In April 2013, Hong Kong and the Association of South East Asian Nations (ASEAN) announced negotiations had commenced for a Hong Kong-ASEAN Free Trade Agreement (HKAFTA). Several rounds of negotiations have since been held and the agreement is expected to come into effect by 2016. It is understood that promotion and protection of investments is one of the issues being negotiated.
Although East and South East Asia are currently seeing historically high flows of foreign direct investment, the HKAFTA negotiations have been taking place in a background of increasing resistance towards the traditional investment-state dispute resolution regime. In recent years, there have been calls to reform the structure of international investment agreements (IIAs) by redefining the protections given to foreign investment, and in particular the mechanism for settlement of an investment dispute. Much of this debate has played out in the so-called “mega-regional” Transatlantic Trade and Investment Partnership (TTIP) and Trans Pacific Partnership (TPP) negotiations, the latter of which several ASEAN member states are participating in.
This article examines the extent to which Asia has been affected by the shifting attitude towards the international investment protection regime and arbitration as the framework of resolving investment disputes.
II. RECENT TRENDS IN EAST AND SOUTH-EAST ASIAN IIAs
The international investment protection regime is designed to protect investors of one state investing in a foreign state through an IIA. The standard protections found in an IIA are States committing to ensure vis-à-vis the foreign investor: (1) fair and equitable treatment; (2) full protection and security; (3) protection for expropriation; and (4) protection from arbitrary and discriminatory treatment. Usually these protections will be accompanied by a carve-out allowing the host-state to take such measures for a public purpose and in accordance with domestic law and procedures.
Fortifying these protections, an IIA will include a mechanism for the settlement of investment disputes, commonly referred to as “Investor-State Dispute Settlement” or “ISDS”. An ISDS provision enables foreign investors to pursue a claim against the host state for breaching the substantive investment protections, which typically will be through an arbitration framework.
For instance, the 2009 intra-ASEAN Comprehensive Investment (ACIA) provides the full gambit of investment protections and incorporates the 2004 ASEAN Protocol on Enhanced Dispute Settlement Agreement (APEDSM). The APEDSM provides for multiple approaches for amicably resolving investment disputes, including consultation, good offices, conciliation or mediation, which is a common first step in an ISDS provision. If the dispute cannot be resolved within 180 days of consultation, the ACIA supplements the APEDSM with further avenues for resolving disputes: At the claimant investor’s option, either submitting the dispute to courts or tribunals of the host state or to arbitration under the International Centre for Settlement of Investment Disputes (ICSID) Convention, ICSID’s Additional Facility Rules, UNCITRAL Rules or other institutionally administered arbitration.
At a time when global levels of foreign direct investment are declining, East and South-East Asian investment inflows and outflows are at a historic high. In parallel, Asia, including ASEAN member states, have been active in negotiating a number of IIAs, including bilateral investment treaties (BITs) and free trade agreements (FTAs). ASEAN in particular has concluded a series of FTAs across the Asia-Pacific, which have also been characterised by the UNCTAD as “mega-regional”.
In the many of these Asian IIAs, the full range of investment protections are provided for, with arbitration as the preferred mechanism for resolving investment disputes, whether as the direct method or only after conciliatory means have failed.
III. THE CHANGING GLOBAL LANDSCAPE FOR IIAs
In recent years, a trend has developed of States announcing their intention to review their model IIAs. Simultaneously, calls have been made for the substantive investment protections and ISDS mechanisms to be revised, which has played out most prominently in the heated debates surrounding the TPP and TTIP negotiations.
Opponents argue that ISDS comprises a State’s sovereignty in regulating internal matters that are in the public’s interest, such as environmental, health or human rights issues. Other objections raised include concerns that: ISDS lacks transparency; there is no appellate process in an ISDS arbitration; disputes are adjudicated by arbitrators who lack impartiality; and causes a diversion of a State’s public funding to defend investment claims.
In the last few years, various proposals have also been put forward to address the criticisms of ISDS, including introducing an appeal mechanism and establishing an permanent international investment court in place of ad hoc arbitral tribunals to resolve investment disputes.
In May 2015, the European Commission (which is responsible for negotiating the TTIP) released a concept paper on investment reforms in the European Union, identifying areas for review, including:
- the right of the EU to regulate in the public’s interest and for legitimate public policy objectives;
- enhancing the legitimacy of the ISDS system through reforming the appointment procedure of arbitral tribunals;
- introducing an appellate mechanism to review ISDS awards for manifest errors of law and assessments of facts; and
- introducing an exhaustion of local remedies requirement to address the relationship between the host state’s domestic courts and the ISDS system.
