A first glance at the Investment Chapter of the TPP agreement: a familiar US-style structure with a few novel twists
Following today’s release of the full text of the Trans-Pacific Partnership (TPP) agreement, IAReporter have made an initial reading of the agreement’s investment chapter (Chapter 9) and highlight some notable features below.
In broad terms, the agreement’s investment chapter (click to download) looks familiar – particularly in relation to other recent U.S. investment treaties and FTAs. The agreement makes some of the same familiar concessions to public concern that have been made for the last 10 years, including transparency of dispute settlement processes and lip-service to a possible appellate mechanism that might be elaborated at some future date.
In terms of the substantive provisions, these continue to be offset by detailed clarificatory language – including in the now-familiar annex defining indirect expropriation, as well as attempts to yoke the minimum standard to customary international law norms only.
Of particular note, the treaty does not purport to supplant, for Canada, Mexico and the United States, the existing North American Free Trade Agreement, thus leaving open the prospect of investor-claimants shopping between the two treaties for the most advantageous rights and dispute settlement mechanism.
GATT Article XX exception does not apply to investment norms – instead public welfare motives to be weighed prior to any exceptions analysis
It also appears that U.S. negotiators prevailed in pushing back demands from some countries for a GATT Article XX style exception that would apply to key substantive investment protections, as is done by certain countries (such as Canada and Japan) in many of their investment treaties. While such an Article XX-type exception was written into Chapter 29 of the TPP – and applies to certain of the trade-related chapters – it does not extend to the investment chapter.
Instead, efforts have been made to ensure that public welfare considerations are relevant to the arbitral elaboration of the key obligations – such as expropriation, non-discrimination and the minimum standard – rather than as a possible exception to the application of such obligations. (As we’ve discussed, arbitrators in a recent NAFTA case favoured a similar approach in light of that treaty’s non-inclusion of an Article XX type exceptions clause.)
The effort to integrate public welfare concerns into the drafting of the TPP’s individual treaty obligations is exemplified not only in the now familiar annex that seeks to explain how expropriation should be defined, but also in a footnote to the non-discrimination obligation that similarly clarifies that the conclusion as to whether treatment is accorded in “like circumstances” … “depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.”
(With respect to non-discrimination, the treaty also contains an annexed “Drafter’s Note on Interpretation of “In Like Circumstances” which elaborates on the shared intent of the parties. The note is lengthy and we don’t purport to summarize it here.)
Thwarted expectations and subsidy changes not in breach of treaty – but what about legitimate investment-backed expectations?
In a departure from the typical U.S. Agreements, the TPP clarifies two categories of alleged mistreatment that do not constitute a breach of the minimum standard: actions that are inconsistent with an investor’s expectations, and withdrawal or modifications to grants or subsidies (see Articles 9.6.4 and 9.6.5).
Article 9.6.4 certainly seems to rule out the possibility that a state’s mere thwarting of a subjective expectation of an investor can trigger an MST breach.
However, it’s less clear, at first glance, that the clause speaks to situations where so-called legitimate expectations (or, to use the parlance, found elsewhere in the TPP’s Annex 9-B “distinct, reasonable investment-backed expectations”) are at issue and have been thwarted by subsequent government action.
Denial of benefits clause included, plus a denial of benefits provision in case of tobacco control measures
As with many U.S. and Canadian agreements there is a denial of benefits clause that allows a party to deny benefits of the chapter if an enterprise is owned or controlled by someone from a non-party to the TPP (or by a national of the “host country”) and has no substantial business activities in another TPP nation.
Additionally, a much ballyhooed exclusion relating to tobacco products regulations is contained in Article 29.5 of the treaty, and turns out to be cast as another denial of benefits provision under which state-parties can elect in advance to deny benefits to claims “challenging a tobacco control measure”.* Indeed, states can elect to do so even after an arbitral claim has emerged, and such an election will terminate such proceedings.
Public debt claims subject to qualifications and exceptions
Interestingly, Annex 9-G of the investment chapter notes that the parties “… recognise that the purchase of debt issued by a Party entails commercial risk.” Claims for default or non-payment of debt are expressly contemplated under the treaty’s ISDS mechanism, but claimants must meet a burden of proving that such default or non-payment constitutes a breach of one of the treaty’s substantive investment obligations.
Paragraph 2 of the same annex takes a more stringent approach to restructurings of debt, specifically those that are “negotiated restructurings”** , leaving a path only for claims of discrimination in relation to such measures. (This particular provision of the treaty does not apply to the U.S. and Singapore, according to a footnote to the agreement.)
Notwithstanding the treaty’s seeming affirmation that public debt can be considered a protected investment, there may be debate as to whether arbitration under the ICSID Convention can be used for such claims. As we’ve reported, one recent ICSID tribunal has split with respect to whether Greek bonds – whatever their status under an investment treaty – could be considered an arbitrable investment for purposes of the ICSID Convention.
