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On 30 July 2008, Australia and Chile signed a free trade agreement (Chile FTA). The Chile FTA contains, amongst other things, comprehensive provisions relating to the promotion and protection of foreign investment and the management and resolution of investor-state investment disputes.

The provisions supersede the previous investment treaty regime contained in the Australia-Chile Bilateral Investment Treaty (Chile BIT). They provide an interesting insight into the ways in which Australia’s approach to investment protection and investor-state dispute resolution is developing.

Background

Australia’s bilateral investment treaties or BITs (and the investment sections of various FTAs, including the Chile FTA) - like the 2,500 other BITs around the world - provide foreign investors of one country with substantive protections against unfair or improper treatment of their investment by the government of another country (the host government in the country where the investment is made). They also provide the investor with the ability to make a claim for compensation in respect of such treatment by means of international arbitration.

Chapter 10 of the Chile FTA is the section devoted to investment. The chapter has many of the features of Australia’s other BITs but with some significant additions and changes.

An “investor” is defined simply as “a national or an enterprise of a Party [i.e. of Australia or Chile as the case may be] that attempts to make, is making or has made an investment in the territory of the other Party”. An “investment” is defined widely to include companies, shares, debentures, futures, contractual rights, IP, concessions and all forms of property. Significantly, the investment must have the “characteristics of an investment” which are stated to include commitment of capital, the expectation of gain or profit, or the assumption of risk.

The Chile FTA provides for a number of familiar protections to a foreign investor with a qualifying investment. These are:

• national treatment (a foreign investor must be given treatment no less favourable than domestic investors)
• most favoured nation treatment (a foreign investor must be given treatment no less favourable than given to investors from a third country)
• civil strife (a foreign investor must be given treatment no less favourable than a domestic investor in respect of losses suffered due to civil strife or armed conflict, and
• expropriation (a foreign investor cannot have its investment expropriated directly or indirectly unless the government does so under proper terms including providing prompt, adequate and effective compensation).

Unlike nearly all of Australia’s BITs and FTAs, the Chile FTA has replaced the obligation to provide “fair and equitable treatment” to investors with a requirement to provide a minimum standard of treatment in accordance with customary international law. This standard of treatment is more restrictive than the standard which has often been applied under the phrase “ fair and equitable” in other BITs.

In addition to these more usual provisions, the Chile FTA has also added certain “mandatory performance requirements” in respect of investments which prevent the host government from enforcing requirements on companies (in which the foreign investor has a stake) such as a fixed level of exports, a given amount of domestic content or supply to a specific market or region.

Similarly, governments cannot require an investor to appoint individuals of a particular nationality to senior management positions although they can require a majority of a board to be of a particular nationality as long as this does not “materially impair” the ability of the foreign investor to control its investment.

Like the Singapore and Thai FTAs, the Chile FTA also contains a denial of benefits provision which allows a government to deny benefits to an investor that is not Chilean or Australian (as the case may be) or is, in reality, a domestic investor of the host government (albeit that the investor may technically qualify as an investor under the FTA by virtue of its incorporation in either Chile or Australia).

Like all other FTAs and BITs to which Australia is a signatory (apart from, significantly, the US FTA), the Chile FTA provides for resolution of any dispute between an investor and the host government by means of international arbitration.

A pre-condition of recourse to arbitration is a requirement to consult and negotiate to resolve the dispute. A claim can be made in arbitration if the dispute is not resolved after six months.

The arbitration provisions of the Chile FTA are significantly more detailed than in most other Australian BITs and FTAs. They provide for arbitration under the ICSID Rules (including the Additional Facility Rules), the UNCITRAL Rules or any other rules that the parties may agree upon.

The Chile FTA requires that arbitrators who are appointed have “the expertise or experience in public international law, international trade or international investment rules” and provides that the costs of arbitration will be borne equally unless otherwise decided by the tribunal.