The European Trade Commissioner further outlined the EU’s new “modern” approach to ISDS in a blog post, providing that it would allow “arbitral tribunals [to] operate more like traditional courts, with a clear code of conduct for arbitrators“, “guarantees access to an appeal system“, and “work towards the establishment of a permanent multilateral investment court“.
Building on the EU Concept Paper, the European Parliament subsequently passed a recommendation in July 2015 calling for “a new and effective system of investment protection“, resolving to:
… replace the ISDS system with a new system for resolving disputes between investors and states […] which includes an appellate mechanism, where consistency of judicial decisions is ensured, the jurisdiction of court of the EU and of the Member States is respected, and where private interests cannot undermine public policy objectives.
These recent developments mark a paradigm shift in the EU’s approach towards ISDS and the international investment protection regime, a trend that is also being observed elsewhere.
IV. THE ISDS DEBATE IN ASIA
In the Asia-Pacific region, Australia and Indonesia have been the most prominent in seeking to revise their IIAs and ISDS policies.
In Australia, the changing stance towards ISDS appears to have been stimulated by a recent claim against Australia by a foreign investor. In 2011, the tobacco company, Philip Morris, filed a claim under the 1993 Hong Kong-Australia BIT, challenging changes in the tobacco labelling regulations, and claiming it was entitled to compensation from Australia, which had introduced plain package labelling regulations for cigarette packets. Philip Morris argued that the regulation amounted to an expropriation of its property and a breach of the fair and equitable treatment standard, and asserted that such action constituted a discriminatory measure that deprived Philip Morris of the full protection and security guaranteed under the Hong Kong-Australia BIT.
Prior to that, Australia’s Gillard Government introduced a strongly worded Trade Policy Statement in April 2011, stating that:
… The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products or its ability to continue the Pharmaceutical Benefits Scheme.”
In the past, Australian Governments have sought the inclusion of investor-state dispute resolution procedures in trade agreements with developing countries at the behest of Australian businesses. The Gillard Government will discontinue this practice. If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries.
Since then, Australia has announced that it would adopt a case-by-case approach towards including ISDS provisions in its IIAs. As such, the subsequent 2014 Australia-Japan Economic Partnership Agreement did not include an ISDS arbitration provision, although the 2015 China-Australia FTA (CHAFTA) did, albeit with a significantly narrower scope of protection afforded to a foreign investor. Although investors are nevertheless protected under a pre-existing BIT between China and Australia, which effectively includes remedies unavailable under the CHAFTA, this omission signals the changing tide of Australia’s approach towards negotiating IIAs.
More recently, Indonesia announced in 2015 that it was terminating and renegotiating existing BITs, while simultaneously developing a new model BIT that will include contribution to economic development as a definition of investment. The Indonesian new draft model BIT is also reported to include revisions to the ISDS provisions, with domestic courts as the default forum for resolving investment disputes, unless the host state has consented to arbitration. As with Australia’s shifting attitude, the Indonesian government’s announcement appears to have been prompted by a recent ISDS arbitration against the Indonesian State brought by the UK and Australian companies Churchill Mining and Planet Mining. In 2012, these companies commenced an expropriation claim against Indonesia in response to an Indonesian local administrative tribunal’s revocation of their mining licenses on environmental protection grounds.
However, IIA negotiations elsewhere in Asia do not appear to be substantially affected by the ISDS debate. Amongst the recently concluded IIAs, most contain an ISDS clause providing for arbitration as the preferred method, including the recent 2012 trilateral China, Japan, South Korea Investment Treaty.
Meanwhile, ASEAN itself is neither participating in the TPP negotiations, nor known to have taken any recent position on the TPP or the ISDS debate. However, the participation of several ASEAN member states has generated some discussion.
In Vietnam, the TPP negotiations has triggered discussion about the impact that the EU’s new approach to ISDS may have upon Vietnam’s current FTA negotiations with the EU. Although such discussion does not appear to be filtering into the policy sphere of the Vietnamese government, the press release to the recently announced agreement in principle for an EU-Vietnam FTA conspicuously stated that “Provisions on investment protection and dispute settlement are still being negotiated in light of the new EU approach on investment dispute settlement.”
What may be described as ambivalence on the part Vietnam’s towards the EU’s so-called “modernised” ISDS would not surprising given the recent headways Vietnam has made towards becoming an investment and arbitration friendly jurisdiction. Since the Doi Moi economic reforms of the mid-1980s, Vietnam has concluded a number of IIAs. Furthermore, in the bid to attract foreign direct investment, Vietnam has introduced reforms to its investment and arbitration legislation, including introducing arbitration as an ISDS mechanism and updating procedures for arbitrations involving the Vietnamese State.
