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Foreign Affairs, Defence and Trade Legislation Committee

NOTTAGE, Professor Luke Richard, Private capacity

WEATHERALL, Associate Professor Kimberlee Gai, Private capacity

Evidence was taken via teleconference—

CHAIR: The committee will resume. I welcome Professor Luke Nottage and Associate Professor Kimberlee Weatherall. Thank you both very much for your submissions, which we have as Nos 21 and 88 respectively, and for appearing before the committee today via teleconference. If you would like to make a brief opening statement each, starting with whoever you have selected, and we will then go to questions.

Prof. Weatherall : Apparently that is me, so I will start. I am an intellectual property specialist and an international IP specialist, so my comments relate solely to the interaction between investor-state dispute settlement and intellectual property, and there are three points on that that I would like to emphasise.

First, I am concerned about the potential impact of investor-state disputes over IP, which I think introduce a new and dangerous dynamic into IP disputes. I think private companies are much more likely to bring complaints in doubtful cases, and that could lead to an increase in international litigation around the area of IP. Second, for the reasons that I have outlined in my submission, I am not convinced that the safeguards included in such chapters—for example, in the recent Korea-Australia FTA—are going to prevent claims being brought. Third, in particular, the carve-out in the Korean FTA as it relates to expropriation that is designed to carve out IP ironically could have the effect of bringing the entire IP chapter into international arbitration dispute, and that is a problem because those chapters are very one sided and it is not clear that the public interest would be appropriately furthered in that sort of dispute.

So, overall, I am concerned about ISDS combined with detailed IP chapters. I think they are going to lead to more international litigation; I think they are a constraint on domestic policymaking; and such disputes could lead to less scope to promote the public interest in IP.

CHAIR: Thank you. Professor Nottage, we do have in front of us your paper, ISDS: do not be afraid—to confirm that we do have that. Go ahead.

Prof. Nottage : Thank you very much for this opportunity and also for having a look at those few slides, which I will be presenting tomorrow in Sydney at a conference, at the invitation of the Public Health Association. I think it is very important to have informed debate about all aspects of international law, including the question of investor-state dispute settlement.

As I put in my earlier written submission, I believe that the bill is well intentioned in the sense that the ISDS treaty-based system, treaty-based investment law and international law are actually not perfect and should be reversed. In fact, I am a strong advocate of enhancing consumer protection both domestically and via international cooperation, using international instruments to promote consumer protection. I have made submissions to this parliament to reform the Australian Consumer Law and I have made many submissions to government to improve consumer protection.

But I am afraid no system is ever perfect, especially in the case of international law. We have a lot of players worldwide. The ISDS system, I think, has improved significantly over the last few years, both in the way treaties are drafted in relation to ISDS clauses and in the way that cases are argued, and therefore in the way arbitrators are deciding cases. So I think it is better for Australia to remain engaged in that ongoing process of reforming the international investment law system, including provisions as to ISDS.

In fact, I think they should continue to negotiate specific improvements in future treaties as well as having a closer look at some of the many older treaties that Australia entered into, including notoriously now the old treaty concluded in the early 1990s with Hong Kong, which has led to the first-ever case where the Australian government has had to defend a claim, but also to have a closer look at some of the treaties concluded by Australia since the early 1990s with countries like Indonesia, where a recent arbitral tribunal decision has decided that the wording in relation to ISDS is so narrow as to prevent foreign investors making claims against host states under those investor-state arbitration provisions.

So I cannot support this bill, which I think takes a position of rejecting completely ISDS, which would make Australia unique among developed countries and put us in the company of a very few countries, even among developing countries, mainly a few very Leftists regimes in South America. I think it would torpedo future trade and investment treaty negotiations to which the major parties in Australia have long been committed, as well as potentially inhibit the development of multilateral initiatives and international investment law. I think it would also reinforce a sense I have, shared among public international law colleagues in Australia, that Australia is turning very inward looking. I think that is obvious, for example, in the field of international human rights, unfortunately, and I think it is very dangerous for this sort of bill to go along with that trend. It may reinforce the sense in Australia that we should not be part of the international law system. Those are my main points.

I would also like at some stage to present some reasons for why I think the Australian government, through the Productivity Commission in 2010, made a recommendation to be much more cautious about engaging in ISDS. I am involved in a very large Australian Research Council project over the next few years with researchers from UNSW, ANU and the University of Melbourne to look more closely at those policy recommendations but I will leave those to raise when you ask questions.

