Promoting investment through arbitration

Introduction

This article provides an update on the progress of international arbitration reforms in the South Pacific region, and offers observations on the potential impact of such reforms on international trade and foreign investment in the region.

Efforts to develop new international arbitration regimes in the South Pacific

International trade plays a crucial role in the economic and social development of South Pacific nations. Despite arbitration being a preferred method for resolving cross-border disputes within the international business community, until recently, most countries in the South Pacific have lacked a developed and modern international arbitration regime.

Recognising the importance of an effective commercial dispute resolution regime for boosting investor confidence, the Asian Development Bank (ADB) has invested in a regional capacity development technical assistance program aimed at establishing an effective commercial dispute resolution regime in Pacific countries through international arbitration reform. The ADB sees the promotion of international commercial arbitration in the region as crucial to creating a better investment climate, facilitating more cross-border trade and investment to accelerate growth, reduce poverty and economic disparity, raise productivity and employment and strengthen national institutions.

The program aims to establish wellfunctioning international regimes in the South Pacific through a combination of modern national laws on arbitration, accession to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) as well as building domestic capability.

The ADB sees the promotion of international commercial arbitration in the region as crucial to creating a better investment climate

The importance of foreign investment and trade

Comprised of small island nations, the South Pacific region is heavily reliant on growth in international trade and foreign investment for economic development. According to the World Bank, in 2019, exports of goods and services comprised 41.7% of the GDP of the South Pacific small States, but only USD 418 million was invested in the region.

To boost international trade, nations in the South Pacific are increasingly entering into or proposing to enter into bilateral or multilateral free trade agreements (FTAs). For example, a regional FTA, the Pacific Agreement on Closer Economic Relations (PACER Plus), entered into force on 13 December 2020. PACER Plus is a comprehensive FTA covering goods, services and investment and has been signed by Australia, New Zealand, Cook Islands, Kiribati, Nauru, Niue, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu. PACER Plus contains an investment chapter but does not provide for investor-State arbitration.

The South Pacific is also a region at high risk from the effects of climate change and will require significant investment in abatement and mitigation measures. Australia has set up the Australian Infrastructure Financing Facility for the Pacific to finance, by way of sovereign loans or grants, infrastructure projects that contribute to the stability of the region. Such projects may well involve private foreign investment.

However, a major barrier in attracting foreign direct investment and stimulating cross-border trade is lack of investor confidence in effective and efficient ways to resolve commercial disputes and enforce resulting decisions.

Increasingly, foreign investors rely on international arbitration as an effective, fair and timely way to resolve commercial disputes and produce awards that can be enforced globally. For many sectors that invest in the South Pacific, particularly mining, oil and gas, international arbitration is the preferred choice for dispute resolution. The absence of effective legal frameworks to facilitate international commercial arbitration and the recognition and enforcement of arbitral awards has therefore been identified as an impediment to the growth of investment and trade in the South Pacific. Recent reforms in the region, supported by the ADB, should contribute to overcoming this barrier.

A major barrier is lack of investor confidence in effective and efficient ways to resolve commercial disputes and enforce resulting decisions.

The Reform Agenda

An effective international arbitration regime requires:

1. a modern, fit-for-purpose national arbitration law that facilitates the enforcement of arbitration agreements, provides efficient curial support for arbitration, and ensures the enforcement of arbitral awards consistent with best international practice;
2. ratification of the New York Convention and its national implementation; and
3. a well-trained legal professional and judiciary that understands and supports international arbitration.

UNCITRAL and the ADB have collaborated to facilitate commercial law reforms, legal harmonisation and implementation of arbitral frameworks in the South Pacific region. Important progress has been made in recent years in respect to (1) and (2) above. The table further below summaries the progress of reform in key Pacific nations, with links to legislation where publicly available.

Legislators in Fiji, Papua New Guinea, Palau and Tonga have expressed confidence that their respective international arbitration laws are now among the most advanced and comprehensive in the world. In all instances, the relevant law implements the UNCITRAL Model Law. Fiji, Palau and Tonga have also borrowed provisions from the Australian, Singaporean and Hong Kong laws to ensure an attractive national arbitration framework. Nauru and Samoa are currently engaging with the ADB and UNCITRAL to develop a modern national arbitration law. At this time, Kiribati, Niue, Tuvalu and Vanuatu have not taken such steps towards reform.

However, these new legal frameworks must also be supported by the local judiciary and legal profession. For this reason, the ADB program also involves capacity building through regional awareness-building and tailored training programs for potential and practicing arbitrators, lawyers and judges. Over time, increased usage of international arbitration in the region will hopefully contribute to strong national regimes supported by a network of skilled and experienced regional arbitration practitioners.

Concluding thoughts

While international arbitration reform in the South Pacific region is in its early stages, there are clear signs that the region is embracing international arbitration as a tool to promote foreign investment and international trade. This is a positive development for companies looking to invest in the South Pacific or with existing investments in the region. As the reform agenda progresses, businesses are well advised to monitor developments in relevant countries and to ensure that contracts are drafted or updated to take advantage of new or amended legal regimes.

Progress of international arbitration reforms