Parties hew to U.S. desire for breaches of “investment agreements” to be arbitrable under TPP’s ISDS mechanism – where such contracts provide for locally-seated or less-prominent arbitration rules
The treaty’s investor-state dispute settlement (ISDS) mechanism provides for arbitration under the UNCITRAL, ICSID and ICSID Additional Facility rules, as well as under other processes if both parties agree to use some other mechanism (for e.g. arbitral rules of other institutions such as the International Chamber of Commerce).
In a notable departure for Canada and various other non-U.S. parties to the TPP, the agreement permits arbitration not only of claims for breach of the treaty’s substantive investment protections, but also for breach of an investment authorization or investment agreement (i.e. certain types of state-contracts).
However, in a further novel twist, the treaty also shows some (limited) deference to certain forum-selection clauses that might be contained in such investment agreements (or contracts). Annex 9-L of the treaty thus prohibits arbitration of claims for breach of an investment agreement/contract’s obligations pursuant to the ISDS mechanism in the TTP if the relevant state-contract already provides for international arbitration under certain prominent rules such as the UNCITRAL, ICSID, ICC or LCIA rules and such contract-based arbitration would take place outside the territory of the respondent and in a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.***
At first glance, the flip-side of this provision seems to be that no such deference is shown to state-contracts that provide for arbitration under less prominent rules – say those of the Vienna or Stockholm Chambers of Commerce, and other less known forums. Similarly the TPP seems to show no deference to forum selection clauses that prescribe arbitration within the host country (for e.g. an investment agreement with Canada that calls for Canada to be the legal seat of arbitration). The dispute resolution provisions of both of these types of contracts thus appear vulnerable to circumvention by a claimant who wishes to instead sue for breach of that investment agreement under the rubric of the TPP’s investor-state arbitration mechanism, rather than the given contract’s dispute settlement rules.
Disputing parties given chance to comment on draft rulings prior to their being rendered
The treaty’s Article 9.22.10 introduces another layer into the arbitral procedure whereby a disputing party can request that arbitrators offer copies of draft decisions and awards on liability – for comment by the parties – thus adding up to another 105 days to the process.
Counterclaims in disputes rooted in contracts or authorizations
When an investor makes a claim for breach of an investment agreement or of an investment authorization, the dispute settlement chapter stipulates that such investors open themselves up to counterclaims “in connection with the factual and legal basis of the claim or rely on a claim for the purpose of a set off against the claimant.”
This provision does not appear to open the prospect of counter-claims if the investor is merely claiming for breach of the substantive obligations in the TPP investment chapter (i.e. expropriation, MST, etc.)
Attempt to limit damages for investments thwarted in the making
For claims that allege a breach arising out of an “attempt to make an investment”, Article 9.28.4 seeks to limit damages to those sustained in the attempt to make the investment – rather than projected losses arising out of the thwarted opportunity.
No punitive damages or specific performance
In common with U.S. and Canadian-style agreements, the treaty prohibits orders of specific performance – i.e. enjoining a state to do or refrain from something – and awards of punitive damages.
ICSID SG plays important appointing role in arbitration cases
Following the path of other agreements such as the NAFTA, the Secretary-General of the ICSID is given the important role of appointing arbitrators in cases where the parties fail to make their own appointments within the time allotted or can’t agree on who should chair a given case.
No clarity on arbitrator codes of conduct and no appellate mechanism
Despite negotiating for seven years, the parties did not agree to any codes of conduct for investment arbitrators, nor an appellate mechanism.
The agreement leaves open, for now, whether a code of conduct prescribed for trade dispute panels under the TPP should also be extended to investment arbitration tribunals. Instead, prior to the entry into force of the TPP, the parties are to “provide guidance” on this code’s application to ISDS cases, and to clarify if further modifications are needed for the ISDS context.
As for appellate mechanisms, the treaty merely notes that if such a mechanism is developed elsewhere, under other institutional arrangements, “… the Parties shall consider” whether awards rendered under the TPP’s ISDS mechanism should be subject to such an appellate mechanism.
* Tobacco control measures are defined in a footnote to Chapter 29 as follows: “… a measure of a Party related to the production or consumption of manufactured tobacco products (including products made or derived from tobacco), their distribution, labeling, packaging, advertising, marketing, promotion, sale, purchase, or use, as well as enforcement measures, such as inspection, recordkeeping, and reporting requirements. For greater certainty, a measure with respect to tobacco leaf that is not in the possession of a manufacturer of tobacco products or that is not part of a manufactured tobacco product is not a tobacco control measure.”
** The treaty’s definitions stipulate that “negotiated restructuring means the restructuring or rescheduling of a debt instrument that has been effected through (a) a modification or amendment of that debt instrument, as provided for under its terms, or (b) a comprehensive debt exchange or other similar process in which the holders of no less than 75 per cent of the aggregate principal amount of the outstanding debt under that debt instrument have consented to the debt exchange or other process;”
*** If the arbitration takes place under the ICSID Convention, Annex 9-L doesn’t require that the legal seat be in a NY Convention state and outside of the host country. The obvious reason for this is that ICSID Convention arbitrations are insulated from domestic review in any case.