New Frontiers in International Arbitration for the Asia-Pacific Region (6): 15 November symposium @USydney

As part of a research project jointly funded by HKU and USydney over 2019 (see background and many related postings via, Sydney Law School will host a second symposium on Asia-Pacific business dispute resolution, all day on 15 November (the Friday before Australia Arbitration Week, this year in Brisbane), with support from CAPLUS, SCIL, TDM and various other ADR or international law related organisations. Registration and speaker bios are here, and presentation Abstracts and/or online publications are being uploaded below. During refreshments following symposium presentations and panel discussions, there will also be a book launch of Vivienne Bath and Gabriel Moens, Law of International Business in Australasia (Federation Press, October 2018).

Challenges and opportunities for Asia-Pacific international commercial arbitration symposium

15 November 2019

Building on Reyes & Gu (eds), The Developing World of Arbitration: A Comparative Study of Arbitration Reform in the Asia-Pacific (Hart, 2018), this symposium examines more recent challenges for international commercial arbitration (ICA), especially the proliferation of international commercial courts, the 2018 UN Convention on enforcement of mediated settlement agreements, and dispute resolution for the Belt & Road initiative. The main focus is on Hong Kong and Singapore (competing jurisdictions in the top “Stage 4” for ICA venues, as identified by Reyes & Gu), Australia (a “Stage 3” venue), China and Japan (“Stage 2” venues).

The symposium will also compare approaches in these jurisdictions to investor-state dispute settlement (ISDS). Building on Chaisse and Nottage (eds) International Investment Treaties and Arbitration Across Asia (Brill, 2018), participants will chart evolving treaty practices and high-profile ISDS cases (including eg in Indonesia), assess whether these do or might impact on public attitudes even towards ICA or other forms of arbitration, and explore alternatives or complements to ISDS.


  • Professor Shahla Ali, University of Hong Kong
  • Professor Vivienne Bath, University of Sydney Law School
  • Adj Prof Max Bonell, Henry Williams Lawyers & Sydney Law School
  • Professor Simon Bronitt, Dean, Sydney Law School
  • Professor Simon Butt, University of Sydney Law School
  • Professor James Claxton, Kobe University
  • The Hon Dr Clyde Croft AM SC, Supreme Court of Victoria
  • Daniel Forster, Clifford Chance & University of Sydney Law School
  • Dr Benjamin Hayward, Monash University
  • Brenda Horrigan, ACICA President & Herbert Smith Freehills
  • Dr Jeanne Huang, The University of Sydney Law School
  • Wilson Mbugua, University of Hong Kong
  • James Morrison, ACICA & Morrison Law
  • The Hon Kevin Lindgren AM QC FAAL, formerly Federal Court of Australia (in lieu of Roger Gyles AO QC, ABA rapporteur for inquiry available via
  • Professor Luke Nottage, University of Sydney Law School
  • Jonathan Redwood, Banco Chambers
  • Yi Tang, University of Hong Kong
  • Dr Nobumichi (Nobu) Teramura, University of Adelaide
  • Professor Leon Trakman, UNSW
  • Professor The Hon Marilyn Warren AC QC, former Chief Justice of the Supreme Court of Victoria

VIEW THE DRAFT PROGRAM (as at 9 August 2019; update via Registration webpage)


Ali, Shahla, “ICA and ISDS Developments in Hong Kong in the Context of China’s Belt and Road Initiative” (September 13, 2019). Available at SSRN:
This article examines the impact of both the Belt and Road Initiative and the UNCITRAL Model Law on International Arbitration (the Model Law) on both international commercial and investor state arbitration practice in Hong Kong. Given the significance of Hong Kong as a gateway to OBOR project financing and logistics, understanding current dispute resolution policy is critical for gaining insights into China’s approach to the resolution of OBOR disputes. Measures taken to modernize the practice of arbitration including training programmes and legislative reforms are examined with a view to gaining insights into challenges and future developments.

Claxton, James M. and Nottage, Luke R. and Teramura, Nobumichi, “Developing Japan as a Regional Hub for International Dispute Resolution: Dream Come True or Daydream?” Journal of Japanese Law, Issue 47, 2019; Sydney Law School Research Paper No. 19/01. Available at SSRN:
The Japanese government, supported by various stakeholders, has recently been attempting to develop Japan as another regional hub for international business dispute resolution services. Tracking this development is important for both theoretical and practical reasons. How it unfolds should reveal which of various theories for explaining Japanese law-related behaviour have more traction nowadays. Assessing the new initiatives is also important for legal practitioners and others interested in the practical question of where to arbitrate or mediate cross-border business disputes. This paper therefore reports on current attempts to promote existing and new international arbitration centres in Japan as well as the recent establishment of the Japan International Mediation – Kyoto, in the context of intensifying competition from other regional venues for dispute resolution services. [Our presentation also updates on the Japan-Korea trade and investment tensions that escalated from mid-2019, and the various dispute resolution options that could be engaged.]

