The investment chapter of the Trans-Pacific Partnership

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In brief

The release of the text of the Trans-Pacific Partnership Agreement has renewed the debate about the ability of foreign investors to sue governments under investor-State dispute settlement mechanisms which are commonly part of international trade agreements or investment treaties between States. Partner Peter O'Donahoo, Managing Associate Hilary Birks and Associate Chris Holland report on the investment protections available in the Trans-Pacific Partnership Agreement and how the parties have attempted to strike a balance between a State's right to regulate and the rights of foreign investors.

How does it affect you?

  • The Australian Government has described the Trans-Pacific Partnership Agreement (TPP) as having 'great potential to drive job-creating growth across the Australian economy'.1 One of the aims of trade agreements is to encourage foreign investment. Chapter 9 of the TPP is directly relevant to any foreign investor (or potential foreign investor) that has an investment in a State Party to the TPP.
  • Current and potential foreign investors should consider the scope and application of Chapter 9 in order to:
    • undertake an appropriate risk assessment regarding potential investments in a State Party or projects relating to the expansion or restructuring of existing foreign investments;
    • understand the scope of protections afforded to foreign investors under the TPP;
    • assess the impact of the carve outs and limitations applicable to the protections available to foreign investors under the TPP; and
    • familiarise themselves with their procedural and substantive rights (and any applicable limitations) to bring a claim against the host State of their investment, including applicable time limits for commencing claims.


The text of the TPP, the largest free trade agreement to date, was released on 5 November 2015. The 12 negotiating parties to the agreement are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Together, these States account for approximately 36.3 per cent of global GDP. Other States in the region have indicated their intention to join the TPP (including South Korea, Indonesia and the Philippines).2

The TPP is complex and very broad in scope. It spans key trade topics across 30 chapters, as varied as tariff elimination, cross-border trade in financial services, and intellectual property. We have separately reported on the intellectual property issues and the scope of the Intellectual Property chapter of the TPP, Chapter 18.3 Chapter 9 is the 'Investment Chapter', which provides substantive protections for investors of one State Party who have investments in another State Party. Such protections are aimed to mitigate the sovereign and political risk of foreign investment. Chapter 9 includes a modern investor-State dispute settlement (ISDS) mechanism, which permits investors to seek recourse to international arbitration to resolve disputes with the relevant host State in certain circumstances. In this article, we focus on the terms of the Investment Chapter and some of the more notable or controversial aspects of it.

The inclusion of ISDS in the TPP, and the system of ISDS more generally, has been subject to significant criticism in recent years. This is in part due to the size of awards that have been made against State governments (eg the US$1.77 billion award against Ecuador in 2012 in favour of Occidental Petroleum Corporation).4 It is also due to the perception that ISDS mechanisms limit the ability of States to take regulatory action (particularly taking measures to protect public health and the environment). However, ISDS is not new – investment treaties have offered arbitration between host States and foreign investors for well over 40 years. Australia already has ISDS mechanisms in a range of its agreements with other States. Further, the drafting of investment treaties has developed to strike a better balance between the State's ability to regulate on the one hand, and the rights of foreign investors to be free from adverse State actions on the other. There has also recently been a greater focus on ways to improve the system generally to address a variety of criticisms; for example, the United Nations Conference on Trade and Development has considered some of the criticisms and possible proposals for reform.5

The scope of investment protections under the TPP

In order to attract the protections of the TPP, an investor of one State Party must have an 'investment' in another State Party, as defined in Article 9.1 of Chapter 9.6 The definition of investment includes a broad list of the forms that an investment may take.7 An 'investor of a Party' is defined in Article 9.1 to include a 'national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of another Party'. Accordingly, provided a company or individual can establish that it is a 'national' of a State Party and that it has an 'investment' in another State Party, it will satisfy Chapter 9's threshold criteria.

