ICSID arbitration and protecting outbound investments

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The International Centre for Settlement of Investment Disputes (ICSID) was established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October 1966.

As of 20 January 2013, the ICSID had 158 signatory states, and 147 contracting states had ratified the convention. China ratified in 1993.

DD_ICSIDThe purpose of the ICSID is to provide facilities for the conciliation and arbitration of international investment disputes. The ICSID does not conciliate or arbitrate the disputes, but provides the institutional facility and procedural rules for independent conciliation commissions and arbitral tribunals constituted in each case.

According to the UN Conference on Trade and Development’s report entitled Recent Developments in Investor-State Dispute Settlement, published in April this year, the number of investment disputes brought to international arbitration reached a peak in 2012, with 62 new cases filed.

This is the highest number of known treaty-based disputes ever initiated in one year, confirming the increasing tendency of foreign investors to resort to investor-state arbitration. In addition, in 70% of the new cases the respondents were developing or transition economies.

Despite the fact that only 10% of the cases registered in 2012 under the ICSID convention affected a party from the Southeast Asia-Pacific region, since China has witnessed a significant increase in outbound investments into various parts of the world, the prospects concerning possible claims made by Chinese parties in order to protect their investments against government interference or expropriation are becoming greater.

Ping An Life Insurance, China’s second-largest insurer, on September 2012 launched the first investment arbitration claim against Belgium with the ICSID. The insurer’s claim is an attempt to recoup the investment loss related to its shareholding in the financial group Fortis, a bank that was nationalised and sold off by the Belgian government in the aftermath of the 2008 global financial crisis. Ping An Life invested RMB24 billion (US$3.9 billion) in the bank and, according to an estimation from analysts, the Chinese company might have lost 90% of its total investment. The current status of the proceeding is pending.

On the other hand, on 24 May 2011, the secretary-general of the ICSID registered an arbitration request submitted by Ekran Berhad against China. The case involved a land lease investment worth US$6 million in Hainan province by one of Ekran’s subsidiaries, Sino-Malaysia Culture & Art (SMCAC). That company had the rights to 900 hectares of land for development in China through a land lease agreement – 70-year leasehold from May 1993, expiring in 2063 – with the local government of Hainan province. SMCAC’s right of leasehold land was revoked by the local authorities in 2004 on the grounds that the investor had failed to develop the land as stipulated under local legislation.

Pursuant to China’s rules to curb hoarding and speculation, when the land is left idle for more than one year and less than two years, 20% of the lease fees for land use may be collected as an idle land fee; when the land is kept idle for more than two years, the right to use the land shall be taken back without any compensation, in order to be reallocated and used. On 16 May 2013, the parties filed a request for the discontinuance of the proceeding, pursuant to ICSID arbitration rule 43.1.

China has signed more than 120 bilateral investment treaties (BITs) according to the UN, some of which provide investment protection, consequently giving the Chinese investor a competitive advantage over investors who lack BITs.

Another reason, and maybe the most important one, for encouraging investment arbitrations launched by Chinese parties is that the investment arbitration enforceability is higher than a typical international commercial arbitration award, which is usually governed by the New York Convention of 1958. Although the convention strongly favours enforcement of arbitration awards, it does provide some grounds for courts to review and set aside awards.

However, enforcement of an ICSID award is governed by the ICSID convention. Unlike the New York convention, the ICSID provides that states shall recognise and enforce ICSID awards as final, non-appealable judgments of their courts, without review of any kind. In addition, the ICSID provides for its own internal, post-award review regime, which is mandatory and exclusive.

Therefore, due to the importance of BITs in foreign investment, it is necessary for Chinese investors to know the scope of this tool in order to protect their interests when investing abroad.

Investors need to take into account that, in spite of the fact that there may be no BIT between China and a host country in which they would like to invest, there is still opportunity for being protected via BITs. In that case, they may first invest in a country that provides BIT protection with Chinese investment, as well as with the host country they want to invest in.

The author, Tony Zhang, is senior partner at Co-Effort Law Firm, which is listed as legal counsel for the Ministry of Commerce in World Trade Organisation and regional trade agreement dispute resolution issues. Zhang specialises in international trade, international investment, maritime and admiralty law, and international arbitration.