CHAIR: I wonder if one of you or both of you could assist the committee to give us an overview of how the process works. We have the circumstance with Philip Morris, using it as an example. Could you describe to us where the process goes to legally from here—who meets, who determines? We understand from a previous witness there are no grounds for appeal once an international arbitrator makes the decision. Could you explain that to us?

Prof. Nottage : Yes. Obviously it depends on the particular forum and process that the host states have agreed on in the treaty. So in the case of the early treaty with Hong Kong, which has been invoked by the first claim ever against Australia since it started entering these investment treaties and free trade agreements with the investment chapters containing ISDS from 1988, the forum selected here was an ad hoc international arbitration process under UNCITRAL arbitration laws. That is quite a common option given to foreign investors to make a direct claim against a state for violations of commitments made by the host state in the investment treaty and is found in all of Australia's subsequent treaties, to my knowledge. The other possible forum, which is also often included in Australia's subsequent investment treaties, is the International Centre for the Settlement of Investment Disputes, which was established under convention in 1965 under the auspices of the World Bank. The main administration is, therefore, in Washington. In the case that I mentioned recently where an Australian investor is claiming expropriation of its coalmining investment against Indonesia, that has been brought instead under the auspices of ICSID under those ICSID arbitration rules.

After the parties select the international arbitrators under the applicable rules—either UNCITRAL rules or the ICSID rules—the first question before the arbitrator is often whether they have full jurisdiction to hear the dispute. In the case of Philip Morris, the Australian government is saying that, as a threshold issue, the appointed arbitrators, the agreed arbitration tribunal, does not have jurisdiction to hear the case because one of the key requirements under the investment treaty—namely, the scope of covered investment—is not satisfied. In particular, the Australian government is saying that Philip Morris has in effect forum shopped, moved its asset deliberately into Hong Kong to take advantage of this old and, by my standards, poorly drafted investment treaty so as to bring a claim against Australia, and this violates the words, if not the spirit, of that treaty. So, on that ground, the case should not proceed to a substantive hearing.

Senator WHISH-WILSON: Could I just stop you for a point of clarification. You did say that it was poorly drafted, and we have had that evidence from a number of witnesses. Would the carve-outs, for example, in the Korean deal still preclude Philip Morris from bringing the same ISDS case against the Australian government if they are doing it for their own strategic reasons?

Prof. Nottage : I think their case would be stronger. For example, even though the old Hong Kong treaty was concluded shortly before Australia and many other countries concluded the WTO agreements, including that agreement, the Hong Kong treaty that we signed did not have an express public health exception. The Australian government, in its submissions, which are publicly available on the Attorney-General's website, has argued that this should not decide the case. Australia can of course rely on customary international law defences to protect the public interest.

Senator WHISH-WILSON: Professor, if I could just be a bit clearer: I understand that the legal case can go on for some time. I am asking whether the new carve-outs would preclude them even launching a case, let alone whether they even have a chance of success.

Prof. Nottage : No, so the current provisions in the KAFTA agreement have an express public health exception, like Australia's more recent treaties and agreements like the WTO agreements.

Prof. Weatherall : So they make harder the case to win but they do not preclude it from being brought.

Senator WHISH-WILSON: They can still bring cases to tie us up in litigation and spend significant taxpayer dollars over a long period of time?

Prof. Weatherall : They can still bring the claim, yes.

CHAIR: We have further a clarification and then I am going to bring some order back. Have you finished the point you were making, Professor Nottage? If you have, I will go to Senator Gallacher for a point of clarification and then to Senator Fawcett.

Prof. Nottage : Can I make a quick final comment in response to your question about the process, Chair. You asked specifically whether there was any scope for appeal of arbitrators' decisions in investor-state arbitration. Again, it depends on whether the state parties have agreed to allow UNCITRAL arbitration rules, for example, or the exit rules process. In the case of UNCITRAL rules, like in the Philip Morris case, there can be a review of the arbitrator decision on specified grounds at the agreed or nominated seat of the arbitration, which the parties in this case—Philip Morris based in Hong Kong and the Australian government—have agreed to be Singapore. However, the key point is that, under modern arbitration legislation like we have in Singapore and which is also based on a UN model law which Australia has adopted into its International Arbitration Act, there is no appeal solely for an error of law by the arbitrator. So, in that sense, there is more limited ground for appealing an international arbitration order for that system. Under a procedure like the one involving the Australian claim against Indonesia at the moment, there is very limited scope to contest the arbitrator's award for purely an error of law. That would be a difference from the domestic court procedures of many countries.

