News in Brief

Australia changes position on investor-state arbitration in free trade agreement with Korea

The Australian government has agreed to investor-state arbitration in the investment chapter of a free trade agreement with Korea, abandoning the position of the previous government which had made a decision not to sign up to such commitments.

The deal, signed in December but not yet public, concludes negotiations that began in 2009.

The previous Labor-led coalition committed to rejecting investor-state dispute resolution in 2011. The government justified the policy on the basis of not allowing “greater rights” to foreign investors and maintaining its “ability to impose laws that do not discriminate between domestic and foreign businesses” to protect the public interest.

That position hardened when Philip Morris, the tobacco company, sued Australia under the Hong Kong-Australia bilateral investment treaty over legislation that limits branding of tobacco products.

However, the new Liberal-National coalition has said it would take a more flexible approach to investor-state arbitration, considering it on a case-by-case basis.

In the new agreement with Korea, the Australian government said that it “has ensured the inclusion of appropriate carve-outs and safeguards in important areas such as public welfare, health and the environment.” The text of the agreement was not public as ITN was going to press, so it was not possible to verify the nature of those carve-outs and safeguards.

Investor-state arbitration has proven divisive in the Trans Pacific Partnership Agreement (TPP)—the mega regional trade and investment agreement that is currently under negotiation. Australia has not confirmed whether it would sign on to investor-state in the TPP, preferring instead to keep its options open.

European Commission goes on the offensive to promote investment treaties

In recent months the European Commission—the executive body of the European Union—has released a number of documents that seek to drum up support for investment treaties.

In October it published a fact-sheet titled Incorrect claims about investor-state dispute settlement, which seeks to refute common concerns about investment arbitration.[1]

For instance, in response to the claim that investor-state dispute settlement “subverts democracy by allowing companies to go outside national legal systems,” the Commission responds “Untrue!” While not exactly responding to that claim, the Commission points out that an “investor may not want to bring an action against the host country in that country’s courts because they might be biased or lack independence,” or “might not be able to access the local courts in the host country.”

A factsheet published in November, however, acknowledges that the investment protection provisions in international treaties have “imperfections.” Investment protection and investor-state dispute settlement in EU agreements identifies two areas where improvements are needed: to investment protection rules, and how the investor-state dispute settlement system operates.[2]

The Commission identifies the “main concern is that the current investment protection rules may be abused to prevent countries from making legitimate policy choices.” It points to Philip Morris’ case against Australia, and Vattenfall’s case against Germany, as examples that raise this concern.

The factsheet goes on to outline how the Commission is responding to these concerns by better defining investment protection rules and the procedures that guide arbitrators.

With respect to investment protection rules, the Commission says that EU agreements preserve states’ right to regulate. For example, on indirect expropriation, “the right of the state to regulate should prevail over the economic impact of those measures on the investor.” On fair and equitable treatment—which is frequently invoked by claimants—the EU’s agreements will “set out precisely which actions are not allowed.”

Turning to dispute settlement, the Commission seeks to discourage frivolous claims, such as by setting rules that encourage tribunals to settle such cases quickly and ordering the claimant to pay for legal costs. In response to concerns about the independence of arbitrators, the EU has established a new code of conduct. It is also aiming to set up an appellate mechanism “to ensure consistency and increase the legitimacy of the system by subjecting awards to review.”

The Commission seeks to show how these approaches have been put into practice in a third document on the EU-Canada free trade agreement, which was concluded last October.[3] Under headings like “How is the right to regulate protected in the investment chapter?” and “Investor state dispute settlement in CETA: main achievements,” the Commission outlines where it believes that progressive moves have been made to improve international investment rules in that agreement.

Ecuador sets up a commission to audit its bilateral investment treaties

Ecuador announced in October 2012 that it had established a commission to audit 26 of its bilateral investment treaties. A similar type of commission examined Ecuador’s external debt in 2008, and its conclusions ultimately prompted the country to default on $3.2 billion in global bonds.

The commission has been tasked with determining whether Ecuador’s BITs compromise sovereignty and are beneficial to the country. Ecuador’s Foreign Minister, Ricardo Patino, said the purpose of the commission is to “discover things that in the past did too much damage to Ecuador.”

Ecuador has been a respondent in at least 26 investment treaty arbitrations—the third highest after Argentina and Venezuela. It has also been on the receiving end of the largest damages award in investment treaty history, having been ordered in September 2012 to pay US$1.77 billion in damages to Occidental Petroleum Corporation. Ecuador initiated annulment proceedings in that case earlier this year.

Similar to Bolivia and Venezuela, Ecuador has also given notice of its withdrawal from the ICSID Convention.

The commission includes lawyers, academic and lobbyists from a variety of Latin American countries. It has been given 8 months to produce its report.