Indonesia-Australia Comprehensive Economic Partnership Agreement comes into force - Inward/ Foreign Investment

The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) officially came into force on 5 July 2020. It was signed by Indonesia and Australia in March 2019 and then survived domestic ratification in both countries. It takes effect at a time when Australia and Indonesia are seeking to work together more closely, including in relation to Indonesia's response to COVID-19.

The IA-CEPA's Investment Chapter updates the investment rules between the two countries which were contained in the Indonesian-Australian 1992 Bilateral Investment Treaty (BIT). It is more modernised than its predecessor and aims to better balance the right of an investor to bring a claim with the right of the government to regulate in the public interest. It contains standards of protection which are better defined but which contain appropriate carve-outs to allow both governments to make decisions in key policy areas such as the environment, health and social welfare.

The IA-CEPA provides Australian and Indonesian investors with access to an independent arbitral tribunal to enforce those standards but the mechanism cannot be used to challenge a State's public health measures.

Some of key provisions of the IA-CEPA's Investment Chapter include the following:

Investor

The definition of investor is relatively broad. It is defined as a natural person or enterprise of one country that "seeks to make, is making, or has made" an investment in the other country.

There are three points of note here. First, an enterprise of a country must be constituted in accordance with that country's laws and carrying out business activities there. There is no requirement that the enterprise must carry out "substantial" business activities - as there is in other international investment agreements like the Australia-Hong Kong Free Trade Agreement (FTA).

Secondly, the definition of investor goes further than the 1992 BIT and other international investment agreements by including an investor that "seeks to make" an investment in the other country. An investor who has merely taken active steps to make an investment comes within the scope of the agreement. For example, an investor may have channelled resources or capital into the country in order to set up a business or apply for a permit or licence there.

Thirdly, the definition of investor needs to be read with the denial of benefits clause in Article 14.3 which permits the exclusion of certain investors from protection. It enables Australia or Indonesia to deny the benefits of the Investment Chapter to an investor, for example, who is owned or controlled by persons of a third country with no substantial business activities in the State. (In this context the business activities must be "substantial").

By this exception, the IA-CEPA will curtail investors who structure themselves through a shell company in order to optimise investment protection. The State can invoke the denial of benefits clause at any time, including after an investor has submitted a claim to arbitration.

Standards of protection

The IA-CEPA contains the usual standards of protection for investors found in most international investment agreements but in more detail. For example:

It gives (some) meaning to the standard fair and equitable treatment protection. It requires each State to not deny justice in any legal or administrative proceedings. The mere fact that a State acts in a way that is inconsistent with an investor's expectations does not constitute a breach of this standard.
It prohibits the imposition of performance requirements by a State on an investment. Clauses of this nature are emerging in modern international investment agreements. The IA-CEPA's prohibition on performance requirements is relatively stringent. Neither government can impose a requirement on an investor to export a given percentage of goods or require an investor to use or purchase (or even prefer) goods produced in that country.
It ensures that investment-related capital transfers can occur freely and without delay.
It contains the usual national treatment and most favoured nation (MFN) standards to ensure foreign investors are treated no less favourably than domestic investors. It takes a position on a point of controversy in investment jurisprudence by excluding procedures, for the resolution of disputes provided for in other investment agreements, from the ambit of the MFN clause.
It protects against direct and indirect expropriation (without fair compensation). Direct expropriation occurs when an investment is nationalised or directly expropriated through formal transfer of title or outright seizure. Indirect expropriation is where an action or series of actions has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. Factors which may evidence indirect expropriation include:
- the economic impact of the action;
- whether the action breaches a binding written commitment to the investor; and
- the character of the action, including its objective and whether it is disproportionate to the public purpose.

It will be assessed on a case-by-case basis, as a fact-based inquiry. Critically, non-discriminatory regulatory actions by a State designed to achieve legitimate public welfare objectives, such as the protection of public health, safety and the environment, do not constitute expropriation.

The IA-CEPA introduces a range of general exceptions to its investment protections, none of which existed in the 1992 BIT, by which each State reserves the right take measures in key policy areas such as the environment, health, social welfare, consumer protection and cultural diversity.

Unlike other recent FTAs, such as the Australia-Hong Kong FTA, the IA-CEPA does not include a carve-out for measures relating to tobacco. However, given Indonesia challenged Australia's tobacco plain packaging law before the World Trade Organisation, this omission is unsurprising.

Investor State Dispute Settlement (ISDS)

The ISDS mechanism provides investors from both countries with access to an independent arbitral tribunal to resolve disputes (which cannot first be resolved by consultation or conciliation). The ISDS mechanism cannot be used to challenge a State's public health measures. This is particularly relevant in the current environment where we see governments globally taking various measures to prevent the spread of COVID-19 - although any investment dispute arising out of the implementation of COVID-19 measures would likely have occurred prior to entry into force of this Agreement.

The ISDS mechanism also contains procedural safeguards to protect both governments, including:

expedited review of claims that are frivolous or manifestly without legal merit;
mechanisms to deter unmeritorious claims, including through the award of costs;
time limits on bringing a claim; and
for the first time in an Australian FTA, the right to order the investor to provide security for costs.

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.