1 April 2014
Being a trusted advisor: practical
considerations for lawyers advising on
investment from China, Japan and Korea
Christopher Hewitt, Senior Associate
Australia has a long history of welcoming international investment. Australia’s limited domestic capital,
abundant resources and comparatively stable economy has attracted investors from across the world for
decades. Investment into Australia from East Asia is also not a new phenomenon, although recently it
has attracted significant attention mostly as a result of the growth of Chinese investment into Australia.
Quite rightly that recent attention has attracted Australian lawyers – lawyers have an essential part to
play in international investment, from developing investment structures to regulatory compliance to
contract preparation. However, as can sometimes occur in our profession, some Australian lawyers have
been thrust into the position of giving international investment advice and representation without all of
the necessary background and information.
Through the years there have been two mistakes that we have commonly seen from lawyers advising on
international investment into Australia, and both are a problem. The first is the lawyer that entirely ignores
the international element of a transaction and simply advises on the underlying domestic transaction. For
example, the lawyer may advise on, and draft, a petroleum joint venture agreement for an international
client without turning their mind to the international character of their client. This approach is easy to
justify – “the international issues are not within my speciality or experience”. However, failing to turn your
I gratefully acknowledge the contribution of my colleagues Gerowyn Schuster and Emilie Franklin, in the
preparation of this paper. 2
mind to the international character of your client may expose them to significant legal and commercial
The second is the lawyer that wishes to be all things to all men, and so takes it upon themselves to learn
– often via Google or Yahoo or WorldLII – the relevant laws of their client’s home jurisdiction. Based on
that research, the lawyer will then advise the client on everything from regulatory compliance and
investment structures all the way through to contract interpretation in the client’s home jurisdiction. The
risks of this approach are obvious – especially if the client’s home jurisdiction is not English speaking or
does not share Australia’s legal structure and traditions. The client will often joyfully seize the opportunity
to instruct and pay only one lawyer; although that may not be in their best interests.
For lawyers that do not specialise in international investment, the best approach is often a middleground of understanding the concepts of international investment, being aware of the trigger points and
then seeking advice, assistance or partnership from an specialist or lawyer in another jurisdiction.
This paper will seek to provide some background to international investment in Australia and provide
non-specialist lawyers with some tips and trigger points. This paper will examine legal issues relating to
investment from the perspective of both the international investor and the domestic investee. An
Australian company that is receiving international investment or selling to an international purchaser
often requires legal advice that is grounded in an understanding of international investment, or the laws
of another jurisdiction. The discussion in this paper will take place against the backdrop of investment
into Australia from three of the world’s most dynamic economies: Japan, the Republic of Korea (referred
to in this paper as “Korea”) and the People’s Republic of China (referred to in this paper as “China”).
B The state of investment from Japan, Korea and China
The financial relationship and trends between Australia and Japan, Korea and China should be
considered prior to going on to examine investment laws, regulations and policies.
In 2012, Japan accounted for 11.1%2
of Australia’s total inward foreign direct investment and 4% of
Australia’s gross domestic product.
Australia is currently Japan’s fourth most popular international
Foreign Investment in Australia up 8.6pc in 2012, Australian Government, 2013
Japanese Investment in Australia, Austrade, 2012 3
destination for investment. Japan’s direct investment into Australia in 2012 was AUD61.2 billion, which
towers over Australia’s direct investment into Japan at AUD220 million. Australia is Japan's second
biggest provider of goods and second biggest buyer of Japanese vehicles.
Japan is the third largest
foreign direct investor into Australia and is Australia's second biggest trading partner.
Korea has not traditionally been a high value investor into Australia, although that has changed in recent
years. In 2012, Korea’s direct investment into Australia was AUD12.8 billion, which accounted for
approximately half of Korea’s total foreign direct investment.
Korea is Australia's fourth-largest overall
trading partner and total two-way trade was worth approximately AUD30.5 billion in 2012 to 2013, which
is equal to about 5% of all of Australia's international trade.