Arbitral tribunals have recognised that the scope of investment treaty protections may extend to corporations who restructure their investments to benefit from ISDS protection in relation to future disputes.8 When restructuring to gain the protection of the TPP, investors should be mindful of the 'denial of benefits' provision in Article 9.14, which permits a State Party to deny the benefits of the TPP to an investor where it does not have 'substantial business activities' in another State Party. In determining whether business activities are 'substantial', the key question is likely to relate to the materiality rather than the magnitude of the business activity in question.9

The scope of investment protections will also extend to adverse actions taken by regional or local governments.10 As noted in our previous report, the liability of the Federal Government for the actions of State and Territory governments has not yet been tested in Australia.11 The express wording of the TPP indicates that the Federal Government may be liable for actions of the States and Territories in some circumstances.

Substantive protections

The TPP contains the substantive investor protections typically found in investment treaties. In summary, the substantive protections with which each State Party is obliged to comply include the 'national treatment' (NT)12 protection, the 'most favoured nation' (MFN)13 protection, a right to fair and equitable treatment,14 full protection and security15 and protection against expropriation.16

To address some of the arguments that ISDS mechanisms unjustifiably fetter a State's sovereignty, in many cases, the substantive protections in Chapter 9 are subject to detailed caveats and clarifications. For example, in the context of the minimum standard of treatment accorded to covered investments, Article 9.6(5) states that 'for greater certainty', the mere fact that a subsidy or grant is not issued or renewed, does not constitute a breach, even if there is loss or damage to the covered investment. Further, Article 9.11 provides that the NT and MFN standards will not apply to certain non-conforming measures (ie existing laws or regulations contrary to the TPP). Australia's schedules contained in Annex I and Annex II to the TPP provide further detail regarding this carve-out from the standard protections.

Similarly, the expropriation protections in the body of the TPP are to be interpreted in accordance with Annex 9-B. This includes guidance to assist in determining whether an action or series of actions by a Party constitutes indirect expropriation (an effect equivalent to direct expropriation without formal transfer of title or outright seizure). Annex 9-B clarifies that this determination involves a case-by-case fact-based inquiry considering the economic impact of the government action, the extent to which the action interfered with distinct, reasonable investment-backed expectations and the character of the government action.

The right to regulate and the 'tobacco' carve-out

According to Article 9.15, nothing in the Investment Chapter is to be construed to prevent a State Party from adopting or enforcing any measures 'otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives'.

Whether measures that a State Party adopts in relation to the environment or health sector could amount to expropriation is dealt with in Annex 9-B which states:

Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives,
such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.
[emphasis added]

No guidance is provided as to the meaning of 'rare circumstances'. There is an express carve-out in the treaty relating to tobacco control measures. Article 29.5 states that 'a Party may elect to deny the benefits of Section B of Chapter 9 (Investment) with respect to claims challenging a tobacco control measure of the Party', and that such a claim 'shall not be submitted to arbitration'. This is responsive to concerns regarding the current arbitral proceedings commenced by Philip Morris Asia against the Australian Government in relation to Australia's plain packaging legislation under the Australia-Hong Kong bilateral investment treaty. In some circumstances, the question of whether a measure is a 'tobacco control measure' will be clear. However, experts have raised the question of whether the characterisation of a measure may be problematic, particularly if a State itself ultimately determines whether the measure is a tobacco control measure.17

Investor-State Dispute Settlement

The ISDS framework is set out in Section B of Chapter 9. In the event of an investment dispute, the process includes a consultation and negotiation period before any commencement of arbitration.18

There is a time limitation on the investor's right to commence proceedings – no claim may be submitted to arbitration if more than three years and six months have elapsed from the date on which the investor first acquired (or should have first acquired) knowledge of the alleged breach.19

One of the criticisms of ISDS has been the lack of transparency associated with the arbitral proceedings in circumstances in which the issues have important public policy consequences.20 In addressing this issue, there are express provisions in Chapter 9, Section B to promote the transparency of arbitral proceedings brought under the TPP. These include a requirement that, subject to the terms of the treaty, the host State makes all pleadings and submissions, minutes and orders and awards of the tribunal available to the public.21 The tribunal is also to conduct hearings open to the public, subject to arrangements for 'protected information' (as defined in Article 9.1).22

A tribunal may also accept and consider written amicus curiae submissions from a non-disputing party that 'has a significant interest in the arbitral proceedings'.23 A submission from such a party must identify the author and other particular details. Article 9.22(3) further provides that the tribunal shall ensure that amicus curiae submissions 'do not disrupt or unduly burden the arbitral proceedings, or unfairly prejudice any disputing party'.

