Australia: Turbines tussle may test free trade agreement

Exploring domestic and international options for settlement

The New South Wales Court of Appeal has dismissed an appeal by Power Rental Op Co Australia (OpCo) against a decision by the New South Wales Supreme Court which held that the interest in millions of dollars' worth of wind turbines vested in Forge Group Power Pty Ltd (Forge) upon it entering administration due to the operation of the Personal Property Securities Act 2009 (Cth) (PPSA).1

This article considers what steps are now available to OpCo or its parent company, APR Energy PLS (APR), including pathways to investor-state arbitration against the Commonwealth of Australia.

Background

Forge entered into an agreement to lease four mobile gas turbines from General Electric International Inc. (GE) for a fixed-term period. In October 2013, APR bought the business that leased the turbines to Forge. As a consequence, the lease and title of the turbines were subsequently assigned to the two US subsidiaries of APR, OpCo and Power Rental Asset Co Two LLC.

The turbines were subject to a lease when Forge went into voluntary administration in March 2014. At first instance, the court found that the lease for the turbines was a PPS lease under section 13 of the PPSA, which gave rise to a security interest to GE.

Accordingly, Justice Hammerschlag held that because APR had failed to register its security interest under the Personal Property Securities Register (PPSR) the interest in the turbines automatically vested in Forge immediately prior to it entering into voluntary administration.

A recent decision by the NSW Court of Appeal leaves United States interests considering their options for a leasing deal gone wrong.

The recent judgment provided by the Court of Appeal dismissed OpCo's appeal on Justice Hammerschlag's decision and found that:

  1. The definition of 'fixtures' under s10 of the PPSA imported its common law meaning, namely that fixtures are tangible property affixed to the land. The reusable nature of the turbines directed the court to conclude that the turbines could not be deemed as fixtures for the purposes of the PPSA.
  2. The turbines were installed with the intention of removing them after two years. Therefore the primary judge was correct in concluding that the turbines were not fixtures due to the 'temporary nature' of the affixation as per the purposes of the PPSA and its associated common law concepts.

What are APR's options?

Domestic avenues

APR, or related entity OpCo, has applied to the High Court of Australia for special leave to appeal the Court of Appeal decision. The Judiciary Act 1903 (Cth) sets out the matters the High Court may take into account when considering whether it will grant special leave to appeal.

These matters include whether the proceedings involve a question of law or are a matter of public importance. Other proceedings that may be granted special leave to appeal include when the High Court is required to resolve differences of opinion between different courts, or within the one court, as to the state of the law and when the interests of justice require the consideration of the High Court.

If special leave to appeal is granted, APR or OpCo will then be able to proceed to have the substance of the appeal heard in the High Court of Australia, Australia's highest court.

If APR is unsuccessful in the High Court, it will have exhausted its legal avenues in the Australian legal system.

International avenues

APR has reportedly brought an action against the Commonwealth of Australia, seeking to rely on the most favoured nation clause in the Australia-United States free trade agreement (AUSFTA) to import the ISDS mechanism from the Australia-Hong Kong bilateral investment treaty (BIT). The Australia-Hong Kong BIT was relied on by Philip Morris Asia Limited (Hong Kong) to bring an action against the Australian Government in respect of Australia's introduction of legislation mandating the plain packaging of tobacco products. This action failed following a preliminary hearing when the tribunal determined that it did not have jurisdiction to hear the claim, as it held that Philip Morris's restructure was for the principle, if not the sole, purpose of gaining protection under the BIT.

The Australian Attorney-General's Department has disputed that APR has any right to bring a claim against Australia and has stated that APR "cannot rely on other agreements in order to create jurisdiction". Australia should follow a similar course to how it conducted the Philip Morris case and apply for a bifurcation of the proceedings to have the question of jurisdiction determined at a preliminary hearing.

If a tribunal finds that it does not have jurisdiction to hear the dispute because APR cannot import the investor-state dispute settlement (ISDS) provisions of the Australia-Hong Kong BIT, then it will be another victory for the Commonwealth. It should be noted, however, that the Philip Morris arbitration took more than four years for the award on jurisdiction to be made, so it may be some time before we know the outcome of any preliminary hearing in the APR arbitration.

APR would be wise to continue simultaneously pursuing procedural steps available to it to bring an action against Australia under the investment chapter of the AUSFTA. The investment chapter of the AUSFTA is Chapter 11. Article 11.16 of the AUSFTA provides:

"Article 11.16: Consultations on InvestorState Dispute Settlement

  1. If a Party considers that there has been a change in circumstances affecting the settlement of disputes on matters within the scope of this Chapter and that, in light of such change, the Parties should consider allowing an investor of a Party to submit to arbitration with the other Party a claim regarding a matter within the scope of this Chapter, the Party may request consultations with the other Party on the subject, including the development of procedures that may be appropriate. On such a request, the Parties shall promptly enter into consultations with a view towards allowing such a claim and establishing such procedures.
  2. For greater certainty, nothing in this Article prevents a Party from raising any matter arising under this Chapter pursuant to the procedures set out in Chapter 21 (Institutional Arrangements and Dispute Settlement). Nor does anything in this Article prevent an investor of a Party from submitting to arbitration a claim against the other Party to the extent permitted under that Party's law."

There are three separate elements in this provision that need to be considered.

  1. consultations on developing procedures for investor-state dispute settlement
  2. raising the matter pursuant to the procedures set out in Chapter 21
  3. submitting a claim to arbitration to the extent permitted under that party's law.

Upon considering the three elements outlined above, it will become evident why APR is reportedly campaigning the US Government to take action on its behalf. The following analysis is based on the present situation whereby the US would be the party seeking to negotiate the resolution of a dispute arising in respect of Australia. If an Australian investor in the US found itself aggrieved by actions of the US Government, the same procedures would apply in reverse.

