Australia: Investing overseas and ISDS – Are you adequately protected by a treaty with investor-state dispute settlement provisions?

Investor-state dispute settlement (ISDS) is a relatively recent phenomenon. Historically, foreign investors whose investments suffered due to actions of the host state were forced to persuade their home state to pursue a claim against the host state. However, beginning with the bilateral investment treaty (BIT) entered between Italy and Chad in 1969, states have been inserting clauses into their BITs and free trade agreements that allow investors of one state party, whose investments are harmed by the actions of another state party, to assert claims directly against that host state in investor-state arbitration. In effect, these investor-state dispute resolution provisions are analogous to arbitration clauses in commercial contracts as they establish the consent necessary for a valid arbitration. Accordingly, it is critical that corporations who conduct business overseas ensure that any investment so made is protected by a treaty with an ISDS mechanism.

A recent French-language ICSID award, published 5 August 2016, is a pertinent reminder that this (seemingly) simple step should not be overlooked. In Menzies Middle East and Africa SA & Aviation Handling Services International Ltd v Senegal,1 two aviation companies, Menzies Middle East and Africa (Menzies), registered in the British Virgin Islands, and Aviation Handling Services (AHS), based in Luxembourg, brought an arbitration against the Republic of Senegal after Senegal placed one of its subsidiaries into administration. AHS claimed the tribunal had jurisdiction under the Senegal-Netherlands BIT because one, the World Trade Organisation's General Agreement on Trade and Services (GATS), to which Senegal, Luxembourg, and the Netherlands are parties, had a most favoured nation clause and two, that clause allowed AHS to invoke the ISDS mechanism in the Senegal–Netherlands BIT. The tribunal rejected the argument and found that Senegal had not unequivocally consented to submit disputes to arbitration in part because the GATS was completely silent on arbitration and, more generally, dispute resolution. Without clear consent, Senegal could not be forced to arbitrate against its will. Menzies brought its claim under the Senegal–UK BIT but the tribunal found that any offer to arbitrate would not apply to Menzies because it was incorporated in the British Virgin Islands, a British overseas territory which did not fall within the territorial scope of the BIT.

This recent award highlights the need for investors to ensure that their investments are protected by international treaties with concomitant ISDS provisions. One way in which corporations may ensure they have this protection is to incorporate in a country with which a BIT exists and channel any investment through that subsidiary.2 However, investors must not wait until the point at which they are facing a dispute to ensure they have this protection. While it is perfectly legitimate for an investor to protect itself from the risk of future disputes by structuring its investment so that it is protected by a treaty that provides for investor-state arbitration, it cannot do so after a dispute arises. Indeed, if an investor restructures its investment to gain access to ISDS protection when a dispute is already in existence, reasonably anticipated, or reasonably foreseeable, a tribunal may find that any investor-state arbitration brought is "an abuse of right" and dismiss the arbitration on jurisdictional grounds.3

This was the case in the widely reported Award on Jurisdiction and Admissibility in Philip Morris Asia Ltd v Australia, which was published on 17 December 2015.4 In that arbitration, Philip Morris Asia sued the Australian Government for certain violations under the Hong Kong-Australia BIT by reason of its tobacco plain packaging legislation. Philip Morris International sought to obtain the benefit of the Hong Kong-Australia BIT by restructuring itself so that Philip Morris Asia, its wholly owned subsidiary and a company incorporated in Hong Kong, held the shares of Philip Morris (Australia) Limited. Critically, this restructuring took place after the Australian Government announced its intention to introduce plain packaging legislation. Philip Morris Asia argued the restructuring was part of a broader international process designed to minimise tax liabilities and optimise cash flow, but it did not produce a single witness who could testify to the rationale for the restructure or contemporaneous corporate memoranda or other internal correspondence to support the argument. As a result, the tribunal found that the "main and determinative, if not sole, reason for the restructuring" was to gain the protection of the ISDS provisions in the Hong Kong–Australia BIT.5 Accordingly, the commencement of the arbitration was an abuse of right, and the claims brought against Australia were dismissed.

Both Philip Morris and Menzies demonstrate what can occur if corporations fail to consider what treaty protections exist with respect to their overseas investments before a dispute arises. The cases highlight the need to obtain sound legal advice on applicable treaties at the outset of any new overseas investment (as well as in relation to existing investments). Of course, multinational corporations and other overseas investors prefer not to consider potential disputes that may arise in a seemingly friendly foreign jurisdiction. Nevertheless, contemplation of these matters and concordant preparation can be the difference between retaining the value of an investment and recovering nothing should a host state take an adverse action.

Footnotes

1 Menzies Middle East and Africa SA & Aviation Handling Services International Ltd v Senegal (Award).

2 However, some (more modern) treaties limit the capacity to adopt this strategy.

3 Tidewater Inc v Venezuela (Decision on Jurisdiction).

4 Philip Morris Asia Ltd v Australia (Award on Jurisdiction and Admissibility).

5 Ibid 184 [584].

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions