Leaked Investment Chapter of the TPP: broad similarities to the US Model BIT, a nod to the ongoing debate and some outstanding issues

On 25 March the 20 January 2015 working draft of the Investment Chapter of the Trans-Pacific Partnership (TPP) was posted on Wikileaks. (There may be later drafts not yet publicly available, but this is the best guide yet to what is coming.) As discussed in our earlier article here, the investment protection and Investor-State dispute settlement (ISDS) provisions of the TPP have proved to be one of the most contentious elements of the agreement and a major battleground in the negotiations, particularly between the United States and Canada.

The content of this working draft has therefore provoked considerable interest and discussion. In particular, many have wondered whether the very public debate surrounding the recent conclusion of the negotiations between the EU and Canada on the CETA text and the on-going negotiation of the content of the Transatlantic Trade and Investment Partnership between the EU and the US may have also coloured the negotiation of the TPP.

In general it appears not. The leaked chapter looks very similar to the 2012 US Model BIT. The US Model BIT was drafted following a three year consultation process and is often used as the benchmark against which investment treaties are negotiated and measured. Given the strong bargaining power of the US in this agreement the similarities should not be particularly surprising.

There are, however, a few notable additions and changes to the text which are not included in the US Model (the below is non-exhaustive):

• The preamble to the chapter includes a right to regulate. The preamble is very similar to that of the preamble to the CETA and seeks to recognise the inherent right of the State to regulate to protect legitimate public welfare objectives including public health, safety, the environment, natural resources and public morals. The state's right to regulate has been a constant theme of the public debate and it is interesting to see that enshrined within the TPP, albeit within the preamble.
• The Most Favoured Nation (MFN) Clause has been restricted to cover only substantive protections and not the dispute resolution provisions of the TPP. This is an important addition and no doubt derives from the efforts of investors from Maffezini v Spain (ICSID Case No ARB/97/7) onwards to argue that the MFN clause should apply to pre-conditions to arbitration and dispute resolution clauses more widely.
• The Denial of Benefits Clause from the US Model BIT has been slightly re-worked to bring more clarity as to the circumstances in which the protections of the Chapter may be denied to an investor although the circumstances themselves have not materially altered.
• The inclusion of a provision recognising the subrogated rights of a State political risk insurer to bring a claim on the basis of any rights an investor may have possessed.
• The Investment chapter does not contain the standard US Model BIT clauses regarding investment, labour and the environment. This exclusion may be due to provision for these aspects elsewhere in the TPP.

One might, however be surprised at the broad similarities between the US Model BIT's ISDS provisions and the TPP. There has been a strong public reaction to ISDS in the US, EU, Australia and globally, and changes to this section might have been anticipated (as, indeed, has been seen in the recently released draft India model BIT text). There are no structural changes at all, with the TPP containing consent to ICSID and UNCITRAL arbitration, or any other arbitral institution or rules where the parties agree. The notice and time requirements of the US Model BIT are largely followed, albeit with a six month extension on the limitation period in when claims may be brought. The arbitrator selection process is very standard (one by each party, the third by agreement). The TPP also mirrors the US Model in its very broad requirements for a public and transparent process and tribunal discretion in cost allocation.

There is, however, a nod to the debate in shifting costs away from the state in the event of frivolous claims, with a provision (currently shown as an alternative text for Article II.28(3)) allowing a tribunal to award the respondent its costs in such circumstances. It is also notable that at Annex II-J Chile, Peru, Mexico and Vietnam appear to have negotiated a specific "fork-in-the-road" provision applicable only to them, stating that "if an investor elects to submit a claim to a court of administrative tribunal [of that state]…, that election shall be definitive and exclusive, and the investor may not thereafter submit the claim to arbitration".

Of interest may also be that the TPP Investment Chapter text mirrors the US Model BIT approach at Article II.6 of linking the standards of fair and equitable treatment (FET) and full protection and security to the customary international law minimum standard of treatment. This is an attempt to redress the oscillating standard which has been fundamental to the success of investors in such claims. However, the US approach to the FET standard differs quite substantially to the approach adopted by other nations and recent trade agreements, in particular the CETA. In the CETA there is no link to customary international law and the FET standard is defined by way of examples of treatment, not by reference to an underlying standard. The retention of the US approach in this agreement will certainly be of interest to those watching the TTIP negotiations and identifying potential areas of disagreement between the EU and US.

The draft text also shows that a number of extremely important issues still remain open. The text is peppered with numerous square brackets. Of particular note are those relating to Australia. When negotiations started Australia had maintained an anti-ISDS stance, and the draft text contains a footnote stating that "Section B [Investor-State Dispute Settlement] does not apply to Australia or an investor of Australia. Notwithstanding any provision of this Agreement, Australia does not consent to the submission of a claim to arbitration under this Section". This does not necessarily reflect the latest policy position of Australia, but it is interesting that Australia is pushing this reservation nonetheless. The footnote is followed by italic text stating that the deletion of the footnote is subject to certain conditions, although those conditions are not listed. Also square bracketed in relation to Australia is Annex II-M providing a carve-out from ISDS for Australian health-care systems. Given the tone of the Australian debate, some may also be surprised to see no specific carve out (square-bracketed or otherwise) for tobacco from investment protection or ISDS.

Herbert Smith Freehills is monitoring reports of the negotiations closely. If you would like to discuss how the TPP may affect you or any issue above then please do not hesitate to contact Christian Leathley, Partner, Donald Robertson, Partner, Leon Chung, Partner, Laurence Shore, Partner, or your usual Herbert Smith Freehills contact.