Senator GALLACHER: I am struggling to understand whether ISDS makes potential litigation clearer. In the absence of ISDS is there just a miasma of legal options that people may want to take?

Prof. Nottage : The two other options that are available for foreign investors in the absence of investor-state dispute settlement are either an interstate arbitration or litigation process, typically spelt out in the particular treaty. In all of Australia's treaties there is that option as well. The Australia-Malaysia FTA investment chapter concluded in 2012 under the Gillard government trade policy statement, which for a few years said that Australia would not enter into any treaties containing ISDS, there is still the option of a foreign investor triggering an interstate process for a binding decision for the process under that treaty.

It is also possible, of course, to turn to multilateral trade agreements like GATT under the WTO system, which also involves interstate processes. In fact, Australia is being sued under those processes in Geneva now by countries like Honduras, Ukraine, Dominican Republic and now Indonesia in relation to its plain packaging legislation. So that is one other alternative.

The second alternative is to claim in front of domestic courts in the host state in particular. The big problem with that, of course, is that, particularly in developing countries, the court process may not meet the standards that are widely accepted in Australia and other developed legal systems. But the substantive rights afforded to foreign investors also may not meet those standards or the standards entrenched through international treaties these days and for many decades. An extreme example would be Vietnam, where its constitution does not apply to foreigners at all, so the protections against expropriation of assets in Vietnam are simply not available in Vietnamese courts. In other situations there may be protection provided to foreign investors as well as local investors but the standard may be much lower and the court process may be much more difficult.

CHAIR: Thank you. Senator Fawcett.

Senator FAWCETT: Thank you for your contribution today. To get a counter position, I have a few questions for you stemming from the evidence that has been raised by other witnesses. There has been some talk about the fact that the last 25 years of experience is not a predictor of the future in terms of lack of ISDS actions against Australia—partly because of the growing market for international lawyers and the fact that firms are seeing that this is now an option. The fact that we have had very little action does not actually mean anything in terms of what will come in the future. Would you care to comment on that point of view and whether we can in fact use the lack of action against Australia in the past as any kind of predictor for the future?

Prof. Nottage : I agree that the investment treaty arbitration field is evolving. In fact, back in 2009 I co-authored an article with my then colleague Dr Kate Miles, who is now at the University of Cambridge, suggesting Australia should include in its treaties various forms of new drafting that allowed tailored sets of rules that would help speed up the process and reduce costs. Already back then there were concerns being raised about that. I think we are seeing more and more of those measures written into treaties by countries that are now more conscious of that problem and how to address it through specific treaty drafting. I think, though, that the main way to address too many claims being brought at too great an expense is to be very clear in relation to the substantive commitments, the substantive rights that are agreed between the states in these treaties. A senator previously asked whether a Philip Morris type case would be precluded by the KAFTA regime. The answer is 'no' under the current wording. If that sort of claim by tobacco companies is a particular concern, the obvious way to preclude it completely is to have a carve out for measures in relation to tobacco.

Prof. Weatherall : Or measures in relation to public health.

Prof. Nottage : Or measures in relation to public health, although then it becomes a question of whether the measure is actually designed to public health purposes.

The other way to do it is to have a carve out where you say that, more specifically, if there is a claim in relation to tobacco regulation, it can only be dealt with by the other alternative provided in the treaty, which is the interstate arbitration process or domestic court proceedings.

Another way to address the concern by focusing on substantive rights would be to try to draft in the treaty the sorts of protections that are available anyway under Australian domestic law. For example, have a definition of expropriation which follows closely or completely the wording used in Australia. We know from the decision of the High Court of Australia in the parallel claim that was before the court against Australia under the Constitution that our definition is comparatively narrow—narrower than some other countries and most international treaty wording. If Australia could put those sorts of provisions in their treaties and negotiate that with the other party, that would then mean that the risk for Australia of extra liability exposure is much reduced and yet Australia would still get the benefit of taking some protection against expropriation when Australian outbound investors went into countries like, for example, Vietnam, which otherwise through the domestic legal system does not provide adequate protections for foreigners.

