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Protecting Chinese Investment under BITs and

ICSID Arbitration

Author: Yuxin Fan

ANR: 616895

Supervisor: Prof. Dr. E.P.M. Vermeulen

Jing Li Mphil

Program: LLM International Business Law

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Contents Introduction .................................................................................................................................................. 3

Chapter I China BITs Regime ......................................................................................................................... 7

1.1 Overviews of BITs ................................................................................................................................ 7

1.2 Chinese BITs regime ............................................................................................................................ 8

1.3 Clause analysis of China BITs – from vertical and horizontal perspective ......................................... 10

1.3.1 Preamble .................................................................................................................................... 10

1.3.2 Definitions .................................................................................................................................. 11

1.3.3 Fair and equitable treatment ..................................................................................................... 15

1.3.4 Most favored nation treatment ................................................................................................. 15

1.3.5 Expropriation .............................................................................................................................. 16

1.3.6 Umbrella clause .......................................................................................................................... 18

1.3.7 Compensation for damages and losses ...................................................................................... 19

1.4 Conclusion ......................................................................................................................................... 20

Chapter II Dispute Resolution and ICSID Arbitration .................................................................................. 20

2.1 Overview of dispute resolution mechanism in China first and second generation BITs ................... 20

2.2 ICSID arbitration ................................................................................................................................ 22

2.2.1 Access to international arbitration ............................................................................................ 22

2.2.2 ICSID and ICSID Convention ....................................................................................................... 23

Jurisdiction of ICSID ............................................................................................................................. 24

Arbitration mechanism ....................................................................................................................... 30

2.2.3 The Ping an case ............................................................................................................................. 32

Chapter III Protecting Chinese investment under BITs regime ................................................................... 35

3.1 Chinese investors and ICSID arbitration ............................................................................................ 35

3.2 Business restructuring ....................................................................................................................... 38

3.2.1 Timing of corporate restructuring .............................................................................................. 39

3.2.2 Denial of benefits ....................................................................................................................... 41

3.2.3 Restructuring in good faith ........................................................................................................ 42

3.3 What Chinese investors and government shall do? .......................................................................... 43

Conclusion ................................................................................................................................................... 45

Bibliography ................................................................................................................................................ 46

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Introduction

Background of Chinese overseas investment and BITs In 1999, China launched Go Aboard Policy aiming to encourage Chinese individuals and enterprises to

invest overseas. By the end of 2013, China’s GDP was the second largest only behind the United States in

the world with total amount of USD 9.240 trillion.1 In light of continuously strong performance of economy

and foregoing Policy, Chinese overseas investments, by means of foreign direct investment (FDI), have

been booming in the past three decades. By the end of 2012, China ranked the third among the countries

that made the most FDI in the world, with total amount of stock FDI of USD 531.94 billion, and approximate

16,000 Chinese investors established 22,000 companies or enterprises in 179 countries and regions all

over the world.2 It is also expected that Chinese overseas investment will continue to grow.

However, impressive Chinese overseas investments have given rise to investment disputes against the host

state when it comes to inappropriate expropriation of investments, unfair treatment or wars in the host

state. For instance, during Libya Civil War from February to October in 2011 Chinese enterprises incurred

tremendous losses in existing investments as well as the business opportunities. In Myanmar, Myitsone

Dam Project, as a BOT project, was approved by Myanmar government in March 2009 when China and

Myanmar concluded The Framework Agreement on Cooperation in Developing Hydroelectric Resources in

Myanmar, and also obtained all necessary approvals from Myanmar government before construction.

Myitsone Dam Project was financed and led by China Power Investment Corporation. In September 2011,

Myanmar government unilaterally suspended the undergoing Myitsone Dam Project due to its domestic

political pressure arising from the local inhabitants, resulting in huge damages to Chinese investor. 3

The examples abovementioned show that it is necessary for Chinese government to adopt all means of

protection mechanisms to protect Chinese overseas investments. In addition to the efforts made through

consultation and diplomatic channel, Chinese government has always endeavored to conclude bilateral

investment treaties (BITs) with other countries aiming to utilize the BITs and in which the dispute resolution

approach is included, to protect the legitimate rights and interests of Chinese international investments

from expropriation or other hazard treatments by the host states. Until June 2014, China has concluded

1 World Bank, World Development Indicators Databases, Total GDP 2013, available at: http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries/CN?display=graph . 2 Ministry of Commerce of People's Republic of China, Guideline on Investment and Cooperation in Foreign Countries and Regions(2013), available at : http://fec.mofcom.gov.cn/gbzn/gobiezhinan.shtml . 3 Report on Development and Cooperation of China's Outward Investment and Economic Cooperation, 2011-2012, 100.

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130 BITs all around the world,4 majority of which are in force at present. It is convincing to conclude that

China has established an integrated BITs regime covering most countries in the world. Compared to

impressive amount of BITs concluded by Chinese government, the dispute resolution approach stipulated

in BITs, however, has been seldom directly invoked by Chinese investors to claim against the host states

for compensation when their investments and legitimate rights and interests have been expropriated,

impaired by the host states or other entities due to host states’ failure of fulfilled performance of their

obligations contemplated in such BITs. Similarly, there are only two BIT-based cases in which Chinese

government acts as a respondent regarding the disputes arising out of or in connection with the

transnational investments.

The reasons for the gap abovementioned come from several perspectives. Firstly, Chinese investors have

not been aware of the function of the BITs and the dispute resolution included in. Historically, they used

to rely on Chinese government to settle the dispute on behalf of them through diplomatic channels.

Secondly, investors as well as the practitioners may find it difficult to apply the incumbent BITs regime to

settle investment disputes against the host states due to the inherent drawbacks existing in the BITs and

also the reservations in the some international conventions made by Chinese government when ratifying

them. Thirdly, dispute resolution, namely, arbitration or conciliation before ICSID, other arbitration bodies

or ad hoc tribunals, is still a new approach to settle the disputes for Chinese investors even for domestic

Chinese practitioners. It can be foreseeable that the disputes will increase with the climbing amount of

investments in different jurisdictions. Therefore, the BITs concluded by Chinese government and the

dispute resolution included in need to be reviewed and adjusted in order to provide both procedural and

substantive protections towards Chinese overseas investments.

Research questions

In light of the background abovementioned regarding Chinese overseas investments and China BITs, for

my thesis, I would like to discuss the protection mechanism for Chinese overseas investments under China

BITs regime to bridge the gap between increasing transnational investments and insufficient protection

mechanism.

In order to provide optimal protection for Chinese overseas investments, it is necessary to analyze the BITs

that have been concluded by Chinese government to find the inherent problems in the contexts of these

BITs which may actually block the claims of Chinese investors against the host states and also discuss the

4 See UNCTAD IIA Database, available at: http://investmentpolicyhub.unctad.org/IIA .

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recent evolutions in BITs, especially the new developments of dispute resolution mechanism. In order to

analyze these problems, a comparison between Chinese BITs and BITs concluded by other countries, for

example Dutch Model BIT and American Model BIT, will definitely enlighten investors in term of the

understanding of identification of aforesaid problems, thereby making it easy to answer the research

question so as to the mechanism that shall be embodied in the Chinese BITs to improve its applicability.

With respect to the dispute resolution mechanism, both procedural and substantive issues need to be

taken into account for the purpose of analyzing the gap aforesaid. It is widely accepted that arbitration

initiated by investors directly against the host state before ICSID has been an effective method to settle

the investment disputes, where such investment has been treated unfairly or harmed by host countries.

Given the reality that there are only two cases initiated by Chinese investors based on the BITs of which

China serves as one Contracting Party and such status does not match the scale of Chinese overseas

investment and the huge amount of BITs concluded by Chinese government at all, it is necessary to analyze

the inherent problems of dispute resolution mechanism included in Chinese BITs and the procedural issues

under the ICSID convention.

Case study could be the most direct approach for Chinese investors to understand the characteristics of

such resolution mechanism. Relevant cases will be discussed in respect of both procedure and substantive

issues, including the Tza Yap Shum v. Republic of Peru5 and Ping An Life Insurance Company of China,

Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium (Ping An v.

Belgium Case)6. Ping An v. Belgium Case, as the first case filed by Chinese company originally from the

Mainland China before ICSID, has drawn so much attention to Chinese legislatures, Chinese legal

practitioners as well as the media since its registration. This case, especially its outcome, probably will

open a window for Chinese investors to adopt the BITs and its dispute resolutions in settling investment

disputes.

Assuming that the inherent problems in Chinese BITs have been identified by Chinese government, it still

has a long way to go to re-open the negotiation process with other contracting party to revise the context

of BITs or to conclude the updated BITs. Therefore, the question is how to protect Chinese overseas

investment under the incumbent BITs regime. A strategic approach to protect the Chinese overseas

investment can be derived from case study. Generally speaking, it is possible to adopt BITs of other

5Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6. 6 Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium, ICSID Case No. ARB/12/29.

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countries, for instance Dutch BITs, to protect Chinese overseas investments through strategically

restructuring the business in such countries of which the BITs the investors intend to invoke. This method

has been proved by the ICSID arbitration award in ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca

B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela (ConocoPhilips v. Venezuela

Case )7 that it is acceptable if such business restructuring complies with some certain principles in order

to use BIT between the host state and a third country rather than the BIT between the host country and

the country which the investors originally and ultimately come from. Therefore, it is meaningful for

Chinese investors to take such mechanism into account as an alternative way to protect their investments

where there could be potential investment disputes on the condition that, compared with the BIT

concluded between the host state and the third country, the BIT between China and the host state cannot

be expected to fully protect the Chinese investment or cannot cover the damages or loss of profit

foreseeable at the time of making the investment, or no BIT has been concluded between China and the

host state at the time when Chinese investors are willing to settle the dispute through arbitration against

the host state directly.

Structure of thesis

The thesis consists of four chapters. Chapter one provides the background information of China BITs and

analyzes the main provisions included in China BITs, with the aim of giving further discussion on the

possible improvement and revision of the context of Chinese BITs. In addition, comparison of China BITs

and other BITs will be deeply discussed in chapter one. Chapter two discusses the dispute resolution

mechanisms stipulated in China BITs and analyzes the arbitration before ICSID. In this chapter, Ping An v.

Belgium Case, still in the arbitration proceedings before ICSID, will be discussed. Chapter three interprets

business restructuring issue for the purpose of strategic adoption of BITs rather than China BITs to protect

the Chinese overseas investments. In this chapter, the ConocoPhilips Case will be discussed to enlighten

Chinese investors to think alternatively with regards to the protection approach of investment in an

efficient way. In conclusion part, I would like to make a summary of all the discussions and propose an

appropriate approach to protect Chinese overseas investments within the BITs regime.

7 ICSID Case No. ARB/07/30.

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Chapter I China BITs Regime

1.1 Overviews of BITs

BITs are international treaties based on public international law concluded between two states for the

purpose of promoting and protecting investments of investors having the nationality of one of the two

contracting parties.8 The conclusion of BITs originated as a reaction of the developed countries’ investors

to the nationalization movements in developing countries, as well as to the appeals of these countries in

the Charter of Economic and Social Rights and Duties of the States.9 Sovereigns purportedly promulgate

these investment treaties as a means to satisfy the need to promote and protect foreign investment and

with a view to enhancing the legal framework under which foreign investment operates.10 Countries all

over the world have been highly motivated to conclude BITs since the first BIT was concluded between

Germany and Pakistan in 1959, with various incentives, for instance, of attracting more foreign investment

to mitigate the gap of shortage of capital, or of protecting the investments made by nationalities of their

countries against the host states. Accordingly, the contents of BITs are affected, more or less, by the

development stages and the main purposes of the contracting parties at the time of the specific BIT was

concluded. This phenomena is obvious especially for emerging countries, such as China, even though there

is a considerable degree of convergence has emerged in terms of the main contents of BITs.

Bilateral parties are able to negotiate with each other considering the specific interests and necessities in

common that can be reflected in the provisions of BIT. In other words, every BIT has been tailored by the

contracting parties to maximize their best interests aiming to meet the needs of contracting countries as

well as their investors. On one hand, it is easy and efficient to reach an agreement in forms of BITs and

other investment treaties between two specific contracting parties, thereby encouraging capital flows

safely to stimulate the foreign investments shortly; on the other hand, this specially tailored BITs lack of

the uniformity thus may increase the concerns of uncertainty of the arbitration awards when it comes to

the similar or even identical investment disputes that need to be settled based on BITs with different

tailored contents when the BITs invoked were concluded by the same responded host state.

8 Lavranos, Nikos, Bilateral Investment Treaty (BITS) and EU Law (September 27, 2010). ESIL Conference 2010. Available at SSRN: http://ssrn.com/abstract=1683348. 9 Dan Wei, Bilateral investment treaties: an empirical analysis of the practices of Brazil and China, European Journal of Law and Economics, 33, no. 3 (2012): 663-690, 664. 10 Franck, Susan D., Foreign Direct Investment, Investment Treaty Arbitration and the Rule of Law. McGeorge Global Business and Development Law Journal, Vol. 19, p. 337, 2007. Available at SSRN: http://ssrn.com/abstract=882443.

