According to Australia’s Investment Review Board, the capacity to invest in foreign economies is increasingly becoming as important to global growth as the capacity to trade. In 2012, Australia’s total investment abroad totalled $1.298 trillion, while foreign investment in Australia amounted to $2.168 trillion.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 year.

 In an Australian context, BITs provide protection to Australians investing abroad and impose obligations on the Australian Government regarding foreign investors in Australia.  Smart investors take note: structuring your investments to take advantage of BITs can provide them with powerful protection. Globally, such treaties not only provide protection to investors operating in the international market but, if properly understood and utilised, may prove to be an instrument of economic growth and improved living standards in the developing world.

What are 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, each government in a BIT is required to ensure that investors from the other country are treated fairly and equitably and are not discriminated against.  Governments also undertake not to directly expropriate or nationalise the foreign investor’s investment.  Where there is a breach of a BIT, an investor from one country may be able to initiate arbitration directly against the other country’s government. The first BIT was signed in 1959 between Germany and Pakistan.  Today there are approximately 3,000 BITs in existence globally.  Australia has entered into 23 BITs, 21 of which are currently in force.

Free Trade Agreements and BITs

While Free Trade Agreements (FTAs) may often be similar in effect to BITs, the basic objectives of FTAs and BITs differ.  BITs seek to promote investment between countries by providing investors with confidence in foreign regulatory environments.  FTAs are mechanisms for trade liberalisation which aim to eliminate discrimination against imports by removing tariffs and other restrictions on the trade in goods.  Unlike BITs, a FTA may have more than two participants.
Australia has FTAs with New Zealand, Singapore, Thailand, the United States, Chile, New Zealand, Malaysia and the Association of South East Asian Nations (ASEAN). 

These countries account for 28 per cent  of Australia’s total trade.  This number is likely to increase, as Australia is also currently engaged in five bilateral FTA negotiations (with China, Japan, Korea, India and Indonesia) and four plurilateral negotiations (the Trans-Pacific Partnership Agreement, the Australia–Gulf Cooperation Council FTA, the Pacific Trade and Economic Agreement and the Regional Comprehensive Economic Partnership Agreement). The countries which are currently in FTA negotiations with Australia account for a further 45 per cent of Australia’s trade.

While FTAs play an important role in supporting global trade, the primary focus of this article is BITs.  Nevertheless, it should be noted that countries that have not entered into a BIT with Australia are more often than not covered by a FTA.  The websites of the Australian Investment Review Board and the Department of Foreign Affairs are excellent sources of information regarding investment into or out of Australia generally and Australia’s FTAs.

Australia’s two-way investment partners

Asia is booming.  Although the United States and the United Kingdom remain some of Australia’s key investment partners, three of Australia’s top ten investment partners are situated in Asia: Japan, Singapore and Hong Kong.  In the past 20 years, China and India have nearly tripled their stake in the global economy and the economic size of these two countries has increased six times over.  Fast forward a few years and Asia will be the largest producer and the largest consumer of goods and services in the world. For this reason, the below discussion will focus on the key aspects of Australia’s BITs with China, Hong Kong, India and Indonesia.

Key aspects of BITs

Form of BITs

BITs are largely in a standard form.  That being said, there can be important differences between BITs.  The Australia–China BIT operates on far more restrictive terms, particularly in relation to dispute resolution provisions, than most other treaties entered into by Australia.   The significance of this difference will be discussed later on in this article.

Framework of a BIT

A BIT usually consists of three parts:
(a) provisions defining a BIT’s scope;
(b) substantive protections and treatment standards; and
(c) dispute resolution provisions.

Provisions defining a BIT’s scope

Investor and investments

The protections provided by BITs are limited to ‘investors’ and their ‘investments’.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.  Whether an investor is a ‘national’ or ‘company’ of a contracting state will be determined by the laws of the contracting countries and the wording of the particular BIT.  In the case of the Australia–India BIT, a company is defined widely to include ‘any corporation, association, partnership, trust or legally recognised entity that is duly incorporated, constituted, set up or otherwise duly organised under the laws of a contracting party’.  An organisation will also fall within this definition of ‘company’ if it is incorporated under the law of a third country but is owned or controlled by an entity incorporated under the laws of either contracting party or by a natural person who is a citizen or permanent resident.
An Australian investor will fall within the definition of ‘national’ if they are a natural person who is a citizen or permanent resident of Australia, whilst an Indian investor will be a ‘national’ if they hold the status of an Indian national under the laws in force in India.  In practice, only a handful of cases have involved individual investors.

