The Power of Perspectives

The Canadian Bar Association

Josh Scheinert and Michael Woods

TPP and the evolution of investor rights, part II

December 9 2015 9 December 2015

As noted in our companion piece, the recently concluded TPP is seeking to set new standards in international investment law, and in particular for the increasingly popular investor state dispute settlement (ISDS) system that has grown with it. Here are some of the specific ways in which it does that, maintaining certain protections in the usual fashion but construing others to import a higher threshold for investors seeking to bring claims.

Several traditional guarantees are made to investors in the TPP. They are protected against expropriation that does not conform to a public purpose and is conducted discriminatorily without due process, and where the investor is not promptly and fairly compensated. States are also prohibited from imposing performance requirements as a condition precedent. Performance requirements are commonly used to require domestic content in the operation of an investment.

Where the TPP parts ways from other investment agreements, including the recent Canada-EU Comprehensive Economic Trade Agreement (CETA) is with respect to other, equally as established investor protections, guarantees of national treatment, most favoured nation (MFN), and the minimum standard of treatment. It is here where the substantive protections become less certain and states are afforded new measures of flexibility.

National treatment and MFN obligations are ubiquitous in the investment provisions in free trade agreements and bilateral investment treaties. In essence, they promise that states cannot treat an investment or investor less favourably than other investors with whom they are in like circumstances, be they nationals of the host state in the case of national treatment, or nationals of a third state in the case of MFN. Under the TPP these protections mean that Canada could not treat a TPP party investor any less favourably than it could a Canadian investor or one from any other nation.

There is nothing unusual in the textual approach to these protections in the TPP. However, a footnote introduces a significant caveat that has the potential to modify the operation of these traditional provisions. The footnote states that in order to determine the existence of “like circumstances” between investors or investments, one must look to the totality of circumstances. It specifically points to “treatment [that] distinguishes between investors or investments on the basis of legitimate public welfare objectives.” It appears that the parties may be able to justify positive discrimination, offering preferential treatment to, presumably, their own nationals, if they can demonstrate a “legitimate public welfare objectives”.

Another potential rollback in investor protection concerns the minimum standard of treatment (MST). The MST provision requires a party to treat investors and investments in conjunction with accepted state practice, known formally as customary international law. It specifically enumerates two doctrines, fair and equitable treatment and full protection and security, as encompassed within this standard.

While guarantees of MST are commonplace, the TPP text appears to set important boundaries that will constrain future ISDS tribunals. The promise by states to afford investors MST, and the alleged failure to grant that level of treatment, has become the primary means for investors to argue in ISDS that they have, in essence, been treated unfairly on account of state actions. The wording of the TPP, however, suggests that unfairness - a standard that may be addressed by domestic judicial review procedures, will not be enough. It makes specific reference to instances of denial of justice or failure to physically protect an investment, elevating the threshold for a breach. It also explicitly excludes violations of an investor’s legitimate expectations, which has been a source of contention between states and investors in ISDS. The non-issuance or even renewal of subsidies or grants is also excluded from the standard.

That said, there will always be opportunity to argue that customary international law prohibits a certain type of act - treatment that is manifestly arbitrary is one probable example, but the MST provisions have set a high bar for an investor to bring a claim.

It may be argued that in light of public pushback regarding ISDS and public policy concerns with respect to potential liability and resulting constraints on states. Read together, the national treatment, MFN, and MST provisions of the TPP are reminders to investors that ultimately states must be in control of their own affairs. This ambition to put in place traditional investor protections while also ensuring states are not prevented from acting in their own interests, even if there may be adverse consequences for those same investors, is attempting to chart a new course for ISDS.

Josh Scheinert is a Toronto lawyer with a specialization in international investment and human rights. Michael Woods is a founding partner of Woods, Lafortune LLP, an Ottawa based international trade law firm. He previously practiced trade law as a partner at Heenan Blaikie LLP and Gottlieb & Pearson. He started his international career with the Department of Foreign Affairs and International Trade as counsel and trade negotiator as well as at postings abroad. The authors wish to thank Ghislaine Murango, a third year law student at the University of Ottawa (Civil Law Faculty) and intern with Woods, LaFortune LLP as part of the University’s program designed to give students an opportunity to gain experience working with law firms.

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Josh Scheinert is a Toronto lawyer with a specialization in international investment and human rights. Michael Woods is a founding partner of Woods, Lafortune LLP, an Ottawa based international trade law firm. He previously practiced trade law as a partner at Heenan Blaikie LLP and Gottlieb & Pearson. He started his international career with the Department of Foreign Affairs and International Trade as counsel and trade negotiator as well as at postings abroad. The authors wish to thank Ghislaine Murango, a third year law student at the University of Ottawa (Civil Law Faculty) and intern with Woods, LaFortune LLP as part of the University’s program designed to give students an opportunity to gain experience working with law firms.

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