On Tuesday 6 October 2015 Australia signed the Trans-Pacific Partnership Agreement (TPP). Australia joined together with the US, New Zealand, Singapore, Japan, Canada, Malaysia, Brunei Darussalam, Chile, Mexico, Peru, and Vietnam to form a free trade zone that accounts for 40% of global GDP and 24% of the world’s trade in services. The TPP will eliminate 98% of all tariffs between Member States, allowing its signatories to reap a full suite of trade and investment rewards.

Crucially for investors, the TPP includes Investor State Dispute Settlement (ISDS). ISDS provisions have garnered considerable controversy for their inclusion in other investment treaties, trade agreements and now the TPP, because they permit foreign investors to bring claims against governments (including Australia) if they do not uphold the protections offered in the trade pact. For investors, ISDS mechanisms provide a measure of comfort against sovereign risk of investing in foreign markets.

The ISDS mechanism will allow investors within a TPP member state to bring claims for breaches of certain investment protections to an independent arbitral tribunal. This provides an important layer of protection to Australian investors by equipping them with the tools to enforce investment protections. We understand the investment protections in the TPP are extensive, including the prohibition against expropriation (except for a public purpose and accompanied by compensation), non-discrimination against foreign investors, international law minimum standards of treatment, free transfer of funds related to investments, freedom to appoint people of any nationality to positions of senior management, and most favoured national treatment. Interestingly, these investment protections are far broader than those provided under the Australia-China Free Trade Agreement.

These broad investment protections are balanced by safeguards in the agreement to ensure the governments’ ability to regulate in the public interest. There are carveouts for policy areas such as public health, safety and the environment.

The TPP includes a number of procedural safeguards to address a historical lack of transparency in international arbitral proceedings. Hearings will be open to the public, documents filed in the proceedings will be made publicly available, and interested individuals (including non-governmental organisations) will be able to make submissions.

The ISDS mechanism included in the TPP strikes a balance between investor protection and the governments’ ability to regulate in the public interest. Of course, the TPP like any other trade pact, does not protect businesses against ordinary trade risks of a dealing with a foreign counterparty. It is important that businesses exercise vigilance in ensuring their contracts adequately protect them in the event of cross-border disputes, which will be increasingly significant in the more liberalised TPP trade zone.