Turning Away at the Gate: Treaty Shopping in Light of the Philip Morris Case

I. INTRODUCTION

Various disputes arise between companies, individuals, or governments. When disputes occur across borders, international arbitration is considered the “golden shield”, especially for foreign investors. As Salacuse notes in The International Lawyer^[1], investor–state arbitration represents “a revolutionary innovation in international litigation.” However, not every investor has this privilege. To file a claim, there must be a valid investment treaty between the host state and the investor’s home country. This requirement has led some investors to change their corporate nationality or route their investments through countries with favorable treaties to gain access to an arbitral tribunal. Several factors may encourage investors to engage in treaty shopping. First of all, many treaties are written with broad or unclear definitions, creating loopholes that investors can exploit. Additionally, some countries have flexible national laws that allow investors to set up legal entities just to gain treaty access easily. This problem is further fueled by the lack of binding precedent (stare decisis) in investment arbitration, which means tribunals aren’t required to follow previous rulings. This may encourage investors to bring claims even if similar cases previously failed. This approach, treaty shopping, is central to current debates over the legitimacy and limits of investor–state arbitration, especially in the wake of high-profile cases such as Philip Morris v. Australia.

          II. The Legal Standard: Timing and Foreseeability

Investor–state tribunals have established a series of jurisdictional filters to prevent investment treaties from being misused in hindsight. Tribunals focus on two main factors to determine if a corporate restructuring is genuine business planning or abusive “treaty shopping.” At the center of these filters lies the timing of a corporate restructuring and the foreseeability of the dispute at that moment. This section will explain how tribunals distinguish legitimate planning from treaty shopping by applying the ratione temporis and foreseeability tests.

1. Ratione Temporis: When Was the Restructuring Done?

Arbitral tribunals typically assess three jurisdictional issues when determining their competence to adjudicate an investment treaty claim: the subject matter, the parties involved, and the timing of the claim. The tribunal’s authority to proceed is contingent upon the satisfaction of all three criteria. “Timing” is often the most decisive in treaty shopping cases. 

BIT (Bilateral Investment Treaty) protections are designed to safeguard existing investments under the treaty, not those created strategically after tensions have arisen. If a company changes its ownership structure or nationality early in the life of the investment, when no conflict is on the horizon, tribunals are more likely to see it as legitimate planning. By contrast, in a restructuring that occurs after government measures are announced, publicly debated, or formally initiated, tribunals tend to view it skeptically. In such cases, the timing suggests that the investor’s aim was not business efficiency but securing standing in arbitration.

2. Foreseeability: Could the Investor Anticipate the Dispute?

Although timing is crucial, it is not sufficient on its own. Tribunals also examine whether the dispute was foreseeable. This means whether a reasonable investor could have guessed that there might be a conflict with the host country. This is not a strict test. Tribunals do not require certainty. However, if government actions were already under discussion, if regulatory changes were publicly debated, or if letters, warnings, or formal notices were exchanged, foreseeability is generally established. Once the dispute becomes foreseeable, any corporate restructuring aimed at acquiring treaty protection is considered “abusive,” regardless of the formal legality of the corporate changes.

3. Legitimate Planning vs. Treaty Shopping  

These two tests, ratione temporis and foreseeability, create a clear line between valid planning and treaty shopping. Tribunals know that multinational firms often use specific structures to manage their tax or operational affairs. This is completely legitimate. However, it becomes a problem if an investor tries to reorganize to gain treaty benefits after a dispute is already on the horizon. In such cases, tribunals apply these rules to “turn investors away at the gate”, preventing the system from being used for strategy rather than a dispute-resolution mechanism.

             III. THE CASE STUDY: Philip Morris Asia Limited v. The Commonwealth of Australia

The principles of timing and foreseeability were clearly applied in the famous case of Philip Morris Asia Limited v. Australia. This case is a perfect example of how tribunals reject claims based on treaty shopping.

1.     What Happened?

In 2010, Australia introduced plain packaging rules for tobacco products. This regulation aimed to remove brand logos, colors, and other promotional elements from packs to achieve a standardized format. After the government announced its intent, the proposal quickly became a topic of public debate and official commentary.

April 2010 (The "Foreseeable" Moment): The Australian government announced its decision to introduce plain packaging legislation. From this point on, the Tribunal later ruled, a legal dispute was "reasonably foreseeable".

February 2011 (The Restructuring): While the legislation was moving forward, Philip Morris reorganized its corporate structure. Philip Morris Asia (based in Hong Kong) acquired the Australian subsidiaries. The Tribunal found this was done principally to gain protection under the Hong Kong–Australia Treaty.[2]

21 November 2011 (The Filing): On the same day the legislative package was fully enacted, Philip Morris Asia officially commenced arbitration. The Tribunal ultimately dismissed the case, ruling that initiating arbitration was an abuse of rights because the company had restructured after the dispute was already foreseeable.

                 2. The Tribunal’s Decision:

Australia argued that the tribunal lacked jurisdiction, claiming that Philip Morris had acquired the Australian shares solely to bring a claim under the treaty. The tribunal agreed and dismissed the case on the grounds of abuse of rights.

Using the foreseeability test, the Tribunal pointed out that when Philip Morris restructured in early 2011, the dispute over plain packaging was already very likely. The government had already made its plans clear.

Using the timing test (ratione temporis), the Tribunal found that the restructuring happened when the dispute was already starting. Since the main reason for the restructuring was to access the treaty for an existing problem, the Tribunal refused to hear the case. As the Tribunal stated, while it is okay to plan ahead to protect your investment before a dispute, doing it afterwards is an abuse of the system.

             IV. CONCLUSION

Ultimately, Philip Morris v. Australia stands as a definitive case regarding the limits of corporate restructuring. The tribunal made it clear that while treaties offer protection, they cannot be used strategically to create jurisdiction for a conflict that is already underway. This dismissal reinforces the doctrine of "abuse of rights," separating legitimate planning from prohibited treaty shopping.

For the legal community, the takeaway is clear. An investor’s freedom to organize their assets stops when a dispute becomes reasonably foreseeable. As the tribunal noted, trying to gain protection at that late stage is like trying to insure a building that is already on fire. By enforcing this standard, the decision prevents the arbitration mechanism from being exploited for procedural advantages.

[1] Jeswald W. Salacuse, "Anatomy of an Investor-State Arbitration: The Case of Aguas Argentinas", The International Lawyer, Vol. 55, No. 2, July 2022

[2] Emma Aisbett et al., Rethinking International Investment Governance: Principles for the 21st Century, Columbia Center on Sustainable Investment, 2018, p. 30.