Chinese investment into Australia continues to increase. China is the ninth largest foreign direct investor
and is Australia's biggest trading partner.
In 2012, China’s investment in Australia totalled
approximately AUD22.9 billion and AUD16.7 billion of this was foreign direct investment.
been ranked in the top three sources of proposed investment, behind the US and UK, for the past three
consecutive years. China is Australia's largest two-way trading partner in goods and services, valued at
an amazing AUD125.1 billion in 2012.
R Callik, Japan trade deal timed for Shinzo Abe visit in July, The Australian, 14 January 2014
Australia Unlimited, ‘Republic of Korea Market Overview’, Australian Government Austrade
Republic of Korea Country Brief, Department of Foreign Affairs and Trade, 2014
Investor Update 5 November 2013, ‘Demystifying Chinese investment in Australian agribusiness’, Australian
Trade Commission, 2013
Australia’s economic relationships with China, Holmes, Dr Ann, Parliament of Australia, 2013
9 China Fact Sheet, Trade Advocacy and Statistics Section, Department of Foreign Affairs and Trade
People's Republic of China country brief, Department of Foreign Affairs and Trade, September 2013 4
C Investment regulations: domestic and international
Domestic: Australia investment regulations
There is significant commentary available on the requirements and future of the Australian Foreign
Investment Review Board (“FIRB”) and the Foreign Acquisitions and Takeovers Act 1975 (Cth) (“FATA”).
This paper will not revisit those requirements, process and procedures, except to say that it is imperative
that Australian lawyers representing an international investor or an Australian investee be aware of the
requirements and practical ramifications. Applying for and receiving approval from FIRB will effect
timeframes for negotiation and execution of contracts, conditions precedent and settlement of a
transaction. Not applying for FIRB approval can also have fairly salutary effects!
As outlined by other commentators at length, FIRB may approve or reject an application under FATA
outright, or may approve an application with conditions. Australian lawyers should consider FIRB’s
powers, policies and processes when negotiating and drafting any contract that forms part of an
international investment. For example, it is usually advisable for a sale and purchase agreement to
contain a condition precedent to settlement that approval from FIRB be obtained on conditions suitable
to the international investor. If you are representing the domestic investee (seller) you will presumably
seek certainty around what constitutes a “suitable” condition from FIRB. Conversely, if representing the
international investor (purchaser) you may seek to preserve discretion for your client.
A few tips that we can provide is first to make it clear to the investor what’s about to happen. Too often
the level of disclosure required, and the need for a full and frank explanation of the investment and the
investing entity, are a surprise for an investor. Secondly, it is important to be mindful of the diverse and
sometimes complicated ownership structures in many Japanese, Korean and Chinese corporations, to
the extent that a corporation that initially appears to be 100% privately owned may turn out to have an
ownership structure that comes within the foreign government requirements of FATA.
This paper has been prepared for a continuing professional development seminar, and other presenters at
that seminar have been briefed with speaking on the Foreign Investment Review Board. Accordingly, FIRB
is no dealt with in detail in this paper.
Foreign Acquisitions and Takeovers Act 1975 (Cth), section 17C; Foreign Acquisitions and Takeovers
Regulations 1989 (Cth), regulations 7 and 10 5
International investment regulations from the investor’s home jurisdiction
Australia’s inward investment regulations are only half the story as many countries have varying levels of
restrictions on outbound investments. Investments from certain countries into Australia will be subject to
notification and approval from investment regulators in the investor’s home jurisdiction. Australian
lawyers should be aware of the existence of these international investment notification and approval
requirements in order to provide for them in certain contracts. For example, sale and purchase contracts
involving an investor from China will often require a settlement condition allowing for Chinese
Government approval of the investment.
Historically, there have been significant restrictions imposed on outward investment by Japanese and
Korean investors. Those restrictions have been progressively reduced and eliminated by the Japanese
and Korean Governments, in order to liberalise, deregulate, stimulate and encourage outbound
investments. China still retains a significant outbound investment approvals mechanism that will affect
many investments into Australia by Chinese investors. We will now examine the current state of outbound
investment regulations in each country.
