S’pore: the right place for dispute settlement

Posted in News July 5, 2014

29 July 2014
Business Times Singapore

The Republic is well equipped to fill the choice position of Asia’s arbitration hub

FOLLOWING the surge of investment and development in Asian countries in recent years, international commercial arbitration as a form of dispute resolution has also gained significance in Asia, and the stage looks ready for an increased level of claims involving investors and states.

This article observes how the investment treaties of Asean member states facilitate investor-state dispute resolution and why Singapore is equipped to fill the choice position of Asia’s arbitration hub in this regard, even possibly becoming the ideal venue for investor-state mediation.

Investor-state dispute settlement provisions in Asean investment treaties

To appreciate the features of investor-state dispute resolution involving Asean member states, the landscape must be considered against the backdrop of the various Asean investment treaties – most notably the Asean Comprehensive Investment Agreement (ACIA) which took effect on March 29, 2012. Protection for an investor in an Asean country is enshrined in the ACIA which – on top of reaffirming core investor protections common to most investment treaties, such as according fair and equitable treatment to investors and protection against unlawful expropriation or nationalisation of investments – provides for further investor protection in the form of Most-Favoured-Nation treatment and greater freedom for the operation of foreign investments within the host state.

More significantly, the ACIA also contains provisions which govern investor- state dispute settlement (ISDS). Such ISDS provisions are crucial in transforming the core protections for Asean investors from mere declarations of intent within a treaty into enforceable safeguards for their investments in the host state. The ISDS regime in the ACIA empowers an Asean investor to unilaterally commence a claim against an Asean host state. This is especially advantageous for an investor where reliance on the national courts of the host state is difficult or impossible. Specifically, Article 33 of the ACIA allows investors to seek dispute resolution in domestic courts or arbitration at various forums, including the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL) or, if the disputing parties agree, at regional arbitration centres such as the Singapore International Arbitration Centre (SIAC).

Moving away from the ACIA, there has also been a proliferation of Asean Plus One treaties where Asean countries as a collective group conclude free trade agreements (FTAs) with key players in the world economy such as Australia, China, India, Japan, New Zealand and South Korea. The Asean Plus One FTAs with Australia, China, New Zealand and South Korea feature ISDS mechanisms similar to those in the ACIA. Further, negotiations are presently underway for the Regional Comprehensive Economic Partnership (RCEP) between Asean and its FTA partners, as well as the Trans-Pacific Partnership Agreement (TPPA), which Brunei, Malaysia, Singapore and Vietnam are party to, and it is highly likely that both these investment treaties will feature ISDS mechanisms as well.

Getting the most out of Asean investment treaties

To date, there has not been a reported decision which finds an Asean member state liable for violation of an investment treaty. In this regard, Asean host states have mostly successfully argued that the arbitral tribunal lacked jurisdiction to hear the substantive dispute. Indeed, the issue of jurisdiction has proven to be a common stumbling block as many investment treaties lay down conditions which must be satisfied before the tribunal has jurisdiction over the matter. As an illustration, in a recent US$3.75 billion claim commenced against the state of Vietnam by a US investor, Michael McKenzie, the tribunal upheld Vietnam’s jurisdictional objections and concluded that McKenzie had not made a qualifying investment because he had failed to demonstrate ownership and control of the investing company, and had failed to comply with an obligation of good faith imposed on those who bring claims against a state in an international forum.

Thus, for an investor to maximise the protection available to it under an Asean investment treaty, it must from the outset familiarise itself with all the requirements under the treaty, not least the requirements to establish jurisdiction of the arbitral tribunal.

Singapore as an investor-state arbitration hub

With the exponential growth of bilateral, regional and multilateral investment treaties, investor-state disputes in the Asean region look set to correspondingly increase. Based on statistics issued by the United Nations Conference on Trade and Development (Unctad) and the ICSID, the number of known investor-state arbitrations involving Asean countries to date are given in the table (above).

In the recent Philip Morris Asia dispute with Australia, Philip Morris Asia succeeded in arguing for Singapore to be the seat of the arbitration over London. Philip Morris Asia cited factors such as the neutrality of Singapore as a seat, and the judiciary’s demonstration of minimal intervention and a supportive attitude towards arbitration. Singapore has also previously been the seat for other arbitrations such as the White IndustriesAustralia dispute against India and the Deutsche Bank dispute against Sri Lanka.

Singapore appears from these proceedings to be gaining popularity as an arbitration seat for investor-state disputes. Indeed, Singapore is equipped to embrace this role. The SIAC has built for itself a strong reputation as an institution of choice for the arbitration of private commercial disputes. The next natural step would be to move towards investment treaty arbitration. The recent addition of rule 3.1(d) to the SIAC Rules 2013 specifically recognises that disputes arising out of an instrument “other than a contract” may be referred to SIAC arbitration, and investment treaty disputes are cited as an example.

Singapore’s Maxwell Chambers is also party to a memorandum of understanding with the ICSID for the conduct of hearings in Singapore.

On the horizon: investor-state mediation?

It has been observed that Asean investor- state arbitrations incline towards a conciliatory approach to dispute resolution. In December 2013, Indonesia and a Japanese consortium, Nippon Asahan Aluminium (NAA), reached settlement of a potential ICSID dispute, with the Indonesian government agreeing to pay US$557 million for NAA’s stake in a joint-venture project, thereby avoiding full-scale arbitration proceedings. News of the settlement was welcome, given Japan’s sizeable investments in Indonesia and concerns about the impact on the countries’ relations had the dispute escalated to the ICSID.

The resolution of the Indonesia-NAA dispute by settlement may be indicative that a viable alternative to arbitration is required. There are many factors which militate in favour of having investor-state mediation as an option, such as the uncertainties, costs and delays in arbitration proceedings which create pressure on small developing nations against whom such claims are brought. The availability of mediation as an alternative may in fact eradicate the often criticised “all or nothing” approach involved in arbitration, in which investors either abandon or settle claims outside the formal procedure, or incur colossal sums in costs.

In this respect, Singapore has taken the initiative to propagate such an alternative. The Singapore government has recently announced intentions to set up the Singapore International Mediation Centre, with the specific aim of promoting mediation in emergent regional markets such as Brunei, Cambodia, Laos, Myanmar, the Pacific Islands, the Philippines, Sri Lanka and Vietnam, and international markets such as China, India, Indonesia, Japan, the Middle East and South Korea. Recommendations have also been made for the introduction of a Mediation Act to strengthen the framework for mediation. With the legal infrastructure to facilitate and support investor- state mediation and jurisprudence supportive of investor-state mediation, Singapore is poised to be an ideal venue for the conduct of investor-state mediation.