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From the foreign investors’ standpoint, BITs contain attractive substantive provisions whose effects are

amplified by the MFN and NT clauses, 11 which, to large extent, would substantially protect foreign

investors’ interests on the assumption that the sovereign will perform its obligations created by the clauses

thereon. In the context of BITs, investors are allowed to initiate arbitrations against the host state directly

invoking the dispute resolution under the BIT rather than the investment contracts. BIT claims are not

based on contract but are made pursuant to the terms of a BIT irrespective of whether there is otherwise

a relevant contractual relationship.12 Such dispute resolution mechanism empowers investor the direct

access to arbitral tribunals to settle the investment disputes against the host state, thereby ensuring the

procedural rights of protection sought by investors and overcoming the drawbacks of domestic court

litigation as well as diplomatic protection.

1.2 Chinese BITs regime

In 1982, China entered into its first BIT with Sweden. The past three decades have witnessed China’s active

participation in the development of global BITs regime. Until June 2014, China has concluded 130 BITs all

around the world, of which 105 BITs are in force.

Source: UNCTAD IIA Database, China

The chart above shows geographical distribution of 105 Chinese BITs which are in force. As illustrated from

the chart, China BITs in force cover most countries in Europe and Asia; however, in North America, there

11 Gazzini, Tarcisio, Bilateral Investment Treaties (March 29, 2012). INTERNATIONAL INVESTMENT LAW: THE SOURCES OF RIGHTS AND OBLIGATIONS, T. Gazzini, E. De Brabandere, eds., The Hague: Martinus Nijhoff, 2012, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2030872. 12 Kim M. Rooney, ICSID and BIT Arbitrations and China, Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2007, Volume 24 Issue 6) pp. 689 – 712, 691.

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37

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74 3

GEOGRAPHICAL DISTRIBUTION OF 105 VALID CHINESE BITS

Asia Europe Africa South Ameirca North Ameirca Oceania

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is no valid BITs between China and the United States, which definitely weakens the Chinese investment

protection in United States, vice versa. It is noticeable that China-Canada BIT just came into force on

October 1 2014. Among the 105 Chinese BITs in force, 17 BITs were concluded in the 1980s and 59 BITs

were made in 1990s which cover more than 50 per cent of the incumbent valid BITs, the rest 29 were

signed or renewed in or after year 2000.13

According to Kim M. Rooney, Chinese BITs fall broadly into two generations of treaties: (a) the first

generation falling roughly into the period from 1982 to the late 1990s; and (b) the second generation from

the late 1990s to the present.14 Won Kidane and Weidong Zhu adopted the “three generations” argument

based on the professor Gallagher & Shan research on Chinese investment history; they divided Chinese

BITs into three generations: the first generation signed from 1982 to 1989 (period of launching of the BIT

program); the second generation from 1990 to 1997 (China’s accession to ICSID); and the third generation

from 1998 to the present. 15 Technically, it is hard to find the manifest boundary between different

generations. The evolution of Chinese BITs reflects the development stages of economy in China and also

the extent that China’s activities the international conventions regarding the foreign investment protection.

It is noticeable that there are some key elements driving the evolution of terms in BITs that China entered

into. One of these cornerstones was China’s accession to the ICSID Convention in 1993 broadening the

dispute resolution mechanism so that Chinese investors are able to get access to international arbitration

directly against the host state before ICSID; however, the dispute is only limited to dispute of quantum of

compensation for expropriation or nationalization. Accession to ICSID also called for modernization of BITs

as to the dispute resolution clause that China would adopt on China’s post ICSID era. In 2001, the year of

China’s accession to the World Trade Organization (“WTO”)16 accelerated the alteration of terms of China

BITs. From China’s access to WTO up to now, revision of BITs has been more active than ever before. More

than 12 per cent of the China BITs that are in force have been replaced by new BITs since the new

millennium17, and such renewal de facto improves the modernization level of China BITs regime, and to

13 See UNCTAD IIA Database, available at: http://investmentpolicyhub.unctad.org/IIA. 14 Kim M. Rooney, ICSID and BIT Arbitrations and China, Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2007, Volume 24 Issue 6) pp. 689 – 712, 701. 15 Kidane, Won and Zhu, Weidong, China-African Investment Treaties: Old Rules, New Challenges (July 18, 2014). Fordham International Law Journal, Vol. 37, 2014, 1052-1055. 16 Kidane, Won and Zhu, Weidong, China-African Investment Treaties: Old Rules, New Challenges (July 18, 2014). Fordham International Law Journal, Vol. 37, 2014, 1053. 17 See UNCTAD IIA Database, China.

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some extent, overcomes the inherent problem with the terms of China BITs. Such modernization will be

discussed in next part.

1.3 Clause analysis of China BITs – from vertical and horizontal perspective

As discussed above, China BITs have been and still are experiencing a significant evolution regarding the

terms and also the methodologies behind it. It is necessary to analyze the main provisions of BITs from

vertical perspective to identify evolution of terms of BITs. For vertical perspective, selection of BITs of

which China entered into with the same countries in different periods will be the clearest way to review

the clauses and the logics behind them. In respect of horizontal perspective, comparable research

between China BITs and the BITs entered into by other countries in the same period would show the

differences in between, thus may enlighten the revision process as to terms of China BITs.

1.3.1 Preamble

Most BITs are prefaced with a preamble, in which the contracting parties state their intentions and

objectives when concluding the agreement.18 Quite often, given that it does not create legal relationships

that are binding, preamble dose not draw much attention as the substantive and procedural provisions

incorporated in BITs. As provided for by Vienna Convention on the Law of Treaties19 preamble constitutes

part of the agreement and is meaningful in interpretation of the purpose and the objectives of the

agreement.

China BIT adopted this preamble approach in most of BITs, for instance, China-Italy BIT states that: 20

“Desiring to intensity economic cooperation between both countries, Intending to

create favorable conditions for investments by nationals and companies of either

country in the territory of the other country and Recognizing that encouragement

and protection of such investments will benefit the economic prosperity of both

countries,”

This preamble focuses on the importance of fostering economic cooperation among the contracting

parties, promoting favorable conditions for reciprocal investments and recognizing the impact that such

18 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking, United Nations, 2007, 3. 19 See Article 31 of Vienna Convention on the Law of Treaties. 20 See Agreement between the Government of the People's Republic of China and the Government of the Italy concerning the Encouragement and Reciprocal Protection of Investments.

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investment may have in generating prosperity in the host country.21 The similar preamble clauses exist in

many China BITs that concluded in 1980s and 1990s, such as BITs with Poland, Bulgaria, Norway, Singapore,

Croatia, Belgian-Luxembourg, Switzerland, and the Netherlands. 22

A significant change of China BITs during the BIT renewal process is that some China BITs included

additional elements, such as technology issues. China and the Netherlands entered into new BIT in 2004,

in which it emphasized the importance of stimulation of flow of capital and technology and such issues

had not been incorporated in the replaced BIT between the two countries23, and the same clause can also

be found in China-Djibouti BIT24. The change in preamble reflects the transition that China is focusing more

on technology exchange than ever before rather than simply emphasizing the capital imported into China

as in the early 1980s.

An increasing number of preambles indicate that BITs do not purport to promote and protect investment

at the expense of other key values such as health, safety, labor protection and the environment. 25 China-

Korea-Japan Investment Agreement adopted this trend in its preamble, which stipulates,”…Recognizing

that these objectives can be achieved without relaxing health, safety and environmental measure…”26 It is

worthy to notice that China-Korea-Japan Investment Agreement was concluded in 2012 and came into

force in May 17, 2014, which, to some extent, is representing the latest strategies that adopted by Chinese

government in negotiating the terms of BITs.

1.3.2 Definitions

Definitions in BITs refer to the interpretation of two key elements: investments and investors. With respect

to investment, most BITs of the last 10 years have continued to adopt a broad asset-based definition of

investment, the scope of which goes beyond covering only foreign directive investment.27 The definition

21 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking, United Nations, 2007, 3. 22 BITs China entered into with Belgian-Luxembourg, Switzerland, and the Netherlands have been replaced by the new BITs. 23 See Agreement on Reciprocal Encouragement and Protection of Investments Between the People's Republic of China and the Kingdom of the Netherlands 24 See Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Djibouti on the Promotion and Protection of Investments 25 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking, United Nations, 2007, 4. 26 See Agreement Among the Government of the People's Republic of China, the Government of Japan and the Government of the Republic of Korea for the Promotion, Facilitation and Protection of Investment. 27United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking, United Nations, 2007, 8.

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covers every kind of assets or any kind of assets, accompanies by a list of examples.28 Apparently, China

has been always following such approach to define what kinds of investments shall fall into the BITs. In

China-Switzerland BIT, the investment is defined as follows,

The term ‘investment shall include every kind of asset, and in particular: (a) movable

and immovable property as well as any other rights in rem, such as servitudes,

mortgages, liens, pledges and usufructs; (b) shares, parts or any other kind of

participation in companies; (c) claims to money or to any performance having an

economic value; (d) copyrights, industrial property rights (such as patents, utility

models, industrial designs or models, trade or service marks, trade names, indications

of origin), know-how and goodwill; (e) business concessions under public law, including

concessions to search for, extract or exploit natural resources as well as all other rights

given by law, by contract or by decision of the authority in accordance with the law.29

Dutch Model BITs adopted the same approach as well, while the United States takes different approach in

respect of defining investment. According to the United States Model BITs published in 2012, investment

is defined in form of combination of circular definition and close-lists definition. 30 The significant influence

with adoption of this approach is that it may, to some extent, address the jurisdiction problem where

investment in one contracting party made by a company which was incorporated in the non-contacting

party but is directly controlled by an investor from the other contracting party. In this case, the American

investor can initiate arbitration against the host state based on U.S. BIT to protect his investment

irrespective of the fact that the investment was made directly by an entity in the third non-contracting

state, if the investor could prove the investment is directly or indirectly controlled by him or her. China has

taken this flaw into account when it comes to the non-contracting party by means of extending the

28 Ibid 29 See Agreement Between the Government of the People's Republic of China and the Government of the Confederation of Switzerland on the Reciprocal Promotion and Protection of Investments. 30 See Article 1, Section A of 2012 U.S. Model Bilateral Investment Treaty: “investment” means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans; (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.

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definition of investor. China- Uzbekistan BIT31, concluded in 2011, provides that legal entities constituted

under the laws of an nоn-contracting Party but directly owned or controlled by nationals in paragraph (a)

or enterprises in Paragraph (b)32 is a qualified investor falling the scope of BIT.

A number of China BITs have been embedded with limitations regarding the investment. BIT between

China and Belgium-Luxemburg Economic Union defines investment as follows,

“ Investment means every kind of asset invested by investors of one contracting party

in accordance with the laws and regulations of the other contracting party in the

territory of the latter, and in particular[…].’’33

This limitation indicates that investment covered by BITs shall comply with laws and regulations of the host

state, otherwise such investment may be precluded from the scope of investment defined in the BITs.

Therefore, such investment cannot be covered by the protection mechanism concluded in the foregoing

BITs.

The basic premise of a BIT is that only a national of one of the two contracting states may bring a claim

under it. The definition of a national is usually in two parts, dealing with natural persons on the one hand

and legal persons on the other.34 With respect to natural persons, a typical BIT protects the natural persons

who have the nationality of one of the contracting parties. Thus, in China-Netherlands BIT, investor as to

natural person is that who have nationality of either contracting party in accordance with the laws of that

contracting party.

Nationality of a natural person may give rise to dispute when it comes to dual nationality. In Soufraki v.

United Arab Emirates Case, 35 Mr. Soufraki, as claimant, claimed under BIT between Italy and the United

Arab Emirates based on his Italian nationality so as to an investor under the BIT thereon, however, Mr.

31 Agreement between the Government of the People's Republic Of China and the Government of the Republic of Uzbekistan on the Promotion and Protection of Investments. 32 Paragraph (a) and paragraph (b) of Article 2 (2) China- Uzbekistan BIT stipulate that: the term “national” means natural persons who have nationality of either Contracting Party in accordance with the applicable laws of that Contracting Party; “enterprise” means any entities, including companies, firms, associations, partnerships and other organizations incorporated or constituted under the applicable laws and regulations of either Contracting Party and have their seats and substantial business activities in that Contracting Party, irrespective of whether or not for profit and whether it is owned or controlled by private person or government or not. 33 See article 1 paragraph 2 of Agreement between the Government of The People’s Republic of China and the Belgium-Luxemburg Economic Union on the Reciprocal Promotion and Protection of Investments. 34 Peter J. Turner, Chapter 10 Investor State Arbitration in Michael J. Moser (ed), Managing Business Disputes in Today's China: Duelling with Dragons, (© Kluwer Law International; Kluwer Law International 2007) pp. 233 – 258, 236. 35 Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7.

