In recent years, with the growth in cross-border investment, investment arbitration cases between investors and host countries have likewise increased accordingly. According to the Special Update on Investor-State Dispute Settlement: Facts and Figures, published by the United Nations Conference on Trade and Development (UNCTAD) in November 2017, there were at least 35 investor-state dispute cases based on investment treaties or agreements between January and July 2017, causing the total number of Investment dispute cases to increase to 817, with a total of 144 countries being involved in one or more such Investment dispute cases.
Consistent with the development trends in international investment arbitration, and with China’s having become a country that both receives investment from abroad and invests abroad, investment dispute cases involving the central government and enterprises have also been gradually trending upwards in recent years. According to figures released by the International Centre for Settlement of Investment Disputes (ICSID), since 2007, a total of six Chinese parties have instituted investment arbitration with ICSID against foreign governments. Additionally, in 2011, 2014 and 2017, the ICSID accepted investment arbitration cases instituted by Ekran Berhand of Malaysia, Ansung Housing of South Korea and Hela Schwarz of Germany, respectively, against the central government.
In contrast to commercial disputes between enterprises, an investor will generally not enter into a dedicated agreement for the protection of its investment with a host country’s government, but requisitioning, nationalization or discriminatory treatment by the host country’s government will usually result in the investor incurring a major loss. For example, in Ping An Bank v Belgian government (ICSID), Ping An Life Insurance Company of China Ltd and Ping An Insurance (Group) Company of China Ltd (China Ping An) acquired shares in Fortis Group for consideration exceeding €2 billion (US$2.3 billion) in total between 2007 and 2018.
In 2008, battered by the global financial crisis, Fortis Group’s banking business suffered a serious liquidity problem. Starting in September 2008, the Belgian government injected more than €4.7 billion in capital into Fortis Bank, a subsidiary of the Fortis Group, acquiring close to 50% of its equity, ultimately transferring 75% of Fortis Bank’s shares to BNP Paribas in May 2009. This intervention caused a major shrinkage in China Ping An’s investment. At the end of 2008, China Ping An allocated RMB22.8 billion (US$3.3 billion) to an impairment reserve for its Fortis stock investment.
When faced with losses arising due to an act of the host country’s government, as mentioned above, many investors will seek relief in accordance with the investment protection provisions of international treaties, multilateral agreements, bilateral investment treaties (BITs), etc. According to UNCTAD statistics, approximately 80% of the investment dispute cases in 2017 were instituted pursuant to a BIT, with the remaining 20% instituted on the basis of a treaty with investment provisions (TIP).
Looked at from the perspective of the institutions that accepted the investment disputes and the applicable rules, as at 31 July 2017, 61% of the cases were accepted by the ICSID pursuant to the ICSID Convention or ICSID additional facility rules; the UNCITRAL arbitration rules ranked second percentage-wise; and third were the arbitration rules of the Stockholm Chamber of Commerce (SCC).
Generally speaking, the remedies available to an investor facing requisitioning, nationalization, discriminatory treatment, etc., by the host country are determined mainly by the provisions of an international treaty, multilateral agreement or BIT. In the absence of an interstate agreement, treaty or convention, an investor will usually be unable to obtain effective relief. However, where there is such an interstate agreement, treaty or convention, the investor’s choice of dispute resolution institution and rules will usually be limited by such agreement, treaty or convention.
A research report for 2017-2018 on Chinese enterprises that have “gone global” reveals that approximately 40% of enterprises under the central government and state-owned enterprises have encountered host country-related risks, the most important of such being inadequacy of the laws of the host country, insufficient legal protection for foreign investors and inability to obtain relief after an investment has given rise to a dispute. A large majority of the enterprises that were interviewed additionally believed that a new international investment dispute resolution institution, the establishment of which is led by China, was necessary. (The research was jointly sponsored by the China Corporate Legal Affairs Research Centre, LexisNexis and Thomas Tang’s legal team in Junzejun Law Offices.)
With a view to addressing the growth trends in international investment arbitration and satisfying the demand of Chinese enterprises for a new international investment dispute resolution mechanism, the China International Economic and Trade Arbitration Commission issued the rules of the China International Economic and Trade Arbitration Commission for the Arbitration of International Investment Disputes (for Trial Implementation), or the CIETAC investment arbitration rules, in 2017. The rules borrow from mature domestic and foreign systems and practice, providing flexible and efficient arrangements in terms of the scope of cases accepted, procedure design, open hearings, panel of arbitrators, submission of written opinions by third parties, consolidation of arbitration, third-party assistance, combination of arbitration and mediation, early dismissal, period for an award, emergency arbitrator, etc.
The provisions of the CIETAC investment arbitration rules on procedure design provide a more flexible choice of self-actuated remedies. Article 2 of the CIETAC investment arbitration rules concerning the scope of cases accepted recognizes that “the arbitration agreement for the resolution of an international dispute between parties may be specified in a contract, treaty, law, regulation or other document”. In this way, in addition to the traditional investment protection relief mechanisms specified in interstate treaties or agreements, an enterprise may also enter into an investment protection contract or other document with the government of the host country, setting different investment protection relief mechanisms.
Pursuant to the CIETAC investment arbitration rules, an enterprise may further design the arbitration procedure and rules. Item (3) of article 3, “Application of the rules”, specifies that, “where the parties provide for referral of international investment disputes to CIETAC for arbitration pursuant to these rules but with revisions to relevant provisions hereof, or provide for the application of other arbitration rules, such provisions shall be complied with …”
This mechanism for flexible arrangements is of great significance to Chinese enterprises that are going global. On the one hand, the traditional investment arbitration mechanisms of the ICSID, SCC and the International Court of Arbitration of the International Chamber of Commerce (ICC) present certain issues for Chinese enterprises, such as a long period, high costs, unfamiliarity with procedures, difficulty in co-ordinating legal resources, etc., creating obstacles to their use.
In contrast, the CIETAC investment arbitration rules permit an enterprise and the government of the host country to specify, design and revise the procedural rules in a contract or other document, while also setting a period of six months for the hearing, thus not only enhancing flexibility but also ensuring efficiency. Costs are also more affordable than those of other arbitration institutions.
On the other hand, with the advancement of the Belt and Road Initiative, the host countries that Chinese enterprises will be dealing with may be countries in which the development of the rule of law is relatively weak, that have a different legal system, that have not entered into a BIT with the central government, or that may not be a signatory to an international convention to which the central government is a signatory. Under such a circumstance, the CIETAC investment arbitration rules offer to enterprises relief mechanisms that they can themselves design, enhancing the predictability and certainty of remedies.
In short, the CIETAC investment arbitration rules, while plugging a hole in Chinese arbitration in the international investment arbitration field, provide a set of flexible relief mechanisms that investors can themselves design, thus providing a solid backstop for enterprises “going global” and implementation of the state’s Belt and Road strategy.
Thomas Tang is a CIETAC arbitrator and a partner at JunZeJun Law Offices