By Ben Prewett and Lauren Lindsay

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On 1 March 2022 (NZT), New Zealand and the UK signed a free trade agreement (NZ-UK FTA), which is yet to enter into force.

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The NZ-UK FTA was prompted by the British public’s decision to leave the European Union on 23 June 2016. In October 2016, New Zealand and the UK agreed to establish a “Trade Policy Dialogue”. Negotiations commenced in earnest in July 2020[1] broadly in parallel with trade negotiations between the UK and Australia.[2] On 20 October 2021, the state parties reached an agreement in principle.[3]

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The NZ-UK FTA primarily concerns trade in goods and services. However, as with most of New Zealand’s other free trade agreements, it also contains a chapter on investment. The stated objective of that chapter is “to encourage and promote the flow of investment between each Party on a mutually advantageous basis”.[4]

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New Zealand’s National Interest Analysis also states that such “growth and development in two-way investment between New Zealand and the UK” will be achieved by “incorporat[ing] modern investment protection rules similar to those contained in other recent FTAs” and “provid[ing]certainty and stability in regard to market access for investors from both countries”.[5]

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This article briefly considers the protections actually conferred on investments and investors by the NZ-UK FTA, and whether these are likely to deliver on the promise of encouraging investment between New Zealand and the UK.

No investor-state dispute settlement mechanism

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The investment provisions of the NZ-UK FTA are perhaps most notable for what they do not contain: an investor-state dispute settlement (ISDS) mechanism. ISDS provisions are relatively well-known, and controversial, for allowing foreign investors to enforce their rights directly against a host state, by compelling the state to arbitrate.

New Zealand communicated from the outset of the negotiations that it would oppose the inclusion of ISDS provisions.[6] The final text of the treaty reflects that position. New Zealand and the UK have also agreed that should the UK accede to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the investor-state provisions under Chapter 9 of that multilateral treaty will not apply.

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The exclusion of ISDS provisions from the NZ-UK FTA has been described as a “significant change”.[7] In fact, however, it seems to reflect New Zealand’s consistent practice since 2017. Indeed, within weeks of the new coalition Government’s election on 23 September 2017, it sought to suspend existing ISDS provisions in the CPTPP. This was achieved through a series of side letters with Australia, Brunei Darussalam, Malaysia, Peru and Vietnam whereby those states agreed to disapply ISDS.[8]

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Moreover, since 2018, new international trade agreements negotiated and signed by New Zealand have not included ISDS. This includes PACER Plus, which entered into force on 13 December 2020; the Regional Comprehensive Economic Partnership (RCEP) – a multilateral treaty between 14 states – which came into force on 1 January 2022; and, most recently, the NZ-UK FTA. New Zealand’s shift away from ISDS is illustrated in Annex 1, which summarises in tabular form the relevant provisions in the 13 free trade agreements and two bilateral investment treaties to which New Zealand is a party and which are in force.

A rationale for no ISDS?

The root cause of this Government’s opposition to ISDS is unclear. Three potential motivations seem possible.

First, the so-called “legitimacy crisis” that ISDS has faced. This prompted the UNCITRAL Working Group III of the United Nations Commission on International Trade Law (UNCITRAL) to consider its reform.[9] The individual sessions have been attended by representatives of more than 90 states, together with representatives from the European Union, ICSID and other international institutions.

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The Working Group is currently in the third and final phase of its work, which is to develop concrete solutions for recommendation to UNCITRAL. This includes considering a code of conduct for ISDS tribunal members and an appellate mechanism.[10] However, although free to do so, New Zealand has not officially taken part in these deliberations.

Secondly, and relatedly, New Zealand First and the Greens staunchly oppose ISDS – apparently because of sovereignty concerns. One former very senior New Zealand trade expert and negotiator has commented publicly that“Central to TPP being toxic in the US (and TTIP being toxic in Europe) is investor state dispute settlement. These fears are absurdly exaggerated. But governments have failed to convince”.[11] The authors of this article agree that such sovereignty concerns are typically exaggerated. A fuller treatment of that topic is beyond the scope of this article.  

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In short, states can, and do routinely, draft around sovereignty concerns when negotiating the scope of investment protection in new investment treaties. Moreover, the authors of this article have witnessed first-hand how tribunals in claims under investment treaties are concerned not to hold states liable for exercising its sovereign right to regulate.

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Those who criticise ISDS on the basis of sovereignty must accept that the alternative for those foreign investors harmed by a state’s unreasonable, arbitrary and/or discriminatory regulatory conduct (conduct which is not uncommon and which is by no means limited to developing nations) is to have recourse to that state’s courts. That alternative will rightly be regarded as unpalatable by many investors.