Despite significant liberalisation, outbound direct investment approval may still be required for Japanese
investors under the Foreign Exchange and Foreign Trade Act (“the FE Act“).
Notification to, and
approval from, the Minister of Finance (“the Minister”) must be obtained in some limited circumstances,
and the Minister has the power to require modifications to, or even the discontinuance of, an outbound
The circumstances where notification and approval are required are limited and the FE Act is relatively
non-interventionist. The stated purpose of the FE Act is to enable:
“…proper expansion of foreign transactions and the maintenance of peace and security in Japan and in
the international community through the minimum necessary control or coordination of foreign
Foreign Exchange and Foreign Trade Act, Act No. 228, 1949
Foreign Exchange and Foreign Trade Act, Act No. 228, 1949 6
In keeping with those liberal sentiments, Japanese natural persons and corporations are only required to
notify the Minister in advance of the intended international investment if the investment is likely to result
• significant adverse effects being brought to the smooth management of the Japanese
• international peace and security being impaired, or the maintenance of public order being
While the circumstances giving rise to a notification obligation under the FE Act may be limited, if
triggered the notification process can potentially result in delays and disruption to an international
investment. Once a notification is received the Minister may recommend changing the content, or even
discontinuing the outbound direct investment altogether. An outbound investment pertaining to a
notification must not occur until 20 days after receiving the Minister’s recommendation. An investor may
refuse to accept the recommendation, in which case the Minister does retain the power – although
seldom used – to block an outbound investment. In certain circumstances when representing a
Japanese investor it may be prudent to provide for outward investment notification in contract
documents. Our experience with legal matters involving government officials in Japan is that there is an
incredible amount of diffidence and adherence towards them and their decisions. An investor may
refuse to accept the recommendation of the Minister, and the Minister does retain the power to block an
outbound investment – but it very rarely needs to be used.
The Korean Government has transformed from a regulator to a facilitator of outbound investment. The
Government has lifted many of the previously required approvals and notification obligations to
encourage internationalisation. After becoming a member of the Organisation for Economic Co-operation
and Development in 1997, the Korean Government made substantial efforts to deregulate, liberalise, and
integrate with the global economy, including transferring authority, responsibility and discretion for
international investment to the private sector. Since that time, the Korean Government has encouraged
Korean businesses to invest abroad through simplifying the foreign investment process.
Foreign Exchange and Foreign Trade Act, Act No. 228, 1949, Article 23
‘Outbound Foreign Investment Policy in Korea: A Review on Policy Issues and Performance’ (October
2006) by Chinmay Pattnaik and Ki-Hwan Kwon 7
Compared to Japan and Korea, China has an onerous outbound investment approvals regime
potentially involving various government ministries and multiple levels of approval. The Chinese
outbound investment approvals regime has been subject to significant changes in recent years,
including dramatic changes in 2013. Prior to 13 December 2013, all international outbound investments
required prior approval from the National Development and Reform Commission (“the NDRC”), the
Ministry of Commerce (“MOFCOM”) and the State Administration of Foreign Exchange (“SAFE”).
approval was (and potentially still is) required at either local, provincial or national levels, depending on
the value of the investment. Investments by State Owned Enterprises also potentially require approval by
the State Owned Assets Supervision and Administration Commission. For many years Chinese investors
have complained that China’s outbound investment regulations have limited their competitiveness in the
global marketplace. Because of these constraints, sellers in other countries, such as in Australia, have
dismissed Chinese bidders, required protective measures for sellers or added the so-called China
In December 2013 the State Council of China promulgated the Catalogue of Investment Projects Subject
to Governmental Verifications 2013 (“the 2013 Catalogue”).
The 2013 Catalogue is seen as a
significant, albeit inconclusive, step towards deregulating outbound investment and empowering
Chinese enterprises. Under the 2013 Catalogue prior approval by the NDRC (or equivalent) will only be
required for “special projects”, being investments in “sensitive countries and regions”, in “sensitive
industries” or for investment of over USD1 billion.
