China-Australia Free Trade Agreement: Form of Investor-State Dispute Regime Remains Unclear

China-Australia Free Trade Agreement: Form of Investor-State Dispute Regime Remains Unclear

On November 17, 2014, China and Australia announced they had reached a Free Trade Agreement ("ChAFTA", the "Agreement"). The ChAFTA text has not been finalized, but that is expected in the coming months. At this stage, the public can only glean insights from the recently released high-level statements of key outcomes and fact sheets.

The statement of key outcomes indicates that the "investment obligations" in ChAFTA can be enforced directly by Australian and Chinese investors through an Investor-State Dispute Settlement (ISDS) mechanism. It also states the ISDS mechanism will include safeguards to protect each government's ability to regulate in the public interest and to pursue legitimate public welfare objectives such as public health, safety, and environmental protection.

In considering the impact of this aspect of the Agreement, is important to note that, since 1988, China and Australia have had a bilateral investment treaty (BIT). The BIT provides that each country shall not take measures of expropriation or nationalisation or other measures having a similar effect relating to any investment unless the measures are in the public interest, non-discriminatory, in accordance with law, and against reasonable compensation. The BIT further provides for an Investor-State Dispute Regime for the recovery of compensation if such measures are taken.

As the text of the ChAFTA is not final, the precise scope of the investment obligations in the Agreement remains unclear. There has been no suggestion that the ChAFTA will replace the BIT, so the BIT will likely remain in force. The ChAFTA describes the investment obligations only in fairly general terms.

It has not been announced if the investment obligations in ChAFTA will also include a non-nationalization provision or other non-interference provisions coupled with rights to damages typically found in other treaties incorporating Investor-State Dispute regimes, such as the BIT. If it does, this development should be viewed as a positive for Australian investment into China and Chinese investment into Australia, and should also enhance investor confidence.

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Steven Fleming

Paul A. Smith

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