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Investment Treaty Practice of China,
Japan and Korea: A Comparative
Analysis of Standards of Protection and
Investor-State Dispute Settlement
Provisions in International Investment
Agreements
Hi-Taek Shin
Year 2012
Official citation
Hi-Taek Shin, Investment Treaty Practice of China, Japan and Korea,
in COLLECTED COURSES OF THE INTERNATIONAL ACADEMY FOR ARBITRATION LAW,
Year 2012, Volume 1, at 1 (2015)
Hi-Taek Shin
Professor of Law and Director of Center for International Economic and
Business Law, Seoul National University School of Law. Yale Law School,
LL.M., J.S.D., Seoul National University, LL.B., LL.M. The author wishes to
express his deep appreciation to H. A. Kang and S. H. Cho for their
invaluable research assistance in the initial preparation of the lectures, and
Homin Lee for helping me convert the text of the lectures into this
publication. The many discussions I had with Homin throughout the
conversion process have significantly enriched the content of this
publication.
Preface
In July 2012, I had the privilege of offering a special course titled,
“Investment Treaty Practice of China, Japan and Korea,” at the Arbitration
Academy in Paris. The course was composed of five lectures over four days.
This book is an outcome of those lectures and the lively exchange of views and
ideas I engaged in with the bright future arbitration lawyers and scholars who
attended the 2012 Arbitration Academy.
The special lectures were intended to present a comparative analysis
of the investment treaty practices of three of Asia’s largest economies: the
People’s Republic of China (China), Japan, and the Republic of Korea (Korea).
In planning the lectures, I attempted to deliver an overview of key substantive
and procedural protection features typically embedded in contemporary
international investment agreements (IIAs) and how China, Japan, and Korea
have adapted such standard features to accommodate their specific needs
and circumstances.
A comparative examination of the specific treaty
provisions adopted by these three East Asian countries should provide insight
into key substantive protections, dispute settlement mechanisms in IIAs in
general, and the particular legal implications of such protections as they are
practiced by the three major East Asian economies. As such, this discussion is
not intended to be a comprehensive treatise or textbook covering all aspects
of China, Japan, and Korea’s IIAs. Rather, it will focus on some of the key
provisions intended to grant substantive protections to foreign investors, such
as protection against discrimination (under national treatment and mostfavored nation treatment standards), protection against expropriation,
provision of fair and equitable treatment, and the investor-state dispute
settlement mechanisms through which an investor may realize the
protections afforded by these IIAs.
The reasoning behind the selection of these three Asian economies
extends beyond their geographical proximity. First, China, Japan, and Korea
have become major participants in the cross-border investment process.
Based on their successful economic development during the past few decades
and current established status as key players in the global economy, further
1
expansion of their respective and collective roles in the realm of international
investment is not difficult to envision.
An important, interrelated aspect of such economic development is
the evolution of each state’s international investment policy. Recent Chinese
IIAs capture the ambivalence of China’s economic policy—on the one hand,
fully acknowledging the need to promote inward foreign investment and
recognizing the need to protect its own investors overseas, but on the other
hand, simultaneously hesitating to make what it considers to be currently
unrealistic commitments in exchange for corresponding economic benefits.
As a traditional capital exporter, Japan has consistently shown a willingness to
offer a significant amount of protection to foreign investors, in the interest of
maximizing the level of comfort offered in return to its citizens investing
overseas.
In contrast to China and Japan, Korea has experienced a
fundamental change in foreign investment policy, as it has shifted from being
a net-capital importer to a net-capital exporter over the course of several
decades. Analyzing each country’s distinctive investment policy, each
occupying a different position along the international investment policy
spectrum, will help us develop a more comprehensive understanding of the
broader global investment landscape. Moreover, the IIAs of these three East
Asian states address issues commonly found in most IIAs. A comparative
overview of key IIA provisions, such as those relating to expropriation and
dispute settlement, and how each state has responded to these issues is, to a
large extent, reflective of various divergent investment practice tendencies of
states in different stages of economic development.
Second, China, Japan, and Korea have been actively involved in
enriching the global network of IIAs. In recent years, each of the three states
has shown increasing enthusiasm in negotiating bilateral investment treaties
(BITs) and free-trade agreements (FTAs, also referred to as economic
partnership agreements, or EPAs), which typically include detailed investment
chapters. In terms of the absolute number of BITs it has ratified, for example,
China ranks second only to Germany. In 2013, Japan joined negotiations for
the Trans-Pacific Partnership, which includes comprehensive investment rules.
Korea, which has signed 93 BITs to date, concluded an FTA with the United
2
States in 2007 that includes a comprehensive investment chapter. Further,
the three states have not only concluded BITs between each other, but on
May 13, 2012, they signed a trilateral investment treaty among themselves
that entered into force on May 17, 2014.
