AUSTRALIAN UPDATE – Protection of Foreign Investment in Australia
- Australia has entered into a number of investment treaties with other nations to reduce sovereign and political risks for foreign inbound and outbound investments.
- Typical treaty protections include protection against uncompensated expropriation, rights to fair treatment, protection against physical harm and non-discrimination.
- Modern investment treaties commonly allow foreign investors to sue the host state directly without the need to apply to their home state to vindicate their rights (investor-state provision). The Australian government has announced that it intends to discontinue this practice and the most recent free trade agreement, concluded by Australia (with Malaysia) signed on 22 May 2012, does not contain such investor-state provisions. Existing investment treaties containing investor-state provisions will continue to be enforceable.
- Investors may also wish to consider structuring investments through an Australian subsidiary to take advantage of treaty protections for investment into riskier countries e.g. by investing through Australia into Myanmar and taking advantage of the ASEAN Australia-New Zealand Free Trade Agreement.
Investing in a foreign country carries with it a certain amount of sovereign and political risk: the government of the day may change and may introduce measures (regulatory, tax or otherwise) which negatively affect foreign investors’ investments. This is true even where the host state is a sophisticated, “developed” country such as Australia.
In order to protect foreign investors from this sovereign risk and to attract foreign investment, Australia has entered into a number of investment treaties with other states.
Those investment treaties (bilateral investment treaties and other multi-national treaties) provide minimum standards which Australia has to observe when dealing with foreign investments and, in some cases, allow the investor to seek redress directly against the Australian government where a violation of these standards has occurred. Foreign investors can benefit from these rights if they are a national of a state with which Australia has entered into such an investment treaty. (Generally, a national of the foreign state is any natural or legal person (i.e., company) of that other state. The protection is reciprocal, i.e., Australian investors into the other contracting states will be afforded the same protections.)
Australia has entered into bilateral investment treaties with 22 states comprising Argentina, Chile, China, the Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Sri Lanka, Turkey, Uruguay and Viet Nam. In addition, Australia has entered into Free Trade Agreements which include investment protection provisions with the ASEAN countries and New Zealand, the United States of America, Malaysia and Singapore.
Substantive rights of investors into Australia
The minimum standards of protection included in those treaties typically are:
- Protection against (uncompensated) expropriation. This includes direct expropriation (ie the taking of investors’ property) by the state, but also includes indirect expropriation where the taking is not outright, but government measures have the indirect effect of rendering the investments useless. This is an absolute right, a standard not dependent on what is given to nationals of the host state;
- Right to fair and equitable treatment. This is a wide standard providing the investor with a right to be treated with good faith and without abuse of government power. This is also an absolute right;
- Right to full protection and security. This right requires the host state to exercise due diligence to protect foreign investors and investments from physical harm. This is also an absolute right;
- Right to national treatment. It prohibits the discrimination of foreigners in favour of nationals of the host state. It is a contingent right dependent on the protection given to national investors of the host state or other foreign investors; and
- Right to most-favoured nation treatment. This obligation prohibits the discrimination of investors from one foreign country in favour of investors from another country. This is another contingent right dependent on the rights given to other foreign investors.
If there is a breach of a treaty obligation, the standard for compensation and damages is typically ‘prompt, adequate and effective’ compensation.
Assertion of these rights
Obligations imposed on states through international treaties can generally only be enforced against that state by other contracting states. In principle, a state cannot be sued by a private person of another state. To give investment treaties more force and to encourage foreign investment further, modern investment treaties contain provisions which allow foreign investors to sue the host state directly without the need to apply to their home state to vindicate their rights. This is achieved by including a provision in the investment treaty through which each contracting state submits to the jurisdiction of international arbitral tribunals should an investor seek to make a claim against the host state for breach of any of the treaty obligations.
To assist with the administration of the resulting arbitration 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. Australia and over 140 other states are signatories to the ICSID Convention to date. Australia’s bilateral investment treaties of the 1990s and early 2000s contain investor-state-dispute resolution provisions.
Thus, if there is a relevant investment treaty, investors can initiate an arbitration against Australia even where there is no direct contract between the investor and the government of Australia in the underlying transaction. The only prerequisite is that the investor is a national of a state with which Australia has entered into a relevant investment treaty and that there is a relevant ‘investment’ pursuant to that treaty.
Unfortunately, the current government is seeking to put some limits on access to this dispute resolution process. In April 2011 the Gillard Government announced that it will discontinue the practice of including investor-state dispute resolution provisions in trade agreements. As a result, the most recent free trade agreement concluded by Australia (with Malaysia) signed on 22 May 2012 does not contain any investor-state dispute resolution mechanism.
Existing investment treaties containing these provisions will however continue to be enforceable. Hence, foreign investors will still be able to benefit from the investment treaty protections within existing agreements if they are a national of a relevant state. Investors may also want to structure investors through an Australian subsidiary to take advantage of treaty protections for investment into riskier countries e.g. by investing through Australia into Myanmar and taking advantage of the ASEAN Australia-New Zealand Free Trade Agreement.