The Philip Morris Case and the Right to Regulate (Legislate)

By Olga S. Shaposhnikova, PhD Candidate, International Arbitration*

Introduction

TOBACCO-2-articleLargeOn December 17, 2015, the arbitral tribunal of Prof. Gabrielle Kaufmann-Kohler, Prof. Don McRae and Prof. Karl-Heinz Boeckstiegel dismissed the claim filed in 2011 by Philip Morris Asia Limited (“PM Asia”) against the Commonwealth of Australia (“Australia”) under the Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments, 1993 (the “BIT”)[1]. This dispute – the first investor-state dispute brought against Australia – was caused by Australia’s introduction of the Tobacco Plain Packaging Act 2011, legislation developed in line with the World Health Organization’s Framework Convention on Tobacco Control, 2003, adopted by 180 States. However, Philip Morris argued in this case[2] that implementing domestic legislation and its following regulations, acts, policies and practices, developed in order “to discourage the use of tobacco products, and for related purposes”, constituted, inter alia, an expropriation of its investments in breach of Article 6 of the BIT, as well as breaching obligations under other treaties. This article explores the sovereign right of states to legislate without running the risk of having to pay damages under a treaty (either trade or investment), covering relevant ongoing initiatives in the course of the reform of Investor-State Dispute Settlement (“ISDS”) system.

International law & its implementation into Australian legislation

Australia has been at the forefront of the move to control smoking since 1973, when the first mandatory health requirements for tobacco products were introduced. Since then Australia has successively strengthened these measures, which now consist of minimum age restrictions on the purchase of tobacco products, price increases through excise measures, minimum pack sizes to make cigarettes less affordable, public and school-based education programs, bans on smoking in workplaces and public spaces, provision of smoking cessation support services, provision of public subsidies for nicotine replacement therapies and other smoking cessation medications, support for indigenous communities to reduce smoking rates, retailer licensing in some jurisdictions, and prohibitions on certain flavored cigarettes[3].

The Tobacco Advertising Prohibition Act 1992 has imposed wide-ranging restrictions on the broadcasting and publishing of tobacco advertisements across different media and other means and advertising on tickets, billboards and public transport.

Moreover, Australia became one of the first countries which actively started implementation of the World Health Organization’s Framework Convention on Tobacco Control (“FCTC”) [4], 2003, ratifying it on 27 Oct 2004.

Since 2006, companies in Australia were required to include pictorial images displaying, in graphic terms, the real and distressing health effects of smoking. Australia’s anti-smoking measures have helped reduce smoking rates in Australia from some 36 per cent of the adult population in 1977 to around 15 per cent in 2010.

But according to Australia[5], the FCTC has imposed a comprehensive set of obligations for Parties to implement and manage tobacco control programmes. Article 11 of the FCTC requires Parties to adopt and implement effective measures in respect of the packaging and labelling of tobacco products, including health warnings and other appropriate messages. Article 13(2) of the FCTC has obliged each Party “in accordance with its constitution or constitutional principles, [to] undertake a comprehensive ban of all tobacco advertising, promotion and sponsorship.”

In line with the above requirements, in 2008, Australia established the National Preventative Health Taskforce. Since June 2009 it has been working under the program ‘Australia: “The Healthiest Country by 2020” and developed its recommendations, according to which, Australian Government announced its decision to adopt a new series of tobacco control measures as part of a comprehensive strategy to promote public health and awareness of the risks of smoking (“Taking Preventative Action – A Response to Australia: The Healthiest Country by 2020”), part of which is the Tobacco Plain Packaging Act 2011[6] (the “TPP Act” or “the plain tobacco packaging legislation”), enacted by the Australian Parliament and which received Royal Assent on 1 December 2011.

The plain tobacco packaging legislation prohibits the display of all tobacco company logos, symbols, and other images that may have the effect of advertising or promoting tobacco products on tobacco products and their packaging. All tobacco packaging must be in a particular shade of drab dark brown, chosen through consumer research as the optimal color for achieving the objectives of the plain packaging legislation. In particular, graphic health warnings will be expanded to cover 75 per cent of the front of cigarette packets (graphic health warnings will remain at 90 per cent of the back of cigarette packs), with commensurate measures for other tobacco products. Brand names and variant names can continue to appear on tobacco packaging in specified locations, and in a standard color, position, font style and size, enabling tobacco companies to continue to distinguish their products[7].

Getting ahead of the story, it should be noted that Australian plain tobacco packaging looks very unpleasant[8]. Such packaging has replaced glamour packaging of a great number of iconic brands such as Marlboro, Longbeach, Peter Jackson as well as also prominent: Alpine, Choice, GT, Bond Street, and Wee Willem, each of them have a number of products lines.

Even before its enactment and further implementation, the plain tobacco packaging legislation caused an investment dispute involving longsuffering Philip Morris.

