The passing of Australia’s Foreign Relations (State and Territory Arrangements) Act 2020 (the “Act”) targeting foreign arrangements (such as the Framework Agreement between Victoria and China) may fall foul of established international commercial law. This potentially exposes Australia to claims from aggrieved parties.

The policy of legislating and centralising agreements with foreign entities at the Federal government level sets Australia apart from international peers, who prefer a decentralised model (albeit with federal oversight), according to the Brookings Institute.

The Act confers overly-broad powers upon the foreign minister, such as the unilateral and retrospective ability to terminate existing foreign contracts and veto rights for future arrangements. This can only result in a chilling effect among the international commercial community looking to deploy investment capital into Australia. Moreover, this is inconsistent with Australia’s widespread adoption of international law.

The nebulous wording of the Act applies to new and existing foreign arrangements which are subject to policy that may still need to be written, formulated or even approved. This renders compliance impossible both at the initial contracting stage and during the life of the contract once executed. Further problems arise for commercial entities that may undergo a change of control event. For example, a compliant entity may unexpectedly fall foul of the Act due to future investment from a sovereign wealth fund.

For example, the Act explicitly states that existing foreign arrangements can be cancelled regardless of whether they are bound by Australian or foreign law. Is it possible, therefore, that the foreign party to a contract would have access to a supranatural system of international law while the Australian party does not? If the answer is yes, two concerns arise: one between the Constitution and judicial awards made by international tribunals and the other in the inequality between the treatment of national entities versus foreign entities.

Furthermore, the appalling lack of procedural fairness has received significant criticism. Decisions made by the foreign minister are excluded from judicial or administrative review. The repercussions of such an omission may herald international tribunals as de facto appellate courts to parties seeking relief.

Worryingly, inept legislation does not abolish remedies available to local and foreign entities who may have recourse under international law. What this means is that savvy investors may in fact find opportunity to exploit the new legislative landscape to balance the negotiating odds in their favour. They may exploit this new landscape by arguing Australia attracts a higher risk premium because of regressive legislation, knowing full well the chance of success in international arbitration is high if powers under the new laws are enforced.

Legislation recognising international law exists throughout Australia in the way of international conventions, treaties, and case law. Therefore, if an existing contract is found to be internationalised, a foreign party falling afoul of the Act can seek international arbitral relief, which would be enforced in Australia. Australia is a member state of the International Centre for Settlement of Investment Disputes (ICSID) Convention, which has been adopted into domestic law. Under the Convention, if a host state justifies terminating a contract due to new domestic law, member states to the ICSID Convention have a surviving commitment whereby disputes can be brought before the ICSID arbitration tribunal. This was confirmed recently in Lahoud v The Democratic Republic of Congo and Eiser Infrastructure Ltd v Kingdom of Spain.

Consequently, the subset of core and subsidiary arrangements where the minister can unilaterally terminate or invalidate existing (legally binding) contracts under the powers vested in the Act have substantial recourse to ICSID arbitration. For a practical application of arbitration clauses, the recent China-Australia Free Trade Agreement (ChAFTA) provides access to either ICSID arbitration, the United Nations Commission on International Trade Law (UNCITRAL) arbitration, or “any other arbitration institution.” China is not a party to UNCITRAL’s Model Law, however they have ratified the ICSID Convention. Therefore, ICSID arbitration is available for investor-state disputes in matters between Australia and China. As a case in point, then, the recent international commercial arrangement between the Australian Northern Territory (NT) and the Chinese-owned Landbridge Group relating to Darwin’s maritime port is arguably on a collision course with the new law.

On 16 November 2015, the NT government and the Chinese-owned Landbridge Group executed two agreements, the first a 99-year Lease for the Port of Darwin, and the second the sale of an 80 percent controlling stake in the Port Operator. The initial value of both agreements was AUD$506 million. The NT government is classified as a core State/Territory entity under the Act, while Landbridge Group is a corporation operating on a commercial basis. Due to the commercial nature of the transaction, the Act purportedly does not apply.

However, in early 2021 a sequence of events has challenged the future legitimacy of the transaction. In January 2021, the Port of Darwin was classified as critical infrastructure under s.11(g) Security of Critical Infrastructure Act 2018. Following this, in April, the foreign minister cancelled Victoria’s commercial arrangements with China’s One Belt, One Road (OBOR) using new powers vested in the Act.

It is reasonable to conclude that the foreign arrangement between the NT Government and Landbridge Group may attract a review under the auspices of the Act. Consequently, this would be a landmark test of the application of the Act to a substantive international commercial arrangement. If such a review occurs, and the foreign minister decides to unilaterally and retrospectively cancel the agreements, Landbridge Group may have recourse to international arbitration. Even if no such explicit internationalisation of the contract exists, there may be recourse to international arbitration under ChAFTA.

The exploitation of foreign capital presents opportunities to be encouraged. For example, a foreign nation was able to export capital to invest in a dilapidated Australian maritime port requiring substantial upgrade. The transaction helped re-purpose significant federal funding into alternative uses: arguably a critical advantage during the COVID-19 environment. Reversal of the transaction will create discord among foreign investors who rely on due process, the sanctity of contracts, and judicial review.

International commercial engagement between foreign investors and host states remains an increasingly essential component of the global economic ecosystem. A delicate balance is required to satisfy the competing interests of foreign corporations requiring long-term political stability to safeguard their investments against governments responsible for developing progressive domestic policies. There is inevitable tension when these interests become misaligned.

It is unfortunate a country as progressive as Australia has made a misstep in their latest legislative effort regarding foreign arrangements, especially against a rich history where numerous international conventions espousing procedural fairness and general principles of law have been adopted.

Lincoln Booth has a Masters Degree in International Commercial Law and a Master of Arts (Laws) degree. He is a legal academic with research interests including international commercial law and constitutional law. He is also a candidate in the Executive MBA programme, Judge Business School, Cambridge University.

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