Investor-State Dispute Settlement Back for Australia’s Free Trade Agreements

Australia’s Coalition Government, dominated by the Liberal Party and led by Prime Minister Tony Abbott, recently completed a rocky first 100 days in power. Diplomatic rows with China and Indonesia are only part of the story. The Government stands accused, for example, of sending ‘conflicting messages’ to the business sector. At the Business Council of Australia’s 30th anniversary dinner on 4 December, Abbott reiterated his election-night declaration that Australia was ‘once more open for business’. Yet five days earlier, his Treasurer had taken the rare step of blocking a major foreign direct investment (FDI) – a $3.4 billion bid by US firm ADM for GrainCorp.

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“The fundamental importance of foreign direct investment to Australia in the 21st century: Reforming treaty and dispute resolution practice”

The (federal government’s) Australian Research Council has provided $260,000 to support this project over 2014-6 (DP140102526), in collaboration with Prof Leon Trakman (lead-CI, former Dean of Law at UNSW), A/Prof Jurgen Kurtz (Melbourne Law School) and Dr Shiro Armstrong (ANU Crawford School of Public Policy, co-editor of the East Asia Forum blog). Below are parts of our original project application to the ARC; an updated and edited version is available at http://ssrn.com/abstract=2362122.

[Abstract]
“This project will evaluate the economic and legal risks associated with the Australian Government’s current policy on investor-state dispute settlement through multidisciplinary research, namely econometric modeling, empirical research through stakeholder surveys and interviews, as well as critical analysis of case law, treaties and regulatory approaches. The aim of this project is to identify optimal methods of investor-state dispute prevention, avoidance and resolution that efficiently cater to inbound and outbound investors as well as Australia as a whole. The goal is to promote a positive climate for investment inflows and outflows, while maintaining Australia’s ability to take sovereign decisions on matters of public policy.”
[Aims] Foreign direct investment (FDI) has become essential to global economic development, with FDI flows exceeding US$1.5 trillion in 2012 (UNCTAD 2012). Australia’s treaty making practice, especially its current policy with respect to investor state dispute settlement (ISDS), may be sub-optimal, in that it is not entirely based on sound economic cost-benefit data and supporting econo-legal research. Australia can potentially increase its share of the global FDI pool by adopting a more efficient approach to formulating policy with respect to ISDS.
This project aims to develop a key policy framework and devise salient institutional structures and processes that take account of two competing pursuits: the cost-benefit advantages of promoting Australia as an FDI destination; and the need to ensure that these advantages are considered in light of competing policy objectives that are not explicated exclusively on economic grounds (as explained in the Background section). This project is valuable and innovative because it identifies significant gaps in the current Australian policy framework and uses interdisciplinary research to address them.
The overall purpose is to ensure that Australia attains its optimal share of the global FDI market in the context of competing policy objectives. As such, the project will evaluate the economic and legal risks associated with the Australian Government’s current policy on ISDS through multidisciplinary research, namely econometric modeling, empirical research through stakeholder surveys and interviews, as well as critical analysis of case law, treaties and regulatory approaches. The general aim is to identify optimal methods of investor-state dispute prevention, avoidance and resolution that efficiently cater to inbound and outbound investors as well as Australia as a whole. The specific purposes therefore are: (1) to investigate policies that underpin Australia’s approach to negotiating international investment treaties, with particular emphasis on its policies on avoiding, managing and resolving investment disputes; (2) to identify and analyse links between these policies and the investment practices of both inbound and outbound investors; and (3) to propose recommendations on alternative approaches to investment policy, so that, through a carefully framed cost-benefit analysis, Australia can retain appropriate sovereignty over public policy issues (such as health and the environment) while promoting a positive economic climate for investment inflows and outflows.

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Investor-State Arbitration: In the TPP and RCEP (‘ASEAN+6’ FTA)?

