- Your foreign assets may be protected under Australia's investment treaties and the investment provisions of Australia's Free Trade Agreements.
Rising commodity prices have led many energy and resources companies to invest in emerging markets, where the potential risks are often as high as the potential benefits. In particular, there may be a risk that host state government action may reduce the value of a foreign investment through often indirect government actions, such as changing regulatory regimes, including tax rates and licensing arrangements, in a way that unfairly targets foreign investors. In extreme cases foreign assets can be expropriated, as happened in the Venezuelan oil industry in 2007.
Australian E&R companies that have significant operations overseas, particularly in emerging markets, should be aware that their foreign assets may be protected under Australia's investment treaties and the investment provisions of Australia's Agreements (FTAs). These agreements establish minimum standards of protection for investors and investments as well as mechanisms under which these protections can be enforced against the government of the host country.
Investment treaties are a key feature of the international investment landscape. Over the past four decades over 170 countries have entered into more than 2500 investment treaties worldwide1 Since 2000 ICSID has handled over 200 cases worth billions of dollars, and many more investment disputes have been resolved confidentially under the UNCITRAL Arbitration Rules (see below).
How do investment treaties protect individual investors?
Under investment treaties, state parties commonly agree to certain investor protection measures, which include provisions to:
- observe minimum standards for the treatment of foreign investors from the other state, often by providing that they:
- be treated no less favourably than domestic investors; and/or
- receive fair and equitable treatment; and/or
- are treated as least as well as the host state treats investors of other countries (known as a "most favoured nation" clause).
- compensate investors for the loss of value of their investments
- resulting from breaches of these standards or by expropriation of foreign owned assets; and
- consent in advance to arbitration so that investors can enforce their claims for compensation under the aegis of the International Centre for the Settlement of Investment Disputes (ICSID), which is a member of the World Bank Group, and the United Nations Commission on Trade Law (UNCITRAL).
What investment treaties has Australia entered into?
Australia has entered into 21 bilateral investment treaties with countries including China, Vietnam, India, Indonesia, Laos, Philippines, Chile, Uruguay and Argentina. It also has Free Agreements with Singapore and Thailand that also include investment provisions similar to investment treaties, and is in the process of negotiating the eagerly anticipated Australia-China FTA. The Australia US Trade Agreement provides investment protection measures, but does not provide for direct investor vs state arbitration.
What classifies as an "investment" in order to be protected under an investment treaty?
Within the scope of investment treaties, the definition of "investment" not only includes ownership of assets such as shares and tangible property, but also includes loans, debt instruments, intellectual property, and concessions or licenses to conduct business.
What if Australia doesn't have an investment treaty with the country my company is investing in?
Australian investors can enjoy the protection of an investment treaty even when the destination country does not have an investment treaty with Australia.
For example, an Australian resources company investing South Africa could consider incorporating an entity in the United Kingdom and using that entity as the vehicle for their investment to take advantage of the BITs between South Africa and the UK, so long as it satisfies the nationality requirements for the UK.
How can my company enforce these investor protection rights against a host state?
The substantive rights and standards in these treaties are of little use if they cannot be enforced by foreign investors. One of the most significant features of these treaties is that they provide for the foreign investor to bring arbitral proceedings directly against the host government in the event of a dispute, usually under ICSID or UNCITRAL.
There are three key advantages to arbitration:
- an arbitration can proceed without the participation of the host state;
- awards must be enforced "as if they were the final judgment of a domestic court" and for this reason can only be challenged on grounds that are narrower than in international commercial arbitration or litigation;
- because is a member of the World Bank Group and is widely supported by the international community there is diplomatic pressure on host states to honour awards.
The proliferation of international investment treaties has changed the way in which companies invest internationally.
In a recent survey of 602 executives of global companies 19 percent reported that the existence of an investment treaty would influence their decision to invest in a particular market2. Forty-eight percent responded that this would influence their investment decision to a more limited extent.
Australian companies wanting to take advantage of opportunities in overseas markets will consider a range of factors when making a business case for investment. One of these factors should be how best to structure the investment to maximise investment treaty protection. This will include consideration of:
- whether there is an investment treaty between Australia and the host country;
- what other protection is available under other investment treaties adopted by the host country, that it may be able to rely on; and
- key investor protection clauses to be included into any agreements between the investor and the host state, e.g. arbitration clause as opposed to court proceedings in the host state.
Early consideration of these issues will not just assist in realising the value of an investment in the event of political instability, but will also help to assess the risks of making the foreign investment and may shape negotiations with investment partners, including foreign governments.
Clayton Utz is hosting a panel discussion on 19 June 2008 on Protecting Foreign Investments which will cover the key issues in foreign investment outlined above from legal, financial and regulatory perspectives. The event is free of charge.
David Anderson, Zurich Financial Services Australia Ltd
Emerging Markets Solutions unit, a leading underwriter of political risk and trade credit insurance.
Leith Doody, Austrade
Leith Doody is Austrade's former Regional Director for Europe, Middle East and Africa and is currently a State Manager for Austrade in Australia.
Doug Jones - Partner, Clayton Utz
Doug Jones heads the International Arbitration, Construction and Major Projects groups at Utz. He has extensive experience advising on major infrastructure projects and acting as counsel and arbitrator in international arbitrations.
Thierry Lauriol, JeantetAssociés
Thierry Lauriol is a Partner from leading French law firm JeantetAssociés and heads the Energy & Natural Resources team. He is experienced both as counsel and arbitrator in energy and natural resources arbitration, particularly in France, Europe and Africa.
Ernst and Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services.Footnotes
1 Rudolf Maim and Christoph Schreuer, Principles of International Investment Law,Oxford, 2008, p.2. Also see UN CTA D, World Investment Report (2006) XVII, 26
2 The Economist Intelligence Unit and Columbia Program on International Investment, World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk (2007) at 96.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.