Background and key issues
As global inflows of foreign investment continue to increase as the world’s economies emerge from the global financial crisis, with UNCTAD predicting a rise in global inflows from US$1.2 trillion in 2010 to up to US$2 trillion in 2012,1 it is becoming increasingly important for investors to understand the international investment landscape.
When investing abroad, one of the key features that investors should be aware of is the existence and possible application of a complex and growing network of bilateral and multilateral agreements designed to promote and protect foreign investment. UNCTAD estimates that by the end of 2009, there were almost 6000 international investment agreements in existence.2 Many of these agreements:
- confer substantive protections on the foreign investor and their investment, and
- provide a mechanism for settlement of disputes between the foreign investor and the host country (the foreign country into which the investor is investing), often without the necessity for recourse to the foreign country’s domestic courts.
Recognising the importance of understanding the impact of this ‘spaghetti bowl’ of agreements on Australia’s international trade and investment, the Productivity Commission (Commission) recently released a draft report for comment (Draft Report).
Why is the Draft Report important?
The Draft Report traverses a broad range of issues relating to the role and effectiveness of bilateral and regional trade agreements (BRTAs) and is likely to be of interest for both Australian businesses investing overseas (or working with overseas investors in Australia) and overseas investors investing in Australia. The Draft Report makes a number of recommendations regarding the future negotiation of BRTAs which, if adopted, could result in substantial changes to Australia’s investment landscape.
We outline two of the key issues addressed in the Draft Report below.
Investor-state dispute settlement
The Commission recognises in the Draft Report that, to promote foreign investment, a robust dispute settlement mechanism, which allows disputes between the investor and the host country to be resolved directly, is required.
In international investment treaties, investor-state arbitration clauses are common and, by providing a means of avoiding the sovereign risk associated with a foreign state’s domestic dispute resolution processes, can significantly reduce the risk of doing business in the foreign country.
Where the legal system of a partner country is relatively underdeveloped, the Commission suggests that it may be appropriate for the BRTA or investment treaty to contain a mechanism allowing an investor to commence investor-state arbitration against the host country.
However, the Draft Report appears to criticise the operation of investor-state arbitration in a number of respects including because:
- awards are generally not appellable, and
- it offers a forum for challenging government actions which would otherwise be non-reviewable in the domestic context.
These criticisms are somewhat curious given they relate to key features of investor-state arbitration, form a core component of the ICSID Convention (to which Australia is a party) and are a large part of the reason for the recent, rapid growth in investment treaties and investor-state arbitration. The criticism that international arbitration is less certain than developed domestic legal systems which are capable of processing complex cases also seems to underestimate the sophistication of international arbitral tribunals and bodies and the parties which arbitrate.
The Draft Report goes on to state that dispute settlement processes should not afford foreign investors in Australia with litigation options not normally afforded to local investors. The implications appear to be that:
- the protections afforded to investors under a BRTA or investment treaty entered into between Australia and a developing country should not be reciprocal but should flow only to the benefit of Australian investors, and
- foreign investors in Australia should not be afforded dispute resolution options such as ICSID or UNCITRAL arbitration, because those options are not available to local investors.
If that is the case, it is difficult to see why a country would enter into such a one-sided agreement with Australia, even accepting that a number of these countries are developing countries whose primary objective is usually to attract foreign investment from Australia. Moreover, it is difficult to understand why investors should not be permitted to invoke dispute resolution options other than the domestic Australian courts. One of the obstacles to foreign investment, even in developed countries, is the fear of lack of partiality from domestic courts, particularly when one of the parties to the dispute is the state or a state authority. Accordingly, giving investors the right to have their disputes heard by a neutral arbitral tribunal whose awards are not subject to appeal by domestic courts is a significant attraction and benefit for foreign investors.
Future BRTAs
In the Draft Report, the Commission also recommends a number of changes to the negotiation and design of future BRTAs to increase flexibility and transparency. In particular, the Commission suggests that:
- where aspects of an agreement are likely to be contentious and cause protracted negotiations, the Australian Government should first aim to put in place an agreement which deals specifically with the ‘non-contentious’ issues
- the order in which agreements are to be negotiated with new partners should be based on the net benefit for Australia, and
- increased opportunities for consultation with industry stakeholders and consumer representative groups may be appropriate.
If these recommendations are adopted, the effect may be a more rapid proliferation of new BRTAs and investment treaties with Australia’s key business partners. The rate at which Australia has been entering into such agreements has increased, in any event, in recent years. Since 2003, Australia has concluded several new treaties (Singapore 2003, Thailand 2005, United States 2005, Chile 2009, and ASEAN-New Zealand 2010). Australia is also negotiating treaties with China, Malaysia, Japan, Korea, the Gulf Cooperation Council; the PACER Plus agreement with Pacific Island Forum countries; and the Trans-Pacific Partnership with Brunei Darussalam, Chile, New Zealand, Singapore, Peru, Vietnam and the United States. Australia has also recently completed feasibility studies for treaties with Indonesia and India.
Next steps
As the Draft Report highlights, the negotiation of BRTAs and investment treaties and their impact on trade and investment for Australia are clearly issues which are high on the current agenda of the Australian Government.
Investors should be aware of the important transaction planning issues raised by BRTAs and investment treaties and the likelihood of important developments in this area in the near future.
If you are interested in commenting on the Draft Report, the Commission has asked for written comments to be directed to tradeagreements@pc.gov.au by 10 September 2010.
This article was written by Leon Chung, Senior Associate and Jamie Stollery, Solicitor, Sydney.
Endnotes
- UNCTAD, World Investment Report 2010, 22 July 2010 (UNCTAD/WIR/2010).
- ibid.
More information
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