Bona-fide corporate restructuring or “treaty shopping”

It is worth mentioning, that Philip Morris participated in consultations held by the National Preventative Health Taskforce (Australia) and was fully aware of the forthcoming implementation of the plain tobacco packaging legislation at least as per the Australian Government’s announcement on April 29, 2010.

In the very beginning of 2011, Philip Morris conducted corporate restructuring. So, on 23 February 2011, Philip Morris Asia Limited (Hong Kong) (“PM Asia”) acquired all the shares in Philip Morris (Australia) Ltd, which, in turn, had owned all the shares in Philip Morris Ltd, which had rights with respect to registered and unregistered trademarks, copyright works, registered and unregistered designs, and overall get up of the product packaging, qualified as “intellectual property” as well as “investments” under relevant treaties.

On 7 April 2011, the Government released an Exposure Draft of the TPP Act together with a Consultation Paper.

On 27 June 2011, PM Asia sent Australia a Written Notification of Claim under the Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments, 1993[9] (the “BIT”).

80ecb8254f0b2dadd52340c21fdcb36ef11f1f01On July 15, 2011, PM Asia suggested by its Notice of Claim to negotiate an amicable settlement in line with Art. 10 of the BIT[10] or, in case of failure, to submit the dispute to arbitration.

On 21 November 2011, after four months (instead of three foreseen by the BIT) of its attempts for amicable settlement, PM Asia filed its Notice of Arbitration under Article 10 of the BIT, and Article 3 of the UNCITRAL Arbitration Rules 2010.

In its Response to the Notice of Arbitration of December 21, 2011, Australia challenged jurisdiction (by way of preliminary objection) citing a number of grounds, including arguments of “treaty shopping” or “nationality planning”, not mentioning these specific terms but stressing that the corporate restructuring which allowed the claim to be brought under the BIT took place after the circumstances giving rise to the dispute had already arisen.

Corporate restructurings can of course be regarded as bona fide , but practitioners in investor-state disputes are well aware of the phenomenon of “nationality planning” or “treaty shopping”, whereby investors ensure their corporate structure is developed to allow a claim to be brought under the most suitable BIT (Bilateral Investment Treaty) / Free Trade Agreement / International Investment Agreement (generally, the “IIA”), containing Investor-State Dispute Settlement (“ISDS”) provision[11].It is of course easy to define the conceptual difference between “treaty shopping” and a bona fide restructuring, harder to apply the distinction in practice.

To determine whether “treaty shopping” is underway, authorities suggest, a twofold test: (1) the alleged “investor” must have substantial business activities in the home State; (2) determination of the owners or controllers of the alleged “investor” through lifting the corporate veil; if such owner/controller originates from a third State or from the host State itself, treaty protection can be denied [12]. But, therefor, a denial-of-benefits clause is at least required. Moreover, according to a number of arbitral awards, a denial of benefits clause formulated discretionally cannot be activated retroactively (for instance, Article 17(1) of the Energy Charter Treaty).

Before disclosing the arbitral award, on May 5, 2015, the European Commission in its Concept paper “Investment in TTIP[13] and beyond – the path for reform. Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court” promised to prevent practices by investors such as “forum shopping”, that is trying to pick the most suitable agreement to bring an ISDS claim, referring: “For example, the making of an investment or business re-organisation for the purpose of bringing a case (as is alleged Philip Morris has done to bring its case against Australia) is explicitly prohibited in CETA[14]”. At the same time the European Commission also realized that no other ISDS agreement contains such a provision[15]. Also, according to the Concept paper, “mailbox” companies will not be eligible to bring investment arbitration cases, but rather companies with real business operations in the territory of one of the Parties will be covered by the ISDS provisions.

PM Asia claim

PM Asia claimed via its Notice of Arbitration that through the plain packaging legislation, Australia violated the BIT by substantially depriving Philip Morris of the real value of its investments in Australia tantamount to expropriation (Article 6(1) of the BIT); treating PM Asia’s investments unfairly and inequitably (breaching of Fair and Equitable Treatment); unreasonably impairing the full use and enjoyment of the investments (Unreasonable Impairment); failing to provide full protection and security for the investments (breaching of Full Protection and Security); and breaching its obligations under other international agreements by means of the so-called “umbrella” clause (Article 2(2) of the BIT)[16].

Umbrella clause

Invoking the “umbrella clause” in Article 2(2) of the BIT, which, amongst others, provides that “Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party”, PM Asia asserted that by adopting and implementing the plain packaging legislation, Australia has failed to observe and abide by its international obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”) (Articles 20, 15.4), the WTO Agreement on Technical Barriers to Trade (“TBT Agreement”) (Article 2(2)), and the Paris Convention for the Protection of Industrial Property (“Paris Convention”) (Articles 10bis, 7)[17].