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Soufraki held the nationality of Canada at the same time. The UAE challenged his right to bring the claim

on two grounds. First, it asserted that Mr. Soufraki no longer held Italian citizenship as a result of having

obtained Canadian citizenship, and, secondly, that his Canadian citizenship was his dominant or ‘effective’

nationality and that he could thus not rely on his Italian nationality in order to bring him within the

definition of an ‘investor’ under the BIT. 36The Tribunal found that it lacked jurisdiction to hear the dispute,

and, therefore, declined to decide the case on its merits. As the Tribunal came to the conclusion that the

Claimant did not have Italian nationality, it did not need to rule on the effectiveness of that nationality.37

The tribunal also held that its competence to examine whether, as matter of fact, Mr. Soufraki was still a

qualified Italian citizen under the Italian law after he has lost the citizenship before and thereby making

its own decision on such issue, irrespective of the certificate of his Italian citizenship issued by Italian

authorities. As to the legislation in China regarding to the nationality, dual nationality is not allowed in

accordance with Article 9 of Nationality Law of China came into force in 1980.38 In reality, there are indeed

a huge number of Chinese de facto processing dual nationality. As interpreted by the tribunal in In Soufraki

v. United Arab Emirates case, it may be problematic when Chinese people who hold the dual nationality

intend to initiate an arbitration on the basis of China BITs. If the tribunal examines the laws of China to

determine the nationality issue, and it does have the power to do it according to the Soufraki Case, it

would conclude that it has no jurisdiction regarding the issue based on the fact that the claimant is not a

qualified investor defined in China BITs, since the claimant has been not a citizen of China any more under

the laws of China.

As to legal persons, it is clear that China BITs define legal person as to investor by means of two criteria

referring to the place of incorporation and the seat of the company. Very often, investments are made

indirectly, through one or more interposed corporate vehicles. This gives rise to several issues for the

purposes of determining whether or not a given legal person qualifies as an investor under a given BIT.39

The point is the definition of investor contained in the BITs. As aforesaid China- Uzbekistan BIT allows legal

persons who indirectly control the investment to be covered by BIT. In case of no specific provisions in BIT

that the investments could be held indirectly, ICSID cases show that BITs are still applicable to indirect

investments made by investors. Despite the treaty's not specifying that investments could be held

36 Supra note 33, at 236. 37 ICSID Case No. ARB/02/7, Decision of the Ad Hoc Committee on the Application for Annulment Of Mr. Soufraki, 8 37 Article 9 of Nationality Law of China provides that: any Chinese national who has settled abroad and who has been naturalized as a foreign national or has acquired foreign nationality of his own free will shall automatically lose Chinese nationality. 39 Supra note 33, at 238.

15

indirectly, the tribunal came to the conclusion that it did support indirect investments as neither a literal

nor systematic interpretation demanded a different outcome.40

1.3.3 Fair and equitable treatment

With respect to fair and equitable treatment, Article 2(1) of China-Sweden BIT articulates as follows, “Each

Contracting State shall at all-time ensure fair and equitable treatment to the investments by investors of

the other Contracting State.” Nearly all the China BITs follow this approach to define this treatment.

However, fair and equitable treatment give rise to problems when it comes to the standard that shall be

adopted in interpretation of this treatment. It may be subject to the principles of international law,

national laws and regulations or customary international law. For instance, BIT between France and

Uganda states fair and equitable treatment shall be subject to the principles of international law.41 Linking

the fair and equitable treatment standard to the principles of international law removes the possibility of

interpreting the provision using the semantic approach.42 BIT between the countries of the Caribbean

common market and Cuba adopted the national laws and regulation approach. 43 It is clear that China

adopts the plain fairness standard in regard of interpretation of fair and equitable treatment, depending

on the tribunal to delineate the inherent and intrinsic meaning when it comes to disputes arising out of

fair and equitable treatment, as a consequence, the uncertainty of the interpretation of fair and equitable

treatment may result in the uncertainty of the outcome of the tribunal decisions.

1.3.4 Most favored nation treatment

A BIT also may provide for most favored nation treatment (MFN treatment), which means that a host

country may not treat an investor or investment form a BIT partner any less favorably than it treats

investors or investment in like circumstances from any other country.44 When states enter into a treaty

containing the MFN clause, they agree to accord each other the same treatment they grant to any nation.45

MFN clause has been embodied in China BITs since the conclusion of China’s first BIT with Sweden. China-

40 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction dated 3 August 2004, 44 ILM 138 (2005). 41 See Article 3 of Agreement Between the Government of the Republic Of France and the Government of the Republic of Uganda on the Reciprocal Promotion and Protection of Investments. 42 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking, United Nations, 2007, 31 43 See Article IV of BIT between CARICOM and Cuba. 44 Kim M. Rooney, ICSID and BIT Arbitrations and China, Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2007, Volume 24 Issue 6) pp. 689 – 712, 695. 45 Scott Vesel, clearing a path though a tangled jurisprudence: Most-favored-nation clauses and dispute settlement provisions in bilateral investment treaties, 32 YALE J. INT’L L.126, (2007).

16

Germany BIT contemplates that “(N)either Contracting Party shall subject investments and activities

associated with such investments by the investors of the other Contracting Party to treatment less

favorable than that accorded to the investments and associated activities by the investors of any third

State.”46

The problem arising from the MFN treatment is that, for instance, whether a Chinese investor is allowed,

relying on the MFN clause that contained in China–Germany BIT to initiate an arbitration against a third

country who entered a BIT with Germany. There has been some debate regarding whether, as a matter of

principle, a MFN clause should also have effect on procedural of importing procedural rights.47 The tribunal

adopted different approaches to solve this problem. In Maffezini v. Spain case, 48 the tribunal held the view

that provisions regarding international arbitration and the other dispute resolution are so essential for

protection of investment under the BIT that these rights must be part of the treatment covered By a MFN

clause. Following this broad interpretation adopted by the tribunal it is possible for Chinese investor to

claim under the example listed above. The tribunal in Plama case, 49on the other hand, argued in favor of

a presumptively narrow interpretation of MFN clause, 50based on various reasons such as treaty-shopping

and the intention of the parties. The approaches adopted by the tribunals in solving the problem listed in

the beginning of this paragraph will result in uncertain outcomes of the cases. Given the absence of dispute

resolution in some China’s first generation BITs and the limitation of scope applicable before ISCID

arbitrations, the prevalence of Maffezini approach in ICSID arbitration will be essential for Chinese

investors to protect their investments.

1.3.5 Expropriation

Historically, one of the main drivers of BITs has been foreign investors’ concern to protect their investments

against the risk of unlawful expropriation. 51 Generally, BITs allow host states to expropriate foreign

investment on certain conditions for public interests and under due process. Article 3 of China-Sweden BIT

provides that “(N)either Contracting State shall expropriate or nationalize, or take any other similar

46 Article 3 (3) of Agreement between the Federal Republic of Germany and the People's Republic of China on the Encouragement and Reciprocal Protection of Investments. 47 Kim M. Rooney, ICSID and BIT Arbitrations and China, Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2007, Volume 24 Issue 6) pp. 689 – 712, 706. 48 Emilio Agustín Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7. 49 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24. 50 Aaron M. chandler, BITs, MFN, Treatment and the PRC: the impact of China’s ever-evolving Bilateral investment treaty practice, 43 INT’L LAW 1303, (2009). 51 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations, 2007, 44.

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measure in regard to, an investment made in its territory by an investor of the order Contracting State,

except in the public interest, under due process of law and against compensation, the purpose of which

shall be to place the investor in the same financial position as that in which the investor would have been

if the expropriation or nationalization had not taken place.” It is obvious that expropriation in China BITs

has been defined very broadly, including expropriation, nationalization and any measures that have the

similar effects as expropriation and nationalization. The languages used in China BITs regarding

expropriation are various. For instance, China-Dutch BIT does not include a specific reference to indirect

expropriation or nationalization, comparably, China-Germany BIT explicitly prohibits the host countries

from directly or indirectly expropriating or nationalizing foreign investment. The linguistic difference

indicates the different concerns as to the expropriation clauses. For China BITs concluded with similar

expropriation provisions as those in China-Sweden BIT, problem may arise that whether Chinese investors

are able to invoke expropriation provisions to protect their investments in case of indirect expropriation.

For China-Germany BIT, the questions arises as to whether, in addition to direct or indirect expropriation,

the clause recognizes a third category of measures as covered by the expropriation provision,52 and the

potential effects are yet to be explored.53 In order to avoid the question that may arise as discussed above,

the expropriation provisions shall include the direct and indirect expropriation and nationalization as well

as measure taken have the equivalent effects with expropriation and nationalization, and provide the

relevant guidance with respect to the criteria that can be referred to in determining the indirect

expropriation and the equivalent effects. Such approach has been adopted in China-Switzerland BIT.54

As mentioned in preceding paragraph, BITs allow the host countries to expropriate foreign investors under

certain conditions. Generally, host countries are allowed to expropriate investment provided that the

expropriation is done in the public interest, under due process of law, on a non-discriminatory basis and

based on the payment of reasonable compensation. A survey of the BITs concluded since 1995 reveals a

remarkable degree of convergence with respect to the conditions required to make expropriations

lawful.55 With respect to the due process of law, China BITs require that the legality of expropriation shall

be subject to domestic legislation. Examples can be found in China BITs came into force after 2000, such

52 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations, 2007, 44. 53 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations, 2007, 44. 54 See Article 6 of China-Switzerland BIT. 55 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking, United Nations, 2007, 44

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as BITs with the Netherlands, Germany and Switzerland. It is worthy to notice that some China BITs

concluded in 1980s require the judicial review by the competent court of the contracting parties to

determine the legality of the expropriation. An example is China-Thailand BIT, which contemplates that,

“(T)he legality of any expropriation, nationalization or similar measures mentioned above shall be subject

to review by the competent court of the Contracting Party taking the expropriatory measures56”, however,

such review by domestic court has been removed in BITs China entered into after 2000, thereby

empowering the tribunal to determine the legality of expropriation in accordance with the domestic

legislation of the contracting party. In respect of compensation for expropriation, China BITs do not fully

adopt the so called “Hull Rules” advocated by the western countries, 57 under which the compensation

shall be prompt, adequate and effective. China-Dutch BIT provides that the compensation shall be

equivalent to fair market value of the expropriated investment immediately before the expropriation

measures were taken.58 The newly signed China BITS has accepted the rule of effective and prompt, but

are still in controversy regarding the requirement of adequate.

1.3.6 Umbrella clause

Article 3(4) of China-Netherlands BIT states: “Each Contracting Party shall observe any commitments it

may have entered into with the investors of the other Contracting Party with regard to their investments.’’

Such clauses are designed to cover any commitment or undertaking made by the host state with respect

to the investor in relation to his investment.59 It should be recalled as well that an umbrella clause or

widely drafted dispute resolution clause would only protect the investor if the contract is with the state or

an emanation of the state for which the state has responsibility in the eyes of international law.60 Umbrella

clause indicates that Contracting State to observe all investment obligations contained not only in BITs and

other investment treaties, but also in investment contracts. The significance of such an application is that

the international arbitration tribunal constituted under the BIT would thereby have jurisdiction over

breach-of-contract claims since a breach of the investment contract is also a breach of the umbrella

56 See Article 5 (1)(b) of China-Thailand BIT; also see Article 6(2) of China-Singapore BIT, Article 6(2) of China- Sri Lanka. 57 Jinxin Qiu and Yingmao Tang, BITs and foreign investments of Chinese enterprises, China law journal, October, 2010. 58 See Article 5(1)(c) of China-Netherlands BIT 59 Peter J. Turner, Chapter 10 Investor State Arbitration in Michael J. Moser (ed), Managing Business Disputes in Today's China: Duelling with Dragons, (© Kluwer Law International; Kluwer Law International 2007) pp. 233 – 258, 247. 60 Ibid

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clause.61 The tribunal in SGS v. Philippines held that it has jurisdiction over such a dispute, however, it

should not exercise such jurisdiction if the contract embedded with an exclusive jurisdiction clause

referring the dispute to a different forum rather than an international arbitration tribunal.62 To the contrary,

the Tribunal of SGS v. Pakistan concluded that the umbrella clause did not entitle the claimant to bring an

arbitration based on BIT.63 The outcomes of the two arbitration result in uncertainty of application of

umbrella clause under BITs in term of its applicability.

Although some argues that the better interpretation is that an umbrella clause enables a BIT tribunal to

exercise jurisdiction over claims concerning such breaches of contract, which are also BIT violations under

the clause, and further permits the tribunal to do so notwithstanding an exclusive forum selection clause

in the contract. Indeed, as detailed below, any other interpretation of the umbrella clause, including those

advanced by the SGS decisions, effectively eviscerates the umbrella clause, and is at odds with the clear

language and purpose of the clause as reflected in its history.64 Whether the umbrella clause is applicable

depends on languages used in BITs as well as the interpretation by tribunals case by case. Thus, following

the decisions made by tribunal, from practical perspective the prudent and realistic choice for investors is

to apply the umbrella clause in an investor-state arbitration where there is absence of exclusive jurisdiction

clause concluded in the investment contract between an investor and the host state.

1.3.7 Compensation for damages and losses

China BITs, as many traditional BITs, include the clause for compensation for damages and losses due to

the war, national emergency, riot and other similar events in order to make sure the equitable treatment

regarding to indemnification, compensation and other settlements. Such clause may be crucial to Chinese

investors since the wars and riots in many politically unstable countries have resulted in huge loss for

investors there. As mentioned in introduction part, Libya war caused tremendous losses for Chinese

investments and business opportunities, therefore, it is possible foe Chinese investors to claim against the

Libya government bases on such clauses together with other clauses under BITs for compensation.

