Australia: Can Australias bilateral treaties protect inbound investors from liability under the Queensland chain of responsibility environmental laws?

Can Australia's bilateral treaties protect inbound investors from liability under the Queensland chain of responsibility environmental laws?

WHO SHOULD READ THIS

• Foreign investors in Australia which are related to a company undertaking an environmentally relevant activity such as mining.

THINGS YOU NEED TO KNOW

• A bilateral investment treaty or free trade agreement may provide protection for your investment in Australia.

WHAT YOU NEED TO DO

• Consider your business structure when investing in Australia to maximise potential benefits of bilateral investment treaties or free trade agreements.

The environmental chain of responsibility legislation came into force in Queensland on 27 April 2016 by force of the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) (Chain of Responsibility Legislation). The provisions allow an environmental protection order (EPO) to be issued to 'related persons' of a company undertaking an environmentally relevant activity (Operator). 'Related person' may include the parent company of the Operator, and both a person or company with control over the Operator's environmental performance and a person or company who receives or may receive a significant financial benefit from the operation.

EPOs can trigger capital expenditure requirements to remediate environmental harm and achieve environmental compliance. Where the related person is an international investor in Australia based in a country with which Australia has concluded a bilateral investment treaty (BIT), and suffers a loss as a result of Chain of Responsibility Legislation, there may be grounds for the investor to consider whether the Australian government has honoured its treaty obligations.

Bilateral investment treaties and investor-state dispute settlement provisions

A BIT is a binding agreement between two states, by which each state assumes obligations in relation to investments made by parties based in the other state. A state in which an investment is made may be obliged, for example, to promote favourable investment conditions, to treat investors fairly and equitably, and not to undertake expropriation or nationalisation. The certainty and security provided by a BIT is intended to foster investment between the signatories to the treaty. Australia is a party to 21 BITs with countries throughout the world.

The obligations assumed by a state under a BIT are directly enforceable against the state by investors, by virtue of investor-state dispute settlement (ISDS) provisions. The provisions will stipulate the method of dispute resolution, typically international arbitration and often at the International Centre for Settlement of Investment Disputes.

Australia also has free trade agreements (FTAs) with other significant trading partners, many of which include ISDS provisions, as is the case in the FTAs with China, Korea, and Singapore. Some FTAs, for example the FTA between Australia and the US, do not provide for investors to enforce treaty obligations by way of a direct and unrestricted suit, instead requiring the consent of both national governments.

In February 2016 the Australian Government also signed the Trans-Pacific Partnership (TPP), which has not yet come into force. The Department of Foreign Affairs and Trade touts the TPP as a regional free trade agreement between 12 countries of unprecedented scope and ambition. President Trump has withdrawn the United States from the TPP. China has been mooted as a replacement state following the withdrawal of the United States, but the future of the TPP is less certain.

Australia has BIT or FTA arrangements that include ISDS provisions with six of its top ten trading partners. However, the inclusion of ISDS provisions in future FTAs is uncertain. They have been a point of controversy within political spheres. The current Liberal government's stance on ISDS provisions is that they will be considered on a case-by-case basis. However, the Labor party, Greens, Nick Xenophon Team and Pauline Hanson's One Nation Party all oppose ISDS provisions, meaning any attempt by the government to agree to the inclusion of ISDS provisions in the future would likely be rejected in the Senate.

Protections afforded by bilateral investment treaties

While each of Australia's BITs is unique in its content, there are six principal protections generally available to inbound investors into Australia, namely:

• promotion of favourable conditions for investors
• fair and equitable treatment of investors
• treatment of international investors no less favourably than domestic Australian investors (national treatment standards)
• treatment of international investors from a BIT country no less favourably than investors from any other country (most favoured nation treatment)
• protection from expropriation and nationalisation except for a public purpose and with fair compensation, and
• the free transfer of funds.

Where Australia breaches any of its obligations under the BIT, the international investor may bring an action against the government for compensation.