I think that is the best way to ensure that we do not see more and more claims being brought against countries, including developed countries like Australia.

Prof. Weatherall : To give my answer to the question briefly: the short answer is the past is not necessarily a predictor, because we are seeing growth in investor-state dispute cases. Professor Nottage has pointed out that there are ways that that could be limited; the question really is whether those ways are being inserted into the Australian negotiated agreements. You would want to look carefully at, say, the language of the Korea-Australia Free Trade Agreement to see if that has actually been effective.

Senator FAWCETT: I have a question on notice for you. I would value your opinion as to whether in fact in the clauses of KAFTA that has been appropriately inserted. I am happy for you to take that on notice.

Prof. Weatherall : I will take that on notice, thank you.

Senator FAWCETT: Professor Nottage, in your submission you talked about—I am not sure if it is a fact or a proposal—how two states like Korea and Australia could agree that an investor's case does not have validity and suspend that claim by agreeing there was no treaty violation by the host state. Could you clarify? Is it a fact that that exists or is that one of your proposals for how FTAs could be improved?

Prof. Nottage : That is a provision that is found in investment treaties, including at least one that Australia entered into: the ASEAN-Australia-New Zealand Free Trade Agreement, signed in 2009. It actually has a longer history. In the particular area of taxation measures, where, of course, nation states have tended to more jealously guard their sovereignty, have their own ways of doing things and are more susceptible to domestic political pressures at the time, they have developed their own dynamic in relation to, for example, trying to minimise problems of double taxation of individuals and companies and their own networks of informal cooperation between countries. In investment treaties, as a result, you quite often see provisions that say that, when there is a question as to whether taxation measures amount to expropriation, those things cannot be decided under the investor-state dispute settlement provision or the home state and the host state can agree that the measure does not amount to an expropriation.

So that is another useful mechanism at the level of substantive rights for state parties to agree on a more tailored special regime to protect their respective public interests. In fact, I think it is a particularly useful mechanism which could lead to trade an investment treaties leading to countries trading up to a higher regulatory standard. Imagine if we had had that sort of provision in the Australia-Hong Kong treaty that Philip Morris is now invoking. The Australian government would then have approached the Hong Kong government and said, 'Look, would you agree that what Philip Morris is claiming—namely that this tobacco plain packaging legislation amounts to an expropriation—is not in fact an expropriation'. If the Hong Kong government then agreed under a provision that was added under the treaty in the first place, that would in effect suspend Philip Morris's claims. It would preclude it, in the words of the Senator from Tasmania. Moreover, it would then get the Hong Kong government and its citizens thinking, 'Maybe the Australian regime for tobacco plain packaging is something worthwhile; maybe we should have it in our own country as well.' So that sort of provision not only has the short-term effect of protecting the policy space of a host state for a legitimate public health matter which it can persuade the other state was enacted for that purpose; but it could also lead to positive ripple effects in the other state.

Senator FAWCETT: Free trade is about equality of access or agreeing terms of access for international players into your domestic market. Is it a defence if the legislation that is passed by government has an equal impact on domestic suppliers into that same market space as it does on international suppliers—so it is nothing to do with discriminatory access against an international player, which was the purpose of establishing the FTA? Does that give credibility to the defence that this is a health measure or for the public good as opposed to something that is a trade barrier?

Prof. Nottage : That is a good question. It also goes, interestingly, to the question of substantive rights and substantive defences to claims. As you can see, it is not really connected to the procedure—namely ISDS versus, say, the treaty based interstate arbitration claim. The same question could be posed under either procedural regimes.

It is very hard to give a short answer to that question, because, again, it will depend on the precise treaty wording that has been used but also the evolving background customary international law and the evolving standards applied by international arbitrators.

Senator FAWCETT: Could I ask you to perhaps take that on notice, which will free up the chair's job in trying to save time, and perhaps give us a considered answer on that question.

CHAIR: Thank you. Senator Fawcett, we may have time to come back to you, but we will now go to Senator Whish-Wilson.

Senator WHISH-WILSON: Dr Weatherall, in relation to the Korean free trade deal, which is the deal we have in front of us at the moment, which includes an ISDS, are you aware of any differences between the carve-outs and the exceptions that we have been looking at and those in other deals that have been done recently or are under negotiation currently—for example, the Canadian-Korean free trade deal? I would like to get a sense of whether, right now, the deal in front of us is good enough compared to improvements that can be made to ISDS, versus the issue of whether we should be banning them in total?