Finally, there are unique concerns in New Zealand around how ISDS might impact Te Tiriti o Waitangi. However, in those international agreements that incorporate ISDS, New Zealand has drafted in the so-called “Treaty of Waitangi Exception Clause”. This exception “protects the Government’s ability to adopt policies that fulfil its obligations to Māori, including under the Treaty of Waitangi. The exception also excludes the interpretation of the Treaty of Waitangi by an arbitral tribunal”.[12] Further to a report by the Waitangi Tribunal, the Government has been developing an ISDS Protocol, in close consultation with Māori.[13] This Protocol aims to prescribe how New Zealand should defend an ISDS claim in circumstances where Te Tiriti o Waitangi issues arise, such as instructing a suitable expert. In light of these safeguards, this does not appear to be a valid reason to abandon ISDS altogether.

The Government’s present position can also be usefully contrasted to previous Government statements. For example, the National Interest Analysis prepared for the NZ-China FTA highlighted as an advantage the ability of NZ investors in China to access “binding third-party arbitration procedures if the Chinese Government breaches the investment provisions”.[14] It appears that those advantages are no longer considered relevant.

Investment protection in the NZ-UK FTA

The NZ-UK FTA investment chapter broadly contains similar substantive investment protections to those contained in New Zealand’s previous free trade agreements.  

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Those protections include:

• National treatment – which requires each state to accord investors of the other state treatment that is no less favourable than the treatment it accords to its own investors (including during the establishment of their investment);[15]
• Most-favoured-nation treatment[16] – a prohibition on performance requirements;[17]
• The minimum standard of treatment – requiring each party to treat investments in accordance with customary international law (including fair and equitable treatment and full protection and security);[18] and 
• Freedom from expropriation without compensation.[19]

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However, as with other free trade agreements recently entered into by New Zealand, the NZ-UK FTA follows a ‘negative list’ approach, which allows the parties to maintain certain “non-conforming measures” that are inconsistent with some of these investment protections.[20]  

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Given the lack of ISDS in the treaty, investors themselves cannot enforce the substantive protections granted in the NZ-UK FTA investment chapter. Instead, disputes arising under the investment chapter can only be resolved between the FTA parties namely New Zealand and the UK.

An inevitable (and unfortunate) feature of such a system is the politicisation of investment disputes. An investor of one party that considers it has been harmed by conduct of the other party cannot itself decide whether to resort to dispute settlement; it must instead appeal to its state to do so. Whether the state then chooses to take up the claim, and if so how it chooses to prosecute or compromise the claim, will necessarily be matters of political discretion with attendant political risk. It follows that this risk will be borne disproportionately by investors that are not well connected politically.

The process by which the state parties are to resolve disputes is set out in the dispute settlement chapter[21] and the Rules of Procedure.[22] That chapter provides for consultations in the first instance,[23] failing which a panel of three arbitrators may be appointed to consider the dispute.[24] In the event that a panel is appointed, the Rules of Procedure provide for written submissions,[25] and the possibility of a hearing at which further submissions may be made and documents may be requested by the panel.[26] Notably, however, there is no provision for witness evidence – save for “information or technical advice” from an expert.[27]

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The Rules also provide for the possibility of amicus curiae submissions from “interested persons and non‑governmental entities”.[28] This appears to be the only means by which an investor, which would likely be considered to be an “interested person”, could make itself heard in a dispute between the state parties. However, an amicus is limited to making a written submission of up to 15 pages, which falls far short of full participation in the dispute as a party.[29]

After receiving submissions, the panel must issue a “report” containing its findings and determinations. The treaty very carefully limits what such a report may order. If the panel decides that a measure is inconsistent with the NZ-UK FTA, it may include “a requirement to remove the inconsistency”.[30] However, a panel may not order the payment of compensation, nor may it compel a party to “remove the inconsistency”.

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The panel’s report is “final and binding”[31] and the parties have agreed to “take any measure necessary to comply promptly and in good faith with the final report”,[32] but there is no means of enforcing that obligation. Instead, in the event of non-compliance, the parties shall “enter into consultations... with a view to agreeing on mutually acceptable compensation”,[33] failing which “the complaining Party may notify the responding Party in writing that it intends to suspend the application of concessions or other obligations under this Agreement”.[34] Such a step would inevitably fall to be considered in the broader context of the parties’ foreign policies and would be highly political.

