The Conclusion of the Phillip Morris v Australia Saga
The long-running investment treaty dispute between Phillip Morris Asia (“PMA”) and Australia concerning tobacco plain packaging laws has finally ended, with the publication of the Tribunal’s final award on costs in July. Having already dismissed Phillip Morris’ claim as an abuse of rights, the Tribunal rejected its argument that each party should bear its own costs. It ordered Phillip Morris to cover an (undisclosed) proportion of Australia’s costs, while agreeing that Australia should bear some of its own costs due to one of its arguments on jurisdiction failing. The Tribunal’s reasoning contains important lessons for both investors and states as to the extent of permissible costs recovery in investment arbitration.
In 2010, the Australian Government introduced legislation requiring uniform “plain” packaging for tobacco products. This meant that tobacco companies, including PMA (the Hong Kong-incorporated claimant), lost the ability to use various intellectual property rights on their products. This, PMA said, breached the expropriation and fair and equal treatment provisions of the Hong Kong-Australia BIT.
Australia denied breaching the BIT, but raised objections to jurisdiction and admissibility which the Tribunal decided to hear before proceeding further. Its first objection was that the Phillip Morris group deliberately restructured its assets after the dispute had arisen merely to take advantage of the BIT, which it said amounted to an abuse of rights. Its second objection was that, when it sought permission to invest in Australia as part of this restructuring, PMA misled the Australian Government as to the purpose for its investment, meaning that the investment was in breach of Australian law (the “Admission Objection”). The Tribunal dismissed the admissibility argument, but agreed that PMA’s conduct was an abuse of right and therefore dismissed PMA’s claim.
The parties’ submissions on costs
The 2010 UNCITRAL Rules, under which the arbitration was held, provide for a general “unsuccessful party pays” rule as to costs, but allow the Tribunal to apportion costs between the parties where it considers it reasonable to do so.
PMA advanced two arguments to support its position that the parties should bear their own costs. First, although Australia succeeded in its submission that the case was an abuse of rights, the Tribunal dismissed two of Australia’s grounds for objecting to jurisdiction. In that sense, each party was partly successful, and partly unsuccessful. Secondly, it argued that costs should be apportioned equally because the parties’ counsel had acted “professionally and efficiently”. In addition to this, it argued that, regardless of any apportionment, the fees charged by Australia’s solicitors, a quasi-public organisation called the Australian Government Solicitor (the “AGS”), were unreasonable because they were disproportionate to the “modest government salaries” which those lawyers received.
Australia rejected the suggestion that PMA, having succeeded on two arguments, was “partly successful”. It submitted that the relevant question was which party succeeded, not which arguments. As PMA’s case had been dismissed, it was plainly the unsuccessful party. It added that the Tribunal should be particularly reluctant to apportion costs given that PMA’s case was considered an abuse of rights. It also disputed the existence of any principle that the “unsuccessful party pays” rule is displaced where counsel acted professionally and efficiently. It noted that, while some cases consider this to be a relevant factor, no case has deemed it to be decisive. As regards the AGS’s fee rates, it noted that the AGS does not receive any government funding, and is a statutory corporation which operates on a commercial basis, charging government departments in six-minute increments like any other law firm.
The Tribunal rejected PMA’s submission that each party should bear its own costs. It held that, under the 2010 UNCITRAL Rules, the “unsuccessful party” is the party whose requests for final relief fail. In this case, that was PMA. It further agreed with the general proposition that “a respondent State that faces an abuse of right should, in principle, not be burdened with the costs of defending itself against such a claim”. In response to PMA’s argument on the professional conduct of counsel, it held that this should not sway the allocation of costs in either direction.
However, the Tribunal noted its discretion to take into account whether the unsuccessful party had succeeded on any major disputed issue, and the amount of work that had entailed. In this regard, it drew a distinction between the two arguments on which Australia failed. Its “Timing Objection” (which asserted that the Tribunal lacked jurisdiction because PMA did not own the relevant investments at the time the dispute commenced) was closely related to its (successful) argument on abuse of rights. As it raised similar factual and legal issues, the failure of the Timing Objection did not justify an apportionment of costs. But the Tribunal considered the position to be different for Australia’s Admission Objection. This, it said, raised a distinct body of evidence and legal issues, requiring extensive expert evidence on Australian administrative law. As a substantial amount of time had been spent on this during the hearing, it held that some apportionment should be made to reflect the fact that this argument had been rejected. It therefore ordered that PMA need only cover a certain portion of Australia’s costs. The precise apportionment is redacted in the public version of the award.
As to the AGS fees, the Tribunal noted that Australia had been justified to hire outside counsel, given that (unlike, e.g., NAFTA countries) it had never faced an investment treaty claim before. It also emphasised the importance of the dispute in Australian politics and public health policy. On the issue of the reasonableness of the AGS fees, the Tribunal thought it incorrect to consider the “modest government salaries” of the relevant lawyers. It held that, as in most cases, the reasonableness of fees should not be assessed purely by reference to salaries. It therefore rejected PMA’s submission on the unreasonableness of these fees.
Because of its subject matter, this case continues to loom large in public debate on investment treaty arbitration and, at least for some time, fuelled the arguments of the system’s detractors. The dismissal of the case as an abuse of rights last year should go some way towards quelling these concerns, and the decision on costs should reinforce this. An investor which seeks to abuse the system will incur substantial costs, and tribunals will consider the political and social importance of the case to the host State involved in assessing this.
The case also provides broader lessons on costs in investment treaty arbitration. For host States, it provides some comfort when electing to hire (expensive) outside counsel and in incurring significant fees. However, the apportionment of costs for Australia’s failed Admission Objection should also encourage parties to think carefully before advancing an argument which will require extensive evidence and legal argument. The Tribunal did not think Australia’s argument was spurious, but still apportioned costs in light of its failure. This serves as a reminder that, as with any case, the financial consequences are not solely determined by who “wins”. Costs awards can have a significant financial impact, and this should be considered at all times.