22 Mar 2010

Australian investors in key Asian countries now enjoy added protection under new FTA

by Dominic Mueller, Eammon Atkinson

Australian investors may now be more confident carrying out investments in a signatory country.

The ASEAN-Australia-New Zealand FTA (AANZFTA) entered into force on 1 January 2010. It is Australia's most recent Free Trade Agreement (FTA) and its most wide-ranging one. There are a number of signatories to the agreement including Australia, New Zealand and the ASEAN nations Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam (these will be referred to below as "member states").

Apart from the comprehensive framework for free trade and tariff elimination between the member states, the AANZFTA also offers protection of foreign investments made by nationals of one member state investing in another. However, one important exception to this is that investments made by Australian investors in New Zealand are not covered by the protection mechanisms of the agreement.

Australian investors may now be more confident carrying out investments in a signatory country, particularly in Cambodia, Brunei, Myanmar and Malaysia, where protection of this kind has not previously been afforded. Australia has seperate existing investment agreements with the other signatories to the AANZFTA.

What protection is afforded to investors?

  • Prohibition against expropriation: A member state is prohibited from expropriating or nationalising a covered investment except on very limited grounds, where the expropriation is for a public purpose and is done in a non-discriminatory manner and where prompt, adequate and effective compensation is paid to the investor. Expropriation that occurs indirectly is also covered. For example, a member state's refusal to grant a licence required to operate a business may be an indirect expropriation prohibited under the AANZFTA if doing so deprives the investor of the expected economic benefit of the property.
  • National treatment: Each member state has to treat investors from another member state no less favourably than, in like circumstances, its own investors and their investments. For example, a special tax on foreign companies may be a discriminatory measure prohibited under this type of protection.
  • Fair and equitable treatment: Member states are obliged to provide protected investments fair and equitable treatment. This includes requiring each member state not to "deny justice" in any legal or administrative proceedings. For instance, where a trial court permits a jury to be influenced by persistent appeals to local favouritism as against a foreign investor, a breach of this obligation may occur.
  • Full protection and security: Each member state is required to take such measures as may be reasonably necessary to ensure the protection and security of a covered investment.
  • Compensation for losses due to armed conflict, civil strife or state of emergency: A member state is required to treat the foreign investor no less favourably with regard to compensation, restitution or indemnity than it treats its own or other investors.
  • Transfers: A covered investor is allowed to transfer freely and without delay any types of income or earnings into and out of a member state subject to certain local laws (for example, relating to bankruptcy and taxation). These transfers are also allowed to be made in a freely usable currency.

How does an investor bring a claim against a state?

An investor may bring a claim directly against a member state if that state has breached its obligations under the AANZFTA. The investor may elect to commence investor-state arbitration proceedings against that member state.

Investor-state arbitration is an attractive dispute resolution mechanism for investment disputes arising under the AANZFTA. An investor will not have to bring its claim in the local courts of the member state that it alleges has breached its treaty obligations. Both the investor and the member state may each nominate one arbitrator of a three member panel, thus playing a role in selecting those who will decide whether the claim will succeed.

Under the AANZFTA, the investor may elect to bring a claim under the International Centre for Settlement of Investment Disputes (ICSID) Rules or under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules. ICSID arbitrations have the benefit of increased enforceability of awards, whereas UNCITRAL arbitrations are regarded as procedurally more flexible.

How does the AANZFTA interact with other international treaties?

There are existing Bilateral Investment Treaties (BITs) between Australia and Vietnam, Indonesia, the Philippines and Laos. Australia has also entered into FTAs with Thailand and Singapore. These BITs and FTAs already afford some level of protection to covered investors and their investments.

The AANZFTA does not affect those existing agreements. Therefore an investor may choose whether to rely on an existing BIT or FTA or the AANZFTA, depending on which terms are more favourable in the circumstances.

Further information

The Clayton Utz Guide to Protecting Foreign Investments (PDF 528.5KB) provides a useful overview of the key legal and commercial issues that should be considered when planning investment overseas, including in those countries party to the AANZFTA.

Some key topics discussed in the Guide which may be of interest include:

  • What are investment treaties and how can they apply to my company's activities?
  • How do investment treaties protect investors?
  • How can an investor enforce its rights?
  • Why is arbitration the preferred method of dispute resolution between investors and States?
  • What is the arbitration process in a nutshell?
  • A checklist to help me see that I've covered the essentials

 

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.