Investment Negotiations: Walking the Tightrope between Offensive and Defensive Interests

Dr. Penelope RidingsThis article by Penelope Ridings* was first published  in The New Zealand Business Law Quarterly (NZBLQ) Volume 21 Number 4, December 2015 –  a special edition of ten articles covering the national and international regulation of foreign investment.

*Dr Penelope Ridings is a barrister sole specialising in international law and international trade law. She was previously the International Legal Adviser and the International Trade Law Adviser with the Ministry of Foreign Affairs and Trade in Wellington. She was Legal Counsel for New Zealand in the negotiation of several free trade agreements including the New Zealand-Korea Free Trade Agreement and the Trans-Pacific Strategic Economic Partnership Agreement (P4).


Article abstract

There has been increasing concern in recent years over the potential for investor-State dispute settlement (ISDS), negotiated as part of a free trade agreement (FTA), to straitjacket the actions of a future government. This article reviews New Zealand’s experience of ISDS and the various safeguards that New Zealand has negotiated in its international investment agreements, including the recently signed Trans-Pacific Partnership Agreement (TPP), to mitigate the perceived risks of ISDS. The broad range of negotiated safeguards shows that New Zealand has walked a fine line between its offensive interests as a potential source of foreign investment and its defensive interests in preserving the Government’s right to regulate.


1  INTRODUCTION

There has been trenchant criticism in recent years of investor-State dispute settlement (ISDS) both internationally, and in New Zealand as a result of the spectre caused by the negotiation and conclusion of the Trans-Pacific Partnership Agreement (TPP). New Zealand’s modest assortment of bilateral investment treaties (BITs) and free trade agreements (FTAs) containing ISDS largely went unnoticed by the public until concerns grew over the potential of TPP to adversely impact policies which the Government may wish to adopt in future. Among the issues raised in New Zealand over ISDS are that it may impact upon the rule of law within domestic legal systems,[1] guarantees a legal process which is not provided to domestic citizens or companies,[2] provides investors with the right to sue governments over policy changes detrimental to the investors’ interests,[3] lacks an independent judiciary, precedent and an appeals process,[4] and has the potential to straitjacket future governments.[5] While apprehension in New Zealand over ISDS has not until recently reached the levels of public attention present in Australia,[6] the concerns largely parallel those raised internationally over ISDS. They have been highlighted by the United Nations Commission on Trade and Development (UNCTAD) in its World Investment Report 2015,[7] and have led to a number of countries reviewing their approach to the acceptance of ISDS in future agreements.[8]

ISDS is a mechanism for the settlement of disputes between foreign investors and the host country of their investments. It allows investors to bring claims against a State before an international forum, rather than having to rely solely on the domestic legal system of the host country of the investment. It also enables investors to bring claims without having to rely on their home State to champion their cause and pursue a claim directly against another State under State-to-State dispute settlement procedures.[9]

ISDS relies on the consent of the host State for the investor to bring a claim against that State in respect of an investment. Consent may be given on a case-by-case basis as each dispute with an investor arises.[10] More common in recent years have been BITs and investment chapters in FTAs whereby consent is given in advance to arbitration by an investor against a State in respect of a qualifying investment in the host State. It is this treaty-based form of consent to ISDS which has engendered the most international and domestic criticism.

This article does not seek to delve into the debate between the proponents and opponents over the efficacy or drawbacks of ISDS. Rather it explores the various safeguards that New Zealand has negotiated in its bilateral investment treaties and the investment chapters of FTAs, including TPP. In this process New Zealand has walked a fine line between its offensive interests as a potential source of foreign investment and its defensive interests in preserving the Government’s right to regulate. The concluding section will address the question of whether the safeguards that New Zealand has sought to negotiate in international investment agreements[11] (IIAs) are sufficient to mitigate the perceived risks of ISDS.

2  NEW ZEALAND’S EXPERIENCE OF INTERNATIONAL INVESTMENT AGREEMENTS

The first form of IIA, bilateral investment treaties, was developed in the 1950s as a mechanism by which capital exporting countries could protect investments of their nationals in foreign countries. In the main such treaties were signed between developed and developing countries in situations where there was doubt whether foreign investors and foreign investments would receive a proper hearing and in order to provide a stable environment for investments.[12]

Unlike many other developed countries, even those foreign capital importers such as Australia, New Zealand did not join the rush to conclude IIAs in the 1990s and early 2000s. In what UNCTAD has described as the era of the proliferation of IIAs in the period 1990 to 2007,[13] New Zealand entered into only a few IIAs. The first venture into ISDS was in 1988 with the conclusion of a bilateral investment treaty with China. However this agreement, as with China’s BITs of that time, restricted the ability of investors to make claims for liability and claims could only be brought for a breach of the expropriation obligation.[14] The 1995 Agreement between the Government of New Zealand and the Government of Hong Kong for the Promotion and Protection of Investments (Hong Kong IPPA) was the first comprehensive agreement to be signed and ratified by New Zealand containing ISDS.[15] There followed in 1999 the investment promotion and protection agreements (IPPAs) signed with Argentina[16] and with Chile.[17] However, these agreements were never ratified. None of New Zealand’s early FTAs included treaty-based consent to investor-State dispute settlement.[18]

New Zealand’s initial FTAs were followed by the 2008 New Zealand-China FTA, which was the first FTA to include treaty-based consent to investor-State dispute settlement. This was followed by the FTA between Australia, New Zealand and ASEAN (AANZFTA), the New Zealand-Malaysia FTA, and more recently the New Zealand-Korea FTA, all of which contain substantive provisions on the promotion and protection of investments, and provide the basis for consent to binding investor-State dispute settlement.[19] These treaties provide the backdrop for New Zealand’s negotiation of TPP.

The handful of agreements containing treaty-based consent to ISDS demonstrates that New Zealand has been at the more cautious end of the spectrum of acceptance of ISDS. Successive New Zealand governments have welcomed the positive contribution that foreign investment can make to the economic and social well-being of New Zealanders.[20] However, as the New Zealand Institute of Economic Research has recognised, if the New Zealand economy is to grow, not only must foreign investment be encouraged in order to generate the technology necessary for the country to stay competitive internationally, but New Zealand businesses must invest offshore to diversify risks and get closer to international production networks and consumers.[21] This realisation has seen a shift over the last 10 years from defensive interests in IIAs towards more offensive interests, including acceptance of ISDS. However, at the same time, there has been concern to ensure that adequate safeguards are in place to protect the Government’s right to regulate in the public interest.

3  SAFEGUARDS IN NEW ZEALAND’S INTERNATIONAL INVESTMENT AGREEMENTS

In seeking to balance offensive with defensive interests, New Zealand has included a number of safeguards in its IIAs which seek to mitigate what are seen as the worst excesses of ISDS. This section identifies the safeguards that are included within New Zealand’s FTAs, including the recently signed TPP.[22] These include those relating to the types of investors and investments that are covered by the IIA and the investor-State dispute settlement procedures, the constraints placed on the substantive obligations subject to ISDS, and the procedural safeguards which seek to achieve a fair dispute settlement process. Such safeguards are included in IIAs by governments to balance the rights of investors with the right of the Government to regulate for public purposes.

3.1 Foreign Investors Entitled to Protection

In general, IIAs are designed to protect foreign investors, who may be natural or legal persons, which has the natural corollary that investors that are not foreign to the host country are not given protection under an IIA. For this reason, most recent IIAs, including TPP, have a “denial of benefits” clause which enables the country hosting the investment to deny the benefits of the treaty provisions to investors incorporated in a Party but under the control of investors of the denying Party.[23] It is also usual to allow for a denial of benefits where the investor of the other Party is under the control of investors of third countries and which do not have substantial business operations in the host country. TPP and all New Zealand’s FTAs contain such a clause.[24] The denial of benefits is a right, and tribunals have considered that this must be exercised by the host State prior to the initiation of a claim.[25] The purpose is to prevent “treaty shopping”, where an investor establishes a presence in a country in order to take advantage of the benefits of an IIA, and to confine the obligation to protect foreign investors to those who are legitimately entitled to such protection.

