Investment Arbitration Reporter

By Luke Eric Peterson

(Editor's Note: This article is one of a small number on our website that is made available to non-subscribers free of charge)

The Government of Australia has announced that it will no longer pursue investor-state arbitration provisions in future international economic agreements with developing countries.

The policy shift builds upon Australia’s longer-standing concerns about including such provisions in agreements with higher-income developed economies. (In its Free Trade Agreement with the United States, Australia famously declined to be bound by an investor-state arbitration (ISA) mechanism – pointing instead to the reliability of its own legal system for resolving disputes involving U.S. investors).

In a Trade Policy Statement released on Tuesday (April 12, 2011), the Australian government notes that it had included ISA provisions in some past agreements with developing countries at the behest of Australian business interests, but that it will not do so in future.

“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 Statement notes.

The government has signaled that it will continue to support the principle of National Treatment, so “that foreign and domestic businesses are treated equally under the law.”

However, the government will not negotiate treaty protections “that would confer greater legal rights on foreign businesses than those available to domestic businesses” or that “constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses.”

The Statement is remarkable for citing concerns that foreign investors might target particular public policies, including a prescription drug policy that has drawn the ire of global pharmaceutical companies and proposals for the plain packaging of tobacco products that have drawn criticism from foreign tobacco companies.

Indeed, calls by the Philip Morris tobacco company for an investor-state arbitration mechanism in a pending Trans-Pacific Trade Agreement between Australia, the U.S. and other countries, have led to a flurry of headlines in Australia in recent months, with reports suggesting that the company wishes to mount an international law-based challenge to Australian plans for the plain-packaging of tobacco products. (A similar arbitration claim launched by Philip Morris against the Republic of Uruguay pursuant to the Switzerland-Uruguay bilateral investment treaty has been discussed widely in Australian media and policy circles).

While Australia’s new policy shift on investor-state arbitration appears to have been motivated by defensive policy concerns, one observer tells IAReporter that the government appears to have taken seriously the economic findings of a public commission tasked with charting a future trade and investment policy.

Jonathan Bonnitcha, a doctoral candidate in law at Oxford University, and the co-author of one of several dozen submissions made to the Australian Productivity Commission last year, says that it is important to note that the Australian Productivity Commission could find no compelling economic rationale for the inclusion of investor-state arbitration mechanisms in its trade and investment agreements. As reported by IAReporter last year**, a draft report of that same Commission had generated a flurry of debate as to the merits and rationale of investor-state arbitration provisions, and lead to a final report wherein the Commission concluded that there were few clear benefits, and several worrying risks, associated with such provisions.

On Bonnitcha’s view, the government’s new policy may be explained more by the Commission’s failure to find an economic justification for a core plank of Australia’s trade policy, as by concerns that Australia will be sued by foreign investors.

He notes, however, that the Commission also weighed other considerations, including concerns about the quality of rule of law in developing countries. Bonnitcha says that the Commission held that such concerns might be better addressed by capacity-building and financial support for domestic legal reform than by creating a system of international arbitration permitting foreigners to opt out of such legal systems altogether.

Effects on investors and arbitration industry to be watched closely

While the new developments will be welcomed by critics concerned with the over-reach of investor-state arbitration, the policy shift may be met with greater concern from some law firms and arbitrators engaged in investor-state arbitration work.

One Australian practitioner, Michael Polkinghorne of the law firm White & Case, tells IAReporter that investors may have the ability to work-around the absence of arbitration clauses in Australian agreements by free-riding on the treaties concluded by other countries.

“It certainly creates a concern for Australian investors seeking to invest abroad, although frequently these concerns can be addressed by intelligent corporate structuring. The real problems may well be for those investors who never think about treaty rights in the first place.”

Another observer from the Asia-Pacific region, New Zealand lawyer James Hosking, tells IAReporter that he will be watching for any ripple effect from Australia’s new policy.

“Other free trade agreements from the region - like the China-New Zealand FTA - have produced very nuanced investor-state dispute mechanism provisions,” he says.

Hosking, a Partner with Chaffetz Lindsey LLP in New York City, adds that he hopes “the new Australian policy doesn't lower the benchmark for other treaties being considered.”

* Australia’s Trade Policy Statement is available here. ** See our reporting from last year. (Subscribers only)

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com