The meaning and scope of the “umbrella clause” is often disputed[18], and most frequently employed to try to convert a contractual dispute into a “treaty claim” under a relevant investment treaty. More rarely, an “umbrella clause” is employed for transformation of a State’s obligation under its domestic legislation into an enforceable obligation under a relevant IIA.

In the Philip Morris case, Philip Morris attempted to apply the “umbrella clause” to Australia’s obligations under other treaties (the TRIPS Agreement and the TBT Agreement) in order to try to bring its dispute against Australia under the BIT, hoping to bring pecuniary and non-pecuniary claims which would not be available under the WTO treaties.

Australia’s response to such a broad interpretation of the “umbrella clause” was to state that whether as a matter of jurisdiction or on the substance, the “umbrella clause” in Article 2(2) of the BIT cannot be understood as encompassing general obligations under multilateral treaties[19], moreover, containing their own dispute settlement mechanism therein as well as appropriate dispute settlement body enjoying exclusive jurisdiction.

Conflict between international obligations under different treaties

Nevertheless, in the Philip Morris case, it has been deemed that there is a conflict between the state’s obligations under different treaties: the FCTC versus the BIT (and) TRIPS Agreement and TBT Agreement, i.e. a conflict between human rights (health protection) and international investment and trade obligations of the state.

So called “human rights considerations”, i.e. invoking treaties protecting human rights as a defense for a state, is seen as relatively recent phenomenon in international investment arbitration[20]. BITs and IIAs rarely contain any exceptions in respect of “human rights considerations”, which would presumably be a defense of the right to regulate.

Article XX of the WTO General Agreement on General Agreement on Tariffs and Trade (“GATT”) contains the provisions generally relied upon to defend such claims. This provides that , nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals; (b) necessary to protect human, animal or plant life or health; (e) relating to the products of prison labor, subject only to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.

The so-called national security exceptions are provided under Article XXI (b) of the GATT, which provide that nothing in that Agreement shall be construed to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests, inter alia, taken in time of war or other emergency in international relations (Article XXI(b)(iii)).

However, both of these exceptions allowing trade restrictions have been being criticized as undermining the principle objective of the WTO[21].

Therefore, for instance, under WTO law, a number of claims have been filed by a number of the WTO member-states, including those participating in the FCTC, against Australia. So, on March 13, 2012, Ukraine initiated consultation with Australia concerning the Tobacco Plain Packaging Act 2011 and its implementing regulations, related acts, policies or practices, allegedly deemed to be in breach of the following bindings under the WTO agreements: Intellectual Property (TRIPS): Art. 1.1, 2.1, 15, 15.1, 15.4, 16, 16.1, 16.3, 20, 1, 27; Technical Barriers to Trade (TBT): Art. 2.2; GATT 1994: Art. I, III:4; Technical Barriers to Trade (TBT): Art. 2.1; Intellectual Property (TRIPS): Art. 3.1 (DS434)[22]. In 2012-2014, the similar cases against Australia were initiated by Honduras (DS435), Dominican Republic (DS441), Cuba (DS458) and Indonesia (DS467). In each case, between thirty to forty States have joined the proceedings as the Third Parties. Since then the cases have been still pending.

But, it should be noted that no monetary remedy can be awarded to investors through the WTO Dispute Settlement Body, which is an international inter-state dispute settlement system quite distinct from the investment protection treaties which exist.

The High Court of Australia

Intellectual property rights as trademarks and copyrights are of course defended before national courts.

In 2012, two companies submitted claims before the High Court of Australia (Australia’s highest federal court) arguing that the Tobacco Plain Packaging Act 2011 was contrary to s 51(xxxi) of the Constitution of Australia. On 17-19 April 2012, the High Court of Australia heard: British American Tobacco Australasia Limited and Ors v. Commonwealth of Australia[23] and J T International SA v. Commonwealth of Australia[24]. On October 5, 2012, a majority of the High Court of Australia held, inter alia, that the Tobacco Plain Packaging Act 2011 did not confer a proprietary benefit or interest on the Commonwealth of Australia or any other person, and therefore, neither the Commonwealth of Australia nor any other person acquired any property and s 51(xxxi) of the Constitution of Australia was not engaged[25].

Requested relief

PM Asia sought orders from the arbitral tribunal requiring Australia to take appropriate steps to suspend enforcement of the plain packaging legislation and to compensate PM Asia for loss suffered through compliance with the plain packaging legislation; or to compensate PM Asia for loss suffered as a result of the enactment and continued application of the plain packaging legislation. [26]

The Philip Morris case was one of the very rare cases in the whole history of international investment arbitration where the investor expressly asked not only for pecuniary damages compensation (amounted to billions of dollars) but for the law in question to be repealed (suspending enforcement of the plain packaging legislation).