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’.  Becoming a majority shareholder in a foreign company (Azurix Corp. v Argentine Republic, ICSID Case No. ARB/01/12), acquiring rights to develop an oil field (Exxon and Venezuela, Mobil Corporation and Others v Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27), a joint venture agreement to develop farmland (Tradex Hellas S.A. v Albania ICISD Case No ARB/94/2), a concession agreement to explore for oil and gas (Deutsche Schachtbau – und Tiefbohrgesllschaft mbH (Fr Germ) v State of R’as Al Ahaimah (UAQ) ICC Case No. 3572 of 1982) and entering into an agreement relating to the ownership of a bauxite mine (Kaiser Bauxite Co v Jamacia ICISD case No Arb/74/3) have all been held to be ‘investments’ for the purpose of a BIT.
Further, in CMS v Argentine Republic, ICSID Case No Arb/01/08 it was held that an investment need not be wholly owned by an investor to be afforded protection under a BIT.Australia’s BITs with Indonesia and China are substantially in the same terms.

Substantive protections and treatment standards

BITs usually contain the following substantive protection clauses:

(a) promotion of favourable conditions for investors;
(b) fair and equitable treatment of investors;
(c) 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;
(d) most favoured nation treatment, requiring the host state to treat foreign investments no less favourably than investments from any other third state;
(e) protection against expropriation and nationalisation; and
(f) requirement to permit the free transfer of funds.

These protection clauses will be discussed in detail below in the context of White Industries Australia Limited v The Republic of India  UNCITRAL Award, 30 November 2011 (White Industries v India) and Phillip Morris Asia Limited (Hong Kong) v The Commonwealth of Australia PCA Case No. 2012-12 (Phillip Morris v Australia).
Further, as W Michael Reisman and Mahnoush H Arsanjani point out, it is important to bear in mind that ‘BITs are legal floors and not legal ceilings’.  The BITs provide a minimum standard of treatment for the nationals of the other state party.

Interpretation of BITs

One important thing to note is that, because the interpretation of BITs is usually by ad hoc tribunals which are differently constituted in each particular case, the development of consistent case law has proven difficult.  However, although a tribunal is not bound by another’s decision, there is a tendency for uniform interpretation.  Further, Article 31(1) of the Vienna Convention (to which Australia is a signatory) requires treaties to be interpreted according to their ordinary meaning, or from international law and the good faith principle.

Dispute resolution provisions

BITs and FTAs generally permit investors to initiate arbitration directly against a country’s national government for a breach of the substantive protections and treatment standards outlined above.  This dispute resolution procedure is usually referred to as ‘investor–state arbitration’, although it is not really arbitration in the true sense.
Professor Doug Jones AO defines arbitration, both domestic and international, as a formal dispute resolution process in which two or more parties agree to refer their disputes to an independent third party for determination.  In comparison, investor–state arbitration under a BIT does not arise from an agreement between the investor and a contracting government but rather from the pursuit of a claim under the treaty.

While the precise formulation of dispute resolution clauses will vary from treaty to treaty, under most BITs to which Australia is contracted to, parties should first seek to settle the dispute through negotiation or consultation.  Failing that, an investor will generally be able to choose between referring the dispute to arbitration through the International Centre for the Settlement of Investment Disputes (ICSID) or by ad hoc arbitration under the UNCITRAL Arbitration Rules after a certain period of time has elapsed.

The ICSID operates under the authority of the ICSID Convention for the Settlement of Disputes between States and Nationals of Other States, which came into force on 14 October 1966 (Washington Convention).
To date, 145 countries have ratified the Washington Convention and the ICSID has become the pre eminent forum for resolving investor–state foreign investment disputes.  India and Hong Kong, however, are not signatories to the Convention, with the effect that investor–state arbitration under BITs with these countries is governed by the UNCITRAL Arbitration Rules.

The ICSID has become the preferred forum for resolving foreign investment disputes for a number of reasons.  First, an ICSID award is subject to limited review undertaken by a special committee appointed by the ICSID.  Under other international arbitration the highest court of the host state will have jurisdiction to review the award.  Second, signatories to the Washington Convention agree to treat and execute ICSID awards as a final decision from their own courts, with the effect that no special enforcement procedure is required.