Teramura, Nobumichi, Luke Nottage and James Morrison, “International Commercial Arbitration in Australia: Judicial Control over Arbitral Awards” (updated June 2019)
Geographical remoteness has not prevented Australia from pursuing its ambition to become a major hub for international commercial arbitration (ICA). While regional competitors in the Asia-Pacific region such as Singapore and Hong Kong have already achieved great success in the arbitration world, Australia’s ‘Tyranny of Distance’ requires extra efforts to attract ICA cases. Recent marketing from the Australian government emphasises (1) a harmonised legal framework for ICA in line with international standards; (2) sophisticated arbitration institutions; and (3) some of the world’s leading arbitration practitioners.
While these factors do reveal strong potential to attract ICA cases, to ensure that this goes beyond a mere possibility, the Australian government and judiciary are making quite concerted broader efforts. The former has recently become more vigorous in marketing Australia-based ICA in and out of the country. The latter has generally tried to issue pro-arbitration judgments particularly over the last ten years, and in public speeches or publications leading judges have been actively summarising and promoting Australian developments both domestically and world-wide. However the court system has structural problems, due to the shared ICA jurisdiction of State and Territory Courts alongside the Federal Courts, compared to the unitary system in Hong Kong and Singapore. There are also persistent delays in court-related ICA matters under the IAA, even in the Federal Court of Australia. Nonetheless, perfection is never attainable.
The rest of this paper argues that Australia has significantly improved legal environment for ICA in line with international standards, focusing on the main topics identified for a wider cross-jurisdictional research project: (1) arbitrator bias; (2) conflicts of interests; (3) procedural irregularities and arbitrator’s misconduct during proceedings; (4) arbitrability (objective arbitrability) (5) judicial interpretation of arbitration clauses (subjective arbitrability); and (6) enforceability of arbitral awards (especially regarding public policy).

Nottage, Luke, “Confidentiality versus Transparency in International Arbitration: Asia-Pacific Tensions and Expectations” (August 29, 2019) Sydney Law School Research Paper No. #19/52, August 2019. Available at SSRN:

Both Australia and Japan lie geographically on the periphery of the Asian region, where international arbitration has been burgeoning especially over the last 15 years. Both countries have struggled to attract significantly more arbitration cases, despite quite extensive efforts (especially by Australia); most cases still go to Hong Kong, Singapore and (especially where local parties are involved) China. This is despite increasingly strict confidentiality obligations being introduced through the rules of the major arbitration institutions, and/or legislation, in Japan and especially Australia. Although aiming to meet the usual expectations of businesspeople and their legal advisors in international commercial dispute resolution, these changes may be “too little, too late”. By contrast, transparency obligations have been added increasingly around the investor-state dispute settlement (ISDS) option included in almost all investment treaties concluded respectively by Australia and Japan. This tendency arguably reflects growing concerns about the public interests implicated by ISDS cases (especially in Australia). Australia has gone the next step of revising its legislation in 2018 to automatically exempt some investment treaty arbitrations from the confidentiality obligations otherwise imposed by default on parties and others in Australia-seated international arbitration proceedings since 2015. Japan does not need to, because its legislation does not apply confidentiality to arbitrations by default. This paper explores possible tensions between these two trajectories in each country. The lessons may be particularly interesting for other jurisdictions (perhaps like Italy) interested in how best to promote and attract international arbitration cases amidst evolving expectations in business and wider communities. The tensions may also influence the EU’s ongoing negotiations for investment protection treaties with respectively Australia and Japan.

Hayward, Ben, “Arbitration in Australia – Efficient, Effective, Economical? A Retrospective”
On 4 December 2009, Australia’s arbitration profession met in Melbourne for a conference hosted by ACICA – the Australian Centre for International Commercial Arbitration – Australia’s leading international arbitral institution. The conference was titled ‘International Commercial Arbitration: Efficient, Effective, Economical?’ – reflecting efficiency, effectiveness, and economic viability’s status as important concerns held by the profession.  Australia’s arbitration laws have been amended many times since then, with a number of significant cases also having been handed down since that time.  One decade later, it is an apt time to ask whether post-2009 developments in Australia’s arbitration laws have addressed these three concerns, and if so, to what extent.  This is the analysis undertaken by this project, which draws upon ten years of developments in Australian arbitration law to identify implications for future law reform in this area.

Warren, Margaret and Croft, Clyde, “An International Commercial Court for Australia: An Idea Worth Taking to Market”

[Extracted from Conclusion of the draft paper:] When the significant trade agreements negotiated by the Federal government are considered with respect to Asia, especially China, and the Pacific, the opportunities offered by an Australian international court are almost boundless. Indeed, there is a symmetry in the establishment of an Australian court which would complement the trade agreements. The proposal for an international commercial court for Australia cannot be left to the Courts themselves or the legal profession to develop and agitate. The experiences of Singapore, Dubai, Abu Dhabi, and indeed, London demonstrate that it is vital for there to be government interest and support for such a proposal.

