Trans-Pacific Partnership – Investment Protection and Investor-State Claims
On October 5, 2015, after over a decade of difficult negotiations and compromise, 12 Pacific Rim countries reached agreement on the Trans-Pacific Partnership (“TPP”), referred to as “the largest, most ambitious free trade initiative in history”. In addition to Canada, Parties to the TPP include Brunei, Chile, Japan, Australia, New Zealand, Singapore, Peru, Malaysia, Mexico, the United States, and Vietnam.
We previously discussed the general benefits that were expected on the date the agreement was announced. With the official text having been released by the Parties, the following provides a more in-depth view of the TPP’s Chapter 9 - Investment.
As with most modern free trade agreements, the TPP recognizes the need to foster foreign investment and provide such reasonable and prudent protections that are necessary to prevent arbitrary and capricious government action. Chapter 9 of the TPP contains protections that will be familiar to those that have a working knowledge of the protections contained in NAFTA Chapter 11 or bilateral investment treaties. However, there are several key differentiating factors.
What is Covered? Investment and Investor
The TPP provides a relatively broad definition of “investment” and “investor” subject to its protections. Rather than taking the exhaustive list approach to defining investment, as done in NAFTA, the TPP instead provides characteristics of what makes an asset an investment, such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk on the part of an investor. The TPP then provides a non-exhaustive list of assets that are commonly defined as investments – including enterprises, shares and securities, turnkey operations, and intellectual property rights.
Importantly, the definition of investment includes bonds and other debt instruments as well as revenue-sharing contracts, licences, permits, and other similar rights. However, the text of the TPP also makes clear that it is not simply a matter of stating that an item bears the same name as an item in the definition of “investment”. Rather, the key consideration is the underlying character of the asset; the TPP contemplates that one debenture may be an investment, while another is not.
Investors include both nationals of a Party and any enterprise organized under the laws of a Party. This includes allowing investors of a Party to claim on behalf of investments it has in another Party (for example, an Australian company with a wholly owned subsidiary in Canada can claim against Canada on behalf of its Canadian subsidiary).
However, there is a significant measure in place to prevent “treaty-shopping”, the practice of structuring investments so as to take advantage of investment protections provisions. Under Article 9.14, a Party may deny the benefit of the investment protection chapter to any enterprise of another Party if that enterprise is owned or controlled by a person of a non-Party or the Party seeking to deny the benefit. However, this denial is only an option if the enterprise carries on no substantial business activity in the territory it claims as the basis for bringing a complaint.
For example, the Japanese may deny a case where a Japanese company opens a facility in Japan via an empty American shell company, and then seeks to claim against Japan for an alleged expropriation. Similarly, if a German corporation opens a shell Canadian company to “own” an American mine, and the mine is illegitimately shut down, the American government may block a claim against it. In both of these cases, if the intermediary corporation is a bona fide corporate entity that carries on actual business instead of a mere shell, any claim would be legitimate.
This is a significant departure from Canadian practice under NAFTA; however it is broadly in line with Canada’s modern bilateral investment treaties and the investment disciplines of Canada’s modern free trade agreements, including the Canada-European Comprehensive Economic and Trade Agreement and the Canada-South Korea Free Trade Agreement. Unlike the modern investment disciplines, NAFTA only allows for a denial of benefit where the enterprise is owned or controlled by a non-Party, there is no mention of denial of benefits in structures where an intermediary is owned by an enterprise of the responding Party. This provides an incentive for entities investing within the NAFTA region to consider resorting to NAFTA rights instead of those granted under the TPP.
The Standard Suite of Investor Protections
The TPP offers what can be thought of as the standard suite of protections for investors in the territory of the other Parties. These measures, which in the TPP generally govern both pre-establishment and post-establishments investments, include:
National Treatment: The requirement to treat foreign investors in a non-discriminatory manner. Foreign investors and their investments should receive the same treatment as like domestic investors.
