Last week I blogged here about the leaked negotiating text of the investment chapter in the Trans Pacific Partnership (TPP) negotiations. I noted that there are two separate proposals for annexes setting out how the provision governing expropriation should be interpreted. Without reproducing those annexes (quite a lot of text), this post examines the alternative proposals in terms of their impacts on regulatory autonomy.
The first approach (Annex 12-C) is along the lines of the annex on expropriation found in the US model BIT. The proposal seeks to clarify that the expropriation provision is intended to reflect customary international law and that whether an indirect expropriation has occurred must be determined on a case-by-case basis, by reference to various factors, including:
- the economic impact of an action (although this alone does not establish indirect expropriation);
- the extent to which the action interferes with distinct, reasonable investment backed expectations;
- and the character of the government action.
Finally, the annex notes in paragraph 4 that except in rare circumstances, non-discriminatory regulatory actions designed and applied to protect legitimate public welfare objectives, such as public health, do not constitute indirect expropriations.
There is a line of case law (see Fireman’s Fund v Mexico para. 176) to suggest that this is how clauses governing expropriation are often (although not always) interpreted. Moreover, the reference to customary international law is a declaration that the approach in the annex reflects custom. As such, the declaration could affect interpretation of expropriation clauses in treaties other than the TPP (assuming those clauses are to be interpreted in line with custom). So, what are the weaknesses in the clause?
The weakness most often identified is use of the phrase “except in rare circumstances” in paragraph 4. This phrase qualifies the scope of the provision without defining what rare circumstances are. The Canadian model BIT identifies rare circumstances “such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith”. Other treaties, such as the ASEAN – Australia – New Zealand FTA (to which many TPP states are parties), include a passage along the lines of paragraph 4 without the qualifier “except in rare circumstances”.
The second proposal (Annex 12-D) specifies what rare circumstances are. That proposal refers to a deprivation of property that is discriminatory in effect, either against a particular investor or class of investors, or in breach of a prior written commitment. The same proposal states that a deprivation of property shall be particularly likely to constitute indirect expropriation where one of these two things has occurred.
One problem with this approach is the idea that a class of investors may be the subject of discrimination. This might be a well intentioned attempt to capture circumstances such as where foreign or other investors are discriminated against, but it might also encompass regulation of one particular industry. For example, is Philip Morris part of a class of investors (tobacco companies) that are discriminated against as compared to other investors? In my view, the clause should not be construed in this way (because the groups would not be in comparable circumstances), but I can imagine such an argument being made.
Similarly, it seems unwise to refer to breach of a written commitment between the state and an investor as a rare circumstance in which an otherwise non-compensable regulatory measure becomes an indirect expropriation. If the written agreement reflects a commitment not to regulate, this might be the case. However, if the written commitment is a commitment of a different type, breach of the commitment should not necessarily be a rare circumstance in which indirect expropriation is established.
The second proposal also requires that in order to constitute an indirect expropriation deprivation of property must be:
- either severe or for an indefinite period; and
- disproportionate to the public purpose pursued.
This proposal captures one strand in the case law that are not captured in draft annex 12-C, which is the occasional use of proportionality analysis in determining the character of a measure. Notably, the reference to proportionality in Annex 12-D actually establishes a different standard than is in Annex 12-C, which refers to measures “designed and applied to protect legitimate public welfare objectives”. It would appear easier for a host state to argue that a measure is designed and applied to protect health than it would be to argue that it is proportionate to a health objective.
In sum, draft Annex 12-C appears to offer host states a greater degree of regulatory autonomy than draft Annex 12-D. The “except in rare circumstances” phrase in paragraph 4(b) of draft Annex 12-C is the one aspect of the provision that looks ripe for revision.