Australia: new government may lead to opportunities for investor/state arbitration

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This autumn, the people of Australia elected a new federal government, presenting a number of potential opportunities for investor-state arbitration in Australia.

First, the new government has reviewed its position with respect to the inclusion of investor-state dispute settlement clauses in investment treaties.

Second, the government proposes to repeal the Clean Energy Act 2011 (containing Australia’s Carbon Pricing Mechanism), a change with the potential to give rise to some investor/state disputes.

Investor-state dispute arbitration clauses

The previous government had ruled out supporting ISDS clauses in investment treaties when such a clause allowed Phillip Morris Asia Limited (a Hong Kong subsidiary of Phillip Morris) to commence an investor-state arbitration against Australia in relation to its introduction of plain-packaging legislation for tobacco products. At that time, while discussing negotiations regarding the Korean Free Trade Agreement, then Trade Minister Craig Emerson stated that it was "the policy of [the] government not to have ISDS provisions in agreements, whereby a foreign corporation can take the Australian government … to an international jurisdiction under a trade deal".[i]

The new government has overturned the blanket ban on ISDS clauses, having recently concluded negotiations for a free trade agreement with the Republic of Korea (Korean FTA). In details released on 5 December 2013, the Korean FTA includes an ISDS clause with carve-outs in areas such as public welfare, health and the environment. The text of the Korean FTA has not yet been released, however, the concluded negotiations will now go to the cabinet for final consideration.

The new government is also considering using ISDS clauses as part of Australia's negotiation position for the Trans-Pacific Partnership, which aims to reduce barriers to trade and investment in the Asia-Pacific region. The new Assistant Treasurer, Arthur Sinodinos, indicated that ISDS clauses could be included. Discussing ISDS clauses, Mr Sinodinos stated that "you enter into international trade agreements when you believe … the benefits exceed the costs. You don't do it in order to reduce your own country's sovereignty… you have to balance all the potential benefits you get from that agreement against potential costs and see where the balance lies".[ii]

There is merit in ISDS clauses being included in future agreements, whether it be the Trans-Pacific Partnership or separate investment treaties, because the clauses promote and protect the investment flows that underpin economic growth. However, the clauses must strike a balance between state sovereignty and investor protection. The new government, sensibly, appears to recognise this, having included an ISDS clause in the Korean FTA.

It is unclear whether the new government will include ISDS clauses in all future investment treaties. Indeed, the new government might take a bespoke approach to each investment treaty, balancing whether the benefit to Australian investors outweighs the risk to Australia itself. Perhaps Mr Sinodinos summed it up best when he said, "Watch this space". [iii]

Proposed repeal of the Carbon Scheme

In October 2013, the new government released draft legislation which, if passed, will repeal the Carbon Pricing Mechanism. The Carbon Pricing Mechanism is the Australian emissions trading scheme that puts a price on carbon pollution by Australia's biggest carbon emitters.  At present, the Carbon Pricing Mechanism is in its initial fixed price phase. From 1 July 2015, the Carbon Pricing Mechanism was scheduled to move to a flexible price determined by the market (similar to the EU Emissions Trading Scheme).

If the new government were to pass the legislation that repeals the Carbon Pricing Mechanism during the initial fixed price phase, its intent will have been to limit the mechanism's impact upon business.  However, secondary market arrangements between private investors might already have been entered into based upon the Carbon Pricing Mechanism, and its repeal might therefore result in claims for compensation from the government, including claims made by way of investor-state arbitration if the investor is resident in a country that is party to a bilateral investment treaty with Australia.

For example, a Hong Kong company that invested in Australia in connection with the Carbon Pricing Mechanism might have rights under the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments. That would depend on whether its investment fell within the scope of the treaty (e.g., shares in a green technology company or an instrument in the secondary market for the Carbon Pricing Mechanism) and whether relief is available under the treaty (e.g., if the repeal is found to be unreasonable or equivalent to expropriation of the investment).