13 February, 2016
On 5 October the Trans-Pacific Partnership1 (TPP) fta was substantially agreed among 12 Asia-Pacific countries (including Malaysia, Australia, Japan and the US), and the lengthy text was released publically on 5 November 2015. Commentators are now speculating on its prospects for ratification,2 as well as pressure already for countries like China and Korea to join and/or accelerate negotiations for their regional Comprehensive partnership (“RCEP” or ASEAN+6) FTA in the region.3
There has also been considerable (and sometimes quite heated) media commentary on the TPP investment chapter 9, especially investor-state dispute settlement (ISDS) protections.4
As outlined by Ioannis Konstantinidis in the previous KLRCA Newsletter,5 the iSDS alternative procedure to inter- state arbitration (itself found separately in Chapter 28 of the TPP, as in almost all investment treaties) emerged as a common extra option for foreign investors to enforce their substantive rights6 if their home states did not wish to pursue a treaty claim on their behalf, for diplomatic, cost or other reasons. this mechanism has been seen as particularly important for credible commitments by developing or other countries with national legal systems perceived as not meeting international standards for protecting investors.
ISDS provisions have gradually come to be accepted in treaties concluded in the asian region, leading recently to more arbitration claims (albeit off a comparatively low base),7 as explained by Loretta Malintoppi in the previous Newsletter, 8 the inclusion of ISDS in the TPP is not too surprising given the involvement already of a developing countries such as Vietnam, and even a middle-income country like Malaysia with a complicated political and legal system (both already subject to occasional investor-state arbitration claims). incorporating ISDS is also explicable because the TPP aims to attract further partners. these include capital- importing developing countries like Indonesia, whose president recently declared that it “intends to join the TPP”,9 although this will be very difficult to achieve domestically and the country is still reviewing old bits partly due to some recent arbitration claims – including from an Australian investor.10 other potential candidates include capital-exporting countries like Korea, which pressed strongly for ISDS in bilateral ftas – even with Australia and New Zealand.11 China, emerging as a major exporter and importer of capital, has also come to favour ISDS protections. this is important because some already urge it to join a further expanded TPP12 and because China already is party to the RCEP FTA negotiations currently involving many existing TPP partners, including australia and Malaysia.
However, the arguments are more finely balanced for including the ISDS option for treaty commitments between developed countries with strong and familiar national legal systems. intriguingly, when the TPP is signed Australia and New Zealand proposed to exchange official side letters excluding its ISDS provisions as between themselves.13 they also obtained such a bilateral carve out in their FTA with ASEAN signed in 2009,14 but partly for the reason that that the two countries were then considering adding an investment protocol to their longstanding bilateral FTA for goods and services. that 2011 protocol also ended up excluding ISDS, ostensibly because australia and New Zealand have strong mutual trust and understanding of each other’s legal system. this argument does gain force in light of the conclusion in 2008 of a trans-tasman treaty on enforcing court judgments (and broader regulatory cooperation), in force from 2013 and unique among asia- pacific countries.15 Australia and New Zealand have also achieved remarkable economic integration and business law harmonisation in other respects, albeit mainly through non-treaty mechanisms.16
Australia also omitted ISDS in its bilateral FTA concluded with malaysia in 2012, consistently with the gillard government’s trade policy Statement of april 201117 – abandoned by the new Coalition government after it won the general election on 7 September 2013, and reverted to including ISDS in treaties on a case-by-case assessment.18 However, omitting ISDS protection in the Malaysia-Australia fta was largely symbolic since protection remained for respective countries’ investors under the aSeaN-Australia-NZ FTA.
By contrast, Australia does not propose any tpp side-letter with the US carving out ISDS, even though their bilateral FTA in 2004 also omitted ISDS. the official explanation given for the latter development was that both these countries also held great trust in each other’s national legal system (despite the Loewen case brought by a Canadian investor against the uS around that time, where a tribunal chaired by a former Chief Justice of Australia sharply criticized an underlying mississippi court procedure).19 Nor do there appear to be any other bilateral carve-outs of iSDS envisaged among tpp partners.
