Recent decades have been marked by China\u2019s economic, military and diplomatic rise, and its increasing integration into the international order.[1]<\/a> China\u2019s accession to the World Trade Organization (WTO<\/span>) and its expanded web of international investment agreements (IIAs) effectively illustrate the country\u2019s enhanced immersion in the fields of international trade and investment\u2014two branches of international economic law greatly shaped by Western ideologies.<\/p>\n Regarding foreign investment in particular, China has sustained robust inbound as well as outbound flows of foreign direct investment (FDI<\/span>).[2]<\/a> It has concluded 139 bilateral investment treaties (BITs) and 21 treaties with investment provisions, such as trade agreements including investment chapters.[3]<\/a> On the one hand, expanding its web of IIAs is an effort to promote the view that China is a legally secure investment destination, with a foreign investment framework that is aligned with international investment law norms.[4]<\/a> On the other hand, China has sought to establish an international legal framework to protect outward Chinese investments following the adoption of the \u201cGoing Global\u201d strategy, aimed at encouraging Chinese companies to invest abroad.[5]<\/a> The web of Chinese IIAs reflects its gradual espousal of international norms aimed at promoting and protecting cross-border investments.<\/p>\n China\u2019s gradually changed stance toward investor\u2013state dispute settlement (ISDS<\/span>) is one of the best illustrations in this respect.[4] <\/a>[5]<\/a><\/a>\u00a0[6]<\/a> This note sheds light on China\u2019s increased appearance in ISDS cases, either as home or host state.<\/p>\n Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty. Therefore, its earliest BITs, such as the 1982 China\u2013Sweden BIT<\/span>, included state\u2013state dispute settlement only. In subsequent BITs, such as the 1987 China\u2013Sri Lanka BIT, international arbitration was accepted as a method to resolve investment disputes, but only those regarding the amount of compensation resulting from expropriation; all other disputes would be subject to the competent court of the host state. Some of the BITs, such as the 1987 China\u2013Japan BIT, allow international arbitration of any dispute subject to specific consent by both parties.<\/p>\n Only in late 1990s China changed its approach more deeply, by providing foreign investors with unobstructed access to international arbitration. Treaties such as the 1998 China\u2013Barbados BIT allow foreign investors recourse to international arbitration to resolve any investment dispute that could not be amicably settled within six months. Since then, the liberal approach has continued, and most of China\u2019s recent BITs, such as the 2011 China\u2013Uzbekistan BIT and the 2013 China\u2013Tanzania BIT, include comprehensive dispute settlement clauses.<\/p>\n It is however surprising to observe China\u2019s seemingly rare involvement in ISDS mechanism either as host or home state, compared to its increased role in inbound and outbound investments and its expanded web of IIAs. Based on publicly available information, Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011. On the one hand, some have suggested China\u2019s lack of affinity for international arbitration and its preference for settling disputes informally through diplomatic consultations possible reasons for the low number of cases initiated by China as an investor.<\/a>[5]<\/a><\/a>\u00a0[6]<\/a>\u00a0On the other hand, several studies have identified some of the possible reasons for the rareness of ISDS cases against China. Among these reasons are foreign investors\u2019 concerns over endangering future dealings with China, the long-held view that only disputes involving the amount of compensation resulting from expropriation can be arbitrated under most Chinese BITs and the opinion that foreign investors could gain more benefits through negotiations.