The Trans-Pacific Partnership Agreement and states' right to regulate under international investment law.

• Author: Zamir, Noam

1. INTRODUCTION

   The Trans-Pacific Partnership Agreement (TPP), (1) which was signed in November 2015 by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, is said to establish new terms for trade and investment deals. (2) The TPP was intended to establish a free trade area in the Asia-Pacific covering nearly 40 percent of global GDP and a third of global trade. (3) The agreement also forms an integral part of broader geopolitical calculations in the region. (4) However, the TPP as currently drafted can only come into force if ratified by six or more of the States Parties representing at least 85% of the GDP of the twelve original signatories. (5) This prospect is now unlikely following the new U.S. administration's announcement in January 2017 that it will not ratify the treaty, (6) amidst a rising tide of anti-free trade sentiment around the world. (7) Nevertheless, other States Parties to the TPP continue to strive for ratification in one form or another, (8) and the TPP will arguably remain a benchmark for future trade deal negotiations.

   The political response to, and widespread scepticism towards the TPP and other international investment agreements (IIAs) is complex and widely debated. This article will focus on one issue that has played an important role in framing the debate on the TPP: the potential impact of the TPP (and similar deals) on States' right to regulate public welfare under international investment law.

   In response to a growing number of investment treaty arbitrations arising out of regulatory measures taken by host States, the recent trend in IIA practice (9) has been to include express language in the treaty preamble reaffirming the right to regulate, to provide greater guidance on the standards of investment protection as they apply to regulatory measures, and to carve out general exceptions, for example, measures taken for the protection of the environment, public health or financial stability. (10)

   As the tribunal in Lemire v. Ukraine (11) stated, the host States enjoys an "inherent right to regulate (...) in order to protect the common good of its people. (12) Indeed, it is said that IIAs "may not be read as preventing States from bona fide regulation in the public interest" (13) and that it is necessary "to balance investment protection with competing policy objectives of the host State, and in particular, with its right to regulate in the public interest." (14) In a recent high profile award rejecting Philip Morris' claims against Uruguay relating to tobacco control measures, an eminent tribunal held that there is a "consistent trend" in awards and treaty practice differentiating an indirect expropriation from a non-compensable regulatory measure. (15) However, the circumstances in which a host State may still be obliged to compensate a foreign investor for a regulatory measure having an economic impact on a protected investment remain contested. In Daimler v. Argentina (16), for example, the Tribunal agreed that host States have the right to regulate the economy as they see fit, but held that:

   [W]here Argentina elects to exercise its powers in a manner that contravenes one of Argentina's voluntarily assumed international obligations to German investors under the German-Argentine BIT, and where such contravention specifically harms the Claimant's investment, Argentina must compensate the Claimant for the violation. (17) Against this background, critics of investment treaty arbitration assert that tribunals illegitimately interfere with States' core public policy prerogatives and that an award of damages against host States can have a "chilling effect on future governmental conduct by preventing governments from adopting certain courses of action for fear of future liability." (18) These concerns have translated into heightened public scrutiny of investment treaty arbitration awards and of IIA negotiations, including the TPP. (19)

   Accordingly, this paper seeks to establish the extent to which the States Parties to the TPP have negotiated the treaty's language to address concerns regarding their right to regulate, and how consistent this has been with the efforts of non-TPP parties, such as the European Union, in their treaty negotiations. As the current uncertainty surrounding the TPP's ratification partly demonstrates, it remains an open question whether the contents of the TPP's investment protection chapter will be sufficient to secure the confidence of all stakeholders.