In a similar vein, investors who are dual citizens are also usually prevented from pursuing a case against their country of citizenship.[26] In the case of TPP, a claimant who is a permanent resident of a Party and a citizen of another Party, cannot bring a claim against his or her country of citizenship.[27]

3.2 Scope of Foreign Investments Entitled to Protection

It is usual for IIAs to define “investment” broadly according to an “asset-based” approach whereby investment is “every kind of asset” followed by a non-exhaustive list of covered investments, such as shares and stocks; bonds and debentures; futures, options, and derivatives; intellectual property rights; rights such as licences, permits and authorisations; and movable and immovable property.[28] The definition of investment in TPP follows this broad characterisation of investment and includes every kind of asset owned or controlled by an investor which has the characteristics of an investment, such as commitment of capital or resources, the expectation of gain or profit or the assumption of risk. It includes rights conferred under contracts such as licences, authorisations and permits. However, whether these have the characteristics of an investment will depend upon factors including the nature and extent of rights accorded to the investor under domestic law.[29] Depending on the circumstances, therefore, the fact of a permit being granted to a foreign entity may not therefore be determinative of whether this constitutes an investment.

The protection of investments may cover the period prior to the investment being made in the host country (pre-establishment) or after the investment has been made (post-establishment). Until TPP, New Zealand had excluded pre-establishment from the ambit of ISDS claims.[30] However, under TPP, a claim may be brought by an investor who is attempting to make an investment where an investor is taking concrete steps to make an investment such as channelling resources or capital to set up a business or applying for a permit or licence.[31]

This is relevant to New Zealand’s pre-establishment investment regime under which certain overseas investments require consent under the Overseas Investment Act 2005 before being admitted into the territory. There has been a concern to ensure that decision-makers under the Act have the full authority to make decisions to admit investments according to the criteria set out in legislation. For this reason, New Zealand’s overseas investment screening legislation has been included as a “non-conforming measure” in Annex II of TPP and New Zealand’s FTAs, which preserves it as an exemption from certain obligations under the agreement.[32]

In a departure from New Zealand’s FTAs, TPP provides that a breach of an “investment authorisation” can be the subject of an ISDS claim. Under TPP, an investment authorisation is an authorisation granted by a foreign investment authority to an investor of another Party.[33] In New Zealand’s case the foreign investment authority is the Minister of Finance, the Minister of Fisheries or the Minister for Land Information, who grant approvals under the Overseas Investment Act 2005.[34] A significant safeguard is included in Annex 9-H of TPP which provides in the case of New Zealand:

A decision under New Zealand’s Overseas Investment Act 2005 to grant consent, or to decline to grant consent, to an overseas investment transaction that requires prior consent under that Act shall not be subject to the dispute settlement provisions under Section B (Investor-State Dispute Settlement) or Chapter 28 (Dispute Settlement).

This therefore preserves the New Zealand past practice whereby decisions to admit an investment into New Zealand territory under the Overseas Investment Act, are not subject to dispute settlement under ISDS. In addition, under TPP a claimant cannot bring a claim for a breach of an investment authorisation in respect of an action taken by a Party to enforce general laws, such as competition, environmental, health or other regulatory laws,[35] or where the Party seeks to enforce conditions or requirements under which the investment authorisation was granted.[36] The effect of this is that New Zealand’s overseas investment screening regime is essentially protected from ISDS claims.

3.3 Scope of Obligations that May Be Subject to Claims

An IIA will set out the scope of the substantive obligations which may be subject to claims before an arbitral tribunal. Usually in the case of FTAs, only those obligations set out in the investment chapter may be subject to arbitral claims and the investor must show that loss or damage has occurred as a result of the breach of the investment obligations.[37] TPP extends the scope of obligations that may be subject to claims to include not only the substantive investment obligations, but also investment authorisations (discussed above), and investment agreements.

In general, an investment agreement is an agreement entered into between an investor and a host State in respect of an investment. Some IIAs provide that a host State is to respect the obligations it has assumed with regard to a specific investment, such as obligations under an investment contract or concession contract.[38] Such clauses bring contractual obligations under the “umbrella” and protection of an international treaty, and are therefore termed umbrella clauses.[39] The criticism of the inclusion of such clauses within the scope of the obligations that may be subject to arbitration claims is that it transforms a breach of contract under domestic law into a breach of the obligations the State has assumed under the treaty.[40] Umbrella clauses therefore enable a contract entered into with an investor to be enforced by an arbitral tribunal, rather than according to domestic legal proceedings to which the investment agreement is subject. They can also lead to parallel legal proceedings: one for breach of the contract itself, and another for breach of the IIA.

The only IIA that New Zealand has ratified to date which includes an umbrella clause is the Hong Kong IPPA, which provides that “Each Contracting Party shall observe any obligations it may have entered into with regard to investments of investors of the other Contracting Party”.[41] While some older-style BITs included such a broad umbrella clause, more recent agreements, such as the 2004 United States Model BIT, have limited claims to those arising from an “investment agreement”.[42] Until TPP New Zealand did not negotiate provisions in its FTAs which included “investment agreements” within the scope of ISDS claims.

TPP alters this approach, but it restricts the circumstances in which such claims may be brought. An investment agreement is defined in the text of the TPP as a written agreement concluded after the entry into force of TPP at the central level of government with an investor that creates binding obligations under domestic law and on which the investor relies in establishing or acquiring an investment, and which grants rights with respect to natural resources, or to supply public services in areas such as power generation, water treatment or distribution or telecommunications, or to undertake construction projects.[43]

In order to further narrow the scope of the term “investment agreement”, the TPP text includes three additional clarifying footnotes. First, “authority at the central level of government” is defined for unitary states such as New Zealand, as an authority at the ministerial level of government, that is, government departments or ministries, but not governmental agencies with a separate legal personality from government departments or ministries.[44] Second, the term does not include an investment agreement with respect to land, water or radio spectrum.[45] Third, investment agreements do not cover correctional services, healthcare services, education services, childcare services, welfare services or other similar social services.[46] These clarifications, separately and together, narrow the scope of claims which may be made for breach of an investment agreement.

An additional narrowing is provided by Annex 9-L of TPP. The Annex sets out that the submission of a claim for breach of an investment agreement to an arbitral tribunal under TPP would be barred if the investment agreement provided for an alternative dispute resolution procedure under one of the four main international arbitration rules. This means in effect that the parties to an investment agreement may contract out of the TPP arbitral rules, and instead provide for arbitration under an alternative method of dispute settlement. This is consistent with the decision of the tribunal in SGS v Philippines, which took a broad interpretation of the umbrella clause in that case, but nevertheless concluded that if the contract vests exclusive jurisdiction over disputes arising under its terms to another tribunal, such as a domestic court or a contractual arbitral tribunal, then that tribunal has the primary jurisdiction to hear claims arising under the contract.[47]

A further difference between New Zealand’s existing FTAs and TPP is that the financial services chapter of TPP incorporates the key obligations of the investment chapter, including those relating to the minimum standard of treatment and expropriation, and also applies the ISDS provisions of the investment chapter to the financial services chapter. This means that financial services suppliers may bring ISDS claims in respect of breach of these investment obligations.

Any such risk, however, is mitigated by the fact that New Zealand’s financial sector is dominated by Australian investors. According to a Ministerial exchange of letters the ISDS mechanism in TPP does not apply between New Zealand and Australia.[48] This is consistent with the non-inclusion of ISDS in the Investment Protocol to the Closer Economic Partnership Agreement between Australia and New Zealand (CER), and indeed the exclusion of binding dispute settlement in CER. It recognises that the interconnections between the economies of Australia and New Zealand and the existing facilitation of trans-Tasman court proceedings removes any advantage that ISDS might bring for Australian and New Zealand investors.[49]

3.4 Scope of Substantive Investor Protections

International investment agreements include certain substantive protections for investors and their investments in the territory of the other country, as well as limitations on the extent to which such protections can be exercised. The principal substantive obligations on a State with respect to foreign investors are to provide treatment no less favourable than that provided to nationals in like circumstances (“national treatment”); to provide treatment of foreign investors no less favourably to foreign investors from third countries in like circumstances (“most-favoured-nation” treatment or “MFN”); to provide a minimum standard of treatment for investors, including fair and equitable treatment; and to protect investors from expropriation unless for a public purpose, on a non-discriminatory basis, with prompt, adequate and effective compensation and in accordance with due process.[50]

The vast majority of international investment arbitration claims are based on an alleged breach of one or more of these obligations. In response to some arbitral decisions, parties to IIAs have sought to clarify the scope of these obligations. The following paragraphs explain the way in which the scope of some of the obligations has been narrowed in New Zealand’s IIAs including TPP.

