Submission made to Parliament's Environment Committee, June 2023.

I welcome this inquiry by the Environment Committee. It is timely, if not overdue. It also allows a broad based focus on the environmental, Tiriti, social, cultural, community, material, commercial and legal dimensions of seabed mining. My submission addresses just one issue which spans all those dimensions: the potential for investor-state disputes that enforce special protections provided for foreign investors in free trade and investment agreements to unjustly enrich potential and actual investors in seabed mining operations, with no corresponding accountabilities, and the risk that threats of such disputes will chill moves by Aotearoa New Zealand to regulate, restrict and ban seabed mining.

As a Professor of Law (now retired) I specialise in international economic regulation, which includes international investment agreements and investor-state dispute settlement (ISDS). My particular concern is the impacts they have on national regulatory processes, decisions and measures, including those in Aotearoa that are designed to protect Tiriti rights, the ecosystem and the national interest more broadly.

I have been involved directly in reform debates in the United Nations and other international forums that seek the reform, and often the abolition, of ISDS. I was also the claimants' expert in addressing these matters in the Waitangi Tribunal claims National Fresh Water and Geothermal Resources (Wai-2357) and the Trans-Pacific Partnership Agreement (TPPA) (Wai-2522).

Special Rights For Foreign Investors

It is not well understood in Aotearoa, including by Members of Parliament, that most contemporary free trade agreements contain chapters on investment that provide special rights for foreign investors from countries that are parties to those agreements. Those chapters do not provide for corresponding obligations regarding their behaviour as investors or responsibility for their impacts.

These special protections include vaguely worded provisions on "minimum standards or treatment" or "fair and equitable treatment" and "indirect expropriation" that allow foreign investors to challenge legislative and regulatory measures, administrative decisions (such as consents and permits), judicial decisions even at the court of final jurisdiction, implementation of policies, etc. These provisions have become highly contentious because they are commonly given a pro-investor interpretation by ISDS tribunals.

In many agreements to which Aotearoa New Zealand is a Party these special investor rights can be enforced directly by foreign investors who qualify as nationals of the other State party/ies. The cases are not heard in our domestic courts, but in private international arbitral tribunals. A finding that the state has breached these pro-investor protections can result in extremely large awards of damages that go beyond an investor's sunk costs to include speculative lost future profits and even punitive damages, which are expanded further through application of compound interest. In some case these awards run into the billions of dollars.

The arbitrators in ISDS disputes are not independent judges. One is chosen by the foreign investor, one by the accused state, and these two agree on a chair. A core group of arbitrators who sit on these cases are sometimes described as the ISDS "mafia". Many of these arbitrators work for prominent commercial law firms that specialise in these disputes and have well-documented conflicts of interest, which fuel the pervasive criticisms of pro-investor bias.

The vague wording of the investor protections, variations across different agreements, and the lack of any system precedent creates a high degree of uncertainty that adds to the pressure on governments that become subject to claims. These investment disputes are often governed by strict confidentiality, at times preventing even the disclosure of their existence or the final outcome.

It is common not to make the claim documentation public or hold open hearings, although that varies across agreements. Taxpayers may end up footing a bill for a proceeding conducted completely behind their backs. Investors are increasingly resorting to third party funders to sponsor their disputes and claim a proportion of any award. Even where governments win these disputes, they usually end up paying millions of dollars in legal costs.

A mounting crisis of legitimacy in the ISDS system has seen a number of governments withdraw from agreements that contain this mode of enforcement and/or block its inclusion in new agreements. For example, in February 2023 the European Commission recommended that the EU, Euratom and EU Member States carry out a coordinated withdrawal from the Energy Charter Treaty, which can be enforced by ISDS.

ISDS In Aotearoa

This combination of factors means the very threat of a dispute may have a "chilling effect" on the willingness of a Government to proceed with a law or policy the investors oppose. This was a concern recognised by the Waitangi Tribunal in the TPPA (Trans-Pacific Partnership Agreement) claim. Whilst considering the risks to future Tiriti-compliant policies was speculative, the Tribunal said in report on the initial urgency inquiry in 2016:

"While we think the Crown fairly pointed to various provisions in the TPPA designed to preserve State regulatory autonomy and improve the operation of ISDS, we remain unconvinced that ISDS under the TPPA is low risk or not substantially different from exposure to ISDS under existing FTAs (free trade agreements) to which New Zealand is party".