Prof. Weatherall : I think that is a really good question. I was looking specifically at the Canadian-Korean agreement this morning. That agreement was concluded this year, so it is another very recent agreement with the same partner country. It does make a really interesting comparison, because I think the carve-outs and safeguards are significantly stronger in the Canada-Korea agreement. For example, the definition of expropriation is narrower, particularly where you are talking about expropriation that occurs through indirect regulatory means. The intellectual property carve-out is better in the Korea-Canada agreement, because it refers to the TRIPS standards, which are more flexible than the specific IP chapter standards. The general regulatory exclusion in the expropriation annex is also wider, or better for allowing some regulatory freedom for the state in the Korea-Canada agreement. I am happy to send through to the committee a table comparing some of those safeguards, if that would be useful. But I do think that the Canada agreement is a salutary comparison with the Australian one. I think it suggests that the safeguards are not the latest safeguards or the strongest safeguards that are available in international law.

Senator WHISH-WILSON: Are you aware of any developments in relation to the negotiations going on between Canada and the European Union?

Prof. Weatherall : We do not have that text yet, unfortunately. Those negotiations were apparently concluded overnight. They have literally just been concluded, so the text has not been released. Again, I am happy to do a comparison once we have that text, if it comes through soon enough for the committee, and pass that on.

Senator WHISH-WILSON: We got a document at JSCOT last week signed by 100 international legal experts. Presumably there had been discussions or submissions around potential carve-outs and improvements to ISDS. In the end, their conclusion was that they still were not good enough and that ISDS should be abandoned.

Prof. Weatherall : That opinion relates to public consultation that is going on currently in Europe around ISDS. The European Union concerns around ISDS initiated a public consultation on these sorts of agreements. In that context a paper was issued that outlined some of the safeguards that they were thinking about in the context of negotiations. Then we had 100 academics analysing those safeguards to say: are they going to be sufficient or not? It is an interesting paper and, again, it is worth comparing that to what Australia has negotiated in the Korea-Australia agreement. Again, the safeguards that were being considered in that letter are actually broader/stronger safeguards for regulatory freedom then we see in the Korea-Australia agreement. Those academics took the view that those safeguards were not strong enough. So I am certain that if they looked at the Korea-Australia agreement they would again say that they are not good enough. They are looking at different text.

Senator WHISH-WILSON: Okay. Given your area of intellectual property, IP usage et cetera, do you have any concerns about how the existing carve-outs will work in that specific area or any contradictions and could you outline them to the committee?

Prof. Weatherall : Sure. They are outlined in more detail in my submission, but to summarise: in particular the IP carve-out in the expropriation chapter, which says that IP rulings about issuance, revocation and limitation are not expropriation provided they are consistent with chapter 13, so that is consistent with the intellectual property chapter in the Korea-Australia Free Trade Agreement. That sort of carve-out is a problem because it allows the complaining party to say, 'Your measures are not in fact consistent with the IP chapter.' So it brings the whole text of the IP chapter into the arbitration dispute. That is a problem because the text of these IP chapters is exceedingly one-sided: they are very strong on providing exclusive rights to IP owners and very weak on protecting the right of states to legislate in the public interest, introduce new exceptions and the like. I will forward to the committee a brand-new paper that was published last week by another academic who has pointed out the point I made in my submission, which is ironically this carve-out is the very thing that brings all of the intellectual property text into a potential arbitration.

Senator WHISH-WILSON: Professor Nottage, you are optimistic about being able to improve ISDS clauses and you have given us some good ideas today and in your submission. Do you accept that the Korean deal and the carve-outs in ISDS are not sufficient or do you think they are sufficient given the debate we are having around improving ISDS?

Prof. Nottage : Particularly in relation to IP I would say my colleague Professor Weatherall makes a compelling case that it is not well drafted and we should look closely at alternative forms of wording used by, say, Canada, which like Australia has had a lot of public discussion about ISDS and investment treaties more generally. In relation to other provisions, again I think it is a question that has been put on notice for us but comparing even KAFTA drafting with the drafting of, say, the Australia-Chile FTA and AANZFTA concluded with ASEAN in 2009 by a Labor government—I cannot remember which one; it must have been before the Gillard government—the wording in the Korea agreement struck me as tighter. However, obviously the EU is also interested in looking at ways to nail down the substantive rights and the exceptions and we should do the match-up that Professor—

Senator WHISH-WILSON: I did attempt to read the document that I just referred to from the 100 academics. As I am not a lawyer I found it very hard going. It was highly technical in nature. You are a legal academic. Do you have any comments about the concerns of those 100 legal academics? Correct me if I am wrong, but I think the conclusion at the end of that report is that we should abandon ISDS.