In terms of the iSDS procedures themselves, these also tend to follow the provisions in the US model bit and its ftas from around 2004, which in turn have influenced the ftas drafted by other TPP partners such as australia.20 for example, the TPP includes time limits for bringing claims (art 9.20.1).
It also has a now standard “fork in the road” provision (art 9.20.2, intensified for four of the 12 countries through Annex 9-J) precluding situations as in the dispute brought by philip morris, whereby it claimed both before the High Court of Australia under constitutional law and (in 2011) before an ISDS tribunal under international treaty law.21
As in Australia’s FTA with Korea (and to a somewhat lesser extent with China), article 9.23 sets out extensive provisions for transparency in proceedings, including public hearings (still rare in WTO inter-state dispute resolution) and admission of amicus curiae briefs from relevant third parties. article 9.22 requires arbitral tribunals to decide preliminary jurisdictional objections on a fast-track basis, and may award lawyer and other costs against the claimant after considering whether the claim was frivolous. (However, it does not have to award such costs, and nor is there a general “loser-pays” rule for costs as under the recent Canada-EU FTA: cf tpp art 9.28.3).22 an (inter-state) Commission can issue an interpretation of a TPP provision that then binds the arbitral tribunal (art 9.24.3).
However, there is some debate among commentators about whether such a Commission can make such a binding interpretation regarding a pending dispute,23 and the China-Australia FTA wording had helpfully clarified that it can. that fta also adds an innovative provision, not found in the TPP (or any other FTA involving australia) allowing a host state to issue a “public welfare notice” to the home state of the foreign investor, declaring that it invokes the (article 9.11.4) general exception for public health measures etc. this triggers inter-state consultations and a requirement on the host state to publically announce its view on the home state’s invocation of the exception.
Partly offsetting this omission in the TPP, it adds the option (in the general exceptions chapter) of a host state precluding claims regarding tobacco control measures. more generally, the investment chapter adds that that the arbitral tribunal can only award limited damages if the foreign investor successfully claims that it was thwarted in attempting to make an initial investment, due to the host state violating substantive treaty commitments. the tribunal must also issue a draft award to the disputing parties for comment (art 9.22.10), albeit not to the public or even the home state of the investor. release of draft decisions is a feature of WTO inter-state dispute resolution, and is found already in australia’s fta investment chapters with Chile (signed in 2008) and Korea.
However, the TPP does not establish an appellate review mechanism, to correct for errors of law (as opposed to procedure or jurisdiction) as under the WTO regime. there is only a commitment to consider such a mechanism if and when developed elsewhere for international investment disputes (art 9.22.11). the eu is now expressing stronger interest, including in its (“TTIP”) FTA negotiation with the US, where it recently even mooted the possibility of an international investment court.24 indeed, the EU has already reportedly agreed on this sort of court (including appellate review for errors of law) in an agreement just reached with Vietnam,25 despite the latter being also party to the tpp and its more traditional ISDS mechanism.
Article 9.21.6 further envisages that, before the TPP comes into force, member states will “provide guidance” on extending the
Code of Conduct for arbitrators (already in Chapter 28 for inter-state arbitrations) to ISDS disputes, as well as “other relevant rules or guidelines on conflict of interest”. the Australian government will presumably point to the Australia-China FTA, where such a Code of Conduct has already been set out for ISDS arbitrators, and reference may also be made to further proposals now being raised in the eu and beyond.
In addition, the tpp allows ISDS claims not only for breaches of the substantive commitments set out in the treaty itself (as in the Australia-China FTA), but also where the host state has contravened its “investment authorization” or specified types of “investment agreement” relied upon by the harmed foreign investor. the latter scenarios are also covered in the Korea-Australia FTA, but the tpp goes on to expressly allow the host state then to raise a related counterclaim or set-off against the foreign investor (art 9.18.2). annex 9-l also restricts ISDS proceedings if certain other arbitration procedures have been agreed between the foreign investor and the host state relating to their investment agreement. oddly, however, this includes arbitration agreed under iCC or lCIA rules, but not the rules of major arbitral institutions in tpp states such as KLRCA.