Most BITs and FTAs limit available remedies to compensation. But, investment cases, where restitution had been asked, had already taken place in the history of international investment arbitration before this case (see below mentioned). However, in international investment arbitration, restitution might mean repealing of a legislative act.

Therefore, Philip Morris expressly asked for the cessation and discontinuance of the legislative acts, obviously considering ad hoc arbitration under UNCITRAL Arbitration Rules under the BIT like something legitimately equal in its authorities to a State Constitutional Court. Nevertheless, the New York Convention on recognition and enforcement of foreign arbitral awards to be applied is aimed only at enforcement of pecuniary remedies under arbitral awards.

It should be noted that even arbitral tribunals convened under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), 1965[27], have no such authorities as well. Article 54 (1) of the ICSID Convention provides, particularly: “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State…”, thus restricting the enforceable remedies to pecuniary awards only.

The issue of restitution (non-pecuniary remedies) was considered in the following known investment arbitration cases: Antoine Goetz and others v. Burundi, Enron Creditors Recovery Corporation and Ponderosa Assets, L.P. v. Argentine Republic, Ioan Micula, Viorel Micula and others v. Romania, ATA Construction v. Jordan, Frank Charles Arif v. Moldova[28].

In Ioan Micula, Viorel Micula and Ors v. Romania, the arbitral tribunal noted that the fact that such a remedy might not be enforceable pursuant to Article 54 of the ICSID Convention should not preclude a tribunal from ordering it[29].

In Ioan Micula, Viorel Micula and others v. Romania, where claimants sought as primary relief the restitution of the legal framework in force at the time of the approval of the Emergency Government Ordinance No. 24/1998, but Romania (Respondent) argued that that claim was inadmissible, the arbitral tribunal stated that under the ICSID Convention, a tribunal had the power to order pecuniary or nonpecuniary remedies, including restitution, i.e., re-establishing the situation which existed before a wrongful act was committed, as well as stressed that remedies and enforcement were two distinct concepts, thus, finding out that it had the powers to order restitution, both under the ICSID Convention and the BIT, and thus could not uphold Respondent’s objection as an objection to jurisdiction and admissibility[30].

In 2004, in Enron Creditors Recovery Corporation and Ponderosa Assets, L.P. v. Argentine Republic, the arbitral tribunal concluded that “…in addition to declaratory powers, it has the power to order measures involving performance or injunction of certain acts”, invoking a number of inter-State cases, considered by international courts and tribunals, suggested by Claimants, according to which “…The delivery of such an order requires, therefore, that two intimately linked conditions be fulfilled, namely that the wrongful act has a continuing character and that the violated rule is still in force at the time in which the order is issued[31]”, thus allegedly confirming the tribunal’s power to order pecuniary or non-pecuniary remedies, including restitution.

Additionally, it is established, that in case of lawful expropriation, the remedy would be compensation, however, with some exceptions; but in case of unlawful expropriation, when feasible the remedy would be restitution rather compensation[32]. So, in Ioan Micula, Viorel Micula and others v. Romania the arbitral tribunal stated, that, ultimately, whether restitution was an appropriate remedy, and whether restitution or compensation should be ordered, were questions properly addressed at the merits phase of the proceedings[33].

The ICSID Convention does not in fact prohibit the award of non-pecuniary remedies. But most likely, legitimate restitution may be reached voluntary if the parties so agree, for instance, through negotiations or mediation.

Requirement of suspending enforcement of the plain packaging legislation seems to be a mistake of Philip Morris (its lawyers). But it has also become a demand of the contemporary history’s phase for such an international body which, probably, may be in the form of the International Investment Court, recently suggested by the European Union as a response to a number of challenges including the considered one relevant to the right to regulate.

Costs of arbitration

The Award on Jurisdiction, dated December 17, 2015, rejecting jurisdiction under the Philip Morris case against Australia has not yet been disclosed, therefore the costs of the arbitration cannot be rightly specified here.

Nevertheless, on July 28, 2015, Australia was reported to face a $50m legal bill for the first investment arbitration stage (and the last one as it appeared on December 17, 2015) of defending its cigarette plain packaging legislation before the arbitral tribunal in Singapore[34].

Since then, the costs of the arbitration under the Philip Morris case has been one of the most contentious issue between the lawyers, as it seems to be a case of the highest legal bills.

It its Response to the Notification of Arbitration, Australia requested as relief not only to declare that it has no jurisdiction over PM Asia’s claims, or that they are inadmissible; alternatively, to dismiss PM Asia’s claims in their entirety; but also to order that PM Asia bear the costs of the arbitration, including Australia’s costs of legal representation and assistance, pursuant to Article 42 of the UNCITRAL Arbitration Rules[35].

