Can Clive Palmer use Investor-State Dispute Settlement to get what the High Court wouldn't give him?
This is the second of two posts AUSPUBLAW is featuring on the High Court’s Decision in Mineralogy v WA. Anne Twomey’s accompanying post is here.
Jonathan Bonnitcha
01.12.2021
The High Court’s decisions in Mineralogy v WA and Palmer v WA end the dispute between Mineralogy/Clive Palmer and the Western Australian government as a matter of Australian law. It is not, however, the end of the dispute. A Singaporean-incorporated entity in Palmer’s corporate group is now poised to commence international arbitration. This international arbitration concerns the ‘Amending Act’, which stipulates that Western Australia has no liability in relation to alleged breaches of its State Agreement with Mineralogy and also declares that an earlier award in an Australian arbitration arising from the underlying dispute between Mineralogy and Western Australia is of no legal effect. The entity in question – Zeph Investments – claims that the Amending Act breaches Australia’s international obligations under the Singapore-Australia Free Trade Agreement (the FTA) relating to foreign investment. If these claims are successful, the outcome of the international arbitration will likely be a binding and enforceable award requiring Australia (ie, the Commonwealth) to pay monetary damages.
That Palmer’s dispute with the WA government will now continue in another forum raises a range of questions. What is this international system for the protection of investment and why was it established? Should Australia continue to provide investors with options for further recourse beyond the High Court? And what are the constitutional implications of an international system that holds the Commonwealth responsible for the conduct of the Australian states?
With these questions in mind, this post is divided into three parts. Part A briefly introduces the system of investor-state dispute settlement (ISDS) under treaties on foreign investment. Readers may recall Philip Morris’s challenge to Australia’s tobacco plain packaging legislation in 2011 – the last high profile ISDS case involving Australia. Part B provides an assessment of the prospects of success of Palmer’s (or, more precisely, Zeph Investments’) claims under the FTA. Part C considers some of the wider questions raised by the parallel application of Australian constitutional law and international investment law in this case. Insights from international investment law justify the Australian constitutional position that Western Australia has the power to extinguish Palmer’s contractual rights, and that misuse of this power is appropriately controlled through reputation effects and the political constraints inherent in the legislative process, rather than through constitutional limits on legislative power enforced by courts. A perspective from international investment law also highlights underlying problems with Western Australia’s practice in relation to State Agreements.
In the discussion that follows, I assume that readers are already familiar with the factual background of the case, which are set out clearly in Professor Twomey’s post. Earlier posts on this blog by Professor Seddon and Dr Brown also provide important background.
A What is ISDS?
The Singapore-Australia Free Trade Agreement is just one of over 2,500 treaties globally dealing with the protection of foreign investment. Australia is party to 25 such treaties. The provisions of these treaties, whether found in investment chapters of FTAs (as is the case with Chapter 8 of the FTA) or freestanding bilateral investment treaties, are remarkably similar in structure and content.
These treaties have two central components. The first is the specification of a set of legal protections that each state party to the treaty (ie, Australia and Singapore, in the case of the FTA) grants to foreign investors from the other state party. These legal protections are defined in abstract terms – normally including guarantees of ‘fair and equitable treatment’, ‘full protection and security’ and payment of full compensation in the event of expropriation of an investment. Because these legal standards are created and defined in treaties, they bind each state party as a matter of international law. This means that the obligations contained in the treaty cannot be modified or extinguished by the unilateral action of either state party to the treaty, or by the action of any sub-national organ of a state party – ie, these legal protections cannot be modified or extinguished by legislation enacted by the Parliament of Western Australia.
The second component of such treaties is the advance consent of each state party to binding arbitration of claims brought by investors or the other state party that the ‘host’ state has breached these legal protections. The arbitration is governed by procedural rules adopted by reference in the treaty. This system of arbitration – popularly known as ISDS – is highly unusual as a matter of international law. There are few other adjudicative mechanisms that allow non-state actors to bring claims against states under international law.