Arbitration of ‘any’ dispute

Generally, BITs to which Australia is a party provide that any dispute arising under the treaty may be referred to arbitration.  However, it should be noted that there are some exceptions.  The Australia–China BIT, for example, provides for arbitration only where the dispute relates to compensation for expropriation.

Investor–state arbitration and state–state arbitration

As will be discussed later on, there has been somewhat of a backlash against investor–state arbitration in recent times and a movement towards state–state arbitration dispute resolution clauses.  The Australia–United States Free Trade Agreement (AUSFTA), for example, does not allow direct investor–state arbitration, only state–state arbitration.
White Industries Australia Limited v The Republic of India.

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 BIT.  This is the first known instance of an Australian company successfully claiming under a BIT.  In handing down the arbitral award the tribunal dealt with many of the standard protections and treatment standards contained in BITs and for this reason White v India provides a useful framework through which to discuss the protections offered by BITs.

By way of background, in 1989 White entered into a contract with Coal India Limited for the supply of equipment and development of a coal mine located in Piparwar, India.  Disputes arose between the parties, principally regarding White’s entitlement to bonus payments and Coal India’s entitlement to penalty payments under the contract.  In 1999, those disputes were referred to ICC arbitration pursuant to the contract.  The tribunal awarded White $4.08 million on 27 May 2002 (2002 Award).

Coal India applied to the High Court of Calcutta to have the award set aside on 6 September 2002.  White, unaware of the set aside proceedings, applied to the High Court at New Delhi to have the award enforced on 11 September 2002.
Between 2002 and 2010 what transpired was a protracted and complicated procedural history.
In July 2010, White commenced arbitration against India and was ultimately successful in arguing that the failure of the India courts to deal effectively with White’s enforcement proceedings over the previous decade amounted to a breach of the Australia–India BIT.

Promotion of favourable conditions for investors

Article 3(1) of the Australia–India BIT provides:‘Each contracting Party shall encourage and promote favourable conditions for investors of the other Contracting Party to make investments in its territory.  Each Contracting Party shall admit such investments in accordance with its laws and investment policies applicable from time to time.’
White contended that it required India to take ‘concrete, positive steps in the interests of investors generally’, arguing that at the very least India had the following obligations:

‘(a) to create a suitable governance framework for supervising the action of state owned corporations, including Coal India, in their dealings with investors;
(b) to ensure that its arbitration laws are administered in line with India’s New York Convention obligations; and
(c) to take steps to reduce the backlog of cases in its courts, given the prospect that such backlog must necessarily have significant effect on domestic and international businesses, including investors, as defined under the BIT.’

The tribunal disagreed with White’s contention, holding that article 3.1 lacked sufficient content to be treated as ‘a stand alone, positive commitment giving rise to substantive rights’.  For this reason it is unlikely that an investor will be able to successfully argue that clauses relating to the Promotion of Favourable Conditions for Investors give rise to specific obligations.

Fair and equitable treatment

Article 3(2) of the Australia–India BIT provides:‘Investments or investors of each contracting party shall at all times be accorded fair and equitable treatment.’
Fair and equitable treatment has been interpreted to include the requirement of a stable and predictable legal framework (for example Techmed v Mexico), and to require the host state to act and make decisions consistently and transparently, and in accordance with the legitimate expectations of the investor. Statements made to a foreign investor by a host state (or by officials of the host state) upon which an investor reasonably relies will be relevant to a determination of whether an investor’s expectations are legitimate.

Fair and equitable treatment and international law

According to Ian Brownlie, the fair and equitable treatment provision included in most BITs is part of the bona fide principles of international law that require ‘due process, economic rights, obligations of good faith and natural justice’ to be afforded to investors.  As stated in Mondev International Ltd v United States of America, ICSID Arbitration no. ARB(AF)/99/2, bad faith is not required for violation of these principles, ‘what is unfair or inequitable need not equate with the outrageous or the egregious.  In particular, a state may treat foreign investment unfairly and inequitably without necessarily acting in bad faith’.

In light of this, it has been held that the fair and equitable treatment provision in BITs requires a host state to act in accordance with a foreign investor’s legitimate expectations. In Techmed v Mexico it was stated:
‘act[ing] in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations ... the foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any pre-existing decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial or business activities.’

