Investor-state Dispute Settlement Under the Trans-pacific Partnership

• Publication year: 2015
• Author: By Ko-Yung Tung*

Investor-State Dispute Settlement under the Trans-Pacific Partnership

By Ko-Yung Tung*

I. INTRODUCTION

The United States is currently in the last stages of its negotiations with eleven other countries in the Pacific Rim region (namely Japan, Australia, Mexico, Canada, Malaysia, Chile, Singapore, Peru, Vietnam, New Zealand and Brunei Darussalam) to conclude a regional trade and investment regime, popularly known as the Trans-Pacific Partnership ("TPP").¹ With the United States and Japan having the largest and the third largest economies of the world, the TPP would encompass approximately forty percent of global gross domestic product.² The European Union, by contrast, accounts for only about eighteen of global GDP.³

While the negotiations for the Trans-Pacific Partnership Agreement ("TPP Agreement") have been conducted in secrecy, a draft of its investment chapter recently was leaked by WikiLeaks.⁴ This article will briefly highlight some salient points of the investor-state dispute settlement ("ISDS") provisions in the leaked draft of the investment chapter of the TPP Agreement. Two important caveats are necessary at the outset— first, there is some dispute whether the WikiLeaks leaked version is authentic and whether it is a current draft as of the date on the version (purported to be to be "January 20, 2015 draft"); and second, what form the final ISDS of the TPP Agreement will take is still unknown, and even whether the TPP will come to fruition at all, given the politics of the United States, let alone those of the other eleven countries.⁵ For purposes of this article, the so-called January 20, 2015 draft will be referenced.

II. SOME NOTABLE PROVISIONS

The essential objective of any investment treaty is to protect foreign investments and foreign investors of a treaty signatory state in host treaty signatory states. As with other investment treaties, the core normative protections afforded by the TPP Agreement are (a) "national treatment," (b) "most-favored-nation treatment," (c) "minimum standard of treatment," and (d) compensation for expropriation.⁶ The ISDS provisions of the TPP Agreement allow an investor from a TPP member state to bring a binding arbitration proceeding against a host TPP member state if the host country has breached any of these normative protections.

The draft ISDS provisions of the leaked TPP Agreement reflect, in the main, the "state of the art" of ISDS law and practices. With over 3,000 separate and discrete investment treaties extant currently,⁷ it is no surprise that there are different wordings of similar provisions, varying interpretations of the same or similar provisions, and even conflicting rulings of the same or similar provisions by arbitral tribunals. To resolve many of these problems, the investment chapter of the TPP Agreement clarifies some of the definitions and introduces some of the best practices from previous investment treaties. To this extent, the investment provisions of the TPP Agreement may be regarded as the "state of the art."

The investment chapter (Chapter II) of the TPP Agreement is divided into two parts. Section A identifies what is protected and what are the protections. Section B provides for international arbitration to resolve any disputes between an investor of a state party against a host state party arising from a breach of those protections.

A. Standards of Investment Protection

1. An Expansive Definition of "Investment". Despite the fact that an "investment" is the core element of investment treaties, early treaties did not define what constituted an "investment" that was to be protected by the treaty. For example, the 1965 treaty establishing the International Centre for the Settlement of Investment Disputes ("ICSID Convention" or sometimes referred to as the "Washington Convention") merely states that "[t]he jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment...."⁸ The travaux preparatoires indicate that this omission of a definition was intentional to allow each arbitral tribunal the power to make its own determination whether there was a purported investment protected by the treaty. Similarly, early Bilateral Investment Treaties ("BIT") either failed to define what constitutes an "investment" for purposes of those treaties or provide a simple definition. This absence or brevity of a definition of a protected "investment" in many treaties has resulted in divergent and conflicting arbitral rulings, for example, whether an "investment" meant only "in the ground" assets such as a power plant but not a "paper" asset such as debt bonds issued by a company.

[Page 13]

The TPP Agreement seeks to avoid ambiguity with an extensive definition of a covered investment by providing both normative elements as well as specific examples. While it defines "investment" broadly to mean "every asset that an investor owns or controls, directly or indirectly," it is qualified by a normative criteria that an investment must have "the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk."⁹ Specific examples of investments are listed to avoid past conflicting rulings. These examples include financial instruments such as bonds, loans, futures, options and derivatives, as well as intangible assets such as intellectual property rights, licenses, and permits.¹⁰

The extensive definition of investment in the TPP Agreement should go a long way to avoid ambiguities and conflicting arbitral rulings, and to provide influential authority to the interpretation of "investment" in other investment treaties.

2. A Clarified Scope of Most-Favored-Nation Treatment. The "most favored nation ("MFN") treatment" standard requires that a host state treat the investor or investment of another member state as favorably as any other investor or investment of another state, whether or not that other state is a member of the TPP Agreement. Generally the MFN treatment was accorded only to substantive norms.¹¹ However, there have been diverging rulings by arbitral tribunals, as well as academic debate, as to whether the MFN treatment encompasses only substantive provisions,¹² or whether it covers both substantive and procedural aspects, such as a prerequisite that the claimant first pursue domestic remedies before resorting to ISDS under the treaty.¹³

The TPP Agreement makes clear that only substantive normative treatment is protected under its MFN clause. Specifically, in the definition of MFN, a new subparagraph has been added: "For greater certainty, the treatment referred to in this Article does not encompass international dispute resolution procedures or mechanisms such as those included in Section B [of Chapter II of the TPP Agreement]."¹⁴

3. Clarification of the Definition of "Minimum Standard of Treatment". The North American Free Trade Agreement ("NAFTA")¹⁵ and many other investment treaties require that a host state accord foreign investments a "minimum standard of treatment," which NAFTA defines as "treatment in accordance with international law, including fair and equitable treatment and full protection and security."¹⁶ There are disputes concerning what constitutes "international law"—whether it refers only to treaties and conventions or also to unwritten customary international law and practices. The TPP Agreement settles this dispute by expanding on the standard by referring to "applicable customary international law principles" and clarifying that the "fair and equitable treatment" and "full protection and security" standards are not in addition to "customary international law minimum standard of treatment of aliens" but are subsets of that minimum standard.¹⁷ An annex to the provision further adds "'customary international law' generally and as specifically referenced in Article II.6 (Minimum Standard of Treatment) results from a general and consistent practice of States that they follow from a sense of legal obligation. The customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the investments of aliens."¹⁸ This expansive definition of "international law" allows for an organic evolution of the scope of minimum protection.

4. A Balancing of Domestic Environmental, Health and other Regulatory Objectives. Investment treaties have been attacked for allegedly prioritizing the protection of foreign investments and investors over the interests of the host country's citizens. To buttress this claim, public health advocates and environmentalists often point to two widely publicized cases—the Philip Morris v. Australia¹⁹ case and the Methanex v. U.S.²⁰case.

In the Philip Morris case, Australia had enacted its Tobacco Plain Packaging Act requiring all tobacco sold in Australia to be packaged in plain packages bearing graphic health warnings.²¹ Philip Morris, a major U.S. tobacco producer, through its Hong Kong subsidiary, brought an...