While the number of investment arbitrations filed by foreign investors
against these three countries or by their own investors against other states
has thus far been limited, a rise in the number of direct and indirect
investment dispute claims involving China, Japan, or Korea is most likely
inevitable, given the continuous increase in foreign direct investment inflows
into and outflows from the Northeast Asian region. From a practitioner’s
standpoint, developing a firm understanding of procedural and substantive
protections and their legal implications relating to the IIAs of China, Japan,
and Korea will provide guidance in resolving complexities embedded in crossborder transactions involving them as host states or involving their investors.
3
I. Introduction
Before
delving
into
specific
legal
provisions
and
ensuing
interpretations of international investment law, this section will describe the
general economic landscape (e.g., GDP, trends in FDI inflows and outflows) in
China, Japan, and Korea, respectively, and examine each state’s recent past
and current investing environment in an attempt to provide a better
understanding of the context in which each investing participant operates.
Macroeconomic Status of China, Japan and Korea
A preliminary look at the population and GDP of each of these three
East Asian states should provide a general sense of the degree to which each
state contributes to the global economy. As of 2013, China’s total population
exceeded 1.38 billion,1 and its GDP at current prices and per capita GDP
amounted to $9.1 trillion and over $6,000, respectively. 2 According to
statistics released by the World Trade Organization (WTO), China’s
merchandise exports and imports were valued in 2013 at US$2.209 trillion and
US$1.949 trillion, respectively.3 Japan is one of the ten most populous
countries in the world, with more than 127 million4 people, and its GDP and
per capita GDP have been measured at approximately US$4.9 trillion and
US$39,000, respectively.5 Its export and import of merchandise reached
US$715 billion and US$833 billion in 2013.6 Korea stands with a population
over 50 million,7 a GDP of US$1.3 trillion, and a per capita GDP of US$26,000.8
The value of its exports of merchandise in 2013 approached US$560 billion,
with imports approaching US$516 billion.9 From a comparative perspective,
International Monetary Fund statistics show that China’s GDP has surpassed
Japan’s, and China currently ranks as the second largest economy in the world.
1
U.N. Department of Economic and Social Affairs, Population Division, World Population
Prospects: The 2012 Revision, Key Findings and Advance Tables, at 9, Working Paper No.
ESA/P/WP.227 (2013) [hereinafter World Population Prospects].
2
U.N. Statistics Division, National Accounts Main Aggregates Database (2014),
http://unstats.un.org/unsd/snaama/resCountry.asp (last updated Dec. 2014).
3
Trade Profiles, WORLD TRADE ORGANIZATION,
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=CN
,KR,JP (last updated Sept. 2014).
4
World Population Prospects at 11.
5
National Accounts Main Aggregates Database.
6
Trade Profiles, WORLD TRADE ORGANIZATION.
7
World Population Prospects at 12.
8
National Accounts Main Aggregates Database.
9
Trade Profiles, WORLD TRADE ORGANIZATION.
4
Japan stands firmly in third, and Korea occupies the thirteenth slot. With the
exception of India, these three neighbors are the only Asian countries among
the world’s top fifteen economies as of 2014.10
In May 2012, the then-leaders of the three economies, Chinese
Premier Wen Jiabao, Japanese Prime Minister Yoshihiko Noda, and Korean
President Lee Myung-bak, convened in Beijing and announced the
commencement of trilateral free trade negotiations among their states, in an
attempt to eventually construct one of the world’s largest free trade zones.
Wen expressed that a trilateral free-trade agreement would “unleash [the]
economic vitality of the region and boost economic integration.”11 Their
signing of a trilateral investment agreement on May 13, 2012, and the treaty’s
entry into force on May 17, 2014, represents a significant leap forward toward
increased economic integration. The size of the combined market created by
the agreement may very well rival that of the EU and NAFTA regions.
FDI Inflows
A specific examination of statistics more directly relevant to the main
subject matter of this paper involves an analysis of data on FDI inflows and
outflows, the status of BITs/FTAs that each of the three states has entered
into, and the implications of such data on each state’s investment policy.
With regard to FDI inflows, the World Investment Report annually
released by the United Nations Conference on Trade and Development
(UNCTAD) shows that FDI into China has continually increased, making China
the world’s second-largest recipient of FDI behind only the United States. In
2013, FDI inflows into the United States and China reached US$188 billion and
US$124 billion, respectively.12 Furthermore, China is the top prospective
10
Int’l Monetary Fund, Report for Selected Countries and Subjects, World Economic
Outlook Database (April 2015).