It is also important to be reminded that a proposal for an Australian court occurs within an international context [… including also] an important legal institute … established in the Asian region in which Australia is an active participant: The Asian Business Law Institute …

A stronger contribution can be made to the rule of law by courts working together than if they are working separately. The early 21st Century is being defined by something of a return to internationalisation and globalisation, although the form and forms that will take remain to be seen. It is for us to shape those forms in the capacity we can and to make contributions towards global stability, harmonisation and due recognition of the law in the context of commercial enterprise. These common purposes, as well as quality of justice and the manner of its administration provided at commercial courts and arbitral tribunals, international and domestic, should be promoted and indeed marketed.

Trakman, Leon “An Australian Perspective on Investment Treaty Negotiations and Investment Arbitration

Notwithstanding the vision of model Investor-State Dispute Settlement (ISDS) provisions across the international community of states, the obstacles are profound.  Supporters propose a cost-benefit analysis to determine the provisions’ utility.  But states are likely to diverge over the costs and benefits of such a multilateral instrument  Material factors will include the stages of development of the states in issue, the kinds of foreign investors (likely) attracted, and alternatives to investor-state arbitration (including recourse to host state courts). Prospects for a model investment treaty that applies internationally are doubtful at best.  Indeed, states that already have their own models, such as the US and China, agonise over their content when revising them, including in relation to ISDS. 

Notably, too, some (especially developing) states that have lost arbitration claims brought by foreign investors have forsaken ISDS in favour of leaving recourse to domestic courts.  Some Latin American states, such as Ecuador and Bolivia, adopted this position after massive losses to foreign investors from developed countries.  More recently, developed states have displayed wariness of ISDS. Australia, unlike Germany and Canada, has never lost an investor-arbitration claim – including the ISDS claim brought by Philip Morris. But it briefly forsook ISDS arbitration a decade ago under a Labour Coalition Government, partly due to a recommendation of Australia’s Productivity Commission.  A Liberal Government soon reverted to a case-by-case approach towards ISDS, excluding it from a new bilateral treaty with Japan (although ISDS is now available via CPTPP) and PACER Plus, while including ISDS in treaties with Korea, China, and (updated) Singapore. Australia’s most recent but as yet unratified treaties, notably with Hong Kong and Indonesia, also include ISDS.  What is distinctive in these various treaties providing for ISDS is how that choice is expressed.

This presentation will explore ISDS in Australia’s bilateral treaties. It will identify disparate provisions, the manner in which they are manifest, and the reasons for and significance of their adoption.  It will explore some perceived costs-benefits underlying such divergence over ISDS.  It will evaluate the rationale that Australian seeks to shield its outbound investors from the domestic courts of its treaty partner states, while protecting itself from excessive claims by their inbound investors.  It will critically evaluate the proposition that ISDS may be more expeditious and transparent than proceeding before domestic courts.  [For an earlier paper focusing on the Asia-Pacific, see here.]

Tang, Yi, “Applying PRC’s BITs in Hong Kong and Macao SARs: Contradictions Between the Chinese Government and Investment Tribunals”

In recent years, it is observed that the investor-state tribunals have more frequently encountered a difficult problem of the territorial application of investment treaties, especially bilateral investment treaties (BITs). Among all the investment treaty arbitration cases concerning the application of BITs concluded by the People’s Republic of China (PRC), the cases of Tza Yap Shum v Peru and Sanum Investment Ltd v Laos stand out due to the special status of China’s Hong Kong and Macao Special Administrative Regions (SARs). In these two cases, one key dispute is whether PRC’s BITs can be applied to Hong Kong or Macao SARs. And the tribunals and courts in both cases reached the conclusion that PRC’s BITs do apply to Hong Kong or Macao, which has presented a sharp contrast with the Chinese official stance. Against this background, this paper intends to analyze how and why the international investment tribunals’ decisions contradict from the Chinese official position. It will first examine the two controversial cases by teasing out the opposing arguments and standpoints, then it will analyze what might explain the confrontation between the positions held by the Chinese government and the investment tribunals respectively. What are the driving forces behind the two contradictory stances? This paper attempts to conduct a relatively comprehensive analysis on this issue by delving into the reasons from historical, legal, political and economic perspectives. This analysis hopes to offer an innovative prism through which we can gain some new insights into the question of applying PRC’s BITs to SARs. It is also of value to the future implications and policy suggestions as to what China should do to solve the current dilemma, and to prevent future confusion. 

Mbugua, Wilson, “Dispute Resolution in International and Bilateral Investment Agreements” (earlier draft paper with Shahla Ali at:

Investor-state dispute settlement (ISDS) claims have mainly centred on impairment of investments by the host state in banking, infrastructure development, mining, among other sectors. Intellectual properties as a form of investments are protected by a considerable number of bilateral investment treaties, however, they have rarely been invoked in ISDS claims until recently. This paper sketches the fabric and the structure ISDS in bilateral investment treaties and how it is applied in practice. Secondly, it will examine how arbitration tribunals have dealt with the subject of intellectual property rights by focusing on two standards of protections- expropriation and fair and equitable treatment. Lastly, the paper will conclude with a discussion on the criticism facing ISDS and possible paths for reforms.   