Effects of Chain of Responsibility Legislation

An EPO may be issued where, for example, a person causes unlawful environmental harm₁ or to secure compliance with a condition of an environmental authority₂ or development approval.₃ Among other measures, the order may require the recipient to cease a particular activity₄ or to take a particular action.₅ Traditionally, an EPO could be issued only to the person doing harm or whose compliance was required (Primary Recipient). However, as a result of the 2016 amendments, an EPO can now also be made against a related person of the Primary Recipient (Related Person).₆

A Related Person includes a holding company or a person with a relevant connection to the primary recipient.₇ A relevant connection may exist where:

• the person is capable of obtaining significant financial benefit from the Primary Recipient's carrying out of an environmentally relevant activity, or
• the person is, or has been at any time in the past two years, in a position to influence the company's compliance with the EP Act.₈

The legislation imposes no restriction on the nationality of a Related Person. For example, a Chinese company which establishes a wholly-owned subsidiary in Australia to conduct mining operations will be a holding company. Similarly, where a Turkish individual invests in a mining company in Australia and stands to obtain significant financial benefit by way of the profits of the venture, the individual may be determined to hold a relevant connection with the mining company. In each case, the party may be a Related Person liable to be issued with an EPO.

The issue of an EPO against a Related Person has two principal effects. First, it can render the Related Person liable for significant capital expenditure to minimise the risk of environmental harm or to otherwise comply with the order. Second, in the case of non-compliance with the order by an individual, the related person may be liable for a penalty of up to $548,550₉ or, in the case of wilful noncompliance, up to $761,875 or five years' imprisonment.₁₀ If a corporation is found guilty of non-compliance with an order, a maximum fine may be imposed of an amount equal to five times that for an individual.₁₁ So, a corporation may be liable for a penalty of up to $2,742,750₁₂ for non-compliance or, in the case of wilful noncompliance, up to $3,809,375.₁₃ Where a corporation is found to have committed an offence, each of the executive officers of the corporation also commits an offence, and may be personally penalised at the individual rate or imprisoned.₁₄

Breach of investment treaty obligations

The Chain of Responsibility Legislation provisions have retrospective application. This means that a domestic or foreign holding company may be issued with an EPO for environmental activities done by the Primary Recipient before the commencement of the legislation. Given the retroactivity of the Queensland legislation, an international investor may argue that it could not reasonably have foreseen its introduction or the associated risk to the value of the investment. If the international investor is able to show that it owned its investment in Australia at the time when the Chain of Responsibility Legislation was adopted, then an investment arbitration tribunal would have jurisdiction to make an award.₁₅

An international investor would most likely assert a breach of the Australian government's obligation to accord investors fair and equitable treatment. This obligation prohibits treatment inconsistent with the basic expectations held by the investor at the time of making the investment.₁₆ It may also proscribe a denial of due process that manifests injustice.₁₇

In the present case, an investor might reasonably have expected that their investment would be governed by Queensland's already robust system of environmental regulation as in force at the time of the investment. While it is unreasonable to expect legislation to forever remain unchanged, the retrospective application of the Chain of Responsibility Legislation is contrary to commonly accepted legislative principles.

Who is the proper respondent

The Chain of Responsibility Legislation was enacted by the Queensland Parliament. However, BITs and FTAs are between national governments and do not appear to bind the states. This gives rise to two fundamental questions:

• do Australia's BITs and FTAs bind the states, or just the federal government; and
• who is the proper respondent to a claim made under a BIT or FTA – the state or federal government.