It remains to be seen whether the new Coalition Government will revert to Australia’s longstanding treaty practice prior to the 2011 ‘Gillard Government Trade Policy Statement’. That declared that Australia would not include investor-state arbitration (ISA) protections in future investment treaties – including investment chapters of Free Trade Agreements – even with developing countries.
The new Prime Minister, Tony Abbott, has declared that he is keen to conclude FTAs which Australia has long been negotiating with Japan, Korea and China respectively. The Gillard Government’s stance on ISA adding to delays experienced in finalising these treaties – see comments, including some of my own in The Australian on 21 September 2013. It also complicates negotiations for regional agreements like the Trans-Pacific Partnership (TPP) agreement and the Regional Comprehensive Economic Partnership (RCEP).
The ISA system is far from perfect, but there are many ways for Australia to draft provisions in investment treaties – old and new – to balance public and private interests effectively. Examples that attract varying degrees of support, from experts in international investment law, are provided in my paper co-authored with Chris Campbell and Sophie Nappert, forthcoming in a special issue of the Transnational Dispute Management journal. It and some of my other recent papers relevant to this topic, uploaded on SSRN.com, are listed with their Abstracts below.

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“What do Australia and others expect from Japan in regional FTA negotiations?” (eg ISDS)

I was recently interviewed on this topic by NHK World Radio’s principal program director, Yutaka Konishi. His main questions and some of my points in response are outlined below. Some of our interview was broadcast on “Radio News in English” on 9 May 2013, at http://www3.nhk.or.jp/nhkworld/english/radio/program/), the transcript of the full interview is here (download PDF file), and my own notes are reproduced below.
Later I was also interviewed in Sydney by TV Asahi specifically about investor-state arbitration (and other ISDS) provisions in the expanded Trans-Pacific Partnership (TPP) negotiations, which Japan has now officially joined. The 14-minute special feature from their “Hodo Station” evening news on 24 May is also available on YouTube, and a video-clip of my edited comments (from 7m30s to 8m5s) can also be downloaded here (11MB .mov file). In the longer interview in Sydney, I reiterated that there is ample scope for this new FTA to include innovative ISDS provisions that appropriately balance the interests of host states (in regulating for the public interest) and private investors (seeking minimum and internationally-accepted legal standards before committing long-term investments). Em Prof Mitsuo Matsushita (former WTO Appellate Body judge) and especially Mr Shigeaki Koga (a former METI official) also emphasised this point in their comments for the Hodo Station special feature. As the TV Asahi website overview pointed out, this topic is now attracting considerable interest in Japan:
TPP検証『ISD条項』
TPP=環太平洋経済連携協定について考える。今回は、『ISD条項』について。国が制度を変えることによって、投資をしている企業が損をした場合、その企業が賠償金を求めて国際機関に訴えることができる仕組みだ。そもそも、ISD条項は、企業が安心して途上国への投資を行えるよう作られた制度で、これまでに提訴された国をみると、アルゼンチンやベネズエラ、メキシコなど、投資に関する法整備が遅れている国が目立つ。日本も、これまで結んだ投資協定のうち、ほぼすべてにISD条項が盛り込まれているが、実際に訴えられたケースはない。しかし、近年、先進国が訴えられるケースも増えている。メキシコ、アメリカ、オーストラリアの現場を取材。ISD条項をめぐり、各国が火花を散らすなか、日本はどうするのか。

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Political Change Versus Law Reform Continuity: Japanese Law After Three Years of Enthusiasm and Disillusionment