ISDS differs from judicial proceedings. Arbitral tribunals are constituted solely for the purpose of resolving a specific dispute. The investor bringing the claim appoints one arbitrator, the respondent state appoints a second arbitrator, and the investor and the state then agree on the appointment of a third, presiding, arbitrator. The arbitration is ordinarily conducted in a regional arbitration hub, not in the territory of the respondent state. The tribunal’s decision is final and the tribunal dissolves once its final award is rendered. There is no possibility of appeal and only limited possibilities for review of the decision. (These possibilities for review depend on where the arbitration takes place and the procedural rules that govern it, and are beyond the scope of this discussion.) The ad hoc nature of arbitration and the absence of an appeals process means there is no mechanism to ensure consistency between decisions. There is, however, a practice of cross-citation of past ISDS awards, which makes it possible to guess how a tribunal might approach a pending dispute.
Arbitral tribunals’ awards in ISDS proceedings are backed by powerful mechanisms for enforcement, under either the New York Convention or the ICSID Convention (depending on the procedural rules governing the arbitration). If a state refuses to pay an award of compensation against it, the investor can then seek to seize state assets in almost any other country around the world to satisfy the award. This mechanism for enforcement creates incentives for compliance. India, for example, initially refused to comply with ISDS awards of USD billions in damages arising from disputes with foreign investors about the retroactive application of capital gains tax. But when one of the investors began proceedings across multiple jurisdictions to seize Indian government assets, and obtained court orders in Paris against 20 Indian government properties, the Indian government scrapped its tax legislation and refunded the disputed billions to the investors.
Investment treaties in general, and the ISDS mechanism specifically, are controversial. Supporters of the system argue that it encourages beneficial foreign investment in developing countries and that it embodies a commitment to the rule of law in investor-state interactions. Critics argue that the system grants investors special rights that are not available to any other class of actor. They draw attention to the imperial origins of today’s investment treaties, and argue that the system restricts the normal operation of democratic processes in jurisdictions in which investors voluntarily choose to operate. In previous work, I have argued that there is little reliable evidence to support the supposed benefits of investment treaties. The existence of such treaties between developed states with well-functioning court systems is particularly misguided.
B Prospects of success of claims under the Singapore-Australia FTA
Zeph Investments’s claims under the FTA raise a series of legal issues. The first is whether Clive Palmer’s investments in Western Australia are covered by the FTA’s investment chapter. This question relates to jurisdiction. If a tribunal is satisfied that it has jurisdiction, the next question relates to the merits of the claims: whether the Amending Act breaches Australia’s investment protection obligations under the FTA. If the tribunal were to find that Australia has breached any of these obligations, the final question would be the amount of damages Australia owes to Zeph Investments on account of the breach.
B.1 The jurisdictional obstacles to Zeph Investments’ ISDS claims
Clive Palmer, as his nationalistic political advertisements remind us, is Australian. Mineralogy and the other six companies that are party to the State Agreement with Western Australia are all incorporated in Australia. What does a trade agreement that governs foreign investment between Australia and Singapore have to do with a dispute between the state of Western Australia, an Australian citizen and his seven affiliated Australian companies?
The answer to this question lies in the open jurisdictional terms of investment treaties, including Chapter 8 of the FTA. As is common, Article 1 of Chapter 8 defines a Singaporean investor as any enterprise constituted in Singapore. Zeph Investments is incorporated in Singapore, where it was registered in January 2019. Article 1 also defines the investments protected by Chapter 8 as including shares in Australian companies owned by a Singaporean investor and, arguably, also as including the underlying Australian assets and contractual rights of an Australian company in which a Singaporean investor owns shares. In its request for consultations (the first step in initiating arbitration), Zeph Investments asserts that it owns and controls two key Palmer-affiliated Australian companies: Mineralogy and International Minerals. If this is true, Zeph Investment is entitled to bring a claim against Australia under Chapter 8. The fact that the structure of Palmer’s corporate group may involve the artificial ‘round-tripping’ of Australian investment in Australia via a Singaporean intermediary is not, in itself, a barrier to the applicability of the FTA.