Huang, Jie (Jeanne), “Data Protection in Investment Arbitration: Privacy, Confidentiality and Transparency

Two recent cases, Tennant Energy v Canada and Elliott v. Korea, demonstrate that the booming domestic and regional data protection laws have brought real and significant challenges to investment arbitration. The unprecedented but unclear role of data protection in investment arbitration requires serious attention from both academic and practising communities. This paper intends to address four issues. Firstly, how to determine whether an investment arbitration is subject to a domestic or regional data protection law? Second, suppose that a domestic or regional data protection law (e.g. GDPR) should be applied to an ISDS, what are the similarities and differences between the concept of ‘privacy’ under the data protection law and the general assumption that arbitration proceedings are both ‘private’ and ‘confidential’? The third issue is the interplay between the immunity under public international law and the privacy obligation under a domestic and regional data protection law. Last but not least, may the transparency obligation under the UN Convention on Transparency in Treaty-based Investor-State Arbitration (now being considered by the Australian Parliament) conflict with the privacy obligation under a domestic or regional data protection law? If so, how to resolve the conflict?

New Frontiers in International Arbitration for the Asia-Pacific Region (5): Mediating Japan-Korea Trade and Investment Disputes

Written by: Prof James Claxton (Kobe University), Prof Luke Nottage (Sydney Law School) & Dr Brett Williams (Williams Trade Law & CAPLUS Associate)

[This is a compilation of our two-part postings for the Kluwer Arbitration Blog, on recent bilateral tensions with regional and even global ramifications. They could generate complicated and protracted disputes across various forums and so arguably could benefit from formal mediation. Our analysis builds on brief discussions at and after a July symposium at HKU as part of a joint research project with USydney, and a longer version can also be found on HKU’s “ADR in Asia” blog. It will be tabled also at the second joint symposium, on Friday 15 November at Sydney Law School.]

1. Complex Multi-faceted Tensions between Japan and Korea

A media and geopolitical storm recently erupted after Japan introduced measures affecting exports to the Republic of Korea (Korea). Thunder sounded with Japan’s imposition of certification requirements on three chemicals needed by South Korean companies to make semiconductors, memory chips and displays for consumer electronics (the 4 July Measure). This was followed by lightning and rain when Japan removed Korea from its “white list” of trusted trading partners (the 2 August Measure), then threats by Seoul to retaliate by reducing military-intelligence cooperation and imposing countermeasures on trade. The growing tempest has brought about the worst breakdown in cross-border bilateral relations in five decades, generating both regional and global ramifications.

Differing rationales for the geopolitical storm have been given. The Japanese government and media tend to emphasise security concerns, namely on-shipments of such chemicals with potential military applications to North Korea, violating multilateral sanctions. The South Korean government and media, as well as some international news outlets, have often placed more emphasis on the possibility of Japan “retaliating” for an October 2018 judgment of the Supreme Court of Korea. That decision upheld lower court judgments from 2014 finding major Japanese companies, such as Nippon Steel, liable to compensate claimants alleging that they were forced labourers for the Japanese companies during World War 2. The companies, and the Japanese government, have argued that such claims were precluded by a bilateral treaty signed in 1965 to restore diplomatic relations. (Similar claims and defences but under different bilateral instruments have been raised before Japanese courts by Chinese war-time labourers, generating a settlement with Nishimatsu group companies.) A few media reports also speculate that Japan introduced export restrictions affecting Korea to bolster the appeal of the Abe Administration in upper House of Councillor elections, but it secured another solid victory anyway. Some media sources suggest that populist Korean President Moon Jae-in may be “playing to the base” too in domestic politics.

Introducing trade-restrictive measures, however, raises the potential for Korea to complain before the World Trade Organization (WTO). It brings to mind the claim successfully brought by the Obama Administration against China over 2012-14, resulting in China removing export duties and quotas imposed on rare earths, for which it similarly controlled almost all world trade. However, the general exceptions China failed to establish in that case, under Article XX of the General Agreement on Tariffs and Trade (GATT), dealt with health and conservation of natural resources. By contrast, Japan here could be expected to raise national security exceptions under Article XXI. There are even greater differences from a procedural perspective, which we focus on below. If indeed Korea files a formal complaint and an ad hoc panel rules against Japan, this would only come by next year at the earliest. By then the Appellate Body will likely lack sufficient members (full-time “judges”), due to the Trump Administration blocking new appointments until its concerns about dispute resolution and other aspects of the WTO system are adequately addressed. Accordingly, Japan could appeal any panel decision allowing retaliation for any GATT violations found, and then never come under pressure to remove or adjust its measures against Korea.

The situation becomes even messier when we consider below other potential inter-state dispute resolution processes. Japan could seek arbitration under the 1965 treaty, but that effectively requires the counterparty to provide further consent, which Korea does not seem to want to do. Japan might also consider litigating the treaty before the International Court of Justice (ICJ). Another option is to invoke inter-state arbitration under the Japan-Korea bilateral investment treaty (BIT) in force since 2003, and/or a trilateral investment treaty including China in force from 2014, underpinning cross-border relations among Asia’s three largest FDI providers. However, it may be difficult to prove that the Korean court judgments involved a procedural defect or discrimination towards the Japanese companies creating a denial of justice, contrary to the relevant treaty.