Other investments should only be subject to post
transaction filing with the State Council. The terms “special projects” and “sensitive countries and
regions” are not defined in the 2013 Catalogue, although certain NDRC implementing rules indicate that:
• “Special projects” will include media, energy, land development, telecommunications and the
exploration and exploitation of water resources.
• “Sensitive countries or regions” will include countries:
without diplomatic relations with China;
Verification and Approval Procedures for OFDI/Interim Measures for the Administration of Examination and
Approval of the Overseas Investment Projects, NDRC, October 2004
Catalogue of Investment Projects Subject to Governmental Verifications, NDRC, 2013
Catalogue of Investment Projects Subject to Governmental Verifications, NDRC, 2013 8
subject to international sanctions; or
at war or subject to political unrest.
However, doubt remains about the operation of the new investment regulation regime. The 2013
Catalogue is not clear on the approval and notification requirements for all investments, and does not
provide absolute clarity on the how the approval regimes of MOFCOM and SAFE will be affected. We
anticipate that MOFCOM and SAFE will issue measures to clarify the rules and requirements for
outbound investments, which should provide even greater liberalisation for Chinese investors into
Australia. Notwithstanding these encouraging developments, lawyers should continue to act as though
investment approval from the Chinese Government may apply to an investment into Australia, in at least
As a lawyer advising Chinese investors you need to be aware of the existence of approval requirements
that may affect, delay or even prevent an investment transaction. Australian lawyers involved in Chinese
investment transactions should, at a minimum, ensure that all transaction documents make provision for
Chinese Government notification and approval processes. It would not be prudent or appropriate for a
non-specialist Australian lawyer to attempt to determine what approvals are required under the 2013
Catalogue and NDRC implementation notices. Investment specialists and Chinese lawyers will be able
to provide advice on the specific requirements. If you are representing an Australian investee or seller
you should be mindful that Chinese notification and approval processes do still exist and may affect
negotiations and settlement. Seller protection measures, including deposits, should be considered –
although as a practical issue those deposits may potentially be subject to SAFE approval themselves.
Queensland specific investment regulation
For international investments into Queensland, a further regulatory consideration is registration with the
Queensland Foreign Land Registry (“the Registry”). Queensland is the only state in Australia that
maintains a register to monitor foreign ownership of land, under the Foreign Ownership of Land Register
Act 1988 (Qld) (“the Foreign Ownership Register Act”).
The Foreign Ownership Register Act requires
notification if a foreign person acquires an interest in land.
The measures for verification of overseas investment projects, NDRC Discussion Draft, August 2012
Foreign Ownership of Land Register Act 1988 (Qld)
Foreign Ownership of Land Register Act 1988 (Qld), section 18 9
A “foreign person” includes:
• a foreign natural person;
• a foreign corporation; or
• a corporation in which a foreign natural person or a foreign corporation holds a controlling
interest or in which two or more foreign natural persons or foreign corporations hold an
aggregate controlling interest.
The notification requirements under the Foreign Ownership Register Act are not extensive – a one page
Foreign Ownership Information form filed at the same time that a transfer of land is registered with the
Queensland Land Registry. The information required includes the property details, details of the foreign
purchaser, country of origin of the purchaser, intended use of the land and any development plans. The
Registry is publicly searchable, including obtaining particulars of the information recorded on the
Penalties are imposed for non-compliance and if a foreign person is convicted of an offence
in respect of land, the land may be forfeited to the State of Queensland.
The new Commonwealth Government has proposed introducing a national register of foreign ownership
in all land, similar to the Registry. The Coalition’s Discussion Paper on Foreign Investment in Australia
“There is no database capable of tracking acquisitions of land across Australia to inform public
debate or policy. To rectify this unsatisfactory situation, the Coalition will establish such a
database or databases, as an up to date public register.”