There are, however, two arguments that Australia could raise to preclude Zeph Investments from bringing claims under Chapter 8. The first is that Zeph Investments has ‘no substantial business activities’ in Singapore. In that case, the ‘denial of benefits’ provision in Article 18 of Chapter 8 allows Australia to exclude Zeph Investments from the protection of the treaty. However, tribunals have tended to interpret denial of benefits clauses narrowly. In general, it has been enough for investors to show they have some business activity in their nominal ‘home’ jurisdiction – eg, an office and employees – to avoid the operation of a denial of benefits clause.
The second potential obstacle for Zeph Investments is the implied doctrine of ‘abuse of process’. This is the basis on which Australia succeeded in the plain packaging dispute under the Hong Kong-Australia investment treaty. In that case, the Philip Morris group shifted ownership of its Australian assets to a Hong Kong-based entity after Australia had announced its intention to introduce tobacco plain packaging legislation, but prior to the enactment of that legislation. The tribunal explained that it would not exercise jurisdiction in circumstances where there is a reasonable prospect that a specific dispute will arise and in which an investor subsequently carries out a corporate restructure for the principal purpose of manufacturing jurisdiction for a future ISDS claim.
It seems that Zeph Investments acquired its stake in Mineralogy and International Minerals in 2019. This was several years after the dispute with Western Australia about the 2012 and 2014 proposals had arisen (see further information about the origins of the dispute in Professor Seddon’s earlier post), but prior to any public action to indicate that the Western Australian government was considering the Amending Act. It is difficult to predict how a tribunal would decide this issue, as any evaluation of the timing and purpose of the restructure depends on internal corporate documents that are not public.
B.2 The merits of the claims under Chapter 8 of the FTA
If Zeph Investments clears these jurisdictional hurdles, it would have a good chance of success on the merits.
Article 13 of Chapter 8 of the FTA requires Australia to provide compensation for the expropriation of any Singaporean investment by Australia. As a matter of international law a state – ie, Australia – is responsible for all its organs of government, including sub-national organs of government. As such, the conduct of the Western Australian Parliament in passing the Amending Act is attributed to Australia and Australia must answer for it.
The Amending Act is careful to preserve the Palmer group’s underlying rights, such as the tenements and the Mining Lease referred to in the Agreement, as well as the right to submit further proposals under the State Agreement and to have such proposals dealt with according to the Agreement’s terms. It is only Mineralogy’s rights in relation to the ‘disputed matters’, including its contractual rights embodied in the Australian arbitral awards of 2014 and 2019, that are extinguished.
These facts raise a conceptual question of whether specific contractual rights can be ‘expropriated’ independently of the wider investment to which they pertain. On one view, there has been no expropriation of Zeph’s investment while Mineralogy retains the underlying mining rights and the ability to bring proposals to develop those mining rights under the State Agreement. However, in Saipem v Bangladesh, an ISDS tribunal characterised an arbitral award arising from a contractual dispute between an investor and a state entity as an ‘investment’ that is, itself, capable of expropriation. On this view, the Australian arbitral awards of 2014 and 2019 are investments and it follows that the Amending Act’s extinguishment of those awards is an expropriation that requires compensation. There is a further question as to whether a tribunal constituted under the FTA would follow Saipem, as the FTA specifically excludes judgments in judicial proceedings from the scope of ‘investments’ protected by Chapter 8. It could be argued, by analogy, that this also excludes arbitral awards from being characterised as freestanding investments capable of expropriation.