Prof. Nottage : I will have to have a closer look at that report to give you a response.

Senator WHISH-WILSON: If you could.

Prof. Nottage : But I would say that there have been a number of earlier shorter open letters signed by various legal academics and past and present judges, for example, from various countries in relation specifically to ISDS, to the procedure rather than substantive rights that states sign up to in the defence of those rights or exceptions. In relation to ISDS and open letters, we have to be a little bit cautious. If someone puts before you an open letter describing a system in very general terms or in a particular way and says, 'What do you think of this? Do you want to sign it or not?', a lot of people will just then say, 'That sounds awful and I'm going to sign'. And of course many others may be approached and not do that.

Senator WHISH-WILSON: I respect what you are saying, but I just reflect again: I read that and I could not understand hardly any of it. It was very technical and, clearly, it had a lot of legal opinion in it, so I did not see it as a general open letter. The conclusion may have been seen that way, but the arguments behind it were highly technical and legal in nature. I just put that on the record. It did not seem like an emotive document to me at all—quite the opposite.

Prof. Nottage : But I think it does make an important point, which is that this area of law is complicated, like many other areas of law. If you read a report, for example, on WTO agreements that Australia has been a party to since 1994 in relation to things like the general exception or the safeguard in relation to public health under article 20 of GATT, that is also very technical and evolving. Even with an appellate body of permanent judges, a review for error of law—that area of law is still evolving; it is still not 100 per cent clear. Unfortunately, that is the nature of law and in particular international law.

I would say that the general trend, both in treaty drafting and in an arbitral awards, has been to give more weight to host state discretion in regulatory measures that are non-discriminatory and put genuine public health or environmental protection benefits. We cannot look at old cases decided in the early days of NAFTA—the North American Free Trade Agreement—and say, 'Look how badly those arbitrators decided the system and ISDS exacerbated the problem'. Those old cases, some of which are cited in submissions on this bill, are no longer representative of the trend. That is why I think the paper you mentioned about the various types of safeguards more recently is complicated because the law has changed. It has moved on from some of those earlier cases.

Senator WHISH-WILSON: But certainly those academics expressed opinions about future risks. We use the word 'risks' rather than stating any facts here, but they still firmly believe that this system presented significant risks.

You use the word 'non-discriminatory'. We had evidence earlier from Dr Rimmer that 'non-discriminatory' is very broad in its interpretations as it stands in carve-outs and in relation to a whole range of issues. We talked about food labelling, local procurement, bans on GMO products et cetera. Do you accept that there are criticisms with the standing exceptions or carve-outs?

Prof. Nottage : The biggest tension is the extent to which something can be said to be discriminatory or not when there is no obvious intention to discriminate, but it has that differential impact on foreign investors or traders compared to local traders and so on. This is an issue that is not specific to international investment treaty law. The WTO system has been grappling with this and continues to grapple with this. In fact, international investment arbitration tribunals refer to that sort of conceptual framework developed in the WTO system. There are some debates about whether that can be easily transported over into the international treaty space, but that is a major reference point.

It goes back to one of my responses to an earlier question: what is the alternative if you just completely banned ISDS and essentially very much limited the scope for future investment disputes emerging through international tribunals? It could backfire in the sense that we no longer benefit from an evolution of the understandings of international investment law experts—the tribunal members chosen by the host states, the drafters of treaties and so on the lawyers involved when they have to get involved. No, because at the moment there is a rich literature evolving that we can refer to. In the absence of that, if we get rid of ISDS completely we will get to a situation where we will never really know and we will just have to rely on, to the extent it is possible, some WTO type jurisprudence and so on.

Senator WHISH-WILSON: Can I ask you a question about that? On page 4 of your submission you talk about your study you have got from the Australian government with colleagues at UNSW, ANU and Melbourne. You are looking at the Productivity Commission recommendations. On page 4 you mention that you can see benefits to ISDS. How far are you into that work? Have you done the economic modelling and the work to support that conclusion?

