To have and have not: Investment protection and arbitration under the AUSFTA

By Jonathan Hoyle.

Key Points:
Investment arbitration is still an option under AUSFTA but you have to draft for it.

The Australian and United States Governments recently released the complete draft text of the proposed Free Trade Agreement (AUSFTA) between the two countries. It is the most recent example of the development of bilateral free trade deals by the Australian Government (eg. with Singapore and Thailand and, in the future, China, Japan and Korea).

The free trade deals, such as the one with Singapore, have included ways for investors to seek redress against host Governments directly – by means of international arbitration – in the event of arbitrary and improper Government action. However, the AUSFTA draft contemplates no recourse to arbitration for private parties.

As a result, investors will have to think more carefully about how they can pursue rights they may have under AUSFTA investment provisions.

What rights do investors have under AUSFTA?

Chapter 11 deals with investment. Articles 11.3 to 11.7 set out a number of familiar ways in which foreign investors in either country will be protected under international law:

• national treatment (treatment no less favourable than that received by a domestic investor)
• most favoured nation treatment (treatment no less favourable than that received by an investor from a third country)
• minimum standard of treatment (which incorporates fair and equitable treatment and full protection and security)
• protection from expropriation (by means of prompt, adequate and effective compensation)
• civil strife (losses to be treated on a national and most favoured nation basis).

What types of activity or assets does AUSFTA protect?

The types of activity or assets that qualify as investments are quite wide. Any asset that is directly or indirectly owned or controlled may qualify as long as it has the “characteristic of an investment” (Article 11.17) including commitment of resources, the expectation of profit or the assumption of risk. Examples listed in the treaty include turnkey, construction, management, production, concession, revenue-sharing and similar contracts, as well as the more familiar types of investment such as equity participation, company acquisition and traded items including derivatives.

Normally, commercial activity such as sale/supply agreements are not protected and they would not appear to come within the definitions currently in the draft (although the references to construction and concession arrangements suggests a possibly wider scope than under many other treaties).

How investment protection is usually enforced

Under many of the free trade investment regimes (as well as bilateral investment treaties or BITs) investors are given the opportunity to seek redress against the host Government directly under a treaty by means of international arbitration. This has a number of potential advantages to an investor, including:

• access to a neutral international tribunal applying international law
• direct access to arbitration without the need for an express arbitration agreement – the offer to arbitrate is set out in the treaty itself and can be accepted by the investor commencing arbitration proceedings
• avoidance of domestic courts and the limitations potentially imposed by domestic law (particularly where seeking remedies against Government parties)
• avoidance of the sometimes more cumbersome and protracted state to state dispute resolution regimes traditionally used to resolve trade disputes.

Such investment arbitration has been included in all of Australia’s BITs and free trade arrangements (as well as those of the United States, most notably under NAFTA).

AUSFTA gives no access to investment arbitration

Both Governments agreed that there would be no access to investor-state arbitration. Investors will have no ability to challenge host Government action directly under the treaty. However, the door has not been completely closed on that possibility. Under Article 11.16, if either Government considers that there has been a “change in circumstances affecting the settlement of [investment] disputes” then it can request consultation with the other Government over the possibility of developing “procedures that may be appropriate” to allow an investor to take direct action.

It is not clear whether this contemplates a purely ad hoc arbitration procedure drafted for the purposes of a particular dispute or a more general change allowing for investment arbitration in the future in relation to all investment disputes.

Investment protection will be enforced only at a State to State level under AUSFTA

Under Article 21 of AUSFTA, all dispute settlement will take place at a State to State level with no direct involvement by the investor.

The treaty envisages a tiered dispute procedure. A Joint Committee will be set up to oversee the progress of treaty implementation and compliance as well as facilitating the settlement of disputes. Should a dispute remain unresolved then either Government can request consultation over the issue. If the dispute remains unresolved within 60 days then a three member panel will be appointed to reach a determination (the panellists coming from an agreed list of individuals).

In practice what this means is that the investor will be required to go through Government channels (usually the trade representative) in the event that the investor considers that Chapter 11 has been breached.

Investment arbitration is still an option under AUSFTA but you have to draft for it

It is open to an investor to seek remedies against a State party in the domestic courts of the host country. However, that is not necessarily an attractive option given the “home court” advantage. Further, the remedies would be ones under domestic and not international law.

However, investors can still take advantage of the investment protection regime under AUSFTA. There does not appear to be anything to prevent an investor from entering into a specific arbitration agreement with a host state. Both Australia and the United States are signatories to the Washington Convention making arbitration pursuant to the International Centre for the Settlement of Investment Disputes (ICSID) possible. In order to do this, an investor and the State party would have to have an arbitration clause included as part of any contractual arrangements. By doing so, an investor could potentially take advantage of the different range of remedies contemplated under Chapter 11.

There appears to be an acknowledge-ment of this in paragraph 2 of Article 11.16 which states that “nothing in this Article prevent[s] an investor... from submitting to arbitration claims against the [State] Party to the extent permitted under that Party’s law” (emphasis added). It is not entirely clear what the italicised part of the sentence refers to, but it arguably contemplates the availability of ICSID arbitration in the event that the host Government is a party to the ICSID Convention.

What about other commercial parties who do not qualify as investors?

For parties entering into normal commercial agreements which do not involve investment (such as the supply of goods or services), the Chapter 11 remedies – as well as the provisions of the AUSFTA generally – will not have a direct effect. Rather, they will change the legal environment (whether by legislation or by direct application) of the market in which they operate. As with most trade agreements, difficulties will continue to be resolved at a State to State level.

However, Australian exporters and other parties entering into cross-border deals with United States companies can still have the potential benefits of using international arbitration by including arbitration clauses in their commercial contracts.