Investor-state Arbitration Down Under: KAFTA review and the anti-ISDS Bill

On 4 September 2014 Australia’s Joint Standing Committee on Treaties recommended parliamentary ratification of the FTA with Korea (KAFTA) signed earlier this year. But there were dissenting reports from (major Opposition) Labor Party members as well as (very minority) Greens Party Senator Whish-Wilson, based partly on objections to ISDS.
If Labor and Greens Senators follow their (Party) line on ISDS, the ruling Coalition lacks a majority (only) in the upper house and so will struggle to get KAFTA implementation legislation enacted, hence the government is unlikely to be able to ratify KAFTA. It depends on whether the Coalition government can bring onside maverick mining billionaire Senator Clive Palmer (suddenly xenophobic, yet again and in the context also of his personal business dealings, about China and its traders/investors!) and his Party members and independents in the Senate.
The Australian Government may then have to go back to Korea to see if it will alter its stance and agree to exclude ISDS after all (as in the subsequently signed Australia – Japan FTA). Interestingly, there had been considerable political discussion in Korea about ISDS (among other issues) in the context of ratifying its FTA with the US, although KORUS was ratified by the Korean legislature on 22 November 2011 and came into effect from 2012. The possibility of Australia and then Korea now removing or redrafting ISDS provisions in their bilateral FTA has significant implications for Australia’s other pending bilateral and regional treaty negos, including RCEP (ASEAN+6, including of course Korea and Japan) and TPP (apparently with the possibility of Korea joining those negotiations).
Curiously, Senator Whish-Wilson’s dissenting Report yesterday mentions that the Greens Party (namely himself) introduced a Bill to prevent the government entering into any future treaties containing any form of ISDS, but he doesn’t add that on 27 August a (different) Committee recommended against the Senate enacting that “anti-ISDS Bill“. (Nor can I see the mentioned in the other Reports on KAFTA ratification.)
The Senate inquiry into the anti-ISDS Bill heard further evidence, including from myself, with both Coalition and Labor Senators agreeing that the Bill should not be passed – albeit with “Additional Comments” from Labor members emphasising that enactment would drastically curtail the constitutional responsibility of the executive branch to negotiate treaties. (Senator Whish-Wilson unsurprisingly dissented, and recommended enactment of his own private member’s Bill.) Against this backdrop, it is quite unlikely that the Senate will ever vote on this particular Bill (many such members’ Bill never go forward) and anyway it would fail resoundingly, assuming other Labor Senators follow their committee colleagues (the usual practice).

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The “Anti-ISDS Bill” before the Australian Parliament

This posting is based mainly on a Note that critically reviews The Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, drawing on my written Submission and subsequent Senate Hearings. The fully footnoted version will appear in the next issue of the CIArb’s “Australian ADR Reporter” or successor Journal. Readers may also be interested in my subsequent posting to the Kluwer Arbitration Blog, followed by the Senate Committee Report (27 August 2014) which agreed that the anti-ISDS Bill should not be enacted. Significant extracts from that Report will also be added and analysed in my draft paper at http://ssrn.com/abstract=2483610, with an introduction incorporating a version of the Note below.
This work is part of an Australian Research Council Discovery Project (DP140102526) funded over 2014-2016 jointly with Dr Shiro Armstrong and Professors Jurgen Kurtz and Leon Trakman, which was acknowledged in the Senate Bill hearings and final Report. The topic of ISDS will also be discussed at the Law Council of Australia’s 2014 International Trade Law Symposium, 18-19 September, Canberra, and will be the focus of an ABC National Radio broadcast on 14 and 16 September (with transcripts here).

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Book Review – “Long Term Contracts”

This is an un-footnoted manuscript version of my review, forthcoming in the Journal of Contract Law (with the footnoted version available at http://ssrn.com/abstract=2557209), of:
Long Term Contracts, Kanaga Dharamananda & Leon Firios (eds)

Federation Press, Sydney, 2013, ISBN 987 186287 915 7, xxxviiii + 419pp, A$225.
The volume, derived from a conference held in Perth in 2012 and edited by a senior counsel with a junior solicitor from Western Australia (WA), adds a useful combination of theoretical and practical papers to the growing literature on long-term contracts (LTCs), especially for Australian and other common law jurists. With a focus on resources and energy contracts, the book is a welcome in-depth addition to more commercially-orientated publications on the subject. It is particularly topical given attempts by buyers in countries such as Japan, which takes 75% of Australia’s exports of liquefied natural gas (LNG), to renegotiate its long-term supply contracts with Australian sellers.