Part II in a separate posting will analyse a further possibility: the Japanese companies might directly initiate investor-state dispute settlement (ISDS) claims, as provided by both investment treaties in lieu of inter-state arbitration. This could theoretically include an application to the ad hoc arbitration tribunal to issue interim measures preventing enforcement of the Korean Supreme Court ruling, until the tribunal had finally determined claims such as denial of justice. However, this dispute resolution option generates legal and practical problems for the Japanese companies themselves, and the Japanese government due to some renewed sensitivity recently over ISDS in general. Because of these multi-faceted potential disputes, involving various treaties and parties, we will end by urging formal mediation to assist achieving a global settlement.

2. Japan vs Korea Under the 1965 Treaty or Investment Agreements

Procedural as well as substantive law complications arise under the 1965 Japan and Korea Treaty on Basic Relations. It purports to settle and foreclose claims related to the treatment of Korean nationals during the period of Japanese colonial rule before World War 2 in exchange for a payment by Japan to Korea of USD 2.5 billion (in today’s terms) and an offer of favourable loans to Korea. Japan and Korea disagree about whether the treaty was meant to settle only state-level claims or to also extend to private claims by Korean labourers against Japanese businesses.

Article III provides that disputes over treaty interpretation can be settled in inter-state arbitration should diplomatic consultations fail. Although Japan invoked this provision on 20 May 2019, after consultations following Korean court execution orders against Japanese companies, Korea has not consented to arbitrate or selected an arbitrator under the terms of the treaty. This effectively closes the door on the possibility as there is no authority named in the treaty for default appointments of party arbitrators. While Korea’s non-compliance with the arbitration provision may raise the issue of good faith under general international law in principle, the practical consequence for now is that arbitration is stalled, although Japan still seems to hold out hope that the Korean government will change its course.

Japan has also said it is considering bringing the 1965 treaty dispute to the ICJ. Like arbitration, this option would require Korea’s consent because, unlike Japan, Korea has not made a declaration that the jurisdiction of the ICJ is compulsory or elsewhere consented to give the Court authority over the dispute. While proceedings before the ICJ raise a different set of procedural considerations – including relative efficiency, confidentiality, and access to provisional measures – it is unclear why Korea would be more open to this alternative than arbitration if Japan were to move to institute proceedings.

Japan could therefore instead make collateral claims under the 2002 Japan-Korea BIT or the 2012 trilateral investment agreement between China, Japan and Korea, although the Japanese government does not seem to have raised this possibility publicly. Both instruments were in force when the dispute arose and each provides for mandatory inter-state arbitration supported by appointing authorities to act for non-participating parties.

Article 14 of the BIT would allow Japan to commence UNCITRAL Rules (ad hoc) arbitration against Korea. It usefully adds an expedited procedure for submissions, hearings, and drafting of the arbitral award, but envisages first “consultations” without specifying any time limit beyond which arbitration can be commenced. Japan may also be disconcerted that there is no express elaboration of a “loser pays” principle, as has become more common (although far from uniform) in international commercial and even investor-state arbitration. The starting point under the BIT is instead that each state bears costs equally, whatever the outcome, subject to tribunal discretion.

Under the trilateral agreement, Article 17 provides that Japan can commence arbitration under the UNCITRAL Arbitration Rules after a mandatory consultation period of six months beginning with a written request for consultations. The scope of the written request, concerning “any dispute relating to the interpretation or application of [the trilateral agreement],” may not be broad enough to include Japan’s request for consultations under the 1965 treaty on 9 January 2019. Assuming notice is not a hurdle, the arbitration procedure mostly mirrors the expedited process and division of costs terms found in the BIT. The most significant difference is that China would be permitted to make submissions and attend hearings as a right.

Apart from these procedural issues, arbitration under an investment treaty may not be attractive to Japan as it could narrow the scope of possible claims. Rather than deal directly with the questions of interpretation of the 1965 treaty, the arbitration would concern whether the Korean judiciary breached standards of treatment in the investment treaty by holding Japanese companies liable for forced labour. The standards for resolving this question are expressed differently in the instruments. The BIT promises state treatment that is fair and equitable without qualification while the trilateral agreement links fair and equitable treatment of investors to “generally accepted rules of international law” and goes on to stipulate that “a determination that there has been a breach of… a separate international agreement, does not ipso facto establish that there has been a breach [of the investment treaty].” Based on the broader treatment standard and indefinite consultation period, the BIT may offer a better option for Japan.

To prevail under either investment treaty, Japan would likely have to demonstrate serious procedural irregularities or prove that the Korean Supreme Court’s ruling was discriminatory and not merely that the court misinterpreted the terms of the 1965 treaty in reaching its judgment. There are a few public examples of investors challenging court judgments successfully on the basis of protections in investment treaties. Chevron notably convinced an investment tribunal to stay a 9.5 billion USD Ecuadorian court judgement against the company and ultimately recovered damages for denial of justice under the Ecuador-U.S. BIT and violations of customary international law. Yet the fit with the dispute between Japan and Korea is far from perfect. While the Chevron tribunal found that the court judgment was written by a third party in exchange for payment to the judge, there have been no such allegations of corruption against the Korean courts.

