is that the parties then would be satisfied to be subject to the Singaporean judicial process.

Mr Percival : No, it does not quite work that way. Again, it comes down to the particular ISDS provision or, if you are looking at a commercial arbitration, that relevant provision. It may be held in Singapore with Singaporean arbitrators, who may be former judges. The governing law could be the governing law of Australia and they would take evidence as to that. So it would not be Singaporean law. There are a variety of things. Singapore and Hong Kong tend to be the part of the world where we do a lot of international commercial arbitration. They are the hubs of it. Australia would like to do more. But once you go to arbitration it is really a matter for the parties to select the governing law. The arbitrators will then take evidence as to what that law actually says.

Senator WHISH-WILSON: This is a fairly generic question. We as a committee have been given a lot of case studies and examples to have a look at. It seems that some of the issues that have gone to these arbitration courts directly involve matters of public interest, such as the environment, water rights et cetera. I suppose the concern, given the nature of the tribunals and the lack of transparency around the selection of the arbitrators and that sort of thing, is around how on issues such as accessing national commons et cetera the public in a country can have input into the decisions that are made in these arbitration courts given that they do not have the checks and balances and the backup of a judiciary such as we have here and that the parliament does not have any say in them either. In our democracy, public interest groups as well as special interest groups have parallel legal systems to what already exists. Regulatory chilling is one issue that we have discussed a lot today. In its own submission on the Phillip Morris case, the government admitted to regulatory chilling being an issue. I heard that from the head of the health department when I asked her in estimates about this when it comes to public health policy. Would your answer be that, once again, it depends on how we structure these things so they do not happen and cannot even go to tribunal?

Mr Percival : I would probably say it is how you structure them. Investor-state arbitration has historically tended to be in private. Is there a compelling reason why it should be? Should there be the opportunity for an interested third party to appear before the proceeding? I cannot see a compelling reason why not, but, again, it depends on how you structure these things.

Senator WHISH-WILSON: An example we got—I will not quote the exact names, but I can give them to you—was a pulp mill that closed in Canada and, I think, went into receivership. The company had water rights allocated to them and, because there was no money available to do the remediation et cetera on the site, the government expropriated their assets to pay for that and then was sued through an ISDS and ended up having to pay $130 million to the company. That is one example where, clearly, there is a matter of public interest, but there is no way that can be scrutinised through these tribunals. There is no way that input can be provided—or they have no jurisdiction there.

Mr Percival : Without knowing the particular case—

Senator WHISH-WILSON: I can provide you the details.

Mr Percival : this seems to me to be an issue where you have a company which had certain rights. I would be interested in what its obligations were to remediate particular sites. Without knowing that, I am not really in a position to comment.

Senator WHISH-WILSON: I am happy to provide that for you.

CHAIR: Mr Percival, thank you again for the Law Council's submission and for your attendance this afternoon. I think you have managed to escape without any homework—is that right?

Senator WHISH-WILSON: No, there are the 100 legal academics we would like you to look at!

CHAIR: Excellent. If you could endeavour to have that material back before next Wednesday, that would be appreciated.

Mr Percival : I will certainly have a look and get back to you. I think I also undertook—

Member of the audience interjecting—

Mr Percival : Yes, a previous submission that we provided—I cannot remember in what context, but it was focused on the US system of committees. I thought I would get an extract of that to the committee. It might be of use.

CHAIR: It is very rare that witnesses offer more! On behalf of the committee, I thank you.

Mr Percival : Thank you.

CHAIR: I now call officers of the Department of Foreign Affairs and Trade.