The tribunal will have important powers in respect of the conduct of the arbitration. In particular, the tribunal may consider submissions from third parties (and, in addition, the government of the investor may, in certain circumstances, make submissions concerning the interpretation of the FTA as it pertains to the dispute) and may consider a preliminary submission that the claim is “manifestly without legal merit”. In addition, there are a number of other detailed provisions in respect of procedural matters such as expert reports, consolidation of other disputes and rendering of awards. This level of detail is not present in most other Australian BITs and FTAs.

Importantly, arbitration proceedings are required to be open to the public (subject to a number of safeguards in respect of confidential or privileged information) and the respondent government must make available to the public all of the documents in the dispute, including copies of pleadings, memorials and transcripts. Provision for transparency of this sort is a significant departure from the provisions contained in other Australian BITs.

The Chile FTA provides for a Joint FTA Committee to issue interpretations on any provision of the FTA and such an interpretation is binding on any tribunal considering a dispute under the FTA. Again, this is a new development in Australia’s FTA and BIT practice and follows the example of, amongst others, the North American Free Trade Agreement (NAFTA) in having a body which resolves issues of meaning (something doubly important as any tribunal is required to apply, as the governing law, the terms of the FTA and international law). In this regard, it should be noted that the two governments have confirmed that:

• The minimum standard of treatment of aliens under customary international law includes all such customary law in relation to the protection of economic rights.
• Expropriation must involve an interference with tangible or intangible property.
• Indirect expropriation requires a fact-based enquiry considering the economic impact of government action, interference with reasonable “investment-backed” expectations and the character of government action. Critically, in respect of such indirect expropriation the two governments have agreed that it will only be in “rare circumstances” that non-discriminatory regulatory actions designed to protect legitimate public welfare - such as public health, safety and the environment - will constitute expropriation.

Comment

The investment provisions of the Chile FTA represent a significant advance on other Australian BITs and FTAs in both scope and detail. It is likely that these changes were driven by a desire for greater certainty about the process of investor-state dispute processes on the part of the signatory governments and a need to respond to the developments in this area of international law over the past few years.

Some of these changes reflect the unusual, and often political, nature of investment disputes. Nowhere is this more apparent that in the treatment of third parties and confidentiality. In recent years investment tribunals have been increasingly open to the participation of third parties (such as NGOs and other advocacy bodies) bearing in mind the often controversial issues of public policy which may be dealt with in an investor-state dispute. Sometimes the power of the tribunal to do this has been called into question; the Chile FTA has embraced the idea by providing the tribunal with an explicit power to admit such third party briefs. In respect of confidentiality, the two governments have opted for a very comprehensive “open” regime. This underlines the trend in investor-state arbitration for proceedings to be transparent given their political importance and to meet criticism of the process from some quarters that the traditional confidential nature of arbitration was inappropriate for investment disputes.

Other changes point towards attempts by the two governments to deal with more problematic areas of international investment law. One of the most keenly debated issues is the extent to which the obligation to provide “fair and equitable” treatment has been expanded in some disputes to cover a broader notion of treatment than the minimum standard prescribed by customary international law.

The two governments have chosen to make it clear that the minimum standard applies thereby making it somewhat harder for investors to succeed in relation to such a claim. In addition, the Chile FTA makes clear that a lot of government regulatory conduct in important public policy areas (e.g. health and the environment) is unlikely to be considered as a measure amounting to expropriation - thereby addressing a trend in recent decisions to bring such conduct within the sphere of indirect expropriation. In both cases the governments have chosen to provide greater certainty to tribunals so as to avoid both speculative claims and unnecessary complication of disputes. Whether that decision is correct, or good for investors, is a matter for debate.

There is much else that is worthy of comment in the Chile FTA but, speaking generally, the new agreement represents very significant development of Australia’s foreign investment practice and a likely template for the investment protection provisions of future FTAs and BITs. Given this, the agreement repays careful study.