[7]<\/a><\/p>\n The next sections provide an overview of the five known claims by Chinese investors and three known claims against China initiated in the past decade.[8]<\/a><\/p>\n In the first known ISDS case involving China as home state, the claimant indirectly owned TSG del Per\u00fa S.A.C., a Peruvian company engaged in the manufacturing of fishmeal and their exportation to Asian markets. The investor initiated arbitration under the 1994 China\u2013Peru BIT alleging that measures adopted by Peru\u2019s national tax authority following a 2004 audit resulted in indirect expropriation of his investment in TSG and violated fair and equitable treatment and full protection and security.<\/p>\n Peru challenged the tribunal\u2019s jurisdiction based on the limited consent to arbitration under the BIT, but the tribunal affirmed its jurisdiction to entertain the expropriation claim. In its reasoning, the tribunal stated that the words \u201cinvolving the amount of compensation for expropriation\u201d in the dispute settlement clause of the BIT must be interpreted as including \u201cnot only the mere determination of the amount but also other issues that are normally inherent in an expropriation\u201d (para. 188). It stated that concluding otherwise would undermine the arbitration clause, which precludes the possibility of arbitration if the investor has already submitted the other issues to a competent court of the host state.<\/p>\n In its final award, the tribunal found in favour of the investor, holding that the measures taken by Peru\u2019s tax authority and upheld by the Peruvian tax court were arbitrary and tantamount to expropriation, as they substantially frustrated the operational capacity of the business.<\/p>\n Peru applied for annulment. The committee found in favour of the investor, holding that the tribunal did not exceed its power by interpreting the dispute settlement clause of BIT widely so as to include issues that are generally involved in an expropriation, and that the tribunal interpreted the phrase \u201cdispute involving the amount of compensation for expropriation\u201d in the overall context of the dispute settlement clause (para. 98).<\/p>\n In a claim brought under the 1991 China\u2013Mongolia BIT, three Chinese investors challenged Mongolia\u2019s decision to cancel their mining license regarding the Tumurtei iron ore mine. This case was concluded on June 30, 2017, and the award is not public. According to Mongolia\u2019s counsel, the tribunal dismissed the case on jurisdictional grounds as the dispute settlement clause of the BIT confines jurisdiction to \u201cdisputes which involve the amount of compensation for expropriation\u201d only.[11]<\/a> It is thus apparent that the tribunal has adopted the narrow interpretation towards China\u2019s conventional dispute settlement clause, which differs from the broad approach taken by Tza Yap Shum<\/em> tribunal affirmed by the annulment committee.<\/p>\n Under the 1986 and 2009 BITs between China and the Belgian\u2013Luxembourg Economic Union (BLEU), the Chinese investors alleged that the corporate rescue plans implemented by Belgium with respect to Fortis Bank SA\/NV (FBB) expropriated their investment in the Fortis Group. The fundamental difference between the dispute settlement clauses of the two BITs is that the 1986 BIT restricted arbitration to disputes arising from the amount of compensation for expropriation, while the 2009 BIT allows investors to submit disputes either to the competent court of the host state or to the International Centre for Settlement of Investment Disputes (ICSID<\/span>), at the investor\u2019s choice. The claimants submitted the dispute to ICSID, relying on the procedural remedy of the 2009 BIT as well as the substantive provisions of the 1986 BIT.