Early in April, the governments of Australia and India signed the Australia-India Economic Cooperation and Trade Agreement (ECTA), an interim step on the way to a Comprehensive Economic Cooperation Agreement – which is scheduled for completion by the end of 2022.
Broadly, the ECTA aims to promote trade between Australia and India by reducing or eliminating tariffs. It offers particular advantages to Australian mining and agricultural exporters, with India agreeing to drop tariffs on such products as wool, sheep meat, and a range of minerals.
While the ECTA is likely to provide a boost for transactional business, what’s conspicuously missing is any protection for investors.
This is unusual in a free trade agreement (which is what the ECTA amounts to). Australia is party to more than twenty bilateral and multilateral free trade agreements, and almost all of them contain a chapter dealing with investment protection. Typically, these chapters contain a variety of promises extended by the host country to the foreign investor, and provide the foreign investor with a dispute resolution mechanism, through which it can seek compensation if those promises are broken. But nothing of that kind appears in the ECTA.
To understand why, you need to look back more than ten years to a claim brought by an Australian company, White Industries, against India. White Industries had contracted with an Indian government entity, Coal India, to develop a mine in India. When the contract ended, Coal India refused to return the security deposit paid by White Industries, and White Industries obtained an international arbitration award which stated that it was entitled to repayment of the deposit. The difficult part was enforcing the award in India. More than ten years after White Industries commenced enforcement proceedings in India, the notoriously slow Indian courts had still not reached a final decision on the preliminary question of whether the application should be dealt with under India’s 1967 arbitration law (which was in force when the contract had been signed) or the 1996 law (which was in force when the proceedings began).
White Industries decided to change tack. The Bilateral Investment Treaty (BIT) between India and Australia allowed an investor to bring a claim against the State, and White industries began an arbitration against India arguing that the protections contained in the BIT had been breached. The claim was successful, and India was held liable for White Industries’ loss.
In monetary terms, the claim was (compared to most investor-State disputes) tiny – around $12 million. But its impact was immense and immediate. The Indian government was appalled to realise that it was exposed to an action of this kind by a foreign investor, and it set about terminating its 74 bilateral investment treaties and offering to replace them with a new model, which significantly diluted the protections offered to investors and did not expose the State to the risk of claims. The change was too late to protect India from further (and very much larger) claims, most of which arose from India’s approach to taxation of offshore capital gains, and the cancellation of a number of 2G telecommunications licences. But over the last decade, there has been no doubt over India’s approach to investment treaties: it will enter into them only if there is no scope for State liability.
Not long after the White Industries case, Australia reconsidered its attitude to investor protection treaties when it received a claim from Philip Morris, arising from the introduction of plain packaging for tobacco products. That claim was defeated, but a subsequent report by the Productivity Commission concluded that investor-State dispute provisions produced few quantifiable benefits while exposing the government to substantial risk. A Labor government policy to exclude dispute provisions from investment treaties was later reversed by the Liberal government, but Australia remains far from enthusiastic about these provisions. For example, Australia’s Free Trade Agreement recently concluded with the UK has investor protection provisions, but no means of enforcing them, which renders them futile.
So the absence of investor protections in the ECTA is not a great surprise. India has no real appetite for investor protection treaties, and Australia is ambivalent about them. It remains possible that the position of investors may be addressed when the final Comprehensive Economic Cooperation Agreement is agreed. But don’t hold your breath.
(Max Bonnell acted as counsel for White Industries in its arbitration against India)