If an investor commences a claim under Chapter 9, its right to pursue other dispute resolution avenues will be limited.24 However, there is a carve-out in relation to actions that seek 'interim injunctive relief' that do not involve the payment of damages before judicial or administrative tribunals of the host State, that are brought for the 'sole purpose' of preserving the investor's or enterprise's rights and interests during the arbitration.25

Notably, Australia has entered into a number of side agreements with certain TPP Parties that impact on the ISDS framework with those States, either under the TPP or separate agreements. There is a carve-out agreed between the governments of Australia and New Zealand, such that the ISDS procedures in the TPP will not apply to investments between their two countries.26 Upon the commencement of the TPP, Australia's bilateral investment agreements with Mexico, Peru and Vietnam will terminate (subject to the applicable survival clauses for pre-existing investments).27


The investment protections in Chapter 9 of the TPP seek to achieve an appropriate balance between a State's ability to regulate and the rights of investors. However, it remains to be seen how many of the carve outs will be interpreted. The scope of the treaty means that any Australian investor with interests in the Pacific region should consider carefully the terms of the treaty and its application to their business. This is especially so, given the possibility that the free trade area may expand as other States in the region join the TPP.


  1. About the Trans-Pacific Partnership, DFAT; (12 November 2015).
  2. See: 'Confirmed: Philippines wants to join TPP' The Diplomat (13 November 2015); 'Indonesia wants to join the TPP: President Jokowi' The Diplomat; 'The Truth about South Korea's TPP Shift' The Diplomat.
  3. Refer in particular to our blog, Scintilla, TPP Comes in at 6000 pages. Here are the Key Bits, (11 November 2015).
  4. This award has recently been annulled in part. See Occidental Petroleum Corporation & Occidental Exploration and Production Company v The Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Annulment of the Award, 2 November 2015.
  5. See UNCTAD's Issues Note, Reform of Investor State Dispute Settlement: In Search of a Roadmap (No 3, June 2013) and our report Focus: A different roadmap for Investor-State dispute settlement?.

  6. For the purposes of Chapter 9, an 'investment' is defined in Article 9.1 to mean:
    …every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.
  7. This includes, among other things, an enterprise, shares, debt instruments and loans, certain contracts (eg, construction contracts), licences, permits and intellectual property rights.
  8. See: Mobil v Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, paragraph 204.
  9. AMTO v Ukraine, Award, 26 March 2008, paragraph 69. In this case, the tribunal was satisfied that a Latvian claimant entity did have substantial business activities on the basis of its 'investment related activities conducted from premises in Latvia, and involving the employment of a small but permanent staff.'
  10. TPP, Article 9.2(2)(a).
  11. Refer to Australia's expanding network of investment treaties and investor-state dispute settlement.

  12. TPP, Article 9.4.
  13. TPP, Article 9.5.
  14. TPP, Article 9.6(1), (2)(a).
  15. TPP, Article 9.6(1), (2)(b).
  16. TPP, Article 9.7.
  17. See Simon Lester The TPP Tobacco Carve Out, 5 November 2015 (accessed 11 November 2015).
  18. TPP, Article 9.18(4) provides that subject to complying with the procedural requirements, an investor may submit a claim to arbitration under the ICSID Convention, the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules or any other arbitral institution agreed by the parties.
  19. TPP, Article 9.20(1).
  20. We have previously reported on these and other related issues, refer to Focus: A different roadmap for Investor-State dispute settlement? and Focus: Shifting Investor-State Arbitration into the Public Spotlight.

  21. TPP, Article 9.23(1).
  22. TPP, Article 9.23(2).
  23. TPP, Article 9.22(3).
  24. Refer to TPP, Article 9.20(2) which provides that no claim shall be submitted to arbitration unless the notice of arbitration is accompanied by a written waiver of 'any right to initiate or continue before any court or administrative tribunal under the law of a Party, or any other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach' that is referred to in the submission of a claim to arbitration.
  25. TPP, Article 9.20(3).
  26. See: side letter (unsigned) available on the DFAT website at:
  27. See: letters available at: