What future for investor-state arbitration provisions in Asia Pacific treaties?

Author: Luke Nottage, The University of Sydney

In its recent review of Bilateral and Regional Trade Agreements (BRTAs), the majority report from Australia’s Productivity Commission remained opposed to including treaty provisions for investor-state dispute settlement (ISDS).

Recommendation 4(c) advised that Australia should not include ISDS ‘provisions in BRTAs that grant foreign investors in Australia substantive or procedural rights greater than those enjoyed by Australian investors.’

This threshold would exclude ISDS in almost all situations, at least where host states — like Australia and 145 others — are party to the 1965 Convention on the Settlement of Investment Disputes (ICSID) between States and Nationals of Other States. This is because subsidiary BRTAs or Bilateral Investment Treaties typically allow investors from those treaty partners to commence arbitration against host states through the World Bank’s ICSID facility, established by the 1965 Convention. The arbitral award then enjoys a special regime for enforcement: it can be reviewed for serious irregularities by other ICSID arbitrators, but not by host state courts. By contrast, local investors seeking remedies for their own state’s illegal interference with their investments must generally sue in local courts.

The Productivity Commission is therefore implying that Australia should never allow ICSID arbitration in its BRTAs. Arbitration administered under the Rules of the International Chamber of Commerce, for example, would be acceptable: such awards cannot obtain the special enforcement mechanism provided by the ICSID. This is contrary to Australia’s investment treaty practice, and to the spirit of the ICSID Convention to which Australia is party. Australian investors will also no longer be able to enjoy protection under ICSID when partners illegally interfere with their own investments abroad.

The Productivity Commission also insists that the obligations imposed on Australia as host state go no further than those already stipulated in local Australian law. Yet it is often difficult to compare the two, especially as both treaty and local law are continuously evolving. Further, if a potential treaty partner (such as the US) adopts a similar policy, and its local law protections are higher than those under Australian domestic law, then no investment treaty can be concluded involving ISDS. The partner will want its higher standards built into the treaty to protect its own investors, but the Australian government is now unable to provide them.

The Productivity Commission suggests that ‘other options are available to investors’ to protect their investments abroad. But host state courts and domestic law are usually unattractive. The court system may be unreliable and provisions may be idiosyncratic even if offering substantive law protections similar to those found in the home state. Litigation procedures are unfamiliar and may involve more scope for appeals than international arbitration. Judges will also be less specialised in cross-border investment dispute resolution and hearings will often be in a foreign language.

An alternative suggested by the Productivity Commission is political risks insurance. But coverage is typically narrower than under treaty protections and governments often support such schemes anyway. Another given is an investment contract between an investor and the host states, but these involve considerable transaction costs (possibly including lateral pressure brought by the investor’s home state), and such contracts are much less feasible for smaller investors or projects.

A further option is the inter-state claim process that the home state can invoke, on behalf of its affected investor, against the host state. The main problem is that the home state retains discretion and control over this claim process, and again it is less likely to be invoked for smaller investors or projects. An alternative would be to structure an investment through a third country that has an investment treaty with the destination state, which includes full ISDS protections. But the transaction costs and inefficiencies will be large.

The Productivity Commission’s analysis and recommendations are therefore unconvincing, and hopefully will not be followed by the rest of the Australian Government — let alone others in the region. The Commission’s concern that inefficient foreign investors might enter Australia due to artificial advantages created by treaty protections seems more theoretical than real and its proposed responses lack practicality. Concerns over adverse effects from investor-state arbitration are better addressed by drafting exceptions more carefully and building other innovations into investment treaties. Active engagement by Australia in refashioning the investment dispute resolution system in such ways is also crucial to promote its legitimacy, not just its efficiency advantages. This is particularly true for the Asia Pacific region, where investor-state arbitration provisions have become increasingly pervasive in treaty practice.

Luke Nottage is Associate Professor at Sydney Law School, The University of Sydney.

This is based on research for the project, ‘Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific‘, supported by the Commonwealth through the Australia-Japan Foundation which is part of the Department of Foreign Affairs and Trade. For further arguments and references, see also http://blogs.usyd.edu.au/japaneselaw/.