TPP and the impact to Vietnam: Part II - Investors are empowered to sue The State Of Vietnam

Dispute resolution mechanism between the State of Vietnam and foreign investors is one of two contents of the Chapter on Investment in TPP; accordingly, a wider mechanism is opened for foreign investors in order to sue the host country Government when their legitimate interests are infringed.

TPP is a free trade agreement with a deeper and wider level than agreements in the framework of the World Trade Organization (WTO) in areas such as reducing of tariff lines; increasing openness of the service; strengthening relevant provisions of foreign investment and protect investors; protecting of intellectual property rights; enhancing transparency in the competition; labor issues ...Therefore, trading relationship between Vietnam and state members of TPP will thrive in the future, which are accompanied by investment flows into Vietnam from countries of TPP and outsiders. Investors outside the TPP will invest in Vietnam in order to benefit of tariff preferences, lower labor costs, the cost of raw material and other incentives low.

However, opportunity has always accompanied with challenge: joining the TPP means that State of Vietnam will face with more risks of dispute, because TPP allows investors to be sue State of investment to the international Arbitration or Court which is independent with the court or dispute settlement body of that State. This mechanism is called the dispute resolution mechanism between the state and foreign investors (Investor-State Disputes Settlement) - ISDS Mechanism.

ISDS is not the first mechanism of Vietnam negotiated in trade agreements (many investment protection agreement previously have bilateral mechanisms, including bilateral trade agreements between the United States and BTA). Although ISDS is not new, but it is a challenge not only with countries such as Vietnam, but also large countries such as the US or EU countries (even in TTIP negotiations between the US and EU, for example, the EU is also very worried, even unacceptable of ISDS).

When ISDS is applied?

ISDS Terms are used when a Member State set out the rules and policies contrary to the norms of TPP and makes influence to the legitimate interests of companies of other Member States.

Previously, when joining BITs and other FTAs, Vietnam was the defendant sued by the investors in a number of disputes such as: Trinh Vinh Binh case sue the Government of Vietnam in 2007; South Fork case in 2010 (with beneficial results for Vietnam); the lawsuit of French investor DialAsie against the Government of Vietnam in 2011.These lawsuits related to withdrawing Investment License and standards of fair and adequate treatment with foreign investor (DialAsie in 2011) and nether content. After officially joining the TPP, Vietnam will face the risk of being entangled in more dispute and lawsuit.[1] 

How does ISDS activity?

Composition of the Arbitration Counsil must consist of three arbitrators, each party appoints one arbitrations and the third arbitrator shall act as a chairman in the arbitration process specified by agreement of parties to the dispute. [2]

The Arbitration Council will prioritize to use mechanisms of international arbitration such as ICSID arbitration (International Centre for Settlement of Investment Disputes between States and citizen of other countries in the World Bank) or UNCITRAL Arbitration Court (International commercial arbitration mechanism of the United Nations) or another international arbitration court agreed by foreign investors and the Government, to sue the nation's policy or the violation of the invested country related to the investment of foreign investors. 

Vietnam's risk before ISDS mechanism of TPP

It should be noted that at all ISDS mechanisms that Vietnam committed with partners, such basic elements mentioned above are determined upon a narrower, tighter chosen (for example, only investors who invested projects in Vietnam have right to sue; only state competent agencies can be sued; arbitration proceedings are confidential; applicable standards are Vietnam's law and relevant BITs ...). Therefore, for Vietnam, although this is not a new mechanism but this poses challenges that Vietnam had never known, including:

There are more risks of being sued (Due to sue mechanism is easier and clearly, does not include the compulsory steps as requirement before; does not include approval in written regarding suiting from State Agency sued; the problem may be sued more broadly ...);

The risk of losing in the suit is larger (by the standards applied to settle the case is more favorable to foreign investors; suit proceeding is more favorable for foreign investors ...).

In addition, this mechanism also causes other concerns such as: this mechanism may be taken advantage by foreign investors (they may use ISDS to force for state agencies to accept its demands) and;

This mechanism causes of inequality between domestic investors with foreign one (due to only foreign investors have right to sue the State). [3]

Notes for Vietnam’s enterprises

TPP ISDS mechanism only applies to investors belongs to TPP countries in Vietnam and Vietnam investors in TPP countries. Domestic investors are not allowed to use this mechanism but still must comply with current complaints claims mechanism of Vietnam’law.

In fact, Vietnamese law has also allowed domestic investors to use arbitration mechanisms to settle disputes with competent agencies but it must follow strict binding conditions (for example, need the consent and approval of the State through the arbitration clause).

With the efforts and preparation, hopes that the process of implementing TPP shall minimize more difficulties for Vietnam before risk of lawsuits by foreign investors.
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 [1] Bach Thi Nha Nam, "TPP and the possibility of Vietnam sued in investment disputes-Part 2 and end", Faculty of Law magazine, 2016, luatkhoa.org.

 [2] Clause 1, Article 9.21, Chapter 9 – Investment, TPP.

 [3] WTO and Integration Center - VCCI, "Updating the TPP negotiations on dispute settlement mechanism between the State and foreign investors (ISDS) to May, 2015", trungtamwto.vn.