15 Oct 2015

Investment protection and dispute resolution under the TPP

by Jonathan McTigue, Caroline Swartz-Zern

Investors who have suffered loss on an investment in a member state should consider whether Investor-State Dispute Settlement is available, particularly if the domestic law does not respond.

With the agreement to the Trans-Pacific Partnership (TPP) on 5 October 2015, the Australian Government has taken another step to increase protection of Australian citizens investments in the other member states of the TPP (including some of Australia's largest outbound trade partners).

There protection will be able to be enforced directly by Australian investors against other member states of the TPP, through Investor-State Dispute Settlement (ISDS) arbitration.

Although Australia already has agreements in place with most of the TPP member states, the TPP provides entirely new investor-state protections for Australian investors in Canada and Brunei.

According to official reports on the content of the TPP, the TPP contains the full suite of modern protections for Australian investors in TPP member states. These protections include most-favoured-nation status (such that if a TPP member state has a treaty with another state that has provisions that are more favourable than the TPP, an Australian investor may take advantage of them), national treatment (Australian investors should receive treatment equal to that afforded to investors from the TPP member states), possible compensation for expropriation where due compensation has not been provided or the expropriation was done for a non-public purpose or without due process, and possible compensation if Australian investors do not receive the "minimum standards of treatment" (including fair and equitable treatment).

These protections are found in most modern treaties, and they will allow Australian investors to invest in a more secure and transparent environment in any of the TPP member states.

Health, safety, and environmental issues are to be excepted from the mechanisms under which claims can be brought against a TPP member state. Australia has insisted on retaining the right to legislate in these areas without constraints. In this context, it is worth noting that the only ISDS claim brought against Australia has been in relation to the plain packaging of tobacco products (which Australia considers to be a legitimate public health measure). Even with these protections, it is likely that the treaty will provide that the exceptions cannot be applied arbitrarily or in bad faith (as was provided in article 9.8 of the China-Australia Free Trade Agreement signed on 17 June 2015, which has similar public welfare exceptions).

Investor recourse – ISDS

If a host TPP member state breaches any of the protections guaranteed under the treaty, the recourse is ISDS. As such, the investor may bring claims against the host TPP member state arising out of the investment before a neutral arbitral tribunal rather than in the domestic courts of the host TPP member state.

According to official reports, the drafters of the TPP have endeavoured to create a transparent arbitral process.

To this end, the drafters have included safeguards such as allowing submissions in the arbitration from third parties not involved in the dispute (including amicus curiae), and containing a review mechanism for interim awards. These measures improve oversight in the decision making process, and increase participation of interested parties who are otherwise not involved in the dispute.

The TPP also includes mechanisms designed to prevent frivolous claims such as the availability of an expedited process for claims which are unfounded or frivolous on their face, and the ability to award legal costs against a party bringing such a claim to pay the legal costs of the other party.

The TPP drafters have also included provisions to clarify how to handle parallel proceedings. These provisions assist in providing greater understanding in the system, while also assisting in preventing abuse of the system.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.