Where a host state or its officials act intentionally and make unambiguous and repeated assurances to a foreign investor so as to give that investor certain expectations with respect to particular treatment or comportment, W Michael Reisman and Mahnoush H Arsanjani suggest in their article ‘The Question of Unilateral Government Statements as Applicable Law in Investment Disputes’, that the host state is likely to be bound by those assurances and the investor is entitled to rely upon them.  The potentially binding character of unilateral statements by government officials on behalf of their governments has long been recognised at international law.

In White v India, White argued that by entertaining Coal India’s application to set aside the 2002 Award in contravention of the New York Convention (which provides for the recognition and enforcement of foreign arbitral awards), India failed to act in accordance with White’s legitimate expectations. Techmed v Mexico again provides a useful reference point on this subject: The fair and equitable treatment requires a State to provide to international investment treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment.’

White sought to rely on this statement in support of its argument that India was in breach of the fair and equitable treatment provision of the Australia–India BIT.  The tribunal, however, considered that this statement did not represent a standard of conduct but rather, ‘a description of a perfect public regulation in a perfect world, to which all states should aspire but very few (if any) will ever attain’, and went on to endorse the following as the applicable standard:
‘Legitimate expectations about the treatment of investments will arise based on the conditions offered by the host State at the time of the investment.  [Investment treaty] jurisprudence highlights that, to create legitimate expectations, State conduct needs to be specific and unambiguous.  Encouraging remarks from government officials do not themselves give rise to legitimate expectations.  There must be unambiguous affirmation or definitive, unambiguous and repeated assurances.  The conduct must be targeted at a specific person or identifiable group.’

On this basis, the tribunal concluded that because White knew at the time of its investment that awards made (in international arbitrations seated) outside of India were subject to being set aside by the Indian courts, White could not have had a legitimate expectation that India would not do this.

National treatment standard

Article 4(1) of the Australia–India BIT provides:‘Each contracting party shall, subject to its laws, regulations and investment policies grant to investments made in its territory by investors of the other Contracting Party treatment no less favourable than which it accords to investments of its own investors.’This provision was not discussed in White v India but is generally understood to safeguard investors from discriminatory regulations, such as special taxes imposed on foreign investors.

Most favoured national (MFN) treatment clauses

Article 4(2) of the Australia–India BIT provides:‘Each Party shall accord to investors of the other Party Treatment no less favourable that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.’

Article 4(5) of the India–Kuwait BIT provides: ‘Each Contracting State shall maintain a favourable environment for investments in its territory by investors of the other Contracting State.  Each Contracting State shall, in accordance with its applicable laws and regulations, provide effective means of asserting claims and enforcing rights with respect to investments.’

The Australia–India BIT does not contain a provision equivalent to Article 4(5) of the India–Kuwait BIT.  However, the existence of Article 4(2) in the Australia–India BIT meant that White was able to incorporate the more favourable substantive provisions (Article 4(5)) contained in the India–Kuwait BIT into the Australia–India BIT.

It was under this clause that India was ultimately found liable.  The indefinite delay by the Indian courts in dealing with White’s claim amounted to a breach of the effective means standard contained in Article 4(5).
Therefore, while it is clear that MFN clauses may operate to incorporate substantive protections into BITs, the question arises as to whether MFN clauses may be relied on by parties to obtain a procedural benefit, such as the right to a more favourable dispute resolution provision contained in another BIT.  This question was only touched on briefly by the tribunal in White v India, so it is necessary to turn to other cases which have dealt with this aspect of BIT jurisprudence for an answer.

In Maffenxini v Spain ICSID Case No. ARB/97/7, the claimant sought to avoid the requirements of the Argentina–Spain BIT that disputes be submitted to a Spanish court and that a period of 18 months must elapse after the submission is filed before arbitration proceedings can commence.  The claimant argued that the Chile–Spain BIT contained no such requirements so therefore Argentinean investors received less favourable treatment than their Chilean counterparts.  The court agreed, holding that the broad language of the MFN clause contained in the Argentina–Spain BIT meant that the claimant could rely on the more favourable dispute resolution provision of the Chile–Spain BIT.  By way of contrast, in Tza Yap Shum v Republic of Peru ARB/07/6. the tribunal held that MFN clauses did not extend to incorporation of more favourable dispute resolution clauses.

