The Joint Standing Committee on Treaties (“JSCOT“) of the Australian Parliament has just released Report No. 186 examining three treaties: the Free Trade Agreement between Australia and Hong Kong, China (“HK-FTA“), the Investment Agreement between the Government of Australia and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (“HK-Investment Agreement“) and the Comprehensive Economic Partnership Agreement between the Government of Australia and the Government of Indonesia (“IA-CEPA“).  We have previously discussed the Hong Kong treaties in detail here and the IA-CEPA here.

The JSCOT’s role is to carry out a review of treaties to determine whether they are in Australia’s national interest. The JSCOT has concluded that each of these treaties are in Australia’s national interest and has recommended that “binding treaty action be taken as soon as possible.”  The treaties will now go before parliament for ratification.

JSCOT’s review process

This is a comprehensive process.  The JSCOT considers the Australian Government’s own assessment of each treaty’s merit (this is called the Australian Government’s “National Interest Analysis”) and also takes into account submissions which concern all aspects of the treaties.  Five public hearings were held in Melbourne, Sydney, Perth and Canberra.[1]  The JSCOT has heard from industry groups, academics, unions and other members of the public.

The ISDS ‘risk’?

There has been public concern in Australia (as elsewhere) about treaty mechanisms which enable arbitration proceedings to be commenced by investors against states (this is called “investor-state dispute settlement” or “ISDS”).  Some critics have argued that the ISDS system exposes the Australian government to an unjustified risk of costly and time-consuming arbitration proceedings being commenced against Australia by investors.

The JSCOT heard evidence for and against ISDS but was ultimately satisfied that the ISDS mechanisms in both the IA-CEPA and HK-Investment Agreement were not against the national interest.  The JSCOT observed that “it was repeatedly pointed out to the Committee that Australia has been a party to ISDS provisions for a considerable time and has not been subject to successful litigation.[2]  As one submission identified “neither of the claims against Australia was successful.  Philip Morris lost their case and costs were awarded against the company.[3]  The JSCOT also noted that “empirical evidence suggested that ISDS provisions increased bilateral investment flow.[4]

The short point is that the JSCOT appears to conclude that the risk of Australia being involved in and suffering loss as a result of meritless or frivolous claims by foreign investors is overstated.

Carefully crafted carve-outs

Both treaties contain a number of noteworthy carve-outs.  These carve-outs seek to limit the scope of claims that can be brought by investors against the states in respect of certain legislative or regulatory measures. They should therefore address concerns held by some about ISDS.

The IA-CEPA contains a carve-out which restricts investors from pursuing a claim relating to measures that are “designed and implemented to protect or promote public health.” A general exceptions clause further provides that claims cannot be made with respect to measures taken by the state parties to protect the public interest in sensitive sectors, such as education, indigenous rights, the promotion of essential security and certain taxation measures, provided that such measures are not arbitrary, discriminatory or a disguised restriction on investment.

The HK-Investment Agreement contains similar general carve-out provisions, but goes further by exempting specific measures including tobacco control measures and, in Australia’s case, measures relating to the Medicare Benefits Scheme, Pharmaceutical Benefits Scheme, Therapeutic Goods Administration and Office of the Gene Technology Regulator.

The impetus for the ‘tobacco carve-out’ in the IA-CEPA was Australia’s involvement as the Respondent state in an investment arbitration brought by Philip Morris in 2011 under the Australia-Hong Kong BIT, which challenged Australia’s introduction of plain packaging legislation.

It is interesting that the specific ‘tobacco carve-out’ has been included in the A-HKFTA but not in IA-CEPA.  Having considered expert evidence, the JSCOT concluded that it does not matter that the IA-CEPA has no tobacco carve-out on the basis that tobacco control measures would be covered under the general exceptions provision.[5]

Overlap with existing bilateral investment treaties

There are existing bilateral investment treaties between Australia and Hong Kong (the “Aus-HK BIT“) and between Australia and Indonesia (the “Aus-Indo BIT“).   The JSCOT noted: “the [Aus-HK BIT] will terminate with the introduction of the new investment treaty, while there is no proposal to terminate the [Aus-Indo BIT].  This has raised concerns over the overlap between the existing [Aus-Indo BIT] and the ISDS provisions in the [IA-CEPA].”

The JSCOT recommends that the Aus-Indo BIT should be terminated and that the ‘sunset clause’ (also known as a ‘survival clause’) in the Aus-Indo BIT should also be terminated.  The ‘sunset’ clause permits claims to be brought by investors for a period of 15 years following the termination of the Aus-Indo BIT.

As it stands, the termination of the Aus-Indo BIT seems to have bipartisan support.  The Australian Labor Party has indicated that it will push the coalition government to terminate the Aus-Indo BIT.  Trade Minister Simon Birmingham has indicated that he was not opposed to it and that the Australian Government “should be able to work through that issue.

What next?

The next stage is for the Australian Parliament to decide whether to pass legislation implementing the treaties in domestic law. This seems likely given that both major political parties have indicated that they support the treaties.

What should you do if you are an investor with a potential claim against Indonesia, Australia or Hong Kong?  The short point is that you need to carefully consider now whether that claim could be lost or affected due to the termination (and replacement) of the Aus-Indo BIT or the Aus-Hong Kong BIT.

 

[1] Para 1.10.

[2] Para 4.47.

[3] Para 4.48.

[4] Para 4.51.

[5] Paras 4.55-4.56.

 

Brenda Horrigan
Brenda Horrigan
Partner and Head of International Arbitration (Australia), Sydney
+61 2 9225 5536
Antony Crockett
Antony Crockett
Senior Consultant, Hong Kong
+852 2101 4111
Mitchell Dearness
Mitchell Dearness
Associate, Singapore
+65 6868 8061

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary.