A seminar held on 10 November 2022 during the Australian Arbitration Week, organised by the UNCITRAL National Coordination Committee for Australia (UNCCA) and hosted by Allens in Melbourne, discussed “Australia’s engagement in the ISDS [investor-state dispute settlement] reform process”. My presentation divided successive governments’ approach into three significant eras over the last decade or so: anti-ISDS (2011-13), case-by-case ISDS (2014-21), and uncertainty (2022-).
Some of the uncertainty in this current third era has dissipated since the seminar. On 14 November Australia’s current Trade Minister Dan Farrell declared that the new Labor Government “will not include ISDS in any new trade agreements” and would attempt to reduce their impact in existing agreements. On the latter point, he stated that “when opportunities arise, we will actively engage in processes to reform existing ISDS mechanisms to enhance transparency, consistency and ensure adequate scope to allow the Government to regulate in the public interest”. The announcement has already generated concern from commentators from the Business Council of Australia and legal practice, including Dr Sam Luttrell (who also presented at the UNCCA seminar). Below I locate the Trade Minister’s announcement in context and sketch some implications, drawing partly on my 2021 book of selected essays on investor-state and commercial arbitration, focusing on Australia and Japan in regional and global contexts.
Before this sequel, in the first era beginning in 2011, the centre-left (Labor/Greens) Gillard Government had declared that Australia would no longer agree to any form of ISDS in future bilateral investment treaties (BITs) or FTA investment chapters. That stance derived partly from the Productivity Commission’s recommendation (by majority) in its 2010 report into international trade policy more generally, which favoured more unilateral liberalisation measures and was skeptical about proliferating FTAs from a more laissez faire perspective. On ISDS provisions, the draft and then final reports asserted that there was no good evidence that offering them led to more FDI flows, Australian investors did not invoke investor-state arbitration, and ISDS could lead to “regulatory chill”. Additionally, the Gillard Government anti-ISDS policy from 2011 was driven by concerns from the political left about investment and trade liberalisation generally. It was probably also influenced by Philip Morris Asia initiating the first-ever ISDS dispute against Australia around this time, challenging Australia’s tobacco plain packaging legislation under the (then) BIT with Hong Kong. The anti-ISDS policy delayed conclusion of major FTAs with China, Korea and Japan, large exporters of capital to Australia which pressed for such provisions.
However, after the centre-right Coalition government won the election in late 2013, it reverted to the pre-2011 approach of agreeing to ISDS provisions on a case-by-case assessment. FTAs were soon concluded with China and Korea, including ISDS. The FTA concluded with Japan did omit ISDS, but probably because it did not offer Australia sufficient extra export market access or other benefits, at a time when the Coalition Government had difficulties passing legislation through the upper house of Parliament. Japan’s longer positive experience of investing in Australia also meant it could play the long game and seek ISDS-backed protections through other treaties, which it eventually achieved in fact through both countries ratifying the Comprehensive and Progressive Agreement for Trans-Pacific Partnership mega-regional FTA (CPTPP, in force for both states from 2019). The Labor Opposition voted with the Government to pass tariff-reduction legislation needed to ratify these ISDS-backed treaties, unlike the Greens, declaring the Labor Party’s continued opposition to ISDS but assessing the FTAs as overall in the national interest.
Additionally over this second era, the Coalition Government omitted ISDS in the PACER-Plus FTA with Pacific Island micro-states, given their limited inbound investment prospects and capacity as host states to defend ISDS claims; and in the Regional Comprehensive Economic Partnership (RCEP) ASEAN+5 FTA, probably because almost all pairs of its 15 member states have at least one ISDS-backed treaty among themselves anyway. The Coalition Government also renegotiated a few early FTAs and BITs (eg with Singapore, Uruguay and Hong Kong), replacing them with CPTPP-like provisions to clarify provisions or make them somewhat more pro-host-state in light of emerging investment treaty case law. It also solicited public submissions to inform a review of older treaties, although the Government did not then publish a report (let alone any Model BIT) formalising its evolving negotiating preferences. Australia further ratified the Mauritius Convention in 2020 to help retrofit transparency provisions on older treaties, although this will bite primarily only if other states also ratify the Convention and so far few have done so.
Australia’s renewed nuanced approach towards ISDS over 2014-21 may have been influenced by some (but not very strong) evidence, in Asia and more widely, that ISDS provisions do in fact have significant positive impacts on FDI flows. Also, ratifying investment treaties globally certainly impacted FDI, meaning that a minority of states increasingly holding out against all ISDS would have instead reduced ratifications and therefore FDI flows. Other empirical research, highlighted by Dr Sam Luttrell at the recent UNCCA seminar, adds that ISDS-backed treaties reduce the cost of syndicated loan finance for cross-border investors.
Luttrell’s presentation further reinforced how Australian investors (particularly in long-term resources projects) not only take into account ISDS protections but also started commencing outbound investor-state arbitrations under Australian treaties (or contracts) alleging host states have violated their substantive commitments. This is especially so since the successful White Industries v India award in 2010, which the Productivity Commission seems to have been been unaware of. Concerns about “regulatory chill” also seem to have declined as Australia defeated Philip Morris Asia on jurisdiction in 2015 (and Uruguay later defeated the parent company on the merits regarding its own tobacco packaging measures), and as no further inbound ISDS arbitrations were commenced against Australia. Nonetheless, perhaps because ISDS remained a live issue in parliamentary treaty ratification hearings and successive Coalition Governments did not control the upper House, Australia does not seem to have been particularly vocal in multilateral ISDS reform discussions in UNCITRAL or ICSID, although it has participated.