The “national treatment” obligation requires treatment of investors and investments to be no less favourable than that accorded to domestic investors and investments “in like circumstances”.[51] In TPP and some of New Zealand’s FTAs, a footnote explains that whether treatment is accorded “in like circumstances” may be determined by looking at all the circumstances including whether the treatment distinguishes between investors and investments based on legitimate public welfare objectives.[52] The Parties to TPP have also prepared a “Drafters’ Note” on the interpretation of “in like circumstances” which serves to define in greater detail what is meant by this phrase.[53] The purpose of the Note is to confirm the shared intent of the Parties to ensure that tribunals follow the approach set out in the Note.[54]

The Drafters’ Note contains a number of clarifications regarding the interpretation of “in like circumstances”:

  • the claimant bears the burden of proving that the respondent has failed to provide no less favourable treatment than that accorded in like circumstances to its own investors and their investments or to investors from third countries or their investments;
  • the national treatment and MFN obligations do not prohibit all measures that result in differential treatment, rather they seek to ensure that they are not accorded less favourable treatment based on nationality; and
  • whether treatment is “no less favourable” depends on the totality of the circumstances, including whether the treatment distinguishes between investors and investments based on legitimate public welfare objectives.

It appears from the text of the Drafters’ Note that factors to be taken into account in the assessment of like circumstances would include whether the different treatment was plausibly connected to a legitimate policy goal, and was neither applied in a discriminatory manner, nor as a disguised barrier to equal opportunity, and had a reasonable nexus to rational government policies and was not based on nationality.

Such a Drafters’ Note is rare in the negotiation of international agreements and appears to be deliberately designed to be accorded weight by arbitral tribunals under art 31(2)(a) of the Vienna Convention on the Law of Treaties 1969, which sets out the customary international law rules of interpretation and which arbitral tribunals use as the basis for their interpretation of IIAs.[55]

The MFN obligation requires that foreign investors be treated no less favourably than other investors of third countries “in like circumstances” with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.[56] In the past investors have sought to use the provisions of another IIA to acquire rights additional to those under the agreement under which the claim was brought. In Maffezini v Spain, the investor used the MFN clause of the BIT between Argentina and Spain to gain more beneficial procedural rights under the dispute settlement provisions of a BIT between Spain and Chile.[57] Subsequent arbitral tribunals were divided over whether or not to follow the Maffezini case.[58] In order to provide greater clarity over the application of the MFN clause to procedural rights, parties began to include in IIAs what is known as the “Maffezini exception” whereby the MFN clause does not extend to more beneficial procedural rights or dispute settlement procedures provided under another IIA. This is expressed in TPP as a clarification that the MFN treatment does not encompass international dispute resolution procedures or mechanisms.[59] New Zealand’s other FTAs include the same type of provision.[60] The MFN exception is designed to prevent the circumvention of dispute settlement provisions in the IIA through recourse to the MFN clause and higher protections in another IIA.

The obligation to provide fair and equitable treatment to investors and investments, which is required as a minimum standard of treatment to be provided to foreign investors under international law, is at the heart of a large proportion of ISDS claims.[61] The minimum standard of treatment is a norm of customary international law which provides a set of principles which States must respect when dealing with foreign nationals and their property. It encompasses “fair and equitable treatment” and “full protection and security”. Both of these concepts are existing obligations owed by States in respect of foreign investments under customary international law.[62] Customary international law standards are developed through the practice of States that is followed on the basis that it is binding on States. Nonetheless, negotiators have sought to clarify the meaning of the substantive obligation to provide the minimum standard of treatment that is required at international law, including fair and equitable treatment.

The standard of fair and equitable treatment has received considerable attention from arbitral tribunals and academics alike. The classical statement of fair and equitable treatment is that espoused in the Neer case, that conduct “should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency”.[63] However subsequent tribunals have recognised that the standard has evolved since Neer. The arbitral tribunal in Waste Management, after reviewing the previous NAFTA cases on fair and equitable treatment, considered that:[64]

… the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety… .

In the past, however, tribunals have not always adopted a consistent approach to the interpretation of fair and equitable treatment.[65] The arbitral tribunal in Metalclad v Mexico,[66] which was then followed by Pope and Talbot v Canada,[67] and SD Myers v Canada,[68] all cases under the North American Free Trade Agreement (NAFTA), interpreted fair and equitable treatment as additional to the customary international law standard of minimum standard of treatment. Furthermore, the tribunal in Metalclad made a determination that there had been a breach of fair and equitable treatment based in part on principles in NAFTA relating to transparency,[69] while a majority of the tribunal in SD Myers v Canada held that having breached NAFTA’s provision on national treatment, Canada had also breached the minimum standard of treatment.[70]

The interpretations of the tribunals were broader than the NAFTA parties had intended. As a result, in 2001 the NAFTA parties, Canada, Mexico and the United States, issued an interpretative note which sought to clarify the relevant obligation under NAFTA:[71]

  • that the obligation is the customary international law minimum standard of treatment to be afforded to investments of investors of the Parties;
  • that the concepts of fair and equitable treatment and full protection and security do not require treatment in addition to or beyond that required by the customary international law minimum standard of treatment; and
  • a determination that there has been a breach of another provision of NAFTA or another international agreement does not establish that there has been a breach of this standard.

TPP follows the NAFTA Interpretative Note, and also provides further clarification regarding the obligation of minimum standard of treatment. Article 9.6 goes beyond the NAFTA Interpretative Note in three ways. First, it provides that the concepts of fair and equitable treatment and full protection and security do not create additional substantive rights. Second, it describes fair and equitable treatment as including the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process, and full protection and security as requiring Parties to provide the level of protection required under customary international law. Third, it goes further than earlier New Zealand IIAs to clarify that “the mere fact that a Party takes or fails to take action that may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result”.[72] This narrows the circumstances in which a Party may be held to the “legitimate expectations” of an investor, and which has been the subject of criticism of some arbitral tribunal decisions. Article 9.23.7 also makes it clear that the burden is on an investor claiming a breach of the minimum standard of treatment to prove all elements of its claim.

Article 9.6 of TPP is to be interpreted in accordance with Annex 9-A, which sets out the shared understanding of the Parties that “customary international law” generally and as specifically referred to in art 9.6 “results from a general and consistent practice of States that they follow from a sense of legal obligation” and the customary international law minimum standard of treatment of aliens refers to “all customary international law principles that protect the investments of aliens”. In this way the TPP negotiating parties have sought to provide guidance to arbitral tribunals on the scope of the customary international law principle in order to prevent it being expanded beyond what was intended by the parties. As such it is an attempt “to rein in the discretion of tribunals when considering its content”[73] and is likely to lead to tribunals applying a higher threshold for application of the standard.[74]

TPP contains a useful clarification of the minimum standard of treatment obligation. According to UNCTAD researchers, where a fair and equitable treatment obligation is tied to customary international law minimum standard of treatment, the liability threshold is generally higher.[75] However it may not completely deal with concerns over the meaning of fair and equitable treatment and differences in its interpretation by arbitral tribunals. Some commentators have noted that there is no agreement on the precise meaning of the fair and equitable principle.[76] As has been recognised by arbitral tribunals, customary international law evolves.[77] It may therefore be difficult to determine at any one point in time the precise extent of the customary international law standard.

