Government revisits trade clause that allowed Clive Palmer lawsuits
Photo: Paul Peter, CSIRO / Wikimedia / CC BY 3.0

The Saturday Paper | 30 September 2023

Government revisits trade clause that allowed Clive Palmer lawsuits

By Patricia Ranald

Patricia Ranald is an honorary research associate at the University of Sydney and honorary convener of the Australian Fair Trade and Investment Network.

Clive Palmer’s attempts to sue the Australian government for $340 billion have highlighted a contentious aspect of trade policy inherited from the Coalition’s tenure, and which will be revisited this week in an inquiry.

The mining magnate has mounted legal cases that exploit a clause championed by the former government: the investor-state dispute settlement (ISDS). This is a special provision that allows foreign, but not local, investors to claim billions in compensation if they can argue that a change in law or policy would reduce their future profits – even if the change is in the public interest.

Labor opposes ISDS, and in November last year Trade Minister Don Farrell said the government would exclude it from future agreements and review it in existing ones. But the Coalition supports it. This will be one of the most-debated issues among a range that the Joint Standing Committee on Trade and Investment Growth will consider this week, following the deadline for submissions on the government’s approach to negotiating trade and investment agreements. ISDS is also opposed by many civil society groups, but is supported by Australian mining companies, which have used the provision to contest mining licensing decisions by governments in developing countries.

All trade agreements have government-to-government dispute processes. ISDS is an optional, separate dispute process in only some trade and investment agreements. It gives additional legal rights to foreign investors, enabling them to bypass national courts and sue governments for millions or even billions of dollars in international tribunals. Labor policy is to exclude ISDS from future trade agreements, and review it in existing ones, partly inspired by its experience of being sued by the Philip Morris tobacco company over its 2012 plain packaging law.

Clive Palmer is using ISDS in an existing trade agreement to sue the Australian government. To do so, the Queensland billionaire registered his company Zeph Investments in Singapore, which enabled the company to claim as a Singapore investor, using ISDS in the ASEAN–Australia–New Zealand free trade agreement. Zeph Investments is claiming a massive $300 billion for the Western Australian government’s decision to terminate an iron ore mining lease, after the company lost a High Court appeal to overturn the decision. Palmer’s firm has since launched a second case, claiming $41.3 billion in compensation for the refusal of coal exploration permits for the Waratah coalmine in Queensland. The permits were knocked back for environmental reasons, including the mines’ potential contribution to increased carbon emissions.

When the first claim was lodged, a spokesperson for Attorney-General Mark Dreyfus said the government would “vigorously defend Australia’s interests … As these matters have now become the subject of an investor-state claim, it would not be appropriate to provide further comment at this time.” The Attorney-General’s Department later reported “ the Commonwealth has also received requests for consultations from the same claimant [Zeph] in relation to two other potential claims”, suggesting that there is a third potential claim. This is most likely a claim to compensate for federal and Queensland government decisions to refuse permits for a second coalmine in Queensland because of impacts on the local environment, local waterways and run-off affecting the Great Barrier Reef.

After the claim related to the Waratah mine, a spokesperson again responded that the government would “vigorously” defend it as “unsubstantiated”, but declined further comment.

Even if these cases are not successful, the government may have to spend years of effort and tens of millions of dollars defending them. The Philip Morris case against the plain packaging laws took more than five years to resolve and cost Australia $24 million in legal fees, only half of which was recovered.

Many would question the existence of a system that enables an Australian business to claim as foreign investors, ignore state court and High Court decisions and sue the government for billions of dollars. These special rights for foreign investors originally developed in the post-colonial period after World War II to compensate international investors for the direct expropriation or taking of property by governments. But over the past 60 years they have expanded to include “indirect” expropriation and “legitimate expectations”, which do not exist in national legal systems. Investors can claim they deserve compensation if they can argue that a change in law or policy reduces expected future profits, that they were not consulted fairly about the change and that they did not expect the change to occur when they made the investment. Many governments now consider ISDS provisions place unreasonable constraints on their right to regulate and to respond to changing circumstances such as the climate crisis. Community resistance to ISDS has also been growing.

ISDS tribunals consist of arbitrators who are not independent judges but practising advocates who can represent a corporation or government in one case and then sit on a tribunal for the next. The proceedings are not public, and decisions need not make use of precedents and have no appeals, meaning they need not be consistent.

Other procedural criticisms include the use of third-party speculative investments to fund cases and the potentially dubious calculations that can estimate lost future profits in the billions of dollars, a substantial proportion of developing countries’ budgets. One of the most notorious cases was the awarding in 2019 of US$5.8 billion to Australian-based mining company Tethyan Copper in a dispute over a mining licence in Pakistan. This was more than 25 times the US$220 million the company had invested in the project. The amount is almost equivalent to the US$6 billion emergency loan the International Monetary Fund had just granted Pakistan to deal with its economic crisis, and therefore cancelled the benefit from the IMF loan. Such awards have convinced leading investment law expert George Kahale that “ISDS is more about making money than obtaining justice”.

Numbers of known ISDS cases have grown to 1257 as of December 2022, including increasing numbers of cases against health, environment and other public interest laws and policies.

Palmer’s second case joins a growing global list of ISDS cases from fossil fuel companies to claim billions of dollars in compensation for government decisions to reduce carbon emissions. A 2022 study published in the prestigious Science journal found ISDS cases threatened the global green energy transition, noting that the Intergovernmental Panel on Climate Change (IPCC) had recently acknowledged that ISDS cases could lead to states refraining from, or delaying, measures to phase out fossil fuels.

One such example is the US-incorporated Westmoreland Coal Company, which used ISDS to claim compensation from Canada over the Province of Alberta’s decision to phase out coal-fired electricity generation by 2030. Its case was unsuccessful, but only due to technicalities regarding changes in the company’s ownership.

In Europe, German energy companies RWE and Uniper used ISDS in the Energy Charter Treaty to sue the Netherlands over its policy to phase out coal-powered energy by 2030. The RWE case is ongoing. The Uniper case was withdrawn as a condition of German government financial support to the company when it was adversely affected by the energy crisis resulting from Russia’s invasion of Ukraine.

The threat to their attempted regulation of carbon emissions has motivated more governments to withdraw from ISDS arrangements in trade agreements. There are no ISDS provisions in Australia’s recent agreements with 14 Asia-Pacific countries in the Regional Comprehensive Economic Partnership, nor agreements with India or Britain, and ISDS has been excluded from the current Australian negotiations with the European Union.

After a comprehensive review and debate of European ISDS cases, the European Commission (EC) in July 2023 proposed a coordinated withdrawal of all European Union member states from the Energy Charter Treaty because fossil fuel companies are using its ISDS provisions to claim compensation for government laws and policies to reduce carbon emissions. The EC’s then executive vice-president for the European Green Deal, Frans Timmermans, said: “With the European Green Deal, we are reshaping our energy and investment policies for a sustainable future. The outdated Energy Charter Treaty is not aligned with our EU Climate Law and our commitments under the Paris Agreement.”

There have also been ISDS cases threatened against other forms of regulation of fossil fuels. For example, when the Labor government was considering gas price regulation in August 2022, it was warned of possible cases from Korean and Japanese energy companies using ISDS in existing trade agreements between Australia and those countries.

The danger for Australia is that there could be more ISDS cases, not just from Australian investors such as Clive Palmer but foreign companies, unless the government moves quickly to review those arrangements in existing agreements as well as in those to come.fquestio