Almost five years have passed since the Gillard government mandated the ‘plain packaging’ of cigarettes. Following the announcement of its intention to do so, Philip Morris transferred its intellectual property rights to a specially formed Hong Kong-based subsidiary, Philip Morris Asia.
It did this to take advantage of the investment protections contained in the 1993 Hong Kong-Australia Bilateral Investment Treaty (BIT), which contained an investor-state dispute settlement (ISDS) clause entitling aggrieved investors to take their claims against the state in which the investment was made to arbitration. Philip Morris did so, alleging that Australia had expropriated its intellectual property rights. It sought billions of dollars by way of compensation.
On 17 December 2015 an arbitral tribunal rejected Philip Morris’ claim out of hand as constituting an abuse of rights, without embarking on an examination of the merits of its claim. In May, a redacted copy of the decision was released publicly. And earlier this month, a separate tribunal published its decision on a similar claim by Philip Morris against Uruguay.
In both cases, Philip Morris was unsuccessful. The cases reveal much about what is right and wrong with the ISDS system, which forms a key part of international trade deals, and they should inform debates on the content of Australia’s future trade agreements.
ISDS is best understood in its historical context. In previous centuries, investors had few mechanisms to protect their property in a foreign state. If their assets were seized by a corrupt government, they lobbied their own government to send warships. This ‘gunboat diplomacy’ satisfied the instinct for vengeance, but it was neither the fairest nor the cheapest method to resolve disputes. And so, over the course of the 20th century, states negotiated treaties in which they promised to protect foreign investors’ assets.
If these are violated, investors can essentially sue the foreign government, and the matter is heard before an international arbitral tribunal. Philip Morris invoked the mechanism in Australia’s investment treaty with Hong Kong. ISDS mechanisms have proved controversial, in no small part due to the Philip Morris case (and similar cases in Europe). A range of political leaders, including Hillary Clinton and Donald Trump, have criticised ISDS. The chief criticisms are that it erodes national sovereignty by granting special rights to foreign claimants; that the arbitrators are a narrow pool of faceless, corporate men; and that ISDS is biased in favour of investors.
The Philip Morris case demonstrates the inaccuracy of these claims. Australia’s sovereign right to regulate tobacco sales remains untouched. Assuming international legal obligations necessarily places limits on state sovereignty. But this is true of all international treaties. States do this freely, recognising that globalisation necessitates international co-operation.
The ISDS clause in question was contained in a 1993 BIT, and was far less sophisticated than modern-day ISDS clauses, such as the one contained in the recent China-Australia Free Trade Agreement (‘ChAFTA’). In particular, the 1993 BIT did not include any public health exception. If it had, the claim probably would not have been brought in the first place (because it would then have been doomed to fail). While concerns have been expressed about ISDS clauses eroding state sovereignty, sovereignty in relation to public health and environmental issues can be protected by appropriately drafted exceptions.
Nor is the ‘faceless men’ argument convincing. The Philip Morris tribunal that heard the claim against Australia comprised three eminent international lawyers. All are well known in international law (never mind the fact that only two of them are men). Their 200-page decision, outlining and analysing each party’s arguments, has been published online, along with each of the tribunal’s 17 procedural orders. The process was thus transparent. While more needs to be done to improve the diversity of international arbitration tribunals, the intellect, propriety and transparency of this tribunal can hardly be questioned.
As to the charge that such tribunals are biased, the proof is in the pudding: Australia and Uruguay won. Indeed, states win most ISDS cases. The tribunal called Philip Morris’ corporate restructuring, apparently designed simply to take advantage of the Hong Kong treaty, an abuse of process. While companies may structure their offshore investments in order to gain treaty protections, they cannot do so once a dispute is foreseeable (or indeed has crystallised).
ISDS is, like all systems of adjudication, imperfect. The case took five years to reach its conclusion, so there is no doubt that further mechanisms are needed to limit delay and cost. It is also reasonable to point out that a claim that, as it turns out, was unmeritorious consumed a substantial amount of the government’s (and by extension the taxpayers’) resources. But this is the price of a system governed by rules. Foreign investors can launch any claim they like, but if they lack a legal basis for doing so they will lose (and almost invariably will be required to pay the government’s costs).
And any system should be evaluated against its alternatives. It is of course undesirable to be caught up in a five-year legal battle. But it is a better way to resolve a dispute than a fleet of battleships.
Albert Monichino QC is the president of the Chartered Institute of Arbitrators Australia. Alex Fawke is an associate in the dispute resolution practice of Linklaters LLP in London.
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