Finally, each member state commits to “encouraging” its enterprises to “voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility” endorsed or supported by the relevant state. this could extend, for example, to (local and foreign) retailers in australia with respect to adopting the accord on fire and building Safety in Bangladesh, which then locks firms to a separate enforcement regime underpinned by international arbitration law.26
Nonetheless, it remains to be seen whether all this is enough to assuage critics of ISDS and allow ratification of the TPP in Australia, the US itself and (arguably to a lesser extent) other TPP partners. the investment chapter’s substantive protections also largely track existing ftas concluded by and among TPP partners. but this will provide little comfort to those who remain firmly opposed to any form of ISDS,27 or concerned more broadly about cross-border investment.28
By Dr Luke Nottage, professor of Comparative and transnational business law at Sydney law School.
5 “effective Dispute resolution mechanisms” 19 KLRCA Newsletter 10-11 July-September 2015) at http://klrca.org/downloads/ newsletters/2015Q3newsletter.pdf
7 Nottage, Luke R. and Weeramantry, romesh, investment arbitration for Japan and Asia: five perspectives on law and practice. foreign investment and Dispute resolution law and practice in asia, V. bath and l. Nottage, eds., routledge, pp. 25-52, 2011; Sydney law School research paper No. 12/27. available at SSrN: http://ssrn.com/abstract=2041686
8 “is there an ‘asian Way’ for investor-State Dispute resolution” 19 KlrCa Newsletter 12-20 (July-September 2015) at http://klrca.org/ downloads/newsletters/2015Q3newsletter.pdf
10 Nottage, luke r., Do many of australia’s bilateral treaties really Not provide
full advance Consent to investor-State arbitration? analysis of planet mining v indonesia and regional implications (april 14, 2014). transnational Dispute management, Vol. 12, No. 1, pp. 1-18, 2015; http://ssrn.com/ abstract=2424987
11 Nottage, Luke R., investment treaty arbitration policy in Australia, New Zealand
– and Korea? (august 13, 2015). Journal of arbitration Studies, Vol. 25, No. 3, pp. 185-226, 2015; http://ssrn.com/abstract=2643926
14 bath, Vivienne and Nottage, luke r., the ASEAN Comprehensive investment agreement and ‘ASEAN plus’ – the Australia-New Zealand Free Trade Area (AANZFTA) and the PRC- ASEAN investment agreement (September 26, 2013) in: International Investment Law: a Handbook, M. Bungenberg, J. Griebel, S.Hobe & A. Reinisch, Eds., Nomos Verlagsgellschaft: Germany, 2015; also at http://ssrn.com/ abstract=2331714
16 Nottage, Luke R., Asia-Pacific regional architecture and Consumer product Safety regulation for a post-fta era (October 4, 2011). 16 Sydney law School research paper No. 09/125; http://ssrn.com/abstract=1509810
17 Nottage, luke r., the rise and possible fall of investor-State arbitration in Asia: a Skeptic’s View of Australia’s ‘Gillard government trade policy Statement’ (June 10, 2011). transnational Dispute management; also at http://ssrn.com/abstract=1860505
20 Nottage, Luke R. and Miles, Kate, ‘back to the future’ for investor-State arbitrations: revising rules in australia and Japan to meet public interests (June 25, 2008). in l Nottage & r garnett (eds), ‘international arbitration in australia’, federation press: Sydney, 2010; Journal of international arbitration, Vol. 26, No.1, pp. 25-58, 2009; http://ssrn.com/ abstract=1151167
23 See generally Burch, Micah and Nottage, Luke R. and Williams, Brett g., appropriate treaty-based Dispute resolution for Asia-Pacific Commerce in the 21st Century (may 24, 2012). university of New South Wales law Journal, Vol. 35, No. 3, pp. 1013-1040, also at SSRN: http://ssrn.com/abstract=2065636; ishikawa, tomoko, ““Keeping interpretation in investment treaty arbitration ‘on track’: the role of States parties” tDm 1 (2014) www.transnational-dispute-management.com/ article.asp?key=2048