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A new era for investments under the Singapore-Indonesia BIT, but tread with caution

Posted on 11 May 2021

On 9 March 2021, a new bilateral investment treaty between Singapore and Indonesia (the "States") came into force (the "SI-BIT"). Singapore is one of Indonesia's biggest trading partners, accounting for an estimated U$48.8 billion in bilateral trade in 2020. The SI-BIT will increase trade by 18 to 22 percent over the next five years.

The SI-BIT signals that both States are keen to protect this important commercial relationship and to update the terms of their previous BIT, which came to an end in 2014 as part of Indonesia's overhaul of all 67 BITs that were in force at the time.

The SI-BIT provides a broad range of protections for investments as well as containing novel and potentially far-reaching clauses dealing with environmental issues, corporate social responsibility, and anti-bribery and corruption. It builds on the recent pivot in BITs characterised by holistic and carefully considered provisions that respond to the modern investment climate, for example the Nigeria-Morocco BIT (2016).

Below we discuss the key features of the SI-BIT in more detail.

1) Definition of Investment

Article 1 of the SI-BIT defines an "investment" as "any type of asset owned or controlled, directly or indirectly, by an investor that has the characteristics of an investment". Crucially, footnote one in the SI-BIT clarifies that an "investment" includes "the commitment of capital, the expectation of gain or profit, the assumption of risk or certain duration". This description reflects the criteria currently demanded by International Centre for Settlement of Investment Disputes (ICSID) tribunals, namely contribution, risk and duration. The explicit inclusion of this criteria into the SI-BIT therefore rules out the need for tribunals or courts to apply a different or broader definition when grappling with whether conduct of an investor amounts to an "investment".

2) Treatment of Investment

The SI-BIT covers the two most important customary international standards of investment protection, namely "fair and equitable treatment" and "full protection and security" (Article 3(1) and (2)). This echoes provisions in older BITs, but Article 3(2)(a) extends the protection further by reference to the denial of justice standard by requiring each State not to "deny justice in any legal or administrative process". Article 3(2)(d) clarifies that the States are not required to afford treatment beyond that which is necessitated by customary international law.

However, Article 3(2)(c) goes on to state that the mere fact that either State takes or fails to take action that is inconsistent with an investor's expectations does not constitute a breach of the protection, even in the event of loss or damage to the said investor. This is a curious provision and a departure from traditional BITs. It appears to address the principle of legitimate expectations of foreign investors encompassed within the standard of fair and equitable treatment. Legitimate expectations is a basic touchstone of the fair and equitable standard in investment arbitration and has been recognised as such by arbitral tribunals (see for example El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011 at para 339; and Gavrilovic v. The Republic of Croatia, ICSID Case No. ARB/12/39, Award, 26 July 2018 at para 954) and the International Court of Justice (see Bolivia v Chile Judgment para 162 (2018)).

The provisions as drafted are therefore broad in language and have been expanded to include the notoriously difficult-to-prove standard of denial of justice. Simultaneously it is uncertain whether this provision in the SI-BIT attempts to remove legitimate expectations from the fair and equitable treatment standard. If so, it tilts the scale towards the States' right to regulate (which is discussed further below). Clarification from arbitral tribunals and domestic courts will be important for the interpretation and application of the SI-BIT's investment protection regime.

Article 3 is further limited by Article 36(1)(b) which states that benefits (and therefore, by extension, protections) will be denied where the investor is an enterprise which has "no substantive business operations" in the host State's territory. It is unclear how this would work in practice, but the language appears to deter shell companies from making claims where there has been no economic or other contribution to the State.

Seen in this light, there is a dialogue between Article 36(1)(b) and the definition of "investment" as discussed above. The first case that presented guidelines for an ICSID tribunal to determine whether an investment has taken place was Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (ICSID Case No. ARB/00/4, Decision on Jurisdiction). The tribunal in that case held that there were four elements to an investment, namely (1) contribution of money/assets, (2) risk, (3) durations and (4) a contribution to the host State’s economy. The fourth element has been the most controversial and most investment treaty tribunals have distanced themselves from this requirement. It is therefore not surprising that it was not included in the definition of "investment" in Article 1. However, when reading Article 36(1)(b), it is difficult to ignore that an investor is required to provide some type of contribution to the host State in order to have jurisdiction under the BIT. It is not clear whether this was an intentional, clever inclusion of an otherwise controversial requirement under international law, or whether it was an accidental drafting coincidence.

3) Expropriation

The expropriation clause in the SI-BIT is extensive, but largely ensures a level of substantive protection comparable to traditional treaties. However, Article 6(4) also allows the States to approach the expropriation of land in light of their own domestic legislation. It is therefore critical that any foreign investor receives proper advice regarding the local legal framework for expropriation of land before entering the host country.

4) Provisions on the Right of the State to Regulate

Under Article 11 of the SI-BIT, the States have the right to exercise their regulatory powers in order to achieve legitimate policy objectives, including protections of public health, social services and education. The Article goes on to state that "the mere fact that a Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation" of the treaty.