Most Favoured Nation: Parties will be required to provide treatment to investors of another Party treatment no less favourable than it accords to like investors of any other State, whether a Party or a non-Party, with respect to establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territories. The practical impact of this measure is to ensure that any future benefits which the Parties provide to other countries, whether through bilateral or multilateral agreements, will be shared with TPP Parties.
In an interesting twist, this preferential treatment does not apply to the dispute resolution procedures and rules set out in section B of Chapter 9. The procedural law under which an arbitration can be begun remain frozen in place, regardless of future procedural concessions to other Parties.
Expropriation: As with NAFTA, the TPP protects foreign investors from expropriation, both direct and indirect. Indirect expropriation includes “creeping” expropriation where a government chisels away at an investment by passing successive laws that, in aggregate, amount to an expropriation of an investment.
The key tension under this article is what scope a Party will be given to enact bona fide regulatory measures under the police power doctrine. The TPP contains an entire annex intended to provide additional clarity on what types of measures will constitute an expropriation. To be considered an expropriation, the measure must interfere with a tangible or intangible property right or interest in an investment, it must constitute bona fide regulatory action taken to protect public health (this includes a specific exclusion for pharmaceutical products), and it must be contrary to the realistic investment-backed expectations of the investor.
Performance Requirements: The TPP contains broad prohibitions on so-called “performance requirements”. This includes prohibitions on requirements to export a certain quantity of goods, to use a certain percentage of local inputs, or to restrict domestic sales on the basis of foreign exchanges or outflows. This prohibition extends beyond restrictions on the establishment or operation of a business, and applies to benefits or advantages conferred upon a business by a State.
Transfers: Each TPP Party must permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. These include: contributions to capital, profits, management and other fees, proceeds from the sale of a covered investment , and payments made under a contract.
Fair and Equitable Treatment: TPP Parties are required to afford the investments of investors of other TPP Parties with a minimum standard of treatment typically required by customary international law. Recent international tribunal case law has tended towards a more expansive reading of this obligation – most importantly by accepting that this standard is an evolving standard and is stricter now than in the past. The TPP attempts to restrict this provision by explicitly limiting this obligation to according due process of law to an investor’s investment.
The TPP attempts to further restrict this provision by stating that the mere fact that an investor’s expectations have been violated, even if that violation results in loss or damage to the investment, does not result in a breach of the minimum standard of protection. This is clearly an attempt to address the recent trend in case law to consider whether there has been a breach of an investor’s “realistic investment-backed expectations” when determining if they have been accorded fair and equitable treatment.
However, in most circumstances where such a claim is successful, it is not a simple violation of an investor’s expectations. The key element to such claims has generally been that a government has breached a specific promise or covenant made to a specific investor for the purpose of inducing an investment, and that investment has been made. This seems to go beyond the mere fact that an action has been taken which is inconsistent with an investor’s expectations.
The Investor-State Dispute Settlement Process
The investor-state dispute settlement process in the TPP is relatively straightforward and will be familiar to those that have experience with modern bilateral investment treaties. Disputes may be submitted under the International Centre for Settlement of Investment Disputes (“ICSID”) Convention and its Rules of Procedure, the ICSID Additional Facility Rules, the United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules, or other arbitral institutions and rules agreed to be the claimant and Party. The claim may only be submitted after a minimum of six months of consultation and negotiation between the investor and the Party taking the allegedly infringing actions. A notice of intent to arbitrate must be submitted by the investor at least 90 days before serving its notice of arbitration. An investor will be eligible to commence a claim both on its own behalf, and on behalf of any investment it maintains in the territory of the Party taking the allegedly infringing actions.
Generally, all Parties consent to arbitration upon signing the TPP. However, there are two important restrictions on this consent:
Limitation Period: In addition to the cooling off period outlined above, there is a limitation period of three years and six months from the date of an allegedly infringing measure placed on any Investor seeking to bring a claim. Any claim brought after the limitation period has expired is barred absolutely.
