Author: Luke Nottage

Written by: Prof Luke Nottage & Ana Ubilava

[This posting and linked video presentation, reproduced from Erga Omnes, relates also to my book in press with Elgar comparing international arbitration in Australia and Japan in regional and global contexts.]

The UNCITRAL Coordination Committee for Australia (UNCCA) and the Commercial Law Association (CLA) is holding an online seminar on Monday 26 October 2020 partly to celebrate the fortieth anniversary on the CISG (UN Convention on Contracts for the International Sale of Goods). The live, interactive seminar will be supplemented by a full conference package including pre-recorded presentations. A longer (30-minute) version of a pre-recording by UNCCA Fellow Dr Luke Nottage (Professor of Comparative and Transnational Business Law) and Ana Ubilava (PhD student at Sydney Law School and ANJeL Executive Coordinator) can be viewed here. Our presentation is entitled “Australia’s recent investment treaty ratifications and reviews: The UN Transparency Convention and investor-state mediation”. It is based on Ana’s recent postings on investor-state mediation (her PhD thesis topic) for the Kluwer Mediation Blog (reproduced here) and for the Kluwer Arbitration Blog with Luke and Prof James Claxton, as well as her lead-authored chapter with Luke for his co-edited book on Asia-Pacific international business dispute resolution due out from Kluwer by end-2020:

Ubilava, Ana and Nottage, Luke R., Novel and Noteworthy Aspects of Australia’s Recent Investment Agreements and ISDS Policy: The CPTPP, Hong Kong, Indonesia and Mauritius Transparency Treaties (March 4, 2020). in Nottage, Luke; Ali, Shahla; Jetin, Bruno; Teramura, Nobumichi (eds), “New Frontiers in Asia-Pacific International Arbitration and Dispute Resolution”, Wolters Kluwer, (Forthcoming) , Sydney Law School Research Paper No. 20/12, Available at SSRN: https://ssrn.com/abstract=3548358 or http://dx.doi.org/10.2139/ssrn.3548358

Our presentation updates for recent developments including DFAT’s public consultation to review Australia’s remaining BITs, with Luke’s Submission here and a related thought-provoking Clayton Utz / University of Sydney International Arbitration Lecture this year by Prof Zachary Douglas; but a summary of our original chapter manuscript is as follows.

Abstract: Investment treaties, and especially investor-state dispute settlement (ISDS) provisions, became a political hot potato from around 2011 when Philip Morris brought the first-ever ISDS claim against Australia under an old bilateral investment treaty (BIT) with Hong Kong. A Labor-Greens Government declared that it would no longer agree to ISDS provisions in future treaties, but when a centre-right Coalition Government regained power from 2013 it reverted to concluding treaties containing ISDS clauses on a case-by-case assessment. Australia therefore agreed to ISDS in FTAs with Korea and China, but not bilaterally with Japan. However ISDS-backed provisions apply between Australia and Japan since the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) can into force between them (and five other Asia-Pacific nations so far) from January 2019. Yet the Australian parliament engaged in robust debate about ratification of the CPTPP, with Labor Opposition (and Greens) parliamentarians continuing to voice concerns over ISDS provisions, despite the Philip Morris claim against Australia’s tobacco plain packaging having been rejected on jurisdictional grounds in 2015.

This paper examines how (US-style) CPTPP drafting compares with two important recent investment agreements subsequently signed by Australia over 2019, namely with Indonesia as part of a wider free trade agreement (IA-CEPA), and with Hong Kong (AHKIA, alongside a bilateral FTA covering non-investment matters). AHKIA came into force from 17 January 2020, while IA-CEPA has been ratified by Australia but not yet by Indonesia. IA-CEPA adds a provision unique in the universe of over 3000 investment agreements world-wide, probably proposed by the Indonesian side: a compulsory mediation step prior to arbitration, if the host state requests mediation after the foreign investor initiates ISDS. The paper also highlights other features of both treaties that may help reduce delays and hence costs in ISDS. The paper summarises empirical data about delays and costs, as well as transparency around ISDS as another growing public concern, including some of our own empirical data provided as evidence to an Australian parliamentary inquiry into ratifying the CPTPP.

