Navigating Treaty Liability for Conditional Approvals in Foreign Investment Screening

Author: Dean Merriman (Barrister at the Victorian Bar) 

I. Imposition of Conditions on Foreign Investment: Anecdotes from Australia 

It is well known that domestic investment screening authorities frequently are given the power to approve inbound foreign investments subject to the imposition of certain conditions, including on national security grounds. In Australia, the Foreign Acquisition and Takeovers Act 1975 (Cth) (“FATA”) permits the Australian Treasurer to impose conditions on investments, including (relevantly) conditions that the Treasurer is satisfied are necessary to ensure a particular action, if taken, will not be contrary to national security (see s 74(2)(a) of the FATA).  

In December 2025, Australia’s Treasurer approved the proposal by South Korea’s Hanwha to increase its shareholding in Australian shipbuilder Austal Limited from 9.9% to 19.9%, subject to conditions. Those conditions are not publicly available but were summarised by the Treasurer as being conditions which: limit Hanwha’s access to sensitive information; limit the storage of sensitive information; and place criteria on any Hanwha nominee to Austal’s board. That decision was said to have taken into account “relevant economic, national security and other national interest issues”, and the advice of “relevant agencies including the Department of Defence, the Department of Home Affairs, the Department of Foreign Affairs and Trade and our national security agencies”.  

This decision was made under the FATA after substantial amendments to that Act in 2021 to introduce national security screening requirements for all investments in sensitive national security land or businesses regardless of value. However, in Australia, the conditional approval of inbound foreign investment predates these reforms. Indeed, in 2019, Australia granted conditional approval to China Mengniu Dairy Company Limited to acquire the child and infant formula company Bellamy’s Australia Ltd, subject to the conditions that: a majority of the Bellamy’s Board of Directors be Australian resident citizens; Bellamy’s headquarters remain headquartered in Australia for at least ten years; and an investment of at least AUD 12 million be made to establish or improve infant milk formula processing facilities in the Australian state of Victoria (see Senate Economics References Committee, 2021, para. 5.12). In 2015, Australia granted conditional approval to a consortium (which included the Abu Dhabi Investment Authority, the Québec Deposit and Investment Fund, and a subsidiary of the Kuwait Investment Authority) for the 99-year lease of New South Wales’s electricity transmission network, TransGrid. In that case, the conditions included that: the operation and control of the transmission system and telecommunications business be undertaken solely from within Australia; electricity supply data and personal information be accessible and held solely within Australia; the interest of the foreign consortium in TransGrid members be maintained at a maximum of 50%; TransGrid’s boards comprise at least 50% Australian citizens and residents; and TransGrid have an independent chairperson and independent director, both of whom are Australian citizens and residents.1 

II. Labyrinthine? Identifying Exposure to Treaty Liability 

To what extent does the imposition of such conditions trigger obligations (and, indeed, exceptions) under a host State’s  international investment agreements (“IIAs”)? Readers will no doubt find it trite to be referred to the text of the relevant IIA, as well as to Article 31 of the Vienna Convention on the Law of Treaties, in answer to this question. Trite though it may be, such analysis is unquestionably necessary. It is of particular importance for States – like Australia – which do not adopt a model investment treaty and for which rights and obligations under the State’s IIAs may differ substantially. In our 2022 article, Professor Tania Voon and I identified possible vulnerabilities of Australia’s foreign investment screening laws under IIAs. The analysis we deployed may be useful to practitioners who are considering whether a host State’s investment screening laws engage treaty liability. Indeed, Australia provides a particularly useful prism through which to consider the IIA issues that the imposition of conditions by a screening authority may create, because of the manner (inconsistent though it may be) in which investment screening is treated in its IIAs. 

Let us consider some examples. Some of Australia’s IIAs do not include investor-state dispute settlement (“ISDS”) at all (such as the Australia-UK Free Trade Agreement (2021), and the Japan-Australia Economic Partnership Agreement (2014)). Others (like the investment chapter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (2018) (“CPTPP”) – see Annex 9-H(1)) explicitly provide that a “decision under Australia’s foreign investment policy … shall not be subject to” either ISDS or state-state dispute settlement. That exclusion is sufficiently broad to capture decisions that impose conditions on investors or investments, assuming they are made under Australia’s foreign investment policy (comprising, inter alia, FATA), regardless of whether those conditions arise from national security concerns.  

