The protection of foreign investment under Bilateral Investment Treaties (BITs) is a field that is currently undergoing a phase of profound and accelerated development, with the number of claims commenced under such treaties increasing every year1. In an Australian context, BITs provide protection to Australians investing abroad.
Protections Provided by BITs
BITs are agreements between two countries by which each country promises to protect the investments of investors from the other. BITs are therefore primarily concerned with private investment. The substantive protections provided by BITs are, for the most part, the same, but there can be slight (though important) differences between treaties. Generally speaking, BITs usually contain the following substantive protection clauses:
- promotion of favourable conditions for investors
- fair and equitable treatment of investors
- national treatment standards, ensuring that investors of a contracting party receive treatment no less favourable than that accorded by the host country to the investments of its own investors
- most favoured nation treatment, requiring the host state to treat foreign investments no less favourably than investments from any other third state
- protection against expropriation and nationalisation, and
- requirement to permit the free transfer of funds.
Where there is a breach of any of these substantive protection clauses, an investor from one country may be able to initiate arbitration directly against the other country’s government. This dispute resolution procedure is usually referred to as ‘investor–state arbitration’.
Australia has entered into 23 BITs, including treaties with China, Hong Kong, India, Indonesia, Lao PDR, Philippines, Sri Lanka and Vietnam.
Provisions defining the scope of BITs
Investor and investments
The protections provided by BITs are limited to ‘investors’ and their ‘investments’.
Who qualifies as an investor?
By way of example, the Agreement between the Government of Australia and the Government of the Republic of India on the Promotion and Protection of Investments (Australia–India BIT) defines investor as a ‘national’ or ‘company’ of a contracting party.
What qualifies as an investment?
Investment is generally defined broadly to include ‘every kind of asset, including intellectual property rights, invested by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and investment policies of that Contracting Party’. Further, an investment need not be wholly owned by an investor to be afforded protection under a BIT2.
Australia’s BITs with Indonesia and China are substantially in the same terms.
Investment planning: structuring your investment to take advantage of BITs
Australians should not invest abroad without first considering BITs. Is there a BIT between Australia and the country in which they seek to invest? How can they best structure their investment to take advantage of a BIT? If there is no BIT in place, how can they otherwise protect their investment?
If an Australian investor is planning to invest in a country with which:
- Australia has not entered into a BIT
- a BIT has been signed but has not yet entered into force, or
- a BIT has been entered into which only provides limited substantive or procedural protections,
one option is to structure the investment so that it is channelled through a company incorporated in a country with which Australia has entered into a BIT that offers investors adequate protection. This type of arrangement – known as ‘treaty shopping’ – is a fairly inexpensive way of enhancing the protection conferred on a particular investment.
BITs provide real protection for Australians investing aboard. On 30 November 2011, White Industries Australia Limited (White) was awarded approximately $10 million in arbitration proceedings against the Republic of India (India) for breach of India’s obligations under the Australia–India BIT3. Smart investors will recognise the importance of BITs and take the time to understand the protections provided by these treaties before investing abroad.
For further information on any of the issues raised in this alert please contact McCullough Robertson's Arbitration Team. The team was recently recognised by Lawyers Monthly as the 2013 Arbitration and Litigation Law Firm of the Year in Australia.