Even so, there may be less disagreement over the standard of fair and equitable treatment to be applied, than over the particular circumstances in which treatment is considered to have failed to meet the standard. It is a concept that depends on the interpretation of the specific facts in a case for its content.[78] This is illustrated by the differing majority and minority views of the arbitrators in Bilcon of Delaware Inc v Government of Canada (Bilcon case). While the arbitrators in that case agreed on the standard of fair and equitable treatment to be applied, they differed on the application of that standard to the case at hand.[79]

The other main substantive obligation set out in IIAs is the prohibition on expropriation unless for a public purpose, on a non-discriminatory basis, with payment of prompt, adequate and effective compensation, and in accordance with due process of law.[80] Expropriation may be “direct”, where a State takes an investor’s property outright, for example through a formal transfer of title,[81] or “indirect”, where the effect is equivalent to direct expropriation, without a formal transfer of title or outright seizure.[82]

TPP includes an interpretative Expropriation Annex 9-B, which provides further explanation of what is meant by direct and indirect expropriation. Non-discriminatory regulatory actions designed and applied by a State to protect legitimate public welfare objectives, such as public health and the environment, do not constitute indirect expropriation except in rare circumstances.[83] Such regulatory actions to protect public health specifically include actions relating to the regulation, pricing, supply, and reimbursement of pharmaceuticals including biologics.[84]

Whether a government action is indirect expropriation requires a fact-based inquiry which takes into account factors such as the economic impact and character of the government action, and the extent to which it interferes with distinct, reasonable investment-backed expectations.[85] Whether an investor’s investment-backed expectations are reasonable depends on factors such as whether the government provided the investor with binding written assurances and the extent of governmental regulation in the sector.[86] The Annex is in part modelled on the United States 2012 Model BIT Annex B(4)(a) and the factors taken into account by the United States Supreme Court in determining the test for regulatory takings under the United States Constitution.[87]

While the TPP Expropriation Annex provides useful clarifications on what is meant by direct and indirect expropriation, the NZ-China FTA Expropriation Annex is similar but more directly addresses the threshold for expropriatory conduct. It provides that expropriation must be either severe or for an indefinite period and disproportionate to the purpose, and a deprivation of property is particularly likely to constitute indirect expropriation when it is discriminatory in effect or in breach of a prior written commitment to the investor.[88] This follows the past decisions on expropriation that the action must be sufficiently severe,[89] have a certain degree of permanence,[90] be proportionate to the purpose,[91] abusive in its arbitrary or discriminatory effect, and in breach of a prior commitment.[92] While the NZ-China Expropriation Annex has received positive comment from New Zealand commentators, [93] TPP also provides guidance to arbitral tribunals on the interpretation of the expropriation obligation which should enhance the predictability of tribunal decisions.

3.5 Safeguarding the Right to Regulate

Entering into any international agreement will inevitably constrain to some extent a country’s freedom of action by the obligations it assumes. Nevertheless, preserving the right of the New Zealand Government to regulate to pursue legitimate public policy objectives has been high on the list of priorities for its IIAs. A balance must be struck between providing the necessary policy space for governments to pursue bona fide public welfare objectives and ensuring that this does not provide legal cover for investment protectionism and unjustified discrimination.[94]

For this reason, New Zealand’s FTAs include a number of safeguards to provide regulatory and policy space for future governments. For example, the national treatment and MFN obligations may be subject to exceptions set out in Annexes to the FTA based on a negative list of “non-conforming measures”. New Zealand has a range of non-conforming measures according to which New Zealand reserves the discretion to implement measures which would otherwise be contrary to the national treatment or the MFN obligations. These include public law enforcement and correctional services; social services such as childcare, health, public education, and public housing; water including the allocation, collection, treatment and distribution of drinking water; publicly funded research and development; protected areas set up for heritage management, public recreation and scenery preservation purposes; the foreshore and seabed, territorial sea, Exclusive Economic Zone, or the continental shelf; and cultural heritage of national value. There are also specific exceptions to the MFN obligation arising from maritime, aviation and fisheries agreements, as well as from regional integration agreements.

The provisions of New Zealand’s FTAs which safeguard the right to regulate through providing exceptions for non-conforming measures, and essential security interests, are paralleled in TPP. TPP includes a provision which preserves the right to take measures, otherwise consistent with the agreement, to ensure that the investment activity is undertaken in a manner sensitive to environmental concerns,[95] and a Treaty of Waitangi clause that applies across the agreement.[96] In an innovation and in response to concerns over the potential for ISDS claims in respect of tobacco plain packaging, TPP permits a Party to deny the benefits of ISDS to claims challenging a tobacco control measure.[97]

The main point of difference between TPP and New Zealand’s other FTAs is in the application of general exceptions based on those in the General Agreement on Tariffs and Trade (GATT) and General Agreement on Trade in Services (GATS) of the World Trade Organization (WTO). These permit taking measures necessary to protect human health, and animal and plant life or health, provided that such measures are not arbitrary or unjustifiable discrimination or a disguised restriction on trade. However, in contrast to New Zealand’s FTAs, in TPP the general exceptions do not apply to the investment chapter. Nevertheless, the substantive obligations of national treatment and MFN have been clarified to account for differences in treatment as a result of legitimate public welfare objectives and regulatory measures taken for health or environmental purposes do not constitute indirect expropriation except in rare circumstances.

TPP, like New Zealand’s FTAs, includes an exception for measures deemed necessary by New Zealand to accord more favourable treatment to Māori, including to meet its obligations under the Treaty of Waitangi, provided that the measures are not used as a means of arbitrary or unjustified discrimination or a disguised restriction on trade and investment.[98]

3.6 Safeguarding Through Arbitral Proceedings

Negotiators of IIAs have an interest in limiting the extent to which ISDS claims are brought so as to protect the regulatory freedom of their governments. IIAs therefore usually constrain the extent to which claims are brought, how arbitrators are selected, how hearings are conducted, and the awards which may be granted. The following section describes the main safeguards which are set out in New Zealand’s IIAs, including when claims may be brought, the prevention of parallel proceedings, constraints on frivolous claims, selection of arbitrators, conduct of hearings, ability to issue joint interpretations to guide decisions of tribunals, and the issue of awards.[99]

TPP and New Zealand’s IIAs contain a six month “cooling-off” period to allow consultations before a claimant may bring a claim against the State.[100] The purpose is to enable negotiations to resolve the dispute. In this regard it serves a similar purpose to consultations under art 4 of the Dispute Settlement Understanding of the WTO.

There is a limit on when an investor may bring a claim. Claims may only be brought within three years and six months from the date that the investor knew or should have known of the breach of obligation causing loss or damage.[101] IIAs usually seek to avoid parallel proceedings where a claim is brought before an arbitral tribunal as well as domestic or other proceedings. TPP, like other IIAs, provides a “fork in the road” whereby investors choosing arbitration have to waive the right to pursue a claim in domestic courts.[102] An exception to this is where injunctive relief is sought to preserve the claimant’s rights pending arbitration.[103]

New Zealand’s FTAs typically provide an expedited procedure to hear objections to frivolous claims and TPP follows this approach. “Frivolous claims” may be expressed as the situation where a claim, as a matter of law, is not a claim for which an award may be made in the claimant’s favour,[104] or where the claim is manifestly without merit.[105] A procedure is included for objections to an arbitration claim to be heard in advance of the substance of the dispute, not only where the claim is manifestly without merit, but also where the objection is that the claim is not within the jurisdiction or competence of the tribunal.[106] Such objections are decided expeditiously.[107]

The selection of arbitrators in TPP is similar to New Zealand’s FTAs whereby each party appoints one arbitrator and the third is appointed either by the disputing parties or by the appointing authority in event of failure to reach agreement or where an arbitrator is not appointed by a disputing party.[108] Unlike New Zealand’s FTAs, the text of TPP provides that prior to its entry into force, the Parties are to provide a code of conduct for arbitrators serving on ISDS tribunals as well as guidance on conflicts of interest.[109] Arbitrators are also to observe the usual rules regarding independence and impartiality.[110]

TPP has more extensive provisions to promote the transparency of arbitral proceedings than in most of New Zealand’s FTAs. This includes the right of non-disputing Parties to make submissions,[111] the ability of the arbitral tribunal to admit amicus curiae submissions from those with a significant interest in the dispute,[112] to hold hearings in public and for the public release of submissions and decisions, subject to the non-disclosure of protected information,[113] and to seek expert reports.[114] Such provisions seek to counteract the perception that arbitral tribunals lack transparent processes.

