How are Chinese Investors Protected in Investment Agreements?
By Tam Teo

How are Chinese Investors Protected in Investment Agreements?

Apr. 01, 2016  |     |  0 comments


China is not party to the Trans-Pacific Partnership (TPP), but it does have numerous Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) concluded with its partner countries, being only second to Germany for the country with the most number of BITs. According to the United Nations Conference on Trade and Development (UNCTAD) Division on Investment and Enterprise, China currently has 109 BITs in force, and about 20 FTAs and investment agreements. China’s most recently concluded free trade agreement is the China-Australia Free Trade Agreement (ChAFTA), which entered into force on December 20, 2015.


The ChAFTA has Investor-State Dispute Settlement (ISDS) provisions enshrined within it, which constitute a relief for Chinese investors. ISDS provisions are a common feature of trade and investment agreements, and aim to give investors protection from discriminatory treatment by the states who are parties to these agreements, and offer these investors the legal standing to protest any discriminatory treatment in arbitration tribunals designated by these agreements. ISDS provisions are subject to exceptions most commonly in public interest areas like public health, safety, and the environment, and the conflicting views of a state’s freedom to act in these areas can often lead to accusations of a host state’s expropriation of an investor’s assets which are in breach of the relevant investment agreement.


Australia’s Caution


Although ISDS mechanisms are common in investment agreements, Australia was one of the most problematic parties in the TPP negotiations regarding the ISDS provisions. Analysts at Herbert Smith Freehills LLP once predicted that an exceptional carve-out of the TPP’s ISDS provisions might be made for Australia in some sectors like tobacco. Although concerns persist over the ISDS provisions in the TPP, Australia has just signed the TPP on February 4, 2016, with no ISDS carve-outs in sight. While the TPP is now undergoing parliamentary inquiry, Trade Minister Andrew Robb has played down concerns over the ISDS provisions, and has stated his confidence that the TPP has sufficient provisions which protect public policy on health and the environment, and which will keep Australia safe from any lawsuits.


Australia’s distaste for ISDS provisions followed a 2011 claim brought by Philip Morris (a large international tobacco company) against the Commonwealth of Australia under the 1993 Australia-Hong Kong Bilateral Investment Treaty. Philip Morris claimed that Australia’s laws, which required plain packaging for tobacco in the interests of public health, harmed its intellectual property with its famous brands including Marlboro and Longbeach. Philip Morris then sought compensation for the allegedly unlawful expropriation of its intellectual property, and the ongoing case has apparently cost the Australian government the likes of AUD 50 million to date in defense of the tobacco plain packaging laws.


An unprecedented number of World Trade Organization (WTO) members have joined the Philip Morris dispute as third parties (which means they have a substantial interest in the dispute), and China is among that number. In contrast with Australia, China has always been a strong proponent of ISDS provisions. Axel Berger of the German Development Institute points out that China has been inking investment agreements since 1998, in tandem with its “Going Global” strategy that encouraged Chinese investors to venture abroad. China clearly appreciates the benefits that ISDS can offer to its citizens, and in recent years, Chinese investors are putting the ISDS provisions in the BITs that their government has negotiated for them to good use.


Chinese Investors and ISDS Provisions


Table 1 summarizes the arbitration cases filed with the International Court of Settlement of Investment Disputes (ICSID) by Chinese investors invoking ISDS provisions in the relevant BIT governing the relationship between themselves and their host states.


Table 1. Chinese Investor-State Arbitrations Filed with the ICSID

No.

Year of Case Registration

Chinese Investor - Complainant

State Respondent

Instrument Invoked

Subject of Arbitration

Result

1

2007

Mr Tza Yap Shum

Republic of Peru

BIT Peru - China 1994

Expropriation of fish flour production enterprise

Tza Yap Shum awarded compensation.

2

2012

Ping An Life Insurance

Kingdom of Belgium

BIT China - Belgium-Luxembourg 1984 and 2005

Expropriation of Investment in Fortis Bank

Ping An Life Insurance awarded compensation.

3

2014

Beijing Urban Construction Group

Republic of Yemen

BIT China - Yemen 1998

Construction of an Airport Terminal

Pending


In 2007, Mr Tza Yap Shum filed a claim against the Peruvian government for the effective expropriation of his business. The Peruvian tax authorities ordered Peruvian banks to retain all passing funds in connection with Mr Tza’s business in Peru, and those actions were found to be arbitrary and unreasonable. Mr Tza was thus compensated.


In 2012, in the first instance of a Chinese investor instituting arbitration proceedings against a developed country government, Ping An Life Insurance successfully obtained an arbitral award for compensation against the government of Belgium. Ping An was the largest shareholder in Fortis Bank, whose assets had been sold off by the Belgium government without consulting Ping An.

In 2014, another corporate Chinese investor, Beijing Construction Group, claimed that the government of Yemen had unlawfully deprived it of its US$114 million contract to construct a new airport terminal in Sana’a, Yemen.


Of the three cases filed with the ICSID by Chinese investors, two have been concluded, and both were in favor of the Chinese investor relying on the ISDS provisions within the relevant BIT. The latest case is still in the works, because the tribunal was just recently constituted in mid-July 2015. This is evidence of the robust protection given to private investors relying on ISDS provisions, and are very heartening precedents for Chinese investors who are wondering how effective a BIT with ISDS clauses can be for them.


