Still standing: Investors’ ability to sue the Government under CPTPP

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed in March 2018 in Santiago, Chile by 11 of the 12 original Trans-Pacific Partnership Agreement (TPP) countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The United States formally withdrew from the TPP in January 2017, and so is not a member of CPTPP.

The Foreign Affairs, Defence and Trade Select Committee has now completed its examination of the CPTPP and has noted that the Government intends the treaty to be implemented through a bill. But what about the concerns with regard to the Investor State Dispute Settlement (ISDS) provisions, which became a point of contention with those groups opposing the original TPP?

This article describes the revised position and seeks to dispel some of the confusion around the ISDS provisions and who can – and cannot – sue the New Zealand Government and for what.

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Can foreign investors still sue the New Zealand Government?

Critics of the original agreement claimed the TPP would undermine New Zealand’s sovereignty by restricting the Government’s ability to regulate in the public interest. The new Minister for Trade and Export Growth, Hon David Parker, sought further concessions for the CPTPP, building on the previous Minister’s work, to safeguard the ability for future governments to regulate in the public interest even if such actions could have an adverse effect on a particular investment. The end result being that the CPTPP continues to offer rights to foreign investors, including a means of settling legitimate disputes through the ISDS provisions, but with a much narrower scope for bringing such actions.

But these modifications have a quid pro quo effect. They also reduce the protection afforded to New Zealand outward foreign investment in CPTPP partner countries – where ISDS is not available, New Zealand investors must use other dispute resolution pathways, such as the host countries’ domestic legal system to resolve disputes which can be problematic.

Suspended provisions and side letters

The CPTPP narrows the scope of the ISDS provisions by:

  1. suspending some of the original ISDS provisions in the TPPA so they cannot be effected under the new agreement for any of the 11 countries. The suspended provisions require the agreement of all CPTPP parties before they will apply again; and
  2. through the use of “side letters”, which are agreements that have the same status as the CPTPP but are only between some of the CPTPP countries.

Suspended provisions

Provisions allowing claims to investment agreements and investment authorisations, as well as minimum standard of treatment in financial services have been suspended.

In the Investment Chapter of CPTPP, provisions allowing claims relating to investment agreements and investment authorisations (Investment Contracts), as well as provisions allowing claims relating to the minimum standard of treatment in financial services, have been suspended. This means that private companies who enter an Investment Contract with the New Zealand Government will not be able to use ISDS provisions if there is a dispute about that contract.

The provisions in the TPP that would have required Pharmac to make administrative changes benefitting the pharmaceutical industry have been suspended. The intellectual property provisions have also been suspended, which means that New Zealand does not need to extend the copyright term from 50 years to 70 years. This removes a significant cost for New Zealand.

Side letters and joint declaration

New Zealand has also signed bilateral agreements (Side Letters) with Brunei, Malaysia, Peru, Vietnam and Australia to restrict the use of the ISDS provisions by their nationals. As a result investors from:

  • Australia and Peru have no recourse to the ISDS provisions against the New Zealand Government; and
  • Brunei, Malaysia and Vietnam will first have to try to resolve any dispute with the New Zealand Government through consultation and negotiation (including good offices, conciliation and mediation). If the dispute cannot be resolved within six months through consultation and negotiation, the investor can seek the consent of the New Zealand Government to start proceedings under the ISDS provisions. If the New Zealand Government refuses to provide consent, then the government of the investor may request that consultation take place at a government-to-government level.

The side letters restricting the use of the ISDS provisions against these five CPTPP parties mean that only investors from Canada, Chile, Japan, Mexico and Singapore can initiate ISDS proceedings against New Zealand without any additional constraints. This is of particular importance as the five countries with side letters in place account for over 80% of foreign investment into New Zealand.

However, New Zealand, Canada and Chile have issued a joint declaration affirming the right of each country to regulate within its territory for legitimate policy objectives such as safety, health, the environment, public morals, social or consumer protection and the promotion and protection of cultural diversity.

So what can the New Zealand Government be sued for?

Just like the TPP, the ISDS provisions only apply to the Investment Chapter of the CPTPP. This means foreign investors can only use ISDS to enforce their rights and the obligations of the host country contained in the Investment Chapter. The purpose is to provide investors with certainty by protecting their investments from actions by governments that are grossly unfair or unjust.

The purpose is to provide investors with certainty by protecting their investments from actions by governments that are grossly unfair or unjust.

Taking into account the suspended provisions, a foreign investor can now only initiate proceedings against the New Zealand Government if the investor can show that the Government has breached one of the limited number of treaty obligations contained in the Investment Chapter. In summary, these treaty obligations include:

  • Not expropriating assets without compensation;
  • Not discriminating based on nationality (except where exceptions apply); and
  • Not treating investments in a way that breach customary international law principles on fair and equitable treatment and full protection and security.

While the CPTPP has made further modifications to the original ISDS provisions in the TPP it is worth remembering that the TPP already had a number of safeguards to protect the ability of governments to regulate in the public interest, and these continue under CPTPP including:

  • ISDS claims must be submitted before three and a half years have passed;
  • Initially an investor must enter into consultation and negotiations to attempt to resolve the claim with the New Zealand Government;
  • Any preliminary objections from the New Zealand Government, e.g. that the claim goes beyond a tribunal’s jurisdiction or is manifestly without legal merit, must be resolved before the full arbitration commences in order to reduce costs;
  • There are also provisions that mean hearings will be open to the public, and which allow tribunals to accept submissions from experts and the public;
  • The New Zealand Government cannot be sued for regulatory measures related to public education, health, social services, and decisions under the Overseas Investment Act; and
  • There is a provision that allows the New Zealand Government to rule out ISDS challenges over tobacco control measures.

In addition, the TPP and now CPTPP also preserves the status of the Treaty of Waitangi. New Zealand was the only country to have specific recognition of its indigenous peoples included in the TPP, and this continues in the CPTPP. Nothing in the agreement will prevent the Crown from meetings its obligations to Māori and New Zealand’s interpretation of the Treaty will not be subject to the dispute settlement mechanisms.

The TTP and CPTPP preserve the status of the Treaty of Waitangi.

Where to next?

The CPTPP will enter into force 60 days after at least six of the CPTPP countries have completed their domestic legal procedures and notified the depositary country (New Zealand) of this.

New Zealand aims to be among the first countries to complete its domestic requirements. This would mean making the legislative changes that are required to comply with CPTPP obligations. We understand the Government intends to introduce legislation in Parliament later this year to enable New Zealand to ratify the CPTTP before the end of 2018.

Interestingly, the Select Committee has also noted that it has been advised by the Ministry of Foreign Affairs and Trade that the Government will not include ISDS provisions into future trade agreements.

About the authors

Daniel Fielding and Kalyani Dixit are members of the Arbitration team within the National Disputes Resolution Division at MinterEllisonRuddWatts. Daniel has recently completed his Master of Laws in International Arbitration and Dispute Resolution at the National University of Singapore.

Disclaimer: This article has been drafted using public information produced by the Ministry of Foreign Affairs and Trade. The information contained in this publication is intended as a guide only and is not legal advice.

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