Article 42(2)[36] of the UNCITRAL Arbitration Rules, 2010, says: “The arbitral tribunal shall in the final award or, if it deems appropriate, in any other award, determine any amount that a party may have to pay to another party as a result of the decision on allocation of costs”. So, the above cannot be considered as an express provision for arbitral tribunals to do as requested Australia in the Philip Morris case.

On 5 May 2015, in support of the above approach, the European Commission in its Concept paper “Investment in TTIP and beyond – the path for reform. Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court”, notes: “We are making investors who bring a case and lose, pay for all the costs of the legal proceedings. This “loser pays principle”, introduced for the first time ever in CETA, will not only discourage frivolous or unfounded claims but will also mean that the investor must pay the litigation costs of the state he has challenged (at present, even if a government successfully defends itself, it often has to bear its litigation costs). Given the financial risk, an investor will think twice before bringing any ISDS claim”[37].

The right to regulate and IIA & ISDS reform

The right to regulate is considered to be the State’s ability to legislate without running the risk of having to pay damages under a treaty either trade or investment.

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Suggesting scientific approach, in February 2015, Andrew Mitchell, Professor at Melbourne Law School, Australian Research Council Future Fellow and Director of the Global Economic Law Network, and Elizabeth Sheargold, PhD Candidate and Research Fellow at Melbourne Law School (Australia), being supported by the Australian National Preventive Health Agency and the Australian Research Council, suggested a brief survey of different options available to States, negotiating IIA, so as to minimize the risk that the IIAs, being negotiated by States, could later be used to challenge tobacco control measures[38].

It is also worth mentioning that some legal professionals insist that the right to regulate in the context of the Philip Morris case would have been an issue to be decided on the merits, had the arbitration gone forward.

One way or another, we are also looking forward for the award on the merits under the other Philip Morris’ case: Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay[39] under the BIT Uruguay – Switzerland 1988, since 2010, having been considered by the arbitral tribunal of Prof. Piero Bernardini (Presiding Arbitrator), Prof. Gary Born and Prof. James Crawford (Arbitrators), where the Decision on Jurisdiction, dated July 2, 2013[40], confirmed the arbitral tribunal’s jurisdiction over the similar dispute under the BIT Uruguay – Switzerland, 1988.

Actually, the right to regulate in the context of international investment arbitration is not an issue of only the merits phase but also of the jurisdiction (jurisdiction ratione materiae).

As a matter in point of fact, before the Philip Morris cases, since 2003-2004 the right to regulate has been actively discussed in the context of international trade and investment relations. According to the OECD’s report of 2004[41], “state measures, prima facie a lawful exercise of powers of governments, may affect foreign interests considerably without amounting to expropriation. Thus, foreign assets and their use may be subjected to taxation, trade restrictions involving licenses and quotas, or measures of devaluation. While special facts may alter cases, in principle such measures are not unlawful and do not constitute expropriation”, Ian Brownlie stated in 2003[42]. The same point of view was put forward by M. Sornarajah in 1994 [43].

It should be mentioned, that, according to Marc Firestone, Philip Morris International Senior Vice President and General Counsel: “This case has never been about a government’s undeniable authority to regulate in the public interest. Nor has there ever been any question that tobacco products merit strict oversight. In our view, the real point is simply this: Even when pursuing tobacco control objectives, governments are still accountable if they choose to use unlawful means. This is the essence of the rule of law”[44].

In any event, the above point of view, with relevant reservations, should be strongly supported and not only in respect of the tobacco control objectives. Generally, in international investment and trade relations, and, supposedly, not only international, according to the principle of non-discrimination, the balance between public and private interests must be always observed. In so doing, the proportionality of measures undertaken by the State, acting as a sovereign in public interests, should not be underestimated in line with predictability and publicity of the appropriate measures undertaken by the State.

The goal to “preserve the state’s right to regulate in good faith and for a legitimate purpose” had been mentioned, amongst others, in the Public Statement on the International Investment Regime – 31 August 2010[45] (“the Osgood Hall Public Statement on the International Investment Regime”), signed by a number of eminent academics from different countries.

Nevertheless, the following information confirms the relevance of the issue being repeatedly put forward as it is in the Philip Morris case.

Even though the arbitral award has not yet been issued and made available, experts are beginning to make reference to the Philip Morris case as being on a par with the Vattenfall case[46], the first investment case against Germany under the Energy Charter Treaty, as a landmark cases, which attracted wider attention. In doing so, in November 2013, the European Commission pointed out that investment protection provisions, including ISDS needed improving to find a better balance between the right of States to regulate and the need to protect investors[47]. Therefore, the European Commission suggested rebalancing the system via a two-pronged approach, providing, inter alia, (1) clarifying and improving investment protection rules (reaffirming States’ right to regulate to pursue legitimate public policy objectives and determining notions ‘Indirect expropriation’ and ‘Fair and equitable treatment’) and (2) improving how the dispute settlement system operates (preventing multiple or frivolous claims (having lost a case, an investor shall be obliged to pay all litigation costs including those of a State).

