Written by: Simon Butt, Luke Nottage and Brett Williams
with special thanks (but no responsibility attributed) to Vivienne Bath and Chester Brown (University of Sydney Law School)
[Updated 18 April, with a shorter version at http://www.eastasiaforum.org/]
Indonesia’s new Mining Law regulation requiring divestment of majority foreign investments is unlikely to generate many formal investor-state arbitration (ISA) claims against Indonesia, based on existing bilateral or regional free trade agreements (FTAs) or investment treaties. But that assessment is based primarily on immediate pragmatic considerations. This situation leaves considerable scope for the international investment law framework to begin unraveling, risking complex adverse effects on cross-border investment particularly in the rapidly evolving Asia-Pacific region.
In the short term, after all, foreign investors have probably done quite well from any mining investments now potentially affected by Indonesia’s new regulation, and they may expect favourable treatment in future deals if they play ball even under the new rules. A conciliatory attitude is particularly likely where the home state of the investor lacks natural resources, such as Japan. That factor provides one explanation for the lack of (direct) ISA claims by Japanese investors, despite a growing number of investment treaties concluded by Japan around the world. Those include the Investment Chapter contained within the 2006 Japan-Indonesia Economic Partnership Agreement (JIEPA), with its heavy focus on enhancing energy security for Japan. Korean investors have never publically filed ISA claims either (see, respectively, Sita Sitaresmi [ch7] and Joongi Kim [ch11] in Bath/Nottage (eds), Foreign Investment and Dispute Resolution Law and Practice in Asia, Routledge, 2011).
More generally, there still have been very few Asian claimants in ISA proceedings, and Asian states also appear under-represented as respondents. Rather than the direct influence of ‘Asian culture’, these phenomena are arguably linked to economic factors, such as unfamiliarity with investment treaty protections, concerns about costs involved in bringing or defending cases, and a concern that a formal ISA claim may jeopardize long-term beneficial relations not just in the particular host state but also other parts of the Asian region. Japanese, Korean and other investors may also be able to mobilize quite easily their home states to help informally resolve an investment dispute caused by measures adopted by the host state, especially if their home states perceive a strong national interest in securing stable access to minerals and other natural resources.
Nonetheless, the new Regulation under Indonesia’s Mining Law, or any similar measure introduced under other regimes, might lead to formal ISA claims, or – more likely – frame renegotiations with foreign investors (and possibly their home states) which are potentially covered by investment treaty protections. Indonesia has reportedly only been subject to three ISA proceedings under the framework 1965 ICSID Convention, which Australia, Japan and the UK are also party to. But a British mining company (Churchill) has recently announced it intends to bring ICSID proceedings against Indonesia for an earlier incident involving one of the world’s largest potential coal coking reserves.
Indonesia is also taking very seriously a highly-politicised claim filed last year by a large UK-based investor in the financially-troubled Bank Century (Rafat Ali Rizvi v. Republic of Indonesia (ICSID Case No. ARB/11/13). The ICSID website reports that over 20-21 February 2012 a hearing was held ‘on the Respondent’s preliminary objections pursuant to ICSID Arbitration Rule 41(5) in Auckland, New Zealand’ (presumably a more convenient neutral location than the ICSID headquarters in the World Bank complex in Washington DC). It also states that the arbitrators (and their nationalities) are: ‘Gavan Griffith (Australian, presiding), Joan Donaghue (US) and Muthucumaraswamy Sornarajah (Australian)’ – the latter having long served as professor of international law at the National University of Singapore. According to Investment Arbitration Reporter (10 April 2012), Rafat Ali Rizvi is alleging unfair treatment by the Indonesia authorities, including the judicial system, and expropriation after the Deposit Insurance Agency forced the bank into administration in 2008. On 4 April 2012 the tribunal reportedly rejected Indonesia’s application, under ICSID Rule 41(5), for the claim to be dismissed on an expedited basis as manifestly without legal merit. A key issue – whether the claimant’s investment was properly ‘granted admission’ under the Indonesia–UK bilateral investment agreement – was found to be too complex to resolve under this preliminary procedure. Nonetheless, the arbitrators are likely to re-examine this jurisdictional objection at a later stage of proceedings.
