Australia continues to expand its network of investment treaties. In light of this, Australian investors should consider a review of the treaty protections that apply to their foreign investments. If a treaty includes an investor-State dispute settlement mechanism, the investor may be able to resolve disputes with the host State through international arbitration. Partner Andrea Martignoni and Associate Christopher Holland examine Australia's engagement with investor-State dispute settlement and the opportunities afforded by Australia's investment treaties.
How does it affect you?
- Australian companies investing overseas (and foreign companies investing in Australia) are likely to benefit from an assessment of whether their investments are protected by investment treaties. This assessment should include an analysis of the availability of recourse to investor-State dispute settlement (ISDS).
- Where a company's foreign investment is protected by an investment treaty, familiarity with available treaty protections is likely to assist in dealing and negotiating with the host State. If the treaty contains an ISDS mechanism, the investor may be able to resolve disputes with the host State through international arbitration.
- Where a company's investment is not protected by an investment treaty (or where the existing treaty protections are limited or do not include access to ISDS), the company may be able to restructure its investment to increase the prospect of obtaining effective treaty protection. This will help to mitigate against the sovereign and political risk associated with foreign investment.
Over the past 12 months, Australia entered into a number of investment treaties with some of its key trading partners. The Korea-Australia Free Trade Agreement (KAFTA) entered into force on 12 December 2014. In November 2014, Australia formalised the conclusion of free trade agreement (FTA) negotiations with China. Both the KAFTA and the China-Australia FTA (ChAFTA) contain an ISDS mechanism. ISDS mechanisms permit an investor of one contracting State to submit a dispute with another contracting State to international arbitration. The Japan-Australia Economic Partnership Agreement (JAEPA), which came into force on 15 January 2015, does not contain ISDS protection – although this is likely to be subject to review in light of the inclusion of an ISDS mechanism in the ChAFTA.1 For an analysis of these treaties, please see our articles on the ChAFTA, the KAFTA and the JAEPA.
The inclusion of ISDS provisions in the ChAFTA and the KAFTA is significant for Australian investors, especially given the volume of Australian trade with these countries (China and Korea account for 23 and 5 per cent of Australia's trade respectively).2 However, Australia is already a party to a number of investment treaties that have entered into force that contain ISDS mechanisms. For example, Australia's FTAs with each of Thailand, Chile, Singapore and ASEAN all contain ISDS mechanisms. In addition, all of Australia's bilateral investment treaties (BITs) contain ISDS mechanisms (Australia is a party to a BIT with each of Argentina, China, Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Vietnam). Accordingly, depending on the terms of each treaty, Australian investors with investments in these countries may be able to seek recourse to international arbitration in the event of a dispute with the host State.
The Coalition Government has adopted the position that it will consider the inclusion of ISDS mechanisms in future investment treaties on a case-by-case basis.3 Australia is currently involved in a number of FTA negotiations, including bilateral negotiations with each of India and Indonesia, and multilateral negotiations on the Trans-Pacific Partnership Agreement (TPP) (a proposed FTA between 12 State parties, including five of Australia's top 10 trading partners), the Australia-Gulf Cooperation Council FTA, the Pacific Trade and Economic Agreement, and the Regional Comprehensive Economic Partnership Agreement. The inclusion of an ISDS mechanism in the TPP is particularly controversial.
There are in excess of 3000 investment treaties in force globally that provide legal protections and guarantees for foreign investors. The vast majority of these treaties contain ISDS mechanisms.4 Broadly speaking, investors from a State party to an investment treaty are automatically protected by the ISDS mechanism by virtue of their corporate nationality – there is no need for a company to have a direct contractual agreement providing for recourse to international arbitration with the host State. There are significant variations in ISDS mechanisms, with more than 1000 different combinations of rules regulating ISDS.5
The system of international arbitration through ISDS is well established. As at year-end 2013, there were 568 known investment treaty cases.6 In 2013, 57 new investor-State disputes were commenced and ISDS tribunals issued at least 37 decisions.7 These cases were initiated by investors who sought to challenge a range of State conduct, including breach of contract by a State or State entity, revocation of licences or permits, land zoning decisions, unfair tax assessments, failure of domestic courts to protect investments, and wrongful criminal prosecutions by the host State.8 Arbitral awards are potentially rewarding for claimant investors; for example, a 2012 decision found that Ecuador had breached a US-Ecuador investment treaty and awarded Occidental Petroleum Corporation US$1.77 billion in compensation.9
In general, Australian companies are yet to fully embrace investment treaties and ISDS as a means of protecting their investments. Australian companies are significant investors in the global economy, ranked 18th in global foreign direct investment referenced by 'outward stock' (the value of capital and reserves in another economy attributable to an Australian parent company).10 As outlined above, Australia is also a party to a significant network of investment treaties that contain ISDS mechanisms. Nevertheless, before 2010, no Australian company had registered a claim (on the public record) under a FTA or BIT.11
However, Australian companies are beginning to utilise ISDS as a means of resolving disputes with host States. Since 2010, at least three disputes in the public domain have been initiated by Australian claimants under Australian BITs against each of India, Pakistan and Indonesia.12 The claimants in these proceedings challenged a range of State conduct, including inordinate delays of domestic courts, a refusal to grant a mining lease, and the alleged expropriation of investments in a coal project. In the one case where a decision was reached on the merits, the claimant was awarded AUD$4,755,429 in compensation.13 In addition to these three cases, an Australian parent company has also used its British subsidiary to instigate proceedings against Gambia under the United Kingdom-Gambia BIT.14
Australian companies still lag behind their European and North American counterparts in utilising ISDS. By way of example, according to an April 2014 United Nations Conference on Trade and Development (UNCTAD) survey, there have been 127 claimants from the United States, 61 from the Netherlands, 43 from the United Kingdom, 39 from Germany, 32 from Canada, 31 from France, 26 from Italy and 25 from Spain.15
Arbitral tribunals have recognised that it can, in some circumstances, be legitimate for corporations to restructure their investments to ensure ISDS protection in relation to future disputes.16 Generally, this may be achieved by channelling the investment through a subsidiary located in a State that is a party to an investment treaty with the host State of the investment (the viability of a restructure to gain ISDS protection will depend on the terms of the treaty).
