Perhaps the most high-profile case in the debate over investor-state arbitration in recent years has been the investment treaty claim by Philip Morris against the Australian Government, concerning the introduction of tobacco plain packaging rules. Opponents have relied on the case to highlight the perceived risk of “regulatory chill” caused by the proliferation of “secret courts”, while many proponents had hoped that the case would result in an award that carefully balanced the State’s “right to regulate” with the investor’s rights to “fair and equitable treatment” and “legitimate expectations”. The recently published decision of the tribunal not to exercise jurisdiction over the claim has therefore resulted in a degree of disappointment from all quarters. Nonetheless, the award on jurisdiction and admissibility of 17 December 2015 deals with some important issues that have direct relevance to any investors seeking to restructure their investments in a manner that maximises their chances of obtaining investment treaty protections.
The claim was brought by Philip Morris Asia Limited (“PM Asia“), a Hong Kong based subsidiary of Philip Morris International Inc. (“PMI“), under the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments, dated 15 September 1993 (the “Treaty“). The substantive claim arose from the introduction of the Tobacco Plain Packaging Act 2011 and the Tobacco Plain Packaging Regulations 2011, which prohibited the use of brands, trademarks and logos on tobacco packaging. PM Asia argued that this amounted to an indirect expropriation of its intellectual property rights and transformed its Australian subsidiary (“PM Australia“) from a manufacturer of branded products to a manufacturer of commoditised products, thus substantially diminishing the value of its investments in Australia. PM Asia claimed damages of over US$ 4 billion.
The award sets out a detailed description of the chronology preceding the claim, but in summary, Australia had first considered plain packaging legislation in 1995. After various consultations and one abortive attempt to introduce legislation into the Senate, the Australian Prime Minister, Kevin Rudd, officially announced his intention to introduce plain packaging legislation in April 2010. Following Mr Rudd’s defenestration by Julia Gillard and the subsequent election in August 2010, the Tobacco Plain Packaging Bill was eventually introduced into parliament in April 2011 and received Royal Assent on 1 December 2011.
In parallel with these developments, PMI had expressed its opposition to plain packaging legislation in Australia from at least late 2009. It maintained its dialogue with the Government from that point onwards, describing the proposals as “restrictions tantamount to expropriation” and threatening “legal challenges” if the proposals were pursued. Staring in September 2010, PMI began restructuring several of its global affiliates, with the stated aim of streamlining its corporate structure. On 21 January 2011, PMI filed a foreign investment application regarding the proposed purchase of PM Australia by PM Asia. The Treasury subsequently issued a “non-objection letter” and the acquisition completed on 23 February 2011. PM Asia issued its initial notice of claim under the Treaty on 27 June 2011 and its formal notice of arbitration on 21 November 2011, the day that the Tobacco Plain Packaging Bill passed both Houses of Parliament.
Award on Jurisdiction and Admissibility
The award on jurisdiction and admissibility deals with two preliminary objections by Australia:
- the “Non-Admission Objection” – Australia argued that PM Asia’s investment in PM Australia was not properly admitted in accordance with Australian law and therefore fell outside the subject-matter jurisdiction (ratione materiae) of the tribunal;
- the “Temporal Objection” – Australia argued that there was a pre-existing dispute between PMI and the Australian Government concerning the plain packaging proposals, and PM Asia’s investment in PM Australia post-dated this dispute, so it did not fall within the temporal jurisdiction (ratione temporis) of the tribunal. Australia supplemented this jurisdictional objection with an admissibility objection: even if the tribunal had jurisdiction over the claim, it should not exercise its jurisdiction because PM Asia’s claim under the Treaty amounted to an abuse of process.
The “Non-Admission Objection” is specific to the facts of the case and is therefore of limited significance. However, the tribunal’s findings on the “Temporal Objection” may have wider application and are therefore worth further consideration.
PM Asia’s primary response to the Temporal Objection was that it had controlled PM Australia prior to the restructuring, through the exercise of management functions and strategic/budgetary decisions since 2001. The Treaty definition of an “investment” included assets “owned or controlled” by an investor and so PM Asia argued that it was eligible for the protections afforded by the Treaty long before its formal acquisition of PM Australia. The tribunal undertook a brief analysis of the case law on the distinction between ownership and control and found that PM Asia’s involvement in the approval of expenditures and dividends, its role in branding and marketing strategy and its supervision of PM Australia’s staff were insufficient to amount to “control” in circumstances where PM Asia’s actions were undertaken in accordance with PMI global policies and procedures and were ultimately subject to PMI approvals.
Having determined that PM Asia’s only eligible investment was its acquisition of PM Australia in February 2011, the tribunal therefore needed to ascertain whether it had jurisdiction and, if so, whether there was any reason for it to refuse to exercise that jurisdiction. Applying Gremcitel, the tribunal held that whenever a cause of action is based on a treaty breach, the test for ratione temporis is whether the claimant made the protected investment before the moment when the alleged breach occurred. In that case, the tribunal had found that the critical date on which the breach crystallised was when the relevant legislative measures were adopted, notwithstanding the fact that this may have been “the culmination of a process or sequence of events which may have started years earlier“. In PM Asia’s case, it was the enactment of the Tobacco Plain Packaging Act in December 2011 that allegedly breached the Treaty and so PM Asia’s investment in February 2011 pre-dated the breach. Accordingly, the tribunal found that it did have jurisdiction over PM Asia’s claim.
