Developments in Investor-State Arbitration: thinking outside the box

The tribunal in Philip Morris Asia Limited -v- The Commonwealth of Australia¹ has refused to hear Philip Morris' claim against Australia in respect of the plain packaging legislation on the basis that it lacked jurisdiction. The tribunal's reasons have not yet been published. However, as the case has been a flashpoint in the public debate over Investor-State Dispute Settlement (ISDS) mechanisms it may have important implications. It is also the first investor-State dispute that has been brought against Australia.

It will also be interesting to see how the tribunal dealt with the argument that jurisdiction should be declined because Philip Morris Asia Limited (PMA) had only acquired an interest in Philip Morris' Australian arm so that it could bring a claim under the Australia-Hong Kong SAR, China Bilateral Investment Treaty (the Treaty). Given the patchwork of multilateral and bilateral treaties which contain ISDS mechanisms, the extent to which companies can structure their transactions and organisation to found jurisdiction is an important issue for investors and States alike.

When can an investor sue?

As a starting point, it is important to note that investors in one State will only have a direct right to bring a claim against another State under an ISDS mechanism where:

• the relevant investment treaty between the two (or more) States provides that investors of the contracting states may do so; or
• they have a direct contract with the State (such as a concession agreement) which makes provision for ISDS or a similar right is provided under domestic legislation.²

In all other cases, investment treaties will only provide a basis for the contracting States to complain of a breach.

Article 10 of the Treaty provides investors with a right to claim against States.³

Phillip Morris: the case

PMA commenced a claim against the Commonwealth of Australia (Commonwealth) under the Treaty in 2011. The claim related to legislation requiring that all tobacco products be sold in plain packages. The arbitration was seated in Singapore and conducted under the UNCITRAL rules before the Permanent Court of Arbitration.

PMA's "investments" in Australia consisted of ownership of 100 per cent of the shares in Philip Morris Australia (PM Australia), which in turn owned 100 per cent of Philip Morris Limited (PML). PML had earlier intervened in a domestic constitutional challenge to the plain packing legislation in 2012, which was rejected by the High Court of Australia.⁴

In the arbitration PMA alleged, among other things, that "the plain packaging legislation bars the use of intellectual property on tobacco products and packaging, transforming PMA's wholly owned subsidiary, PML from a manufacturer of branded products to a manufacturer of commoditized products with the consequential effect of substantially diminishing the value of PMA's investments in Australia." PMA sought orders requiring the repeal or suspension of the legislation and compensation for losses suffered in complying with the legislation (including loss of revenue, direct costs of compliance and loss of value of intellectual property) until the date of suspension/repeal, or, in the alternative, compensation for the damage to its investments as a result of the enactment and continued enforcement of the legislation.

The Commonwealth challenged the jurisdiction of the tribunal on the basis that:

• PMA was aware of the upcoming changes in the legislation at the time of its acquisition in 23 February 2011, because (i) the commitment to introduce the legislation had already been announced in 2010, and (ii) PML and its parents were active in their opposition to the legislation during a Government consultation in 2009. As PMA was aware of the upcoming change, it could not "buy into the dispute" which was already existing at the time of acquisition. The acquisition was for the purpose of bringing a claim and was an abuse of process under Article 10 of the Treaty. Alternatively, a "dispute regarding an investment" under the Treaty could only arise after the investment had been made.
  PMA argued that no "dispute" arose until the legislation was passed on 21 November 2011.
• There was no qualifying investment. Specifically, the Commonwealth argued that the assets of PM Australia (i.e. the shares in PML) and the assets of PML were not protected. They did not fall within a recognised category of investment as they were investments held by Australian companies.
• Article 2(2) (Protection of Investments and Returns) of the Treaty does not cover obligations owed by the Commonwealth to other States under multilateral agreements; as such the tribunal had no jurisdiction to determine matters raised by PMA in respect of the WTO Agreement or the Paris Convention, which are more properly determined by State application under the procedures in those agreements.
  PML argued that it was not seeking relief under those treaties, but rather relief on the basis that it reasonably expected that the Commonwealth would abide by its obligations under them.

The decision and its implications

The tribunal ruled on 18 December 2015 that it had no jurisdiction over the dispute. While its reasons have not yet been published, the decision may have important implications for the debate about ISDS mechanisms. The recent Australian debate on ISDS is summarised in our June 2015 update on the China Australia Free Trade Agreement (see Bull in a China Shop?).

The decision may allay public concern about corporations using ISDS mechanisms to frustrate regulation in the public interest. However, since it was reached on jurisdictional grounds, the ultimate question of whether Australia was entitled to introduce plain packaging legislation was never addressed by the tribunal, leaving some uncertainty. Moreover, it took four and a half years to obtain a decision on jurisdiction alone. While many of the materials are not public, a review of the Procedural Orders shows that a huge amount of time was spent on resolving a preliminary issue. That time and cost may itself be a disincentive for States (particularly smaller States) to adopt regulatory measures which could trigger claims: it is perhaps unlikely to prevent States adopting measures of political/national significance but more modest/technical reforms may be affected.

Of course, the sophisticated investor protections and ISDS mechanisms in recent agreements such as the Trans-Pacific Partnership Agreement (TPP), which specifically seek to protect the ability of States to regulate in the public interest,⁵ will provide further protection for States. But it remains to be seen precisely how tribunals will interpret them and the time and cost which will be required to secure a decision on whether those protections apply.

The case also highlights that the increase in the number of bilateral and multi-lateral investment treaties potentially permits "forum-shopping" by companies wishing to benefit from investor protections granted under favourable investment treaties which contain ISDS mechanisms. There is an important question about the ability of companies to structure their transactions and operations to facilitate a challenge to announced/anticipated regulation (for example on health and environmental issues). It is hoped that the decision in Philip Morris will provide greater certainty for investors and States about when and how investors can do so. We will provide a more detailed analysis when the reasons are published.

_{Notes
1 Permanent Court of Arbitration Case No. 2012-12.
2 According to ICSID's 2015 statistics, 51 per cent of its caseload comes from bilateral investment treaties, 22 per cent from the Energy Charter Treaty, 20 per cent from either the law of the Host State or a direct agreement with the investor and the remainder from other multilateral treaties. Of course, not all investor-State arbitrations are under the ICSID framework.
3 For a summary of Australia's other treaties with ISDS protection, see the DFAT website
4 JT International SA -v- Commonwealth of Australia (2012) 250 CLR 1.
5 In the case of the TPP, there is also a broad opt-out from the investor protections in relation to tobacco regulation.}