In 2017 the New Zealand Labour-New Zealand First government implicitly recognised the risks raised by the claimants in the Wai 2522 inquiry, and in various international forums, by announcing a policy of no ISDS in future agreements. That position is reflected in the free trade agreements with the United Kingdom, European Union, and the Regional Comprehensive Economic Partnership.

However, New Zealand still has exposure to ISDS in agreements, including with China, Singapore, Japan, Malaysia, Indonesia, South Korea, Canada, Mexico, Brunei, Thailand and Vietnam. Moreover, the current position is only a policy and is vulnerable to political trade-offs or a change of policy by the current or a future Government. It needs to be embedded in law.

The United Nations Conference on Trade and Development (UNCTAD) specialises in monitoring ISDS disputes and has been a major proponent of reform. UNCTAD's report on Treaty-Based Investor-State Dispute Settlement Cases and Climate Action in September 2022 pointed to at least 175 cases using international investment agreements and ISDS to challenge measures taken to protect the environment. Another 192 were fossil fuel cases and at least 80 more on renewable energies.

These disputes, occurring in the context of growing concern for the environment and the climate crisis, have intensified opposition to energy-specific agreements that contain ISDS. As noted earlier, states are now withdrawing from the Energy Charter Agreement. Aotearoa is not a Party to that Agreement. However, generic investment rules apply equally and raise similar risks. As the Select Committee is looking specifically at seabed mining, I will focus on two current cases that illustrate the risks these investment rules and ISDS pose to the sovereign right to regulate seabed mining in Aotearoa.

Odyssey Marine Exploration v Mexico

A US company, Odyssey Marine Exploration, was denied an environmental permit for seafloor mining off the Baja California Sur coast of Mexico after local opposition to the impacts of the project. In 2019 the company lodged an ISDS dispute against Mexico under the North American Free Trade Agreement (NAFTA) seeking $US2.36 billion in damages. The claim is financed by a private litigation firm.

In 2012 the company obtained a 50-year renewable concession to dredge the seabed and transport the material to a ship where phosphate sand would be separated and the remainder discharged back into the sea. However, the Mexican environmental authorities denied the company the environmental permit it needed to operate. The company litigated the issue through every level of Mexico's domestic courts and lost. It then launched an ISDS dispute claiming $US2.36 billion in future lost potential profits, claiming the denial of the permit was politically motivated and violated its special investor rights under NAFTA.

Local fishing communities affected by the project made multiple submissions to the domestic courts that the project would destroy the marine ecosystem, risk the health of their fisheries, endanger the livelihoods of the families and larger local economy, and more broadly threaten the interconnected biodiversity of the Gulf and its habitat.

The ISDS tribunal denied the fishing communities, supported by an environment law NGO, the ability to present an amicus curiae brief to address the potential impact on their lives and environment and the importance of the precautionary principle. The evidence was deemed irrelevant by two of the arbitrators (the investor's nominee and the chair) because the investor was only seeking damages, not conferral of the permit. The dissenting arbitrator (Mexico's nominee) referenced the growing global dissent over the legitimacy of the ISDS system that it seen to privilege corporate interests, and warned that such decisions would create a chill over environmental regulation.

Australian Clive Palmer's ISDS Dispute Against Australia Under AANZFTA

Commentators on the Odyssey case point to moves in Australia to restrict seabed mining and the risks of similar disputes. For example, the Northern Territory converted a nine-year moratorium on seabed mining into a total ban in August 2021 to protect the coastal environment's substantial cultural, economic, biological and social value, especially given the inability to adequately assess or regulate the real risks from seabed mining.

That policy has not yet generated a dispute, but the prospect is ever-present given other ISDS disputes by mining companies in Australia. The Western Australian Government is currently facing an ISDS dispute brought by an Australian investor Clive Palmer over a dispute regarding an on-land mining arrangement. The details are not important here. The investor's strategy is.

As with Odyssey, Palmer's companies appealed through the Australian court system seeking $A27.8 billion and lost. In 2019 Palmer transferred ownership of his main Australian mining firms to Singapore to take advantage of ISDS under the SEAN-Australia-New Zealand (AANZFTA) free trade agreement. He is now claiming $US200 billion in damages, including US$10 billion for "moral damages".