Joint interpretations issued by the parties to an IIA are a further safeguard to avoid the possibility that arbitral tribunals deliver awards that fail to reflect the Parties’ interpretations of the FTA. TPP provides that the Commission established by the Agreement may issue a joint interpretation on a matter in dispute which is then binding on the tribunal.[115] This is also found in New Zealand’s other FTAs.[116] A further safeguard over the arbitral tribunal’s decision-making, not found in New Zealand’s FTAs, is the ability to review proposed decisions of the tribunal and to submit written comments on the proposed decision, which are then considered by the tribunal.[117]

The awards that an arbitral tribunal under TPP may make are limited to monetary damages and any applicable interest, and the restitution of property.[118] This excludes punitive damages[119] and the possibility of awarding specific performance. Only loss or damage incurred by a claimant in the capacity of an investor may be recovered.[120] Tribunals may also award costs and legal fees.[121]

While there is no appeals process, TPP provides for the possibility of developing a multilateral appeals process in the future for reviewing awards.[122] To avoid the possibility that a successful claimant will seek to enforce the award while proceedings to annul or set aside the award are under way, TPP allows time for a decision whether to annul an award to be made and for the completion of those proceedings if commenced before an award is enforced.[123]

TPP contains virtually all of the safeguards found in New Zealand’s FTAs, and in some instances the text of TPP is more detailed in its coverage and in the manner in which it clarifies the rights and obligations of investors and States in respect of investments. The safeguards are particularly strong where they address the substantive obligations which may be the subject of ISDS claims. Based on experience of investment arbitrations, particularly of the parties to NAFTA, the TPP text seeks to clarify the substantive obligations so as to provide guidance to arbitral tribunals on the interpretation of the obligations.

4  ARE THE SAFEGUARDS ADEQUATE?

A polemical approach is likely to be taken to consideration of the adequacy of the safeguards included in New Zealand’s IIAs, and in TPP in particular, depending on whether acceptance of any chance of an international arbitration claim is worth the risk. The safeguards can be assessed by condensing the criticisms of ISDS to their core elements: whether the terms of the IIA provide sufficient leeway to a government to regulate in the public interest,[124] and whether they address the legitimacy of the system of ISDS arbitration.[125]

The Government’s right to regulate to protect public health, safety and the environment is an overarching objective included in IIAs in order to provide context for the interpretation of investment obligations.[126] New Zealand’s IIAs confine the scope of obligations subject to ISDS, and have clarified the intent of the parties as to the nature and extent of obligations in response to certain decisions of arbitral tribunals. New Zealand’s traditional expropriation annex circumscribes what may be interpreted as indirect expropriation and its IIAs by and large address fair and equitable treatment by reference to customary international law. These safeguards have remained essentially intact in TPP, although TPP confines in a different way what may be regarded as indirect expropriation. The additional safeguard in TPP of a Drafters’ Note to clarify the meaning of “in like circumstances” will assist in the future interpretation of the national treatment and MFN obligations.

In terms of procedural safeguards, most of the UNCTAD-recommended reforms to the way in which arbitration proceedings are conducted have been adopted by New Zealand.[127] These include increased transparency of proceedings, discouraging frivolous claims, and enhancing the contracting parties’ roles in interpreting the IIA. While a code of conduct for arbitrators is yet to be developed, the International Bar Association Guidelines on Conflict of Interest in International Arbitration are likely to be a starting point for any such code of conduct.[128]

There are two main areas where the text of TPP has departed from New Zealand practice and has followed the United States Model BIT: the extension of the scope of ISDS to investment authorisations and investment agreements and the non-application of the general exceptions of the Agreement to the investment chapter. Both of these have been noted with some concern.[129] However, given the protections in the agreement which would enable a government to undertake policies in furtherance of legitimate public welfare objectives, and given the caveats placed around the exercise of the WTO exceptions, their omission from the TPP investment chapter is not a fundamental flaw. This is particularly the case since, as UNCTAD has noted, their absence does not prevent a party from taking actions to protect the public interest.[130]

The failure to include even more safeguards has recently been criticised on the grounds that “the starting point, the United States Model BIT, is a pro-investor template”.[131] A more pragmatic question is whether New Zealand or other TPP negotiating partners could have wrought changes to the United States Model BIT. Many countries have model international investment agreements, and negotiations are commenced on the basis of that model and continued on the basis of accepting or modifying the provisions of the model.[132] Countries may be concerned over the potential for altering established texts in IIAs to heighten uncertainty in arbitral decisions. It is worth bearing in mind not only that the United States has not to date lost an international investment arbitration, but that of the 356 concluded ISDS cases to date, approximately 37 per cent were decided in favour of the State, and 25 per cent in favour of the investor, with 28 per cent of cases settled.[133] Despite the odd headline case, the spectre of capricious international arbitrators dangerously impinging on a State’s legitimate right to regulate is not well-founded in reality.

Nevertheless, due to the shadow over ISDS one option that is sometimes advocated is to avoid treaty-based consent to ISDS altogether in negotiating an IIA. Any negotiation is a give and take. ISDS may be part of the price that has to be paid for an agreement.[134] The option of avoiding treaty-based consent to ISDS may not be practical if one wishes to reach agreement. A refusal to enter into treaty-based consent to ISDS may have a deleterious impact on New Zealand’s ability to conclude an IIA. The alternative option, which the author shares with some other commentators, is that with careful drafting ISDS can provide sufficient safeguards to ensure a proper balance between the interests of New Zealand investors investing abroad, and the interests of the New Zealand Government in regulating foreign investment and in ensuring the protection of the right of a government to regulate for the public welfare.[135]

To date New Zealand has succeeded in walking the tightrope between its offensive and defensive interests in the negotiation of IIAs. Absent a crystal ball, one has to look instead to the broad range of safeguards in New Zealand’s IIAs, including TPP. These should be sufficient to mitigate the perceived risks of ISDS and preserve the Government’s right to regulate.


Footnotes

[1] Dame Sian Elias “Barbarians at the Gate: Challenges of Globalization to the Rule of Law” (address given at the World Bar Association Conference, Queenstown, 4 September 2014) <www.courtsofnz.govt.nz>.

[2] Jane Kelsey “Investor-State Dispute Settlement under the TPPA” (24 September 2012) It’s Our Future <www.itsourfuture.org.nz>.

[3] Brian Fallow “Trade disputes not so clear-cut” The New Zealand Herald (online ed, Auckland, 13 March 2015).

[4] Australian Fair Trade and Investment Network (AFTINET) “Foreign companies could sue our governments!” (fact sheet on ISDS) <www.aftinet.org.au>; AFTINET “TPP text favours corporate rights” (press release, 5 November 2015).

[5] Andrew Geddis “Of TPP’s, ISDS’s and the Constitution” (5 October 2015) Pundit <www.pundit.co.nz>.

[6] Jürgen Kurtz and Luke Nottage “Investment Treaty Arbitration ‘Down Under’: Policy and Politics in Australia” (2015) 30 ICSID Review 465.

[7] United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2015: Reforming International Investment Governance UNCTAD/WIR/2015 (2015) at 127–132.

[8] Jane Kelsey “Unilateral State Strategies to Reform the International Investment Regime” (paper presented to the Foreign Investment Roundtable, University of Auckland, 16 June 2015). See also UNCTAD Investment Policy Monitor No 13 UNCTAD/WEB/DIAE/PCB/2015/13 (January 2015) 12. The countries reviewing their approaches include India, South Africa, Indonesia, Bolivia, Ecuador and Venezuela.

[9] Some States have brought a claim before the International Court of Justice against another State in respect of the way in which its investors have been treated. See, for example, Barcelona Traction, Light and Power Co Ltd (Belgium v Spain) [1970] ICJ Rep 3; Elettronica Siuela SpA (ELSI) (United States of America v Italy) [1989] ICJ Rep 15.

[10] This case-by-case consent to ISDS is contained in some of New Zealand’s free trade agreements, such as the Agreement between New Zealand and Singapore on a Closer Economic Partnership [2001] NZTS 1 (signed 14 November 2000, entered into force 1 January 2001) (New Zealand-Singapore Closer Economic Partnership), New Zealand-Thailand Closer Economic Partnership Agreement [2005] NZTS 8 (signed 19 April 2005, entered into force 1 July 2005), and the Agreement between New Zealand and the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu on Economic Cooperation (ANZTEC) (signed 10 July 2013, entered into force 1 December 2013).

[11] This is the term used to describe bilateral investment treaties and investment chapters in FTAs.

[12] Susan Franck “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions” (2005) 73 Fordham L Rev 1521 at 1527.

[13] UNCTAD World Investment Report 2015: Reforming International Investment Governance, above n 7, at 123.

[14] Daniel Kalderimis “Investment chapter of the NZ-China FTA” [2009] NZLJ 156 at 157. See also Agreement between the Government of New Zealand and the Government of the People’s Republic of China on the Promotion and Protection of Investments [1988] NZTS 10 (signed 22 November 1988, entered into force 25 March 1989) (China IPPA) art 13.3.

[15] Agreement between the Government of New Zealand and the Government of Hong Kong for the Promotion and Protection of Investments [1995] NZTS 14 (signed 6 July 1995, entered into force 5 August 1995) (Hong Kong IPPA).

[16] Agreement between the Government of New Zealand and the Government of the Argentine Republic for the Promotion and Reciprocal Protection of Investments (signed 27 August 1999, not yet in force).

[17] Agreement between the Government of New Zealand and the Government of the Republic of Chile for the Promotion and Protection of Investment (signed 22 July 1999, not yet in force).

[18] New Zealand-Singapore Closer Economic Partnership, above n 10; New Zealand-Thailand Closer Economic Partnership, above n 10; and the Trans-Pacific Strategic Economic Partnership Agreement [2006] NZTS 9 (signed 18 July 2005, entered into force 28 May 2006) (which did not include an investment chapter).

[19] Free Trade Agreement Between the Government of New Zealand and the Government of the People’s Republic of China UNTS 46123 (signed 7 April 2008, entered into force 1 October 2008) (NZ-China FTA); Agreement establishing the ASEAN-Australia-New Zealand Free Trade Area [2010] NZTS 1 (signed 27 February 2009, entered into force 1 January 2010) (AANZFTA); New Zealand-Malaysia Free Trade Agreement [2010] NZTS 9 (signed 26 October 2010, entered into force 1 August 2010) (NZ-Malaysia FTA); Free Trade Agreement between New Zealand and the Republic of Korea (signed 23 March 2015, entered into force 20 December 2015) (NZ-Korea FTA). The Protocol on Investment to the New Zealand–Australia Closer Economic Relations Trade Agreement [2013] NZTS 1 (signed 16 February 2011, entered into force 1 March 2013) does not include dispute settlement mechanisms, either State to State dispute settlement or investor-State dispute settlement. The Investment Protocol to the New Zealand–Hong Kong, China Closer Economic Partnership Agreement is not yet in force.

[20] The Treasury New Zealand Economic and Financial Overview 2015 (New Zealand Debt Management Office, March 2015).

[21] New Zealand Institute of Economic Research ISDS and sovereignty: The use of investor-state dispute settlement mechanisms in trade agreements and their impact on national sovereignty: NZIER report to Export New Zealand (17 September 2015) <http://nzier.org.nz/>; Jean-Pierre de Raad, Chris Nixon, John Ballingall, Shamubeel Eaqub and James Zuccollo “In defence of foreign investment” (NZIER Insight 17, 10 August 2010) New Zealand Institute of Economic Research < http://nzier.org.nz/>.

[22] Trans-Pacific Partnership (TPP) (signed 4 February 2016, not yet in force). For the text of TPP see <www.tpp.mfat.govt.nz>.

[23] “Control” is not defined and it is often difficult to determine where it lies: Z Douglas The International Law of Investment Claims (Cambridge University Press, Cambridge, 2009) at 554–573.

[24] NZ-Korea FTA, above n 19, art 10.14; NZ-China FTA, above n 19, art 149; AANZFTA, above n 19, ch 11, art 11; NZ-Malaysia FTA, above n 19, art 10.14; Hong Kong IPPA, above n 15, does not contain a denial of benefits clause.

[25] Plama Consortium Ltd v Republic of Bulgaria (Decision on jurisdiction) ICSID ARB/03/24, 8 February 2005 at [158] and [165].

[26] See NZ-Korea FTA, above n 19, art 10.18.3; AANZFTA, above n 19, ch 11, art 18.3; NZ-Malaysia FTA, above n 19, art 10.19.2.

[27] TPP, above n 22, art 9.1. NZ-Korea FTA, above n 19, art 10.2, is more explicit in providing that in the event of a dispute relating to an investment of an investor of a Party, a dual national is deemed to be exclusively a national of the State of his or her “dominant and effective nationality”. This reflects the customary international law position with respect to the right of a State to exercise diplomatic protection on behalf of one of its nationals even if the national possesses the nationality of the other State, provided the dominant and effective nationality is that of the State exercising diplomatic protection: Centre for Co-operation with Non-members International Investment Law: Understanding Concepts and Tracking Innovations (OECD, Paris, 2008) at 12. This customary international law principle is based on the Nottebohm case (Liechtenstein v Guatemala) (2nd Phase) [1955] ICJ Rep 4 at 23.

[28] TPP, above n 22, art 9.1.

[29] TPP, above n 22, art 9.1.

[30] NZ-Korea FTA, above n 19, for example, provides that ISDS claims may only be brought in respect of “covered investments”, ie existing investments – see art 10.18.1; and a claim must relate to the “management, conduct, operation, or sale or other disposition of a covered investment” – see art 10.20.1.

[31] TPP, above n 22, arts 9.1 and 9.19.

[32] TPP, above n 22, Annex II. Annex II of TPP contains non-conforming measures which are exempt from the obligations of national treatment and most-favoured-nation, described further below.

[33] TPP, above n 22, art 9.1.

[34] TPP, above n 22, art 9.1.

[35] TPP, above n 22, art 9.1.

[36] TPP, above n 22, art 9.19.

[37] See, for example, NZ-Korea FTA, above n 19, art 10.18 which specifies that ISDS claims may be made concerning an alleged breach of an obligation under Section A, which includes the substantive obligations relating to the protection of investors and their investments.

[38] See Centre for Co-operation with Non-members International Investment Law: Understanding Concepts and Tracking Innovations, above n 27, at 101–125 for an examination of umbrella clauses including their history, and the way in which they have been considered in the literature and by arbitral tribunals.

[39] Christoph Schreuer “Travelling the BIT Route: Of Waiting Periods, Umbrella Clauses and Forks in the Road” (2004) 5 Journal of World Investment and Trade 231.

[40] Nobel Ventures Inc v Romania ICSID ARB/01/11, 12 October 2005 at [54]. This difficulty has been highlighted by the two arbitrations brought by Société Générale de Surveillance SA (SGS) which came to opposite conclusions on whether an umbrella clause in a concessional contract turned the contractual breach into a breach of the treaty. See Emmanuel Gaillard “Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered” in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, London, 2005) 325; and Franck “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions”, above n 12.

[41] Hong Kong IPPA, above n 15, art 3.2.

[42] Centre for Co-operation with Non-members International Investment Law: Understanding Concepts and Tracking Innovations, above n 27 at 115.

[43] TPP, above n 22, art 9.1.

[44] TPP, above n 22, art 9.1.

[45] TPP, above n 22, art 9.1.

[46] TPP, above n 22, art 9.1.

[47] SGS Société Générale de Surveillance SA v Republic of the Philippines (Decision on Objections to Jurisdiction) ICSID ARB/02/06, 29 January 2004, at [113]–[129] and [170]–[176].

