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Unearthed documents illustrate pitfalls of ISD clause

The Hankyoreh | 3.1.2012

Unearthed documents illustrate pitfalls of ISD clause

The account of a former judge reveals government pressure to rule in favor of the US

By Jung Eun-joo

The main bone of contention for South Korean opponents to the Korea-US Free Trade Agreement the (KORUS FTA) was the investor-state dispute (ISD) clause, which allows companies who have lost money to sue the national government in an international court. Opponents argued that the ISD provisions could disrupt the balance of interests between South Korea and the US and violate the legitimate rights of a sovereign state, including the executive’s right to decide public policy and judicial authority.

As shown by "The Reasons Requirement in International Investment Arbitration: Critical Case Studies," a collection of papers published by Yale Law School in 2008, concerns over the ISD clause have troubling precedents.

The collection of papers includes an account of the experiences of Abner Mikva, a former federal court judge then working as an adviser to the US Justice Department after being named as an arbitrator in the Loewen case in 1998. The case constituted the first time a Canadian company had challenged a US court ruling under the North American Free Trade Agreement (NAFTA).

At the time, a US Department of Justice (DOJ) official warned that a US defeat in the Loewen case could mean the end of NAFTA. Mikva was told by a DOJ official that “if we lose this case we could lose NAFTA.” This demonstrates how Mikva was pressured to favor the interests of the American establishment.

The Loewen case was an ISD claim filed by a Canadian funeral business of the same name after it was ordered by a Mississippi state court ruling to pay $500 million in damages. Loewen contended that this was a violation of the FTA between the two countries.

Mikva, the judge pressured by the US government, served on the three-person arbitration panel for the Loewen case. The other two arbitrators, from Australia and the United Kingdom, determined at the time that Loewen had suffered damages from a wrongful ruling by a US state court. In response, Mikva reportedly argued an opposing opinion on behalf of the US government under difficult circumstances.

The two other judges would later reverse their positions, and in June 2003 the panel sided unanimously with the US government. While acknowledging that the US court ruling was clearly wrong and could not be viewed as legitimate in light of international practices, the panel dismissed the plaintiff’s claim citing procedural flaws, namely that Loewen had been reestablished as a US company after going bankrupt, and judicial procedures in the US had not finished.

The performance of the trial judge was called “so flawed as to constitute a miscarriage of justice.”

Mikva reportedly first discussed the behind-the-scenes details of the Loewen case at an environmental law symposium at Pace University School of Law in Dec. 2004. His presentation was recorded and disclosed to the public for the first time in the 2008 Yale collection.

The lack of accountability among arbitrators is an inherent limitation to the system. Because arbitration has traditionally been a means of resolving private disputes between businesses (on contracts in particular), the three arbitrators on a panel are typically not public civil servants like judges. Some have worked as attorneys representing multinational corporations or as senior government officials before going on to serve as arbitrators in cases involving those same corporations or governments.

In particular, the fact that two of the three arbitrators are named directly by a party to the case calls into question the guarantee on neutrality and independence, as there have been instances where their conclusions have differed according to the party.

David Schneiderman, professor in the University of Toronto Faculty of Law, said it appeared that the arbitration panel had dismissed Loewen’s claim strategically after accepting the US government’s argument that a defeat for the US could trigger a major controversy that would jeopardize NAFTA’s survival.

The South Korean Ministry of Foreign Affairs and Trade has argued that the ISD system is a fair international arbitration procedure and that the neutrality and independence of arbitrators is assured. The US government has had 15 ISD suits launched against it by foreign investors and has lost none of them.

Throughout the case, Mikva described himself as being “on the dissenting side of a difficult problem.” The adoption of the KORUS FTA could cause similar problems in South Korea. That may explain why on Dec. 30 the National Assembly adopted a resolution urging renegotiation of the KORUS FTA.

The resolution included calls for a renegotiation, including the abandonment, postponement, or modification of provisions on the ISD system, which emerged as the chief issue during the National Assembly’s debate over the KORUS FTA.

The resolution also requested that the government examine federal and state laws in the US that might clash with the terms of the KORUS FTA and make diplomatic efforts to encourage the US to alter these quickly.

 source: The Hankyoreh