Moreover, Vietnam has been a Respondent in several recent cases brought by foreign investors. Significantly, amongst the reported arbitrations, Vietnam has prevailed in most of these cases, bringing Vietnam a new sense of confidence in their handling of arbitration and investment disputes. The most widely publicised (but unpublished) cases are South Fork v The People’s Committee of Binh Thuan Province, Michael McKenzie v Vietnam and DialAise SAS v Vietnam. Unlike Indonesia and Australia’s response to foreign investment claims, Vietnam confidently defended the claims in these cases in conformity with the arbitration rules and did not subsequently suggest a revision of its approach towards its IIAs.
There may be a lingering question as to how Vietnam would respond to being a losing Respondent in an investment dispute, and doubt may also be cast on the effectiveness of the recent changes in the law due to the widespread prevalence of corruption, particularly amongst officials holding office in industries favoured by investors. Indeed these issues may be the cause of further claims against Vietnam, however, the concerted efforts of the Vietnamese government to clarify and update their laws and combat corruption signals Vietnam’s long-term commitment towards protecting foreign investment that is backed-up by a robust ISDS system. The implication is clear from the firm presence of arbitration as the ISDS mechanism in Vietnamese IIAs: Arbitration is the state’s preferred mode of resolving investment disputes.
On the other end of the spectrum of experience with ISDS is Hong Kong. Neither Hong Kong nor China are taking part in the TPP negotiations, and Hong Kong has been largely unaffected by the ISDS controversy. However, Hong Kong historically has had a policy of being a pro-arbitration jurisdiction in addition to its strong reputation for being trade and investment-friendly and providing an attractive environment to foreign investors. Not surprisingly therefore, Hong Kong has never been a respondent to an investment dispute, and the only known investment dispute under a Hong Kong BIT is the above mentioned Philip Morris case, which has not been widely publicised or the subject of wider social debate in Hong Kong.
V. REFORMING ISDS IN ASIA?
An international investment court would be an attractive option for addressing (or redressing) the concerns about the current ISDS framework. However, given the lack of a pan-Asian Union and Asia’s notorious phobia of signing up to permanent international courts and tribunals, it would be surprising if Asian states were now to embrace such proposal. That said, the recent establishment of the International Commercial Court in Singapore with its international panel of judges might be a step in the direction of what could effectively become a regional equivalent of an international investment court.
Ultimately however, the experiences of Vietnam and Hong Kong have demonstrated that the real issue facing the ISDS system in Asia is not whether it is in need of reform or what form it should take. Rather, the priority for Asia is ensuring foreign investments and the ISDS system, in whatever form it takes, are entrenched in a robust and dynamic domestic legal system. By pursuing new investment and ISDS policies while claims are still pending, Australia and Indonesia’s new-found opposition towards the existing ISDS system is arguably premature and reactionary. Such uncertainty would likely be disheartening for potential investors.
Recent foreign investment trends in Vietnam have shown that strengthening the legal system, entrenching the rule of law and embracing a credible and internationally accepted dispute resolution framework creates a highly conducive environment for foreign investors.
Meanwhile, the absence of investment disputes against Hong Kong demonstrates that policies respecting existing investment protections obligations, buttressed by a strong legal system that support the ISDS framework, is not only a successful strategy for inducing foreign investment, but can also obviate some of the concerns about the public cost and the opaqueness of ISDS.
This article may be cited as follows: Phuong Dung Nguyen and Jessica Sien Wai van der Kamp, “With the current, but against the tide? The international investment protection regime and the investor-state dispute settlement debate in Asia” International Arbitration Asia (4 November 2016) <www.internationlarbitrationasia.com/articles/with-the-current-but-against-the-tide-the-international-investment-protection-regime-and-the-investor-state-dispute-settlement-debate-in-asia/>.
*This article was written as part of a project under the Young ICCA Mentorship Programme, with the guidance and advice of Teresa Cheng, GBS, SC, JP (Senior Counsel and Arbitrator, Des Voeux Chambers) and Emi Rowse (Senior Consultant, Herbert Smith Freehills).
 APEDSM, articles 3-4.
 ACIA, articles 30-32.
 World Investment Report: Reforming International Investment Governance, UNCTAD (2015), pp.3-4.
 See “International Investment Agreements by Economy”, UNCTAD Investment Policy Hub, available at: http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu.
 UNCTAD Report, p.161.