Unfortunately, China-Libya BIT has not been entered into force until now.

61 Wong, Jarrod, Umbrella Clauses in Bilateral Investment Treaties: Of Breaches of Contract, Treaty Violations, and the Divide between Developing and Developed Countries in Foreign Investment Disputes (August 29, 2008). George Mason Law Review, Vol. 14, 2006. Available at SSRN: http://ssrn.com/abstract=1260897. 62 See SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6. 63 See SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13. 64 Wong, Jarrod, Umbrella Clauses in Bilateral Investment Treaties: Of Breaches of Contract, Treaty Violations, and the Divide between Developing and Developed Countries in Foreign Investment Disputes (August 29, 2008). George Mason Law Review, Vol. 14, 2006. Available at SSRN: http://ssrn.com/abstract=1260897.

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1.4 Conclusion It is obvious that China BITs regime not only covers most jurisdictions in the world, but also arguably

provides for substantive protections considering the recent development in evolution of clauses.

Meanwhile, it is still uncertain that whether Chinese overseas investments can be truly protected due to

the limitations contained in the first generation China BITs. Discussions in this chapter are only referred to

the substantive protection clauses in BIT, dispute resolution, as cornerstone clause in BIT, will be analyzed

in next chapter in order to give better understanding of BIT and its function.

Chapter II Dispute Resolution and ICSID Arbitration

Historically, a foreign investor deprived of its property had to rely on its own government's willingness to

take up a claim on its behalf and then only if it spent further time and money exhausting local remedies.65

Such resolution mechanism has been altered since BITs are introduced to protect the investors. According

to the survey with respect to dispute resolution provisions in international investment agreement, 93% of

the selected samples of BITs contain language on investor-state dispute resolution66 , under which the

investors are entitled to claim directly against host states from both procedural and substantive

perspectives. Consequently, the investor-state arbitration cases before ICSID have witnessed a dramatic

increasing since Holiday Inns S.A. against Morocco, as the first case before ICSID, in 1972. 67

2.1 Overview of dispute resolution mechanism in China first and second generation BITs

For a long time, China was reluctant to trust international adjudication and kept a very cautious attitude

towards ICSID investor-state arbitration by only allowing for disputes relating to the compensation

amounts of expropriation to be submitted to international arbitral tribunal. 68 Actually, there is no

provisions regarding investor-state dispute resolution in China first BIT with Sweden in 1982. An attached

letter between China and Sweden stated that upon China’s accession to the Washington convention, the

BIT would be supplemented with a supplementary agreement on a binding system for the settlement of

65 Kim M. Rooney, ICSID and BIT Arbitrations and China, Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2007, Volume 24 Issue 6) pp. 689 – 712, 691. 66 See Pohl, Joachim and Mashigo, Kekeletso L. and Nohen, Alexis, Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey (November 1, 2012). OECD International Investment Working Paper No. 2012/2. Available at http://dx.doi.org/10.2139/ssrn.2187254. 67 See ICSID Caseload-Statistics, Issue 2012-2, p. 7. Available at: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ShowDocument&CaseLoadStatistics=True&language=English31. 68 Qi, Tong, How Exactly Does China Consent to Investor-State Arbitration: On the First ICSID Case against China (2012). Contemporary Asia Arbitration Journal, Volume 5, Issue 2, pp. 265-291, November 2012. Available at SSRN: http://ssrn.com/abstract=2181451.

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disputes with the ICSID framework. 69 Such similar provisions were included in many early or so-called first

generation of China BITs. 70 Under first generation of China BITs, disputes between an investor and the

host state could be resolved through administrative review in host state or local court that has jurisdiction

over the host state that accepted the foreign investments. . Furthermore, only after that authorities had

determined the existence of the expropriation by the government could the foreign investor commence

arbitration under the relevant BIT to determine the amount of the compensation. 71 As a consequence,

for the first generation China BITs investor-state dispute resolution has been strictly limited within the

scope of local remedies rather than widely accepted international arbitration whilst only the dispute

concerning the amount of compensation for expropriation can be referred to an ad hoc arbitral tribunal

in line with Arbitration Rules of UNCITRAL.72

Despite the linguistic variation of dispute resolution clauses, investor-state dispute resolution mechanism

adopted in China first generation BITs usually contained following items73:

Any dispute concerning investment between investors of one Contracting Party and

other Contracting Party shall be settled amicably as far as possible by the two parties

concerned.

If the dispute cannot be settled within six months from the date on which either related

party files a request for settlement it shall be resolved by either one of the following

procedures chosen by the investors: (a) filing a complaint with the competent

administrative authority of the Contracting Party which accepts the investment; (b)

filing a complaint with the court of justice that has jurisdiction over the Contracting

Party which accepts the investment.

A dispute arising from disagreement on the amount of compensation payments can be

resolved by ad hoc arbitral tribunal, pursuant to the period in which the court made the

decision if the parties concerned has resorted to local remedies approach.

Different tribunals may hear the dispute concerning amount of compensation for expropriation, such as

ad hoc tribunal established under the UNCTRAL arbitration rules, established according to clauses in the

69 Letter attached to agreement on the mutual protection of investment, March 29,1982 from ambassador of Sweden to vice minister for economic affairs, Beijing, available at : www.unctadxi.org. 70 See China-Turkey BIT (1988) and China- Republic of Korea BIT (1992). 71 Kim M. Rooney, ICSID and BIT Arbitrations and China, Journal of International Arbitration, (© Kluwer Law International; Kluwer Law International 2007, Volume 24 Issue 6) pp. 689 – 712, 702. 72 See Protocol of China- France BIT(1984). 73 See China-France BIT and its Protocol (1984).

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BITs, or set up by agreement of the contracting parties of the BITs. As mentioned above, after China

accession to Washington convention, such dispute can be submitted to ICSID, provided that both BIT

contracting parties entered into supplementary agreement for such submitting.

In 2000 China concluded BIT with Botswana, as a milestone for China BITs in term of dispute resolution

mechanism, in which China unconditionally consented to submit all dispute between investor and host

state to be settled before ICSID. 74 However, such unconditional consent to arbitration before ICISD does

not constitute the exclusive dispute resolution mechanism in China BITs. For instance, either of the party

to the dispute is entitle to submit the dispute to domestic court in the territory of the contracting party

accepting the investments under China-Botswana BIT. Such approach is followed by China-Netherlands

BIT and China-Germany BIT, but China-Netherlands BIT adopts the different method to solve the conflict

between international arbitration and domestic court as to fora.

2.2 ICSID arbitration

2.2.1 Access to international arbitration

Various institutions offer arbitration services, and the BITs also refer to different arbitration bodies as

choices of forum, for instance, the tribunal under ICSID, the ad hoc tribunal under UNCITRAL rules, the ICC

and also the ad hoc tribunal specifically established according to the provisions under the relevant BIT.

ICSID as well as ad hoc tribunal established according to UNCITRAL rules are by far the most often

mentioned as possible fora for investor-state resolution mechanism, while the ICC comes a distant third.75

Other fora, including treaty-designed ad hoc tribunals and regional tribunals in Stockholm, Cairo, Bogota,

etc. are mentioned infrequently.76

As abovementioned, China first generation BITs provide for various forums for investor to choose when it

comes to the dispute arising from the amount of compensation for expropriation. There are some

significant alterations regarding the international arbitration contained in China second generation BITs.

Firstly, China extended the scope of dispute that can be submitted to the international arbitration for

settlement from only the dispute of amount of compensation for expropriation to all disputes or any

dispute,77 That is to say Chinese investor is entitled to initiate arbitration against the host state for any

74 See Article 9 of China- Botswana BIT(2000) 75 Pohl, Joachim and Mashigo, Kekeletso L. and Nohen, Alexis, Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey (November 1, 2012). OECD International Investment Working Paper No. 2012/2. Available at http://dx.doi.org/10.2139/ssrn.2187254 76 Ibid 77 See China-Netherlands BIT, China-Germany BIT, China-Canada BIT, China-Russia BIT and China-Latvia BIT.

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dispute arising from or in connection with the host state’s activities where such activities violate the

substantive protections under the relevant BITs. Secondly, China is starting to give unconditional consent

to the submission of a dispute to international arbitration, which complies with the “written consent”

requirement of the ICSID Convention.78

Choices of international arbitration forum contained in China BITs fall, despite the variation of languages,

into the three categories: tribunal established under ICSID, ad hoc tribunal under UNCITRAL rules and the

tribunal designed by the relevant BIT or parties. Such approach follows the normal way as to choice of

forum worldwide. ICSID arbitration will be further discussed below.

2.2.2 ICSID and ICSID Convention International Center for Settlement of Investment Disputes (the Center) was created by the Convention

on the Settlement of Investment Disputes between States and Nationals of Other States 1965 (the

Convention) entered into force in October 1966 and has been ratified by 150 states,79 which has covered

most States all over the world. ICSID Convention provides an autonomous regime for submitting disputes

to arbitration or conciliation, 80and acts as forum to settle the legal investment dispute between investors

and the host state. The World Bank group, which facilitated drafting of the ICSID convention, was

appropriately positioned to serve as a core of the newly created international dispute resolution

mechanism.81 ICSID can be an adequate mechanism to solve investment dispute between a state and an

investor using arbitration or conciliation, provided that both the host state and the home state have

ratified the Convention-

In accordance with the Convention, ICSID was established with a simple structure, the Administrative

Council and Secretariat. The Administrative Council is the governing body of the ICSID, comprised of one

representative of each of ICSID contracting states. Principal functions of the Administrative Council include

the election of the Secretary-General and the Deputy Secretary-General, the adoption of regulations and

rules for the institution and conduct of ICSID proceedings, the adoption of the ICSID budget, and the

78 See China-Netherlands BIT, China-Germany BIT, China-Mexico BIT. 79 There are currently 159 signatory states to the ICSID Convention. See: https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ShowHome&pageName=MemberStates_Home 80Julian D.M. lew: ICSID Arbitration: special Feature and recent Developments, Arbitrating foreign investment disputes Arbitrating foreign Investment Disputes / ed. by Norbert Horn, Kluwer Law International, 2004., P. 267-282, 269 81 Kryvoi, Yaraslau. ‘International Centre for Settlement of Investment Disputes (ICSID)’. In International Encyclopedia of Laws: Intergovernmental Organizations, edited by Jack Wouters. Alphen aan den Rijn, NL: Kluwer Law International, 2013.

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approval of the Annual Report on the operation of ICSID.82 The Secretariat consists of a Secretary-General

and his or her deputies. The Secretary-General also acts as the registrar with the authority to decide at the

initial stage whether a claim is manifestly outside the jurisdiction of the Centre in accordance with Article

36(3) of the Convention.83

Prior to 1997, there were mere cases filed to ICSID with less than 1 case per year on average. In fact in

ICSID’s first six years no case was filed. From 1997, the registered cases in ICSID have been increasing

dramatically. Up to June 30, 2014, there are 473 cases registered under the convention, of which 420 are

arbitration cases; 63.7 per cent of the ICSID registered cases are based on the consent invoked from BITs

to establish ICSID jurisdiction.84 Such phenomena implies, to some extent, the tied relationship between

the BITs and the popularity of the ICSID’s jurisdiction.

The Chinese government ratified the convention in 1993 and the ICSID convention entered into force for

China on February 06, 1993. In the notification to ICSID, the Chinese Government would only consider

submitting the jurisdiction of ICSID over the compensation resulting from expropriation and

nationalization. 85 As discussed above, many Chinese first BITs state that only the disputes of the amount

of compensation for expropriation are allowed to be submitted to ICSID for arbitration following the

reservation made by Chinese government in ratification of the Convention.

Jurisdiction of ICSID

The jurisdiction issue in an arbitration case has always been essential as a preliminary problem to be solved

by the arbitral tribunal. For the fiscal year 2013, 31 per cent finds of the ICSID declined the jurisdiction of

ICISD.86 The ICSID Convention stipulates the extent of its jurisdiction in details. Article 25 (1) of the

convention contemplates the jurisdiction of the Center that the Center has the jurisdiction over a dispute

on conditions as follows: 87

(1) any legal dispute;

82See: https://icsid.worldbank.org/ICSID/Index.jsp. 83 Kryvoi, Yaraslau. ‘International Centre for Settlement of Investment Disputes (ICSID)’. In International Encyclopaedia of Laws: Intergovernmental Organizations, edited by JackWouters. Alphen aan den Rijn, NL: Kluwer Law International, 2013. 84 THE ICSID CASELOAD – STATISTICS (ISSUE 2014-2), available at: https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ShowDocument&CaseLoadStatistics=True&language=English52. 85 See https://icsid.worldbank.org/ICSID/FrontServlet 86 See ICSID Annual Report 2013, at 27. 87 See Article 25(1) of the ICSID Convention.

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(2) directly out of an investment;

(3) between a contracting state and a national of another contracting state;

(4) the parties to the dispute consent in writing to submit to the Center.

