New Frontiers in International Arbitration for the Asia-Pacific Region (3): What Future for ISDS?

After Australia’s general election held on 18 May 2019, the prospects for investor-state dispute settlement (ISDS) and therefore investment chapters in free trade agreements (FTAs) remain unclear not only for Australia but also the wider Asia-Pacific region. This posting provides some backdrop and reiterates a proposal for a bipartisan (and bi-national) approach by Australia (especially with New Zealand) to more actively promote a “permanent investment court” (or at least some of its core features) as a compromise alternative to conventional ISDS, for its future treaties as well as in reviewing older ones. This should be not just in pending FTA negotiations with the European Union, which now already insists on such a court for resolving investor-state disputes (aiming also to develop a multilateral investment court), but also in (re)negotiations with other Asia-Pacific states. A version of this posting is with the East Asia Forum blog too.
This proposal will be tabled and hopefully discussed at the upcoming seminar at the University of Hong Kong, on 15 July, as part of a joint project over 2019 with USydney on “New Frontiers in International Arbitration for the Asia-Pacific Region“.

“What Future for Asia-Pacific Investor-State Dispute Settlement?”
Host states increasingly added investor-state dispute settlement (ISDS) provisions to investment treaties, alongside inter-state arbitration provisions which require investors to mobilise, to more effectively commit to substantive obligations such as non-discrimination, fair and equitable treatment, and adequate compensation for expropriation.
Standalone bilateral investment treaties proliferated from the early 1990s, as the communist bloc Europe disintegrated and Asia moved towards a socialist market economy. From the turn of the century, as efforts stalled in the WTO and OECD to develop a multilateral treaty for investment liberalisation and protection, ISDS-backed investment chapters were folded into burgeoning bilateral and then regional free trade agreements. The latest significant Asia-Pacific example is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), little different from the TPP that the US had originally signed. ISDS provisions were also being negotiated carefully in an investment chapter leaked in 2015 for the Regional Comprehensive Economic Partnership (RCEP or ASEAN+6 FTA).
However, as investment flows have grown alongside an expanding network of treaty commitments, ISDS claims have burgeoned. Asian states and outbound investors were somewhat under-represented compared to those from other regions. But this has been changing in recent years, as “institutional barriers” to bringing or defending cases have diminished.
Arguably reflecting “availability bias”, the first inbound ISDS claim tends to lead host states to rethink the net benefits of such commitments, often even suspending the signing of new investment treaties. But treaty signing has usually resumed after a few years. Often host states have been able to fend off ISDS claims, yet still want to offer this commitment to attract foreign investment in an increasingly competitive global market. A 2018 study found that most ASEAN states, for example, had been subject to at least one treaty-based ISDS claim but had not had any award yet executed against them.
This pattern is true not just of developing countries, but also for example Australia. In 2011, when the first ISDS claim was brought by Philip Morris under an old BIT with HK regarding Australia’s tobacco plain packaging legislation, a Labor-Greens (centre-left) government declared that it would no longer accept ISDS provisions in future treaties. This policy shift impeded the conclusion of FTAs with Korea, China and Japan, already or potentially large investors into Australia and therefore keen to obtain ISDS protections. But those treaties were signed after the Liberal-National (centre-right) coalition government regained power in 2013 and reverted to including ISDS provisions on a case-by-case assessment. Existing treaties were mostly left alone. However, Australia’s earliest FTA with Singapore was refreshed with CPTPP-like provisions, and Australia signed a new BIT with Uruguay adding tighter (CPTPP-like) substantive and procedural provisions while retaining ISDS. Meanwhile, Australian outbound investors (especially in resources) have become more aware of and willing to commence treaty-based ISDS arbitration – against India (successfully), Indonesia (unsuccessfully), Pakistan, Thailand, Egypt and possibly Poland (all pending).
Despite Australia winning the Philip Morris arbitration in 2015, and New Zealand never having experienced an inbound treaty-based claim, its Labor-led government also decided to eschew ISDS provisions in its new treaties from November 2017. New Zealand even partly opted out of ISDS provisions in the CPTPP through bilateral side-letters, although ISDS-backed protections remain available anyway (except regarding Peru) under other FTAs.