<\/p>\n Accepting Belgium\u2019s temporal objection to jurisdiction, the tribunal decided that \u201cthe more extensive remedies under the 2009 BIT\u201d are not available to \u201cpre-existing disputes that had been notified under the 1986 BIT, but not yet subject to arbitral or judicial process\u201d (para. 231). In the tribunal\u2019s point of view, the expansive interpretation suggested by the claimants would provide investors with an opportunity to employ the broad dispute resolution clause included in the 2009 BIT to bring claims notified under the 1986 BIT, which limited the substantive scope of dispute settlement.<\/p>\n The Macao-based investor Sanum alleged that taxes imposed by Laos deprived her investment in Laos\u2019 gaming industry of several standards of protection guaranteed by the 1993 China\u2013Laos BIT. Rejecting the jurisdictional objections by Laos, the tribunal found that the BIT applies to Macao and that jurisdiction covered the investor\u2019s expropriation claims, following Tza Yap Shum<\/em>\u2019s broad interpretation of the dispute settlement clause.<\/p>\n Laos successfully challenged the award on jurisdiction before the Singaporean High Court, which rejected the applicability of the BIT to Macao and the tribunal\u2019s broad interpretation of the treaty\u2019s dispute settlement clause. However, the Singapore Court of Appeal overturned the High Court\u2019s decision, finding in favour of Sanum. The investor and Laos eventually agreed to an amicable settlement, but the investor yet again initiated an arbitration proceeding before ICSID challenging the conduct of Laos after the settlement. [11]<\/a>\u00a0The case is still pending.[14]<\/a><\/p>\n Chinese state-owned enterprise Beijing Urban Construction Group Co. Ltd. (BUCG) alleged under the 2002 China\u2013Yemen BIT that Yemen unlawfully deprived it of its investment in constructing a portion of new international terminal at Sana\u2019s International Airport. The tribunal rejected Yemen\u2019s objection that BUCG was a state agent, having found that in the relevant fact-specific context it acted as a commercial contractor, not discharging governmental functions. Yemen also objected to the tribunal\u2019s subject matter jurisdiction based on a narrow interpretation of the dispute settlement clause of the BIT. However, the tribunal dismissed the objection, considering that the words \u201crelating to the amount of compensation for expropriation\u201d in the dispute settlement clause must be construed to \u201cinclude disputes relating to whether or not an expropriation has occurred\u201d (para. 87) as it promotes the BIT\u2019s overall purpose and objective. This case is currently at its merit phase and the decision is pending.<\/p>\n The investor brought the first known case against China, under the 1990 Malaysia\u2013China BIT, to challenge the revocation of its right of leasehold land by local authorities of the Hainan Special Economic Zone on the grounds that the investor had failed to develop the land as stipulated in the pertinent local legislation. The parties agreed to suspend the case, which did not reach the award stage.<\/p>\n Ansung Housing Co., Ltd, a privately-owned company incorporated under the laws of the Republic of Korea, brought the second case against China, under the 2007 China\u2013Korea BIT. Ansung alleged that measures by Chinese local governments violated the investment agreement to develop a golf course and related facilities including luxury condominiums and a clubhouse.<\/p>\n China argued that Ansung\u2019s claims were time-barred as the investor initiated arbitration more than three years after acquiring knowledge of the loss or damage. Finding in favour of China, the tribunal emphasised that the \u201climitation period begins with an investor\u2019s first knowledge of the fact that it has incurred loss or damage, not with the date on which it gains knowledge of the quantum of that loss or damage\u201d (para. 110).<\/p>\n To save its time-barred claim, Ansung invoked the most-favoured-nation (MFN<\/span>) clause of the BIT, pointing to other Chinese BITs that do not provide for three-year limitation periods. However, the tribunal found that the MFN clause did not extend to a state\u2019s consent to arbitrate with investors or to the temporal limitation period for investor\u2013state arbitration. It also pointed out that the BIT offers specific MFN protection in relation to an investor\u2019s \u201caccess to courts of justice and administrative tribunals and authorities,\u201d without making any reference to international dispute resolution. Accordingly, the tribunal dismissed the case for lack of jurisdiction.