  1. Consultations on developing procedure for investor-state dispute settlement

The important distinction between paragraphs 1 and 2 of article 11.16 is that paragraph 1 contemplates a mechanism by which an investor of the US may be able to submit an investment claim to arbitration against Australia. Paragraph 2 on the other hand contemplates options available on a state-to-state level.

It is not, however, a straightforward process and it is apparent that APR cannot commence any action against Australia without US Government intervention.

Firstly, the US Government would need to consider there is a change in circumstances affecting the settlement of investment disputes and in light of such change an investor-state arbitration mechanism should be discussed at the state-to-state level. The guide to the AUSFTA published by the Department of Foreign Affairs and Trade (DFAT) elaborates by stating the "change in circumstances" relates to the parties' economic and legal environments. Obviously the political environment has recently changed; Trump is now President and the Trump-Turnbull dynamic is reportedly strained. It is probably a stretch to argue that this change in political dynamics constitutes a change in the parties' economic and legal environments sufficient to affect the settlement of investment disputes and that the state parties should consequently consider allowing investor-state arbitration.

APR would have difficulty arguing that the 'expropriation' of its turbines arises from a change of circumstances in Australia's legal environment since it contracted with Forge. The PPSA came into effect in January 2012 which was about 12 months before Forge and GE entered into the lease for the turbines. Accordingly, APR's loss of its security interest in the turbines did not arise from a supervening government act, rather, it is a consequence of GE's, and subsequently APR's, failure to comply with legislation in force at the time of contract.

In any event, even if the US Government could argue that a change in circumstances has occurred, all it would be able to do under paragraph 1 of article 11.16 is request consultations with Australia regarding the "development of procedures that may be appropriate". Even then, there is no requirement in the provision for the parties to reach any definite agreement.

The language of the provision is rather non-mandatory and does not require any particular action by Australia, even if the US requested consultation. Accordingly, unless Australia agreed to engage with the US, paragraph 1 of article 11.16 is not likely to assist APR in bringing an investor-state arbitration against Australia.

  1. Raising the matter pursuant to the procedures set out in Chapter 21

Paragraph 2 of article 11.16 makes it clear that a request for consultations on investorstate dispute settlement under paragraph 1 of the article does not preclude the US Government from raising the matter under Chapter 21 of the AUSFTA, which relates to institutional arrangements and dispute settlement between the state parties. For APR to obtain any assistance under Chapter 21, it would need the US Government to take action on its behalf.

The DFAT guide states that Chapter 21 "establishes a fair, transparent, timely and effective procedure for settling disputes" under the AUSFTA. Importantly, the guide clearly distinguishes Chapter 21 as a mechanism not available for investors to bring an action against Australia but rather a mechanism for the resolution of disputes on the state-to-state level.

Relevantly, Chapter 21 applies to resolve a dispute regarding the interpretation or application of the AUSFTA or where the US considers that Australia has a measure that is inconsistent with its obligations or has failed to carry out its obligations under the AUSFTA.

The stages of dispute settlement under Chapter 21 involve:

  1. The US Government may request consultations to which Australia is expected to reply and enter into in good faith.
  2. If consultations fail to resolve the matter, the dispute may be referred by either party to the AUSFTA Joint Committee which will endeavour to resolve the matter.
  3. If the joint committee fails to resolve the matter, the US may refer the matter to a dispute settlement panel which will prepare and present a report containing its findings and determinations.

If a breach of the AUSFTA is identified in the panel's report, Chapter 21 provides a range of solutions, including requiring Australia to correct the breach or provide trade compensation to the US. If a breach cannot be rectified, Australia may be required to pay a monetary assessment which can be paid into a joint fund to be spent on initiatives which facilitate trade between the two countries. Failure to pay a monetary assessment may result in the suspension of AUSFTA benefits ordinarily conferred on Australia.

As mentioned above, the protections in Chapter 21 would only be of use to APR if it is successful in lobbying the US Government to take action on its behalf.

  1. Submitting a claim to arbitration to the extent permitted under that Party's law

Finally, paragraph 2 of article 11.16 also clarifies that nothing in the article precludes a US investor from submitting an arbitration claim against Australia to the extent permitted under Australian law.

The relevant law is the International Arbitration Act 1974 (Cth) (IAA). Section 32 of the IAA provides that Chapters II to VII of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States have the force of law in Australia.

Chapter II of the convention sets out the jurisdiction of the International Centre for Settlement of Investment Disputes (ICSID), which is established by the convention. Article 25 provides that the ICSID shall have jurisdiction over any legal dispute arising out of an investment between a contracting state and a national of another contracting state, in this case between Australia and a national of the US. However, in order for the ICSID to have jurisdiction over the disputed matter, the parties to the dispute must consent in writing to submit the dispute to the ICSID.

In effect, APR is not precluded from having its dispute determined by the ICSID; however it would need Australia's consent in order to do so.

Blocked at every turn?

It seems that APR is attempting to import the ISDS mechanism from the Australia-Hong Kong BIT and ignore the fact that there is no such mechanism in the AUSFTA, as it is clear from the above analysis that direct avenues to bring an action against the Commonwealth of Australia are limited and the assistance of the US Government or the consent of the Australian Government appears to be necessary to enliven any dispute resolution mechanism under the AUSFTA. Given the current political climate, the likelihood of the states collaborating to allow APR to bring an investor-state claim against Australia is probably low.

In the meantime, Australia should move quickly to have the arbitration bifurcated so that the preliminary question of jurisdiction can be determined early, and hopefully nip this claim in the bud.

Footnote

1Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2017] NSWCA 8.

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