In Opposition from 2013, Australia’s Labor Party also maintained its policy against ISDS, which was problematic for the Coalition government as it lacked a majority in the Senate (and even recently the lower House). However, Labor eventually voted with the government for legislation reducing tariffs under new FTAs, agreeing (unlike the more protectionist Greens) that ratification was probably still in the national interest.
The Coalition Government retained power in the 18 May 2019 election, claiming a few more seats in the lower House but still obtaining only a razor-thin majority. By-elections could again cause complications, as could developments in the Senate, resulting again in complications ratifying treaties if Labor remains opposed to ISDS.
The best way forward remains forging new bipartisan consensus in Australia, but also especially with New Zealand, to promote a hybrid dispute resolution option: a permanent ‘investment court’. Adopting this mechanism in treaties helps address concerns about delays, costs, neutrality and (potentially) the diversity of ISDS arbitrators being appointed case-by-case, including by (sometimes repeat) investor claimants; instead, treaty states appoint “judges” to a panel, who are appointed with investors lodge claims. The mechanism also precludes them from “double-hatting” (acting as counsel in other ISDS cases), although the new CPTPP Code of Conduct helpfully bans this anyway, as some urged during ratification inquiries. Adding an appeal mechanism also helps minimise inconsistent and/or incorrect rulings.
Yet the court mechanism sidesteps the inefficiencies and potential inequities of an investor having to mobilise a home state for enforcement of treaty commitments through inter-state arbitration. It also avoids the problems of relying on domestic law and courts, particularly but not only in developing countries. Political risks insurance is often not a perfect substitute even for expropriation claims, as some recent litigation indicates for an Australian investor’s pending claim against Thailand, and generally does not provide coverage for several international law based protections commonly spelled out in contemporary treaties.
The investment court compromise should be politically feasible for Australia and New Zealand as it is distinct from traditional or even further “improved” ISDS, or even ISDS with an additional appellate review mechanism. This is evident from recent Concept Papers from the Academic Forum for ISDS, created to assist state delegates (and many NGOs and other official observers) in divided and quite likely very protracted UN deliberations over reforming ISDS.
Diplomatically, promoting this court through future Asia-Pacific treaties should be feasible for many reasons. The EU insists on this model due to local backlash against often high-profile ISDS claims, but it has also just been ruled clearly compatible with EU law. It is already found in the FTAs with Vietnam, Singapore and Canada, and the EU is presently negotiating FTAs with several other Asia-Pacific countries. At least for RCEP, it may even be palatable even for Japan, which used to be flexible in investment treaty negotiations. (However, the Abe Government has been flexing its muscle here too, by accelerating BIT signings, not agreeing on an investment protection treaty alongside its new FTA with the EU, and holding out for ISDS in the UN deliberations.) Other developing countries that have been and/or are now reticent about ISDS, like India and Thailand after some inbound claims, will likely be attracted too as the court mechanism mostly rebalances in favour of host states.
From a policy perspective, providing for investment courts in bilateral and regional treaties is the best way forward too. They can build into a multilateral mechanism, as urged already by the EU, which economists and others would generally prefer on efficiency and legitimacy grounds. This alternative to ISDS should dampen some over-ambitious claims (reflected arguably in claim/award ratios) and may also encourage other innovations, such as “med-arb”. (Promisingly but unusually, Article Art 23.14.1 of the newly-signed Australia-Indonesia FTA allows the host state to require mediation before the investor can initiate arbitration.) Some econometric analysis also suggests that while ISDS-backed treaties (especially between OECD and non-OECD countries), have generally increased FDI flows, qualified ISDS commitments have had an even greater effect.
Shifting towards a new model is always hard, especially for cautious officials who may prefer the “known unknowns” or uncertainties in conventional ISDS. But Australia, New Zealand and the Asian region now have the opportunity to join in leading the way, in an era when the region is already emerging as a “rule maker” rather than a “rule taker” in international investment law.

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.