This chapter provides background on the Investor-State Dispute Settlement (ISDS) system that is at the centre of the treaty actions reviewed in the following two chapters: Chapter 3 (Agreement between Australia and the Oriental Republic of Uruguay on the Promotion and Protection of Investments) and Chapter 4 (United Nations Convention on Transparency in Treaty-based Investor-State Arbitration).
ISDS provides a framework for greater certainty and protections for cross‑border investments, an issue that has taken on greater importance as a result of growing global economic integration. ISDS aims to provide protections for foreign investors from arbitrary actions by host governments, particularly where domestic legal systems are weak or do not provide adequate mechanisms or remedies.
ISDS systems allow foreign investors, be they businesses or individuals, to access international arbitration mechanisms for actions by a host government which are in violation of commitments made under investment treaties or other international agreements. ISDS is an enforcement mechanism that allows foreign investors (including Australian investors overseas) to:
directly apply investment protections in treaties, which include a minimum standard of fair and equitable treatment and granting compensation if investments are expropriated or nationalised;
access an international tribunal to resolve investment disputes; and
seek compensation for government actions which are in breach of commitments.
ISDS is a provision that can be included in a free trade agreement (FTA) or in a stand-alone investment treaty. ISDS provisions vary across the range of agreements in which they are contained, but the common thread is direct recourse to international arbitration and adjudication mechanisms for foreign investors to seek redress if a host government fails to honour its commitments.
ISDS cases are generally heard by a tribunal of three and can be either public or private. An ISDS tribunal does not have the authority to overturn domestic laws and regulations. The tribunal can only rule for an investor to receive compensation for the loss of the investment.
Australia has ISDS provisions in eight FTAs, including in one that is yet to enter into force (Peru–Australia Free Trade Agreement). Australia also has ISDS provisions in 18 bilateral Investment Protection and Promotion Agreements.
ISDS provisions provide significant advantages to Australian investors overseas, granting them a higher level of certainty and protection and enabling them to access a credible legal remedy. This advantage is especially pronounced in countries where local courts and local jurisprudence may be weak, corrupted, inefficient or insufficient.
Evolution of ISDS
Early versions of ISDS included in free trade agreements and investment agreements were process-oriented, binding countries to participate and detailing the steps of the process.
Several participants in the Committee’s inquiries into free trade agreements have regularly argued either for the removal of ISDS provisions from treaties, or for the ISDS process to be modified to curtail the scope and application of ISDS provisions. Concerns expressed include:
the potential undermining of sovereignty implicit in a foreign investor being able to hold a host government to account in a method not available to domestic investors;
the need for more transparency in ISDS cases;
the need to prevent ISDS cases relating to matters of national interest;
advocacy for an appellate review mechanism—ISDS tribunal decisions are final and binding;
the absence of precedent in tribunal rulings on ISDS cases—such that tribunals do not have a ‘base of previous decisions’ to guide their consideration of ISDS cases;
arbitrators’ independence, highlighting the ability of ‘double hatting’ (where an ISDS arbitrator can also serve as counsel in other ISDS cases); and
‘regulatory chill’—which is the theory that relates to governments deciding not to pursue regulation on health and environmental issues in the public/national interest as a result of ISDS.
Over time international investment law and Australia’s investment policies have evolved to incorporate explicit, substantive and procedural safeguards. The Department of Foreign Affairs and Trade (DFAT) reflected that Australia’s investment practice has evolved over time and that older style treaties:
… do not explicitly recognise the government’s right to regulate and protect legitimate public welfare objectives, such as public health and the environment, nor do they contain the same detailed procedural safeguards in relation to ISDS.
For example, the explicit carve-out for public health measures, including the regulation of tobacco, came about as a result of Phillip Morris ISDS case, which used the Australia–Hong Kong Investment Agreement’s ISDS provisions to seek compensation for Australia’s plain packaging tobacco laws. According to DFAT, this is the only ISDS case against Australia, to date—and it failed on jurisdictional grounds, before consideration of the merits.
The Australian Government has responded to community concerns by negotiating ISDS provisions with more precise language and additional protections for governments wishing to regulate in the national interest.
More broadly, Australia has participated in multilateral ISDS reform efforts, including the International Centre for the Settlement of Disputes (ICSID), and the United Nations Commission on International Trade Law (UNCITRAL).
The Agreement between Australia and the Oriental Republic of Uruguay on the Promotion and Protection of Investments and the United Nations Conventions on Transparency in Treaty-based Investor-State Arbitration both reflect the Australian Government’s response to concerns about ISDS.