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Investment Protection Under the New ASEAN-Australia-New Zealand Free Trade Agreement

Winter 2010
International Disputes Quarterly
Eckhard R. Hellbeck

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On January 1, 2010, the Agreement Establishing the Association of Southeast Asia Nations-Australia-New Zealand Free Trade Area (AANZFTA) entered into force for Australia, Brunei, Burma, Malaysia, New Zealand, the Philippines, Singapore and Vietnam. The AANZFTA will also enter into force for Indonesia, Cambodia, Laos and Thailand once they have ratified it. It will then cover all ten ASEAN nations, Australia and New Zealand (AANZ). Why does this matter?

First, the AANZFTA establishes one of the world's largest free trade areas, substantially reducing tariffs and removing other trade barriers among its 12-member countries with a total population of more than 600 million people.

Second, the AANZFTA, in its Chapter 11, grants a modern set of investment protections to investors from one AANZ country investing in another AANZ country, including the right to resort to international arbitration of disputes that may arise with the host country about the investment. This note provides an overview of those protections and discusses how they might apply even to an investor from a non-AANZ country making an investment in an AANZ country.

Conceptually, one might expect a multilateral treaty such as the AANZFTA to apply uniform legal standards to all State parties. Generally, Chapter 11 of the AANZFTA appears to live up to that expectation. Careful review, however, reveals a number of carve-outs for individual ASEAN countries, both in the body of the treaty provisions and in footnotes. Indeed, Article 1(e) of the AANZFTA states that one of its objectives is to "provide special and differential treatment to ASEAN Member States, especially to the newer ASEAN Member States, to facilitate their more effective economic integration." Article 15 of Chapter 11 spells this out in greater detail with regard to investment protection. Advisers to foreign investors thus should pay close attention to the details of Chapter 11.

Who And What Is Covered?
Like most investment protection agreements, Chapter 11 of the AANZFTA contains definitions of the terms "investment" and "investor" to clarify the scope of its coverage. Article 2 defines the covered "investment" broadly as "every kind of asset owned or controlled by an investor" and then lists examples of such assets, such as: movable and immovable property rights; participation in companies; intellectual property rights; contractual rights; or business concessions. Although claims to money may also qualify as an "investment," footnote 3 clarifies that a claim to money arising solely from a commercial contract for the sale of goods or services, or from the extension of credit in connection with such a contract, does not qualify as an "investment." This is broadly consistent with the jurisprudence of arbitral tribunals interpreting the scope of what generally constitutes an "investment" under bilateral investment treaties.

Article 2 also defines the term "investor," which is crucial to determining who may benefit from the investment protections of Chapter 11. If the investor is a natural person, it must be a national or citizen, or a permanent resident, of an AANZ country in order to be covered by the protections of Chapter 11. The fact that Chapter 11 thus extends its protections to permanent residents, besides citizens and nationals, is unusual because it effectively broadens the scope of protection to nationals of non-AANZ countries, provided they have permanent residency status in an AANZ country.

If the investor is a juridical person, it must be constituted or organized under the law of an AANZ country in order to benefit from the protections of Chapter 11. The definition of "investor" expressly includes not-for-profit organizations, which is rare in investment protection treaties.

If a non-AANZ company (for example a Japanese, European or US company) wishes to invest in an AANZ country, can it acquire the protections of Chapter 11 simply by incorporating a holding company in one AANZ country and channeling its investments in other AANZ countries through the holding company? Article 11, entitled "Denial of Benefits," addresses this issue. Article 11 allows the host State of the investment to deny the benefits of Chapter 11 (i.e., the investment protections) to a juridical person (and its investment), despite the fact that it qualifies as an "investor" under the Article 2 definition, if that juridical person is owned or controlled by a person of a non-AANZ country and has no substantive business operations in the AANZ country in which it is incorporated or organized. A non-AANZ company thus would have to incorporate a substantive business operation in one AANZ country and make investments in other AANZ countries through that operation in order to prevent the host State of the investment from successfully denying the benefits of Chapter 11 of the AANZFTA.

The host State may also deny benefits to a juridical person that qualifies as an "investor" under Article 2 but has no substantial business operations in the AANZ country in which it is organized, and is owned or controlled by a person of the host State. This reflects the classic tradition in public international law for States to grant treaty benefits only to non-nationals.

Special denial of benefits rules apply to investments in Thailand and the Philippines. Under Article 11(2), Thailand has the right itself to determine whether an "investor" is owned or controlled by a person of a non-AANZ country, or by a Thai national, as a basis for denying benefits. Further, Article 11(3) contains special definitions of what constitutes ownership and control with respect to Thailand. In the event of an investor-State dispute, this rule may in effect withdraw the issue of ownership or control from review by an arbitral tribunal.

With respect to investments in the Philippines, Article 11(4) grants the Philippines the right to deny benefits if it establishes a violation of its so-called Anti-Dummy Law. Incidentally, the Anti-Dummy Law, which limits foreign investment in certain Philippine public utilities, was key to a recent award (presently under review) by an international tribunal deciding that it lacked jurisdiction over a bilateral investment treaty claim based on its finding that the foreign investor had made its investment in violation of the Anti-Dummy Law.