Additionally, the Commonwealth Government has proposed that the Australian Securities and
Investment Commission establish and maintain a national register of foreign ownership in businesses
valued above a certain threshold of, say, AUD15 million.
The national register has been proposed as a
post-acquisition recording system to operate independently of the FIRB investment approval process.
Foreign Ownership of Land Register Act 1988 (Qld), schedule 1
Foreign Ownership of Land Register Act 1988 (Qld), section 14
Land Title Practice Manual (Queensland) Part 25 Foreign Ownership Information, Department of Natural
Resources and Mines
‘Coalition’s Discussion Paper on Foreign Investment in Australian Agricultural Land and Business’, 2012
‘Coalition’s Discussion Paper on Foreign Investment in Australian Agricultural Land and Business’, 2012 10
D Contractual provisions - confidentiality and disclosure
As with most commercial transactions, confidentiality and disclosure obligations are often critical to an
international investment. It is possible that your client will either require, or be required to agree to, a
confidentiality and non-disclosure agreement during negotiations. Most transactional documents will
include a confidentiality provision of some nature protecting the ongoing confidentiality of the parties. If
representing an international investor, prior to advising on confidentiality agreements or provisions it is
worth considering whether your client may be bound by continuous disclosure regulations from your
client’s home jurisdiction or a third jurisdiction. The ownership structure of an international investor may
be such that it has continuous disclosure obligations that you may not be aware of – it is important to
conduct further enquiries with your client before advising on confidentiality and disclosure provisions.
While continuous disclosure obligations are common to the Australian Stock Exchange, Tokyo Stock
Exchange, Shanghai Stock Exchange and Korea Exchange, the specific requirements of continuous
disclosure may differ between jurisdictions. In respect of the Shanghai Stock Exchange, for example, the
occurrence of a major event that may have considerable effect on the share trading price of a listed
company requires an immediate provisional report to the China Securities Regulatory Commission.
Under the Law of the People's Republic of China on Securities, the report must include an explanation of
the causes, status and possible legal effects of the event.
The assessment of whether a continuous
disclosure obligation has arisen will depend on the Chinese securities law, administrative regulations
released by the China Securities Regulatory Commission
and even judicial interpretations from the
Supreme People’s Court. It is obviously not within the expertise of most Australian lawyers to advise
clients on continuous disclosure on the Shanghai Stock Exchange. However, you may be able to sculpt
confidentiality and disclosure provisions that preserve the necessary flexibility for your international client
to comply with its disclosure obligations, wherever they may arise.
E Contractual provisions – dispute resolution
When representing an Australian party entering into an agreement with a foreign entity or individual you
need to give consideration to a dispute resolution strategy, especially in the context that the foreign
investor may have limited assets in Australia. It may be in your client’s interest to be in a position to take
Law of the People's Republic of China on Securities 2005, article 67
Law of the People's Republic of China on Securities 2005, article 67
Law of the People's Republic of China on Securities 2005, article 67(12) 11
legal action that can be enforced against the assets of a foreign entity or individual in their home
Japan and Australia have a reciprocal relationship for the enforcement of superior and inferior court
This allows for an Australian court judgement to be enforced directly against a Japanese
entity or individual through the Japanese District Court without the substantive dispute being reexamined. All that is required is that the Australian court judgement meet the following conditions:
• the jurisdiction of the foreign court is sustainable under international civil jurisdiction rules of
Japanese law, ordinance or a treaty;
• the defeated defendant has been properly served with a summons, or has appeared and
presented the merits of the case;
• the contents of the judgment, and the procedure in which the judgment is rendered, are not
contrary to the “public order” or “good morals” of Japan; and
• there is a reciprocal “guarantee”.
Usefully, the Japanese District Court has established that foreign judgements from the Supreme Court of
Queensland relating to business activities will satisfy the reciprocity requirements of the Code of Civil
The jurisdictional requirement under (a) above may generally be satisfied with properly
constructed choice of court and choice of law provisions that establish the jurisdiction of the courts and
laws of the State of Queensland.