The question of whether an investor may rely on a MFN clause to access more favourable dispute resolution clauses becomes particularly significant in a situation where a country has entered into both first and second generation BITs.  For example, when the Australia–China BIT came into force in 1988, China had a protectionist foreign investment policy, was generally sceptical of international law and placed primacy on state sovereignty.  Since then China has moved towards a more liberal view of foreign investment and this is evidenced in a number of the country’s more recent BITs (e.g. the China–Brunei BIT), which provide greater protection to investors.  This development of the Chinese policy on investment protection is  described by Nils Eliasson in his paper presented at the 2013 APRAG   Conference, as the shift from the first to the second generation Chinese BITs.  If MFN clauses allow investors to incorporate the more favourable dispute resolution clauses, however, this distinction between first and second generation BITs will become unimportant.

Ultimately, the scope of a MFN clause will depend on the language of the particular clause in question.  The Australia–Chile FTA agreement expressly bars MFN clauses from applying to dispute settlement procedures.  Such provisions may be one way of clarifying the extent to which MFN clauses provide protection to investors.

Expropriation and nationalisation

Article 7 of the Australia–India BIT provides:‘Neither Contracting Party shall nationalise, expropriate or subject to measures having effect equivalent to nationalisation or expropriation the investments of investors of the other Contracting Party except for a public purpose, on a non-discriminatory basis, in accordance with its laws and against fair and equitable compensation.’

According to the Shorter English Oxford Dictionary, ‘Nnationalise’ may be defined as ‘to bring under the control of, or to make the property of the nation’ while expropriation may be defined as ‘to dispose of ownership; to deprive of property’.  While cases of direct expropriation by a host country of a foreign investor’s investment are rare, the question often arises for the purposes of pursuing a claim under a BIT as to whether indirect expropriation has occurred.  In White v India the tribunal rejected White’s claim under Article 7.1 but nevertheless outlined the test for determining whether an indirect expropriation has taken place: ‘[H]as there been a substantial deprivation of the investor’s right in the investment?’.  Current case law reveals that the exact line between what is and what is not indirect expropriation is yet to be defined.
The extent that BITs protection against expropriation will be discussed further in the Phillip Morris v Australia case study below.

Free transfer of funds

Article 9 of the Australia–India BIT provides:‘Each Contracting Party shall permit all funds of an investor of the other Contracting Party related to an investment in its territory to be freely transferred, without unreasonable delay and on a non-discriminatory basis.’
This provision was only briefly touched upon in White v India and is generally understood to protect an investor’s right to repatriate earnings, profits and capital back to their home country.

Indirect expropriation: Phillip Morris v Australia

In JT International SA v Commonwealth; British American Tobacco Australasia Ltd (ACN 002 717 160) and Others v Commonwealth [2012] HCA 43, the High Court rejected the constitutional challenge to Australia’s plain cigarette packaging legislation brought by British American Tobacco, Japan Tobacco and Phillip Morris.  French CJ, Gummow J, Hayne J, Crennan J, Kiefel J and Bell J (Heydon J dissenting) dismissed the tobacco companies’ argument that the Tobacco Plain Packaging Act 2011 (Cth), breached section 51(xxxi) of the Constitution, which provides for ‘acquisition of property on just terms from any State or person for any purpose in respect of which Parliament has power to make laws’.
In short, the majority held that the Tobacco Plain Packaging Act 2011 (Cth) did not confer a proprietary benefit or interest on the Commonwealth or any other person but instead merely regulated the plaintiffs’ intellectual property rights and imposed controls on the packaging of tobacco products.  For this reason neither the Commonwealth nor any other person acquired property and as a result section 51(xxxi) was not engaged.

Following that decision the tobacco companies were left with no recourse against the legislation other than to challenge it under international law.  To date Phillip Morris has commenced proceedings under the World Trade Organisation multilateral trade agreements and under the Hong Kong–Australia BIT, essentially arguing that the legislation amounts to an indirect expropriation of its investment.

