In Part I of this series, Dr Anil Yilmaz and Assistant Editor Stephanie Triefus discussed how international investment treaties are being used in a way that unduly expands the reach of this controversial legal regime. This part elaborates on why existing safeguards are not sufficient, and how states should proceed with investment treaty reform to combat this issue.

ST: An ISDS case brought against Australia by Phillip Morris was unsuccessful because the tribunal found that Philip Morris’ claim was an abuse of rights – Phillip Morris Asia acquired an Australian subsidiary for the purpose of initiating arbitration under the Australia-Hong Kong BIT. Is this an example of the current system working to prevent claims that states have not consented to? What are the problems with abuse of rights arguments and other challenges to corporate identity that states have used in arbitration to combat this issue?

I’ll start by saying a few things about the Australia case. It was a very well-known case because of the tobacco measures and public health questions around it, and it was going somewhat in parallel with the Philip Morris v Uruguay case. Unlike the Uruguay case, the Australia case didn’t proceed to the merits, because Australia was successful in its objection that Philip Morris was abusing its right to invoke that investment treaty. And that was because in anticipation of the dispute, Philip Morris restructured its investment in Australia to move its holdings to Hong Kong, and that was found to be an abuse of rights in this particular case, and therefore the claim was dismissed. The tribunal didn’t consider Philip Morris genuinely to be a Hong Kong investor to be able to benefit from that investment treaty and that’s a successful outcome in this context. But it was a difficult and hard-fought decision, probably by skilled Australian counsel, and there were very particular circumstances. 

It’s very difficult to make a successful abuse of rights argument. First, you have to demonstrate that there was a lack of good faith in the acquisition of the investment, which requires you to go into the intentions of the investor at the time they acquired that corporate entity. The other question is about the timing of when the investor restructured their investment and that seems to be a condition on its own, but it also helps to demonstrate whether the investor was lacking good faith. Timing is important to demonstrate whether a dispute was already reasonably foreseeable at the time of restructuring. In this particular case, the timing of the restructuring was off: the plain packaging policy plans were already announced, and the dispute was foreseeable by Phillip Morris because Australia had already expressed its intention to regulate the tobacco industry through plain packaging. The Tribunal also looked at whether access to the investment treaty was the only or the dominant purpose of the restructuring or whether there were other legitimate reasons. In this particular instance, it was held that Philip Morris’ dominant reason for restructuring was benefitting from that investment treaty. As the timing of the restructuring was off and Philip Morris seemed to lack good faith in that restructuring, the tribunal found there was an abuse of rights. But there have been quite a few other cases where states haven’t been able to make this argument successfully because it’s quite difficult to show that an investor has restructured their investment in a certain way, only or primarily for the purpose of benefiting from investment treaty protection. And indeed, there might be other reasons for it as well, such as tax reasons. 

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