11
Aaron Back, Toko Sekiguchi and Yuka Hayashi, Asia Powers Agree on Free-Trade
Negotiation, WALL STREET JOURNAL (May 13, 2012),
http://www.google.co.kr/url?sa=t&rct=j&q=japan%2Bchina%2Bkorea%2Bwall%2Bstreet
%2Bjournal%2Bfreetrade%2Bnegotiations&source=web&cd=1&ved=0CCwQqQIwAA&url=http%3A%2F%2Fo
nline.wsj.com%2Farticle%2FSB10001424052702303505504577401843152321480.html&ei
=_sHfUZzxEsKeiQeC34CgDw&usg=AFQjCNFCL4hNol38leQSQ5v04W7a0uAh1w&bvm=b
v.48705608,d.aGc&cad=rjt (First round negotiation of this FTA was held in Seoul from
March 26 to March 28, 2013.).
12
UNITED NATIONS CONFERENCE ON TRADE AND DEV. [UNCTAD], WORLD INVESTMENT REPORT
2014, Annex tbl. 1, at 205-06.
5
destination for FDI, surpassing the United States in an UNCTAD ranking of
transnational corporations’ top prospective host economies for 2013-2015.13
With respect to the other two East Asian neighbors, FDI inflows into
Korea show a steady increase in recent years, whereas the amount of FDI
flowing into Japan has been relatively insignificant considering the size of its
economy. FDI inflows into Korea have increased during the past few years
from US$8.961 billion in 2007 to US$12.221billion in 2013.14 On the other hand,
Japan’s FDI inflows totaled US$2.304 billion in 2013.15 The East Asia region as
a whole recorded FDI inflows of approximately US$221 billion, compared to
US$188 billion in the United States and US$246 billion flowing into the
European Union.16
FDI Outflows
In contrast to the recent past, in which traditional capital-exporting
states such as the United States, Germany, and France occupied top-ranking
positions on lists measuring FDI outflow, statistics for 2013 present the United
States (US$338 billion), Japan (US$136 billion), and China (US$101 billion) as
the three largest investor economies in terms of FDI outflow.17 In addition,
Hong Kong18 and Korea were ranked 5th (US$92 billion) and 12th (US$29
13
UNITED NATIONS CONFERENCE ON TRADE AND DEV. [UNCTAD], WORLD INVESTMENT REPORT
th
2013, at 22 (In the same survey, Japan ranked 10 ).
14
Id. at 206.
15
Id. at 205-06.
16
Id. (FDI inflows into Japan are not accounted for in the World Investment Report
statistics for the East Asia region (which includes China, Hong Kong, North Korea, South
Korea, Macao, Mongolia and Taiwan as the constituent states), as the country is
separately classified as one of the five “other developed countries” (in addition to
Australia, Bermuda, Israel and New Zealand). Therefore, the statistics for the East Asia
region and Japan have been integrated in reaching the $221 billion East Asia FDI inflow
figure.).
17
Compare UNCTAD, WORLD INVESTMENT REPORT 2011, U.N. SALES NO.E.11.II.D.2 (2011), at
9, with UNCTAD, WORLD INVESTMENT REPORT 2014, at xv.
18
The WORLD INVESTMENT REPORT 2014 excludes data for the Hong Kong Special
Administrative Region (SAR) from the statistics for China. Investment statistics for Hong
Kong are often separated from those for China, as this SAR retains authority to enter into
IIAs in accordance with Article 151 of the Basic Law of the Hong Kong Special
Administrative Region of the People’s Republic of China. However, information pertaining
to the Hong Kong SAR is not irrelevant in analyzing the role of China, Japan and Korea in
the larger global investment market. For our purposes, the applicability of Chinese BITs to
Chinese nationals residing in Hong Kong carries particular significance. This jurisdictional
issue was addressed in the Sr. Tza Yap Shum v. Republic of Peru decision (to be examined
in subsequent chapters), and after examining the relevant Agreement between the
Government of the Republic of Peru and The Government of the People’s Republic of
China Concerning the Encouragement and Reciprocal Protection of Investments, ChinaPeru, June 9, 1994, http://unctad.org/sections/dite/iia/docs/bits/peru_china.pdf
6
billion), respectively, placing all three East Asian neighbors in the world’s topfifteen investor economies. Such strong capital export performance further
supports the view that the importance of these East Asian economies to the
cross-border investment process is growing. First, China’s meteoric rise to
top-five capital exporter status has been remarkable. In 2010, the absolute
amount of Chinese overseas investment exceeded that of Japan, and between
2007 and 2012, the amount of Chinese overseas investment more than
tripled. 19
FDI outflow from Japan and Korea has similarly increased
significantly during a similar period, although not to the extent of China’s
exponential growth. FDI outflow from Japan and Korea increased from
US$128.020 billion and US$19.633 billion in 2008, to US$135.749 billion and
US$29.172 billion in 2013, respectively.20 In sum, FDI outflow from the East
Asia region (including Japan) amounts to approximately US$372 billion,
exceeding that of the United States (US$338 billion) and the European Union
