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The preceding analysis highlights another important feature of the Trans-Pacific Partnership agreement: its inclusion of an investor-state dispute settlement (ISDS) mechanism, especially arbitration (generating a decision binding on both disputing parties, unlike mediation – which they may also attempt under Art 9.17.1 but do not need to try first). This alternative to inter-state arbitration (found in Chapter 28, as in almost all investment treaties) emerged as a common extra option for foreign investors to enforce their substantive rights if their home states did not wish to pursue a treaty claim on their behalf, for diplomatic, cost or other reasons. This mechanism has been seen as particularly important for credible commitments by developing or other countries with national legal systems perceived as not meeting international standards for protecting investors.

The inclusion of ISDS in the TPP is not too surprising given the involvement already of a developing countries such as Vietnam, and even a middle-income country like Malaysia with a complicated political and legal system (both already subject to occasional investor-state arbitration claims). Incorporating ISDS is also explicable because the TPP aims to attract further partners. These include capital-importing developing countries like Indonesia, whose President recently declared that Indonesia “intends to join the TPP”, although this will be very difficult domestically and the country is still reviewing old BITs partly due to some recent arbitration claims – including from an Australian investor. Other potential candidates include capital-exporting countries like Korea, which pressed strongly for ISDS in bilateral FTAs – even with Australia and New Zealand.

However, the arguments are more finely balanced for including the ISDS option for treaty commitments between developed countries with strong and familiar national legal systems. Intriguingly, when the TPP is signed, Australia and New Zealand propose to exchange official side letters excluding the TPP’s ISDS provisions as between themselves. They also obtained such a bilateral carveout in their FTA with ASEAN signed in 2009, but partly for the reason that that the two countries were then considering adding an Investment Protocol to their longstanding bilateral FTA for goods and services. That 2011 Protocol also ended up excluding ISDS, ostensibly because Australia and New Zealand have strong mutual trust and understanding of each other’s legal system. This argument does gain force in light of the conclusion in 2008 of a Trans-Tasman treaty on enforcing court judgments (and broader regulatory cooperation), in force from 2013 and unique among Asia-Pacific countries. Australia and New Zealand have also achieved remarkable economic integration and business law harmonisation in other respects, albeit mainly through non-treaty mechanisms.

By contrast, Australia does not propose any TPP side-letter with the US carving out ISDS, even though their bilateral FTA in 2004 omitted ISDS. The official explanation given for the latter development was that both these countries also held great trust in each other’s national legal system (despite the Loewen case brought by a Canadian investor against the US around that time, where a tribunal chaired by a former Chief Justice of Australia sharply criticised an underlying Mississippi court procedure). Nor do there appear to be any other bilateral carve-outs of ISDS envisaged among TPP partners.

In terms of the ISDS procedures themselves, these also tend to follow the provisions in the US Model BIT and its FTAs from around 2004, which in turn have influenced the FTAs drafted by other TPP partners such as Australia. For example, the TPP sets time limits for bringing claims (Art 9.20.1). It also contains a now-standard “fork in the road” provision (Art 9.20.2, intensified for four of the 12 countries through Annex 9-J) precluding situations as in the dispute initiated by Philip Morris, whereby it claimed both before the High Court of Australia under constitutional law and an ISDS tribunal under international treaty law.

As in Australia’s FTA with Korea (and to a somewhat lesser extent with China), Article 9.23 sets out extensive provisions for transparency in proceedings, including public hearings (still rare in WTO inter-state dispute resolution) and admission of amicus curiae briefs from relevant third parties. Article 9.22 requires arbitral tribunals to decide preliminary jurisdictional objections on a fast-track basis, and may award lawyer and other costs against the claimant after considering whether the claim was frivolous. (However, it does not have to award such costs, and nor is there a general “loser-pays” rule for costs as under the recent Canada-EU FTA: cf TPP Art 9.28.3). An (inter-state) Commission can issue an interpretation of a TPP provision that then binds the arbitral tribunal (Art 9.24.3).

However, there is some debate among commentators about whether such a Commission can make such an order regarding a pending dispute, and the China-Australia FTA wording makes it clear that it can. That FTA also adds an innovative provision, not found in the TPP (or any other FTA involving Australia) allowing a host state to issue a “public welfare notice” to the home state of the foreign investor, declaring that it invokes the (Article 9.11.4) general exception for public health measures etc. This triggers inter-state consultations and a requirement on the host state to publically announce its view on the home state’s invocation of the exception.

The TPP does add that that the arbitral tribunal can only award limited damages if the foreign investor successfully claims that it was thwarted in attempting to make an initial investment, due to the host state violating substantive treaty commitments. The tribunal must also issue a draft award to the disputing parties for comment (Art 9.22.10), albeit not to the public or even the home state of the investor. Release of draft decisions is a feature of WTO inter-state dispute resolution, and is found already in Australia’s FTA investment chapters with Chile (signed in 2008) and Korea.

However, the TPP does not establish an appellate review mechanism, to correct for errors of law (as opposed to procedure or jurisdiction) as under the WTO regime. There is only a commitment to consider such a mechanism if and when developed elsewhere for international investment disputes (Art 9.22.11). The EU is now expressing stronger interest, including in its (“TTIP”) FTA negotiation with the US, where it recently even mooted the possibility of an international investment court.

Article 9.21.6 further envisages that, before the TPP comes into force, member states will “provide guidance” on extending the Code of Conduct for arbitrators (already in Chapter 28 for inter-state arbitrations) to ISDS disputes, as well as “other relevant rules or guidelines on conflict of interest”. The Australian government will presumably point to the Australia-China FTA, where such a Code of Conduct has already been set out for ISDS arbitrators, and reference may also be made to further proposals now being raised in the EU and beyond.

In addition, the TPP allows ISDS claims not only for breaches of the substantive commitments set out in the treaty itself (as in the Australia-China FTA), but also where the host state has contravened its “investment authorization” or “investment agreement” relied upon by the harmed foreign investor. The latter scenarios are also covered in the Korea-Australia FTA, but the TPP goes on to expressly allow the host state then to raise a related counterclaim or set-off against the foreign investor (Art 9.18.2). Annex 9-L also restricts ISDS proceedings if certain other arbitration procedures have been agreed between the foreign investor and the host state relating to their investment agreement.

Finally, each member state commits to “encouraging” its enterprises to “voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility” endorsed or supported by the relevant state. This could extend, for example, to (local and foreign) retailers in Australia with respect to adopting the Accord on Fire and Building Safety in Bangladesh, which then locks firms to a separate enforcement regime underpinned by international arbitration law.

[A version of this posting appears in Issue 20 of the KLRCA Newsletter (Oct-Dec 2015). Sydney Law School is hosting a TPP seminar on 17 March 2016 at Herbert Smith Freehills.]

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Japanese Law in Asia-Pacific Socio-Economic Context