“Fork-in-the-Road”: When submitting a claim to arbitration an investor must waive all rights to pursue the claim before any court or administrative tribunal or other dispute settlement body, with respect to the alleged breach for a claim for damages. Investors are still allowed to bring a request for injunctive relief.
Once an arbitration has begun, regardless of whether brought under ICSID or UNCITRAL rules, the procedure is largely within the power of the arbitral tribunal which sets its own process. There are certain requirements. Both non-disputing Parties and citizens or other private groups are entitled to make intervenor or amicus curiae submissions if the tribunal believes it will be of assistance.
Furthermore, the default procedure for all arbitrations shall be that they are open and transparent in nature. All pleadings, notices, orders, and hearings will be open to the public. Parties to an arbitration will be able to make confidential submissions; however, this is the exception and a Party wishing to designate information as confidential has the onus of demonstrating to a Tribunal that such a designation should be conferred.
Chapter 9 also contains a provision to allow Parties to object to a claim being made. Such objections are designed to thwart claims that are “manifestly without legal merits”. The TPP requires such objections to be submitted as soon as possible after a tribunal is constituted and any tribunal shall suspend proceedings pending the outcome of the objection. When considering the merits of an objection, the tribunal is required to assume that every factual allegation made by the complainant is true.
In addition to this investor-state procedure, there is also a Party-to-Party dispute settlement mechanism under Chapter 28 of the TPP. The Chapter 28 dispute settlement mechanism is designed to apply where there is a dispute between Parties as to whether one or the other is violating a commitment under the TPP as decided by a panel convened by the Parties. As with the process under the World Trade Organization (“WTO”), if the responding Party is found in breach, they will be given an opportunity to rectify and implement the recommendations of the panel. Failure to do so may result in orders for the suspension of benefits the responding Party receives under the TPP. Unlike the WTO process, a panel may order a responding Party to pay monetary compensation to the complaining Party.
Exceptions and Carve-Outs
Careful review of the exceptions and carve-outs in Chapter 9 is necessary to understand the full impact of the TPP’s investment protection obligations for both investors and Parties.
Intellectual Property and Government Procurement
There are relatively broad carve-outs from Chapter 9 created for two major fields, intellectual property and government procurement. Intellectual property contains its own rules for national treatment and most-favoured-nation (“MFN”) treatment requirements set out in Chapter 18. No claims may be brought in respect of any alleged violations so long as the measures complained of fall within the scope of allowable measures under Article 18.A.9 of the TPP, or Articles 3 or 4 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.
Government procurement is exempted from both national and MFN treatment requirements as well as a many of the performance requirement restrictions. This likely stems from the requirements imposed by many nations to have some level of domestic industrial regional benefit in government procurement. There are also specialized protocols and procedures for government procurement created by Chapter 15 since allowing for dispute settlement under both the procurement discipline and the investment protection chapter could create issues of double recovery.
The Parties have also insulated themselves against claims brought in regards to defaults or non-payment of public debt. Any such default is considered not to be a breach of any obligation under the TPP, and not an expropriation. Similarly, TPP States are entitled to restructure public debt without being in breach of their obligations under Chapter 9. Given the recent spate of claims against Argentina in the aftermath of its economic meltdown, this exception is largely unsurprising.
Existing Non-Conforming Measures
Each country also maintains broad exceptions for existing “non-conforming measures”. These exceptions are set out in the Annexes for each Party and no claim lies against a government because of the operation of such a non-conforming measure. For Canada, the Annex includes exceptions for residency requirements under the federal and provincial business corporations acts and for cultural properties (including exceptions designed to protect Canadian content requirements). Governments are allowed to amend these provisions in non-conforming ways, and no claims lie from amended non-conforming measures. However, any such amendment cannot make the non-conforming measure less conforming. This provision is designed to allow countries policy space to liberalize incrementally without facing legal challenges from foreign investors.
Investment Canada Act Review
Importantly, the Annex of non-conforming measures includes an exception for the Investment Canada Act (“ICA”). In general, the ICA allows the government to review acquisitions of Canadian businesses with assets of greater than $600 million. This review threshold is set to increase to $1 billion by 2019.