Moving on to the question of admissibility, the tribunal undertook an analysis of the arbitral case law on abuse of process. Drawing on several prominent cases, the tribunal emphasised that the mere fact of restructuring an investment to obtain the protection of an investment treaty is not per se illegitimate and that the threshold for finding an “abusive manipulation of the system of international investment protection” is high. Applying Tidewater and Mobil, the tribunal determined that the key question was whether there was a “pre-existing” dispute at the time the restructuring was carried out. The tribunal grappled with the various formulations adopted in Gremcitel, Lao Holdings and Pac Rim and held that the initiation of a treaty claim constitutes an abuse of process when an investor “has changed its corporate structure to gain the protection of an investment treaty at a point when a specific dispute was foreseeable“. Rather than adopting the test of foreseeability articulated in Pac Rim as “a very high probability and not merely a possibility“, the tribunal held instead that a dispute is foreseeable when there is a “reasonable prospect… that a measure which may give rise to a treaty claim will materialise“.
Applying this test to the facts, the tribunal noted PMI’s objection to the Government’s proposals as early as 2009, including specific references to the deprivation of property rights and possible legal challenges. The tribunal also emphasised the fact that, while it took a considerable time for the legislation to pass and there was a degree of uncertainty as to whether the Government could obtain the parliamentary majority needed to pass the legislation, the intention of the Government remained relatively clear since April 2010 and so there was at least a “reasonable prospect” of the legislation being passed from that point onwards.
Notwithstanding these findings, the tribunal acknowledged that the commencement of a claim shortly after a corporate restructuring might not necessarily amount to an abuse of process where the restructuring was justified “independently of the possibility of bringing a claim“. On the facts, the tribunal was unconvinced by PM Asia’s insistence that the restructuring (i) was part of a broader group-wide process, (ii) was needed to align ownership with pre-existing management control, (iii) helped minimise PM Asia’s tax liabilities, and (iv) helped to optimise cash flow. In particular, the tribunal noted the failure of PM Asia to present any witnesses who were directly familiar with the rationale for the restructuring and the lack of “contemporaneous corporate memoranda or other internal correspondence sufficiently explaining the business case for the restructuring in detail“.
The tribunal also placed significant emphasis on the volume and timing of legal advice from PMI’s advisors concerning potential investment treaty claims. As part of the production phase of the arbitration, the parties agreed to exchange privilege logs listing any documents that they wished to withhold on grounds of privilege or political sensitivity. Following objections from both parties, the tribunal ordered the production of many of those documents. While the award itself contains heavy redactions in relation to privileged and commercially sensitive documents, it is evident that the subject headings of emails passing between PMI and its legal advisors (for example, “Australia-HK BIT“, “Arbitration under the HK BIT“) gave a clear indication that PMI was being advised on potential investment treaty claims from as early as July 2010. Critical email exchanges also coincided precisely with the internal approval of the restructuring and the finalisation of the notice of claim.
In such circumstances, the tribunal was satisfied that the passage of the offending legislation was not only foreseeable, but actually foreseen. The tribunal concluded that “the main and determinative, if not sole, reason for the restructuring was the intention to bring a claim under the Treaty, using an entity from Hong Kong“. Since this was carried out “at a time when there was a reasonable prospect that the dispute would materialise” it was deemed to be an abuse of process. Accordingly, the tribunal declared the claim inadmissible, precluding it from exercising jurisdiction over the dispute.
There are several key lessons to take away from the Philip Morris award for any investor seeking to restructure its foreign investments in an effort to maximise treaty protections:
- Preparing for the “worst case scenario” by seeking legal advice on investment treaty protections is entirely normal and prudent business behaviour.
- Similarly, restructuring investments to benefit from treaty protections is unlikely to be abusive where this is in response to a general risk of future disputes.
- The threshold for abusive conduct lies where a restructuring takes place at a point in time when a specific dispute is foreseeable; in other words, there is a reasonable prospect that a measure giving rise to a treaty claim will materialise.
- Factual evidence is likely to be fundamental to the outcome of any objection based on abuse of process. It is therefore critical to ensure that any other reasons for the restructuring (such as tax benefits, costs reductions, management rationalisation) are well-documented and are presented in a manner that can be adduced in evidence without jeopardising any subsequent claims for legal privilege.
- Legal advice on potential investment treaty protections should be sought as early as possible, and certainly prior to the crystallisation of a specific dispute. Wherever possible, any communications seeking legal advice should be clearly marked as privileged and should be drafted carefully to avoid any inadvertent suggestions that a specific dispute is either inevitable or foreseeable.
 Award on Jurisdiction and Admissibility, Philip Morris Asia Limited v The Commonwealth of Australia (PCA Case Nº 2012-12); available at https://www.pcacases.com/web/sendAttach/1711
 Gremcitel v Peru [ICSID Case No. ARB/11/17]
 Tidewater v Venezuela [ICSID Case No. ARB/10/5]; Mobil v Venezuela [ICSID Case No. ARB/07/27]; Gremcitel v Peru [ICSID Case No. ARB/11/17]; and Aguas del Tunari v Bolivia [ICSID Case No. ARB/02/3]
 Phoenix Action v Czech Republic [ICSID Case No. ARB/06/5]; Chevron v Ecuador [PCA Case No. 34877]
 Tidewater v Venezuela [ICSID Case No. ARB/10/5]; Mobil v Venezuela [ICSID Case No. ARB/07/27]
 Gremcitel v Peru [ICSID Case No. ARB/11/17]; Lao Holdings v Laos [ICSID Case No. ARB(AF)/12/6; Pac Rim v El Salvador [ICSID Case No. ARB/09/12]
 Paragraph 554
 Paragraph 554
 Paragraph 570
 Paragraph 582
 Procedural Order No. 12 (14 November 2014); available at https://www.pcacases.com/web/sendAttach/1483
 Paragraph 585