Agreement between Australia and the Oriental Republic of Uruguay on the Promotion and Protection of Investments
This Chapter examines the Agreement between Australia and the Oriental Republic of Uruguay on the Promotion and Protection of Investments (the 2019 Agreement). The treaty action was signed in Canberra on 5 April 2019 and tabled in the Parliament on 31 July 2019.
The National Interest Analysis (NIA) states that the 2019 Agreement will replace the Agreement between Australia and Uruguay on the Promotion and Protection of Investments, which entered into force on 12 December 2002 (the 2002 Agreement). The 2002 Agreement will terminate upon entry into force of the 2019 Agreement.
The 2019 Agreement imposes a number of obligations, which are detailed in full in paragraphs 10–19 of the NIA. In brief, the provisions include:
the explicit recognition of the ‘Government’s right to regulate and protect legitimate public welfare objectives, such as public health and the environment’;
tightening the drafting of key definitions, such as ‘investment’ and ‘investor of a Party’, to provide clarity;
the inclusion of a ‘modern provision regarding the minimum standard of treatment’;
a most favoured nation (MFN) treatment obligation that ‘requires the host State to give covered investments and investors treatment that is no less favourable than the treatment that it accords to the investments and investors of any third country in like circumstances’;
the addition of a ‘Maffezini clause’ to explicitly prevent investors from using MFN to import more favourable investor-state dispute settlement (ISDS) provisions from other treaties;
further elaboration and guidance regarding expropriation and indirect expropriation;
protections for the free transfer of funds to and from a country related to the investment;
expanding the ‘circumstances in which the benefits of the 2019 Agreement may be denied’ including that the ‘agreement of the other Party is no longer required for the denial of benefits’;
significant changes to the ISDS mechanisms;
the addition of explicit general and security exceptions, and an explicit taxation exception;
that upon entry into force of the 2019 Agreement the 2002 Agreement will terminate.
As discussed in Chapter 2, Australia’s approach to investment treaties, including ISDS provisions, has evolved over time. To reflect these changes, the government is currently ‘pursuing ISDS reform.’ This includes updating older style treaties so that they align with Australia’s modern investment treaty practices and participating in multilateral ISDS reform efforts in a range of fora.
The 2019 Agreement sits within this broader context, and is an initiative which forms part of efforts to update and modernise Australia's network of existing bilateral investment treaties. The Department of Foreign Affairs and Trade (DFAT) argued that this reform provides ‘greater certainty for both government and investors.’
Reasons for Australia to take the proposed treaty action
To reflect Australia’s modern investment treaty practice, the 2019 Agreement replaces the ‘broadly drafted’ and outdated provisions of the 2002 Agreement with updated requirements. In particular, the 2019 Agreement includes ‘explicit procedural and substantive safeguards’ for ISDS.
The NIA notes that ISDS provides foreign investors with the opportunity to ‘directly enforce the investment protections in treaties.’ The 2019 Agreement includes ‘detailed procedural safeguards’ in the ISDS mechanism that are intended to:
narrow the scope of the ISDS mechanism;
encourage the settlement of disputes;
prevent forum shopping; and
generally enhance efficiency, consistency and State Party control in relation to the dispute settlement process.
The NIA suggests that these updates will ‘ensure greater certainty for investors and governments with respect to their rights and obligations.’ Under the 2019 Agreement, Australian companies operating in Uruguay will still be able to bring an ISDS claim for breaches of any applicable investment protections.
DFAT noted that Uruguay is a growing market for Australian investors. Since 2018, a range of Australian companies have invested in Uruguay:
An Australian company has purchased a software logistics company in Uruguay … Warrego Energy [is] exploring oil and mineral reserves, which may be commercialised … [and] Uruguay’s decision to legalise cannabis in 2013 has seen five Australian companies go into the market for that reason.
Safeguards in the 2019 Agreement will encourage further investment in Uruguay and provide clarity for existing Australian investors in the country. In addition, the updated treaty will provide Australian investors in Uruguay with the opportunity to expand into the broader Latin American market. In particular, the 2019 Agreement could strengthen Australia’s foothold in the Mercosur market, which includes Argentina, Brazil, Paraguay and Uruguay. Mercosur has a combined Gross Domestic Product (GDP) of US$2.7 trillion and a consumer base of over 260 million people. DFAT stated:
… with Uruguay being a hub for investment—a country that has higher standards of transparency than a number of countries in its neighbourhood … the strategic logic of deepening protections for Australian investors in Uruguay makes a lot of sense.
The Committee queried whether the 2019 Agreement would bring an added level of investment security for Uruguay. While DFAT noted it could not speak on behalf of Uruguay, it suggested that in general, Latin American states:
… view the inclusion of ISDS as something very important to signal to foreign investors that they take the protection of investments in their countries seriously … [b]ecause many of these countries … are looking to develop their economies and are very much wanting to attract foreign direct investment.
ISDS provisions—procedural safeguards
Similar to previous inquiries, the Committee heard concerns that the inclusion of ISDS provisions could lead to costly litigation and potentially limit the government’s ability to regulate in the public interest.
The Australian Fair Trade and Investment Network (AFTINET) outlined that there ‘has been a dramatic increase in the number of known ISDS cases’ including some against health, environment and other public interest laws. AFTINET argued that ISDS can limit a government’s regulatory sovereignty and potentially result in the revisions of policies, legislation or legal decisions:
… even the threat of ISDS can deter governments from implementing public interest policies, including in relation to health, workers’ rights and the environment.
The Committee was interested in the specific safeguards for ISDS that would be included in the 2019 Agreement. DFAT informed the Committee that the 2019 Agreement:
‘explicitly allows for preliminary objections’ so that unmeritorious claims can be addressed earlier, thereby reducing costs for the parties involved;
limits the time on bringing a claim to three years;
includes a detailed set of ethical rules for arbitrators and a code of conduct;
allows for the expedited review of preliminary objections to address issues to do with frivolous claims and enhanced transparency;
contains a provision for joint interpretations; and
includes a World Trade Organization (WTO) style ‘general exception’.
Similar to the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership (CPTPP), DFAT highlighted that the 2019 Agreement includes a clause that requires investors to ‘waive their rights to initiate or continue dispute settlement proceedings in any other fora.’ DFAT stated that once a claim is made under the 2019 Agreement, the claimant relinquishes their rights to bring claims under domestic procedures or other international agreements. DFAT noted that this clause intends to address concerns about forum shopping and is an important provision to avoid overlapping claims.
ISDS provisions—public policy exclusions
The NIA claims that the 2019 Agreement includes provisions that reflect ‘Australia’s modern investment treaty practice.’ However, AFTINET suggested that some of the ISDS provisions in the 2019 Agreement differ from Australia’s current practice.
According to AFTINET, the 2019 Agreement does not contain specific exclusions for public health or tobacco. In contrast, they noted that recent agreements such as the Australia-Hong Kong Free Trade Agreement and the Singapore-Australia Free Trade Agreement include specific exclusions for public health and tobacco. AFTINET suggested that without clear exclusions the Australian government risks litigation in these areas.
DFAT suggested that other safeguards in the agreement, such as the explicit reference to the right to regulate in the preamble and a WTO‑style general exception, are sufficient to address concerns relating to public health. The Committee sought clarification that the measures designed to protect public health would extend to government regulation of the use, and consumption of tobacco. DFAT assured the Committee that the measures would extend to tobacco regulation and vaping.
The right to regulate
The Committee sought clarification on whether ISDS provisions have compromised Australian social, environmental or health laws. DFAT explained that Australia currently has ISDS mechanisms in 18 bilateral treaties and seven free trade agreements, and that:
Over the course of the last 30 years, Australia has only appeared before one tribunal in relation to any of those agreements and had to defend the tobacco plain packaging legislation, where there was a unanimous decision by the panel that it didn’t have jurisdiction to hear that dispute, so [Australia] successfully won.