Many investment treaties concluded by Indonesia, as well as several other ASEAN states, contain provisions requiring investments to have been ‘admitted’ in specified ways. For example, such a jurisdictional hurdle was problematic in the only ISA claim ever brought under the old ASEAN investment treaty system, which required prior approval in writing (Yaung Chi Oo v Myanmar, (2003) 42 ILM 540, where Professor Sornarajah happened to be lead counsel for the Singaporean claimant). However, elsewhere he has remarked that the situation may be different under the 2009 ASEAN Comprehensive Investment Agreement because that treaty now requires states to specify procedures for admitting investments (ch13 in: Bath/Nottage (eds), Foreign Investment and Dispute Resolution Law and Practice in Asia, Routledge, 2011, at p.246).
For Australian investors potentially affected by the recent mining regulation changes in Indonesia and considering protections under investment treaties with Indonesia, it should also be noted that the 1993 bilateral treaty defines an ‘investment’ to be one ‘admitted by [Indonesia] in its territory in conformity with the laws, regulations and investment policies of [Indonesia] applicable from time to time’ (Art I.1(a)) and that it applies to investments ‘granted admission in accordance with the Law No. 1 of 1967 concerning Foreign Investment or with any law amending or replacing it’ (Art III.1(a)). The 2010 ASEAN-Australia-New Zealand Free Trade Area agreement (AANZFTA) defines a ‘covered investment’ somewhat differently: one ‘admitted by the host Party, subject to its relevant laws, regulations and policies’ (Chapter 11 (Investment) Art 2(a)). Footnote 29 clarifies for Vietnam or Thailand that this means registered and/or approved in writing. (Art 14(1) adds that all foreigners’ covered investments may be subjected to a requirement of being ‘legally constituted under the laws or regulations of the [host state]’, but ‘provided that such formalities do not substantially impair the protections afforded by a host state’.)
Such provisions may create a particular difficulty for foreign investors considering treaty claims against Indonesia. Post-Soeharto democratization and decentralization have generated an extraordinarily complex set of laws and policies impacting on the admission as well as the operation of foreign investments (as detailed by Butt, ch6 in: ibid).
However, if such preliminary hurdles can be overcome, Australian investors might argue that the new Indonesian regulations breach several substantive protections under international treaty law. One avenue may be AANZFTA, which provides ‘national treatment’ (NT) for covered investments, namely ‘treatment no less favourable than that [the host state] accords, in like circumstances, to its own investors and their investments’ (Art 4). Art 12(1) does provide for exceptions for non-conforming measures by local authorities of the host state, or by regional or central government listed in a ‘Schedule to List I’. Other exceptions are for sectors or activities set out in a ‘Schedule to List II’ (Art 12(2)), although even if so covered the host state cannot introduce a measure requiring only the foreign investor ‘to sell or otherwise dispose of an investment existing at the time the measure becomes effective’ (Art 12(3)). So AANZFTA prima facie adopts a ‘negative list’ approach to NT, and foreign investors would normally just need to check Lists I and II for any listed reservations.
However, for now this appears to be trumped by footnote 33 to Art 4, which states that anyway the host state’s NT commitment is subject to a Work Program (Art 16). It requires member states to discuss – for up to five years from AANZFTA coming into force (ie over 2010-14) and under the aegis of a joint ‘Committee on Investment’ (Art 17) – the reservations’ made under Art 12. Art 16(5) adds that ‘Notwithstanding anything to the contrary in this Chapter, Article 4 (National Treatment) and Article 12 (Reservations) shall not apply until the Parties’ schedules of reservations to this Chapter have entered into force’. Australian investors into Indonesia must therefore wait for that to occur.