(US$250 billion).21
Membership of International Conventions and Organizations
The active involvement of China, Japan, and Korea as members of
international conventions and organizations is another essential indicator of
the three Asian states’ participation in and contribution to the global
investment process. For example, with respect to investment policies and
practices, accession to the Organisation for Economic Co-operation (OECD)
indicates that a state is, in effect, committing itself to a higher level of
liberalization obligations in its investment policies, as are set forth in the Code
of Liberalisation of Capital Movements, the Code of Current Invisible
[hereinafter China-Peru BIT (1994)], the Tribunal determined that the Claimant was
indeed a Chinese national in accordance with the Chinese Nationality Act, regardless of
his place of residence. The Tribunal further suggested that Chinese BITs shall apply to
Chinese nationals with Hong Kong residence irrespective of Hong Kong’s treaty status,
provided that the Chinese BIT concerned does not expressly “exclude Hong Kong
residents from its scope of application.” Tza Yap Shum v. Republic of Peru, ICSID Case No.
ARB/07/6, Decision on Jurisdiction and Competence (June 19, 2009), para. 74. The
applicability and precedential value of this decision to future cases are unclear, but a
Chinese national with Hong Kong residence may reasonably expect to benefit from
protections offered by Chinese BITs, unless otherwise excluded from coverage.
19
Compare UNCTAD, WORLD INVESTMENT REPORT 2013, at 214 (FDI inflows into China were
recorded at $26.510 billion in 2007), with UNCTAD, WORLD INVESTMENT REPORT 2014, at
206 (FDI inflows into China were recorded at $123.911 billion in 2013).
20
UNCTAD, WORLD INVESTMENT REPORT 2014, at 205-06.
21
Id.
7
Operations, and interrelated transparency requirements.22 Japan joined the
OECD in April 1964, and Korea followed suit in December 1996.23 Japan and
Korea also have been members of the WTO since 1995, and China’s accession
took place a few years later in 2001.24 China’s accession to the WTO marked a
critical occasion to level up its trade and investment related regulatory
framework and transparency. With respect to the International Centre for
Settlement of Investment Disputes (ICSID) Convention on the Settlement of
Investment Disputes between States and Nationals of Other States (ICSID
Convention), Japan and Korea became Contracting States in 1967, and China
signed the ICSID Convention in 1990 and became a Contracting State in
1993.25 Finally, the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards of 1958 was ratified by Japan in 1961, by Korea in 1973,
and by China in 1987.26
In addition to accounting for a sizeable amount of international
movement of capital and investment, China, Japan, Korea, and their investors
are expected to make significant contributions to the development of
international investment law and practice. For example, investors from these
countries may very well emerge as claimants in FDI-related disputes, and any
of the states could be named as a respondent in arbitrations arising out of
claims brought by foreign investors under investment treaties. So far, the
investment claims that have been submitted to arbitration against China,
22
See Organisation for Economic Co-Operation and Development (OECD) Code of
Liberalisation of Capital Movements 2013, available at
http://www.oecd.org/daf/inv/investment-policy/CapitalMovements_WebEnglish.pdf, and
OECD Code of Liberalisation of Current Invisible Operations 2013, available at
http://www.oecd.org/daf/fin/private-pensions/InvisibleOperations_WebEnglish.pdf.
23
See List of OECD Member Countries, available at
http://www.oecd.org/general/listofoecdmembercountriesratificationoftheconventionontheoecd.htm.
24
See World Trade Organization Members and Observers, available at
http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm.
25
Japan signed the ICSID Convention on September 23, 1965, and the agreement entered
into force on October 14, 1966. Korea signed the document on April 18, 1966, and the
entry into force took place on March 23, 1967. China signed the Convention on February 9,
1990, and the agreement entered into force on February 6, 1993. For a list of ICSID
Contracting Parties and respective dates of accession for each state, see
https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=Co
ntractingstates&ReqFrom=Main.
26
For a list for the current status of and signatories to this Convention, see United Nations
Commission on Int’l Trade Law [UNCITRAL], Status: Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, available at
http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html.
8
Japan, or Korea, or brought by their investors against other states, have been
few in number, though not insignificant in terms of their implications for
future investment.
As of the end of 2014, Chinese investors have filed four investment
arbitration cases, against Peru,27 Mongolia, 28 Belgium,29 and Yemen, 30 and
China has been named a state respondent in two arbitrations, one filed by a
Malaysian investor31 and another filed by a Korean company.32 Japan has not
faced any investment arbitration claims as of yet, although a Dutch subsidiary
of a Japanese securities firm has brought investment claims against the Czech
Republic.33 The first investment arbitration claim against Korea was filed in
late 2012, by an investor invoking the Korea-Belgium-Luxembourg BIT.34 In
order to better comprehend current policy choices and future expected
attitudes toward international investment and interrelated dispute settlement,
it is critical to examine the decisions China, Japan and Korea have made in the
recent past and the inclinations those decisions reveal.
A. China
As discussed above, FDI flow into China has been on a steady rise and
Chinese overseas investment has sharply increased, particularly in the past
five years. Despite rapid growth in FDI outflow, however, China remains a net
capital importer in terms of both FDI flow and stock. In 2013, FDI inflows were
approximately US$124 billion, compared to US$101 billion in FDI outflows,
and levels of FDI inward stock (US$957 billion) far exceeded those of outward
stock (US$614 billion).35 Nevertheless, based on the recent exponential
27
Sr. Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction
and Competence (June 19, 2009) (to be examined in further chapters).
28
China Heilongjiang International Economic & Technical Cooperative Corp, et al. v.
Mongolia (more details relating to this pending case at the Permanent Court of Arbitration
available at http://www.pca-cpa.org/showpage.asp?pag_id=1378).
29
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.
30
Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No.
ARB/14/30.
31
Ekran Berhad v. People’s Republic of China, ICSID Case No. ARB/11/15.
32
Ansung Housing Co., Ltd. v. People’s Republic of China, ICSID Case No. ARB/14/25.
33
Saluka Investments BV v. Czech Republic, IIC 210 (2006), available at http://www.pcacpa.org/showpage.asp?pag_id=1149.
34
LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37 (2012),
available at http://www.italaw.com/cases/2022.
35
UNCTAD, WORLD INVESTMENT REPORT 2014, at 206-10.
9
growth of China’s levels of FDI outflow, Chinese overseas investment may well
surpass FDI into China sometime in the near future.
At the Third Plenum of the Eleventh Central Committee of the
Communist Party of China, held in December 1978, Deng Xiaoping called for
Economic Reform and Openness (Gaige Kaifang) and openly embraced
attracting FDI as one of the top policy priorities of the Chinese government. In
an attempt to promote and control the flow of such FDI into China, the
Chinese government enacted special foreign investment laws and
simultaneously engaged in concluding BITs; the first BIT China concluded was
with Sweden in 1982.36 Subsequent BITs during this earlier stage of reform
were primarily negotiated and concluded with Western developed
economies.37 This specific inclination toward industrialized, capital-exporting
counterparties revealed China’s underlying policy goal of promoting inward
foreign investment. In contrast, the Chinese government adopted a cautious
stance with respect to the level of protection offered to foreign investors. For
instance, the Chinese government refused to sign off on substantive national
treatment commitments and restricted the scope of disputes allowed to be
submitted for arbitration to the amount of compensation for expropriation.38
36
See, e.g., Agreement on the Mutual Protection of Investments, China-Swed., March 29,
1982, http://arbitrationlaw.com/files/free_pdfs/china-sweden_bit.pdf (China had
concluded treaties of friendship with communist bloc comrades, such as the Soviet Union
in 1950—“Treaty of Friendship, Alliance and Mutual Assistance”—and North Korea in
1961—“Mutual Aid and Cooperation Friendship Treaty” —which touched upon economic
cooperation and investment, but it would be very difficult to characterize these
agreements as BITs under the strict definition of the term).
37
For instance, China concluded BITs with France in 1984 (Agreement between the
Government of the French Republic and the Government of the People’s Republic of
China on Encouragement and Reciprocal Protection of Investments, China-Fr., Mar. 30,
1984, http://investmentpolicyhub.unctad.org/Download/TreatyFile/734), Italy in 1985
(Agreement between the Government of the Italian Republic and the Government of the
People’s Republic of China on the Promotion and Mutual Protection of Investments,
China-It., Jan. 1, 1985, http://investmentpolicyhub.unctad.org/IIA/country/103/treaty/916),
the United Kingdom in 1986 (Agreement between the Government of the United
Kingdom of Great Britain and Northern Ireland and the Government of the People’s
Republic of China Concerning the Promotion and Reciprocal Protection of Investments
with Exchange of Notes, China-U.K., May 15, 1986,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/793 [hereinafter China-U.K.
