On 12 April 2011 the Australian Government released its Trade Policy Statement, setting out the Government’s agenda for trade policy in the future. Whilst a number of the announcements are positive and welcomed, the Government’s rejection of investor-state dispute resolution procedures in trade agreements may cause problems for Australian and foreign investors alike.
In brief, by entering into trade agreements that do not include any adequate procedures for investor-state dispute resolution, the new trade policy has the potential to:
- increase the risk for Australian investors investing overseas;
- increase the cost to Australian investors of obtaining political risk insurance for their investments;
- increase the costs and risks of investing in Australia; and
- encourage investment to be channelled through countries with more favourable investment treaty regimes, thereby channelling potential profits and government revenue away from Australia.
What are investor-state dispute resolution procedures and why are they important?
Investor-state dispute resolution procedures are provisions within international trade or investment treaties that give investors direct rights to sue a State for non-compliance with provisions in the treaty.1
These treaties provide substantive protections to an investor of one State against adverse actions by the State in which they make an investment (the host State), including protections against expropriation, discriminatory treatment and unfair or inequitable treatment. They also commonly provide for dispute resolution procedures, most often including investor-state arbitration, as a way of enforcing both State and investor obligations under a treaty and providing a remedy for breach.
Investor-state arbitration (named as such because it is an arbitration between an investor and a State but does not necessarily take place in the investor State) gives the investor the ability to sue the State directly in a neutral and international forum free from the constraints of many of the host State’s domestic laws and any perceived bias of the host State’s courts.
The mere availability of investor-state arbitration is also likely to influence the behaviour of States and investors, making both more reluctant to breach any obligations under a treaty due to the possibility of an adverse arbitral award.2
An example of the benefits of investor-state dispute resolution procedures
For example, if after a foreign company invests millions into a mining project upon an agreement with the host State that a certain rate of taxation will apply, and the host State then significantly increases that rate of tax contrary to the agreement, an investor without the benefit of an investor-state dispute resolution procedure would have to seek redress through either diplomatic protection,3 which in many circumstances could be difficult, or in the courts of the host State. Litigating in the courts of the host State would subject the investor to any domestic principles of law in that host State that would prevent enforcement of the State’s promise.4
If, however, there was an investor-state dispute resolution procedure, an international arbitral tribunal would apply principles of international law in determining whether the actions of the State amounted to either a form of indirect expropriation or, depending on the investment treaty, a breach of the fair and equitable treatment principle.5
The Government’s new policy on investor-state dispute resolution procedures
In the Trade Policy Statement, the Government has suggested it will not implement investor-state dispute resolution procedures into future investment treaties. The Statement says:
“In the past, Australian Governments have sought the inclusion of investor-state dispute resolution procedures in trade agreements with developing countries at the behest of Australian businesses. The Gillard Government will discontinue this practice. If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries.”
The effect of the new policy
The Government’s new policy will not affect existing investment agreements to which Australia is a party and which already contain investor-state dispute resolution procedures. However, it will result in Australia entering into new investment treaties or free trade agreements that lack an effective enforcement mechanism.
The practical effects of having an investment treaty without adequate dispute resolution procedures are:
- investors will not be able to directly enforce any protections afforded to them under an international agreement against a host State which breaches that agreement. They will instead have to either resort to domestic courts, those courts potentially being subject to improper government influence or restricted in their ability to afford an adequate remedy, or seek diplomatic protection from their home State;
- sovereign risk for Australian investors investing overseas or foreign investors investing in Australia may increase as a result, potentially discouraging investment;6
- the increase in sovereign risk should increase the premiums for any political risk insurance, especially if the insurer’s rights of subrogation would not include the ability for the insurer to recover from the host State, in an impartial international arbitral tribunal, any money paid to an investor;
- investors may channel their investments through entities in countries that have more beneficial investment treaties with the host State. That in turn may channel any profits from such investments (and any government revenues flowing from those profits) away from Australia to those other countries
The way forward for Australian investors
If this new policy is implemented and future Australian investment treaties do not include any procedures for investor-state dispute resolution, to adequately protect their investments Australian investors will need to instead rely on:
- political risk insurance, where it is available, including through the Multilateral Investment Guarantee Agency (MIGA), the Australian Export Finance and Insurance Corporation, or certain private insurers;7
- channelling their investment through an entity of a country with a more favourable investment treaty in place with the host State; 8
- negotiating directly with the host State to enter into an agreement that requires the resolution of disputes through investor-state arbitration; or
- any domestic investment laws, if they exist, that provide a standing consent by the host State to investor-state arbitration.