Just terms: States must respect property rights to secure foreign investment

Chris Merritt                 28 July 2022

Published in the Australian Newspaper

By flying to Tokyo last week on a trade mission for NSW Dominic Perrottet proved he has more hide than an elephant.

The Premier of this state was trying to encourage trade and investment despite the fact that NSW has stripped some of Japan’s leading companies of $40m in assets, has refused to pay compensation and has banned legal challenges to its actions.

Is Perrottet serious? Did he really expect his presence would overcome the impact left by the expropriation in 2014 of assets owned by investors led by Nippon Gas, a major utility?

At no point in this affair has anyone accused the Japanese of doing anything wrong. Yet for eight years, Perrottet and his Coalition predecessors have refused to address this injustice.

The Japanese investors had a $40m stake in an Australian mining company, Cascade Coal, that was stripped of its main asset – a coal exploration licence – in 2014 based on a report from the Independent Commission Against Corruption. That rendered the Japanese stake in Cascade almost worthless.

The problem for Perrottet is that ICAC’s untested accusations of wrongdoing against Cascade have turned out to be sharply at odds with subsequent assessments by the justice system.

As long ago as 2015, the Court of Appeal had prepared draft declarations vindicating Cascade directors only to be stymied by legislation that retrospectively validated accusations by ICAC that had no basis in law.

Since then, there have been several convictions against others over the way the NSW government issued coal exploration licences. Appeals and retrials are pending.

Yet after all this time, nobody from Cascade has a conviction against their name. When an allegation from one of ICAC’s public hearings was taken up by the Australian Competition & Consumer Commission it was thrown out unanimously by the full Federal Court with costs.

That means Cascade did nothing wrong and the refusal to compensate this company is indefensible.

But that’s not the worst of it.

Two mining companies were stripped of licences eight years ago and the other one, NuCoal Resources, has investors from the US who lost much more than the group led by Nippon Gas.

The Americans had invested $120m in NuCoal and nobody, not even ICAC, has ever accused NuCoal of wrongdoing.

In 2015, when it became clear that NSW proposed to ignore Australia’s treaty obligations with the US, two American institutions with stakes in NuCoal, Ventry Industries and Sparta Group, vowed never again to invest in this country.

And who can blame them?

Before this affair, the Coalition in NSW gave the impression they supported property rights, equal treatment before the law and access to justice. By taking assets from Americans with no proof of wrongdoing or compensation, Perrottet and his predecessors have made it clear investing in this state is about as safe as doing business with a banana republic.

This has been a harsh lesson for Japan and America about the weakness of this country’s protection for property rights.

When the federal government signed treaties with these countries it pledged to protect foreign investors and pay compensation if a foreign asset needed to be acquired by the government. The federal government could point to section 51 (xxxi) of the Constitution that says compensation should be paid in “just terms”.

But that constitutional guarantee, made famous in “The Castle”, only binds the federal government – not the states.

That flaw needs to be repaired by a referendum extending the reach of section 51 (xxxi) to defang rapacious state governments.

Right now, the Constitution permits every state to follow the unprincipled example of NSW and seize the assets of anyone – foreigners and Australians – without fearing an order to pay “just terms”.

This makes a mockery of Article 9(4) of Australia’s 1977 Basic Treaty of Friendship and Co-Operation with Japan.

That provision says: “The property of nationals of one contracting party within the territory of the other contracting party shall not be compulsorily taken unless for a public purpose and unless prompt, adequate and effective compensation is paid.”

This is in line with Article 11.7 of the US-Australia Free Trade Agreement which contains similar guarantees but is even more misleading because it promises “due process of law” before any asset can be expropriated.

From the perspective of Tokyo and Washington, these treaty provisions have been exposed as worthless because they do not bind the states.

Until Perrottet’s government compensates Cascade and NuCoal, he is sending the worst possible message to those who are considering investing: NSW has shown it will strip companies and individuals of assets based on ICAC’s unproven accusations, destroy legal rights retrospectively and deny access to the courts for those who would seek a remedy at law.

Why would anyone risk capital in a state that not only engages in this sort of conduct but brags about it?

If you doubt that this actually happened, look up NSW Hansard to see what former premier Barry O’Farrell told parliament on January 30, 2014. It will make your hair curl.

Here’s a taste: “The government recognises that this bill will abrogate common law rights that would otherwise operate, including common law rights regarding property. In passing this legislation, the parliament will clearly be extinguishing, without compensation, whatever property rights might otherwise subsist in the licences as well as in certain exploration legislation. By immunising the state from liability, the bill will also abrogate other common law rights, including contractual rights.”