Even if Japan were to convince a tribunal that its nationals were denied justice by the Korean courts, the tribunal would not necessarily have to interpret the 1965 treaty to resolve the claims. Absent a ruling on the meaning of the treaty, the root cause of the dispute would remain unsettled.

3. Korea vs Japan in the WTO

So far, Korea has not filed any formal complaint under the WTO’s Dispute Settlement Understanding (DSU). In force from 1995, that allows an affected member state first to seek bilateral consultations, then request formation of panel of three ad hoc decision-makers, and then appeal any adverse ruling to the Appellate Body for review by a minimum of three “judges”. However, Korea instead has so far raised its concerns in this case to the WTO General Council, the WTO’s highest decision-making body comprising representatives of all member states. Korea may be seeking to raise wider awareness among them about the bilateral tension and thereby prompt an informal diplomatic solution, but raising matters in this forum could entrench positions. If Korea does file a formal complaint through the DSU, issues anyway are complicated in terms of substantive WTO law and especially under the current WTO dispute settlement regime.

We elaborate elsewhere the substantive issues. In short, Korea will claim that Japan’s 4 July Measure violates the Most-Favoured-Nation rule in GATT Article I because exports to other WTO Members of the three chemicals receive an advantage in the form of the expedited export facilitated by the bulk licences and that advantage is not extended to exports to Korea. It could similarly complain about the 2 August Measure, removing Korea from the white list of countries receiving less onerous treatment from Japan in relation to controls over exports of a broad range of goods.

Japan might then claim justification for both measures under GATT Article XXI, allowing a state to take “any action which it considers necessary for the protection of its essential security interests”. A recent WTO panel decision in one of several disputes between Russia and Ukraine, found that this exception is not completely “self-judging” (as asserted by Russia, as well as generally the USA,) so it had jurisdiction to examine the measures that Russia claimed were to protect its security. But the panel nonetheless found them justifiable, applying a two-step test.

If Korea does bring a WTO claim and Japan raises this particular security exception, a new ad hoc panel formed may not follow such legal reasoning and factual determinations may be difficult. There is further uncertainty because although the Russia-Ukraine panel decision was appealed, the Appellate Body is understaffed and cannot deal with it this year.

That understaffing points to an ever bigger, procedural problem for Korea. Even if it prevails on the merits before a WTO panel, this is unlikely to occur before next year. By then, however, another of the three remaining Appellate Body judges will have reached mandatory retirement. If the USA keeps objecting to any new appointments because of various objections to the DSU procedures and the wider WTO system, the Body will lack a quorum to decide any appeals, including for example by Japan if unhappy with the earlier ad hoc Panel. In other words, Korea will have achieved only a pyrrhic victory.

Various WTO members are trying to resolve the DSU breakdown. For example, the EU proposed amendments to the DSU in late 2018 that attracted support from Australia and Korea, but the USA was not persuaded. The EU and China apparently criticised April 2019 proposals by Australia and Japan as being too soft on the USA. China’s views towards the WTO dispute settlement system are unclear, after recently withdrawing from panel proceedings against the EU’s anti-dumping duties.

There are ongoing discussions for back-up plans whereby member states agree not to appeal or to substitute the usual two-tier DSU process with inter-state arbitration under DSU Article 25, rarely used since 1995 (as discussed on this blog here). But these plans are complicated and involve states opting in to a new dispute settlement regime. Such deep uncertainties over inter-state dispute resolution procedures further cloud the picture regarding a potential WTO claim by Korea against Japan.

To conclude so far, Japan can probably fend off WTO claims by Korea. However, on substantive and/or procedural grounds, Korea probably has a good chance of fending off claims brought by Japan under the two applicable investment agreements and the 1965 treaty. This leaves questions over potential investment agreement claims by affected Japanese companies, creating further complications and enhancing the need to try formal mediation, as we explain [below …].

4. Japanese Companies vs Korea Through ISDS

Apart from the difficulties outlined in our previous posting over proving a denial of justice, a major problem for the Japanese companies if they initiate ISDS arbitration is that they would have to fork out tribunal, lawyer and expert witness fees. Empirical evidence confirms those are often hefty, even if the claim ultimately succeeds, which is one major reason why investors try to mobilise and involve their home states even if relevant treaties allow them to “go it alone” by providing the option of ISDS as well as inter-state arbitration.

A major problem for the Japanese government, in turn, is that any ISDS claims brought by the companies would likely further incense not only the current Korean government, but also some groups within Korean society (including an association of judges). They and the then opposition party first became critical of ISDS especially as it was negotiated into the Korea-US Free Trade Agreement (KORUS) and their presidential candidate ran on a platform that was critical of ISDS. However, that candidate lost resoundingly, which practically ended the debate, and KORUS was brought into effect from March 2012. Nonetheless, ISDS also remained on the radar as the first-ever treaty-based claim was brought against Korea from late 2012 by a Belgian subsidiary of US-based Lone Star. The claim is still pending, despite some expectations it would be resolved by March 2019.