This is not a practice unique to Australia – some of Mexico’s IIAs, for example, exclude from the scope of their ISDS provisions decisions by Mexico’s Comisión Nacional de Inversiones Extranjeras (“CNIE”) in respect of “a decision … to prohibit or restrict the acquisition of an investment” (Art. 95 of the Japan-Mexico Economic Partnership Agreement (2004); see also CPTPP Annex 9-H(3)). Notably, these Australian and Mexican examples do not specify a nexus between the decision to apply conditions, and a national security concern, for the decision to be excluded from ISDS (such as, for example, the decision being ‘necessary’ for the protection of national security). Note also, though, that these examples of Mexico’s IIAs limit the exclusion from ISDS to “decision[s] … to prohibit or restrict the acquisition of an investment”; this may be narrower than the exclusion for any “decision under Australia’s foreign investment policy”. There may also be a question of whether these Mexican IIAs exclude from ISDS a decision that restricts the expansion of an existing investment. Thought therefore needs to be given to whether the action that the authority is screening is an action that is within the scope of any exclusion from ISDS.  

In other examples, Australia’s IIAs exclude foreign investment laws from the application of certain obligations. Art 11.13(1)(a) and Annex I of the Australia-United States Free Trade Agreement (2004) (“AUSFTA”) lists Australia’s foreign investment policy as a non-conforming measure (“NCM”), to which Australia’s obligations concerning national treatment, most-favoured nation (“MFN”), performance and senior management do not apply. The China-Australia FTA (2015) (“ChAFTA”), by contrast, lists Australia’s foreign investment policy as being exempt from only the national treatment and MFN obligations (see Art. 9.5 and Annex III, Part 1, Section A, Item 1). Under ChAFTA, Australia also “reserves the right to adopt or maintain any measure that it considers necessary for the protection of its essential security interests with respect to proposals by foreign persons and foreign government investors to invest in Australia”, although this right is only reserved in respect of the market access, national treatment and MFN obligations. (ChAFTA does not contain obligations concerning performance requirements, nor senior management and board of directors obligations – had it done so in 2019, it is likely Australia would have been at least vulnerable to challenge in respect of the conditions placed on China Mengniu Dairy Company.) Provisions concerning NCMs may therefore provide some protection for screening of inbound investment but, again, the devil is in the detail. 

Australia nonetheless remains constrained in the context of IIAs in which investment screening is an NCM. The exclusion of NCMs from the scope of the obligations identified in these respective agreements extends also to amendments of those measures (such as FATA), but only to the extent that the amendments do not “decrease the conformity of the measure, as it existed immediately before the amendment, with” the obligations from which they are exempt” (see Art. 11.13(1)(c) of the AUSFTA; Art. 9.5(1)(c) of the ChAFTA). That limitation is a real one in the dynamic realm of foreign investment screening and national security.  

For example, in October 2025, the Australian Treasurer launched consultations in respect of reforms to foreign investment screening in Australia, including to grant the Treasurer the ability to impose conditions in the event that the structure of a proposed investment changes after the issuance of an approval but before the completion of the transaction (Department of the Treasury, 2025, p. 13). That concern is said to arise because such stage in the investment lifecycle is not addressed in the FATA. While such amendments may enhance the circumstances in which conditions can be deployed to manage risks, they may also involve a decrease in the conformity of the screening regime, insofar as they create additional opportunities to impose conditions that may be in tension with (for example) the national treatment and MFN obligations. This may therefore jeopardise whether any amendments to the regime remain exempt from the corresponding obligations under the IIA in question. 

All this is to say nothing of the variation of conditions placed on an investor or an investment post completion. In Australia, the Treasurer may vary any conditions imposed by an approval, subject to certain conditions, but including on the Treasurer’s own motion (see s 79G of the Foreign Acquisition and Takeovers Act 1975 (Cth)). Jurisdictions in which such variations are permissible may, or may not, be exposed to liability under their IIAs in respect of the imposition of such further conditions. So, under the CPTPP, a variation of a condition is likely to be a “decision under Australia’s foreign investment policy” and not subject to ISDS or state-to-state dispute settlement. However, to the extent that NCMs in an IIA extend only to national treatment, MFN, senior management and/or board of directors obligations, conditions imposed originally on the establishment or acquisition of an investment but varied after establishment or acquisition are, at least in principle, left open to scrutiny under other obligations, such as the fair and equitable treatment and/or expropriation obligations.   

III. Lessons 

What emerges, then, is an acute need on the part of screening authorities and arbitration practitioners to consider the IIA obligations in question in assessing whether conditions imposed by an investment-screening authority may engage treaty liability. Australia provides a useful example of this in light of the commonality (though not uniformity) with which the measures giving effect to its foreign investment policy are excluded from the scope of some or all of the obligations under several of its IIAs. States take different approaches in this respect, and uniformity in approaches should not be assumed. 

Dean Merriman is a barrister at the Victorian Bar, based in Melbourne, Australia. Liability limited by a scheme approved under Professional Standards Legislation. 

This post is based in part on research funded by the Australian Research Council pursuant to Discovery Project DP200100639.