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15 July, 2019
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What you need to know
Australia and Hong Kong signed the Australia-Hong Kong Free Trade Agreement (FTA) and associated Investment Agreement (IA) on 26 March 2019.
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Introduction
The Liberal-National Coalition Government was recently re-elected in Australia making it increasingly likely that the Australia-Hong Kong FTA and associated IA, which was signed in March of this year, will be ratified by Australia. Once the FTA and IA are in force, the existing BIT, which has been in place since 1993, will terminate.
This update builds on our previous note on the FTA, which detailed the liberalised trade rules that would be implemented if it is ratified and outlines the impact the IA would have on investors in each jurisdiction. In particular, we identify where the degree of protection provided to an investor under the IA appears to be narrower than that which is currently provided for under the existing BIT, so that investors in both jurisdictions can consider the protections that will be afforded to their investments going forward.
Restriction on types of disputes
The IA prohibits claims from being brought in respect of healthcare and tobacco products. The carve-out relating to tobacco seems to have arisen out of Australia's experiences in the arbitration brought against it by Philip Morris challenging the introduction of the Tobacco Plain Packaging Act 2011 (Cth) under the Australia-Hong Kong BIT in 2011. Philip Morris moved its Australian investments to Hong Kong immediately before the enactment of the Tobacco Plain Packaging Act 2011 (Cth) in order to bring the arbitration proceedings against Australia. The arbitration was ultimately dismissed as an abuse of process.
The reasoning behind the carve-out in respect of healthcare reflects concerns that host jurisdictions should be able to regulate healthcare in the public interest without the risk that investors will challenge any laws relating to domestic policies.
The IA also largely excludes claims in respect of taxation measures, except where those measures represent expropriation or certain types of transfers going in and out of the area.
The scope of protections offered
Definition of investor
"Investor" is defined more narrowly under the IA than under the BIT. In the IA, "Investor of a Party" includes a reference to being an "enterprise of a Party" which has "substantial business activities" in the area from which it claims nationality (i.e. Australia or Hong Kong). "Substantial business activities" is not defined and its interpretation will be a question of fact. On the face of it, however, it appears this would exclude shell companies, meaning that investors can potentially no longer easily restructure their companies to take advantage of the treaty without also undertaking business activities in each jurisdiction. As mentioned above, Philip Morris had sought to bring a claim against Australia under the BIT by restructuring its company. It is likely that this experience will have informed Australia's approach in adopting a more narrow definition of "Investor" for the purposes of the IA.
Most favoured nation and national treatment
The IA extends to investors the usual protection that each party will provide treatment "no less favourable" than it accords to its own investors and their investments (Article 4), as well as investors and investments of any non-Party (Article 5) (a Most Favoured Nation, or "MFN" clause).
In relation to the MFN clause, the IA differs from the BIT by expressly prohibiting investors from bringing a claim on the basis that another bilateral or multilateral agreement contains more favourable rights or obligations. Claims can only be brought challenging measures of a party, including measures taken in accordance with another bilateral or multilateral agreement on the basis that such measures breach the MFN clause and have resulted in loss or damage to the claimant's covered investment.
The purpose of this wording is to prevent claims being brought in circumstances where host jurisdictions have not taken measures which would breach their MFN obligations and where the claimant has not suffered any loss or damage.
Fair and equitable treatment
On the face of it, the fair and equitable treatment (FET) clause under the IA is similar to the BIT and provides that "each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security"(Article 8(1)).
Where the IA differs from the BIT is that it narrows the potential scope of this clause by adding that, "the concepts of "fair and equitable treatment" and "full protection and security" do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens … and do not create additional substantive rights" (Article 8(2). Such clarifying language addresses concerns that FET clauses can be interpreted to impose additional obligations to those required by the "the minimum standard of treatment" under customary international law.1
The FET clause under the IA provides further guidance that "fair and equitable treatment" includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process (Art. 8(2)(a)) and "full protection and security" requires each party to provide the level of police protection required under customary international law (Article 8(2)(b)).
Expropriation
Article 10 provides that neither party shall expropriate an investment, either directly or indirectly, through measures equivalent to expropriation, except for a public purpose, in a non-discriminatory manner, on payment of compensation, or in accordance with due process of law. This protection is similar to that which is contained in the BIT.
Settlement of disputes – UNCITRAL rules for arbitration
The IA provides for arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules. Parties may, however, choose to agree to any other arbitral institution or arbitration rules (Article 24(3)). Unless the parties agree otherwise, the tribunal will comprise three arbitrators (one appointed by each of the parties, and a third – the presiding arbitrator – appointed by the agreement of both parties) (Article 28). The Secretary-General of the Permanent Court of Arbitration at The Hague will serve as the appointing authority for arbitrations (under the BIT this was the President of the International Court of Justice in his/her personal or individual capacity).
If a tribunal has not been constituted within 75 days after a claim is submitted to arbitration, the Secretary-General will, upon the request of a party, appoint the arbitrator(s), taking into account the expertise and experience of the candidates regarding public international law, international investment law or the resolution of disputes under international investment agreements (Article 28(3)). If the dispute relates to financial services, all arbitrators must have expertise or experience in financial services law or practice (Article 25(1)).
Types of relief
The IA restricts the type of relief that can be awarded by an arbitration tribunal to, separately or in combination, only (a) monetary damages and any applicable interest; and (b) restitution of property, in which case the award shall provide that the respondent may pay monetary damages and applicable interest in lieu of restitution (however, interim relief is also available). By contrast, there are no such restrictions under the existing BIT.
Conclusion
As currently drafted, the more restrictive protections offered under the IA appear to follow a global trend of states choosing more limited investment protections in relation to their investment treaty arrangements. For example, India, Indonesia, Venezuela, Bolivia, Ecuador and South Africa have all recently terminated BIT agreements, the Netherlands has sought to restrict investor protection with its new model BIT and the United States, Mexico and Canada have renegotiated NAFTA with more restrictive protections (yet to be ratified).
Having said that, some of the narrower aspects of the IA have ostensibly been designed to deal with concerns that Australia legitimately had following the commencement of the Philip Morris arbitration. On balance, investors should welcome the liberalised trade rules between the two jurisdictions which will probably come into force soon, but, as always, remain conscious of the types and scope of the protections that will be afforded to their investments going forward.
1. For example, a tribunal found that "fair and equitable treatment" in the Spain-Argentina BIT required a higher treatment and was not limited to the minimum standard (Teinver SA and others -v Argentine Republic (ICSID Case No. ARB/09/1).
For further information, please contact:
James Comber, Partner, Ashurst
james.comber@ashurst.com
