In April 2011, the Gillard Government announced that it ‘will discontinue [the] practice’ of including investor-state dispute resolution procedures in trade agreements.

What does this mean for Australian investors? Are they disadvantaged vis-à-vis their Chinese, Indonesian or American competitors? The answer is a resounding no, if the foreign investments are structured smartly. This article discusses the issues which Australian investors should bear in mind when structuring foreign investments so as to benefit from trade agreement protections.

The protection of foreign investment

Before the advent of modern investment treaties, investors in foreign countries were left without a right of recourse against the host state in the event that, for example, that state had taken the investment away. Investors had to rely on their home state to press the claim, including before the International Court of Justice.

This unsatisfactory state of affairs became more pressing with the growth of international trade after WWII and increased ‘globalisation’ of the world’s economy. This is one reason for the growth of investment treaties.

Investment treaties address investors’ concerns on two levels:

  • first, they provide for certain minimum standards of protection of foreign investments (for example, no expropriation without full compensation); and
  • second, they allow investors to start proceedings against the foreign state in their own name before an international arbitral tribunal.

It is this second limb of investment treaty protection, which the Gillard Government intends not to include in future investment treaties.

Over the years, a number of investment treaties have been concluded, both bilaterally between two states and multilaterally between many states. It is estimated that there are currently around 2,750 bilateral investment treaties.

To assist with the administration of investment treaty cases and ensure the enforceability of arbitral awards rendered against states, the Convention for the Settlement of Investment Disputes Between States and Nationals of Other States (the ICSID Convention) was agreed in 1965. There are more than 140 signatory states to the ICSID Convention to date.

The basic point is this: In order to benefit from an investment treaty, there must be an international treaty in place between the host state (i.e. the state into which the investment is made) and the home state (i.e. the state of which the investor is a national).

Structuring the investment

The solution for investors who would like to benefit from treaty protection (including the right to bring proceedings against the foreign host state in their own name), but whose home state is not party to a relevant investment treaty, is to make use of an investment treaty concluded with the host country and another state.

This involves the following steps.

  • First, identify a convenient state which has entered into an investment treaty with the relevant host state.

Australian investors need to identify a state with which the relevant host state has entered into a suitable investment protection treaty.

  • Second, make the investment via that state in a way that it is likely to be recognised by an international arbitral tribunal.

This element of the structuring of the foreign investment requires careful consideration.


In order to qualify for the protections under a given investment treaty and to make use of the dispute resolution procedure set up by that investment treaty, the investor must qualify as an investor of the home state.

Investment treaties differentiate between natural persons and legal persons (corporations) when defining who is protected. With regard to legal persons, investment treaties typically refer to:

  • the place of incorporation or seat of the legal entity; or 
  • the country of ownership or control of the legal person; or 
  • a combination of the two.

The relevant treaty should be reviewed carefully.

For example, if an Australian investor wishes to make use of the Netherlands/Malaysia bilateral investment treaty, the investor must be:

  • a legal person constituted in accordance with the law of the Netherlands; or 
  • a company or partnership constituted in accordance with the law of Malaysia but which is controlled directly or indirectly by a national of the Netherlands or by a legal person constituted in accordance with the law of the Netherlands (Netherlands/Malaysia BIT, Article 1(2)).

Similarly, the Energy Charter Treaty provides that an investor is ‘a company or other organisation organised in accordance with the law applicable in that Contracting Party’ and includes investments which are directly or indirectly controlled by such an investor. Australia has not ratified the Energy Charter Treaty. Thus, in order to benefit from its protections, the investment has to be made via another contracting state.


The activities in the host state must be an investment which, in some cases, requires the foreign investment to be authorised or approved by the host state.

Structuring not a sham

It will not come as a surprise, however, that the investor’s sought after attribution to the home state must not be a sham.

Some bilateral investment treaties require the head office of the company to be in the territory of the home state or an economic connection with the home state. Even if the relevant treaty does not, it may be prudent to bolster any claim that the investor is a national of the relevant state by:

  • keeping an operating head office within the state territory;
  • ensuring that (the majority of) directors reside within the state territory;
  • keeping the company’s books and records within the state territory;
  • holding board meetings and shareholder meetings within the state territory; and
  • paying taxes to the home state.

There are, however, precedents for a strict application of the country-of-incorporation test where the tribunal did not go beyond simply checking that the relevant company is incorporated in the home state.

In some treaties, the host state can argue that the treaty is not applicable to the company in question, for example,   Article 17(1) of the Energy Charter Treaty. This article provides that a contracting state may deny advantages under the Treaty to a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the area of the contracting party in which it is organised. This is a question of fact. Applying this provision, the tribunal in Plama Consortium Limited v Bulgaria (2005) held that a state’s decision to deny the rights under the treaty must be exercised specifically vis-à-vis the relevant investor and then only takes effect prospectively, i.e. only from the date the declaration was made.

Restructuring after the investment has taken place

A tribunal will not confer treaty protection on an investor who has gained the relevant nationality only after the dispute arose. However, this does not generally preclude restructuring of existing investments. The tribunal in Mobil Corporation v Venezuela (2010) held that in circumstances where:

  • the restructuring (which ultimately led to the treaty protection) was notified to the host state;
  • the investment was ongoing and was at least partly made after the restructuring; and 
  • the government’s measures allegedly in breach of the investment treaty took place after the restructuring,

the treaty applied – albeit only to those disputes which had arisen after the restructuring. The tribunal held that ‘the aim of the restructuring … was to protect the investments … by gaining access to ICSID arbitration through the BIT’ which was a ‘perfectly legitimate goal’.


Through some smart structuring (or restructuring) of investments, Australian investors can benefit from investment treaty protection for investments in countries with which Australia has not entered into a suitable agreement and thereby significantly decrease the risk of investing in foreign countries.