[48] See Letter from the Honourable Todd McClay (Minister of Trade, New Zealand) to the Honourable Andrew Robb (Minister for Trade and Investment, Australia) regarding the relationship between TPP and Other Agreements (4 February 2016) <www.tpp.mfat.govt.nz>.

[49] See also Luke Nottage “The TPP Investment Chapter: Mostly More of the Same [ISDS Procedure]” (12 November 2015) University of Sydney <www.blogs.usyd.edu.au>.

[50] There are other obligations which are also routinely included in IIAs, including a requirement to permit the free transfers of the monies produced by an investment, to compensate for losses caused by armed conflict or insurrection, and not to impose performance requirements or controls on the nationality of boards of directors. However, such obligations are infrequently the subject of ISDS proceedings, one recent exception being Mobil Investments Canada Inc and Murphy Oil Corp v Canada (Decision on Liability and on Principles of Quantum) ICSID ARB(AF)/07/4, 22 May 2012 which included a claim based on breach of the prohibition against performance requirements under North American Free Trade Agreement (signed 17 December 1992, entered in force 1 January 1994). For this reason, these other obligations will not be discussed further in this article.

[51] TPP, above n 22, art 9.4.

[52] TPP, above n 22, art 9.4.

[53] Drafters’ Note on Interpretation of “In Like Circumstances” Under Article 9.4 (National Treatment and Article 9.5 (Most-Favoured-Nation Treatment) for TPP <www.tpp.mfat.govt.nz>.

[54] Ibid.

[55] Vienna Convention on the Law of Treaties 1155 UNTS 331 (signed 23 May 1969, entered into force 27 January 1969) art 31.2(a) provides for any agreement made between the parties in connection with the conclusion of the treaty to be regarded as “context” for the interpretation of the treaty in addition to its text, preamble and annexes.

[56] NZ-Korea FTA, above n 19, art 10.6. Note that the reference to “establishment” must be read in light of the other provisions of the Agreement relating to the ability to bring investment claims. For a description of the key elements of MFN see Final Report of the Study Group on the Most-Favoured-Nation clause, Annex of Report of the International Law Commission, Sixty-seventh session, General Assembly Official Records (A/70/10) <www.legal.un.org>.

[57] Emilio Agustin Mazzezini v Kingdom of Spain (Decision of the Tribunal on Objections to Jurisdiction) ICSID ARB/97/7, 25 January 2000. The application of the MFN clause allowed the investor to bring a claim without needing to go through the required 18 month waiting period as set out in the BIT under which the claim was brought.

[58] For a description of the various arbitral tribunal decisions following Maffezini see Final Report of the Study Group on the Most-Favoured-Nation clause, above n 56, at [91]-[140].

[59] TPP, above n 22, art 9.5.3.

[60] NZ-Korea FTA, above n 19, art 10.6.3; NZ-China FTA, above n 19, art 139.2; NZ-Malaysia FTA, above n 19, art 10.5.2. AANZFTA, above n 19, does not contain a MFN clause.

[61] UNCTAD World Investment Report 2015: Reforming International Investment Governance, above n 7, at 137.

[62] For a review of “fair and equitable treatment” see M Paparinskis The International Minimum Standard and Fair and Equitable Treatment (Oxford University Press, Oxford, 2013); R Kläger Fair and Equitable Treatment’ in International Investment Law (Cambridge University Press, New York, 2011); and OECD Directorate for Financial and Enterprise Affairs Fair and Equitable Treatment Standard in International Investment Law OECD Working Papers on International Investment (2004/03, OECD, Paris, September 2004).

[63] Neer v United Mexican States (1926) 4 RIAA 60 at 61–62.

[64] Waste Management, Inc v United Mexican States (Award) ICSID ARB(AF)/00/3, 30 April 2004 at [98].

[65] See OECD Directorate for Financial and Enterprise Affairs Fair and Equitable Treatment Standard in International Investment Law OECD Working Papers on International Investment, above n 62; United Nations Conference on Trade and Development Fair and Equitable Treatment (UNCTAD Series on Issues in International Investment Agreements) (United Nations, New York, 1999); United Nations Conference on Trade and Development Fair and Equitable Treatment: A Sequel (UNCTAD Series on Issues in International Investment Agreements II) (United Nations, New York, 2012) for a review of the jurisprudence on fair and equitable treatment.

[66] Metalclad Corp v United Mexican States (Award) ICSID ARB(AF)/97/1, 30 August 2000.

[67] Pope and Talbot Inc v Government of Canada (Award on the Merits of Phase 2) UNCITRAL, 10 April 2001.

[68] SD Myers Inc v Government of Canada (Partial Award) UNCITRAL, 13 November 2000.

[69] Metalclad Corp v United Mexican States, above n 66, at [76].

[70] SD Myers Inc v Government of Canada, above n 68, at [266].

[71] Free Trade Commission “North American Free Trade Agreement: Notes of Interpretation of Certain Chapter 11 Provisions” (31 July 2001) Foreign trade Information Systems <www.sice.oas.org>.

[72] TPP, above n 22, arts 9.6.2 and 9.6.4. See also NZ-Korea FTA, above n 19, art 10.7; NZ-China FTA, above n 19, art 143; AANZFTA, above n 19, ch 11, art 6.2; NZ-Malaysia FTA, above n 19, art 10.10.

[73] United Nations Conference on Trade and Development Fair and Equitable Treatment: A Sequel (UNCTAD Series on Issues in International Investment Agreements II), above n 65, at 28.

[74] At 29.

[75] At 13.

[76] R Dolzer and M Stevens Bilateral Investment Treaties (Martinus Nijhoff Publishers, The Hague, 1995) at 58; Stephan Schill The Multilateralization of International Investment Law (Cambridge University Press, Cambridge, 2009) at 263.

[77] ADF Group Inc v United States of America (Award) ICSID ARB(AF)/00/1, 9 January 2003 at [179], cited by the tribunal in Waste Management, Inc v United Mexican States (Award), above n 64, at [92].

[78] William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc v Government of Canada (Award on Jurisdiction and Liability) PCA 2009-04, 17 March 2015 at [444].

[79] Bilcon case, above n 78, including Dissenting Opinion of Professor Donald McRae.

[80] TPP, above n 22, art 9.8; NZ-Korea FTA, above n 19, art 10.9. See also NZ-China FTA, above n 19, art 145; AANZFTA, above n 19, ch 11, art 9; NZ-Malaysia FTA, above n 19, art 10.8.

[81] TPP, above n 22, annex 9-B.2. See also NZ-Korea FTA, above n 19, annex 10-B.2(a).

[82] TPP, above n 22, annex 9-B.3. See also NZ-Korea FTA, above n 19, annex 10-B.2(b).

[83] TPP, above n 22, annex 9-B.3(b). See also NZ-Korea FTA, above n 19, annex 10-B, which does not include the qualified “except in rare circumstances”, and the NZ-China FTA, above n 19, with this qualifier: annex 13: Expropriation, para 5.

[84] TPP, annex 9-B fn 37.

[85] TPP, above n 22, annex 9-B.3(a).

[86] TPP, above n 22, annex 9-B.

[87] The United States Supreme Court in Penn Central Transportation Co v New York City 438 US 104 (1978) at 124 took into account the economic impact of the government action, the extent to which is interferes with distinct, reasonable investment-backed expectations, and the character of the government action. See Martin Weiss, Shayerah Akhtar, Brandon Murrill and Daniel Sheed “International Investment Agreements (IIAs): Frequently Asked Questions” (15 May 2015) Congressional Research Service <www.bilaterals.org>.

[88] NZ-China FTA, above n 19, annex 13: Expropriation, paras 3 and 4. See also NZ-Korea FTA, above n 19, annex 10-B: in order to constitute indirect expropriation, the deprivation of the investor’s property “must be so severe in the light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith”.

[89] Pope and Talbot Inc v Government of Canada (Interim Award) UNCITRAL, 26 June 2000 at [102]. See also Marvin Feldman v Mexico (Award) ICSID ARB(AF)/99/1, 16 December 2002.