The 10th Asian Law Institute (ASLI) conference will take place in Bangalore at the National Law School of India University (NLSIU) over 23-24 May 2013. The following is an accepted panel proposal drafted primarily by Dr Dan Puchniak, ANJeL-in-ASEAN Convenor (NUS):
In autumn 2009, the progressive coalition led by the Democratic Party of Japan (DPJ) achieved a historic victory in the general election and came to power, expelling the Liberal Democratic Party (LDP), which had been in power continuously since its establishment in 1955 (except for a very brief break in the early 1990s). The new DPJ-led coalition intended to make the policy-making process more transparent and more strongly controlled by politicians, as well as to make the policy orientation of the Japanese government more progressive. After three years, the polls showed significant discontent among the public with the DPJ’s achievements, and power reverted to the LDP in the December 2012 general election.
It is timely for legal academics to examine whether, and in which sense, the DPJ-government affected law reform over the last three years. In this context, Nottage and Kozuka will explain how—perhaps, quite unexpectedly—the historic political turnover in Japan (“macro-politics”) has had a limited influence on important reforms that are taking place in the field of Japanese contract law. In contrast, however, the process of contract law reform has been substantially influenced by the politicking of lawyers and professional bureaucrats (“micro-politics”) who have a personal stake in the reform process. Ultimately, based on this experience, Nottage and Kozuka suggest that micro-politics is more important than macro-politics in Japan’s legal reform process.
Matsunaka will continue the discussion of politics and legal reform by analyzing the new round of corporate law reform, which was initially driven by the strong policy agendas of several DPJ members. As the corporate law reform deliberations progressed, however, the debates increasingly became dominated by elite academics and MOJ officials and, ultimately, the reforms now appear to reflect little, if any, of the DPJ’s core values. Matsunaka’s analysis of this “watering-down” of the DPJ’s policy based reforms provides an interesting perspective on Japan’s legal reform process and contributes to the broad literature on the politics of corporate governance law reform.
Kozuka will then extend on Matsunaka’s analysis by examining Japan’s recent reform of its broadcasting regulation, which was one of the most important agendas for the DPJ when it first came to power. Again, Kozuka’s findings suggest that the more extreme policy based positions of the DPJ gradually faded in the process of law reform, with the final result being more technical and modest deregulatory reforms in the new Broadcasting Law of 2010.
Puchniak will conclude the discussion by examining the recent introduction of the business judgment rule into Japanese corporate law. At least based on conventional wisdom, the fact that the business judgment rule—which is of critical importance in corporate law—was introduced into Japanese law purely through judicial precedent (without any mention of it in Japan’s codified/statutory corporate law) is astounding. Puchniak’s analysis of this unanticipated source of law reform in the DPJ era will shine a light on a substantial blind-spot in both the current understanding of Japanese legal reform and the more general comparative corporate law literature.
In sum, these four presentations offer a good opportunity to discuss the relationship between the political process and law reform, policy choice through the judiciary and the determinants of the role of law in a post-industrial society in Asia.

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Negotiating and Applying Investor-State Arbitration Provisions in Free Trade Agreements and Investment Treaties: Australia, Japan and the Asia-Pacific

My recent Sydney Law School Research Paper No. 12/84, forthcoming in a special issue 119 (9&10) Hogaku Shimpo (Chuo University) for Professor Satoru Osanai, is an edited and updated collection of postings over 2012 on this ‘Japanese Law and the Asia-Pacific’ blog (and/or the East Asia Forum blog) dealing with investor-state arbitration (ISA) and other forms of investor-state dispute settlement.
The topic has become particularly controversial for Australia, given its ongoing Free Trade Agreement negotiations with Japan. Japan is also considering joining negotiations underway among Australia and 10 other states (including the US) for an expanded Trans-Pacific Partnership Agreement, and both are also interested in the more recent ‘Regional Comprehensive Economic Partnership‘ (RCEP) initiative (ASEAN+6). Both Japan and Australia have almost always included ISA protections in their investment treaties, but Australia omitted them in investment treaties with the USA and New Zealand, and recently declared that it will no longer accept ISA in future treaties – even with countries with less developed legal systems and economies.

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The Olympus scandal and corporate governance in Japan

On 22 October Sky News ‘Late Agenda’ interviewed me and Rick Wallace (Tokyo-based correspondent for ‘The Australian’) following an interview with Michael Woodford, former CEO of Olympus in Japan (click here and then here for 200-MB mp4 video-clips). Corporate governance in Japan is important for Australia, given the countries’ strong trade and investment relationship and recent pressure to finalise a bilateral Free Trade Agreement, as well as from broader regional and theoretical perspectives.

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Australia-Japan Business Cooperation: The Last 50 Years and a New FTA?