One Australian NGO now even interprets a recent Korean newspaper report of current Prime Minister Lee Nak-Yeon as suggesting that Korea may “abolish” ISDS. More likely he was expressing his personal views because Korea’s investment treaty policy and practice largely remain unchanged. This is evident from the recent Korea-Armenia BIT and Korea-Central America FTA, which both contain ISDS, although wider policy and practice have been evolving somewhat (e.g., regarding transparency in ISDS). Nonetheless, an ISDS claim by Japanese companies and/or an award favouring Lone Star would further inflame simmering political tensions. This potential is heightened as this year another US investor (Gale) has filed a notice to initiate ISDS regarding a development in Incheon, while Chinese and now Malaysian investors have filed notices regarding projects on Jeju Island.

Despite such practical difficulties, as early as 2014 (in the wake of the first-instance Korean court judgments against Japanese companies like Nippon Steel) Investment Arbitration Reporter commentators had reported that Japanese companies could be preparing ISDS claims against Korea. Apart from questions over the substantive grounds under the relevant treaties, outlined in our previous posting, another threshold issue to consider is: how likely are Japanese investors generally to bring ISDS claims anyway?

Japanese investors were initially very “reluctant claimants”, with an analogy potentially with Japan’s “reluctant litigants” as measured by comparatively few per capita civil suits filed in Japanese courts. In contrast to home countries with much higher ISDS claiming per capita (such as Canada, more so say than the US), there had been only a few indirect treaty-based claims from companies linked to Japan, notably Nomura via its Saluka Investments subsidiary against the Czech Republic (settled in 2007), and Bridgestone via a US subsidiary against Panama (with public hearings over the internet, 29 July – 2 August 2019, illustrating incidentally the growing transparency of ISDS proceedings). At least one other threatened ISDS claim was seemingly based on consent to arbitration administered by the International Centre for the Settlement of Investment Disputes (ICSID) contained not in a treaty but an investment contract, namely between an aluminium smelter consortium and Indonesia. However, this also settled (in 2013) so no arbitration was commenced by the Japanese investors.

Nonetheless, Japanese firms have filed three Energy Charter Treaty claims arbitrations against Spain since 2015. This follows the lead of investors from many other states, also impacted by Spain’s abrupt changes in renewable energy policy. Their precedents allow Japanese companies and their legal advisors to reduce costs and other “institutional barriers” to pursuing formal dispute resolution procedures. Nissan’s UNCITRAL Arbitration Rules claim in 2017 under the India-Japan FTA is even bolder, as few of the many ISDS claims brought against India (since a 2011 award for Australia’s White Industries) have involved investments in manufacturing. This claim may indicate a changing mindset among the leaders of at least larger Japanese companies, towards more active engagement in international arbitration. However, Nissan is quite unusual given its alliance with French shareholder Renault (although that relationship is itself now impacted by securities law prosecutions against CEO Carlos Ghosn).

Tracing the emergence of claims by Japanese investors generally, the possibility of ISDS claims against Korea now by Nippon Steel and other affected companies cannot be excluded simply on the basis say of some general “cultural” aversion to formal dispute resolution processes. As for those who still favour instead the “elite management” theory put forward for such aversion to explain low levels of civil litigation within Japan, whereby government and business elites divert cases away from formal dispute resolution, it is noticeable that peak business associations (especially the Keidanren) have long pressed for ISDS-backed investment treaty protections. And the Abe Administration since 2012 has signed 16 standalone BITs (all with ISDS), albeit still far fewer than Korea, as well several FTAs. This sends the message that investment treaties are important and to be used, paralleling more active engagement with ISDS in other parts of Asia especially as various “institutional barriers” slowly start to come down. However, in highly politicised cases such as this they are probably best used as part of a multi-level negotiation and an overall dispute resolution as elaborated in the concluding section below.

Article 15 of the 2002 BIT envisages the investor seeking “consultations or negotiation” with the host state for up to 3 months, then a notice of intent triggering a cooling-off period of at least another 3 months, before being able to commence arbitration under the ICSID Convention (as both Japan and Korea are parties), with its more favourable enforcement regime, or any other separately agreed Arbitration Rules. (Articles 17-18 exclude ISDS for disputes over prudential measures concerning financial services and temporary safeguards for cross-border capital transactions, which are inapplicable here.)

Article 15 of the trilateral agreement requires more details in the investor’s request for consultations so the dispute can be “solved amicably”, but if no settlement is reached after four months the investor can seek arbitration under the ICSID Convention, UNCITRAL Rules or any other separately agreed Arbitration Rules. The host state can require the investor to first seek administrative review under any local requirements, but only for up to four months before arbitration is commenced. (ISDS exclusions regarding certain intellectual property rights or temporary safeguards are again inapplicable here.)

Nonetheless, filings would mean investors incurring significant arbitration expenses up-front, with empirical studies on ISDS costs showing claimants are often unable to recover all lawyer and expert witness expenses even if successful. More importantly, filings by Nippon Steel and others would likely inflame the underlying tension, resulting in boycotts, protests or even strikes around their affiliated companies in Korea. Perhaps for such practical reasons, this point has not been raised by general media, relevant companies or the Keidanren, although the Investment Arbitration Reporter has reiterated the possibility of ISDS claims since the Korean Supreme Court judgment late last year.

5. Mediation to Assist a Negotiated Settlement

In light of this complex and delicate situation, how could a global settlement be reached? One possibility is for one or more affected Japanese companies to seek direct consultations with Korea, but include a request for mediation to help reach a negotiated outcome. Neither the BIT or the trilateral agreement mention mediation or conciliation, unlikely some investment treaties that refer to it as an option, but mediation can be agreed separately as neither treaty’s “fork in the road” provision preclude this possibility.

Recent empirical research highlights the pervasiveness of settlements even after arbitration is filed, contrary to some commentators’ scepticism. This therefore demonstrates the potential for even more settlements through greater use of investor-state mediation.

An advantage of such ad hoc mediation is that skilled mediators could also bring in the host states, and come up with a resolution of the disputes under the 1965 treaty and the WTO as well. Mediation has not been so popular in inter-state dispute resolution, but a recent successful settlement of a maritime boundary dispute between Australia and Timor-Leste has highlighted its wider potential for large-scale international disputes nowadays.

There are otherwise few signs that Japan and Korea will be able to work out the dispute on their own at the moment. President Moon has warned of a “prolonged” conflict and has committed that Korea “won’t be defeated again”, while Japan initially resisted engaging in negotiations after Korea refused to arbitrate under the 1965 treaty and is now ratcheting up pressure on Korea in the trade dispute. This suggests that the states’ positions have hardened as public sentiment on both sides has soured amidst protests, product bans, disruptions to business and tourism, and even self-immolation by Korean nationals in protest against Japan.

High-level officials from the US have tried to extricate the parties from their entrenched positions. An early offer by Donald Trump to mediate did not get traction, but the US has continued to try to play a role in resolving the dispute including calls for a “standstill agreement” to prevent further escalation of tensions. Yet the US suffers from a credibility problem, as the Trump Administration has itself been using trade policy in a more confrontational way, evidenced by the WTO Appellate Body problem and bilateral trade war with China. Some see that approach as having spread now to Japan’s dealings with Korea. Others urge the US to keep exploring ways to “quietly nudge” both nations to resolve their disputes, but acknowledge the limited scope for informal interventions even for a superpower.

Australian (former) officials or politicians from Australia may have a role to play, or from another influential state (such as Singapore) in current negotiations around the WTO DSU as well as a Regional Comprehensive Economic Partnership (RCEP, or ASEAN+6 FTA). Furthermore, Singapore is actively positioning itself as a proponent of international mediation, not least by hosting last week the diplomatic conference for a new UN Convention on cross-border enforcement of mediated settlement agreements – signing up along with 45 others (including Korea, China and the USA, but not Australia or Japan), attracting widespread commentary. Although the new treaty is designed to promote commercial and potentially investor-state mediation, it could heighten interest also in inter-state mediation.

It would further delay RCEP negotiations if there were a collapse in trust and values shared between Korea and Japan, including generally regarding ISDS and investment commitments. Already, some have suggested that this bilateral tension is behind Korea getting cold feet about seeking to join the regional CPTPP now partly in force, which Japan (with Australia and Singapore) pushed to bring into force after the Trump Administration withdrew US signature of the earlier Trans-Pacific Partnership FTA.

However, even Australia or Singapore could be seen as having their own interests in the bilateral spat. Better candidates as neutral mediators – especially for a more structured and sustained mediation process – could be senior figures (formerly) within the United Nations, such as UNCTAD, or another international organisation such as:

  • the OECD, although it is more policy – than practice – oriented;
  • the International Bar Association, which produced investor-state mediation rules in 2012, although those are hardly used so far and the Association’s leaders tend now to be full-time practitioners especially from larger law firms; and
  • the International Law Association, instead comprising mostly professors specialising in international law.

Both ICSID  and the Centre for Effective Dispute Resolution (CEDR) have started to promote investor-state mediation recently, including running courses with the International Energy Charter and International Mediation Institute to train up mediators for investment disputes. They too could be consulted for possible mediators, with experience also preferably in WTO law and broader international relations, especially in Asia.

Overall, successful mediation and negotiated settlements tend to arise in two ways. One is where the litigation behind the mediation, including likely costs and delays, has a predictable outcome. (This is one reason sometimes given for low levels of civil litigation in Japan, epitomised by traffic accident data.) But another is where the dispute becomes very complicated, allowing skilled mediators to help parties find novel ways to perceive and develop shared interests. This would not be possible before an adjudicatory forum, like the ICJ or an arbitral tribunal, with a limited mandate to decide claims. An imposed solution, with a perceived winner and loser, might also fail to calm the tide of nationalism, public unrest, and deteriorating relations between the countries. These circumstances offer both a unique opportunity for mediation as well as a challenge for international dispute resolution.

This analysis derives from a project on Asia-Pacific international business dispute resolution funded jointly over 2019 by the University of Hong Kong and the University of Sydney. It will be tabled at a second symposium on 15 November.