Australia's BITs provide only for suit against a 'Contracting Party', which is usually defined as the Government of Australia and the government of the treaty partner. Generally, the recital to an Australian BIT acknowledges that investments in the territory of a Contracting Party would be made within the framework of laws of that Contracting Party. It might, therefore, be contended that for the purposes of a BIT, the laws of the states are considered to be a part of the 'framework of laws' of the Government of Australia. This approach is supported by Article 4 of the International Law Commission Draft Articles on State Responsibility (ILC Draft Articles), which provides that:

'The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organisation of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State'₁₈

In the commentary accompanying ILC Draft Article 4, it is stated that reference to a 'State organ' is to be construed in the most general sense, and includes organs of government at a provincial or local level. This supports the view that the Commonwealth may be sued by an international investor for breaches occasioned by a change of regulation in Queensland.₁₉ ILC Draft Article 32 reinforces this point, stating that a 'state may not rely on the provisions of its internal law as justification for failure to comply with its obligations'.₂₀

Whilst this issue has not yet arisen in a claim under a BIT or FTA to which Australia is a party, it has arisen in a number of claims made against the Canadian Government under the Northern America Free Trade Agreement (NAFTA). By way of example, AbitibiBowater Inc sought compensation from the Government of Canada (Canada) under Chapter 11 of the NAFTA for damages arising out of an act passed by the Government of Newland and Labrador (Province). In AbitibiBowater Inc's Notice of Intent to Submit a Claim to Arbitration under Chapter 11 of the NAFTA (Notice), it was argued that the provinces are political subdivisions of Canada, and Canada is therefore internationally responsible for the actions of the Province. On this basis it was argued Canada had breached Chapter 11 of the NAFTA. Following the Notice, the two parties entered into a settlement agreement in which Canada was required to pay AbitibiBowater Inc CAD$130 million. This case, and others like it in which Canada has incurred liability for the actions of its provinces, indicate that federal governments are liable for the adverse acts of its states in the context of BITs. However, it is worth noting that Article 105 of the NAFTA specifically provides that the states and provinces shall ensure all necessary steps are taken in order to give effect to the provisions of the agreement. The BITs to which Australia is a party do not appear to contain a similar article. Notwithstanding this, this claim may still provide guidance in the context of Australian BITs and their application to the Chain of Responsibility Legislation, and reaffirms the approach set out under Article 4 of the ILC.

Concluding comment

Queensland's Chain of Responsibility Legislation allows EPOs to be made against an international investor who owns or stands to gain a financial benefit from the environmentally relevant activities of a company operating in Australia. The costs of compliance with an EPO and the penalties in the case of non-compliance could result in significant liabilities being retrospectively imposed upon the investor. By implementing legislation inconsistent with an investor's expectation at the time of making the investment, investors who feel the brunt of the new legislation may have cause to consider whether they have been treated fairly and equitably, and whether Australia has honoured its obligations under the relevant BIT or FTA.

Footnotes

₁ Section 358(c) Environmental Protection Act 1994 (Qld) (EP Act).
₂ Ibid s 358(d)(iii).
₃ Ibid s 358(d)(iv).
₄ Ibid s 360(a).
₅ Ibid s 360(c).
₆ Ibid s 363AC.
₇ Ibid s 363AB(1).
₈ Ibid s 7(2)(b).
₉ Ibid s 361(2).
₁₀ Ibid s 361(1).
₁₁ Penalties and Sentences Act 1992 (Qld), s 181B.
₁₂ Environmental Protection Act 1994 (Qld), s 361(2).
₁₃ Ibid s 361(1).
₁₄ Ibid s 493.
₁₅ Vito G. Gallo v.The Government of Canada, NAFTA/UNCITRAL, Award, 15 September 2011, para. 328
₁₆ Técnicas Medioambientales Tecmed, SA v The United Mexican States, ICSID Case No. ARB (AF)/00/2 [154].
₁₇ Loewen Group, Inc. and Raymond L. Loewen v United States of America, ICSID Case No. ARB(AF)/98/3 [132].
₁₈ International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, November 2001, Supplement No. 10 (A/56/10), chp.IV.E.1, art 4.
₁₉ It is a well established rule of international law that 'the conduct of any organ of a State must be regarded as an act of that State. This rule ... is of customary character': Difference Relating to Immunity from Legal Process of a Special Rapporteur of the Commission on Human Rights, p. 87, para 62.
₂₀ International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, November 2001, Supplement No. 10 (A/56/10), chp.IV.E.1, art 32.