[A version of the second half of this Comment, on the potential impact of Australia’s new policy against treaty-based Investor-State Arbitration provisions on the pending FTA negotiations with Japan, appears also on the East Asia Forum – cited by Rowan Callick ‘Arbitration Hitch Holds Up FTAs’ The Australian (2 November 2012, p10).]
The remarkably well-attended and interactive 50th Anniversary Australia Japan Joint Business Conference took place in Sydney over 8-9 October. It was hosted by the Australian Committee, established in 1962 and comprising Australia-based firms involved with Japan. But the conference program was developed with its counterpart in Japan, which hosts there a Joint Conference in alternate years. This cooperative arrangement has become unusually close, and provides an inspiration for other bilateral business community centred relationships. (By contrast, for example, the Australia China Business Council hosts its own main events quite independently of those organised by its Chinese counterpart, comprising firms interested in doing business in Australia.) The Australia-Japan Committees’ arrangement is also very longstanding: the first joint conference took place in 1963 at the Tokyo Chamber of Commerce, with the second in 1964 at the Australian National University.
As ANU Emeritus Professor Peter Drysdale reminisced in his keynote address at this year’s conference in Sydney, this cooperative arrangement – and indeed the entire bilateral relationship between Australia and Japan – proved to be an unexpected success. After all, both countries were bitter foes during World War II. For several ensuing decades Australia maintained concerns about engaging with Asia, as well as trade liberalisation and inbound foreign investment more broadly, with Japan also habouring mercantilist tendencies.

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Abandoning all Investor-State Dispute Settlement Mechanisms Also Not Supported by the Facts (updated 17 August)

I am glad the High Court of Australia rejected today the argument by major tobacco companies that Australia’s plain packaging legislation is an unconstitutional “acquisition” of their rights. I dislike those companies’ products, their marketing and their litigation strategies, and I support the plain packaging legislation. I’ve also made numerous submissions to the Australian government since 2005 seeking to improve safety regulation for general consumer goods – partially achieved in the 2010 “Australian Consumer Law”.
But I hope that the ongoing arbitration claim of “expropriation”, initiated by Philip Morris Asia under the 1993 Hong Kong – Australia bilateral investment treaty, does not feed into blanket rejection of any forms of investor-state dispute settlement (ISDS) in investment treaties. Although that system has flaws, it also has benefits, and there is ample scope to draft treaties to provide clear and appropriate mechanisms to balancing private and public interests. With others familiar with international investment law, I provide further examples of the most promising substantive and procedural law reforms in an Open Letter dated 28 July 2012, in response to a recent OECD Public Consultation on ISDS.
My comment will therefore address points made recently on The Conversation blog by Dr Kyla Tienhaara, who remains completely opposed to any form of ISDS. In fact, she urges the Gillard Government to try to excise ISDS from all Australia’s existing FTAs and investment treaties (dating back to 1988), in addition to eschewing them for future treaties – as the Government seems to be attempting, pursuant to its policy shift on ISDS announced in the 2011 Trade Policy Statement (TPS). An alternative is for the Government to approach Hong Kong authorities to seek agreement on amending the 1993 treaty to suspend PMA’s pending claim. More generally, Australia should consider including ISDS provisions in future treaties but expressly reserve its right to agree with the treaty partner to suspend particular types of claims, for example regarding public health issues. This compromise approach is already essentially found in investment treaty practice where the claim involves allegations of “expropriatory taxation”.

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Open Letter – Assessing Treaty-based Investor-State Dispute Settlement

Some are concerned about treaty-based Investor-State Dispute Settlement (ISDS), especially binding Investor-State Arbitration procedures in investment treaties and Free Trade Agreements. One response includes public calls for states to eschew such procedures completely in future treaties, for example in the expanded Trans-Pacific Partnership Agreement presently under negotiation. This approach would essentially leave foreign investors to approach local courts if host states illegally interfere with their investments, or to encourage their home states to activate an inter-state dispute resolution process, or to try to negotiate individualised arbitration agreements with host states.
An alternative approach is to identify and address more specific concerns with treaty-based ISDS. An example is the scoping paper and Public Consultation on ISDS generated by the Organisation for Economic Cooperation and Development, over 16 May – 23 July.
As a constructive contribution to this debate, we created an online form asking for views on whether ISDS should be left as is, abandoned completely, or adapted in various listed ways. As explained below, no respondents favoured eschewing ISDS completely. Yet that position represents the policy shift announced by Australia in the “Gillard Government Trade Policy Statement” (April 2011), resulting in ISDS being omitted from the Australia-Malaysia FTA (May 2012) but difficulties in negotiating other bilateral treaties (with Korea, and Japan) and the TPPA. Implications and other topics related to the TPPA negotiations will be discussed at a Roundtable in Canberra on 8 August, hosted by the Crawford School of Public Policy (ANU College of Asia and the Pacific).

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