AUSTRALIA AND INDONESIA SIGN COMPREHENSIVE ECONOMIC PARTNERSHIP AGREEMENT

On 4 March 2019, Australia and Indonesia signed the Australia-Indonesia Comprehensive Economic Partnership Agreement ("CEPA"). In this post, we briefly consider some of the noteworthy features of the CEPA chapter on investment and in particular its provisions regarding investor-State dispute settlement ("ISDS").

Indonesia and Australia signed a bilateral investment treaty ("BIT") containing ISDS provisions in 1992. Both States are also party to the ASEAN-Australia- New Zealand Free Trade Agreement ("AANZFTA"), signed by Australia in 2009 and Indonesia in 2012, which contains an investment chapter.

As we reported in a previous post, Indonesia announced in 2015 that it would seek to renegotiate and replace its older investment treaties with more modern agreements. The Australia-Indonesia BIT, however, will remain in force even after CEPA enters into force. This is in contrast to the Hong Kong-Australia Free Trade Agreement signed this week (see our post here) pursuant to which Australia and Hong Kong have agreed to terminate the Hong Kong-Australia BIT, which was signed in 1993 and became infamous in Australia after Philip Morris used the treaty to commence arbitration against Australia challenging the Tobacco Plain Packaging Act 2011.

Investment protection – more or less standard

CEPA contains the conventional standards of investment protection, including, amongst others, non-discrimination, fair and equitable treatment, full protection and security, most-favoured nation treatment, compensation for expropriation and compensation for losses suffered owing to armed conflict or civil strife, and the prohibition of performance requirements.

CEPA ties the definitions of fair and equitable treatment ("FET") and full protection and security to customary international law.  Article 14.7(2) states that FET "requires each Party to not deny justice in any legal or administrative proceedings", in a way which mirrors the equivalent provisions of the AANZFTA.  The language of this provision contrasts with definitions such as that in the recently in force Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") (which Australia has ratified).  The TPP provides that FET "includes" the obligation not to deny justice, without necessarily excluding other possible elements of the FET standard.

The reach of most-favoured nation ("MFN") clauses appears to be curtailed in CEPA.  Article 14.5(3) provides that the parties MFN obligations do not apply to ISDS provisions included in other treaties.  Article 14.21(1)(a) further provides that no investor-State claim may be brought alleging a breach of the MFN clause on the basis that another international agreement contains more favourable provisions.  If an investor brings such a claim, the State may seek summary dismissal of the case, and the tribunal must order the investor to pay the State's defence costs, unless exceptional circumstances apply.

In keeping with Australia's other recent treaties, Annex 14-C to CEPA excludes from scrutiny decisions made under each State's foreign investment screening process (for Australia the Foreign Investment Framework, and for Indonesia any equivalent process established by Indonesia in the future).

CEPA also contains a general exceptions clause similar to GATT Article XX of the General Agreement on Tariffs and Trade ("GATT"), a security exception similar to GATT Article XXI (although adding a ground for "critical public infrastructure"), and a taxation exception.  The latter exception, however, permits claims alleging breach of the expropriation and free transfer provisions in relation to taxation measures, subject to prior assessment of the claim by both States.

Unlike the recently amended Australia-Singapore FTA and the even more recent Hong Kong-Australia FTA, CEPA does not include any specific carve out for measures relating to tobacco (perhaps not surprising given that Indonesia challenged the Tobacco Plain Packaging Act 2011 as being contrary to World Trade Organisation Rules).

ISDS lives to fight another day

Although there has been political and public opposition to ISDS in both Indonesia and Australia, CEPA provides investors with the right to refer claims to international arbitration. Provisions have been included, however, which seek to address some of the criticisms of traditional ISDS and to limit the risk and costs of claims for the State parties.

For example:

• claims will be subject to a limitation period of 42 months from the date on which an investor was aware of the alleged breach and losses.
• a dispute must first be submitted for resolution through a written request for consultation. If the dispute cannot be resolved after 180 days, the respondent State may submit the claim to conciliation.
• If the respondent State has initiated a conciliation process. The dispute may be submitted to arbitration after 120 days after conciliation was initiated, provided that the investor submits a written notice of intention to submit the dispute to arbitration at least 60 days before the claim is submitted to arbitration.  If the respondent State did not initiate a conciliation process, the dispute may be submitted to arbitration after 180 days from the date the request for consultation was received from the respondent State, provided that the investor submits a written notice of intention to submit the dispute to arbitration at least 90 days before the claim is submitted to arbitration.
• where there is an objection to jurisdiction (which must be made no later than 60 days after the constitution of the tribunal albeit without prejudice to the respondent State's ability to raise such an objection at another stage of the proceedings), it is mandatory for this to be resolved by issuing a decision or award prior to any assessment of the merits of the claim within 150 days from the request, or 180 days if either disputing party requests for a hearing.

Of particular note is Article 14.23 which allows the respondent State to require that the investor submit the claim to conciliation prior to the commencement of arbitration proceedings. This provision reflects Indonesia's long-standing preference for non-adversarial resolution of investor-State disputes.

Article 14.21 provides that the respondent State may seek summary dismissal of any claim which:

• alleges a breach of (or otherwise invoking) the MFN clause on the basis that another international agreement contains more favourable rights or obligations;
• in relation to a measure that is designed and implemented to protect or promote public health;
• in relation to investments established through illegal conduct,  including fraudulent misrepresentation, concealment or corruption; or
• is frivolous or manifestly without merit.

If a claim is dismissed on these grounds, the tribunal is required to make an award requiring the disputing investor to pay all costs and legal fees incurred by the respondent State, unless it considers that there are exceptional circumstances that warrant the disputing parties to bear costs in other specified proportions.

CEPA is the first treaty signed by Australia to include an express provision on security for costs.  This is consistent with Australia's recent representations to the UNCITRAL Working Group III on Investor-State Dispute Settlement Reform that investors sometimes do not pay costs awards.  Article 14.28 empowers a tribunal to order such security upon request if there are reasonable grounds to believe that the claimant-investor risks not being able to honour a possible decision on costs issued against it.  If security is not provided within 30 days, the tribunal may terminate the proceedings.

CEPA also requires investors to disclose any third-party funding for their claim at the time of submission of the claim, either to the Secretary-General of ICSID or the Secretary-General of the Permanent Court of Arbitration (for ICSID arbitration or UNCITRAL arbitration respectively).  Failure to make this disclosure may result in termination the proceedings.

Like the CPTPP, CEPA incorporates in an annex a Code of Conduct of Arbitrators. This imposes obligations on arbitrators relating to disclosure of potential conflicts, prohibition on delegation of the arbitrator's duties to third parties, confidentiality, as well as detailed provisions on independence and impartiality.

Other specific provisions relating to the conduct of the arbitration are as follows:

• Like the AANZFTA, CEPA permits either disputing party or the tribunal on its own account in an investor-State claim to request a joint interpretation from Australia and Indonesia of any provision in dispute.  Both States must submit this interpretation within 60 days of the request, which will be binding on the tribunal and any decision or award issued by the tribunal must be consistent with that decision.  In the event only one State delivers such interpretation, it shall be forwarded to the disputing parties and the tribunal, but will not be binding.
• Article 14.31 requires publication by the respondent State of all tribunal decisions and awards.

Entry into force

Both States will need to ratify the treaty according to their respective domestic requirements before it will enter into force.  There is potential for delays in the ratification process in light of upcoming national elections in Australia and Indonesia in April and May respectively.

The full text of CEPA is available in English here.

For further information, please contact Antony Crockett, senior associate, Daniel Chua, associate, or your usual Herbert Smith Freehills contact.