We also examine the 2019 parliamentary inquiry that agreed with the submission that Australia should ratify the Mauritius (“UN ISDS”) Convention, thereby retrofitting extensive transparency provisions on pre-2014 treaties between Australia and other states that might also accede to that framework Convention. Even if Mauritius Convention ratifications proliferate, however, it will not retrofit extra transparency provisions to treaties concluded even after 1 April 2014 even among those states (say between Australia and Indonesia, where the investor chooses the ICSID Rules rather than UNCITRAL Rules option for arbitration). Accordingly, states ratifying the Mauritius Convention will still need to agree bilaterally to expand any still-limited transparency provisions in such post-2014 treaties, which is quite inefficient compared to a multilateral solution. Nonetheless, we conclude from these new developments that Australia is now better placed to play a more active role in guiding the future path of international investment treaty-making multilaterally and especially in the Asia-Pacific region.

Reproduced from the Kluwer Arbitration Blog, which subsequently ran a series on investor-state mediation; and written by: James Claxton (Rikkyo University), Luke Nottage (University of Sydney & Williams Trade Law), and Ana Ubilava (University of Sydney).

Arbitration has been the default dispute resolution mechanism in the investor-state dispute settlement (ISDS) regime for a long time. Provisions for third-party procedures other than arbitration have been relatively rare in older generation bilateral investment treaties (BITs). Even where those have provided in advance for the option of ICSID (Convention or Additional Facility) Conciliation Rules, investors have rarely invoked them. Only 13 cases have been filed since 1982 with four filed since 2016. The latest Conciliation Rules case was filed by Barrick Niugini Ltd against Papua New Guinea on 22 July 2020 under a mining lease contract. Barrick Niugini is a joint venture between Chinese Zijin Mining and Canadian Barrick Gold. In parallel, Barrick Gold’s Australian subsidiary instituted ICSID Convention arbitration on 11 August 2020 under the 1990 Australia-PNG BIT.

Over the past decade, calls have grown for other alternative dispute resolution mechanisms with a special focus on mediation. Mediation is believed to be a time- and cost-efficient dispute resolution mechanism that can prevent disputes from escalating to arbitration. Various stakeholders have taken up the call to facilitate and promote investor-state mediation. UNCITRAL Working Group III is discussing mediation in the context of ISDS reform and so is the Academic Forum on ISDS (see, for example, a March 2020 paper circulated for discussion). Mediator trainings are being offered for investor-state disputes, and ICSID is promulgating mediation rules for the first time that will be available even if neither the home nor host state has ICSID membership status. The UN Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention) is also set to come into force from 12 September 2020. While this Singapore Convention does not extend expressly to investment disputes, there is broad agreement that at least some settlement agreements resulting from investor-State mediations will fall within its scope.

Some newer treaties include additional express references to mediation or conciliation in ISDS clauses, but disputing parties must agree separately and later to those procedures.¹⁾ While the use of such voluntary mediation may be growing, until recently there has been little to no interest in mandatory mediation – as a pre-condition to arbitration. Some still see mediation as unlikely to be or even incompatible with the aims of ISDS. Perceived obstacles include: (a) some States may have difficulty determining an authority to conclude settlements on their behalf; (b) settling an investment dispute could be associated with risks of personal liability and criminal prosecution (especially in developing economies or totalitarian States with weak rule of law); (c) settling a dispute could be considered an admission of guilt by the respondent State; (d) settlements do not pay as much as what a Claimant could be awarded through a successful award; (e) some investment disputes have non-monetary claims that require certain legislative or policy measures from the Respondent State which would go beyond the capacities of mediation; and (f) settlements promote secrecy of outcomes.

Several such arguments have been challenged through a recent empirical study analysing 541 concluded, treaty-based investor-state arbitration cases with the focus on settlement outcomes. The findings suggest that none of the key factors — such as the economic industry of the investment, size of the initial claim (or whether it was monetary or non-monetary), or the economic development status of the respondent state (and claimant home state) — have a negative impact on settlements. The study also found that in settlements the average compensation rate is 32%, very similar to that of the awarded-to-claimed compensation rate (31%). In addition, settlement agreements have been reached on non-pecuniary terms even when the claim was monetary, suggesting that the non-pecuniary claimed relief is not an unsurmountable impediment to reaching a settlement agreement. The study did find that settlements are associated with increased confidential outcomes compared to those ending in arbitration awards, but recently the rate of confidentiality for all outcomes has remained stable while the rate of settlements keeps falling. This suggests that leaving investor-state disputes to arbitration does not guarantee increased transparency either. Such findings, highlighting more potential for amicable settlements generally than many may have assumed, dovetail with emerging interest by investors and States in mandatory mediation. A forthcoming report by Queen Mary University of London finds that 64% of respondents (mostly in-house counsel plus some management representatives of firms investing internationally) favour integrating mediation as a mandatory pre-condition to arbitration in ISDS.