<\/p>\n On June 21, 2017, a German-owned investor initiated a third known claim against China, under the China\u2013Germany BIT. The notice of arbitration is not public, and information about the case is scarce.<\/p>\n Compared to China\u2019s robust FDI flows, the number of ISDS cases in which it is involved as home or host state\u2014all of them initiated in the last decade\u2014is considerably low. Therefore, it is difficult to make definite observations regarding ISDS cases involving China.<\/p>\n Almost all ISDS cases already decided denote the hurdle that Chinese investors must overcome when bringing claims under first-generation BITs that provided for limited consent to international arbitration. On the one hand, the broad interpretation adopted in Tza Yap Shum, <\/em>followed in Sanum <\/em>and Beijing Urban Construction<\/em>, rebuffed the view that the restrictive dispute resolution clause found in China\u2019s early BITs limits arbitration to disputes regarding the amount of compensation in case of expropriation, providing Chinese investors with more room to arbitrate expropriation claims. On the other hand, narrow interpretations such as the one adopted in Heilongjiang <\/em>could limit access to arbitration to cases in which the occurrence of expropriation has been already declared or determined.<\/p>\n As Chinese FDI outflows increase, Chinese investors may increasingly rely on broad arbitration clauses to protect their investment-related interests, leading to more cases like Ping An<\/em>. At the same time, the success in defending itself in cases such as Ansung <\/em>could boost China\u2019s confidence in the ISDS mechanism also as a respondent host state.<\/p>\n The ISDS regime has been under fire, among other reasons, due to its impact on states\u2019 right to regulate in the public interest.[19]<\/a> Several states have been calling for ISDS reform, by creating appeals mechanisms or a permanent international investment court, by emphasizing state\u2013state dispute settlement or by turning to alternative dispute resolution methods.[20]<\/a> In this context, it remains to be seen whether China would support reform initiatives or whether it would be more inclined to maintain the existing regime.<\/p>\n Dilini Pathirana is attorney-at-Law (Sri Lanka); lecturer, Faculty of Law, University of Colombo; and Ph.D. candidate in international law, Faculty of International Law, China University of Political Science and Law, Beijing, China.<\/p>\n [1]<\/a> Ikenberry, G. J. (2008). The rise of China and the future of the West. Foreign Affairs<\/em>, 87(1). Retrieved from https:\/\/www.foreignaffairs.com\/articles\/asia\/2008-01-01\/rise-china-and-future-west<\/a>. Huisken, R. (Ed.). (2009). Rising China: power and reassurance<\/em>. Canberra: ANU E Press.<\/p>\n [2]<\/a> United Nations Conference on Trade and Development (UNCTAD<\/span>). (2017). World investment report 2017: Investment and the digital economy<\/em>. New York and Geneva: United Nations. Retrieved from http:\/\/UNCTAD<\/span>.org\/en\/PublicationsLibrary\/wir2017_en.pdf<\/a>.<\/p>\n [3]<\/a> UNCTAD. (2017). International investment agreements navigator<\/em>. Retrieved from http:\/\/investmentpolicyhub.unctad.org\/IIA<\/span>\/CountryBits\/42#iiaInnerMenu<\/a>.<\/p>\n [4]<\/a> Schill, S. W. (2007). Tearing down the Great Wall: The new generation investment treaties of the People\u2019s Republic of China. Cardozo Journal of International and Comparative Law<\/em>, 15<\/em>(1), 73 et seq.<\/p>\n [5]<\/a> Berger, A. (2008). China\u2019s new bilateral investment treaty programme: Substance, rational and implications for international investment law making<\/em>. Retrieved from https:\/\/www.die gdi.de\/uploads\/media\/Berger_ChineseBITs.pdf.