The forgotten ‘free trade’ dispute
New Zealand once battled a big, gnarly American oil company over a free trade Investor-State Dispute Settlement provision. Will Harvie reports.
Investor-State Dispute Settlement (ISDS) clauses are among the most controversial aspects of free trade agreements. To critics, they limit the sovereignty of nation states while handing power to foreign corporations. To fans, they compensate owners when nation states take property or economic rights.
There are many flavours of free trade agreements and many different ISDS clauses and carveouts. Lawyers and legal academics have a grand time litigating and analysing them. Politicians and activists have a difficult time arguing their pros and cons.
So, it’s a surprise that ‘‘the Mobil case has largely gone unnoticed in New Zealand, even in recent years, and even though it is New Zealand’s only experience as a defendant in an ISDS arbitration’’, wrote legal scholars Amokura Kawharu, of the University of Auckland, and Luke Nottage, of the University of Sydney, in a recent article titled The Curious Case Of ISDS Arbitration Involving Australia and New Zealand.
The New Zealand story starts in the 1970s. World oil prices soared after the Organisation of the Petroleum Exporting Countries (Opec) restrained production in 1972. Prices soared again during the 1979 Iran Revolution and as the Iran-Iraq War started in 1980.
Prime Minister Robert Muldoon responded with his signature ‘‘Think Big’’ projects, designed to lessen our reliance on foreign energy.
One project was the Motonui Synthetic Fuels Plant, sometimes spelled Motunui. It converted natural gas from Taranaki into liquid synthetic gasoline. This was an engineering feat and Motonui was the world’s first plant to operate on a commercial scale. It still makes petro-chemical engineers wistful.
Mobil Oil was the main driver of the project and signed a contract with the Muldoon Government in February 1982.
Among other things, the contract provided Mobil with preferential ‘‘off-take rights’’ – that is, ‘‘Mobil was entitled to purchase gasoline on preferential terms’’, according to the scholarly article.
In short, it got wholesale gasoline cheaper than its competitors.
The plant was built and Mobil took up its off-take rights.
Meanwhile, David Lange’s fourth Labour Government was elected in 1984 and Rogernomics became the new economic order.
Granting off-take rights to Mobil wasn’t popular. If farmers were losing their subsidies, why should a big American corporation get cheaper gasoline?
Lange’s Government passed a new Commerce Act in 1986, which prohibited contracts that lessened competition.
Mobil’s Motonui contract looked a prime example and the Government tried to end it.
Mobil objected and invoked an arbitration clause in the 1982 contract. This was in effect an early ISDS clause, according to Kawharu and Nottage, and we’re now into the heart of the matter.
The clause said conflicts between the Government and Mobil should be arbitrated by the International Centre for Settlement of Investment Disputes, based in Washington, DC.
New Zealand argued the new Commerce Act over-rode the 1982 contract. The dispute first wound up in the New Zealand High Court, where Justice Heron ruled in favour of Mobil in 1989.
The language was legal but Kawharu and Nottage summarised the problem like this:
‘‘Fundamentally, the dispute only arose because a newly-elected New Zealand Government tried to rely on legislation that it had passed, for generally good reasons but also in this case to escape responsibility under a contract that its predecessor had entered into . . .
‘‘The new Government thereby tried to circumvent the dispute resolution process that had been agreed to in that contract.’’
And the High Court said no. International arbitration was reasonable in the circumstances.
The arbitration clause limited the jurisdiction of the New Zealand domestic courts ‘‘to a very marked degree’’, Justice Heron wrote, but that was a deliberate decision by the Muldoon Government.
So the lawyers went to Washington. Mobil won the liability argument and thereafter the dispute was settled, confidentially.
Frustratingly, that confidentiality continues to this day, wrote Kawharu and Nottage.
Without reading the settlement, it’s impossible to say which side won the ISDS case. It doesn’t look good for New Zealand, however.
‘‘At the time, confidentiality of ISDS cases was not the controversial issue it has since become,’’ the academics wrote,
‘‘. . . even though the lack of information about the settlement has prevented quantification of the cost to New Zealand’’.
Stuff approached several senior Labour Cabinet ministers active in the late 1980s and early 1990s and none could remember the case or the settlement. They thought Cabinet must have been briefed but it wasn’t a significant topic.
Mobil stopped producing synthetic gasoline at Motonui in 1999 and the site was later sold. Today, it produces methanol for a Canadian company called Methanex.
The dispute was based on a contract, rather than a treaty, but ‘‘New Zealand’s early run-in with [an ISDS situation]’’, wrote the legal scholars, ‘‘did not prevent New Zealand from concluding four [Bilateral Investment Treaties] during the late 1980s and 1990s, nor from actively pursuing [Free Trade Agreements] with ISDSbacked commitments from the turn of the 21st century’’, including the Trans-Pacific Partnership (TPP) and the later Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).