The greater challenge for Australia is the ‘fair and equitable treatment’ standard contained in Article 6 of Chapter 8 of the FTA. Although ISDS tribunals’ interpretation and application of this standard has been inconsistent, the standard is often understood to protect investors from ‘arbitrary’ conduct and conduct that breaches investors’ ‘legitimate expectations’.
The decision of an ISDS tribunal in Tethyan Copper v Pakistan provides some guidance as to how a tribunal might apply these vague standards in the present case. Tethyan Copper concerned the Pakistani province of Balochistan’s refusal to issue a mining lease required for an Australian mining company to proceed with a proposed gold mine. The underlying contractual Agreement between the investor and the province stipulated that if the investor:
elects to develop a mine then, subject only to compliance with routine Government requirements, it shall be entitled to convert the relevant Prospecting Licence(s) held by it into Mining Licences…
The tribunal approached the issue through the rubric of the investor’s legitimate expectations. It concluded that the refusal to issue the mining lease was not justified under Balochistan’s mining regulations and that assurances from government officials reinforced the investor’s legitimate expectations that the mining lease would be granted. On these grounds, the tribunal held that Pakistan had breached the investor’s legitimate expectations that the grant of the mining lease would be a routine matter and, therefore, the fair and equitable treatment obligation in the treaty.
An additional difficulty for Australia is that ISDS tribunals have been especially sceptical of retroactive legislation designed to reverse the outcome of earlier adjudicative proceedings. For example, the case of Vodafone v India arose out of an underlying dispute between Vodafone and the Indian tax authorities over whether Vodafone was liable for capital gains tax for its acquisition of a Hong Kong-based mobile operator that indirectly owned an Indian telco. The case was litigated all the way to the Indian Supreme Court, where Vodafone prevailed. The Indian Parliament subsequently enacted retroactive legislation, which had the effect of holding Vodafone liable for capital gains tax on the earlier acquisition. Vodafone then launched ISDS proceedings under the Netherlands-India Bilateral Investment Treaty. In an unpublished award, the tribunal concluded that this retroactive imposition of a tax liability breached the treaty’s fair and equitable treatment provision.
B.3 Damages in ISDS proceedings
If Zeph Investments were successful in any of its claims in ISDS, the outcome would almost certainly be an award of monetary damages to compensate for the loss resulting from the breach. Depending on how the claim is framed and decided on the merits, damages could be calculated either by reference to:
the loss of value of the (hypothetical) arbitral award that would have been rendered in the Australian arbitration had it been allowed to continue to its conclusion, or
the loss of the chance to have the Balmoral South Project properly considered and approved in a timely manner by the Western Australian government.
ISDS tribunals have adopted inconsistent approaches to the calculation of damages, particular in disputes involving loss of a chance. A significant minority of tribunals have made very large damages awards in roughly analogous cases. For example, in the case of Tethyan Copper v Pakistan, the tribunal calculated damages by estimating the present value of the income that the gold mine would have generated over its entire 60 year operating cycle had it been allowed to proceed. This led to an award of more than USD 4 billion damages plus back-dated interest.
On the basis of the information that is currently publicly available, there is no realistic possibility of an AUD 30 billion damages award in ISDS proceedings (this being the figure that the Western Australian government used to justify the passage of the Amending Act). However, an award of damages in the AUD billions is conceivable. Ironically, the unpredictability of ISDS means that Palmer may have a better shot at a multi-billion dollar damages payout in the ISDS than would have been the case if the arbitration in Australia had been allowed to continue.
C Wider policy issues
A perspective from international investment law also throws light on some of the wider policy issues raised by the Mineralogy saga.