Also, the European Commission established that the key challenge for the EU’s reformed investment policy is the need to ensure that the goal of protecting and encouraging investment does not affect the ability of the EU and its Member States to continue to pursue public policy objectives[48].

One of the weaknesses of the most IIAs is an absence of explicit references to the right to regulate in the public interests. Therefore, arbitral tribunals have no appropriate applicable provisions safeguarding the sovereign right of States to legislate in good faith and for a legitimate purpose.

But States and integration communities have already started safeguarding their right to regulate, introducing appropriate reservations into relevant treaties (BITs, IIAs, FTAs and some others).

So, the preambles of CETA and EU Singapore FTA declares that Parties preserve their right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, public morals and the promotion and protection of cultural diversity, thus giving a very important interpretative guidance.

Generalizing international trade and investment practices, UNCTAD in its World Investment Report 2015 (WIR15)[49], recalling UNCTAD’s Investment Policy Framework (WIR12), UNCTAD’s reform paths for investment dispute settlement (WIR13), and its reform paths for the IIA[50] reform (WIR14), names, among other main purposes of the IIA reform, safeguarding the right to regulate [51] and reforming ISDS mechanism[52].

Finally, on September 16, 2015, proposing a new and transparent system for resolving disputes between investors and States – the Investment Court System[53] to replace the existing ISDS mechanism in all ongoing and future EU investment negotiations, including the EU-US talks on a Transatlantic Trade and Investment Partnership (TTIP), the EU pointed out amongst the major improvements, that “governments’ right to regulate would be enshrined and guaranteed in the provisions of the trade and investment agreements”[54].

But, in some opinions including mine, the Investment Court System will definitely dilute the very attributes so desired by the actors, preferring arbitration. Besides, it may take another fifty years. So, in 1948, International Law Association suggested the Draft Statutes of the Arbitral Tribunal for Foreign Investment and Foreign Investment Court [55], but only the idea of the Arbitral Tribunal was supported and further developed, bringing us to the ICSID Convention, providing international investment conciliation and arbitration, already ratified by 150 Contracting States.

Conclusion

The existing system of ISDS, including the ICSID’s one, has being widely critiqued recently for many reasons, particularly, for undermining the right of States to regulate (legislate). But all the stakeholders have been interested in peaceful, non-informal and just mechanisms of investment dispute settlement. Therefore all the existing Alternative Dispute Resolution (ADR) mechanisms such as mediation/conciliation, arbitration, ‘good offices’ shall be further developed, as they are especially important in international investment and trade relations, pursuing aims of avoiding or mitigating conflicts, providing peace, security and global sustainable development, meeting rights and demands of all the stakeholders including States and investors as well as insuring the balance between private and public interests; safeguarding the right of States to regulate in good faith and for legitimate public policy objectives; and balancing it with the need to protect investors; therefore, insuring predictability, publicity and proportionality of the measures undertaken by States and integration communities.

(* Olga Shaposhnikova graduated from Moscow State Institute of International Relations of the Ministry of Foreign Affairs of the Russian Federation (MGIMO University, Moscow). She has been completing her Ph.D. thesis on international investment arbitration at MGIMO University. She is a lawyer from the Russian Federation. She can be reached at: olga.shaposhnikova.2013@mail.ru.)