Already, the new Hong-Kong-United Arab Emirates BIT (HK-UAE BIT) and the Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA) free trade agreement, add unusual provisions for mandatory conciliation as a pre-condition to arbitration. These provisions mark a break with existing IIAs that do not even mention mediation or conciliation – much less make such provisions mandatory. Under the HK-UAE BIT and IA-CEPA, both signed in 2019, respondent States can require claimant investors to attempt conciliation before they can raise their claims in arbitration. Investors do not have the same right to mandatory conciliation. Both of the treaties carve dispute resolution out of their most-favoured nation provisions (Art. 14.5(3) of IA-CEPA and Art. 4(8) of the HK-UAE BIT), which means that there is no risk that this conciliation requirement can be circumvented by investors on the basis of MFN treatment.

These provisions mark an innovative approach to conciliation and a significant rethinking of its place in the ISDS system. They coincide with ongoing attempts to put States on better footing to manage and defend investor claims that include control mechanisms on treaty interpretation, procedures to address frivolous claims, and the potential creation of a multilateral advisory centre. The State option to require mediation as a precondition to arbitration could serve as a model for other treaties, although the forthcoming Queen Mary report suggests that there may also be appetite for mandatory mediation among investors. Quite similarly, some commentators have argued that greater transparency around investor-state disputes can appeal to investors, not just host states, by highlighting state practices (such as discrimination in favour of well-organised local interests) that diminish overall welfare among more disparate citizens. Accordingly, in advocating compulsory investor-state mediation, reformers may find more widespread support than expected.

Nonetheless, to minimise the risks of just adding extra time and expense to ISDS proceedings, such provisions need to be well drafted. A separate analysis already identifies some uncertainties in interpretation, including for different timeframes established by IA-CEPA compared to the HK-UAE BIT. In theory, different timelines might be expected if the treaty involves a developing country, likely to have more inbound than outbound ISDS claims. Indeed, Indonesia seems more likely to have proposed the compulsory mediation step than Australia, as it has been subject to 7 inbound treaty-based claims according to UNCTAD (including a high-profile one brought ultimately unsuccessfully by Australian/British mining companies under the now-terminated 1992 Australia-Indonesia BIT). Indonesia has also mentioned mediation in UNCITRAL reform deliberations, whereas no compulsory mediation step was included in the Australia-Hong Kong BIT – even thought that too was signed in 2019.

Nonetheless, the HK-UAE BIT shows that even developed economies can be willing to add a compulsory investor-state mediation step. It seems more likely to have been proposed from the UAE side, as the latter has experienced 4 inbound claims (although its outbound investors have also initiated 12), whereas Hong Kong has not been subject to any – although Hong Kong has also been trying to position itself as a hub for investor-state mediations generally. Just as Lauge Poulsen’s earlier empirical research showed a significant (though temporary) slowdown in investment treaty signings after a host state’s first inbound ISDS claim, it may be that states subject to several claims become more likely to negotiate for compulsory investor-state mediation provisions. Australia instead has only been subject to one serious inbound claim, albeit the very high-profile Philip Morris Asia claim brought unsuccessfully under the now-terminated 1993 BIT with Hong Kong, and its government may be mindful that Australian investors (especially resources companies) are now initiating quite a few outbound claims. Accordingly, even if a counterparty proposes a compulsory mediation step (like Hong Kong may have done for the new BIT), Australia may be less likely to agree unless pressed strongly (as Indonesia may have done with IA-CEPA).

If such hypotheses are plausible, it may take more sustained effort to “nudge” more states towards adding such compulsory investor-state mediation provisions in addition to the default arbitration clause. This could be done through international bodies (UNCITRAL, ICSID, UNCITRAL and the OECD) but also widespread consultation among stakeholders domestically, including firms or industry groups interested in outbound investment as well as the civil society groups that are typically more concerned about inbound ISDS claims. Broader discussion is needed anyway as Poulsen’s study reveals how “status quo bias” extends to treaty negotiators, and jurists may be particularly risk averse and wedded to precedent. A rethink may be particularly timely as concerns are emerging, including in Australia, about potential ISDS claims in the wake of the COVID-19 pandemic. The Australian government has also just announced public consultation to review remaining older bilateral investment treaties. One question for stakeholder submissions is whether those should incorporate modern provisions from Australia’s FTA practice. Compulsory mediation before arbitration is not specifically mentioned but is worth considering.