Given the nature of the foreign investments and the concerns of the substantive outcome of the case

before the Center, it is common for the Respondent involved in disputes, usually the host state, to

challenge the tribunal on its jurisdiction over the case. Arbitral tribunal therefore has to review the

particular case at issue to decide whether it falls in the jurisdiction of the Center. Take the term

“investment” as an example, ICSID convention itself does not provide the definition of investment. The

tribunal usually refer such definition to BITs in order to decide the jurisdiction issue. . From Chinese

investors’ perspective, the following aspects at issue may come into trouble when the arbitral tribunal

considering the jurisdiction challenged by the host state.

Locally incorporate companies

As mentioned above, by the end of the 2013, approximately 16,000 Chinese investors have established

22,000 companies or enterprises in 179 countries and regions all over the world. Therefore, the company

is the most commonly used legal form when it comes to foreign investment. The term of investor in China

BITs usually defined according to the place of the incorporation and seat of the company. The question

arises that whether the company locally incorporated with native investors can be treated as a national of

the other contracting parties under the BITs regime and the Convention. Article 25 (2) b does provide that

the legal entity through which the investment was made may be considered to be a national of anther

contracting state when it is subject to foreign control. 88In the Amco v. Indonesia Case, the tribunal held

that PT Amco, registered in the Indonesia was an Indonesian company under foreign control because it

was clear from the documents in which the consent to arbitration was made.89 With respect to the extent

of foreign control, the tribunal in Vacuum V. Ghana Case determined that the foreign control does not

require, or imply, any particular percentage ownership. It found that only 20 per cent of the shares of

Vacuum were in foreign hands and 80 per cent in local hand and the same situation was somehow

reflected in company’s management. 90 Therefore the tribunal concluded that ICSID did not have

88 Julian D.M. lew: ICSID Arbitration: special Feature and recent Developments, Arbitrating foreign investment disputes Arbitrating foreign Investment Disputes / ed. by Norbert Horn, Kluwer Law International, 2004., P. 267-282, 270. 89 Amco Asia Corporation and Others V. Republic of Indonesia, ICSID Case No. ARB/81/1. 90 Omar E.GARCIA-BOLIVAR, Foreign Investment Dispute under ICSID, A Review of Its Decisions on Jurisdiction, 5 J. World Investment & Trade 187, 2004.

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jurisdiction. The decisions may be enlightening for Chinese investors to take the factor of foreign control

into account when they are planning to establish a joint venture with the local entities in the host state,

assessing to what extent that the investment could be covered by the BITs and ICSID regime.

Consent

In accordance with Article 25 of the Convention, ICSID has jurisdiction over the dispute only the parties to

the dispute consent to submit such dispute to the Center for settlement. Consent of the parties is the

cornerstone of the jurisdiction of the Centre. 91 In certain circumstances, a state consents in advance to

submit dispute to ICSID arbitration, this consent is not complete until the investor has accepted.92 In BIT

regime, the contracting states usually articulate that both contracting parties unconditionally and explicitly

consent to submit the investor-state dispute to arbitration including ICSID. Since China-Botswana BIT, the

unconditional consent has been concluded in many following BITs, therefore the host states under such

BITs have given unconditional consent to submit the dispute to ICSID in accordance with Article 25 of the

Convention. The question arises when it comes to some China BITs in which unconditional and explicit

consent has not been concluded. Further discuss regarding applicability of BIT will be provided in next

chapter.

Waiting periods

Almost 90% of the treaties with investor-state dispute resolution provisions require that the investor

respect a cooling-off periods before bringing a claim,93 and such claim includes both claim before a

competent domestic court and the international arbitration institution. Nearly all China BITs adopt the

waiting period with six months in order to set out a waiting period for disputing partiesto negotiate

amicably aiming to reach a settlement agreement. Waiting periods gives rise to issue that whether a

claimant is barred from the international arbitration jurisdiction where the claim has been made within

the waiting period. In accordance with Article 21. 2 (b) of China-Canada BIT, a disputing investor may

submit a claim to arbitration only if at least six months have elapsed since the events giving rise to the

claim, thereby establishing a condition for submission a claim to arbitration. That is to say the phrase “only

if” refers to a mandatory period barring disputing investor’s access to arbitration. However, the tribunal in

Lauder v. Czech held that six month waiting period is not a jurisdictional provision and in the circumstances

91 Report of the Executive Directors on the Convention 92Omar E.GARCIA-BOLIVAR, Foreign Investment Dispute under ICSID, A Review of Its Decisions on Jurisdiction, 5 J. world Investment & Trade 187, 2004. 93 Pohl, Joachim and Mashigo, Kekeletso L. and Nohen, Alexis, Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey (November 1, 2012). OECD International Investment Working Paper No. 2012/2. Available at http://dx.doi.org/10.2139/ssrn.2187254

27

of this case, six months amount to an unnecessary, overly formalistic approach which would not serve to

protect any legitimate interests of the Parties. 94 From the investors’ perspective, it is not an optimal option

to directly ignore the cooling-off period because the specific circumstances as mentioned in the Lauder v.

Czech decision are too broad to define from case to case. As stipulated in China-Netherlands BIT, the six

months waiting period starts from the date either party to the dispute requested amicable settlement,95

consequently, the investors willing to begin an arbitration before ICSID are obligated to prove the date of

request for settlement, otherwise the arbitration may come into jurisdiction problem or become time-

consuming. Therefore, the prudent approach regarding the waiting period is to take every single

procedural step that required by relevant BIT into account including the waiting period and the date it

starts. Comparably, China-Canada BIT encompasses very detailed and comprehensive requirements to be

fulfilled before submission of dispute to ICSID.

Judicial review and international arbitration

In BITs regime, the relationship of judicial review and international arbitration is usually defined as so-

called “forks in the road” clause. That is to say the provision that gives investors the right to choose either

to pursue a remedy in national courts or to pursue a remedy through arbitration under a BIT.96 States have

adopted various approaches to regulating investor’s access to domestic courts and international

arbitration.97 In the order of frequency observed in the sample, those approaches consist of: giving parties

to the dispute a choice between domestic court and international arbitration; defining a chronological

sequence to make both adjudicative avenue successively available; or identifying the competent

institution by reference of the subject matter of the dispute; only a few treaties in the sample take an

approach falling outside of those main categories.98 Article 9(2) of China-Botswana BIT gives the investor

the right to seek remedies to competent court of the contracting part accepting the investment; Article

9(3) enables the investor access to international arbitration provided that investor concerned does not

resort to the judicial review specified in article 9(2). Apparently, China-Botswana BIT falls into the

approach that the choice for judicial review or international court is final and exclusive.

94 Ronald S. Lauder v. The Czech Republic, Award dated 3 September 2001, 9 ICSID Reports 62. 95 See Article 10 (3) of China-Netherlands BIT. 96 Lowe, Vaughan, Changing Dimensions of International Investment Law (March 2007). Oxford Legal Studies Research Paper No. 4/2007. Available at SSRN: http://ssrn.com/abstract=970727. 97 Pohl, Joachim and Mashigo, Kekeletso L. and Nohen, Alexis, Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey (November 1, 2012). OECD International Investment Working Paper No. 2012/2. Available at SSRN: http://ssrn.com/abstract=2187254. 98 Ibid

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China-Netherlands BIT follows a flexible solution to cope with the relationship of judicial review and

international arbitration. On one hand, both Chinese and Dutch investors are free to choose judicial review

or international arbitration to settle the dispute concerned; on the other hand, if a legal dispute

concerning an investment in the territory of China has been submitted to competent domestic court,

international arbitration is still open for the investor, provided that such dispute has been withdrawn; if a

dispute concerns an investment in the Netherlands, an investor may submit such dispute to international

arbitration at any time, irrelevant of whether prior submission to a competent court in the Netherlands.99

China-Germany BIT adopts the same approach as it in the China-Netherlands BIT. 100 China-Canada BIT,

coming into force on October 1, 2014, adopts the same approach as China-Netherlands BIT with regards

to forks in the road clause, according to which an investor can start an international arbitration before

ICSID or other arbitration bodies stipulated in the BIT only if the investor has withdrawn the case from the

nation court of China before judgment has been made.101 Under China-India BIT, it is possible to refer

investment dispute to domestic court, arbitral or administrative bodies of the concerned contracting party,

subject to mutual consent in which both investor and concerned contracting party agree to do so.102

Consequently, application of judicial review has been restricted by mutual consent thereby narrowing the

freedom of concerning parties to choose the dispute resolution mechanism.

Another issue may arise under the fork in the road clause of BIT. For instance, the foreign investor may

start a claim under the relevant BIT, while the locally incorporated company in which he is a shareholder

may start proceedings in the host state's courts.103 In CMS Gas Transmission Co. v. Argentina case, TGN, a

locally incorporated company as a subsidiary, claimed Argentina courts against Argentina government to

challenge the measures adopted by the government during the financial crisis, while CMS as a shareholder

of the locally incorporated company instituted arbitration before ICSID based on US-Argentina BIT in which

the fork in the road clause was included. The tribunal held that since no submission has been made by

CMS to local courts and since, even if TGN had done so - which is not the case -, this would not result in

triggering the "fork in the road" provision against CMS. 104 In CMS case, TGN and CMS, as separate legal

99 See Article 10 of China-Netherlands BIT. 100 See Article 9 of China-Germany BIT and Article 6 of Protocol. 101 See Annex C.21 of China-Canada BIT. 102 See Article 9 of China-India BIT. 103 Peter J. Turner, Chapter 10 Investor State Arbitration in Michael J. Moser (ed), Managing Business Disputes in Today's China: Duelling with Dragons, (© Kluwer Law International; Kluwer Law International 2007) pp. 233 – 258, 250. 104 CMS Gas Transmission Co. v. Argentina case, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, , paragraph 80, available at: http://oxia.ouplaw.com/view/10.1093/law:iic/64-2003.case.1/IIC064(2003).pdf.

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entities, sought for remedies in different forums based on different legal grounds, namely, the parties and

the cause of actions are not identical, therefore the fork in the road clause in US-Argentina BIT did not

apply. The tribunal explained that the contractual claims are different from treaty claims even if there had

been or there is currently a recourse to the local court for breach of the contract, this would not have

prevented submission of the treaty claims to arbitration.105

Sometimes the outcomes are uncertain and problematic if the qualified investors initiate arbitrations

separately based on different BITs. In CMS v. Czech Republic Case, a Dutch company, the directly

shareholder of the locally incorporated company claimed based on US-Netherlands BIT, while the owner

of the Dutch company who is an American, claimed under the Netherlands-Czech BIT. But each claim was

heard by a different tribunal established under the relevant BIT; and the two tribunals came to

diametrically opposite results.106 Suffice it to say that such inconsistent decisions are quite controversial,

but the risk of parallel proceedings (for example by shareholders in the same company who have different

nationalities) cannot be excluded altogether.107

It is obvious that China follows various fork in the road clauses in BITs. Despite the variation of approaches,

the trend is clear that China is following a comprehensive way to tackle potential issue arising from

relationship between judicial review and international arbitration giving investor more freedom to choose

the forum he or she deems to be appropriate. Specifically, China-Netherlands BIT has abandoned the

typical way of exhausting the local remedies and furthermore gives the investor the right to make a second

choice. It seems that this approach represents the latest trend for China in concluding BITs in term of fork

in the road clause. However, China-India BIT is most unusual at this issue as it requests the local court

remedies to be subject to mutual consent. For China’s perspective, it is possible that China may require

the investor to exhaust the administrative review for the dispute concerning an investment in the territory

of China before submitting such dispute to local courts or international settlement bodies.

105Eudoro A. Olguín v. Republic of Paraguay ICSID Case No. ARB/98/5, Decision of the ICSID Tribunal on Objections to Jurisdiction of August 8, 2000. 106 Lowe, Vaughan, Changing Dimensions of International Investment Law (March 2007). Oxford Legal Studies Research Paper No. 4/2007. Available at SSRN: http://ssrn.com/abstract=970727. 107 Peter J. Turner, Chapter 10 Investor State Arbitration in Michael J. Moser (ed), Managing Business Disputes in Today's China: Duelling with Dragons, (© Kluwer Law International; Kluwer Law International 2007) pp. 233 – 258, 251.