BIT (1986)]), and Japan in 1988 (Agreement between Japan and the People’s Republic of
China Concerning the Encouragement and Reciprocal Protection of Investment, ChinaJapan, Aug. 1, 1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/747
[hereinafter China-Japan BIT (1988)] (albeit not a “western,” but evidently a “developed”
economy)).
38
China-U.K. BIT (1986) art. 7 (“(1) A dispute between a national or company of one
Contracting Party and the other Contracting Party concerning an amount of
10
Over time, China gradually steered away from this disposition favoring
inward investment and embraced a more liberal BIT regime, adopting the ‘Go
Abroad Policy’ (Zouchuqu Zhanlue, also referred to as either the ‘Go Out’ or
‘Going Global’ Strategy) in 1999. The Chinese government realized that sharp
appreciation in the renminbi was, in large part, attributable to the massive
foreign reserves it had accumulated as a result of increasing FDI inflows. In
order to contain rapid rates of inflation, the Chinese government encouraged
outbound investment and acquisition of assets overseas. The new BIT policies
capture this dual concern, focusing on the promotion and protection of both
inward and outward investments. At the same time, this policy reflects
China’s successful transition to sizeable capital-exporter status.
With respect to BIT text itself, China has composed and utilized three
versions of its Model BIT over the years: (1) the first Model BIT relied on in the
1980s; (2) the second version adopted in the early 1990s; and (3) the current
version implemented since the late 1990s. 39 Specific details and policy
orientations revealed therein will be discussed in the following chapters.
Despite experiencing several shifts in their specific content and general focus,
the Chinese Model BITs largely track China’s dramatic transition from a closed
economy to an increasingly globalized market economy.
As an example, more recent BITs depart from a protectionist stance
and unveil China’s focus and interest in promoting overseas investment. Two
of its most recent IIAs, the trilateral investment treaty among China, Japan
and South Korea and the BIT between China and Canada,40 feature the most
liberal positions on investment that the Chinese government has taken to
date. At the same time, even these more liberal agreements reflect a very
cautious approach, both in a substantive and procedural sense. Moreover,
heightened scrutiny of the treaty negotiation and ratification process is not
compensation which has not been amicably settled after a period of six months from
written notification of that dispute shall be submitted to international arbitration.”).
39
See Norah Gallagher & Wenhua Shan, China, in COMMENTARIES ON SELECTED MODEL
INVESTMENT TREATIES 131-182 (Chester Brown ed., Oxford University Press 2013)
(comprehensive analysis and actual text of Version III of the Chinese Model BIT).
40
Agreement between the Government of Canada and the Government of the People’s
Republic of China for the Promotion and Reciprocal Protection of Investments, Can.China, Sept. 9, 2012, http://investmentpolicyhub.unctad.org/Download/TreatyFile/600
[hereinafter Canada-China BIT (2012)].
11
necessarily a tendency exclusive to the Chinese side. China’s IIA treaty
counterparts and their domestic constituencies, in particular, often approach
negotiation with a great amount of sensitivity and express serious concern
with possible threats to sovereignty that an IIA with China might pose. In
response to the signing of the China-Canada BIT in September 2012, at least
74,000 Canadians submitted notes to their government seeking rejection of
the BIT. 41 Regardless of its general conservative stance, China has been
actively involved in the IIA negotiation process: as of June 1, 2013, it has
signed BITs with 128 nations,42 and as of August 2013, it has entered into nine
FTAs.43
B. Japan
Japan’s reputation as a traditional capital exporter has been
established since the early 1980s. Its investment policy, not surprisingly, has
reflected this position. As mentioned above, the amount of FDI activity
flowing into Japan has been modest considering the large size of its economy.
For instance, FDI inflows into Japan reached approximately US$2.3 billion in
2013, compared to outward flows of US$136 billion in that same year.44 Inflow
and outflow in terms of stocks display a similar disparity: in 2013, the amount
of Japan’s overseas stock investment was over four times greater than the
amount of inward stock movement, as there was approximately US$993
billion of FDI outward stock compared to US$171 billion of FDI inward stock. 45
Shotaro Hamamoto and Luke Nottage caution against attributing this
relatively low level of inward investment activity to the domestic legal regime,
noting that “Japan’s traditionally low inflows and stocks of inbound FDI seem
to reflect broader socio-economic factors rather than any particularly strict
legal restrictions on FDI flows into Japan,” and adding that the Japanese
41
Gus Van Harten, Taking Apart Tories’ Party Line on China-Canada Treaty, THE TYEE.CA
(Nov. 5, 2012), available at http://tcktcktck.org/wp-content/uploads/2012/11/Gus-VanHarten-Tyee.pdf (Van Harten points out several concerns relating to state sovereignty
caused by entering into the China-Canada BIT, such as limiting the ability of Canadian
governments to confer benefits with respect to domestic resource extraction upon its own
citizens.).