This is a similar strategy to that used by Philip Morris to challenge plain packaging of tobacco using ISDS under an Australian Hong Kong agreement. Ultimately Philip Morris lost, but it cost Australia around A$15 million in legal costs and had a chilling effect on other governments looking to adopt similar laws, including New Zealand.

New Zealand is also party to AANZFTA and has similar investor rights obligations enforceable by ISDS to all the parties except Australia: Singapore, Malaysia, Indonesia, Philippines, Thailand, Brunei, Vietnam, Lao PDR, Cambodia, Burma/Myanmar. This Agreement has just been "refreshed", but there is no indication that the New Zealand Government's policy against ISDS has resulted in any changes to the original agreement. As noted earlier, AANZFTA is just one agreement under which such a dispute could arise.

Lobbying Powers Of Foreign Investors

A number of recent free trade agreements also guarantee that foreign investors will receive prior notification of proposed new laws and policies, and potentially even proposed administrative decisions, so they can comment on them (lobby against them) in advance. Governments must take their comments into account and explain the rationale for their final decisions (e.g., paragraphs 14-18 of the Reference Paper on Services Domestic Regulation adopted by New Zealand at the World Trade Organisation in 2023). Ironically, these guarantees are described as "transparency".

To some extent, these requirements reflect the currently regulatory regime that operates domestically. However, these trade agreements lock in this right for foreign investors that does not apply to Māori or other citizens of Aotearoa, and has added force in the hands of foreign companies backed by ISDS. Viewed in the context of investor rights and the threat to bring ISDS disputes, these "transparency" rules amount to a lobbyist's charter - in exactly the way Philip Morris used the right to comment to make threats in relation to plain packaging tobacco. Mining companies will do exactly the same.

Te Tiriti o Waitangi

It is easy to see the Odyssey and Palmer scenarios playing out in Aotearoa. The NAFTA investment protections and ISDS processes are the basis for the TPPA/CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). Many other investment chapters with ISDS have similar rules and procedures, including for the secrecy of ISDS claims and the right of arbitral tribunals to decide whether affected communities, including Māori, have any input.

If the Māori Party's Seabed Mining Legislation Amendment Bill had been passed, or if Māori legal challenges based on tikanga succeeded before the courts, I would not have been surprised if New Zealand faced an ISDS dispute - whether that was brought by aggrieved investors from a country with which New Zealand has ISDS obligations or an investor who uses such a country as a jurisdiction of convenience. The same risks apply even where a regional government exercises its statutory functions in relation to Te Taiao to deny sea-bed mining permits.

There was a complex legal debate in the Waitangi Tribunal during the Wai 2522 urgency hearing on whether the Treaty of Waitangi Exception in the TPPA would apply to such claims and, if it did, how an ISDS arbitral tribunal of investment lawyers would interpret it. The Tribunal proposed a protocol be developed to ensure Māori had some guaranteed input into, and influence over, such a dispute. The resulting ISDS protocol fell short of the Tribunal's proposal and the expectations of the claimants.

Even if the protocol was more robust, it does not remove the legal risk of a dispute, only how it would be handled. Numerous FTAs still pose fundamental risks of an actual or threatened ISDS dispute if the Crown moves to secure a seabed mining policy and law that recognises rangatiratanga and kaitiakitanga o ngā hapu and protects Ngā Taiao o te Moana Nui a Kiwa. I am NOT suggesting that these agreements mean that mining companies should have free rein. The responsibility rests with the Crown under Te Tiriti, and to all in Aotearoa, to remove these risks, as other governments are doing internationally.

My Recommendations Are Very Simple

Legislate to:

1. Prohibit the inclusion of investor-state dispute settlement in any future free trade, investment or other agreement;
2. Require the mandate for reviews of any existing agreement that contains ISDS to make the exclusion of future ISDS claims a red line for negotiations;
3. Insist that Māori, in the exercise of their rangatiratanga under Te Tiriti o Waitangi, have a seat at the negotiating table on these matters, independent of the Crown, to protect Ngā Taiao o te Moana Nui a Kiwa; and
4. Require the inclusion of a comprehensive carveout in future agreements for all measures taken in pursuance of the Crown's obligations under Te Tiriti o Waitangi.