<\/p>\n [6]<\/a> Qingjiang, K. (2003). Bilateral Investment Treaties: The Chinese approach and practice. In K. Sik, M. Masahiro, M. Pinto & S. Subedi (Eds.), Asian Yearbook of International Law 1998\/1999<\/em>. Leiden, Boston: Martinus Nijhoff Publishers; Shan, W., & Su, J. (Eds.). (2015). China and international investment law: twenty years of ICSID membership<\/em>. Leiden, Boston: Brill Nijhoff.<\/p>\n [7]<\/a> Trackman, L. (2015). Geopolitics, China and investor\u2013state Arbitration. In L. Toohey, C. Picker & J. Greenacre (Eds.). China in the international economic order: New directions and changing paradigms<\/em>. New York: Cambridge University Press.<\/p>\n [8]<\/a> Philip Morris Asia Limited<\/em> v. The Commonwealth of Australia<\/em>, a case initiated under the 1993 Hong Kong\u2013Australia BIT, is not covered by this article.<\/p>\n [9]<\/a> Se\u00f1or Tza Yap Shum v. The Republic of Peru, ICSID Case No. ARB\/07\/6. Retrieved from https:\/\/www.italaw.com\/cases\/1126<\/a>.<\/p>\n [10]<\/a> China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd., and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v. Mongolia, UNCITRAL<\/span>, PCA<\/span> Case No. 2010-20. Retrieved from https:\/\/www.italaw.com\/cases\/279<\/a>.<\/p>\n [11]<\/a> Herbert Smith Freehills. (2017). China-related investment arbitrations: three recent developments<\/em>.Retrieved from http:\/\/hsfnotes.com\/arbitration\/2017\/07\/17\/china-related-investment-arbitrations-three-recent-developments<\/a>.<\/p>\n [12]<\/a> Ping An Life Insurance Company, Limited and Ping An Insurance (Group) Company, Limited v. The Government of Belgium, ICSID Case No. ARB\/12\/29. Retrieved from https:\/\/www.italaw.com\/cases\/3088<\/a>.<\/p>\n [13]<\/a> Sanum Investments Limited v. Lao People\u2019s Democratic Republic, UNCITRAL, PCA Case No. 2013-13. Retrieved from https:\/\/www.italaw.com\/cases\/2050<\/a>.<\/p>\n [14]<\/a> Sanum Investments Limited v. Lao People\u2019s Democratic Republic, ICSID Case No. ADHOC\/17\/1. Retrieved from https:\/\/www.italaw.com\/cases\/5776<\/a>.<\/p>\n [15]<\/a> Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No. ARB\/14\/30. Retrieved from https:\/\/www.italaw.com\/cases\/5904<\/a>.<\/p>\n [16]<\/a> Ekran Berhad v. People’s Republic of China, ICSID Case No. ARB\/11\/15. Retrieved from https:\/\/icsid.worldbank.org\/en\/Pages\/cases\/casedetail.aspx?CaseNo=ARB\/11\/15<\/a>.<\/p>\n [17]<\/a> Ansung Housing Co., Ltd. v. People’s Republic of China, ICSID Case No. ARB\/14\/25. Retrieved from https:\/\/www.italaw.com\/cases\/5391<\/a>.<\/p>\n [18]<\/a> Hela Schwarz GmbH v. People’s Republic of China, ICSID Case No. ARB\/17\/19. Retrieved from https:\/\/www.italaw.com\/cases\/5973<\/a>.<\/p>\n [19]<\/a> See, for example, Public Statement on the International Investment Regime, August 31, 2010. Retrieved from http:\/\/www.osgoode.yorku.ca\/public-statement-international-investment-regime-31-august-2010<\/a>; Waibel, M., Kaushal, A., Chung, K.-H., & Balchin, C. (Eds.). (2010). The backlash against investment arbitration: Perceptions and reality<\/em>. Austin & Alphen aan den Rijn: Kluwer Law International.<\/p>\n [20]<\/a> UNCTAD. (2013, June). Reform of investor-state dispute settlement: in search of a roadmap. IIA Issues Note<\/em>, 2<\/em>. Retrieved from http:\/\/unctad.org\/en\/PublicationsLibrary\/webdiaepcb2013d4_en.pdf<\/a>.<\/p>\nChina and the ISDS mechanism<\/h2>\n
ISDS cases involving China as home state<\/h1>\n
1. Tza Yap Shum v. Peru[9]<\/a><\/h3>\n
2. China Heilongjiang v. Mongolia[10]<\/a><\/h3>\n
3. Ping An Life Insurance v. Belgium[12]<\/a><\/h3>\n
4. Sanum Investments v. Lao People\u2019s Democratic Republic[13]<\/a><\/h3>\n
5. Beijing Urban Construction v. Yemen[15]<\/a><\/h3>\n
ISDS cases involving China as host state<\/h1>\n
1. Ekran Berhad v. China[16]<\/a><\/h3>\n
2. Ansung Housing v. China[17]<\/a><\/h3>\n
3. Hela Schwarz v. China[18]<\/a><\/h3>\n
Final remarks on China\u2019s appearance in ISDS cases<\/h1>\n
\nAuthor<\/h3>\n
\nNotes<\/h3>\n