Prof. Nottage : So there are three aspects in particular that we are working on. One is to do a proper econometric study tailored to the Australian environment and to Australian policymakers such as yourself, looking at whether offering various types of investor-state dispute settlement—because there are various gradations possible, ranging from full-on investor-state arbitration through to some partial substitutes and also some investor-state mediation provisions—lead to an increase in inbound FDI and the extent to which those different types of provisions actually do that. Australia and many other countries in the region desperately need increased inbound FDI, for example to promote infrastructure in particular in developing countries. So we are in the process of doing that this year, but we will not have results until next year. It is a very difficult process, and it is one the Productivity Commission did not attempt. They referred to a working paper at the time, published through the TTO, but we want to do a proper study. It will take time. We are working with Dr Shiro Armstrong at the ANU.

The second thing we are doing, which we will be able to present some results on more quickly, is precisely in relation to the questions this committee has raised in relation to safeguards and so on: the degree to which exceptions can and are being applied by arbitral tribunals in investor disputes. That is a matter of going through that growing literature of decisions of arbitral tribunals and related commentary, the sorts of detailed reports like the one that you are having difficulty with. We are going through all of that and trying to distil it so that we see clearly the trend and whether or not host states like Australia are subject to greater risk.

Senator WHISH-WILSON: Sorry, Professor Nottage, but I have just been told by the chair I have only got three more minutes. You do use the words in your submission:

… there appear to be more such benefits for Australia in treaty-based ISDS than hypothesized by the Productivity Commission—

and that is obviously the basis you are exploring in your report. But what evidence do you have that there appears to be these benefits at this point if you have not done the work yet?

Prof. Nottage : There is, for example, in the Productivity Commission's own cited literature a finding in it from econometricians cited that actually investor-state arbitration provisions did lead to an increase in inbound investment on a global basis, on an aggregate basis, on one form of regression analysis. That is one thing we want to explore. It is not highlighted by the Productivity Commission: they actually cite that proposition in that paper only for the contrary view, which was that there was no significant statistical benefit. Another thing I have mentioned before is we now know, unlike the Productivity Commission, that Australian investors are using the system to protect their outbound investments. For example, the claim against Indonesia at the moment by an Australian mining company; there was an earlier arbitration that was actually going on at the time of the Productivity Commission did its study, but which was not reported because it was under the UNCITRAL rules. That was where an Australian investor successfully claimed against India. So we now know that there are Australian companies benefitting tangibly from the system and it is working the way it was designed to work.

Senator WHISH-WILSON: When did you receive the funding and the go-ahead for that report? Was it December? I notice your reference says December, but did you receive that from the government recently or a while back?

Prof. Nottage : It was formally notified around November last year. We put in the application, of course, earlier in—

Senator WHISH-WILSON: Thank you. Can I get your opinion on whether you think the system that we have seen in Europe, where the whole ISDS issue has been opened up to three months of public submission, is something we should consider doing in this country given that you feel that there is room for evolution in these investment clauses. You also talk about a model investment treaty. Or are you happy with the way the system is at the moment, where DFAT tends to make these decisions or government departments make these decisions internally?

Prof. Nottage : I have been saying for several years that Australia should be looking to develop its own model international investment treaty, like many of our trading partners do, both developed countries and developing countries. The EU, of course, is a special case because it involves several dozen member states with different levels of development and it has a very complicated semi-constitutional structure. So, of course, their consultations are going to take a longer time and have to be done in a particular way. But I think there would be a lot of benefit in more structured public discussion led by the government about not only investor-state dispute settlement but also the broader international investment treaty regime, including the substantive rights, which I notice we have been spending most of our time talking about. That, I think, is the more important question.

However, I must say that I do not think a bill along these lines, which proposes just to get rid of all forms of ISDS and prevent Australia from engaging in that process with its counter-parties, and even domestically after that if the bill is passed, is the constructive way forward. I think a better way would be for politicians such as you to please engage with other politicians on all sides of politics and try to get responsible ministers to direct their government officials towards a broader public discussion where there can be consultation about the range of options available to try to improve the system.