Given the reciprocal nature of investment treaties, foreign investors with investments in Australia may also benefit from considering the possibility of ISDS in the event that their investments are subject to adverse interference by the Australian Government. To date, Australia has had just one ISDS case registered against it by Phillip Morris Asia Limited (Hong Kong) under the Australia-Hong Kong BIT.
An untested issue in Australia relates to the liability of the federal government for the actions of state and territory governments in ISDS cases. This issue has arisen in Canada, where ISDS claims have been initiated against the federal government in response to actions of provincial governments.17 Based on the Canadian experience, it is possible that foreign investors with investments in Australia may be able to pursue a claim against the federal government for the adverse conduct of state or territory governments.
The inclusion of ISDS mechanisms in the ChAFTA and the KAFTA will provide some comfort to Australian businesses with investments in China and Korea against sovereign and political risk. However, Australian investors would benefit from considering the broader network of Australia's investment treaties and familiarising themselves with the treaty protections that apply to their investments. By adopting a proactive approach and restructuring where existing treaty protections are inadequate, Australian companies will be well placed to utilise the opportunities afforded by ISDS.
- JAEPA, Article 14.19(2): Australia and Japan shall conduct a review of the investment chapter (including the establishment of an ISDS mechanism) if Australia enters into any international agreement providing for an ISDS mechanism after entry into force of the JAEPA.
- Department of Foreign Affairs and Trade website, About Free Trade Agreements; Department of Foreign Affairs and Trade website, Republic of Korea country brief.
- The Coalition, The Coalition's Policy for Trade, September 2013.
- According to the Organisation for Economic Co-operation and Development (OECD), 93 per cent of investment treaties surveyed (of a sample of 1660 treaties) contained ISDS mechanisms. Pohl, J., K. Mashigo and A. Nohen, 'Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey', OECD Working Papers on International Investment, 2012/02, OECD Publishing, p7.
- Pohl, J., K. Mashigo and A. Nohen, 'Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey', OECD Working Papers on International Investment, 2012/02, OECD Publishing, p8.
- UNCTAD, Recent Developments in Investor State Dispute Settlement, No 1, (April 2014), p1.
- UNCTAD, Recent Developments in Investor State Dispute Settlement, No 1, (April 2014), p1.
- See: UNCTAD, Recent Developments in Investor State Dispute Settlement, No 1, (April 2014).
- See: Occidental Petroleum Corporation v. The Republic of Ecuador, ICSID Case No ARB/06/11, Award of 5 October 2012.
- Department of Foreign Affairs and Trade website, Where does Australia Invest?
- Note: an Australian company was a minority shareholder of the claimant entity in Misima Mines Pty Ltd v. Independent State of Papua New Guinea, ICSID Case No ARB/96/2. At the time of registration of the dispute in 1996, Orogen Minerals Limited (an Australian corporation) owned 20 per cent of Misima Mines Pty Ltd (the 80 per cent shareholder was Placer Dome Inc., a Canadian corporation).
- White Industries Australia Limited v. Republic of India, UNCITRAL; Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1; Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and 12/40.
- White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award, 30 November 2011.
- Carnegie Minerals (Gambia) Limited v. Republic of The Gambia, ICSID Case No. ARB/09/19.
- UNCTAD, Recent Developments in Investor State Dispute Settlement, No 1, (April 2014), p8.
- See: Mobil v. Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, paragraph 204.
- Eg: AbitibiBowater Inc. v. Government of Canada, NAFTA, Statement on Settlement, 24 August 2010; St. Marys VCNA, LLC (US) v. Government of Canada, NAFTA, Notice of Intent, 13 May 2011.