State of play of investment treaty arbitration in Australia

Investment protection regimes are at a crossroads globally. Different governments, trading blocks and interest groups are pushing their policy agendas in diverging directions when it comes to bilateral and multilateral investment protection schemes. Australia is no exception to this debate.

In this note we canvass some of the key developments in the investment treaty arbitration space in Australia, including:

• Australia’s review of its Bilateral Investment Treaties;
• the upcoming Australia-EU and Australia-UK Free Trade Agreements; and
• recent legislative measures and political discussion in relation to foreign investments in infrastructure assets in Australia.

Review of Australia’s Bilateral Investment Treaties

Following the Federal Government’s announcement that it was reviewing the BITs to which Australia is party (which we have commented upon previously), the Department of Foreign Affairs and Trade (DFAT) sought submissions to inform the Federal Government’s position on whether to continue, amend, renegotiate or terminate the BITs to which Australia is a party, or replace them with comprehensive free trade agreements (FTAs).

DFAT has recently published 27 submissions it received. The submitters came from a broad range of backgrounds and included industry bodies, business councils, associations, universities, law societies, law firms, law academics and economists.

The key take away is that the majority of submitters considered that Australian BITs should maintain their investor-state dispute settlement (ISDS) provisions, but that the BITs should be modernised and ‘tweaks’ should be made. Australia is considered a thought leader in the investment protection space in the Asia-Pacific region and how Australia chooses to respond to those questioning the continuing utility of ISDS provisions under its BITs will be closely watched.

Although a range of issues were raised and potential tweaks proposed, some particular points of interest include:

A. Clarifying the scope of investment protections

There was widespread support for improving or modernising Australia’s BITs, in particular:

• The fair and equitable treatment (FET) obligations in Australia’s BITs were described as unrestricted. A number of submitters recommended that the FET obligations be refined to address the scope or standard of conduct that will violate the FET standard.
• Some Most Favoured Nation (MFN) provisions in Australia’s BITs were described as potentially allowing investors to benefit from the most generous protections found in any of Australia’s BITs, without limitation. Certain submitters recommended that the operation of MFN clauses needed to be limited after considering Australia’s policy objectives.
• Australia’s BITs do not provide guidance on determining when indirect expropriation has occurred. Certain commentators considered it would be useful to identify factors for determining whether indirect expropriation had occurred.

B. Tightening fork-in-the-road provisions

Some of Australia’s BITs were reported to contain ‘uncertain’ fork-in-the road provisions. Fork-in-the-road provisions typically bind an investor to its chosen dispute resolution process (usually domestic courts or arbitration), so they cannot seek to pursue their claim in both forums. It was suggested that these provisions be reinforced to ensure that an investor could only use one forum.

C. Responsibility for State Government actions

An issue identified with Australia’s BITs was the silence on whether BITs bind the Federal Government for State Government actions, and whether the substantive obligations in BITs apply to State Government actions. One potential avenue for dealing with State Government compliance risk identified in the submissions was to exclude liability for State Government acts.

D. Transition to renewable energy

Concerns, whether rightly or wrongly held, were raised regarding the potential ‘chilling’ impact some claim ISDS provisions may have on Australia’s sovereign right to regulate, in particular in relation to human rights, labour rights, equality and the environment. A concern that gained some attention was the potential for an investor claim to be brought against Australia based on Australia’s measures to protect the environment, such as meeting the objectives set out in the Paris Agreement (see our overview here), namely the transition to renewable energy.

We will issue an update once DFAT publishes its findings from the BITs review.

Upcoming Australia-EU Free Trade Agreement

Australia is seeking an ambitious and comprehensive FTA with the European Union (EU) which from time to time has been Australia’s largest source of foreign investment. As a bloc the EU is Australia’s second largest trading partner, third largest export destination, and second largest service market.

Australia’s approach to FTAs

It is likely that the FTA will include a comprehensive investment chapter that provides for substantive protections and seeks to regulate ISDS.

DFAT has indicated that it is committed to seeking improved market access for Australian investment and that it will also seek an undertaking from the EU not to impose residency and/or citizenship requirements on senior representatives of Australian companies established in the EU. DFAT has also indicated its commitment to upholding Australia’s right to regulate for “legitimate public purpose and screen investments for national interest”.