Senator FAWCETT: I would like to come back to a comment you made earlier about the developing body of law. We have had some comments from other witnesses—and, again, I am just seeking to get a counterbalance here. The US has made a fair bit of moving away from the broad statement of 'fair and equitable' and coming down to requiring people to consider the body of existing international law and interpretations. The concern has been that that body of international law is now starting to include some of the outcomes from various panels. I wonder if you share that concern and if you think that traditional interpretation is starting to change such that that is no longer a suitable path for states to go down in drafting these agreements.

Prof. Nottage : I have noticed that argument. I would have to go back and see what other academics have written specifically about that sort of point more recently. In principle, I think the provisions added to Australia's treaties and many others around the world over recent years—in fact, going back more than a decade—have tried to limit the scope of fair and equitable treatment to the customary international law standard. That was intended to rein in the scope of application of that obligation by states. Perhaps there is an argument that the customary international law has expanded as a result of earlier arbitral tribunals. In theory that is possible, but the question would be: how are current arbitral tribunals dealing with that question? There are many treaties now that have sort of provision; how are they actually deciding it? So it is an empirical question and it is something where I am sure there is some good literature that tests the hypothesis. I think Dr Tienhaara made the assertion or put the hypothesis, but it requires some actual hunting around to test it.

Senator FAWCETT: Sure. I am happy for you to come back on notice.

Prof. Nottage : I will try to find something that might assist you in that.

Senator FAWCETT: Thank you. I have two final questions. First, the concern has been raised about 'regulatory chill' and a reluctance of nations to pass legislation. I am just wondering whether you would care to comment on that. Second, there has been concern about a lack of transparency around ISDS provisions. Specifically looking at the KAFTA as the current example, do you have a comment on the KAFTA agreement, how it is drafted and the degree of transparency in it, specifically around the ISDS provisions?

Prof. Nottage : First, on regulatory chill, again, it is a theory that makes some intuitive sense. But, again, it is a matter that needs to be tested empirically. The difficulty here is that it is hard to prove a negative. We are trying to find examples of where a government has not introduced a measure because of the concern about foreign investor claims—in fact, the extra concern of investor claims facilitated through ISDS provisions. It is very hard to find such examples—clear examples. Dr Tienhaara has done a lot of work trying to find such examples, and she has not come up with many clear ones, because at that level of policy there is not a lot of publicly available information. In our project that we have embarked on we are planning to interview not just foreign investors who are considering accessing foreign markets from Australia but also government officials in different countries, including Australia. We may be able to get, on a confidential basis, an anonymised basis, some examples that prove or disprove this hypothesis.

But I would say—and this is a point I made in my written submission—that already developed countries, in particular, like Australia, are subjected to regulatory chill anyway, because our courts are full of cases where concerned citizens and corporations are challenging government action or inaction through our court system. We are also subject to regulatory chill from interstate dispute settlement processes, including the WTO claims, including in relation to investment in services sectors under the General Agreement on Trade in Services—GATS. So, especially in developed countries, the extra regulatory chill could well be overstated. But, again, it is a matter that needs to be tested.

Finally, on transparency, as I wrote with Dr Kate Miles in published work in 2009, I think Australia should continue down the line that it was already going down in agreements with Chile, for example, of enhancing transparency. We see some of those being picked up in the KAFTA, most recently. It is a concern also in other developed countries to enhance the transparency of proceedings. I predict that the EU and the US will retain ISDS in some form but certainly with enhanced transparency, which they have already started to introduce in some of their treaties, which will take them perhaps to the next level. I think that is the sort of thing Australia should be engaging in and doing as well, rather than just getting rid of ISDS completely, as proposed in this bill.

Prof. Weatherall : Perhaps I could make just a very brief comment about the regulatory chill question. I think it is worth noting that we have had a number of examples in the intellectual property area where specific obligations that have been negotiated in these free trade agreements have been cited as reasons not to do law reforms that might otherwise be desirable. We have had law reform bodies commenting on a number of occasions, and I can provide some examples of that. The link with investor-state dispute settlement is that if, as I have said, the entire text of the IP chapter is coming into potential arbitration and can be arbitrated, then that significantly raises the risk that those sorts of issues around consistency with the IP chapters are going to be raised in law reform processes and be a real problem. Luke rightly points out that it is not an example of actual regulatory chill, but I think the risk is there, and I am happy to provide some specific examples.

CHAIR: Thank you for that, and thank you both for your submissions and for appearing. If senators have any other questions I am sure they will put them on notice through the secretariat. Again, thank you for your interest in appearing today.