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[1] Philip Morris Asia Limited (Hong Kong) v. The Commonwealth of Australia, UNCITRAL Arbitration Rules, 2010, PCA Case No. 2012-12, available at: http://www.pca-cpa.org/showpage3619.html?pag_id=1494; http://www.pcacases.com/web/view/5; http://www.italaw.com/cases/851; http://investmentpolicyhub.unctad.org/ISDS/Details/421.
[2] See also the first case (2010) brought by Philip Morris against the Oriental Republic of Uruguay: Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7 (formerly FTR Holding SA, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay), available at: http://www.italaw.com/cases/460#sthash.WYyu6o9n.dpuf
[3] Philip Morris Asia Limited (Hong Kong) v. The Commonwealth of Australia, UNCITRAL Arbitration Rules, 2010, PCA Case No. 2012-12, Australia’s Response to the Notice of Arbitration, December 21, 2011 (hereinafter “Australia’s Response to the Notice of Arbitration”), paras. 11-15, available at: http://www.italaw.com/sites/default/files/case-documents/ita0666.pdf
[4] The World Health Organization’s Framework Convention on Tobacco Control, Geneva, 21 May 2003, available at: https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=IX-4&chapter=9&lang=en
[5] Australia’s Response to the Notice of Arbitration, para. 17.
[6] Australian Tobacco Plain Packaging Act 2011, No. 148, 2011, available at: https://www.comlaw.gov.au/Details/C2011A00148
[7] Australia’s Response to the Notice of Arbitration, para. 26.
[8] Gareth Hutchens, “Australian government wins plain packaging case against Philip Morris Asia”, The Sydney Morning Herald, December 18, 2015, available at: http://www.smh.com.au/federal-politics/political-news/australian-government-wins-plain-packaging-case-against-philip-morris-20151218-glqo8s.html
[9] Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments (the BIT), 1993, available at: http://www.unctad.org/sections/dite/iia/docs/bits/hongkong_australia.pdf
[10] According to Prof. Mark Davison, it seems that Philip Morris Asia Limited (Hong Kong) acquired assets in Philip Morris (Australia) Ltd being fully aware that they would be adversely affected by the forthcoming legislation. // Mark Davison, ‘Big Tobacco vs Australia: Phillip Morris scores an own goal’, available at: http://www.monash.edu.au/news/show/big-tobacco-vs-australia-phillip-morris-scores-an-own-goal
[11] UNCTAD IIA Issues Note, May 24, 2013, Reform of Investor-State Dispute Settlement, p. 3, available at: http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf
[12] UNCTAD, SCOPE AND DEFINITION, UNCTAD Series on Issues in International Investment Agreements II, UN New York and Geneva, 2011 p. 93-94, available at: http://unctad.org/en/Docs/diaeia20102_en.pdf
[13] “TTIP” means the Transatlantic Trade and Investment Partnership.
[14] “CETA” means the Comprehensive Economic and Trade Agreement between the EU and Canada, available at: http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf
[15] European Commission Concept paper “Investment in TTIP and beyond – the path for reform. Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court”, 5 May 2015, available at: http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.PDF
[16] Philip Morris Asia Limited (Hong Kong) v. The Commonwealth of Australia, UNCITRAL Arbitration Rules, 2010, PCA Case No. 2012-12, Notice of Arbitration, 21 November 2011 (hereinafter “Notice of Arbitration”), paras. 1.6, 7.2, available at: http://www.italaw.com/sites/default/files/case-documents/ita0665.pdf
[17] Notice of Arbitration, 21 November 2011, paras. 6.6-6.11.
[18] UNCTAD, Investor–State Dispute Settlement and Impact on Investment Rulemaking, UN, New York and Geneva (2007), p.28; Christopher Dugan, Don Wallace, Jr., Noah D. Rubins, Borzu Sabahi, Investor-State Arbitration (New York: OUP, (2008) 5 June 2014) at 542; Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, paras. 219, 258, 260-1. (De Brabandere E.C.P.D.C., Investment Treaty Arbitration as Public International Law: Procedural Aspects and Implications (Cambridge: OUP, 2014) at 36)
[19] Australia’s Response to the Notice of Arbitration, paras. 56-58.
[20] De Brabandere E.C.P.D.C., Investment Treaty Arbitration as Public International Law: Procedural Aspects and Implications (Cambridge: OUP, 2014) at 129-147.
[21] Mergen Doraev, The “Memory Effect” of Economic Sanctions Against Russia: Opposing Approaches to the Legality of Unilateral Sanctions Clash Again, 37 U. Pa. J. Int’l L. 355 (), pp. 378-379, available at: http://scholarship.law.upenn.edu/jil/vol37/iss1/7
[22] WTO DISPUTE SETTLEMENT: DISPUTE DS434 “Australia — Certain Measures Concerning Trademarks and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging”, available at: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds434_e.htm
[23] British American Tobacco Australasia Limited and Ors v. The Commonwealth of Australia, Case S389/2011, available at: http://www.hcourt.gov.au/cases/case-s389/2011
[24] JT International SA v. Commonwealth of Australia, Case S409/2011, available at: http://www.hcourt.gov.au/cases/case-s409/2011
[25] http://www.hcourt.gov.au/assets/publications/judgment-summaries/2012/hca43-2012-10-05.pdf
[26] Notice of Arbitration, 21 November 2011, paras. 1.7; 49.
[27] Convention on the Settlement of Investment Disputes between States and Nationals of Other States (The ICSID Convention), 1965, including the Report of the World Bank Executive Directors on the Convention, as well as the ICSID Regulations and Rules, as amended and in effect from April 10, 2006, available at: https://icsid.worldbank.org/apps/ICSIDWEB/icsiddocs/Pages/ICSID-Convention.aspx