In relation to the 2019 Agreement, DFAT suggested that the addition of explicit safeguards provide further assurance that the inclusion of ISDS mechanisms will not compromise health, social or environmental law. Moreover, the NIA states that:
[t]he 2019 Agreement explicitly recognises the Government’s right to regulate and protect legitimate public welfare objectives, such as public health and the environment.
The Committee sought clarification on what constitutes a legitimate public welfare objective. DFAT stated:
As far as we are aware, there’s no definition of ‘legitimate public welfare objective’, nor has there been any attempt to define the issue. From the basis of our research it’s clear that it’s a broadly defined term and it’s a term which States would be given a large margin of appreciation and discretion in defining what it means.
DFAT noted that in the context of the 2019 Agreement, the fifth paragraph of the preamble provides the best guide as to what could constitute a legitimate public welfare objective:
RECOGNISING their inherent right to regulate and resolving to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals.
The Committee queried whether broader protections such as ‘legitimate public welfare’ are preferred over narrower issue-by-issue carve-outs. DFAT responded that:
The approach the government takes at a macro level in relation to ISDS is that the government considers the inclusion of ISDS on a case-by-case basis in light of the national interest, taking into account issues such as the protection of Australian investors overseas, the overall balance of the agreement and the inclusion of adequate safeguards. In relation to safeguards, we look at both substantive and procedural safeguards.
Most favoured nation (MFN) treatment obligation
The 2019 Agreement includes an MFN treatment obligation that:
... requires the host State to give covered investments and investors treatment that is no less favourable than the treatment that it accords to the investments and investors of any third country in like circumstances.
In relation to MFN, the 2019 Agreement now includes a ‘like circumstances’ framework, which permits States to regulate in regards to legitimate public welfare objectives. A ‘Maffezini clause’ has also been incorporated to explicitly prevent investors from using MFN to import more favourable ISDS mechanisms from other treaties.
The Committee sought further details on this clause, which relates to the Maffezini vs Spain case, where an investor ‘sought to include a more favourable ISDS mechanism into a treaty which had a less favourable ISDS mechanism.’ DFAT reflected that after the dispute:
… state practice changed such that states wanted to make it abundantly clear that you weren’t able to incorporate ISDS mechanisms into treaties that didn’t include ISDS.
DFAT argued that the inclusion of a Maffezini clause in the 2019 Agreement confirms that it is not possible for investors to apply more favourable ISDS mechanisms.
The NIA Attachment on Consultation outlines the consultation process:
External stakeholders, including the Australian Chamber of Commerce and Industry, the Minerals Council of Australia and the Australian Fair Trade & Investment Network, were consulted as part of the bi-annual Trade and Investment Law Outreach events held by the Department of Foreign Affairs and Trade.
AFTINET submitted that the consultation process for the 2019 Agreement process varied from previous agreements noting that:
… there was no information on the DFAT website and no public invitation for submissions during negotiations for this Agreement. AFTINET was not aware that the agreement was being negotiated until the government announced the agreement had been signed on April 5, 2019.
The NIA states that legislative changes are not required for the 2019 Agreement to enter into force and that it is in line with Australia’s recent free trade agreement practice.
According to the NIA, the 2019 Agreement will not affect regulatory costs.
The Committee welcomes efforts to update older style investment treaties, bringing them into alignment with Australia’s modern practices. In particular, the Committee acknowledges the 2019 Agreement’s inclusion of detailed procedural safeguards in relation to ISDS.
The Committee supports the 2019 Agreement and recommends that binding treaty action be taken.
The Committee supports the Agreement between Australia and the Oriental Republic of Uruguay on the Promotion and Protection of Investments and recommends that binding treaty action be taken.