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[Updated 3 August 2011]

Justice Oliver Wendell Holmes famously remarked in Northern Securities Co v United States 193 US 197 (1904) that:

“Great cases like hard cases make bad law. For great cases are called great, not by reason of their importance... but because of some accident of immediate overwhelming interest which appeals to the feelings and distorts the judgment”.

We might take this reasoning a step further: big cases make or entrench bad policy. A contemporary example is the request for arbitration (in Singapore) initiated on 27 June by tobacco giant Philip Morris Asia (PM) against Australia, pursuant to the 1993 “Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments”. PM seems to be alleging that proposed legislation mandating plain packaging of cigarettes amounts to “expropriation” of its trademarks (Art 6) and possibly a violation of “fair and equitable treatment” obligations (Art 2(2)).

For many, this treaty-based investor-state arbitration (ISA) claim will seem like a “big bad company” claiming against a government trying to pass a “good law” – aimed at addressing the serious public health problems and expenses still associated with cigarette sales. These persist despite the Australian government already having tried many other measures to curb consumption: graphic warnings on cigarette packaging and in TV or print advertisements, restrictions on displays and promotion, and increasingly high consumption taxes.

PM’s claim will also lead some to acclaim the April 2011 “Gillard Government Trade Policy Statement”, which blew cold on ISA provisions. On one interpretation it means simply that Australia will no longer agree to ISA in any future treaty even with developing countries. This effectively means no more ISA in treaties with anyone, as Australian investors anyway are less concerned about ISA protections where the host state has a more developed legal system – offering a reliable court system applying domestic substantive law supportive of the rights of all investors.

However, read in the context of Productivity Commission recommendations finalized last December, an alternative interpretation is that the Statement allows scope for the Gillard Government to include ISA in future treaties on certain conditions – in particular, provided that foreign investors are not accorded better rights than local investors. If the partner country’s domestic law protections are lower than Australia’s, then future treaties can therefore at least include substantive protections (aimed at Australian investors abroad) capped at the Australian domestic standard of protection. Yet even this policy stance generates complex implications, and the theory and evidence contained in the Productivity Commission analysis have significant weaknesses, as I outline in a recent paper.

By contrast, ISA claims are often brought by smaller and/or “good” investors complaining about “bad laws” enacted by the host state. The larger investors often have political clout even in the host state, and/or their home state, to facilitate a negotiated settlement (including via an inter-state process typically also offered by treaties) without filing formal arbitration claims. Indeed, PM perhaps approached their home state to encourage it to launch a WTO claim alleging breaches of the TRIPS Agreement. But that legal avenue seems weak, as explained in this paper by Dr Andrew Mitchell, which could explain why we now see a direct ISA claim brought by PM against Australia. (Presumably PM also decided that the substantive rights under the treaty with Hong Kong provided greater protection than public law rights offered by Australian courts, including the constitutional prohibition on the government acquiring property without paying compensation.)

The problems implicit in the Gillard Government’s recently announced policy stance on ISA would have received a fairer hearing if the first arbitration claim against the Australian government had been brought not by a tobacco company for this sort of legislation. Imagine for example if we’d had a Malaysian solar power panel manufacturer claiming breach of “fair and equitable treatment” due to NSW legislation retrospectively changing feed-in tariffs that the state government had promised to retain for at least five years, based on ISA protections contained in the 2009 ASEAN-Australia-NZ Free Trade Agreement. As I explain in my recent paper, the government did back down and anyway the chances of success would not necessarily have been high. But if such a claim had been made then we would have had an example of a smaller “good” company complaining about a “bad law”.

Instead, Australians (and others) will now tend to remember the PM claim whenever ISA is mentioned. That will entrench the Gillard Government’s policy stance rather than creating opportunities to properly reconsider more targeted ISA reform options, such as those outlined in Appendix A of my paper. After all, social psychologists and now behavioural economists have long warned about “availability bias” (we all usually give too much weight to high-profile or memorable events) and “confirmation bias” (we discount counter-examples and instead are disproportionately influenced by evidence that seems to support our existing preferred theories).

However, all is not lost. Even this arbitration claim by PM may leave scope for more rational debate about ISA’s problems – which are indeed significant – and the best ways to address those. This case may not even get to full-scale arbitration. PM seems to have initiated a 3-month “cooling off” period prior to being able to commence the arbitral proceedings against Australia (as provided by Art 10 of the Australia-Hong Kong treaty). Although tribunals interpreting other treaties have differed in their interpretations of similar provisions, this may mean that no arbitration can commence for at least 3 months – by which time Australia’s plain packaging legislation will have been enacted. Hopefully the claim will be withdrawn or settled before then, and the broader hubbub over ISA will start to die down, so more rational debate can be resumed.

Even if arbitration proceeds, if PM and Australia cannot agree otherwise the procedure shall follow UNCITRAL Arbitration Rules “as then in force”. This means the 2010 version of those Rules (see Art 1), recently agreed by the United Nations. This version has been praised for many significant improvements compared to original 1976 Rules (eg by Justice Clyde Croft and Dr Chris Kee in chapter 7 of Nottage/Garnett, eds, International Arbitration in Australia, Federation Press, 2010). However, because Hong Kong is still not a member of the World Bank / ICSID family, treaties like this one with Australia do not provide for ICSID Arbitration Rules. The 2006 revisions of the ICSID Rules, in particular, offer greater transparency compared to the UNCITRAL Arbitration Rules, including notifications about important steps in the proceedings through the ICSID website.

Nonetheless, the Hong Kong treaty (Art 10) allows for PM and Australia to agree in writing to modify the UNCITRAL Rules. It may be in PM’s short-term interest to agree to greater transparency in the arbitral proceedings, if its strategy is really to seek a negotiated settlement about the scope or timing of the plain packaging legislation. Agreeing to greater transparency may also be in PM long-term interest, namely avoiding problems when seeking to enforce and execute any favourable arbitral award against the Australian government. This possibility arises because, for instance, social psychologists have also shown that a process perceived as fairer is more likely to generate one side’s compliance with an outcome, even if substantively adverse to that party.

If the parties can agree on such changes to UNCITRAL Rules, and perhaps others such as requiring arbitrators actively to facilitate settlement throughout proceedings (“Arb-Med”), this may point the way more generally towards alternative policy initiatives by Australia (and indeed other countries) regarding ISA. Rather than throwing the baby out with the bath water and omitting ISA provisions completely, states could encourage arbitral institutions and others to develop more tailored sets of Arbitration Rules for ISA, include them in future treaties, and then require or encourage their investors to invoke those Rules in any future disputes – appealing to those firms’ short- and long-term interests, including commitments to broader Corporate Social Responsibility.

In fact, Dr Kate Miles and I proposed this in detail in a 2009 paper (updated as chapter 10 of my book with Professor Garnett cited above). But we also mentioned that this would not preclude other reforms to the ISA system, including adding to investment treaties broader express exemptions for regulation bona fide in the public interest (eg for public health purposes). These are already found in WTO Agreements, and indeed in some of Australia’s more recent FTAs and investment treaties.

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Find out more at a 3 August seminar on "Australia's new policy on investor-state dispute resolution".

[This comment draws on research for the project, "Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific", supported by the Commonwealth through the Australia-Japan Foundation which is part of the Department of Foreign Affairs and Trade.]

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Japanese Law in Asia-Pacific Socio-Economic Context
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