Accordingly, an agreement prepared on behalf of an Australian company with a Japanese individual or
entity can generally rely on court based dispute resolution remedies. Similarly, the courts of Korea
provide for direct enforcement of Australian court judgements, subject to equivalent procedural
Australia, Foreign Judgements Regulation 1992 (Cth), schedule 1; Japan, Code of Civil Procedure, article
118 and Civil Execution Act, article 24.
Code of Civil Procedure, article 118 (Japan)
Tokyo District Court, Judgment, February 25, 1998, Hanrei Taimuzu, No. 972, 258
Australia, Foreign Judgements Regulation 1992 (Cth), schedule 1; Republic of Korea, Civil Procedure Act
and Civil Execution Act12
China does not have a reciprocal relationship with Australia for the enforcement of foreign court
judgements. Courts in China do not generally accept the jurisdiction of Australian courts over Chinese
nationals, companies or assets, and will not directly enforce an Australian court judgement.
even if an Australian business does obtain a judgement against a Chinese company in, say, the
Supreme Court of Queensland, the judgement will most likely be unenforceable in China. The Australian
company will be forced to restart the court proceedings in China, or worse still be barred from taking any
action at all in China if the choice of court clause provides exclusive jurisdiction to an Australian court.
Thankfully, in 1987 China became a signatory to the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards, 1958 (known as the “New York Convention”). Under the New York Convention a
properly constituted arbitral award (not a court judgement) from another convention country, including
Australia, may be enforced by a Chinese court. The process for enforcing a foreign arbitral award takes
about six months, and must be commenced within two years of the date of the underlying award. A more
efficient process for enforcement within China can be a “foreign-related’ arbitral award from a select
Chinese arbitration body, which may be enforced in the same manner as a domestic award.
strategic down side of this option is that the arbitration must take place within China.
In practice, the dispute resolution clause in a contract involving a Chinese party investing in Australia
• provide that all disputes be resolved through arbitration;
• stipulate the jurisdiction where the arbitration will take place;
• identify the language of the arbitration;
• identify the rules that will govern the arbitration and the arbitral body.
The Agreement on the Reciprocal Encouragement and Protection of Investments between Australia and
China does provide for judgments of each country to be recognised and enforced where they involve
“investors” or “investments” of the other country. This has rarely been used to enforce Australian court
judgements in China.
Arbitration Law of the People’s Republic of China
If no language is stipulated, then under Chinese law the proper language of the arbitration will be Chinese
In the absence of agreement to an arbitral procedure, we have recommended to clients – much to their
initial shock and concern – that the jurisdiction of Chinese courts over an agreement should be accepted
and expressly recognised. Western companies are finding that the rule of law does exist in China, and
that they can get a fair hearing and a judgement under the laws of China which is ultimately more
effective than an Australian one.
F Free trade agreements
Current developments in free trade agreements
Free trade agreements may be relevant to investments into Australia in a number of direct and in-direct
ways. Australia is a party to a growing number of free trade agreements, and is in negotiation for a
number of new free trade agreements that could be strategically important to Australian businesses.
Korea and Australia reached agreement regarding a new Korea-Australia Free Trade Agreement (known
as “KAFTA”) in December 2013. Australia is currently in the process of negotiating free trade
agreements with both Japan and China. The new Australian Government is making all the right noises
about finalising negotiations and signing agreements with both countries. As an interested party we
remain hopeful, but not expectant, about the finalisation of the Japan and China free trade agreements.
When it comes to negotiating free trade agreements nothing happens quickly.
Typically, there are three key elements of a free trade agreement that may potentially effect investment
• trade costs;
• national treatment and most favoured nation; and
• investor state dispute mechanisms.
Using the soon to be signed KAFTA, we will briefly examine these investment issues in free trade
agreements. We note that another investment issue related to free trade agreements is the setting of
special thresholds for FIRB notification and approval, which we have not examined in this paper.