42
A comprehensive list of Chinese BITs available at
http://investmentpolicyhub.unctad.org/IIA/CountryBits/42#iiaInnerMenu.
43
A comprehensive list of FTAs China entered into and those currently undergoing
negotiation available at http://fta.mofcom.gov.cn/english/fta_qianshu.shtml.
44
UNCTAD, WORLD INVESTMENT REPORT 2014, at 205.
45
Id. at 209.
12
government has, in fact, intensified its efforts to attract FDI into Japan.46
Significant increases in the amount of FDI inward stock over the past decade
illustrate Japan’s liberalized regulatory regime, as figures have increased from
$50.3 billion in 2000, to $171 billion in 2013.47
The magnitude of Japanese overseas investment notwithstanding,
Japan has been rather passive in pursuing BITs for protection of its investors
and investment abroad. During the twenty-five year time span between 1977
(Egypt) and 2001 (Mongolia), Japan only concluded nine BITs.48 From the late
1990s onwards, however, major Japanese business interest organizations and
corporations began imploring the government to enter into EPAs embracing
comprehensive investment chapters, which contain a binding legal
commitment to liberalize markets to Japanese investors. As Japan realized
that this liberalization commitment and enhanced protection of overseas
investment were unattainable through the multilateral trade channels offered
by the WTO framework, Japan developed its own “new generation
investment treaty” program.49
To that end, Japan shifted gears and adopted a more aggressive
stance toward protecting its investors by pursuing bilateral commitments
through BITs and investment chapters embedded in FTAs. In 2002, Japan
concluded its first significantly pro-investor BIT, with Korea.50 From 2002 to
February 2015, Japan concluded 29 investment treaties, encompassing both
BITs and FTAs.51 Despite this recent change in stance, however, Japan’s
46
Luke Nottage & Shotaro Hamamoto, Japan, in COMMENTARIES ON SELECTED MODEL
INVESTMENT TREATIES 347-348 (Chester Brown ed., Oxford University Press 2013).
47
UNCTAD, WORLD INVESTMENT REPORT 2014, at 209.
48
See Agreement between Japan and the Arab Republic of Egypt Concerning the
Encouragement and Reciprocal Protection of Investment, art. 2(1), Egypt-Japan, Jan. 28,
1977, http://arbitrationlaw.com/files/free_pdfs/egypt-japan_bit.pdf [hereinafter EgyptJapan BIT (1977)] and Agreement between Japan and Mongolia Concerning the
Promotion and Protection of Investment, Japan-Mong., Feb. 15, 2001,
http://www.bilaterals.org/IMG/pdf/japan_mongolia.pdf [hereinafter Japan-Mongolia BIT
(2001)].
49
See Luke Nottage & Shotaro Hamamoto, Japan, in COMMENTARIES ON SELECTED
MODEL INVESTMENT TREATIES, at 347-349.
50
Agreement between the Government of the Republic of Korea and the government of
Japan for the Liberalisation, Promotion and Protection of Investment, Japan-S. Kor., Mar.
22, 2002, http://unctad.org/sections/dite/iia/docs/bits/korea_japan.pdf [hereinafter JapanKorea BIT (2002)].
51
These include BITs with Korea (Id.), Vietnam (Agreement between Japan and
the Socialist Republic of Viet Nam for the Liberalization, Promotion and
13
investment treaty agenda is still limited in scope and lags behind other FDIexporting states such as the United States and Germany, in terms of the
absolute number of IIAs it has ratified. The lack of a Japanese model BIT may,
Protection of Investment, Japan-Viet., Nov. 14, 2003,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1738 [hereinafter
Japan-Vietnam BIT (2003)]), Cambodia (Agreement between Japan and the
Kingdom of Cambodia for the Liberalization, Promotion and Protection of
Investment, Cambodia-Japan, Aug. 31, 2002, http://www.kh.embjapan.go.jp/political/nikokukan/invest-agree.pdf [hereinafter Cambodia-Japan
BIT (2002)]), Laos (Agreement between Japan and the Lao People’s Democratic
Republic for the Liberalisation, Promotion and Protection of Investment, JapanLaos, Jan. 16, 2008,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1729 [hereinafter
Japan-Laos BIT (2008)]), FTAs with Singapore (Agreement between Japan and
the Republic of Singapore for a New-Age Economic Partnership, Japan-Sing., Jan.