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Arbitration mechanism

Most China BITs do not set up the arbitration procedure and arbitration rules in BITs themselves and

therefore refer to arbitration rules established by arbitration bodies. ICSID establishes the Institution Rules

and Arbitration Rules for disputing party to apply when instituting an arbitration before ICSID. Therefore,

if a Chinese investor wishes to institute an arbitration against the host state before ICSID, Institution Rules

and Arbitration Rules shall apply. The relationship between Institution Rules and Arbitration Rules is

explicitly specified in Preamble of the Institution Rules. The Institution Rules apply only during the period

from the filing of a Request to the dispatch of the Notice of Registration. All transactions subsequent to

that time are to be regulated in accordance with the Conciliation and the Arbitration Rules.108

Institution Rules

Any contracting state or a national of such a state directs a request to institute arbitration proceedings to

the secretary-general, who sends a copy to the other party.109 And such request could be made jointly by

the parties to the dispute. The content of the Request for Arbitration shall be subject to Rule 2 of

Institution Rules. The Request for Arbitration at least shall include the following contents: names and

contact details, constituent subdivision or agency of a contracting state, nationality, written consent,

information on the dispute and authorization to file a Request.110 One original and five copies of the

request and its annexes should be submitted111, and the Request shall be drafted in official languages –

English, French or Spanish. In some circumstances, the request may additionally include the optional

information, for instance, the number of arbitrators, and the method to appoint arbitrators and as well as

any other provisions agreed concerning the settlement of the dispute. 112 On receiving the Request,

Secretary-General shall send an acknowledgement to the requesting party and wait until the requesting

party finish the payment of lodging fee. Once the payment has been received, the Secretary –General shall

transmit a copy of the Request and of the accompanying documentation to the other party and register

the Request for Arbitration and on the same day notifying the other party the registration.113

108 See Institution Rules Preface. 109 Kryvoi, Yaraslau. ‘International Centre for Settlement of Investment Disputes (ICSID)’. In International Encyclopaedia of Laws: Intergovernmental Organizations, edited by Jack Wouters. Alphen aan den Rijn, NL: Kluwer Law International, 2013. 110 See Rule 2 of institution Rules. 111 Institution Rule 4(1) 112 Institution Rule 3 113 Institution Rule 5 and 6

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For investors, the relevant BIT that invoked in the request for arbitration shall be carefully reviewed. For

instance, China-Canada BIT specifies the method of arbitrator appointment in Article 24114 and precludes

the application of the Arbitration Rules under the ICSID in terms of arbitrator appointment. Such

information shall be included in the request for arbitration as optional information in accordance with the

Institution Rules 3.

The Notice of Registration shall be dispatched to the parties according to Institution Rule 8. It shall be

noticed that the Secretary-General has the screening power to refuse the registration of Request for

Arbitration directly if he finds, on the basis of the information contained in the Request, the dispute is

manifestly outside the jurisdiction of the Centre. It is possible to withdraw the Request by written notice

to the Secretary-General on the condition that such Request has not been registered.115 If such Request

has been registered by the Secretary-General, it is not allowed to be withdrawn unilaterally. However, the

party may discontinue the proceedings during the arbitration proceedings, subject to consent from the

other party.

Arbitration Rules

Generally, the Convention allows the parties to the dispute to decide how the proceedings will be

conducted; in the absence of such agreement, Chapter IV Section 3 of the Convention and The Arbitration

Rules shall apply. 116 China BITs seldom set out the items regarding the arbitration proceedings and

constitution of the arbitral tribunal, for instance China-Netherlands BIT; however there are some

exceptions. China-Canada establishes comprehensive rules with respect to constitution of arbitral tribunal,

agreement to appointment of arbitrators and consolidation of claims,117 and such provisions can be found

in China-Mexico BIT as well.118 The ICSID Secretariat also administers international dispute settlement

proceedings under rules and treaties other than the ICSID Convention or the ICSID Additional Facility.119 In

particular, the Secretariat often assists parties and tribunals with investment arbitrations conducted

pursuant to the UNCITRAL Arbitration Rules.120

114 See China-Canada BIT Article 24 115See Institution Rules 8. 116See Article 44 of the Convention. 117 See Article 24, 25 and 26 of China-Canada BIT. 118 See Article 14 and 16 of China-Mexico BIT. 119 ICSID Annual Report 2013, at 19. 120 Ibid

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Arbitration Rules set out an explicit and comprehensive system to manage the dispute before the Center.

The chart below illustrates the basic conduct under the Convention and the Arbitration Rules. (ICISD

Annual Report 2013)

Request for Arbitration

Refusal to Register

Registration

Constitution of the Tribunal

First Session

Written Procedure

Oral Procedure

Deliberations

Award

Supplementary Decision and

Rectification

Post-Award Remedies: Annulment,

Interpretation, Revision

2.2.3 The Ping an case As mentioned above, there is hardly ICSID case which Chinese investors involve in. Ping An Case is the one

that Chinese investor, Ping An, acting as one party to claim against host state. On September 19, 2012

ICSID Secretary-General registered Request for Arbitration from Ping An Life Insurance Company of China,

Limited and Ping An Insurance (Group) Company of China, Limited (the Claimant) against kingdom of

Belgium (the Respondent).121 In accordance to procedural details listed on the website of ICSID,122 the

Claimant-appointed arbitrator accepted the Claimant’s appointment on December 13, 2012, while the

Respondent-appointed arbitrator accepted the Respondent’s arbitrator on January 02, 2013; the arbitral

tribunal was constituted following the appointment of presiding arbitrator appointed by co-arbitrators on

February 26, 2013. Further proceeding is still subject to the tribunal’s determination on whether it has the

jurisdiction over the case.

121 See https://icsid.worldbank.org/ICSID/FrontServlet. 122 See https://icsid.worldbank.org/ICSID/FrontServlet.

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The RBS led consortium acquired ABN AMRO in October 2007. As a member of the consortium, Fortis

Group would take over the global asset management, private banking and retail and commercial banking

Netherlands of ABN AMRO. The remarkable funding source for Fortis Group came from the Chinese issuer,

Ping An. Ping An purchased 4.18% of stake of Fortis from the open market at an average price of €19.05

per share, with a total of € 1.81 billion, and then raised its stakes in Fortis Group up to 4.99%.123 The

amount of investment in Fortis for Ping An reached RMB 23.83 billion. Up to June 30, 2008, Ping An

became the biggest shareholder of Fortis Group, with total amount of 121 million Fortis Group’s shares,

representing 4.81% of all the outstanding shares of Fortis Group.

As a result of financial crisis in 2008, Fortis Bank’s share price was heavily impacted in the month of

September, and the price declined steadily and rapidly during this period. In order to contend with an

extremely liquidity requirement, the Belgian government, Dutch government and Luxemburg government

decided to intervene. On 29 September 2008, Fortis Group announced that the Belgian government would

invest EUR 4.7 billion in Fortis Bank SA/NV, that the Dutch government would invest EUR 4.0 billion in

Fortis Bank Nederland (Holding) N.V., and that the Luxembourg government would invest EUR 2.5 billion

in Fortis Banque Luxembourg SA. 124 Then the parties started to discuss the implementation of

abovementioned transactions, the implementation with Luxemburg government was signed, however,

implementation with Dutch government did not complete. On 6 October, Fortis announced the sale of the

remaining 50 % plus 1 share of Fortis Bank to the Belgian state (via the SociétéFédérale de Participations

et d’Investissement/Federale Participatie-en Investeringsmaatschappij – ‘SFPI/FPIM’) for EUR 4.7 billion.

The parties failed to reach an agreement regarding the Fortis’ proposal. During the negotiations, a

multitude of legal proceedings was threatened. On 12 December 2008, the Court of Appeal in Brussels

ruled that the decisions taken by the Board of Directors of Fortis SA/NV on 3 and 5-6 October 2008 and

the agreements entered into in implementation of those decisions were to be submitted to the

shareholders’ meeting of Fortis SA/NV. 125 Subsequently, several meetings of shareholders has been

convened by the board of Fortis seeking the approval for the transactions, but no approval had been

reached by the end of 2008. The parties, including the Benelux governments, BNP Paribas and Fortis

reopened the negotiation to modify the transactions in order to obtain the approval form the shareholders.

On April 28, 2009, the meeting of shareholders approved the sales, in which Belgian government would

123 See Ping An Annual Report 2008. Other resource indicated this figure shall be 4.99%, see Ping An press release on April 18, 2008, available at: http://www.pingan.com/about/en/news_73825.jsp . 124 See Fortis Annul Review 2008. 125 Ibid

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purchase the remaining half part of Fortis and BNP Paribas would acquire both the Fortis insurance from

Fortis group and the Belgian government of 75% of Fortis Bank. Ping An voted against it saying it destroyed

the company’s value and impaired shareholders’ interests. During the nationalization of Fortis by Belgian

government and the sale to BNP Paribas, Ping An’s holding in Fortis loss more than 90 per cent. In April

2009, Ping An reported a write-off RMB22.8 billion as a result.126

China and Belgium-Luxemburg Economic Union BIT was concluded on June 04, 1984 and came into force

on October 05, 1986. On June 06, 2005 new BIT between the parties was signed and became valid on

December 01, 2009 replacing the previous one. 127 1984 China-BLEU BIT and Protocol state that ad hoc

tribunal could resolve the investment dispute between the investor of one contracting party and the other

contracting party rather than empowering the ICSID with the jurisdiction over the dispute thereon. 128

While the revised BIT in 2005 stipulates that ICSID has the jurisdiction over the investor-state dispute

adopting a chronological method with respect to the fork in the road clause. Namely, under the 2005

China-BLEU BIT investor is entitled to submit the dispute to ICSID as an option on the condition that the

dispute cannot be settled through consultation within six months from the date it has been notified by

the party to the dispute.129 Ping An will definitely benefit from the revised and updated BIT compared with

the BIT in 1984 in terms of dispute resolution mechanism in which the ICSID is available for Ping An as

forum to choose. From Ping An’s perspective, it shall notify , as a prerequisite to access to the ICSID, the

Belgian government in writing regarding the dispute and endeavor to settle through consultations by

means of expert advice from the third party or conciliation between Chinese government and Belgian

government as to diplomatic channels. It is reported that such endeavor has been tried by Ping An.

According to Bloomberg, a statement from Ping An on September 25, 2012, six days after the Request was

registered by ICSID, said “We have been trying very hard to negotiate with the Belgian government through

different channels on compensation for our investment losses in Fortis.”130

China-BLEU BIT contemplates that nationalization is only legitimate for public purpose, security or national

interest and the measures adopted for such nationalization shall be taken under domestic legal procedure,

without discriminatory and accompanied by provisions for the payment of compensation. Ping An’s

arguments may focus on whether it is necessary for Belgian government to take the second step to

126See Ping An Annual Report 2008. 127 See UNCTAD Database, http://investmentpolicyhub.unctad.org. 128 Protocol of China-BLEU BIT 1984, Article 6. 129 Article 8 of China-BLEU BIT 2005. 130 See http://www.bloomberg.com/news/2012-09-25/ping-an-seeks-international-arbitration-to-recoup-fortis-losses.html.

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nationalize remaining stakes of the bank given that 49.9% of Fortis bank had been nationalized by then,

and whether the domestic legal procedure regarding nationalization adopted by Belgian government

complied with the requirement of due process. Ping An may further argue that the compensation for

nationalization, namely the call option plan, violated fair and equitable treatment, the national treatment

and the non-discriminatory stipulated in Article 2, Article 3 and Article 4 of the BIT accordingly.

Ping An case is the first case filed by mainland Chinese company to ICISD to settle investment dispute with

the host state. As Eversheds arbitration partner Andy Moody said: “This case may turn out to be the first

of many future claims commenced by Chinese investors as they increasingly make investments outside

China and recognize that they may try to use bilateral investment treaties to help protect those

investments against government interference or expropriation.”131 It is hard to predict that to what extent

the case outcome will affect Chinese powerful companies in decision-making regarding investment outside

of China, since making decision to invest overseas concerns not only the investment protection under BITs

or other mechanisms but also financial factors such as global strategy, expected profit and other risks etc.

However, to some extent, the outcome and the case itself does give lessons for Chinese individuals and

enterprises who intend to make oversea investment that they shall take the BITs and dispute resolution

mechanism into account when they or their lawyers do due diligence to evaluate the possibility of

obtaining the compensation if their investments are impaired by host government.

Chapter III Protecting Chinese investment under BITs regime

3.1 Chinese investors and ICSID arbitration

In purely arithmetic terms, given the geometric increase in investments abroad by Chinese investors

including by Chinese state enterprises, it is reasonable to expect a comparable increase in claims brought

by Chinese investors against foreign states.132 However, the reality is that only few Chinese investors filed

claims before ICSID based on BITs, and up to now there is no decided case for such claims. Specific

provisions in China’s investment treaties and a “reservation” by China to the ICSID Convention at least

raise doubts in this respect.133 As discussed above, China first generation BITs limit subject matter that can

be submitted to ICSID for arbitration only to the dispute arising from compensation for expropriation,

131 See http://www.thelawyer.com/kirkland-scoops-role-on-first-chinese-icsid-arbitration/1014489.article. 132 Trakman, Leon, China and Investor-State Arbitration (October 2, 2012). UNSW Law Research Paper No. 2012-48. Available at SSRN: http://ssrn.com/abstract=2157387. 133 Markert, Lars A., Arbitration Under China's Investment Treaties – Does it Really Work? (November 30, 2012). Contemporary Asia Arbitration Journal, Vol. 5, No. 2, pp. 205-241, November 2012. Available at SSRN: http://ssrn.com/abstract=2192035.

36

thereby narrowing applicability of the BITs as means to be resorted to. Actually, there is only one

arbitration case that instituted by Chinese investor before ICSID based on China first generation BITs. Tza

Yap Shum v. Peru, as the first case launched by Chinese investor to ICSID, is still under annulment

proceedings. In accordance with the award, the tribunal interpreted extensively the China-Peru BIT with

respect to jurisdiction and the substantive outcome of the case, and therefore upheld the claims by the

investors. 134

Even China second generation BITs has extended the scope of dispute that can be settled through ICSID

from dispute regarding the amount of compensation for expropriation to any dispute from the investment,

it seems that Chinese investors have not been incentivized by the changes thereon to utilize the BITs

protecting their investments in the host states.