Free trade agreements: trade costs
Many investments into Australia from Korea, China and Japan are made for the predominant purpose of
achieving security of supply for a commercial operation in the home jurisdiction. For example, there has
been recent growth in agribusiness investments in Australia from China designed to secure supplies for
Chinese businesses. A classic example is investment in Australian red meat resources for the purposes 14
of securing supply for Chinese hot-pot restaurants. In this context the trade and investment nexus is
critical as Australia’s tariff levels, export controls, export licensing and other trade measures will directly
impact the profitability of the investment. Securing supply from Australia may appear less attractive to a
Korean investor if trade expenses and barriers significantly expand the cost of that supply. A key cost of
trade is tariffs, and typically the cornerstone to each free trade agreement is the reduction and
elimination of certain tariffs on key goods and services. For example, under KAFTA Korea has agreed to
eliminate its 40% tariff on Australia beef in equal annual stages.
The inequalities in treatment of
countries inside the FTA to those outside can cause huge shifts in investment and competition, with the
preferences enjoyed by one international car maker under the Thailand-Australia Free Trade Agreement
being touted as one of the factors that has led to the demise of the Australian vehicle manufacturing
Free trade agreements: the investment chapter
Most free trade agreements include an investment chapter that describes the treatment that each nation
will give to direct investments from the other country. For example, Chapter 11 of KAFTA includes
provisions to facilitate more direct investment into Australia from Korea, and vice versa. Thus, KAFTA will
provide enhanced protections and certainty for Korean investors in Australia with provisions to ensure
non-discrimination, protection and security for investments.
KAFTA requires Australia to treat investors from Korea in the same manner that it treats Australian
investors in like circumstances – this is known as national treatment.
National treatment is designed to
ensure competitive equality in the market for national and foreign investors. KAFTA also requires
Australia to treat investors from Korea in the same way as it does investors from any third country – this
is known as most favoured nation.
Most favoured nation is designed to ensure competitive equality
between all international investors. National treatment and most favoured nation are relevant to a range
of issues relating to international investors and businesses, including treatment by Commonwealth, State
and Territory government agencies.
Korea Australia Free Trade Agreement, 11
39 Korea Australia Free Trade Agreement, 11.3
40 Korea Australia Free Trade Agreement, 11.4 15
Free trade agreements: investor state dispute mechanisms
Arguably the most important provisions in the investment chapter of a free trade agreement are those
which – if included - protect the investor against government actions. These are very controversial. An
investor state dispute mechanism is a system whereby international investors may directly initiate
dispute settlement proceedings against a foreign government in certain circumstances. Free trade
agreements, such as KAFTA, often include substantive protections for investors that are guaranteed by
the host country. For example, KAFTA includes a commitment by Australia and Korea that they will not
expropriate or nationalise a covered investment either directly or indirectly except:
• for a public purpose;
• in a non-discriminatory manner;
• on prompt payment of adequate compensation; and
• in accordance of due process under international law.
There are a significant number of moderating exceptions under KAFTA, dealing with public health,
safety and the environment (including legitimate resource retention).
If a dispute arises between the investor and Australia, the investor state dispute mechanism in KAFTA
allows the investor to initiate international arbitration directly with Australia.
This would generally be
seen as more advantageous for an international investor than initiating proceedings against the
Australian Government in an Australian court. KAFTA sets out the detailed process for an arbitration,
including enforcement of an arbitral award under the New York Convention.
Investment law is not a discrete area of law and does not stand alone. International investment
transactions are a team effort that involve lawyers and advisors with different skills, knowledge and
experience. Lawyers that are new to international investment or are representing non-Australian clients
Korea Australia Free Trade Agreement, 11.7.1
42 Korea Australia Free Trade Agreement, Section B
43 Korea Australia Free Trade Agreement, 11.2616
should be mindful of the various investment-specific obligations and rights of their clients. In this paper
we have provided a brief summary of some of those rights and obligations, though this is by no means
comprehensive and Australian lawyers should always be open to seeking specialist assistance.
This paper presents an overview and commentary of the subject matter. It is not provided in the context of a
solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.