 For an overview of the criticisms of ISDS and the responses, see “A response to the criticisms against ISDS” published by the European Federation for Investment Law and Arbitration (17 May 2015), available at: http://efila.org/wp-content/uploads/2015/05/EFILA_in_response_to_the-criticism_of_ISDS_final_draft.pdf.
 See 2015 UNCTAD Report, pp.146-152, and van Harten, G., “A Case for an International Investment Court”, Paper Presented at the Conference of the Society of Economic Law (16 July 2008), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1153424.
 Investment in TTIP and beyond – the path for reform, European Commission (May 2015), pp.6-12, available at: http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.PDF.
 “Investments in TTIP and beyond – towards an International Investment Court” (5 May 2015), available at: https://ec.europa.eu/commission/2014-2019/malmstrom/blog/investments-ttip-and-beyond-towards-international- investment-court_en.
 Report on the negotiations for the TTIP, European Parliament (7 July 2015), available at: http://www.europarl.europa.eu/sides/getDoc.do?type=AMD&format=PDF&reference=A8-0175/2015&secondRef=117-117&language=EN.
 Claimant’s Notification of Claim (22 June 2011) paras.5-11, available at: http://www.ag.gov.au/Internationalrelations/InternationalLaw/Documents/Philip%20Morris%20Asia%20Limited%20Notice%20of%20Claim%2027%20June%202011.pdf.
 “Gillard Government Trade Policy Statement: Trading our way to more jobs and prosperity” (April 2011), p.14, available at: http://www.acci.asn.au/getattachment/b9d3cfae-fc0c-4c2a-a3df-3f58228daf6d/Gillard-Government-Trade-Policy-Statement.aspx.
 The standard substantive investor protections such as fair and equitable treatment and protection against expropriation are absent.
 China-Australia BIT (11 July 1988), articles 3 and 9.
 Indonesia informed the Dutch embassy that it would terminate the Netherlands-Indonesia BIT effective 1 July 2015. See: http://indonesia.nlembassy.org/organization/departments/economic-affairs/termination-bilateral-investment-treaty.html.
 Amianti, G.D., “Government revises investment treaties” Jakarta Post (12 May 2015), available at: http://www.thejakartapost.com/news/2015/05/12/govt-revises-investment-treaties.html.
 Indonesia presented its new IIAs and ISDS policy at the UNCTAD expert meeting on the transformation of the IIA regime held during the World Investment Forum in February 2015. Indonesia’s presentation is available at: “Indonesia’s Experience: IIA in Review”, see: http://unctad-worldinvestmentforum.org/wp-content/uploads/2015/03/Indonesia_side-event-Wednesday_model-agreements.pdf.
 China, Japan, South Korea Investment Treaty, article 17; See also Ahmad, J., et al., “Investment Arbitration in Asia”, The Asia-Pacific Arbitration Review (2016), available at: http://globalarbitrationreview.com/reviews/71/sections/237/chapters/2874/investment-arbitration-asia/.
 “EU and Vietnam reach agreement on free trade deal” (4 August 2015), available at: http://trade.ec.europa.eu/doclib/docs/2015/august/tradoc_153674.pdf.
 Vietnam has concluded 60 BITs and 20 FTAs (including FTAs concluded through ASEAN), of which 46 BITs and 15 FTAs are in currently in force.
 See the 2014 and 2005 revised Law on Investment, Nos.67/2014/QH13, article 14.4 and 59/2005/QH11.
 See Decision No.04/2014/QD-TTg which introduced procedures for co-ordinating investment disputes.
 See the statements of the Vietnamese Ministry of Justice, in Thai Son, “French investor loses lawsuit against Vietnamese government”, Thanh Nien News, (1 January 2015), available at: http://www.thanhniennews.com/business/french-investor-loses-lawsuit-against-vietnamese-government-37044.html, and comments of Le Net, in “South Fork case offers experience”, Vietnam Investment Review (24 February 2014), available at: http://www.vir.com.vn/south-fork-case-offers-experience.html.
 Ngan Anh, “Corruption poses hurdle to Vietnam FDI”, Thanh Nien News, (3 April 2014), available at:
 Vietnam revised both its Criminal Code in 2009 and Anti-Corruption Law in 2012 to combat corruption.
 Hong Kong was ranked second in the 2015 Global Opportunity Index Ranking, see: http://www.globalopportunityindex.org/opportunity.taf?page=rankings.
 Ibid, and “fDi Report 2015”, fDiInteligence (2015) available at: http://www.ftbsites.ft.com/forms/fDi/report2015/files/The-fDi-Report-2015.pdf.