Despite the obstacles that probably barring Chinese investor to resort to ICSID arbitration, duration

needed for settlement may make investors less desired to institute an arbitration before ICSID. Research

shows that the average duration of ICSID case is 3.6 years (1,325 days).135 The award of Tza Yap Shum v.

Peru case, registered by secretary-general on February 12, 2007, had not been issued by the tribunal until

July 07, 2011, nearly four years and a half after its registration. 136 Due to annulment proceeding, the

parties had been notified of the provisional stay of enforcement of the award. The latest progress for this

case is that the ad hoc committee held a hearing on annulment in Washington D.C. on March 21 and March

22 in 2014. That is to say the case has been lasting for 7 years since its registration and it has not come

into the end till now. The longest period from Request for Arbitration to final award in any ICSID case is

10.5 years (3,839 days), which occurred in Pey Casado v Chile.137 The award in that case is now subject to

an annulment application.138 It is obvious that the longer the ICSID case lasts, the more costs will occur,

which to some extent would block, as a matter of fact, the small and medium sized enterprises and

individuals as well resorting to ICSID arbitration. From this point of view, the ICSID arbitration would be

the last opportunity for investors after they have exhausted all possible means to settle the dispute.

134 Tza Yap Shum v. The Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence (Feb. 12, 2007); Final Award on the Merits (July 7, 2011), summary available at http://www.italaw.com/documents/TzaYapShumAwardIACLSummary.pdf. 135Allen & Overy, ICSID arbitration: how long does it take? GAR journal, Volume 4 issue 5, available at: www.GlobalArbitrationReview.com. 136See Tza Yap Shum v. Republic of Peru (ICSID Case No. ARB/07/6) available at: https://icsid.worldbank.org/ICSID/FrontServlet. 137 Allen & Overy, ICSID arbitration: how long does it take? GAR journal, Volume 4 issue 5, available at: www.GlobalArbitrationReview.com. 138 Victor Pey Casado and President Allende Foundation v. Republic of Chile, ICSID Case No. ARB/98/2

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Therefore, ICSID arbitration is neither the top priority nor the best choice for investors if there is any other

possibility to solve the dispute in an efficient way.

As discussed, investors are able to get access to international arbitration to claim against the host state.

The question is that whether ICSID arbitration works for investors or not. The answer might be positive.

On one hand, the figures indicate that Claimants have more chances to successfully recoup damages from

the host state before ICSID if the Center has the jurisdiction over the cases. In 2012, 20% awards made

within the year found that ICSID had no jurisdictions, 20% rejected the claims, and 60% awards made in

favor of claimant in part or in full.139 In 2013, 31% awards decided by arbitration tribunal under ICSID

Convention declined jurisdiction, while 32% awards dismissed all the claims from the investors and 37%

awards upheld the claims in part or in full.140 That is to say 53% awards made by arbitral tribunal for those

cases fell into the ICSID jurisdiction were in favor of the claimants in 2013, and remarkably, this figure in

2012 was 75%. On the other hand, investor-state dispute resolution mechanism in BITs may be the last

hope for investors seeking remedies against the host state. Investors are given various choices to solve the

dispute including consultation, conciliation, diplomatic channels, domestic court and investor-state

arbitration. The reality is that investors may find it is difficult to settle the dispute through non-binding

mediation activities, and normally, they have exhausted the non-binding activities aforementioned before

they finally submit the dispute to the Center for binding and final award in the meantime affording the

huge costs and time. A reasonable and economical investor may take his last chance to resort to ICSID

given that his claims have a good chance to be upheld, wholly or partly. The situation is the same for

Chinese investors.

Obviously, Chinese investors can institute arbitration before ICSID against the host states to protect their

investments based on China second generation of BITs, in which full substantive protections and investor-

state arbitration mechanism are provided for. However, the protection cannot cover all circumstances.

Firstly, for those states have not concluded BITs with China, Chinese investors are not able to claim against

them directly through investor-state arbitration mechanism. Taking Libya as an example, no BIT or other

investment treaties have been concluded between Chinese government and Libyan government. During

the Libya civil war, Chinese investments, with total amount of US$ 18.8 Billion, were imposed in very

dangerous position; however, Chinese investors can only rely on Chinese government on behalf of them

to negotiate with Libyan government with respect to the compensation through the diplomatic channel.

139 ICSID 2012 Annual Report 140 ICSID 2013 Annual Report

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It shall be noted that negotiation through diplomatic channel could be easily and heavily influenced by

many other political, social and economic factors, which therefore gives rise to more uncertainty regarding

the outcome. Furthermore, there are still nearly 30 BITs that have not been in force, which means that BIT

based investor-state arbitration is not applicable for Chinese investor to claim against those states. Lastly,

if Chinese investors make their investment in the states with BITs with China falling into first generation

BITs of China, Chinese investor may face difficulties to apply such BITs to protect their investment in terms

of dispute resolution and substantive protection provisions. For instance, Ping An were not able to institute

arbitration against Belgian government before ICISD if new China-BLEU BIT had not replaced the previous

one, because ICSID and the tribunal established according to ICSID Convention has no jurisdiction over the

dispute according to the previous BIT.

3.2 Business restructuring In order to solve the problems aforementioned, a series of corporate steps can be followed, including

business restructuring to change the chains of corporate ownership, transfers of assets to new or existing

entities and changes of corporate nationalities. Generally, these activities can be defined as treaty-

shopping.

If treaty-shopping is allowed by the arbitral tribunal regarding jurisdiction to access the ICSID to claim

against the host states, the problems listed above can be easily solved. For those countries that have not

concluded BITs with China or have concluded BIT with China but unenforced, Chinese investor could

establish, before making investment, its wholly controlled company in a state which has concluded BIT

with the state where the investment is expected to be located and then make investment through the

established company, thereby ensuring the established company could claim against the host state on the

basis of BIT concluded by the host state and the state in which the company was established. As discussed

above regarding Chinese investments in Libya, Chinese investors are not able to claim against Libyan

government since China and Libya has not entered into any BIT that can be invoked by Chinese investors.

The alternative approach could be to incorporate a company in Germany, as an investment vehicle, and

make the investment in Libya through the established Germany company, since Libya-Germany BIT has

been in force since 2010. Furthermore, Libya-Germany BIT clearly points out that investor-state dispute

can be referred to ICSID arbitration. For existing investment, Chinese investors may restructure the

business by means of transferring all the shares or assets of the existing local company in Libya to a

Germany company directly or indirectly controlled by Chinese investors at an appropriate timing following

39

well-accepted criteria, in order to deploy procedural and substantive protections under Libya-Germany

BIT.

Nationality of an investor is preliminary issue for the tribunal in determining jurisdiction over the dispute.

The substantive standard guaranteed in a treaty will only apply to nationals of the state prior to the treaty;

in addition, the jurisdiction of an international tribunal is determined, inter alia, by the claimant

nationality.141 To determine the validity of corporate restructuring, an arbitral tribunal shall review the

relevant BITs and international investment laws in accordance with criteria of good faith and abuse of right.

It must be stated that treaty-shopping is not, in principle, prohibited under international investment law,

as the purpose of BITs is exactly encouragement of investment.142 Whether the restructuring complies

with good faith or constitutes an abuse of rights shall be subject to specific decision made by an arbitral

tribunal considering the circumstances in every single case. Tribunals in ICSID arbitrations have outlined

certain principles in their decisions regarding the possibly accepted restructurings.

3.2.1 Timing of corporate restructuring “[T]he validity of nationality planning is primarily dependent on the time of the restructuring in relation

to the dispute. If the restructuring was undertaken early i.e. before the outbreak of the dispute, the newly

acquired nationality will be honored. But a last minute change of nationality in the face of an existing

dispute will be rejected.” 143Identifying the date of commencement of a dispute that is the subject of an

investment claim may be crucial in determining the impact of corporate transfers or restructuring on the

resolution of the claim.144 In Conocophillips Petrozuata B.V. Conocophillips Hamaca B.V. Conocophillips Gulf

of Paria B.V. And Conocophillips Company V. Bolivarian Republic of Venezuela case, 145 the Respondent

challenged the jurisdiction of ICSID over the dispute at the first place. The Respondent contended that the

Claimants technically met the nationality requirement of the relevant treaties constituting an abuse of the

corporate form and blatant treaty or forum shopping. The Claimants responded in two aspects, first is the

141 Christoph Schreuer: Nationality Planning, Fordham Conference, London, 27 April 2012. Revised 12 October 2012, 17. 142 Inna Uchkunova, Drawing a Line: Corporate Restructuring and Treaty Shopping in ICSID Arbitration, available at: http://kluwerarbitrationblog.com/blog/2013/03/06/drawing-a-line-corporate-restructuring-and-treaty-shopping-in-icsid-arbitration/. 143 Christoph Schreuer: Nationality Planning, Fordham Conference, London, 27 April 2012. Revised 12 October 2012, 18. 144 Voon, Tania S. and Mitchell, Andrew D. and Munro, James, Legal Responses to Corporate Manoeuvring in International Investment Arbitration (August 26, 2013). (2014) Journal of International Dispute Settlement, Forthcoming; U of Melbourne Legal Studies Research Paper No. 668. Available at SSRN: http://ssrn.com/abstract=2316440. 145 Conocophillips Petrozuata B.V. Conocophillips Hamaca B.V. Conocophillips Gulf of Paria B.V. And Conocophillips Company V. Bolivarian Republic of Venezuela case, ICSID CASE NO. ARB/07/30.

40

timing of the restructuring of their investments in Venezuela occurred before the dispute arose; second

is there is no principle of law, which precludes a corporation from altering its form by creating subsidiaries

or reincorporation to benefit from the protection of another country’s laws. The tribunal found that

transfers of ownership in 2005 and 2006 did not attempt to transfer any right or claim arising under ICSID

or BIT from one owner to another. Despite the Claimants’ principal witness acknowledged that the

purpose of business restructuring is to be able to get access to ICSID proceedings, the tribunal still rejected

the challenge of jurisdiction, considering the significance of dates of two measures as well as of August 29,

2006 as commencement of dispute. As a circumstantial evidence supporting its decision, the tribunal also

observed the fact that the Claimant made further investment to the project after corporate restructuring,

considering such investment constituted substantive involvement in the business.

It is not easy for a tribunal to figure out the date of restructuring. In determining the date of

commencement of a dispute, various approaches have been adopted by the tribunals in different cases in

terms of the date of Notice of Arbitration or Request of Arbitration, harm and underlying facts. For those

tribunals considering the date of notice of claim, it is easy to identify the date of Notice of Claim or the

Request of Arbitration, therefore the certainty of the decision can be safeguarded. However, the event

causing actual harm or injury often pre-dates the formal initiation of the claim or arbitration,146 the

Claimant may complete, either in good faith or bad faith, any restructuring process during the period

between the occurrence of harm and the date of issuance of the Notice or the Request at its own

discretion, because the Claimant can decide the timing to file a Notice or Request without any limitation.

This formalized standard gives the Claimant excessive and unnecessary freedom in determining the

commencement date of the dispute and results in abuse of right in term of treaty-shopping, thereby

imposing the host state into an unfair and uncertain position. For those tribunals adopting the date of

harm or injury as the commencement date of dispute, the tribunal may find that it is always problematic

for them to identify the date of harm and injury. A tribunal’s decision to view a given act as ‘continuing’ or

‘composite’ may have a significant impact in circumstances where the nationality of an investor or

ownership of an investment changes in between the first and last acts.147 In addition, it is inevitable for

146 Voon, Tania S. and Mitchell, Andrew D. and Munro, James, Legal Responses to Corporate Manoeuvring in International Investment Arbitration (August 26, 2013). (2014) Journal of International Dispute Settlement, Forthcoming; U of Melbourne Legal Studies Research Paper No. 668. Available at SSRN: http://ssrn.com/abstract=2316440. 147 Voon, Tania S. and Mitchell, Andrew D. and Munro, James, Legal Responses to Corporate Manoeuvring in International Investment Arbitration (August 26, 2013). (2014) Journal of International Dispute Settlement, Forthcoming; U of Melbourne Legal Studies Research Paper No. 668. Available at SSRN: http://ssrn.com/abstract=2316440.

41

tribunal to determine the dispute either from the narrow perspective or broad perspective. As

ConocoPhillips case abovementioned, the tribunal adopted narrow conception of the dispute. The tribunal

selected August 29, 2006, the date tax law was amended to increase the tax from 33% to 50%, as of

significance of the dispute regarding the tax problem rather than the previous activities that actually

impaired the investment as well. No matter what approach adopted by the tribunal, determining the

commencement day is always problematic. The tribunal needs to find a balance point to address the issue

under specific circumstances taking the certainty of the award into account.