The EU’s push for bilateral and multilateral Investment Courts

Much ink has been spent debating the relative advantages and disadvantages that would attend a permanent Investment Court operating as the final and sole arbiter (subject to an appellate mechanism) of investment disputes. Advocates point to issues of coherence and consistency with ISDS as well as the perennial question of costs, whilst detractors point to the potential politicisation of such a body and question its capacity to address the perceived concerns around ISDS.

Investors will be particularly interested in how Australia responds to any suggestion by the EU that the proposed FTA replace the ISDS mechanism with an Investment Court System. The EU in its recently negotiated investment agreements with Canada, Mexico, Singapore and Vietnam has jettisoned ISDS in favour of establishing a bilateral Investment Court. Under each treaty a standing tribunal is established, with members pre-selected by the contracting states, invested with power to establish its own procedural rules. In one of our previous blog posts we have considered the Investment Court System under the Canada-EU Comprehensive Economic and Trade Agreement and the procedural rules adopted there.

These agreements also include provisions allowing for the transition to a multilateral Investment Court System. Such a body, made up of pre-selected members, would in principle provide a procedural framework for any investment dispute arising under any treaty that submits to its jurisdiction.

In March this year the EU released its report of the 10th round of negotiations which indicated that Australia and the EU have agreed on “objectives for the [Dispute Settlement] Chapter, which include transparent, efficient and effective dispute settlement procedures”. The report also indicates that good progress has been made on the articles relating to the substantive investment protections to be included in the investment chapter.

We will issue an update if further information is released regarding ISDS under the proposed Australia-EU FTA.

Australia-UK Free Trade Agreement

On 15 June 2021, Prime Ministers Scott Morrison and Boris Johnson announced that Australia and the UK had reached an ‘in principle’ agreement on core elements of a new FTA. In a media release, DFAT indicated that, “When the agreement is finalised it will deliver the most comprehensive and liberal agreement outside [Australia’s] partnership with New Zealand”.

The UK is one of Australia’s largest trading partners for both goods and services. According to the information released to date, when the agreement comes into force, 99 per cent of Australian goods will be able to enter the UK duty-free. Tariffs on wine and rice will be eliminated upon entry into force, while tariffs on beef, sheep, and sugar will be eliminated in eight to 10 years. The agreement will also contain provisions to improve the ease of investing and doing business, and provisions to enhance recognition of qualifications for professional services.

Although the investment chapter contains a number of investment protections, there will be no ISDS mechanism. DFAT has indicated that, “as two well governed countries with a strong investment relationship, sound domestic legal systems and a strong commitment”, there is no need for ISDS in the FTA.

DFAT have declined to give a precise timeframe on when the FTA is likely to be finalised, noting that the negotiations will be concluded “as quickly as possible, without compromising on quality or ambition”.

Recent legislative measures and government initiatives

Australia has recently introduced Australia’s Foreign Relations (State and Territory Arrangements) Act 2020 (Cth), which establishes a legislative scheme for Commonwealth engagement with arrangements between State or Territory governments and foreign governments, and their associated entities. Relevantly, the Act empowers the Minister for Foreign Affairs to review, and potentially veto, any existing and prospective arrangements between State/Territory governments and foreign entities. Previously, the Security of Critical Infrastructure Act 2018 (Cth) sought to address national security risks posed by foreign involvement in Australia's critical infrastructure, namely around 200 assets in the electricity, gas, water and ports sectors.

Recent discussion concerning Darwin Port and how the Federal Government may utilise the new legislative framework to potentially affect the 99-year lease of the port granted to the Chinese-owned Landbridge have drawn increased attention to foreign investments in Australian infrastructure.

Looking forward

Many will be watching Australia’s next moves in the investment protection space, be it investors or counterparties to its BITs and upcoming FTAs.

DFAT’s conclusions on its review of Australia’s BITs and the negotiations of the EU-Australia FTA and the UK-Australia FTA will be closely watched alongside ongoing discussion concerning Darwin Port and other investments in Australian infrastructure.

For more information, please contact Leon Chung, Partner, Guillermo García-Perrote, Senior Associate, or your usual Herbert Smith Freehills contact.