[90] Tecnicas Medioambientales Tecmed SA v United Mexican States (Award) ICSID ARB(AF)/00/2, 29 May 2003 at [116].

[91] Tecnicas Medioambientales Tecmed SA v United Mexican States (Award) ICSID ARB(AF)/00/2, 29 May 2003 at [122].

[92] Link-Trading Joint Stock Company v Department for Customs and Control of the Republic of Moldova (Final Award) UNCITRAL, 18 April 2002 at [72]–[73].

[93] D Williams and A Kawharu Williams and Kawharu on Arbitration (LexisNexis, Wellington, 2011) at 883; Daniel Kalderimis “Investment chapter of the China-New Zealand FTA”, above n 14, at 159.

[94] UNCTAD World Investment Report 2015: Reforming International Investment Governance, above n 7, at 128.

[95] TPP, above n 22, art 9.16.

[96] TPP, above n 22, art 29.6.

[97] TPP, above n 22, art 29.5.

[98] TPP, above n 22, art 29.6. See also NZ-Korea FTA, above n 19, art 20.6; NZ-China FTA, above n 19, art 205; AANZFTA, above n 19, ch 15, art 5; NZ-Malaysia FTA, above n 19, art 17.6.

[99] See also P Green, B Hunt and T Kennedy-Grant Green and Hunt on Arbitration Law and Practice (online looseleaf ed, Thomson Reuters), International Arbitrations at [IN3.7]–[IN3.8].

[100] TPP, above n 22, art 9.19.1; NZ-Korea FTA, above n 19, art 10.20.1. See also China IPPA, above n 14, art 13.3; Hong Kong IPPA, above n 15, art 9; NZ-China FTA, above n 19, art 153; AANZFTA, above n 19, ch 11, art 20; NZ-Malaysia FTA, above n 19, art 10.21.1.

[101] TPP, above n 22, art 9.21.1. This is the same as in NZ-Korea FTA, above n 19, art 10.22.1, whereas in the case of New Zealand’s other FTAs the time period is three years. See NZ-China FTA, above n 19, art 154.1; AANZFTA, above n 19, ch 11, art 22; NZ-Malaysia FTA, above n 19, art 10.22.1.

[102] TPP, above n 22, art 9.21.2. See also NZ-Korea FTA, above n 19, art 10.22.2(b).

[103] TPP, above n 22, art 9.21.3. This is similar to New Zealand’s FTAs: see AANZFTA, above n 19, ch 11, art 22; NZ-Malaysia FTA, above n 19, art 10.21.7; NZ-Korea FTA, above n 19, art 10.22.3. In the case of the NZ-Malaysia FTA the claimant may be required to go through domestic legal or administrative procedures prior to submitting a claim to arbitration: above n 19, art 10.21.6. The NZ-Korea FTA also includes a Korea-specific Annex 10-C which provides that New Zealand investors which choose to pursue domestic legal action in Korea cannot subsequently bring an international investment claim under the Agreement. The reason for this is the self-executing nature of Korean law.

[104] TPP, above n 22, art 9.23.4. See also NZ-Korea FTA, above n 19, art 10.26.2.

[105] TPP, above n 22 art 9.23.4. See also NZ-China FTA, above n 19, art 154.2.

[106] TPP, above n 22 art 9.23.4. See also NZ-China FTA, above n 19, art 154.3; NZ-Malaysia FTA, above n 19, art 10.24.2.

[107] TPP, above n 22, art 9.23.5. New Zealand’s FTAs permit costs to be awarded to the prevailing party incurred in submitting or opposing a preliminary objection that was “frivolous”. See NZ-Korea FTA, above n 19, art 10.26.4; NZ-China FTA, above n 19, art 154.4; NZ-Malaysia FTA, above n 19, art 10.24.3.

[108] TPP, above n 22, art 9.22.

[109] TPP, above n 22, art 9.22.6.

[110] TPP, above n 22, art 9.22.6.

[111] TPP, above n 22, art 9.23.2.

[112] TPP, above n 22, art 9.23.3.

[113] TPP, above n 22, art 9.24.

[114] TPP, above n 22, art 9.27.

[115] TPP, above n 22, arts 9.25.3 and 27.2.2(f).

[116] NZ-Korea FTA, above n 19, art 10.25; NZ-China FTA, above n 19, art 155; AANZFTA, above n 19, ch 11, arts 27.2 and 27.3; NZ-Malaysia FTA, above n 19, art 10.26.

[117] TPP, above n 22, art 9.23.10.

[118] TPP, above n 22, art 9.29.1. The provisions on awards are similar to New Zealand’s FTAs: see NZ-Korea FTA, above n 19, art 10.30; NZ-China FTA, above n 19, art 158; AANZFTA, above n 19, ch 11, art 28; NZ-Malaysia FTA, above n 19, art 10.29.

[119] TPP, above n 22, art 9.29.6.

[120] TPP, above n 22, art 9.29.2.

[121] TPP, above n 22, art 9.29.3.

[122] TPP, above n 22, art 9.23.11.

[123] TPP, above n 22, art 9.29.9.

[124] Amokura Kawharu “Trans-Pacific Partnership Agreement Expert Paper Series, Expert Paper No 2 TPPA: Chapter 9 on Investment” (2 December 2015) TPP Legal <https://tpplegal.wordpress.com>.

[125] Cecilia Olivet and Pia Eberhardt “Profiting from injustice: How law firms, arbitrators and financiers are fuelling an investment arbitration boom” (27 November 2012) Transnational Institute <www.tni.org>.

[126] See the Preamble to TPP, above n 22, which provides that the Parties “recognise their inherent right to regulate and resolve to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals”.

[127] UNCTAD World Investment Report 2015: Reforming International Investment Governance, above n 7, at 148.

[128] See International Bar Association “The 2014 Revisions to the IBA Guidelines on Conflicts of Interest in International Arbitration” (18 May 2015) <www.ibanet.org> and International Bar Association “Rules of Ethics for International Arbitrators” (9 July 2008) <www.ibanet.org> which complement the Guidelines in certain respects.

[129] Amokura Kawharu “Trans-Pacific Partnership Agreement Expert Paper Series, Expert Paper No 2 TPPA: Chapter 9 on Investment”, above n 124, at 7–8, 13, 19; Daniel Kalderimis “Trans-Pacific Partnership – the deal is done” (6 October 2015) <www.chapmantripp.com>.

[130] UNCTAD World Investment Report 2015: Reforming International Investment Governance, above n 7, at 140. Furthermore, critics have noted that the general exception is a “weak provision” which is “clearly not an effective safeguard”: Jane Kelsey “A Layperson’s Guide to the Investment Chapters in the NZ-Korea FTA and the Leaked Chapter from the TPPA” (26 March 2015) Pacific Guardians <www.pacificguardians.org> at 10.

[131] Amokura Kawharu “Trans-Pacific Partnership Agreement Expert Paper Series, Expert Paper No 2 TPPA: Chapter 9 on Investment”, above n 124, at 19.

[132] Final Report of the Study Group on the Most-Favoured-Nation clause, above n 56, at [142].

[133] UNCTAD “Recent Trends in IIAs and ISDS” (IIA Issues Note No 1, February 2015) UNCTAD/WEB/DIAE/PCB/2015/1.

[134] D Kalderimis “Investor/state arbitration, the TPP and New Zealand” (presentation to LEANZ seminar, Wellington, 28 July 2015) LEANZ <http://leanz.org.nz>.

[135] Daniel Kalderimis “Trans-Pacific Partnership – the deal is done”, above n 129; New Zealand Institute of Economic Research ISDS and sovereignty: The use of investor-state dispute settlement mechanisms in trade agreements and their impact on national sovereignty: NZIER report to Export New Zealand, above n 21, at 6.


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New Zealand Business Law Quarterly - foreign investment editionThe New Zealand Business Law Quarterly (NZBLQ) is New Zealand’s leading business law journal. The NZBLQ aims to provide in-depth, but accessible, analyses of business law issues for both a national and international legal audience. It is a fully refereed journal, with material submitted by academics, from New Zealand and abroad, and by practising lawyers. Published four times per year, it is available in hard copy and online.

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