In recent years, Australia has had a somewhat volatile relationship with investment arbitration. Unequivocally pro-free trade since the early 1980s, it traditionally embraced bilateral investment treaties (“BITs”), including investor-state dispute settlement (“ISDS”) provisions, with great enthusiasm. This faltered after the commencement of the Philip Morris “plain-packaging” dispute, which made Australia an occasional poster child for ISDS’s detractors.

A change of government, and the dismissal of the Philip Morris case last year, has seen an apparent return to the norm. Australia’s two most recent trade agreements both include ISDS provisions, and the Philip Morris decision – dismissing the claim as an abuse of process – has muted domestic opposition to ISDS for the foreseeable future. The award also serves to remind investors of the limits of treaty protection and the dangers of last-minute “forum shopping”.

New trade agreements and negotiations

Although Australian governments have expressed ambivalence to investment arbitration in recent years, Australia’s two most recent trade deals, the China-Australia Free Trade Agreement (“ChAFTA”) and the Trans-Pacific Partnership (“TPP”), both contain investor-state dispute settlement provisions. ChAFTA – which was notable for its thin substantive protections and significant exemptions – entered into force in December 2015. While the TPP’s future has, of course, been thrown into doubt by the election of President Trump, the Australian Government has expressed interest in proceeding with a “TPP minus one”, which has received initial support from Singapore and New Zealand.

Philip Morris Asia Ltd v Australia

Facts

In 2010, the Australian Government introduced legislation requiring uniform “plain” packaging for tobacco products. This meant that tobacco companies, including Philip Morris Asia (“PMA”) (the Hong Kong-incorporated claimant) lost its right to use various intellectual property rights on its products. This, it said, breached the expropriation and fair and equal treatment provisions of the Hong Kong-Australia BIT.

Australia denied breaching the BIT, but also raised several objections to jurisdiction and admissibility which rested largely on the fact that PMA did not acquire ownership of the relevant Australian assets until long after the Government had announced its intention to introduce the measure.

The Tribunal bifurcated proceedings to hear two of Australia’s objections before proceeding further. The first objection was that PMA’s investment had not been lawfully admitted under Australian law, because the application to invest in Australia was misleading as to its purpose: the true purpose of the investment was to benefit from the BIT. The second was that, as PMA’s investment had been made so late, either the Tribunal lacked jurisdiction ratione temporis or the conduct amounted to an abuse of rights by PMA.

PMA strongly opposed each of these objections and retorted that, in any case, it in fact had day-to-day control of the assets from 2001, entitling it to protection under the BIT.

Decision

The Tribunal accepted Australia’s abuse of right argument, agreeing that the investment had only been made to take advantage of the Hong Kong-Australia BIT. It found that the key test in this regard was foreseeability: an investor abuses its rights under a treaty if it changes its corporate structure to take advantage of the treaty when a specific dispute is already foreseeable. It considered that a dispute is foreseeable when there is a “reasonable prospect...that a measure which may give rise to a treaty claim will materialise”.

The tribunal first rejected PMA’s submission that it had control of the assets since 2001. Crucially, it was persuaded that, on the facts, day-to-day control was exercised by a US-incorporated parent entity.

The tribunal nonetheless dismissed Australia’s submission that the relevant investment was admitted unlawfully. It found that Australia’s legal framework to admit foreign investments did not require investors to exhaustively disclose their future intentions as to legal claims and that, in any event, the Australian Government would have been aware of a possible claim.

The Tribunal also rejected Australia’s argument that the timing of the investment, after a dispute between the parties had already arisen, meant that the temporal requirements for jurisdiction had not been met. It agreed with PMA that the dispute only arose when the plain-packaging legislation actually passed. While still at the stage of a policy proposal, albeit one to which an investor has objected, the dispute has not yet arisen.

Finally, the Tribunal addressed Australia’s argument that PMA’s investment was only made to take advantage of the Hong Kong-Australia BIT, finding that the key test in this regard was foreseeability: an investor abuses its rights under a treaty if it changes its corporate structure to take advantage of the treaty when a specific dispute is already foreseeable. It considered that a dispute is foreseeable when there is a “reasonable prospect...that a measure which may give rise to a treaty claim will materialise”.

Comment

This case makes an important contribution to the debate as to how and when an investor can structure its investments to maximise protection under investment treaties. By requiring only a “reasonable prospect”, the Phillip Morris decision makes it more difficult for investors to “forum shop” in the face of a possible dispute.

The policy consequences are already clear from recent trade deals. The TPP contained a specific carve-out for tobacco-related claims in its investment provisions, which reportedly came at Australia’s urging. The case – which generated significant public antagonism towards arbitration in Australia and a Senate inquiry – may also convince some critics that investment arbitration does not suffer from the bias and unfairness which is sometimes suggested.

Conclusion

The high-profile Philip Morris case will continue to inform legal and policy debate in Australia for years to come. At present, Australia seems to have returned squarely to the pro-investment arbitration camp, and the more extreme critiques of ISDS in Australia can be dismissed.     

Alexander Fawke

Associate
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