22 July 2021
On 9 March 2021, the new Singapore-Indonesia bilateral investment treaty (“the BIT”) entered into force. The BIT contains a number of significant features that will likely permeate into the overall ongoing efforts towards the modernization of international investment agreements (“IIAs”). The BIT was negotiated and concluded following Indonesia’s declaration in 2014 that it intended to terminate and replace its more than 60 BITs.
The BIT has replaced the previous 2005 agreement between the two countries, which expired in 2016. The entering into force of the BIT is of particular importance for investors since Singapore has been Indonesia’s main source of foreign direct investment in the last number of years and Indonesia was one of Singapore’s top ten trading partners in 2020.
Main characteristics and notable features
A key feature of the BIT is that it requires that a holding company of the other State (which is owned or controlled by a person of a third party state or the host State) have substantive business operations in the company’s home State in order to be afforded protections under the BIT. This ‘denial of benefits’-type provision has increasingly been seen in IIAs, as an effort to prevent treaty shopping.
The BIT provides for the usual standards of protection, including fair and equitable treatment, national treatment, most-favoured-nation (“MFN”) treatment, and protection against unlawful expropriation.
However, the BIT also contains important qualifications in relation thereto. For example, Article 5 expressly excludes procedures for the settlement of disputes from the scope of the MFN provision and it makes clear that substantive obligations in other IIAs do not constitute “treatment” if no measure has been adopted based on such obligations. Also, the MFN provision does not extend to investment agreements which were signed or which entered into force before 9 March 2021, clearly indicating the intention of the Contracting Parties to avoid having provisions of ‘older generation’ BITs brought into application under the BIT. Similarly, provisions within agreements with third party states or parties in the same geographical region which promote economic, industrial or monetary fields within the framework of specific projects would not be accorded on the basis of the MFN provision.
In relation to expropriation, Article 6 includes details regarding valuation criteria and the explicit exclusion from any valuation of any speculative or windfall profits claimed by the investor. In turn, Annex II (which is worded similarly to the relevant annex in the EU-Singapore Free Trade Agreement) further clarifies the definition of indirect expropriation.
The BIT also contains specific carve-outs in relation to matters such as taxation. However, under the BIT, Article 6 (on expropriation) will apply to taxation measures qualifying as expropriatory. Nevertheless, in order to invoke Article 6 in such context, the investor will have to first seek the involvement of the competent tax authorities in accordance with the BIT. In addition, the BIT excludes the provisions on expropriation from applying to the issuance of compulsory licenses granted in relation to intellectual property (“IP”) rights in accordance with WTO rules, a topic that has since become particularly relevant in the context of the protection of IP rights of pharmaceutical companies as a result of the Covid-19 pandemic.
It is worth noting that the BIT, in a footnote to Article 1, also expressly excludes judgments or arbitral awards from qualifying as “investments”.
The BIT, contrary to its predecessor, also provides for enhanced regulatory space in cases of financial crises, exceptional capital movement threatening macroeconomic management, and serious balance of payment difficulties. This is in line with other provisions reaffirming the States’ right to regulate in areas such as public health, the environment and privacy and data protection. In the event that a host State imposes restrictions on capital movement, it must promptly notify the other State party and upon the latter’s request, the host State must agree to a consultation to review the measures.
Also now present in the BIT are provisions addressing corporate social responsibility and corruption. Although these provisions represent encouraging statements, they do not contain any specific legal obligations either for the States or the investors.
Investor-State Dispute Settlement (“ISDS”): a novel feature
The BIT provides for a multi-tier ISDS system, which combines voluntary mediation and mandatory consultations followed by arbitration before ICSID (provided that Singapore and Indonesia are parties to the ICSID Convention, which they currently are) or under the UNCITRAL Arbitration Rules or any other arbitration rules as agreed by the parties. Under the BIT, the investor must wait one year from the moment in which consultations are requested before it can submit an arbitration claim. The BIT also requires that a dispute be submitted to arbitration within three years from the moment that the disputing investor became aware, or should have reasonably been aware, of a breach of an obligation under the BIT causing loss or damage to the investor.
A notable feature of the BIT is contained in Article 24, which allows (only) the investor to request the tribunal to make the draft award on liability available to the disputing parties for comments. The tribunal shall then ‘consider’ such comments in issuing its final decision. Although a provision of this type can also be found in other IIAs (e.g., the Singapore-Myanmar BIT of 2019), it remains to be seen how tribunals will apply it and what the impact may be (on, e.g., annulment or enforcement proceedings) of, for example, tribunals dismissing the parties’ comments to the draft award.
Importantly, Article 18 requires any externally-funded party to disclose the name and address of the third-party funder. Additionally, in relation to costs, the BIT specifically provides that, absent exceptional circumstances, the costs of the proceedings shall be borne by the losing party. Interestingly, Article 26 allows the host State to request the tribunal to order the investor to post security for the costs of the arbitration, without expressly providing the investor with the same right. It appears that this provision, coupled with the third-party funding disclosure obligation, might have been introduced to discourage speculative claims by investors and address the risk of the State not being able to recover its legal costs against an unsuccessful investor.
Relationship with the ASEAN Comprehensive Investment Agreement (“ACIA”)
Finally, it is relevant to note that the BIT complements the ACIA of 2009 to which both Singapore and Indonesia are a party. For example, the BIT stipulates that if other international agreements afford investors a more favourable treatment than that contained in the BIT, such more favourable position will not be affected by the provisions of the latter.
The official text of the Singapore-Indonesia BIT is available here, in English.
For further information, please contact:
Jelita Pandjaitan, Partner, Linklaters
jelita.pandjaitan@linklaters.com