After Labor won the general election in May 2022, the new Government had not publically declared its policy approach towards ISDS, until the Trade Minister’s announcement on 14 November. At the UNCCA seminar the week before, I noted that the foreign ministry’s website still stated that Australia assesses ISDS on a case-by-case assessment. However, setting policy going into the election, the Labor Party’s 2021 National Platform had reiterated that “Labor will not enter into agreements that include ISDS provisions” (p9 para 45). In addition, it stated (p94, paras 33-34):
“Labor in government will review ISDS provisions in existing trade and investment agreements and seek to work with Australia’s trading partners to remove these provisions. While this process is underway, Labor will work with the international community to reform ISDS tribunals so they remove perceived conflicts of interest by temporary appointed judges, adhere to precedents and include appeal mechanisms.
Labor will set up a full time negotiating team within the Department of Foreign Affairs and Trade whose sole job will be to negotiate the removal of ISDS clauses …”
Until 14 November 2022, there had been no public announcement about any such initiatives.
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Accordingly, at the UNCCA seminar, I pointed out that Australia’s major ongoing FTA negotiations involving investment were with India (with a provisional agreement reached only on trade related matters) and the European Union. India unilaterally terminated its BIT with Australia in 2017, as part of its broader policy of winding back protections for foreign investors since the White Industries award and successive claims against India under other older treaties. Although India’s new Model BIT from 2016 retains ISDS, it provides a narrow window and its substantive protections are heavily circumscribed, and India has been able to only conclude a few new investment treaties from this negotiating position. Even maintaining the second era’s case-by-case assessment policy, I therefore considered it quite possible that Australia and India could end up agreeing on a parallel investment treaty that leaves only inter-state arbitration, especially if India offered significant preferential market access to Australian investors.
Omitting ISDS is now the only possibility, under the newly announced Labor Government stance, but India now may not offer as much market access or other benefits to Australia. A better compromise, given problems encountered by foreign investors in India as well as JNU Prof Jaivir Singh’s empirical evidence that ISDS-backed treaties cumulatively have had positive impact on FDI inflows for India, could have been a CPTPP-like investment treaty with some further innovations. Those might include a mandatory mediation step before arbitration, as Australia agreed upon (unusually) with Indonesia in 2019 but not with Hong Kong.
Australia is also still negotiating an FTA with the EU. Since 2015, as a partly political compromise internally, the EU offers only an “investment court” alternative to traditional ISDS, on a take it or leave it basis. Singapore took this option, for example, but Japan did not (preferring to stick with pre-existing BIT with EU member states with traditional ISDS, and watching longer term multilateral reform discussions). Australia should probably take the investment court option, to secure an overall better FTA deal, as I have argued (with Prof Amokura Kawharu) also for New Zealand after it too from 2018 mimicked Australia’s first anti-ISDS policy. Arguably, this option is not “ISDS” so it would not conflict with the Labor Party’s 2021 platform and now the 14 November 2022 Labor Government’s anti-ISDS position. Although the EU’s investment court model allows foreign investors the right to directly commence arbitration, they cannot nominate arbitrators; they instead are pre-selected only by the home and host states, and then randomly assigned to hear the claim (and any appeal). If Australia adopts this interpretation of its stance eschewing ISDS, to conclude a deal with the EU, this would also signal to other regional players and UNCITRAL delegates that there is scope to be flexible in investment treaty negotiations.
However, one wild card for Australia has been that a right-wing politician and mining magnate (Clive Palmer) escalated complaints in 2020 by formally seeking consultations with the federal Government and then notifying a dispute through his Singaporean company (Zeph), after unsuccessful constitutional and other domestic law challenges. They allege expropriation and breach of fair and equitable treaty (denial of justice) related to Western Australian state legislation impacting on iron ore rights and related past domestic arbitration awards. Given his high public profile, and rights originally held by his Australian company being transferred to Zeph in Singapore, if and when an ISDS arbitration is commenced (potentially from early 2023) under one of Singapore’s multiple treaties with Australia, this risks another Philip Morris Asia moment. An arbitration filing would certainly rekindle media and political interest in ISDS, which peaked in Australia over 2010-16.
In addition, concerns were reportedly being raised last week about potential ISDS claims brought by Asian and other investors and in Australian gas resources under the Labor Government’s plans to deal with the global energy crisis. Announcing now a renewed anti-ISDS policy may help pre-empt public criticisms in this respect as well. However, any such claims would be preserved under existing treaties, while substantive commitments made under Australia’s treaties (especially FTAs) anyway give the host state considerable scope to introduce emergency measures.
Whatever the impact of these potential claims on its policy-makers, Australia’s renewed anti-ISDS posture will make it even more difficult for RCEP to add ISDS protections, unless the Labor Government backtracks or loses the next elections in 2025. ISDS must be discussed again among member states within 2 years of RCEP coming into force, with a decision then on whether and how to add ISDS to be reached within another 3 years (Art 10.18). Any implications for Australia’s recently concluded review of its FTA with New Zealand and Australia have yet to be spelled out. In addition, the new Labor Government policy will probably have further ripple-on effects particularly across the Asia-Pacific region. It could also potentially impact on wider multilateral discussions about ISDS in UNCITRAL, and even on the “modernisation” of or withdrawal from the ISDS-backed Energy Charter Treaty (which Australia signed in 1994 but never ratified), especially if the Australian government can articulate more specifically the arguments and evidence for adopting this renewed anti-ISDS position.