By Notice of Claim dated 22 June 2011 and the Notice of Arbitration, Phillip Morris Asia Limited (Phillip Morris) commenced proceeding against the Commonwealth of Australia in the International permanent court of Arbitration under the Australia–Hong Kong BIT alleging that the:
‘plain packaging legislation bars the use of intellectual property on tobacco products and packaging, transforming [the Claimant’s wholly owned subsidiary] from a manufacturer of branded products to a manufacturer of commoditized products with the consequential effect of substantially diminishing the value of [the Claimant’s] investment in Australia.’
Phillip Morris seeks an order that the Respondent:
‘(i) take appropriate steps to suspend enforcement of plain packaging legislation and to compensate [the Claimant] for loss suffered through compliance with plain packaging legislation; or (ii) compensate [the Claimant] for loss suffered as a result of the enactment and continued application of plain packaging legislation.’
The amount in dispute is described in the Notice of Arbitration as ‘an amount to be quantified but in the order of billions of Australian dollars’.

Effect of the decision

If Phillip Morris is successful it could jeopardise Australia’s ability to determine its own public policy by creating a precedent for large and influential multinational companies to have influence on the law?making ability of a country that has entered into BITs.  Governments should bear in mind that a country may breach a BIT through changes in the legal framework which affect the investments of foreign investors.  Indeed such claims have been mooted in relation to the emission trading scheme and the resources rent tax but are yet to be tested in the courts.

The effect of the claim brought by Phillip Morris is already being felt.  In April 2011, the Australian Government had already released a policy statement indicating that it would no longer include investor?state dispute resolution provisions in BITs or FTAs with developing countries.  This policy change was largely a reaction to the Philip Morris arbitration which the government considers a threat to Australia’s sovereignty over its health policy.

Rejection of investor–state arbitration: the policy debate

As evidenced by the above case studies, BITs provide potentially very wide protections to investors, and a breach of such protection provisions will generally entitle an investor to commence investor–state arbitration.  This gives people that are considering investing in a foreign country comfort that their investments will have a sufficient measure of legal protection.
In announcing that BITs and FTAs entered into by Australia would no longer include investor–state arbitration, Australia became the first developed country to join the backlash against such dispute resolution clauses. 

The Gillard-Rudd Government raised a number of concerns regarding investor–state arbitration, including the recognition that BITs and FTAs may have the effect of conferring greater legal rights on foreign investors than Australian businesses and that investor–state arbitration erodes Australia’s ability to determine its own public policy, particularly in relation to health and environmental protections.  Nevertheless, it is submitted that such concerns could be addressed by including modified investor-state arbitration clauses that provide appropriate exemptions for matters such as health and environmental policy.

The policy change will also have negative effects.  Australian investors could be left without an adequate legal mechanism to protect their overseas investments.  Without an effective means of enforcing the protections provided by BITs, such protections may prove to be largely illusory.  Without recourse against the host country an investor’s only remedy is to request its own government to take diplomatic action or commence proceedings in the host country’s courts.

The debate surrounding investor–state arbitration will no doubt continue.  Recently appointed Attorney-General George Brandis made comments (when shadow Attorney-General) describing the policy against investor-state arbitration as ‘curious’.  In the meantime, investor–state arbitration clauses will continue in BITs that are already in effect.  Interestingly, if MFN clauses incorporate more favourable dispute resolution provisions, the government’s policy change may be of little consequence for years to come.

In any case, given that the world is coming to Australia to invest in everything from mining to infrastructure, tourism, clean energy, agribusiness and services, it would be pertinent for Australia to have a clear understanding of its current obligations under the 21 BITs that it has entered into. 

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:

(a) Australia has not entered into a BIT;
(b) a BIT has been signed but has not yet entered into force
(c) 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.

By way of example, an Australian investor may wish to invest in Brunei.  Australia has not entered into a BIT with this country, however, China has.  If the Australian investor were to incorporate a holding company in China and then channel their investment in Brunei through the holding company, the Australian investor would be afforded protection under the China–Brunei BIT.

Alternatively, an Australian investor wishes to invest in China.  The Australia–China BIT contains a limited dispute resolution clause and for this reason an investor may consider channelling their investment through a holding company in India as the China–India BIT provides for arbitration of ‘any dispute’.  In doing so, an investor would not have to concern themselves with the question of whether the protection afforded by MFN clauses extends to incorporating more favourable dispute resolution clauses.