Substantive Investment Protections
Chapter 11 contains many of the substantive protections found in most investment protection treaties, but it is important to note the details, especially limitations, reservations and exceptions:

National Treatment is granted in Article 4 but, according to footnote 5, its "application...is subject to Article 16." Article 16 then clarifies that the States parties will discuss and prepare schedules of reservations to Chapter 11, and that Article 4 shall not apply until such schedules have entered into force. Article 12, which contains certain reservations with respect to national treatment, also shall not apply until such time. Foreign investors thus will not be able to invoke the national treatment standard until a later date and, even then, it will apply only subject to the reservations included in the schedules.
Article 6 (1) obligates the AANZ countries to accord Fair and Equitable Treatment. Presumably in order to counteract a perceived tendency of international arbitral tribunals to interpret the fair and equitable treatment standard broadly, Article 6(2)(a) goes on to define that standard as requiring State parties "not to deny justice in any legal or administrative proceeding." Article 6(2)(c) further clarifies that the standard is limited to the customary international law minimum standard for the treatment of aliens.
Article 6(1) also obligates the AANZ countries to provide Full Protection and Security, which it defines as an obligation "to take such measures as may be reasonably necessary to ensure the protection and security of the covered investment." The scope of protection under that standard also is limited to what is required under customary international law.
Article 8 grants investors the right to Transfer Payments relating to the investment freely and without delay, in a freely convertible currency, into and out of the host State. Under Article 8(3), the host State may limit the investor's right to transfer payments only "through the equitable, non-discriminatory, and good faith application of its laws and regulations relating to certain areas listed in Article 8."
Article 9 provides the customary international law standard of prompt, adequate and effective Compensation for Expropriation. It is important to note, however, that Chapter 11 also contains a novel "Annex on Expropriation and Compensation," which spells out a number of detailed factors that must be considered in determining whether government action constitutes an expropriation in a particular case, thus limiting an arbitral tribunal's margin of appreciation in this regard, and potentially restricting the scope of what may constitute an expropriation.

It is noteworthy that Chapter 11 does not contain two types of clauses whose meaning has been the subject of intense debate and litigation in recent years:

A Most-Favored Nation Clause requiring the host State to grant the same level of treatment that it grants to a foreign investor from any country to foreign investors from all other countries. Article 16(2)(a) requires the States parties to
discuss further the application of most-favored nation treatment to Chapter 11.
An Umbrella Clause, pursuant to which undertakings of the host State relating to the investment are granted treaty protection.

Investor-State Dispute Resolution
Article 18 contains the AANZ countries' consent to international arbitration of disputes between the foreign investor and the host State concerning the alleged breach of substantive protections under Chapter 11. In the event of such a dispute, the foreign investor thus has a powerful right to commence international arbitration directly against the host State, including before the World Bank's International Centre for Settlement of Investment Disputes (ICSID).

Significantly, Article 21 creates an exception for the Philippines and Vietnam: a claim against either State may only be brought before the courts or tribunals of that State, provided however that such courts or tribunals have jurisdiction over such claim.

Overlap With Existing Treaties
Given the large number (approximately 3,000) of bilateral and multilateral investment treaties in force among countries around the world, it is not surprising that several such treaties already exist among two or more of the AANZ countries, such as the 1987 ASEAN Investment Agreement, the 1998 Framework Agreement on the ASEAN Investment Area and numerous bilateral investment treaties. Adding the AANZFTA to the mix may result in overlaps and even inconsistencies.

Under Article 30 of the Vienna Convention on the Law of Treaties, the later-in-time rule generally applies to the application of successive treaties relating to the same subject matter. This would likely result in the AANZFTA overriding earlier treaty provisions relating to the same subject matter to the extent they are in force among the same parties. Chapter 18 of the AANZFTA, however, appears to indicate that the parties to the AANZFTA apparently wished to exclude automatic application of the later-in-time rule: Chapter 18, Article 2(5) of the AANZFTA states that the provisions of the AANZFTA shall not apply to agreements among ASEAN countries or any ASEAN country and Australia or New Zealand. Moreover, Article 2(3) provides that in the event of an inconsistency between the AANZFTA and any other agreement among AANZ countries, the countries involved "shall immediately consult with a view to finding a mutually satisfactory solution."

For the foreign investor, the fact that the AANZFTA thus left open the resolution of overlaps and inconsistencies among the various treaties may result in open questions as to what rules apply to a given investment project.

Conclusion
Upon preliminary review, Chapter 11 of the AANZFTA certainly is a step in the right direction toward providing globally accepted international law protections to foreign investments in ASEAN countries. Nonetheless, the various limitations, exceptions and reservations to the substantive protections, and the lack of clarity as to the applicable treaty regime, may result in an increased need for foreign investors to obtain international legal advice from specialists in preparing to invest in ASEAN countries.

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