The TPP Investment Chapter: Mostly More of the Same [Substantive Commitments]

On 5 October the Trans-Pacific Partnership (TPP) FTA was substantially agreed among 12 Asia-Pacific countries (including Japan, the US and Australia), and the lengthy text was released publically on 5 November 2015. Commentators are now speculating on its prospects for ratification, as well as pressure already for countries like China and Korea to join and/or accelerate negotiations for their Regional Comprehensive Partnership (ASEAN+6) FTA in the region. There has also been considerable (and typically quite polarised) media commentary on the TPP’s investment chapter, especially investor-state dispute settlement (ISDS). The Sydney Morning Herald, for example, highlights a remark by my colleague and intellectual property (IP) rights expert, A/Prof Kimberlee Weatherall, that Australia “could get sued for billions for some change to mining law or fracking law or God knows what else”. Other preliminary responses have been more measured, including some by myself (in The Australian on 6 November) or Professor Tania Voon within Australia, and other general commentary from abroad.
Based partly on an ongoing ARC joint research project on international investment dispute management, with a particular focus on Australia and the Asia-Pacific, I briefly introduce the scope of ISDS-backed protections for foreign investors in the TPP, compared especially to the recently-agreed bilateral FTAs with Korea and China. Overall, the risks of claims appear similar to those under Australia’s FTAs (and significantly less than some of its earlier generation of standalone investment treaties). However, some specific novelties and omissions are highlighted below, and issues remain that need to be debated more broadly such as the interaction between the investment and IP chapters (as indeed raised by both A/Prof Weatherall and myself in last year’s Senate inquiry into the “Anti-ISDS Bill”). The wording of the TPP’s investment chapter derives primarily from US investment treaty and FTA practice, which has influenced many other Asia-Pacific countries (including Australia) in their own international negotiations. Yet the European Union is now actively considering some further innovations to recalibrate ISDS-based investment commitments. TPP’s investment chapter’s substantive commitments by host states to foreign investors, aimed at encouraging more (but also potentially higher-quality) foreign investment, include for example:
(1) non-discrimination compared to local investors (ie national treatment “in like circumstances”: Art 9.4) as well as third-country investors (most-favoured-nation treatment “in like circumstances”: Art 9.5), both before and after establishment or admission of the investment, but with some annexed exceptions;
(2) fair and equitable treatment, tied to the evolving customary international law standard (elaborated in Annex 9-A), including a specific reference to denial of justice through local adjudicatory proceedings (contrary to “the principle of due process embodied in the principal legal systems of the world”: Art 9.6);
(3) compensation for direct and indirect expropriation (Art 9.7).
By contrast, the Australia-China FTA signed on 17 June 2015 (and now expected to be ratified soon, after a change of heart by the main opposition Labor Party), had more limited non-discrimination commitments from China. It also lacked a commitment to FET, although some protection remains available (not enforceable through ISDS) under the 1988 bilateral investment treaty, which will be reconsidered along with the China FTA’s investment chapter during a work program after it comes into force.
The TPP’s main substantive commitments try to build in public welfare considerations, for arbitral tribunals to assess if when foreign investors allege violations, eg by further elaborating what constitutes “in like circumstances” as well as the now-familiar Annex (9-B, derived from US domestic law and then treaty practice) on what constitutes indirect expropriation. Article 9.15 adds that a host state may use measures “that it considers appropriate to ensure that investment … is undertaken in a manner sensitive to environmental, health or other regulatory objectives”, but only if “consistent with this Chapter” (ie non-discriminatory etc). The TPP’s Preamble also acknowledges the member states’ “inherent right to regulate”.
By contrast, investment chapters in Australia’s FTAs with Korea (signed in 2014), China and even ASEAN-NZ (signed in 2009) included a general exception, based on GATT Art XX for trade in goods, allowing host states to introduce measures necessary to protect public health etc provided these were not applied in a discriminatory manner or as a disguised restriction on investment. An advantage of this approach is the extensive jurisprudence from WTO panels applying the GATT exception. Disadvantages include some obvious as well as subtle differences between trade and investment law, as well as a potentially higher evidentiary burden on the state seeking to justify its measures.
Anyway, the TPP limits the scope of protection available to investors in specified areas raising strong public interest concerns, such as public debt claims (Annex 9-G) and tobacco control measures. Claims over the latter can be completely precluded in advance by member states, under the General Exceptions chapter (Art 29.5). This is clearly in response to arbitration claims brought by Philip Morris against Australia (and earlier Uruguay), although such a sector-specific exclusion had earlier been resisted by the US as setting a dangerous precedent for future treaty negotiations. The TPP Investment chapter also contains the usual “denial of benefits” provision (Art 9.14) to limit scope for forum-shopping, as alleged in the Philip Morris case under Australia’s old BIT with Hong Kong.
[A version of this posting appears in the December 2015 issue of the ACICA Review. Sydney Law School is hosting a TPP seminar on 17 March 2016 at Herbert Smith Freehills.]

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.