   It has been suggested elsewhere that the TPP's Investment Chapter sets a new worldwide standard. (20) We suggest that the Investment Chapter is nevertheless broadly consistent (and in parts entirely derivative of) the approach taken by the U.S. for over ten years. Although States Parties to the TPP appear to have reacted to particular investment treaty arbitration claims or awards--as well as perhaps to general legitimacy concerns regarding how investment agreements constrain host State regulatory space--the TPP represents an evolution rather than revolution in the drafting of IIAs. (21) Indeed, as set out below, the TPP is largely consistent with the 2012 U.S. Model BIT (22) and recent U.S. IIAs, and notably seeks to preserve the status quo by retaining ad hoc arbitration as the mechanism for resolving investor-State disputes. (23) By contrast, new EU investment treaties, including the EU-Canada Comprehensive Economic and Trade Agreement (CETA), have replaced investment treaty arbitration with a standing international investment court. (24)

   This paper is structured as follows: Section II briefly explains the main features of international investment law and the debates regarding the legitimacy of this legal regime in light of its effect on States' regulatory power; Section III examines the main provisions of Chapter 9, the Investment Chapter of the TPP. which address States Parties' regulatory power, and highlights how some of these provisions were drafted in direct response to certain controversial treaty claims and awards. This reaction is manifest in three main respects: (1) express language asserting the inherent rights of States to regulate in the public interest; (2) denial of benefits clauses excluding specific types of claim, such as tobacco regulations; and (3) more detailed guidance in order to limit tribunal discretion in the interpretation of the standards of protection in the treaty. Section IV concludes this paper.

2. THE MAIN FEATURES OF INTERNATIONAL INVESTMENT LAW AND THE LEGITIMACY DEBATES REGARDING THIS REGIME

   International investment law is a branch of public international law that governs the protection of foreign investments in host States. (25) IIAs are the primary source of international investment law and establish certain substantive standards of investment protection, including fair and equitable treatment ("FET") and compensation for acts of expropriation. (26) The majority of the more-than-3,200 IIAs worldwide arc bilateral investment treaties (BITs), which as the name suggests arc concluded between two States. (27) There are also a growing number of free trade agreements ("FTAs") that contain foreign investment protection provisions in addition to establishing free trade areas. These may be bilateral or multilateral, such as the North American Free Trade Agreement ("NAFTA"), (28) the Energy Charter Treaty (29) and the TPP itself.

   Investor-State disputes are typically heard by an international arbitration tribunal. (30) The creation of a neutral forum for the settlement of disputes between investors and States is a key feature of the modern system of international investment protection. Whereas the jurisdiction of international commercial arbitration tribunals is based on an arbitration clause in a contract between the parties, (31) the claimant investor in an investment treaty arbitration is not a party to the IIA. Rather, the arbitration clause in the IIA contains an offer by the host State to arbitrate investment disputes; the investor accepts this offer by filing a request for arbitration. (32) This procedure for investor-State dispute settlement has famously been described as "arbitration without privity." (33) As discussed below, the use of arbitration for investor-State dispute settlement is not without its critics. (34) Indeed, the recently signed but not yet effective EU-Vietnam FTA, (35) and the EU-Canada CETA, both replace investor-State arbitration with a standing international investment court. (36)

   This combination of substantive and procedural protections for foreign investors has resulted in a robust and far-reaching legal regime. (37) Indeed, investment treaty arbitration has been analogized to judicial review or to an international human rights court. (38) Arbitral tribunals scrutinise the sovereign conduct of the executive, legislative, or judicial branches of host States to assess compliance with the standards of protection set out in the relevant IIA. (39) It is a potent mechanism: to date, several tribunals have ordered the respondent State to pay investors over a billion U.S. dollars in compensation for treaty violations. (40) Additionally, notorious inconsistencies notwithstanding, the sheer volume of claims and resulting arbitral awards has revolutionised the practice of public international law in little over fifteen years. (41)

   There is an inherent tension between State regulatory power and investment treaty arbitration. By entering into 11 As, States consent to delegate some of their sovereignty to an international tribunal to determine when an investor is entitled to compensation for an attributable sovereign act. (42) The rub is that most investment treaty claims today do not concern bright-line cases of direct expropriation--a government's takeover of a factory plant, for example--but may seek to impugn general regulatory measures directed at environmental protection...