On 4 October 2015, following five years of negotiations, ministers of 12 countries gathered in Atlanta (including Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam) and announced that they had entered into a Trans-Pacific Partnership (TPP). The TPP is a multilateral trade and investment treaty which, if ratified by the signatories, would become the largest free trade association on the planet. On an economic scale, the signatories account for approximately 40% of global trade.

The stated object and purpose of the TPP is to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs”.¹ The Office of the United States Trade Representative (USTR) characterizes the TPP as a “landmark 21st-century agreement,” which includes 30 chapters covering trade and trade-related issues, including provisions on trade in goods, customs and trade facilitation, sanitary and phytosanitary measures, technical barriers to trade, trade remedies, investment protection, services, electronic commerce, government procurement, intellectual property, labor and environmental protection.²

The TPP Investment Chapter

Focusing on investment protection (the TPP Investment Chapter), the TPP includes substantive provisions on the protection of investments of nationals of contracting states on the territory of the other contracting states, including investor-to-state dispute settlement provisions (ISDS).

The TPP Investment Chapter is similar, but narrower in scope and extent of investment protection, than most bilateral and multilateral international investment agreements (IIAs). Under IIAs, host states provide a favorable investment environment by guaranteeing protection standards, such as fair and equitable treatment and full protection and security. Also, under most IIAs host States must compensate investors in cases of nationalization or expropriation. IIAs provide redress for investors through international arbitration. They empower arbitral tribunals to make binding orders for compensation for treaty violations committed by the host state or its instrumentalities. Frequently, treaties provide investors with the option to participate in International Centre for Settlement of Investment Disputes (ICSID) arbitrations in accordance with the ICSID Convention, or arbitrations with other arbitral institutions and rules.

The TPP provides the basic investment protections found in IIAs, including:

• Fair and equitable treatment (FET), which at a minimum requires the host state to refrain from adopting a conduct toward investors that is arbitrary, grossly unfair, unjust or idiosyncratic, discriminatory, or that involves a lack of due process or a lack of transparency;

• National treatment and Most-Favored Nation (MFN) treatment standards, which are meant to secure a level playing field for investors and their investments, and compensation in the event of discrimination. The host state, in addition to not discriminating against foreign investors in favor of domestic competitors in like circumstances, must not treat foreign investors any less favourably than it treats competitors from another contracting state or any third-party state;

• Prohibition of expropriation that is not for public purpose, without due process, or without compensation;

• Full protection and security, encompassing the obligation to ensure that the assets and individuals connected with a qualifying investment are free from physical harm in the host state;

• Prohibition on “performance requirements” such as local content or technology localization requirements; and

• Free transfer of funds related to an investment, subject to exceptions to ensure that the host state retains the power the address volatile capital flows and other economic crisis-related circumstances.

The TPP Investment Chapter narrows the scope of application of the FET standard. This is because in instances where the FET standard is not defined (which is often the case), it has been construed broadly to include the right to a stable and predictable business and legal framework, preventing the host state from applying regulations that depart from investors’ legitimate expectations at the time the investments were made. On this basis, the FET standard has become the most frequently invoked provision in disputes between states and investors. To clarify this issue, the TPP Investment Chapter defines the FET standard to which qualifying investors are entitled as equivalent to the minimum standard of treatment provided under customary international law. This approach is in line with the North American Free Trade Agreement (NAFTA), Chapter XI, as well as the investment chapters in more recent free trade agreements concluded by the United States. In practice, this means that mere violation of an investor’s legitimate “expectations” regarding the application of a particular economic regime will not be considered sufficient to establish a violation of the FET standard under the treaty. An additional element will be required, such as discrimination or arbitrariness.

Notably, the TPP departs from previous IIAs in that it appears to be heavily focused on balancing the investment protection provisions with the host state’s right to regulate. Indeed, the TPP Investment Chapter provides for certain exclusions which are meant to preserve regulatory discretion in sensitive areas such as public health, environmental protection, and labor standards.

