Costs Awards by International Courts and Tribunals: Key Lessons from Philip Morris v. Australia.

• Author: Tully, Stephen

I Introduction

In 2017 at Singapore, a second and final award regarding costs was issued by an arbitral tribunal constituted pursuant to a 1993 Hong Kong-Australia investment treaty. Australia had been a respondent in arbitral proceedings conducted under the auspices of the Permanent Court of Arbitration (PCA) in accordance with Rules of Arbitration formulated by the United Nations Commission on International Trade Law, as revised in 2010 (the 2010 UNCITRAL Rules). The claimant, Philip Morris Asia Limited (PM Asia) was a limited liability company incorporated under Hong Kong law. PM Asia had commenced arbitration under a bilateral investment treaty challenging Australia's enactment and enforcement of legislation requiring all tobacco products manufactured and sold in Australia to be in plain packaging.

The costs award issued in Philip Morris Asia Limited (Hong Kong) v The Commonwealth of Australia (Philip Morris v Australia) is explained in Part 1 of this article. The background to the dispute, the parties' contentions and the tribunal's essential findings and conclusions are described. Part 2 reviews some of the key implications of this costs award in light of recent trends in international commercial arbitration and investment treaty arbitration as well as the established practice of significant international courts and arbitral institutions. Reference will be made to relevant provisions of national and international law. This article contends that, considered overall, the award in Philip Morris v Australia is broadly consistent with comparable precedents. In the particular circumstances of this case, an award of costs which followed the event and made in favour of the prevailing party was moderated by comparative success and the reasonableness of Australia's claimed costs.

II The Costs Award In Philip Morris v Australia

1. Background (1)

   Australia's federal Parliament adopted the Tobacco Plain Packaging Act 2011 (Cth) and Tobacco Plain Packaging Regulations 2011 (Cth) to discourage the use of tobacco products and for related purposes. This measure sought to improve public health and give effect to Australia's obligations under the Framework Convention on Tobacco Control. (2) Australia had ratified this treaty in 2003. (3) The treaty requires State parties to adopt and implement effective measures concerning the packaging and labelling of tobacco products, including health warnings and other messages. (4) Each party must comprehensively ban all tobacco advertising, promotion and sponsorship in accordance with their constitution. (5) A suite of measures was proposed to give effect to these obligations, including plain packaging. (6) In 2009 a federal taskforce recommended that Australia mandate the sale of cigarettes in plain packaging and increase the size of graphic health warnings. (7) During April 2010 plain packaging measures were implemented. Australia's legislation prohibits the display on tobacco products and their packaging of all tobacco company logos, symbols and other images that may have the effect of advertising or promoting tobacco products. All tobacco packaging must have a dark olive brown matt finish, as well as display specific text and graphic health warnings.

   PM Asia contended that these steps expropriated its Australian investments and breached specific commitments made by Australia under a bilateral investment treaty, being an Agreement between Hong Kong and Australia. (8) That Agreement by its preamble seeks to create favourable conditions for greater investment (9) by the investors (10) of one State into the area of the other. Australia and Hong Kong must not deprive investors from each other State of their investments or subject them to measures equivalent to deprivation, except under due legal process for a public purpose related to the host State's internal needs, on a nondiscriminatory basis, and accompanied by compensation. (11 ) Fair and equitable treatment must be accorded to investments and investor returns as well as their full protection and security. (12)

   Australia and Hong Kong must not impair the management, maintenance, use, enjoyment or disposal of investments or investor returns through unreasonable or discriminatory measures. Obligations entered into with investors from the other State must also be respected. Disputes between a State and investors from the other State concerning an investment which have not settled after 3 months are submitted to agreed procedures or arbitration under the 2010 version of UNCITRAL's Arbitration Rules. (13)

   In 2011 PM Asia informed Australia that arbitration would be initiated if Australia did not discontinue all steps towards plain packaging legislation. PM Asia then served Australia with written notification of its claim as well as formal notice of arbitration under the Hong Kong-Australia bilateral investment treaty. PM Asia sought orders from an arbitral tribunal requiring Australia to suspend enforcement of its plain packaging legislation and compensate PM Asia for losses suffered by reason of legislative compliance. Australia filed a response in December 2011. A challenge conducted by the tobacco industry before the High Court of Australia also failed. (14)

   An arbitral tribunal was constituted in 2012. (15) In 2014, at Australia's request the tribunal bifurcated the proceedings to split the arbitration into jurisdiction and merits phases. (16) A hearing was conducted in Singapore in 2015.