One of the main issues facing international investment law is the adverse effect a determination from an international arbitration tribunal can have on the regulatory powers of a State. Article 11 is therefore a clear indication that Singapore and Indonesia consider the right to regulate on carved out policy matters imperative to good governance, even if such actions lead to the investor suffering damage. The specific reference to "public health" is also a welcomed addition, which undoubtedly has been informed by the COVID-19 pandemic.

5) Corporate Social Responsibility

Article 12 of the BIT acknowledge that the States affirm the importance of encouraging businesses to voluntarily incorporate internationally recognised standards, guidelines and principles of corporate social responsibility into their policies.

As with the anti-corruption provision (see below), there is no direct obligation for the States arising out of this Article. However, the inclusion of this provision is remarkable as it encourages States to hold investors accountable for their actions. One only has to look at the current legal battle between Royal Dutch Shell and Nigeria for an example of what can happen when international conglomerates' actions are left unchecked and unaccounted for. Article 12 is therefore a step towards imposing international best practices on international corporations.

6) Measures against Corruption

Article 13 of the SI-BIT provides that both States reaffirm that bribery and corruption in investment can undermine democracy and the rule of law as well as adversely affect economic development.

Like the Nigeria-Morocco BIT, the inclusion of this provision is significant. Allegations of corrupt and dubious practices by foreign investors are abundant in investment treaty jurisprudence and continue to be a major concern. Furthermore, there remains inconsistency between international arbitral tribunals' approach to dealing with issues of corruption (for example, in Fraport v Philippines (ICSID Case No. ARB/03/25), the tribunal held that where corruption can be proved to have taken place before an investment is made, a tribunal can decline jurisdiction on the basis that it is an illegal investment. The tribunal in World Duty Free v Kenya (ICSID Case No. ARB/00/7) held that payments made to the President of Kenya to obtain a contract was a bribe. However, in Tanzania Electric Supply Company Limited v Independent Power Tanzania Limited (ICSID Case No. ARB/98/8) bribery of government officials did not render the power purchase contract ineffective).

While Article 13 does not go as far as to impose an obligation on the host State to take measures to combat corruption (as in the Nigeria-Morocco BIT), its significance lies in the fact that it records an agreement between the States that corruption is endemic. Parties to a dispute therefore could rely on this provision, which may result

7) Dispute Resolution

Article 15 allows any dispute to be resolved, in the first instance, through consultations and negotiations. These consultations must be initiated by way of a written request from the disputing investor to the disputing State, and shall contain the information relating to the legal and factual basis for the dispute. The place for consultations will be either Jakarta or Singapore, depending on where the disputing party is located.

Under Article 16, the disputing parties may at any time agree to refer the dispute to mediation. Unlike the consultations, the mediation is voluntary.

Should the dispute not be settled within one calendar year of the written request, the investor has a choice: it can either submit the dispute to the local court or tribunals of the State, or proceed to arbitration under the ICSID Rules, the United Nations Commission On International Trade Law (UNCITRAL) Arbitration Rules or any other arbitral institution that the parties agree to. This flexible and sophisticated approach appears to indicate a mutual level of trust in the States' legal systems and rules of law, while acknowledging that arbitration is often the preferred dispute resolution forum for international investors.

Unusually, Article 25 of the BIT states that an arbitral tribunal “shall order that the costs of the proceedings be borne by the unsuccessful disputing party”. This would apply equally to the State and the investor. Article 18 requires disclosure of third-party funding, and Article 26 provides the arbitral tribunal with express jurisdiction to order security for costs against an investor “if there are reasonable grounds to believe that the disputing investor risks not being able to honour a possible decision on costs issued against it”.

This multi-tiered approach to dispute resolution is alive to the realities of modern investment arbitration. Articles 18 and 26 indicate an educated understanding of some of the main challenges facing States during the course of investment arbitration. It is assumed that these provisions were drafted on the basis of discouraging spurious claims from foreign investors and forcing governments to actively engage in resolving disputes. While the treaty aims to strike a conciliatory and balanced approach between the interests of the State and investor, it is unclear whether tribunals or courts will feel bound to these provisions or interpret them simply as guidelines, especially since tribunals and courts traditionally have a wide discretion in their approach to costs. Time will tell whether this flexible approach encourages cooperation between the disputing parties or creates another point of tension.

Conclusion

The SI-BIT presents an ambitious and contemporary framework for foreign investors and States alike. Along with the Nigeria-Morocco BIT, the SI-BIT signals a new breed of treaties that incorporate clauses reflecting the realities of present-day investment and dispute resolution. The emphasis on corporate social responsibility and measures against corruption are likely to be well-received by States. One hopes that this will ultimately encourage responsible, value-driven investments.

It remains to be seen how tribunals and courts will interpret and apply the protection of investment regime as set out in Article 3, including its limitations and articulations in light of Customary International law. Notwithstanding, the holistic approach adopted in the SI-BIT acknowledges the active role that States can play in negotiating the framework of their bilateral relationship, as well as addressing the perceived backlash against the development of investment arbitration.

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