[28] De Brabandere E.C.P.D.C., Investment Treaty Arbitration as Public International Law: Procedural Aspects and Implications (Cambridge: OUP, 2014) at 187-190.
[29]Ioan Micula, Viorel Micula and others v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008 (hereinafter “Ioan Micula Decision”), para. 166, p. 48.
[30] Ioan Micula Decision, paras. 49(iii), 158-168, pp. 11, 47-49.
[31] Rainbow Warrior, R.I.A.A., Vol. XX, 1990, p. 217, at 270, paragraph 114, as cited in James Crawford: The International Law Commission’s Articles on State Responsibility, 2002, p. 196, note 457 and associated text, and in Claimants’ Counter-Memorial on Jurisdiction, footnote 107. // Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004, paras. 78-81, pp.
[32]Sergey Ripinsky with Kevin Williams, Damages in International Investment Law, British Institute of International and Comparative Law, 2008.
[33] Ioan Micula Decision, para. 168, p. 49.
[34] http://www.smh.com.au/federal-politics/political-news/australia-faces-50m-legal-bill-in-cigarette-plain-packaging-fight-with-philip-morris-20150728-gim4xo.html#ixzz3ur9tIXeN
[35] Australia’s Response to the Notice of Arbitration, para. 60.
[36] Article 42(1) of the UNCITRAL Arbitration Rules, 2010 is irrelevant in the context.
[37] European Commission Concept paper “Investment in TTIP and beyond – the path for reform. Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court”, 5 May 2015, available at: http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.PDF
[38] Andrew Mitchell and Elizabeth Sheargold, ‘State Regulatory Autonomy and Tobacco Control in International Trade and Investment Law’, February 19, 2015, available at: https://www.iisd.org/itn/2015/02/19/state-regulatory-autonomy-and-tobacco-control-in-international-trade-and-investment-law/
[39] Abal Hermanos S.A. (Uruguay) (Uruguayan), FTR Holding S.A. (Swiss), Philip Morris Brand Sàrl (Switzerland) (Swiss), Philip Morris Products S.A. (Switzerland) (Swiss), ICSID Case No. ARB/10/7 (formerly FTR Holding SA, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay), available at: https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/casedetail.aspx?CaseNo=ARB/10/7
[40] The Oriental Republic of Uruguay: Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Decision on Jurisdiction, 3 July 2013, available at: http://www.italaw.com/sites/default/files/case-documents/italaw1531.pdf
[41] See, for example, OECD (2004), “Indirect Expropriation” and the “Right to Regulate” in International Investment Law”, OECD Working Papers on International Investment, 2004/04, OECD Publishing. http://dx.doi.org/10.1787/780155872321 // http://www.oecd.org/daf/inv/investment-policy/WP-2004_4.pdf
[42] Ian Brownlie, ‘Public International Law’, Oxford University Press, 6th Edition, 2003 at 509.
[43] M. Sornarajah, ‘The International Law on Foreign Investment’ (1994) at 283, Cambridge University Press.
[44] http://www.pmi.com/eng/media_center/press_releases/pages/201512171934.aspx#
[45] The Osgood Hall Public Statement on the International Investment Regime, 31 August 2010, available at: http://www.osgoode.yorku.ca/public-statement-international-investment-regime-31-august-2010/
[46] Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6 (formerly Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. The Federal Republic of Germany), available at: http://www.italaw.com/cases/1148#sthash.JLGH5svc.dpuf
[47] European Commission, ‘Investment Protection and Investor-to-State Dispute Settlement in EU agreements’, November 2013, available at: http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151916.pdf;
[48] European Commission Concept paper “Investment in TTIP and beyond – the path for reform. Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court”, 5 May 2015, available at: http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.PDF
[49] UNCTAD, ‘World Investment Report 2015’, available at: http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
[50] “IIA” means “International Investment Agreements”, including investment and trade treaties.
[51] Re the right to regulate see also: UNCTAD, ‘The Development Dimension of FDI: Policy- and Rule-Making Perspectives’, 2003, available at: http://unctad.org/en/Docs/iteiia20034_en.pdf
[52] Esme Shirlow, ‘Reforming Investment Treaties: UNCTAD’s 2015 World Investment Report’, July 23, 2015, available at: http://kluwerarbitrationblog.com/2015/07/23/reforming-investment-treaties-unctads-2015-world-investment-report/
[53] Cecilia Malmström, European Commission, ‘Proposing an Investment Court System’, 18 September 2015, available at: http://ec.europa.eu/commission/2014-2019/malmstrom/blog/proposing-investment-court-system_en
[54] European Commission, ‘Commission proposes new Investment Court System for TTIP and other EU trade and investment negotiations’, Brussels, 16 September 2015, available at: http://europa.eu/rapid/press-release_IP-15-5651_en.htm
[55] International Law Association, Draft Statutes of the Arbitral Tribunal for Foreign Investment and Foreign Investment Court, 1948; UNCTAD, International Investment Instruments: A Compendium (72 Volume 3, Non-Governmental Instruments), available at: http://www.unctad.org/sections/dite/iia/docs/Compendium//en/72%20volume%203.pdf
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