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Independent Directors in Australia, Japan and the Asian Region

Requirements or inducements for (especially listed) company boards to adopt a minimum number or proportion of “independent” directors (IDs), who are not executives as well as free from other relationships that might impede their capacity to exercise independent judgement on behalf of the company as whole, are spreading through the Asian region. This is rather curious, as many countries (including in fact Australia) have a tradition of large non-institutional blockholders, which typically have the capacity and incentive to exercise shareholder rights to extract information and influence the management and direction of the company. The need for IDs is therefore reduced, compared to countries with more dispersed shareholders, such as the US and especially the UK. However, blockholders can take advantage of dispersed shareholders, so the latter (or policy-makers more generally) may still press to have more IDs on boards. Yet blockholders can be expected to lobby to resist such measures, and anyway the impact of IDs on corporate performance may be less in such jurisdictions.
This backdrop may explain the difficulties in introducing requirements for IDs into Japan, despite calls for more IDs in the wake of corporate failures (such as Olympus) and the enactment of the Companies Reform Act on 20 June 2014 (after extensive deliberations). But it is also consistent with the history and reality of IDs in Australia’s listed companies. Below is the Abstract for a detailed draft paper comparing Australian developments, co-authored with my colleague Fady Aoun, for the Berlin conference / book project on “IDs in Japan and other Major Asian Jurisdictions” (click here for a PDF of our Powerpoints), as well as the third joint research conference for USydney, UGeneva, Harvard and Renmin Law Schools (hosted in Beijing over 11-12 July: click here for an audio file of my 13-minute presentation by video link).

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12th ANJeL Japanese Law conference: Cairns, 16 May 2014 (2)

The Australian Network for Japanese Law (ANJeL) successfully hosted the Cairns Symposium on Japanese Law on Friday 16 May, with special thanks to ANJeL member and James Cook University Associate Professor Justin Dabner.
The Symposium’s primary theme was ‘Japanese Law and Business Amidst Bilateral and Regional Free Trade Agreements’, which was a timely coincidence, in light of the conclusion of negotiations for the Japan Australia Economic Partnership Agreement on 7 April 2014. However, presentation proposals dealing with other Japanese Law topics were also welcomed, and topics discussed included agricultural land law and policy, corporate law reforms, insolvency law and practice, long-term contracting, cross-border investment dispute resolution, tax treaties, emissions trading schemes and political participation rights. Please see here for previously published abstracts and see here for the conference program.
The list of presentations topics and speakers, and where possible, their presentation slides appear below.

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Do Many of Australia’s (and Some of Japan’s) Treaties Not Give Full Consent to Investor-State Arbitration?

Indonesia recently announced that it would review its 67 bilateral investment treaties (BITs). Shortly beforehand, it had unsuccessfully challenged the jurisdiction of an ICSID arbitral tribunal in a claim for expropriation and other violations brought by the Australian subsidiary of a UK coal mining company (Planet Mining v Indonesia).
The tribunal’s decision found that consent to jurisdiction existed under the coal mining licences given by Indonesian authorities, but not under the wording of the 1992 Australia-Indonesia BIT. It found that the countries had only given a “promise to consent” rather than full advance consent to ICSID jurisdiction, meaning that Indonesia could still refuse consent subject to potential review through an inter-state arbitration procedure separately provided under the treaty. Further, as both countries remained party to the framework 1965 ICSID Convention facilitating enforcement of arbitral awards, another BIT provision for ad hoc investor-state arbitration (ISA) was also unavailable to investors.

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The new Japan-Australia Economic Partnership Agreement (FTA)

There has been a flurry of media attention paid to Australia-Japan relations this week. For example, I was asked to appear on “The Wire” radio on 7 April, on the eve of the conclusion of 7 years of negotiating this major bilateral Free Trade Agreement (transcript here). At that stage, the inclusion of Investor-State Dispute Resolution (ISDS) protections for foreign investment in the treaty was still a real possibility, but I argued that there was no need to panic. Japanese investors have never experienced major problems with Australian government authorities illegally interfering with their investments, and indeed have never directly invoked ISDS (especially arbitration) procedures already provided by Japan’s treaties with around 30 countries.
Both governments subsequently announced key features of the Japan-Australia FTA, which ultimately did not include ISDS – unlike the Korea-Australia FTA concluded in December 2013 (and formally signed this week in Seoul). On this blog and then the East Asia Forum, I argued that this presumably meant that the Australian negotiators were happy enough with market access commitments offered by Japan, especially for agricultural products. This may be true but it is hard to be sure, and he argued that omitting even a weak form of ISDS in the FTA with Japan may complicate Australia’s ongoing regional and bilateral FTA negotiations (including with India and Indonesia).

