Bill proposing to preclude Australia from ISDS in future investment treaties

I am pleased to provide this Submission on The Trade and Foreign Investment (Protecting the Public Interest) Bill 2014. I specialise in international and comparative commercial and consumer law, and have produced extensive academic publications and media commentary on treaty-based investor-state dispute settlement (ISDS). My interest is in the policy and legal issues associated with this system; I have never provided consultancy or other services in ISDS proceedings.
The Bill simply provides, in clause 3, that:

“The Commonwealth must not, on or after the commencement of this Act, enter into an agreement (however described) with one or more foreign countries that includes an investor-state dispute settlement provision.”

The Explanatory Memorandum provides no guidance as to the background to this proposal, or its pros and cons. However it seems to be aimed at reinstating the policy shift announced by the April 2011 “Gillard Government Trade Policy Statement”. That is no longer found on Australian government websites and is inconsistent with the present Government’s policy on ISDS, which allows for such provisions on a case-by-case basis (as evidenced by the recent Korea-Australia FTA).
The Bill, like the previous Trade Policy Statement in this respect, may be well-intentioned, but it is premature and misguided. Treaty-based ISDS is not a perfect system, but it can be improved in other ways – mainly by carefully negotiating and drafting bilateral investment treaties (BITs) and free trade agreements (FTAs). This may also have the long-term benefit of generating a well-balanced new investment treaty at the multilateral level, which is presently missing and unlikely otherwise to eventuate.

The treaty-based ISDS system is particularly important when dealing with developing countries, where local courts and substantive rights may not meet widely-accepted global standards, although ISDS is also now found in some treaties among developed countries. Reflecting concerns about the capacity of national courts to deal with specialized cross-border investment disputes, BITs and FTAs also commonly include inter-state arbitration procedures. However, these are very infrequently invoked, because they require the home state to run the case for its investor against the host state that has illegally interfered with the investment. This involves financial costs to the home state as well as delays and potential diplomatic embarrassment. Due to similar problems, Australia and other countries have recently begun to conclude double-tax treaties that require the two states to resolve the matter by arbitration if the double-taxed firm so requests.
Because of its advantages over other existing and immediately foreseeable international dispute resolution mechanisms, the treaty-based ISDS system is increasingly accepted by Australia’s major existing and potential treaty partners, including both developed and developing countries in the Asia-Pacific region. It is more responsible therefore for Australia to keep engaging with the system by negotiating specific improvements in future treaties. This is also the approach taken recently by the European Commission and US government, which have been reassessing ISDS as well.
Otherwise, there is also a serious risk of preventing – or at least seriously delaying – the conclusion of any future FTAs. Those include several major treaties currently being negotiated by Australia, including the FTA with Japan, the Trans-Pacific Partnership Agreement and the Regional Comprehensive Economic Partnership (“ASEAN+6”).
Opposition to ISDS in Australia appears to derive from an uneasy alliance between those on the (political) left and some on the (economic) right. The latter, epitomized by the majority opinion in the Productivity Commission’s 2010 report on trade policy, argue in particular that (i) there is no clear evidence that offering ISDS significantly increases inbound FDI, and (ii) Australia’s outbound investors do not rely on or need treaty-based ISDS protections. However, regarding (i) the econometric evidence remains mixed, and should anyway be focused on Australia’s actual and potential treaty partners (rather than aggregate world-wide FDI). Regarding (ii) there is now evidence that Australian outbound investors do avail themselves of ISDS (eg in India, Indonesia and Pakistan), and political risks insurance (or legal technical assistance to developing countries) is an inadequate substitute. In other words, there appear to be more such benefits for Australia in treaty-based ISDS than hypothesized by the Productivity Commission in 2010.
Another potential benefit is to provide fewer incentives for Australia’s outbound investors to instead privately “manage” risks by bribing foreign officials or parties. This is often contrary to Australian law and international treaties, but recent cases show that enforcement is still inadequate. Although a bigger “stick” is needed in that respect, protecting FDI through ISDS-backed investment treaties provides an additional and useful “carrot” for foreign investors and host states to behave properly.
The Commission in 2010 also queried the potential costs or risks involved for Australia as a whole when agreeing to ISDS. This concern is also emphasised by those on the political left keen to preserve national sovereignty and to avoid “regulatory chill”. However, there has only ever been one claim brought against in Australia (by Philip Morris, regarding our tobacco plain packaging legislation) and it may well fail. A recent ICSID arbitration tribunal has also held that Australia’s 1993 BIT with Indonesia (and indeed, by implication, several other Australian treaties) did not provide full advance consent to ICSID arbitration. Anyway, the extra potential “regulatory chill” from ISDS is likely to be minimal for a country like Australia which is subject to numerous (often successful) public law claims every year through its national courts.
The concerns raised by the Productivity Commission, as well as other community groups and scholars, are certainly worth exploring further – and risks inevitably associated with ISDS can and should be managed more effectively, especially through more careful treaty drafting. In fact, I have received major federal government funding through the Australian Research Council (with colleagues at UNSW, ANU and UMelbourne) to examine such issues in greater detail, from empirical, theoretical and “black-letter law” perspectives. But it is premature and ill-advised for Australia to reverse its longstanding treaty practice by refusing to include any form of ISDS in future treaties. No other developed country adopts such a stance.
If anything, the Australian government should seek to improve the drafting of old treaties (especially as they come up for renewal or may be supplanted by FTA investment chapters) and to consider developing and publicising a well-balanced Model Investment Treaty (along the lines of many of our major treaty partners). No Act of Parliament is needed to pursue such alternatives.
Anyway, the present Bill is curiously worded. For example, clause 3 encompasses investor-state mediation as well as investor-state arbitration, even though only the latter process automatically produces a binding outcome – impacting much more on host states. The Bill also only refers to treaties with “foreign countries”, which may not include entities such as the European Union or Hong Kong SAR – potential FTA partners for Australia.
I would be pleased to give evidence in any Senate Hearings associated with this Bill.
Yours sincerely,
Luke Nottage

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.