The TPP Investment Chapter includes detailed ISDS provisions. As in other IIAs, the TPP provides qualifying investors (who are nationals of other contracting states) with a right of action against the host state through international arbitration, in circumstances where the state adopts measures in violation of the treaty’s investment protection standards that have an adverse effect on their investments. The USTR reports that the ISDS provisions include “strong safeguards to prevent abusive and frivolous claims and ensure the right of governments to regulate in the public interest, including on health, safety, and environmental protection”. ³ Notably, these safeguards include: ⁴

(a) “expedited review of frivolous claims,” including the power for a tribunal to award “attorney’s fees” to the prevailing party in those cases;

• detailed provisions on transparency, requiring arbitral tribunals to “conduct hearings open to the public” and to “make public all notices of arbitration, pleadings, submissions and awards”;

• the possibility of allowing the intervention of third parties (such as non-government organizations) by filing amicus curiae submissions;

• remedies that can be awarded through arbitration are limited to compensation of monetary damages, which means that the tribunal cannot award restitution requiring the host state reinstate a regulatory regime or to change any law or regulation;
• review of awards “either by domestic courts or international review panels”;

• “binding joint interpretations” of the provisions of the TPP Investment Chapters that “shall be binding on a tribunal”; and

• the power of arbitral tribunals to consolidate different arbitration proceedings that involve claims arising under “the same events or circumstances”, with the purpose of avoiding the risks of parallel proceedings.

Last but not least, the contracting states are to “provide detailed additional guidance on arbitrator ethics and issues of arbitrator independence and impartiality”⁵, an issue increasingly in discussion in the wake of recent high-profile, politically charged arbitrations involving allegations of potential unethical behavior by arbitrators.

Government representatives involved in the negotiations of the TPP say that the TPP Investment Chapter is meant to craft a “gold standard” in international investment law, based on lessons learned from arbitrations conducted under existing IIAs. However, its practical application regarding the effective protection of investments remains to be seen.

Next steps

The signature of the TPP does not mean that the treaty is already in force. It first requires ratification, a process of obtaining approval from individual signatory governments under their respective domestic laws that, when completed according to the terms of the TPP, leads to its entry into force. The TPP provides two avenues for the treaty to enter into force. If all 12 signatories ratify the agreement, then it will become effective 60 days later. If, however, two years elapse and at least some signatories have not ratified the treaty, then the treaty will still enter into force if six parties have ratified it and those parties comprise at least 85% of the GDP of the original 12 signatories.⁶ This latter option places outsized importance on ratification by the United States and Japan, the two largest economies in the treaty: If either fails to ratify the deal, then the 85% threshold cannot be reached.

In the United States, ratification usually requires the approval of a treaty by two-thirds of the Senate. ⁷ In June 2015, however, Congress authorized the President’s special “Trade Promotion Authority” (TPA) with respect to the TPP.⁸ Also known as ‘fast track,’ TPA gives the President greater leverage to conclude trade negotiations by allowing for expedited approval of the resulting treaty, provided the President follows certain statutory procedures.⁹ After a 90-day notification period and an economic analysis of the treaty by the U.S. International Trade Commission (which may last up to 105 days), the President may formally present the treaty to Congress, along with an implementing bill, proposed implementing regulations, and other required documents. At this time, the TPA requires Congress to act within 90 days, with no power to make amendments, and the treaty would pass with a simple majority vote in each house of the Congress.¹⁰ Interestingly, a majority of Republican members of Congress voted in favour of granting Trade Promotion Authority on the TPP, one of the few issues on which these members have sided with the White House. However, the debate is sure to be contentious, and even under the ‘fast track’ the TPP will not reach Congress for formal consideration until 2016.

We will be monitoring progress closely. If you are a client and have a query in this regard, please do not hesitate to contact us.

¹Trans-Pacific Partnership Fact Sheet, United States Office of the Trade Representative (USTR) (November 2011), https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2011/november/united-states-trans-pacific-partnership

²Trans-Pacific Partnership Fact Sheet, USTR (October 2015), https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/summary-trans-pacific-partnership

³Id.

⁴TPP: Upgrading and Improving Investor State Dispute Settlement Fact Sheet, USTR, https://ustr.gov/sites/default/files/TPP-Upgrading-and-Improving-Investor-State-Dispute-Settlement-Fact-Sheet.pdf (accessed on 9 October 2015).

⁵USTR TPP Fact Sheet (November 2015), supra note 2.

⁶http://dfat.gov.au/trade/agreements/tpp/outcomes-documents/Pages/outcomes-at-a-glance.aspx

⁷U.S. Constitution Article II, Section 2, Clause 2.

⁸See Trade Preferences Extension Act of 2015, P.L. 114-27 (29 June, 2015).

⁹See “Trade Promotion Authority (TPA) and the Role of Congress in Trade Policy,” Congressional Research Service (June 15, 2015), available at https://fas.org/sgp/crs/misc/RL33743.pdf; see also Trade Act of 1974 (P.L. 93-618), which defines TPA.

¹⁰See Trade Act of 1974, supra note 9, §§ 151-154.