New Zealand signs side letters with five CPTPP members to exclude compulsory investor state dispute settlement

New Zealand has recently signed "side letters" to exclude compulsory Investor State Dispute Settlement ("ISDS") with five members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") – Brunei Darussalam, Malaysia, Peru, Viet Nam and Australia. This demonstrates the evolving approach to ISDS in the Asia Pacific region and is of particular interest both in the context of the worldwide debate about the future of ISDS, and also due to the importance of CPTPP members within the global economy.

ISDS: global and regional trends

Countries and regional organisations worldwide have proposed and have started implementing various changes that will alter the ISDS landscape. At a global level, this includes the work of UNCITRAL's Working Group III in considering recommendations on the possible reform of ISDS to make the ISDS system more coherent and consistent. Another notable and awaited development is the upcoming publication by ICSID of background papers on proposed amendments to ICSID Arbitration Rules, so as to "modernize [them] based on case experience".

Regionally, the EU is seeking to establish a Multilateral Investment Court to replace the system of ad hoc arbitration. Meanwhile, following policy reviews on foreign direct investment, countries like South Africa, India, Indonesia, Venezuela, Bolivia and Ecuador[1] have decided to terminate, re-negotiate or not renew their Bilateral Investment Treaties ("BITs"). In the US, the debate about ISDS and the renegotiation of NAFTA is still on-going.

Side letters to the CPTPP

Following the withdrawal of the US from the Trans-Pacific Partnership ("TPP"), 11 countries have decided to sign the CPTPP, a revived version of the TPP. Notably, the CPTPP has narrowed the scope for investors to make ISDS claims – eg the CPTPP restricts the ability of private companies who enter into an investment contract with the government to use ISDS.

On 8 March 2018, alongside signing the CPTPP itself, New Zealand also signed side letters to exclude compulsory ISDS with five signatories to the CPTPP – Brunei Darussalam, Malaysia, Peru, Viet Nam and Australia. This move was anticipated given  announcements by New Zealand's newly elected government in October 2017 that it would not agree to ISDS, as well as prior observations by the New Zealand's Ministry of Foreign Affairs and Trade in particular that New Zealand would continue “to seek similar agreements with the other countries that share [their] wider concerns about ISDS.”

New Zealand has taken two different approaches to the side letters, which constitute bilateral agreements between the relevant states that will enter into force on the same date as the CPTPP itself.

First approach: full exclusion of ISDS

The first approach is to fully exclude an investor's right to ISDS. This can be seen in the Peru and Australia side letters. Australia is the source of 80% of New Zealand's overseas investment from CPTPP countries and this approach is consistent with the previous practice of these two countries to exclude ISDS clauses (eg in relation to the ASEAN-Australia-New Zealand Free Trade Agreement ("AANZFTA")). As for the Peru side letter, New Zealand did not previously have an investment treaty with Peru, therefore from a practical perspective it has not changed the stance of the two states in relation to ISDS.

ISDS: escalation approach

The second approach, taken in the remaining three side letters, is more complex and provides for dispute resolution on a staged basis. In case of a dispute, an investor should make a written request for consultations and negotiations, briefly describing the facts regarding the measure(s) at issue. The state and the investor will then try to resolve the dispute amicably within six months by using non-binding third party procedures, including good offices, conciliation and mediation, failing which the dispute may be submitted to arbitration in accordance with Chapter 9 of the CPTPP, provided, however, that the state consents (and, in case of the Viet Nam side letter, "specifically consents") to its application.

This approach changes the traditional mechanism where a state party provides a standing offer and consent to arbitration via the treaty and the arbitration agreement is perfected through of the commencement of an arbitration by an investor. It follows from the wording of the side letters that a state may provide consent upon its own discretion only after an unsuccessful attempt to resolve a dispute amicably, and a refusal by a state to consent or "specifically consent" to arbitration may then limit the option of arbitration for that investor.

The Brunei Darussalam side letter additionally provides that when the host state does not provide consent to ISDS, the investor home state may request consultations with the host state under a New Zealand-Brunei Darussalam agreement on bilateral consultation. In theory, therefore, investors initiating a dispute settlement mechanism under this instrument may have an additional layer of protection, albeit this will depend on the home state's discretion and will, no doubt, be exercised with political considerations in mind.

Investors from Brunei Darussalam, Malaysia, and Viet Nam and investors from New Zealand investing in these countries may still be able to rely on other instruments providing for ISDS to which the above states are party, as for example, AANZFTA. Thus, under article 1.2 (Relation to Other Agreements) of the CPTPP member states acknowledge existing rights and obligations of each member state under existing international agreements to which all or at least two CPTPP member states are parties. Moreover, the Viet Nam side letter expressly provides that nothing in it "shall derogate from the rights and obligations of the Parties under any existing international agreements".

Joint declaration on ISDS

In addition to signing the side letters, New Zealand, together with Chile and Canada, also made a joint declaration on ISDS. While reaffirming the right of each state to "regulate within its territory to achieve legitimate policy objectives", this declaration recognises "the strong procedural and substantive safeguards" of the CPTPP and intends "to consider evolving international practice and the evolution of ISDS including through the work carried out by multilateral international fora". It remains to be seen what the practical consequences of this declaration are, although it seems that Chile and Canada are unwilling to restrict the availability of ISDS in its entirety. Such "evolving international practice" may, on Canada's part at least, be a reference to the ongoing negotiations between the EU and Canada in the CETA regarding the use of an investment court, rather than arbitration.

Comment

The approach taken to ISDS within the CPTPP demonstrates the flexibility that can be achieved under the broader church of such a wide ranging international agreement. Rather than allowing the issue of ISDS to stymie the agreement, parties have instead reached bilateral agreements and understandings which derogate from the wider agreement.

In terms of what this means in practice, unless additional side letters in relation to ISDS are signed before the CPTPP enters into force, the general ISDS provisions contained in Chapter 28 of the CPTPP will apply between New Zealand and the remaining five CPTTP signatories. Japan, Mexico and Singapore have, to date, decided not to express any specific views on ISDS, whereas the joint declaration of Chile and Canada signify their intention to remain within the current system at this time. It is worth remembering that these side letters are solely bilateral and that they only apply for investors of Brunei Darussalam, Malaysia, Peru, Viet Nam and Australia into New Zealand and vice versa.

Investors covered by the side letters which include escalation ISDS provisions may be able to benefit from ISDS protection in other international instruments. However, the approach taken by the side letters' signatories shows their intention to limit or exclude ISDS and it remains to be seen if amendments to AANZFTA could follow.

For more information, please contact Brenda Horrigan, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

[1]       Although Ecuador's new government has recently indicated a shift in this policy and is considering entering into new BITs.