C.1 Western Australian practice in relation to State Agreements
A first issue relates to Western Australian government’s practice in relation to State Agreements (ie, legislated agreements between the state of WA and investors in significant projects). One issue highlighted by the Mineralogy saga is the practice of limiting Ministerial discretion to deal with investors’ proposals. This practice is reflected in Clause 7(1) of the revised State Agreement (contained in Schedule 1 to the Agreement Act), which limits the Minister’s options on receiving a proposal from the investor to: approving the proposal; approving the proposal with conditions; or deferring consideration of the proposal until some matter specified in the Agreement is addressed. There is no possibility for the Minister to reject the proposal. The Western Australian government’s abdication of the power to reject proposals is an extraordinary governance failure, especially given the lack of relevant technical detail in State Agreements themselves, which has the effect of leaving substantive questions about what any proposed mining project would actually entail for negotiation and resolution at the proposal stage. It seems that this has already been identified as an area for policy overhaul, at least in relation to future State Agreements.
Another aspect of Western Australian practice on State Agreements that has received less attention is the practice of agreeing to the arbitration of disputes arising from a Minister’s failure to unconditionally approve a proposal. This practice is reflected in Clause 7(4) of the revised State Agreement; it is the reason why Mineralogy’s original disputes with Western Australia were resolved through private arbitration, rather than in open court. This is an issue on which scholarship on international investment law can inform Australian public law debates. Scholarship on international investment law highlights the problems with investment disputes being resolved through confidential proceedings to which only the government and the investor are privy. One problem is that such disputes invariably raise public interests, including the management of environmental impacts, the commitment of public resources to the project and the construction of public or dual use infrastructure. Affected stakeholders and the wider public have little opportunity to understand what is at stake in such disputes or to participate if disputes are resolved in private through arbitration. Another problem is that the private resolution of such disputes removes an important mechanism for government accountability. Some of the wider failures in Western Australian practice on State Agreements may have been addressed earlier if the implications of these agreements had been disclosed publicly in open court in 2014.
C.2 The implications of ISDS for Australia’s federal structure
A second policy issue relates to the implications of international investment law for Australia’s federal structure. Comments made by the leader of the Western Australian government in the Legislative Council prior to the adoption of the Amending Act show that the government was aware that Palmer’s affiliated entities might bring claims to ISDS under the FTA. However, it seems that the law firm advising WA on the Amending Act was specifically instructed not to consider the possibility of such claims in its advice, and that the Commonwealth was not consulted on the drafting of the legislation. In other words, it seems that, in bringing the Amending Act forward, the Western Australian government did not pay much attention to the unquantifiable contingent liability it was creating for the Commonwealth.
The case raises significant questions for Australia’s constitutional settlement. On the one hand, there is the question of what, if any, constraints should be in place to prevent Australia’s states from acting in ways that trigger the legal liability of the Commonwealth; on the other hand, there is a question of whether the Commonwealth should continue to bind Australia to economic treaties that have broad and potentially unanticipated implications for Australian states’ ability to exercise legislative and executive power. These are big questions, which have been widely debated elsewhere, including in Canada, Germany, the USA and Indonesia.
To be sure, there are few easy answers to these questions. Concerns about the risk to the national government of liability arising from the conduct of provincial governments was one factor that led Indonesia to begin terminating its bilateral investment treaties. In Canada similar concerns have led to the development of systems for vetting regulation for treaty compliance at the Provincial level. In Germany these concerns have played into a wider debate about the intersection between investment treaties and the constitutional structure of the European Union, leading to the 2019 decision of the Court of Justice of the European Union in Achmea, which determined that intra-EU investment treaties are incompatible with the EU legal order.
C.3 Public debate about the relationship between private rights and legislative change
A third issue relates to the terms of public debate around the relationship between investors’ legal rights and the possibility of overriding legal change through ordinary democratic processes. Much of the public debate around the Mineralogy saga has been carried out through the language of ‘sovereign risk’. In the second reading of the Amending Act, the Western Australian Attorney General argued that the Amending Act would not increase sovereign risk, because it was narrowly targeted at Palmer and his affiliated entities, and would not affect the way the state engaged with other actors in the mining sector. The Law Society of Western Australia, in contrast, suggested that the Amending Act would increase perceptions of sovereign risk. In his concurring judgment in Mineralogy v WA Edelman J (at [97]) observes that:
The decision to enact the Declaratory Provisions [of the Amending Act] may reverberate with sovereign risk consequences. But these consequences are political, not legal.