   Australia contended that the tribunal lacked jurisdiction and PM Asia's claims were inadmissible. PM Asia did not have an "investment" in PM Australia when the plain packaging measures were introduced during 2010. Furthermore, its reliance on article 10 of the treaty was an abuse of right: investors could not assert a breach of that treaty in circumstances where a host State had announced that it would take certain regulatory measures; the prospective investor, fully appraised of the relevant facts, then acquired an interest in the object of those measures; and the host State then acted as it had intended. The plain packaging legislation was a legitimate exercise of Australia's regulatory power to protect its citizen's health which did not breach the Hong Kong-Australia Agreement. (17) The tribunal moreover lacked jurisdiction over certain intellectual property treaties relied upon by PM Asia.

   PM Asia argued that the tribunal enjoyed jurisdiction. Furthermore, Australia's legislation would expropriate its investments in Australia by substantially depriving it of intellectual property rights and undermining their economic rationale. Without branding, PM Asia's products would be indistinguishable to consumers from competing products. The public health concerns underpinning the adoption of plain packaging measures were factually contradicted and ignored available alternative measures. Australia's legislation also breached its international trade and intellectual property obligations. (18)

   In December 2015, the tribunal issued its award addressing jurisdiction and admissibility. (19) Australia's first two preliminary objections were rejected. However, the tribunal upheld the third objection, concluding that initiation of the arbitration amounted to an abuse of right. (20) The corporate restructuring by which PM Asia acquired its Australian subsidiaries occurred when there was a reasonable prospect that a dispute would materialise and was carried out for the principal, if not the sole, purpose of acquiring treaty protection. (21) PM Asia's claims were inadmissible and the tribunal was precluded from exercising jurisdiction over the dispute. (22)

2. The Parties' Submissions on Costs

   The parties agreed that the arbitration costs were to be allocated under the 2010 version of the UNCITRAL Arbitration Rules (the 2010 Rules). Article 42(1) provides that these costs shall in principle be borne by the unsuccessful parry. However, the tribunal may apportion such costs between the parties if that is reasonable, taking into account the circumstances of the case.

   As to the quantum of costs, the parties agreed that Article 40(2) of the 2010 Rules applied. The term "costs" includes only the tribunal's fees, the reasonable travel and other expenses incurred by the arbitrators, the reasonable costs of expert and other advice required by the tribunal, and the reasonable travel and other expenses of witnesses. "Costs" moreover included a party's legal and other costs to the extent determined to be reasonable, as well as any fees and expenses of the appointing authority and the PCA Secretary-General.

   Australia sought reimbursement for its claimed costs whereas PM Asia made no claims, and the parties disagreed about the reasonableness of Australia's claimed amounts.

   PM Asia submitted that each party should pay its own legal fees and one-half of the arbitration costs. The most reasonable method for apportioning costs and fees was to do so equally, and the "loser pays" approach under Article 42(1) of the 2010 Rules was reversible. Each party had prevailed on two and lost on rwo of the major issues during the preliminary objections phase. One of Australia's objections was late, spurious and constantly shifting. Counsel for both parties had acted professionally and efficiently. Both parties had incurred substantial expenses because of Australia's burdensome document requests, including requesting PM Asia's business records for a 13-year period. PM Asia's counsel had to address Australian foreign investment law, policy and practice and Australia's cost claim was excessive because its legal team consisted primarily of government lawyers.

   Australia contended that PM Asia should pay the arbitration costs as well as its costs. There was no reason to depart from Article 42(1) of the 2010 Rules, and the "loser pays" principle has been applied by many tribunals. Contrary to the "mixed success" argument promoted by PM Asia, PM Asia was the "unsuccessful" party because...