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Why no investor-state arbitration in the Australia-Japan FTA?

Australia and Japan finally concluded a bilateral Free Trade Agreement on 7 April 2014. Some Australian media outlets had prior inklings that negotiations had achieved significant breakthroughs, especially for agricultural market access into Japan, but a frequent assumption was that Australia must have “given up” something major in return. Concerns were expressed that this included measures favouring Japanese investors into Australia, especially protections from investor-state dispute settlement (ISDS, especially arbitration) provisions [listen to my radio interview here]. These provide an extra avenue for foreign investors to enforce the substantive treaty rights limiting a host state’s capacity to illegally interfere with foreign investments (eg through expropriation). They add to the (more politicised) inter-state arbitration procedure invariably included in investment treaties, as well as any rights under domestic law available through the host state’s court system – particularly problematic in developing countries, such as Indonesia.
ISDS provisions had been added to the Korea-Australia FTA concluded in December 2013 by the Abbott Government, which also declared that it was reverting to a case-by-case approach to ISDS. This contrasted with the position taken by the 2011 Gillard Government Trade Policy Statement, which had reversed Australia’s longstanding treaty practice by declaring that it would not agree to any forms of ISDS in future treaties – even with developing countries. The 2012 Malaysia-Australia FTA omitted ISDS, although that was meaningless in practice as ISDS remains available to enforce similar substantive rights under the 2009 ASEAN-Australia-NZ FTA. Curiously, however, the new Australia-Japan FTA ultimately omitted ISDS provisions as well. Why is this, and what are the broader implications?

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Bill proposing to preclude Australia from ISDS in future investment treaties

I am pleased to provide this Submission on The Trade and Foreign Investment (Protecting the Public Interest) Bill 2014. I specialise in international and comparative commercial and consumer law, and have produced extensive academic publications and media commentary on treaty-based investor-state dispute settlement (ISDS). My interest is in the policy and legal issues associated with this system; I have never provided consultancy or other services in ISDS proceedings.
The Bill simply provides, in clause 3, that:

“The Commonwealth must not, on or after the commencement of this Act, enter into an agreement (however described) with one or more foreign countries that includes an investor-state dispute settlement provision.”

The Explanatory Memorandum provides no guidance as to the background to this proposal, or its pros and cons. However it seems to be aimed at reinstating the policy shift announced by the April 2011 “Gillard Government Trade Policy Statement”. That is no longer found on Australian government websites and is inconsistent with the present Government’s policy on ISDS, which allows for such provisions on a case-by-case basis (as evidenced by the recent Korea-Australia FTA).
The Bill, like the previous Trade Policy Statement in this respect, may be well-intentioned, but it is premature and misguided. Treaty-based ISDS is not a perfect system, but it can be improved in other ways – mainly by carefully negotiating and drafting bilateral investment treaties (BITs) and free trade agreements (FTAs). This may also have the long-term benefit of generating a well-balanced new investment treaty at the multilateral level, which is presently missing and unlikely otherwise to eventuate.

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Berlin conference on “Independent Directors in Japan and Other Major Asian Jurisdictions” (17-19 July)

“Save the date” for this international conference organized by the:
Max Planck Institute for Comparative and Private International Law
Japanese-German Center Berlin (JDZB)
German-Japanese Association of Jurists (DJJV)
[For the latest Program, see http://sydney.edu.au/law/anjel/documents/2014/independent_directors_berlin_program.pdf (as of 9 April) or via http://sydney.edu.au/law/anjel/content/anjel_events_up.html (also for registration details etc)]
Date: 17–19 July 2014
Format: 2-day conference open to public, plus half-day closed session for editors and authors of a conference volume
Venue: Japanese-German Center Berlin (JDZB)
Sponsors: Fritz Thyssen Foundation
Publication: edited by Harald Baum, Souichirou Kozuka, Luke Nottage & Dan Puchniak
Further details will be provided via http://sydney.edu.au/law/anjel/content/anjel_events_up.html

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