[Update: extracts from reviews of this book are reproduced after this Guest Blog, based on the Preface] Written by: Dr Michael Hwang SC

This is a book which looks forward to possible future outcomes in the development of cross-border dispute resolution in the Asia-Pacific region, focusing on major economies in East and South Asia, as well as neighbouring countries such as Australia which are closely linked economically and geographically. The principal questions posed are: (a) whether international commercial arbitration can improve its attractiveness through law reform and case law development, overcoming criticisms about cost and delay; (b) whether growing concerns about ISDS issues in current investment treaties will lead to Asian states to become rule-makers in international investment law, rather than continue as rule takers; (c) whether innovations in existing or new fields can assist the Asia-Pacific region to develop international dispute settlement mechanisms further. It is therefore an exciting book that challenges existing procedures and frameworks for cross-border dispute resolution both in commercial as well as in treaty arbitration, rather than being another book which is simply descriptive of the existing mechanisms (valuable as such books might be).

There are clearly catalysts for change within the existing framework of dispute resolution in Asia, and several could be real game changers, like China’s Belt and Road initiative (examined in detail in Chapter 7) and the Singapore Convention on Mediation (Chapter 14). The team of writers specially assembled for this project have impressive credentials, led by the prolific and perceptive Professor Luke Nottage, and supported by several authors whom I have the privilege of knowing personally, and whose work I can wholeheartedly recommend as being worth reading, both for their knowledge and experience, but particularly for their insight.

The various authors are not simply writing about existing practices and procedures in the region, but are examining the situation on the ground with a critical eye, and making informed observations about where changes are needed and educated guesses about the chances of reforms being successful, and the consequences if they are not. It has been written in the time of COVID-19 and accordingly points out the special challenges to the field of international dispute resolution in this unprecedented situation. Those include whether lawyers can adapt to new technological solutions to overcome the difficulties of conducting virtual hearings, and whether players in the field of dispute resolution can continue to afford the time and cost of long drawn-out forensic procedures to resolve the inevitable disputes that have been caused by the pandemic, or whether there will be added impetus to use mediation in place of confrontation. There are also protectionist issues affecting the future of maintaining the rule of law in settling cross-border commercial disputes. Local judges might be influenced by the fact that certain apparent breaches of contract have been caused by events beyond the control of their local businesspeople, and the law may become stretched or even disregarded for what may be perceived to be a fairer commercial solution, when performance of a contractual obligation has been rendered impossible in the light of conditions brought on by the pandemic. Such situations could lead possibly to foreign judgments and/or foreign arbitration awards not being recognised or enforced, relying on an overly liberal interpretation of the doctrine of public policy to justify such non-enforcement.

There are also challenges arising from internal social and political challenges in certain Asian jurisdictions such as Malaysia and Hong Kong, where rule of law issues may affect investor confidence in those territories. This mistrust of the application of the rule of law will likely also lead to an international lack of confidence in the reliability of the dispute resolution system of the countries concerned, and Hong Kong in particular may find it difficult to maintain the hitherto proud record of independence and efficiency of its courts and arbitral tribunals. And there are legacy challenges which were there in several Asian countries before Covid-19 and remain as challenges to be overcome, without which their attractiveness as international investment and commercial centres will surely decrease if the legacy problems are not resolved.

The best introduction to this book is actually to start from the succinct final chapter (Chapter 15) jointly authored by Professors Anselmo Reyes, Shahla Ali and Nobumichi Teramura. This gives an excellent summary of the aims and contents of the 14 preceding chapters, and will highlight to readers which chapters might be of particular interest and therefore help determine in which order to read which chapters, although all 14 are worth reading.
I therefore congratulate Professors Nottage, Ali, Jetin and Teramura and their team of other authors on producing a timely and lively study. It will certainly stimulate ideas and discussion among its readers and perhaps also contribute to some positive changes in the jurisdictions which are the subject of this critical study.

Book Review key extracts:

“a smorgasbord of international dispute resolution for sophisticated palates. Regardless of the extent of expertise or experience, everyone will learn something new or more from reading it” Dr Winnie Ma FCIArb[i]

“Considering its expert observations and analytical depth, the book can be highly recommended to newcomers and experts on Asia-Pacific dispute resolution” Dr Lars Markert & Dr Anne-Marie Doernenberg[ii]

“The value of this exciting book lies in its challenges to existing procedures and frameworks for cross-border dispute resolution, both in commercial and treaty-based (investor-State) arbitration, rather than being simply descriptive of the existing mechanisms” Dr Somesh Dutta[iii]

[i] Arbitration Chambers, Singapore: Arbitration (2021) 441 at 447.

[ii] Nishimura and Asahi, Tokyo; 54 JJL (2022) 307-13 at 312.

[iii] Max Planck Institute for International Procedural Law, Luxembourg: Transnational Dispute Management (July 2022) at 1.