1993 BIT between Hong Kong and Australia (the “Treaty”).
On 21 November 2011, some nine months after Philip Morris HK had acquired the shares in PM Australia, the Plain Packaging Measures that had been announced the previous year were actually enacted. On the same day, Philip Morris HK served The Commonwealth of Australia with a Notice of Arbitration under the Treaty.
Australia objected to the Tribunal’s jurisdiction on the basis that it was barred from considering Philip Morris HK’s claim because the dispute was foreseeable when Philip Morris HK obtained the nominal protection of the Treaty through the restructuring in which it had acquired PM Australia and, therefore, that the resort to arbitration under the Treaty constituted an abuse of right. Under the extensive body of jurisprudence resulting from the lengthy history of arbitrations under BITs and similar intergovernmental agreements, the invocation of the protections under such agreements may be abusive if standing to do so is acquired through measures taken when a dispute has already arisen or is clearly foreseeable. That line of authority is grounded on the principle of good faith, and its application depends upon the subjective motivation for the measures in question, particularly whether the purpose was simply to obtain the benefits of the relevant treaty.
According to Philip Morris HK, the “overall objectives of the restructuring were to minimise tax liability, align ownership with control, and optimize cash flows”. There were also “additional benefits”, such as alignment of the ownership of the Australian subsidiaries with Philip Morris HK’s pre-existing management control of the subsidiaries, optimization of the Philip Morris HK’s cash flow, as well as “additional BIT protection[s]”. A further key motivation behind the restructuring was, according to Philip Morris HK, that restructuring aligned the ownership and management control of many Philip Morris affiliates. In the submission of Philip Morris HK, the restructuring had entirely legitimate objectives independent of its desire to obtain the protections of the Treaty.
Reasoning
In the view of the Tribunal, it would not normally be an abuse of right to bring a BIT claim in the wake of a corporate restructuring, if the restructuring was justified independently of the possibility of bringing such a claim. However, the Tribunal found that Philip Morris HK had not proved that tax or other business reasons were determinative of the restructuring. From all the evidence, the Tribunal was only able to conclude 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” after it received ample warnings that the Australian government was considering introducing the Plain Packaging Measures.
In the Tribunal’s view, there was no uncertainty about the Australian Government’s intention to introduce the Plain Packaging Measures after its announcement on 29 April 2010. The Tribunal held that, from that date, there was at least a reasonable prospect that legislation equivalent to the Plain Packaging Measures would eventually be enacted and that a dispute would arise. The Tribunal further held that the Australian Government’s adoption of the Plain Packaging Measures was not only foreseeable but actually foreseen by Philip Morris when it chose to change its corporate structure.
The Tribunal concluded, accordingly, that the initiation of the arbitration constituted an abuse of rights, as the corporate restructuring by which Philip Morris HK acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and was carried out for the principal, if not sole, purpose of gaining Treaty protection. Accordingly, the Tribunal held that the claim was inadmissible and that it