The concept of ‘sovereign risk’ has no agreed definition, either as a matter of law or business practice. Historically, sovereign risk referred to the risk of asset seizure or sovereign debt default. In the modern private insurance market, sovereign risk (or the related term ‘political risk’) refers to a wider but carefully specified set of risks arising from government conduct, including war damage and restrictions on currency convertibility and the repatriation of profits. Used in this sense, the concept does not ordinarily include Ministerial rejection of investment proposals or legislative interference in arbitrations arising under contract. A broader conception of sovereign risk seems to be at work in many criticisms of the Amending Act, perhaps encompassing any risk arising from doing business with government as perceived from the perspective of the investor. As the concept of sovereign risk is deployed in increasingly imprecise ways, it becomes less and less normatively useful.
Scholarship on international investment can inform this debate in Australia. For example, there is sophisticated body of empirical work suggesting that mutually beneficial investment agreements between states and investors tend to be stable (see, eg, here, here and here), notwithstanding that governments, in principle, retain the power to legislate in ways that unilaterally change the terms of such agreements. These empirical insights provide normative justification for the Australian position as articulated by Edelman J. They suggest that Western Australia’s power to unilaterally alter the terms of State Agreements is appropriately controlled through political constraints inherent in the legislative process and the discipline imposed by reputation effects, rather than through limits on legislative power enforced by courts.
Scholarship on international investment law can help clarify debates about the legal dimensions of ‘sovereign risk’ in other ways. For example, in work with economist Emma Aisbett, we distinguish between the general risk that government actors may renege on investment agreements and a more specific risk that government actors may obtain a benefit from allowing an investment to proceed and then later opportunistically renege on their agreement. To illustrate this distinction, consider the difference between a situation, on one hand, in which a government grants an investor legal rights and then extinguishes those rights through overriding legislation and a situation, on the other hand, in which a government sells an investor legal rights and then extinguishes these rights through overriding legislation having pocketed the sale price. Only the latter situation involves opportunism in the sense in which we use the term. From an investor’s perspective there may be little to distinguish these situations. From an economic perspective, however, the difference is important. Judicially-enforced constraints on legislative power are only justified in the latter situation, not the former.
This broad insight is reflected in the High Court’s decision in the Mineralogy case. Western Australia did not obtain any meaningful benefit from Mineralogy’s investment, prior to the Amending Act extinguishing Palmer’s rights. (Palmer presumably would have paid some fees and charges for the maintenance of the underlying tenements and the Mining Lease referred to in the State Agreement, as is required under the Mining Act 1978 (WA). But the Amending Act does not extinguish these rights and, in any event, the amounts paid to maintain them are trivial compared to the scale of the South Balmoral Project and the damages claimed.) This insight is also reflected in the existing Australian constitutional position, at least insofar as action by the Commonwealth is concerned. Extinguishment of contractual rights is not compensable, unless there has been an acquisition of something of value by the Commonwealth.
Author’s note: I am grateful to Emma Aisbett, Gabrielle Appleby, Caroline Henckels, Jarrod Hepburn, Emily Speers Mears and Elisabeth Perham for helpful comments on an earlier draft. Remaining errors are my own.
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Jonathan Bonnitcha is a Senior Lecturer in Law at UNSW Law & Justice.
Suggested citation: Jonathan Bonnitcha, ‘Can Clive Palmer use Investor-State Dispute Settlement to get what the High Court wouldn’t give him?’ on AUSPUBLAW (1 December 2021) <https://auspublaw.org/blog/2021/12/can-clive-palmer-use-investor-state-dispute-settlement-to-get-what-the-high-court-wouldnt-give-him/>