What would this mean for American companies doing business in Australia?

The Trans-Pacific Partnership Agreement (TPP)

The TPP is a multi-lateral trade agreement, currently being negotiated among a number of the nations which border the Pacific Ocean, including Australia and the USA. The parties had targeted the end of 2013 for finalizing the TPP but negotiations continue. The TPP is not finalized at this time.

Investor-State dispute settlement (ISDS)

One keen area of negotiation of the TPP is whether or not to include ISDS provisions. The U.S. Government is in favour of including ISDS, but is meeting opposition from other countries. If ISDS is included in the TPP, it would give American investors investing in Australia an additional remedy in the event of a dispute, as the Australia-US free trade agreement (AUSFTA) does not include ISDS.

Australian Government position on ISDS

The Australian federal Labor government had announced a trade policy statement in April 2011 that it would no longer include ISDS in bilateral investment treaties (BITs) or free trade agreements (FTAs).  That has changed.

Under the Coalition Government, elected in October 2013, ISDS will be considered on a case by case basis.  However, the government is opposed to signing up to international agreements that would restrict Australia’s capacity to govern in the public interest — including in areas such as public health, the environment or any other area of the economy.

Australia has agreed to ISDS in four FTAs (but not in the AUSFTA) and in Australia's 21 BITs.  The Coalition's pre-election trade policy document reflected that the Coalition remained open to including ISDS as part of taking a pragmatic approach to trade negotiations.

In December 2013, Australia announced that it had concluded the Korea-Australia FTA with ISDS.  We expect that Australia would be prepared to agree to ISDS in the TPP, as part of an overall negotiation.

What is ISDS?

ISDS usually gives an investor the right to bring a claim in international arbitration against the State in which it has made its investment (i.e. the Host State).  The investor would not otherwise have the right to bring a claim against the State unless it had a claim for breach of contract or a claim for breach of a statute or law of the Host State.  The investor may be required to bring such claims in the national courts of the Host State.

ISDS is included in bilateral and multilateral investment treaties. ISDS has been included in many FTAs, such as the North American Free Trade Agreement between the US, Canada and Mexico and the Australia-ASEAN-New Zealand Free Trade Agreement. 

Who can use ISDS?

If ISDS is included in the TPP, then an American citizen or an American company (that has invested in Australia) may bring a claim in international arbitration against Australia for any actions attributable to the Australian government that were in breach of the investment protections in the TPP.

The investment that is protected may include any type of investment, such as property, intellectual property, shareholdings, claims to money, such as loans, and contractual rights and business concessions, including a concession to search for natural resources.

It is most likely that ISDS could only be invoked in relation to claims that arose after the TPP entered into force with respect to Australia. While the claim may relate to an investment made before the TPP entered into force, the actions attributable to the Australian government underpinning the claim must have occurred after the TPP entered into force with respect to Australia.

On what basis could an investor bring a claim under ISDS?

A claim brought pursuant to an ISDS provision must be for a breach of the investment protections provided in the TPP.  The investment protections may include:

  • fair and equitable treatment;
  • full protection and security;
  • national treatment and most favoured nation treatment; and
  • no expropriation without compensation.

If the TPP included ISDS, and an Australian government body, such as a Department, a local council or a State owned corporation (in some cases) takes action that is contrary to investment protections included in the TPP and impacts upon the investment, the American investor may bring a claim for damages under the ISDS provision. The claim is against the State for actions that are attributable to the State.

For example, expropriation may involve nationalisation of assets or cancelling a licence that effectively shuts down the investor's operations.  Unfair and inequitable treatment may include a unilateral and non-transparent change in the law or regulations, such as increasing or imposing new taxes or royalties, or introducing new tariffs.

What is provided for in ISDS?

Usually, ISDS would require the American investor to first negotiate with the Australian government.

If no resolution is reached, the investor may commence international arbitration against Australia under the ISDS.  Some ISDS provisions include procedural or substantive restrictions in order to limit the types of claims that may be brought in international arbitration.

The tribunal will usually comprise three independent arbitrators who have expertise and experience in international investment law.

If the arbitral tribunal finds a breach of the treaty, it may award damages for the losses suffered by the investor as a result of the breach, plus interest and costs. The tribunal's award will be enforceable against Australia via one of two international conventions (the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the International Convention on the Settlement of Investment Disputes).

Australia may, however, claim State immunity when it comes to execution of the award against its assets. 

Tobacco companies

Concerns have been expressed about the possibility of tobacco companies using the proposed TPP ISDS in response to Australian plain packaging laws.

A Hong Kong subsidiary of Philip Morris has commenced an arbitration against Australia under the Australia-Hong Kong BIT claiming, amongst other things, that Australia has expropriated its valuable intellectual property by introducing plain packaging legislation.  The arbitration is still pending.

Similarly, other tobacco companies may look to invoke the TPP ISDS provisions to protect intellectual property investments.  A proposal to largely carve-out tobacco control measures (aside from cuts to tariffs) from the TPP may address these concerns.

Conclusion

ISDS may provide foreign investors with an additional means of resolving a dispute if a Government interferes with their investment. Threatening or commencing an investment arbitration may be sufficient to compel the State to negotiate an appropriate settlement.  If not, it may provide the investor with a remedy for a lost or damaged investment.  American investors may soon be able to take advantage of ISDS with respect to their investments made in Australia if such provisions are included in the TPP.