Conclusion

State-to-state diplomacy and dispute resolution has previously been tried and failed as an effective means of resolving disputes relating to foreign investment. Indeed, somewhat ironically, it was that very failure that resulted in the creation of ISDS mechanisms several decades ago, leading to the proliferation of treaties conferring protections on investors and their investments.  

As illustrated in the NZ-UK FTA, New Zealand has come full circle. As a result, New Zealand investors in the UK are in an invidious position: they are dependent on the political whims of the New Zealand government taking up their claims, they cannot obtain compensation for harm inflicted on their investments as a result of breaches of the NZ-UKFTA, and they have no effective means of requiring the UK to comply with its obligations.  

The net effect the investment chapter of the NZ-UK FTA is therefore to establish a carefully‑negotiated set of rights and obligations for which there is no remedy. It is, effectively, aspirational. It is therefore difficult to see how the NZ-UK FTA could live up to its stated aim of encouraging and promoting investment between New Zealand and the UK. In such circumstances, one may reasonably ask: what is the purpose of including the investment chapter at all?[35]

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Footnotes

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[1]           “Timeline and history of negotiations” available at: mfat.govt.nz (last accessed 21 March 2022). 

[2]          A timeline for the negotiations of the UK-Australia FTA is available on the Department of Foreign Affairs and Trade website. Negotiations commenced in June 2020: dfat.gov.au (last accessed 21 March 2022).

[3]          The Agreement in Principle is available here (also available on the MFAT website).

[4]          Free Trade Agreement Between New Zealand and The United Kingdom of Great Britain and Northern Ireland (NZ-UK FTA), Article 14.1.

[5]           National Interest Analysis available here (as at 23 March 2022) at p.13.

[6]           See mfat.govt.nz/assets/Trade-agreements/UK-NZ-FTA/UK-NZ-FTA-High-Level-Objectives.pdf

[7]           Jane Kelsey “Behind the ‘inclusive’ façade, NZ-UK free trade deal disappoints politically and economically”, 6 March 2022, available here (last accessed 22 March 2022).

[8]           In principle, New Zealand investors could still avail themselves of ISDS for breaches by Canada, Chile, Japan, Mexico and Singapore.  

[9]           See, e.g., UNCITRAL Report of Working Group III (Investor-State Dispute SettlementReform) on the work of its thirty-fourth session(Vienna, 27 November–1 December 2017) UN Doc A/CN.9/930/Rev.1 (19 December2017).

[10]         The areas of reform being considered are explained in more detail in A Kirk and L Lindsay “Arbitration”in [2020] NZ Law Rev 639, 680-682.

[11]          Crawford Falconer “How to fix trade in the age of Trump” NZ Herald, 18 November 2016, available here.

‍New Zealand-China Free Trade Agreement National Interest Analysis available here at p. 3. The author of this analysis is not identified and the analysis is not dated. It appears to be a document that was prepared by the Government, rather than independently.

[12]          See mfat.govt.nz/en/trade/trade-law-and-dispute-settlement/a-draft-isds-protocol/ (as at 1 April 2022).

[13]          See mfat.govt.nz/en/trade/trade-law-and-dispute-settlement/a-draft-isds-protocol/ (as at 1 April 2022).

[14]          New Zealand-China Free Trade Agreement National Interest Analysis available here at p.3. The author of this analysis is not identified and the analysis is not dated. It appears to be a document that was prepared by the Government, rather than independently.

[15]         NZ-UK FTA, Article 14.6.

[16]         NZ-UK FTA, Article 14.7.

[17]         NZ-UK FTA, Article 14.8.

[18]         NZ-UK FTA, Article 14.11.

[19]         NZ-UK FTA, Article 14.14.

[20]         NZ-UK FTA, Article 14.10.

[21]          NZ-UK FTA, Chapter 31.

[22]          NZ-UK FTA, Annex 31A.

[23]          NZ-UK FTA, Article 31.5.

[24]          NZ-UK FTA, Article 31.6.

[25]          NZ-UK FTA, Annex 31A, Clause V.

[26]          NZ-UK FTA, Annex 31A, Clause VII.

[27]          NZ-UK FTA, Annex 31A, Clause XI.

[28]          NZ-UK FTA, Annex 31A, Clause X.

[29]          NZ-UK FTA, Annex 31A, Clause X.

[30]          NZ-UK FTA, Article 31.12(9).

[31]           NZ-UK FTA, Article 31.12(10).

[32]          NZ-UK FTA, Article 31.13(1).

[33]          NZ-UK FTA, Article 31.15(1).

[34]          NZ-UK FTA, Article 31.15(2).

[35]          See Williams & Kawharu on Arbitration, 2nd ed, p. 866.