Australia’s 1993 investment treaty with Indonesia does not provide for NT at all. However, it does include ‘most favoured nation’ provisions (Art IV), allowing Australian investors to claim the benefit of protections extended by Indonesia to third countries. Thus, for example, they can invoke the NT obligation found in JIEPA Art 59 (although this too is subject to reservations under Art 64, more detailed and arguably more pro-investor than under AANZFTA). Australia investors should also look through all other investment treaties concluded by Indonesia: the UNCTAD database provides 52 treaties. They must be read carefully, as provisions appearing to provide for full or ‘clean’ NT (eg Art III of the 1970 Indonesia-Denmark BIT) may add qualifications (eg a Protocol limited full NT for Danish investments ‘in so far as Law No. 1 of the year 1967 gives scope to such treatment’).
As a second and possibly simpler remedy, foreign investors might claim compensation for ‘expropriation’ or its equivalent arising from the host state’s measures. This is provided by both the Australia’s 1993 treaty (Art VI) and AANZFTA (Chapter 11 Art 9 – with greater detail provided in the text, footnotes and an Annex). Discriminatory measures are particularly prone to challenge under international law.
It is also generally unnecessary for the host state to benefit directly and financially from measures that detract from the foreign investor’s investment. This contrasts with some national laws regulating expropriation, including arguably the Australian Constitution, which may require an ‘acquisition’ or ‘taking’ into government hands. (This is one reason why Philip Morris Asia launched last year the first ever ISA claim against Australia under a 1993 investment treaty with Hong Kong, whereas other tobacco companies complaining about Australia’s new plain packaging law are challenging it in the High Court of Australia.) Anyway, a measure such as the new Regulation under Indonesia Mining Law envisages foreign shareholdings being forced, at least initially, into state hands or government-linked companies.
Third, the host state commits to extending ‘fair and equitable treatment’ to Australian investors under both the 1993 treaty (Art II.3) and AANZFTA (Art 6(2), adding tighter definitions). A core aspect is due process with regard to measures impacting on foreign investments (including notifications and opportunities for affected investors to be fairly heard), but in some situations this duty may extend to protection of substantive ‘legitimate expectations’ held by foreign investors.
Both treaties also provide for other protections which may be violated by Indonesia’s new regulations, such as a requirement for ‘transparency of laws’ (Art X and especially Art 13, respectively). Some provisions may also impact on future measures that have been mooted, such as restrictions on foreigners holding key management positions in human resources departments. In particular, the 1993 treaty permits Australian investors to employ ‘key … managerial personnel of their choice’ (Art IX).
Lastly, the 1993 treaty allows Australian investors only to commence ICSID arbitration (Art XI(2)(b), whereas AANZFTA adds several options including the UNCITRAL Arbitration Rules designed for ad hoc proceedings (as revised in 2010: Art 21(3)). The former usually provide for greater transparency in proceedings; but AANZFTA allows the host state, for example, to make public all awards and decisions rendered by a tribunal (Art 26). This is arguably important for host states given the greater public interests involved in ISA compared to inter-firm commercial arbitration. But greater transparency may also be valuable for responsible foreign investors considering the filing of a claim in order to focus the mind of the host state on its prior treaty commitments, yet who are still prepared to negotiate an amicable settlement even after proceedings have commenced.
After all, the international law regime does not and cannot solve all issues, even with increasingly sophisticated drafting of investment treaties. Widely-accepted legal interpretations are still evolving and all ISA disputes tend to become quite fact-intensive, generating costs and delays. But international law does and should provide additional mutually-agreed understandings aimed at balancing a host state’s national interests in maintaining appropriate regulatory discretion while attracting foreign investment, with reasonable predictability expected by foreign investors especially in longer-term cross-border foreign direct investments into politically sensitive sectors. The ISA mechanism is important to give traction to the substantive rights. Recent developments in Indonesia therefore provide another reason to reconsider the Gillard Government Trade Policy Statement’s eschewal of ISA in all of Australia’s future treaties.
[This comment draws on research for the project by Nottage and Williams (with Micah Burch), “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.]