3.2.2 Denial of benefits Some treaties require actual control of the company from with a state party, so that the mere formality of

incorporation does not suffice and benefits are denied to a corporation which is in reality controlled from

a third state.148 China-Canada BIT contains such denial of benefit clause as follows:149

Furthermore, in order to achieve greater certainty for the consequence of denying the benefits, China-

Canada BIT articulates that contracting party may deny the benefits of this BIT at any time for the reasons

listed in Article 16, including after the initiation of arbitration proceedings in accordance with this BIT.150

Such a provision allows a contracting party of a BIT to deny the benefits of the agreement to a company

that is a subsidiary of a shell company organized under the laws of the other contracting party if controlled

by nationals of a third country.151 In Guaracachi America, Inc. (U.S.A.) and Rurelec Plc (United Kingdom) v.

Plurinational State of Bolivia case, the tribunal reviewed the denial of benefit under US-Bolivia BIT and

148 M. Sornarajah, The International Law on Foreign Investment, Cambridge University Press; 3 edition (June 14, 2010), 329. 149 See Article 16 paragraph 1 of China-Canada BIT. 150 See Article 16 paragraph 3 of China-Canada BIT. 151 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations, 2007, 75.

A Contracting Party may, at any time including after the institution of arbitration

proceedings in accordance with Part C, deny the benefits of this Agreement to an investor

of the other Contracting Party that is an enterprise of that other Contracting Party and to

covered investments of that investor: (a) if investors of a non-Contracting Party own or

control the enterprise; and (b) the denying Contracting Party adopts or maintains

measures with respect to the non- Contracting Party: (i) that prohibit transactions with

the enterprise; or (ii) that would be violated or circumvented if the benefits of this

Agreement were accorded to the enterprise or to its covered investments.

42

then concluded that denial of benefits can be invoked at the time the objections to jurisdiction are raised

and ruled that it has no jurisdiction over the dispute because no substantive activities of the Claimants are

found in the US.152 The position adopted in Rulelec & GAI v. Bolivia reflects the reasoning of the ICSID

tribunal in Pac Rim Cayman LLC c. El Salvador.153

Obviously, denial of benefits clause precludes the application of corporate restructuring in term of treaty-

shopping by imposing limitation on nationality of the Claimant in a third county and substantive activities

of the Claimant in the contracting state. Most BITs, however, do not contain a denial of benefits clause.154

Given that the tribunal may rule that denial of benefit in deciding jurisdiction issue, investors, who intend

to restructure their business either in the very beginning stage of investment or in an appropriate timing

before claiming, are strongly recommended to carefully review the denial of benefits clause contained in

the BIT which is expected to be invoked to cover the coming dispute. Even though the existing BIT

applicable does not include with such clause, it is still necessary to assess the possibility that to what

extent the contracting parties of BIT may revise the BIT adding the denial of benefits clause in it, since the

retrospective effect of denial of benefits, as a legal risk, would make restructuring counterproductive to

get access the BIT expected by virtue of jurisdiction battle.

3.2.3 Restructuring in good faith

In general terms, good faith could be said to refer to notions of honesty, fairness and reasonableness.155

Many states file objections on jurisdiction with the dispute when corporation restructuring involved

asserting that such corporation restructuring was operated in bad faith or constituted abuse of right or

process. As the tribunal in Mobile v. Venezuela said, under general international law as well as under ICSID

case law, abuse of right is to be determined in each case, taking into account all the circumstances of the

case.156 In Autopista Concessionada v. Venezuela 157and Tokios Tokeles v. Ukraine158, both Tribunals reached

the conclusion that an abuse of rights exists when establishing a corporation for the sole purpose of

152 Award, dated on 31 January 2014, Guaracachi America, Inc. (U.S.A.) and 2. Rurelec plc (United Kingdom) v. Plurinational State of Bolivia, PCA Case No. 2011-17. 153 Carmen Núñez-Lagos and Javier García Olmedo: The invocation of “denial of benefits clauses”: when and how?, available at: http://kluwerarbitrationblog.com/blog/2014/02/17/the-invocation-of-denial-of-benefits-clauses-when-and-how-2/ 154 United Nations Conference on Trade and Development: Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations, 2007, 76. 155 John O’Conor, Good Faith in International Law (Dartmouth publishing, 1991) 118-119. 156 Decision on jurisdiction, dated on June 10, 2010, Mobile v. Venezuela, ICSID CASE NO. ARB/07/27, paragraph 177. 157 Autopista Concessionada v.Venezuela, ICSID Case No. ARB/00/5. 158Tokios Tokeles v. Ukraine, ICISD Case No. ABR/02/18.

43

gaining access to an international arbitration.159 While in Mobile v. Venezuela, the tribunal held that the

restructuring was legitimate and acted in good faith.

The timing of a corporate restructuring or transfer is crucial in identifying an abuse of rights. If this event

takes place after a dispute has commenced or becomes foreseeable, or after injury has occurred, a tribunal

is more likely to regard it as an abuse of rights.160 Tribunal is reluctant to conclude that the Claimant acted

in bad faith if corporate restructuring completed in advance of the dispute which was not foreseeable at

the time of such restructuring. Tribunal in Mobile case considered that getting access to ICSID arbitration

to protect investment itself is legitimate and reasonable rather than constituting an abuse of right. Other

ICSID cases show that motivations, such as financing and taxation, are taken into account in deciding the

whether the restructuring is acted in good faith. Divergence of decisions made by tribunals in ICSID cases

indicate that abuse of right itself is too ambiguous to be construed in a universal standard. However, the

tribunals are willing to identify corporate restructuring as in good faith if such restructuring complies with

the applicable law and operate in a manner of transparency with other understandable motivations

besides getting access to ICSID arbitration.

3.3 What Chinese investors and government shall do? As a “big player in the world’s economy and a leading magnet for foreign direct investment,”161 Chinese

investors seem to be reluctant in access to international arbitration when investments are impaired by the

host state, as reflected by the divergence between the numbers of investor-state arbitration cases and the

huge amount of overseas investment. Practitioners in King & Wood, a Chinese leading law firm, released

some articles to discuss the legal issues to apply BITs to protect Chinese overseas investment. 162 Houthoff

Buruma, a well-known Dutch law firm, also advocates Chinese investors to strategically use BITs to protect

overseas investment.163 Recently, Chinese investors, especially the large Chinese enterprises, have been

159 Stratis G. Georgilas, ‘Abuse of Rights’ in modern International Investment Arbitration: The Rule of Law revisited? ILA REGIONAL CONFERENCE 2013, GREECE (Cape Sounion, Athens, 29 - 31 August 2013): Imperium Juris: Governance, Trade, Resources, Parallel Panels IV Governance IV - Normative Governance Friday, 30 August 2013. 160 Voon, Tania S. and Mitchell, Andrew D. and Munro, James, Legal Responses to Corporate Manoeuvring in International Investment Arbitration (August 26, 2013). (2014) Journal of International Dispute Settlement, Forthcoming; U of Melbourne Legal Studies Research Paper No. 668. Available at SSRN: http://ssrn.com/abstract=2316440. 161 Michael J. Moser, treaty claims in China: do China’s BITs have teeth?, In Doing Business in China: resolving the challenges in today’s environment, 28.3 162 Jinxin Qiu and Yingmao Tang, BITs and foreign investments of Chinese enterprises, China law journal, October, 2010. 163 Houthoff Buruma: Protecting Chinese Investments in Africa and elsewhere in the world, available at: http://www.houthoff.com.

44

aware that BIT could be applicable in investment dispute, following the widespread news of Ping An case.

However, what shall Chinese investor do to protect investments under BITs regime?

The starting point is to take BIT into account at an early stage before making investment. Before investing

in states outsides of China, it is advisable for Chinese investor to review the existing BIT system between

China and the expected host state in due diligence stage to identify if, or to what extent, such BIT could

provide effective protection both in procedural and substantive ways. If not, investor may think

alternatively to make investments through vehicle in a third country, which is subject to, including but not

limited to, cost, foreign currency control and taxation. Such study shall be included in the feasibility

research of the investment thereby providing a visible picture for investors to understand the possible

remedies choices including BIT regime and their inherent advantages and disadvantages.

As discussed above, Chinese investor may face difficulty in applying BITs, especially China first generation

BITs, to obtain full protection in terms of dispute resolution and substantive. In some circumstances,

Chinese investors have to resort to the technique of corporate restructuring “deliberately” using BITs of

other states rather than China. Given that the restructuring mechanism is not always permissible according

to the ICSID cases, Chinese investor shall be prudent when deciding to adopt restructuring technique to

get access to ICSID arbitration. When restructuring business, investors and adviser shall carefully review

the BITs that is expected to apply to find that if there are clauses against restructuring making it impossible

to be accepted when it comes to jurisdiction battle before a tribunal, such as denial of benefits clause and

applicable law clause. In addition, ICSID cases shall be analyzed in order to understand principles that can

be concluded from tribunals’ reasoning process as instructions to ensure that business restructuring

complies with such principles and does not constitute an abuse of right.

It shall be noticed that BIT is concluded between sovereign states offering procedural and substantive

protection to investors making investor in one contracting state against wrongful acts of the other

contracting state. 164 In other words, investor can only apply BITs in a passive way in which the choice left

for investors is only to apply or not rather than deciding, revising and waiving any of the content in BIT.

Therefore it does matter that what kind of BIT is offered for investor to apply and whether the BIT offered

can provide substantive protections to investors. From this standpoint, governments as main players in

signing BITs are expected to conclude those BITs that comply with international best practices protecting

164 See Franck, Susan D., Foreign Direct Investment, Investment Treaty Arbitration and the Rule of Law. McGeorge Global Business and Development Law Journal, Vol. 19, p. 337, 2007. Available at SSRN: http://ssrn.com/abstract=882443.

45

best interests for investors, thereby giving investors more possibilities and conveniences to get access to

such regime. Modern BITs usually provide foreign investors with high levels of substantive and procedural

protection.165

Modernization of Chinese existing BITs ought to be the top priority for Chinese government under the BIT

regime. Chinese government needs to start renegotiation with contracting states to revise and modernize

the existing BITs concluded in 1980s and early 1990s, in order to make the BITs applicable. Chinese

government has started such work, for instance, new BITs with the Netherlands, Germany, and BLEU have

been modified and come into force replacing previous versions. As consequence, Ping An could institute

arbitration before ICSID under the new BIT between China and BLEU. However, such renew could not catch

up the trend of increasing Chinese overseas investment, in other words, numerous Chinese overseas

investments are still under exposure of the risk that such investments are not covered by modern BITs

providing for substantive or procedural protection. On one hand, that is the reason why Chinese investors

are advised to resort to business restructuring as to treaty-shopping; on the other hand, this diversity in

China BITs results in uncertainty of the outcome in BIT based cases. Chinese government has done

remarkable work both in concluding and modernizing BITs, however it seems that there is still a long way

to go to modernize Chinese BITs in accordance with international best practices. Another issue rose from

the Chinese government’s reservation when ratifying ICSID convention limiting the ICSID’s jurisdiction only

to the dispute arising from the amount of compensation for expropriation and nationalization. Such

reservation may give rise to jurisdiction battle in ICSID cases, thereby creating a huge obstacle for Chinese

investors to get access to ICSID. Probably it is time for Chinese government to reconsider it in an open and

practical way.

Conclusion Recently concluded China BITs, which are defined as second generation BITs, share similarities of BITs that

are world widely acceptable. This trend reflects evolution in investment protection mechanism in

emerging countries. China BITs and the legislation logic behind the BITs have been changing towards

explicit and comprehensive approach regarding the investor protection. On one hand, this trend is created

by Chinese government following demand of investors; on the other hand and more importantly, it is

motivated by the continuously strong performance of economy in China which gives rise to more overseas

165 Berger, Axel, The Politics of China’s Investment Treaty-Making Program (October 31, 2010). THE POLITICS OF INTERNATIONAL ECONOMIC LAW, pp. 162-185, T. Broude, A. Porges, M. Busch, eds., Cambridge University Press, 2011. Available at SSRN: http://ssrn.com/abstract=1838651.

46

investment than ever before. The new provisions-national treatment, comprehensive investor-state

arbitration, and indirect investment protection- level the playing field and are evidence of a huge step in

the direction of the economic system at the heart of international investment law: capitalism.166 Such

change will not only benefit for Chinese investors but also encourage the foreign investors to make more

investment in China.

Under the BITs regime, Chinese investors can expect to institute an arbitration as their last hope to seek

compensation against the host state when their investments are impaired. Following the Ping An case,

Chinese investor may be more open to the ICISD arbitration system thereby increasing the amount of cases

of investor-state arbitration which Chinese investor are involved, therefore, the influences of Chinese

investment treaties including BITs will be enhanced than ever before. Such trend is predictable in

accordance the huge amount of investments made by Chinese investors.

In some circumstance, Chinese investors need to think alternatively in a practical way when intending to

apply BITs as legal weapon to settle the dispute with the host state. Despite divergence from ICSID

tribunals’ decisions, business restructuring has been proved to be a practical and acceptable method to

choose appropriate BITs in order to get access better protection under BITs regime as long as some

principles are complied with. However, such business restructuring can be only provisional as

supplementary method, for long term, a comprehensive and reasonable BITs regime is needed.

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50

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