Such arrangements have been upheld by arbitral tribunals as long as the holding company fulfils the definition of ‘investor’ under the applicable BIT.  In the above example of an Australian investor wishing to invest in Brunei, the China–Brunei BIT defines ‘investor’ to include ‘a company that is incorporated under the law of a third country but is owned or controlled by an entity or national of a contracting party’.  However, it should be noted that some BITs expressly exclude this phrase from the definition of investor.
Another option to channelling the investment though a company incorporated in a country with which Australia has entered into a BIT is to include adequate investor protection clauses into the investment contract.

In summary, the issue of protecting investments should be considered and addressed before investing abroad and smart investors will recognise the potential of BITs in this regard.

BITs and developing countries

The long slow journey towards the end of poverty is speeding up.  The facts and figures outlined recently by Bono for TED speak for themselves.  Since the turn of the century more than eight million more people have received AIDS treatment, deaths from malaria have reduced by 75%, child mortality is down by 2.65 million per year and the percentage of the world’s population living in extreme poverty has reduced from 43% in 1990 to 21% in 2010.  In modern times, the biggest hurdle facing the end of poverty is not lack of means but corruption.  And it is in the fight against corruption that

BITs may prove to be a useful tool.

The protection and comfort that BITs give to foreign investors means that such treaties have the potential to be an engine of economic growth, employment and rising living standards in the developing world.  In the absence of a BIT, an investor investing in a developing nation has no protections other than those offered by the domestic (and often corrupt) legal system of that country.  As such nations often have less than stable political environments, investors have often been reluctant to direct their money towards the developing world.

Where an investor’s home country has entered into a BIT with a developing nation, the investor will be able to seek redress through arbitration, usually at the ICSID, and this should provide a certain level of comfort to investors.  While with any dispute involving a nation with a less than stable government automatic adherence to an award of the ICSID (or any arbitral award for that matter) cannot be guaranteed, there are a number of mechanisms which can be used to ensure compliance with an award.  An example of this is the influence of the World Bank. 

As the ICSID is a member of the World Bank Group of international organisations, they may utilise the influence of the World Bank to secure payment of an award.  This influence has been used in the past when the Bank, after being informed of a delay in paying an award, reminded the debtor of the importance of prompt payment and hosted post-award settlement discussions.  It has also been suggested by Antonio Parra in his paper ‘the Enforcement of ICSID Arbitral Awards’, at the 24th Joint Colloquium on International Arbitration November 2007, that the Bank may refrain from making new loans to a member country is cases of extreme expropriation, however such measures have so far not been required in connection with an ICSID arbitral award, as in almost all cases the respondents have discharged their payment obligations.

With the re-election of President Robert Mugabe of Zimbabwe in July 2013, the Zimbabwean government announced plans to seize control of foreign-owned mining interests with no compensation in return as part of a program to accumulate assets worth US$7 billion.  However, Zimbabwe is party to a number of BITs, with countries including China, the Czech Republic, Denmark, Germany, the Netherlands and Switzerland.  Investors who can bring themselves within the protection of these treaties are afforded a greater level of protection than those who cannot.  Indeed, successful claims for expropriation under BITs have been brought against the Zimbabwean government in the past.
BITs stabilise the investment climate in developing nations by granting protection to foreign investors and the study by Eric Neumayer and Laura Spess suggests that,  BITs raise the foreign direct investment that flows into a developing country, thereby promoting the economic prosperity of that nation.

Conclusion

For investors, BITs provide protection to those investing aboard. For Australia, BITs help promote foreign direct investment in the nation.  Globally, BITs provide an effective means of resolving international investment disputes, and by stabilising the investment climate in developing nations may prove to be a mechanism by which economic growth and living standards in such countries are enhanced.

While attempts by big tobacco companies to use BITs to sure up their ability to continue providing their products to the masses raises legitimate concern over Australia’s ability to determine its own public policy, the overwhelming benefits of BITs cannot be overlooked.  Rather than declining to include investor–state clauses in future BITs and thereby risking the possibility that the protections and benefits provided by BITs become illusory, perhaps a better approach would be to include wide public health and environmental exceptions in future BITs.

Russell Thirgood is the Head of Arbitration and partner of McCullough Robertson Lawyers. Lawyers Monthly awarded McCullough Robertson the 2013 prize for Best Arbitration and Litigation Law Firm – Australia.  McCullough Robertson Lawyers is independent and not aligned to any global law firm.The author gratefully acknowledges the assistance in the preparation of this paper by Erin Lewis, research clerk of McCullough Robertson Lawyers.