According to Toby Landau, Queen’s Counsel in England and an authority on arbitration, the numbers of arbitration cases are skyrocketing and the scope of the assets that are subject to investor-state arbitration is ballooning. All forms of governmental activity are potential ISDS fodder, including cigarette packaging, the regulation of carbon emissions, nuclear policy, and taxation. Landau describes a regulatory chill that has overtaken governments, some of whom have retained him to advise on the potentially adverse implications of particular policies with respect to ISDS cases.


Advice for Chinese Investors


With China’s new Silk Road well on its way, there will be numerous investment opportunities for Chinese investors in many parts of the world, and these will not be without their accompanying political risks. According to CNBC, the top ten destinations for Chinese investment between 2004 and 2010 include Singapore, South Africa, Australia, and Hong Kong.



King & Wood Mallesons suggests that all assets are usually protected under investment treaties, but the relationship between the investor and the asset might be limited.



It will be advisable for Chinese investors interested in investing abroad to find out whether there is a relevant BIT or FTA governing the investment relationship, and to what extent their investment is protected. King & Wood Mallesons suggests that all assets are usually protected under investment treaties, but the relationship between the investor and the asset might be limited. Investors should also note whether expropriation and the amount of compensation provided can be challenged, and whether any arbitral awards will be made promptly and adequately.


All in all, the prospective investor should feel comfortable with the protections available, knowing that they and their investments would be protected in accordance with what they would reasonably expect of a hospitable host government. This sort of protection would manifest most commonly in clauses such as “national treatment” i.e. the same privileges and restrictions extended to local investors of the host state, and “most favored nation treatment” i.e. treatment as favorable as that offered to other foreign investors. Studying the history of a host state’s treatment of foreign investors will be reassuring, and even the treatment of visa applications by visitors can be illuminating.


Investors can also take heart that the mere existence of a treaty with ISDS provisions is indicative of the host state’s basic respect and willingness to protect Chinese investments, which in turn are reflected in the host state’s regulatory framework. If and when a dispute arises, treaties often have pre-arbitration conditions that oblige disputing parties to attempt an amicable resolution. This way, host states have a chance to show how sincere they are in resolving the issue of contention for the disgruntled Chinese investor.


Chinese Investors and the WTO


Milos Barutciski, co-chair of the international trade and investment practice at Bennett Jones LLP, observes that China has been an increasingly active complainant at the WTO. This observation is backed by the numbers from WTO (see Figure 1). China has been a WTO member since 2001. Thus far, it has made 13 complaints, of which 12 were made from 2007 to 2015. Most of the claims are against the United States, which is the country which has filed the most complaints against China. This loggerheads situation should perhaps not be too perplexing, as China is the country responsible for the largest share of acquisitions in the US from 2011 to 2013 ― 17 percent, as noted by the Committee on Foreign Investment in the United States (CFIUS).


Figure 1. Map of Disputes Between China and Other WTO Members



Source: World Trade Organization

https://www.wto.org/english/tratop_e/dispu_e/dispu_maps_e.htm?country_selected=CHN&sense=e


Litigation


The emboldened stance of China in challenging what it sees as anti-free trade measures adopted by the US and other developed nations, foretells a similar trend in disgruntled Chinese investors. It must be noted that ISDS provisions are one way for investors to protect their investments, while litigation is another.


In 2012, Ralls Corp., a wind turbine operator registered in the US owned by two Chinese nationals, filed a lawsuit in a US district court against the President Barack Obama and the CFIUS for violating its right to equal protection under the law, by denying it permission to construct wind farms that were deemed too close to a navy training site. In 2014, a US federal appeals court found for Ralls Corp., bolstering the confidence of Chinese investors (or any private investor for that matter) in their ability to challenge even deal reviews made in the name of national security.

Investors should also be aware that ISDS provisions only extend to some provisions of BITs and FTAs. For example, the ISDS mechanism in the ChAFTA only covers “national treatment” of Chinese investments (and vice versa). The “most favored nation” treatment is covered by interstate arbitration clauses, and this recourse is rarely had in practice.


Arbitration


Arbitration is an out-of-court alternative dispute resolution mechanism that is often seen as a more informal form of litigation. Arbitration can be voluntarily entered into or imposed upon by statute or contract. It allows parties to choose the arbitrator(s) of choice, who need not be judges, and who can offer special expertise when the dispute concerns technical areas like biosciences, construction or maritime laws. Arbitral awards are enforceable in court.


Some advantages touted for arbitration include time and cost efficiency compared to the lengthy and expensive trials of litigation. Arbitration proceedings do not necessarily have to be made accessible to the public, and thus can be kept confidential for parties who prefer it that way. The ChAFTA for example, precludes the application of the United Nations Commission on International Trade Law’s (UNCITRAL) transparency rules to arbitration arising from investment disputes.


Critics have pointed out that the impartiality of arbitrators can be tampered by the influence of powerful law firms representing wealthy parties, as arbitrators are often practicing lawyers. The costs of enforcing an arbitral award in court might negate the cost savings expected in selecting arbitration over litigation.


Leave a Reply

Your email address will not be published. Required fields are marked *