TPP countries will receive a preferential threshold of $1.5 billion; any acquisition of a company worth less than that amount will not be subject to review under the ICA except for national security purposes. The new ICA threshold does not apply to cultural businesses. There are also special rules put in place in regards to foreign state-owned enterprises. The threshold for acquisitions of Canadian companies by foreign state-owned enterprises will remain at the generally applicable threshold for state-owned enterprises of $369 million.
Decisions by Canada following an ICA review with respect to whether or not to permit an investment are not subject to the TPP’s investor-state or Party-to-Party dispute settlement mechanisms.
Tobacco Control Measures
There is another major carve-out from the scope of Chapter 9: tobacco. Article 29.5 creates a hole in the investment protection regime of the TPP expressly to deny investments related to tobacco from receiving protections under Chapter 9. A Party may elect to deny benefits to any person or entity bringing a claim under Chapter 9 in regards to a tobacco control measure. This election may be made at any time, and has the practical effect of denying an entire industry access to the protections usually accorded to foreign investors.
Given that the protections given to foreign investors are generally those that most people would deem reasonable – States cannot act in capricious, arbitrary, and expropriatory manner towards the investments of a class of investor which is typically vulnerable – it is hard to understand the reasonable basis for such a carve out. Nonetheless, those that are concerned about such a restriction should take heart that the protections afforded by NAFTA continue to be in place, and NAFTA investors can make Chapter 11 claims for tobacco control measures which infringe on their rights.
Breach of Investment Agreements
The TPP’s investor-state mechanism also allows for recovery of damages arising from a Party’s breach of an “investment agreement”, defined as a written agreement between a government authority of a Party and a covered investment or an investor of another Party that creates an exchange of rights and obligations binding on both parties and on which an investor relies when making its investment (“Investment Agreement”). These agreements must also be:
- with respect to natural resources that a national authority controls, such as oil, natural gas, rare earth minerals, timber, gold, iron ore and other similar resources, including for their exploration, extraction, refining, transportation, distribution or sale;
- to supply services on behalf of the Party for consumption by the general public for: power generation or distribution, water treatment or distribution telecommunications, or other similar services supplied on behalf of the Party for consumption by the general public; or
- to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams or pipelines or other similar projects; provided, however, that the infrastructure is not for the exclusive or predominant use and benefit of the government.
An investor may bring a claim for damages under Chapter 9 for the breach of an Investment Agreement if the subject matter of the claim and claimed damages directly relate to the investment that was made in reliance on the Investment Agreement. However, claims may not be advanced if the Investment Agreement provides that (i) its breach may be arbitrated under one of the following: ICSID, ICSID Additional Facility, UNCITRAL, International Chamber of Commerce or London Court of International Arbitration, and (ii) for arbitration not under the ICSID Convention, the legal place of arbitration must be brought both outside the territory of the respondent Party and within the territory of a State that is party to the New York Convention.
The other interesting aspect of the TPP’s provisions regarding Investment Agreements is that the TPP allows a Party to make a counterclaim against an investor claiming for the breach of an Investment Agreement. This is completely novel for Canadian free trade agreements or bilateral investment treaties. This introduces a wrinkle in the process and increases the risks in bringing such an investor-state claim against a TPP Party.
The TPP is a complex and highly detailed trade and investment agreement totaling over 6,000 pages. To assist, the International Trade and Investment Law Group at McCarthy Tétrault will continue to provide analysis of the key element of the TPP and its opportunities and obligations for business and government in Canada and abroad.
 Canada has specifically defined such authority to include any government entities listed in Schedule III of the Financial Administration Act, and port or bridge authorities that have entered into an Investment Agreement only if the government directs or controls the day to day operations or activities of the entity or authority in carrying out its obligations under the Investment Agreement.
 Noting that land, water, and radio spectrum are explicitly not natural resources with respect to this provision.