13, 2002, http://www.bilaterals.org/IMG/pdf/JSEPA_JP-SG_FTA_2000_.pdf
[hereinafter Japan-Singapore EPA (2002)]), Mexico (Agreement between Japan
and the United Mexican States for the Strengthening of the Economic
Partnership, Japan-Mex., Sept. 17, 2004,
http://www.mofa.go.jp/region/latin/mexico/agreement/agreement.pdf
[hereinafter Japan-Mexico EPA (2004)]), Malaysia (Agreement between the
Government of Japan and the Government of Malaysia for an Economic
Partnership, Japan-Malay., Dec. 13, 2005, http://www.mofa.go.jp/region/asiapaci/malaysia/epa/content.pdf [hereinafter Japan-Malaysia EPA (2005)]), The
Philippines (Agreement between Japan and the Republic of the Philippines for an
Economic Partnership, Japan-Phil., Sept. 9, 2006,
http://www.mofa.go.jp/region/asia-paci/philippine/epa0609/main.pdf
[hereinafter Japan-Philippines EPA (2006)]), Chile (Agreement between Japan
and the Republic of Chile for a Strategic Economic Partnership, Japan-Chile, Mar.
27, 2007, http://www.mofa.go.jp/region/latin/chile/joint0703/agreement.pdf
[hereinafter Japan-Chile EPA (2007)]), Thailand (Agreement between Japan and
the Kingdom of Thailand for an Economic Partnership, Japan-Thai., Apr. 3, 2007,
http://www.mofa.go.jp/region/asia-paci/thailand/epa0704/agreement.pdf
[hereinafter Japan-Thailand EPA (2007)]), Brunei (Agreement between Japan and
Brunei Darussalam for an Economic Partnership, Brunei-Japan, June 18, 2007,
http://www.mofa.go.jp/region/asia-paci/brunei/epa0706/agreement.pdf
[hereinafter Brunei-Japan EPA (2007)]), Indonesia (Agreement between Japan
and the Republic of Indonesia for an Economic Partnership, Indon.-Japan, Aug.
20, 2007, http://www.mofa.go.jp/region/asiapaci/indonesia/epa0708/agreement.pdf [hereinafter Indonesia-Japan EPA
(2007)]), Vietnam (Agreement between Japan and the Socialist Republic of Viet
Nam for an Economic Partnership, Japan-Viet., Dec. 25, 2008,
http://www.mofa.go.jp/region/asia-paci/vietnam/epa0812/agreement.pdf
[hereinafter Japan-Vietnam EPA (2008)]), and Switzerland (Agreement on Free
Trade and Economic Partnership between Japan and the Swiss Confederation,
Japan-Switz., Feb. 19, 2009,
http://www.mofa.go.jp/region/europe/switzerland/epa0902/agreement.pdf
[hereinafter Japan-Switzerland EPA (2009)]). Japan also entered into a FTA with
ASEAN in 2008 (Agreement on Comprehensive Economic Partnership Among
Japan and the Member States of the Association of Southeast Asian Nations, Apr.
2008, http://www.mofa.go.jp/policy/economy/fta/asean/agreement.pdf
[hereinafter ASEAN-Japan FTA (2008)]).
14
in part, be attributable to this latecomer status. As of March 2015, Japan has
signed 25 BITs and fifteen FTA/EPAs.52
C. Korea
In contrast to Japan, a longtime capital exporter, and China, a
traditional net capital importer despite its recent surge in FDI outflows, Korea
presents an interesting case, as it has successfully transformed itself from
capital importer to net capital exporter status both in terms of FDI flow and
stock movement. For instance, Korea’s outward flows of FDI in 2013 were
recorded at US$29.2 billion, outweighing its inward flows of US$12.2 billion,
and Korea’s outward stock flow of US$219 billion exceeded its inward stock
flow of US$167.4 billion.53
In the 1960s, the Korean government was primarily focused on
recovering from the devastation left behind by the Korean War and relied
heavily on international public aid. When international public aid began to
noticeably decline, the Korean government recognized a need to resort to
private sources of capital in order to finance its economic reconstruction and
development. In response, the Korean government enacted the first special
FDI legislation in 1960, designed to attract foreign capital and investment by
offering various investor incentives and protections. Korea’s first BIT was
concluded in 1964 with what was then West Germany, and BIT negotiations
with other Western developed economies subsequently followed.54 Until the
52
For updates on negotiations, meetings and statuses relating to Japanese FTA/EPA/IIAs,
see http://www.meti.go.jp/english/policy/external_economy/trade/FTA_EPA/index.html.
53
UNCTAD, WORLD INVESTMENT REPORT 2014, at 206, 210.
54
Treaty between the Republic of Korea and the Federal Republic of Germany Concerning
the Promotion and Reciprocal Protection Investments, Ger.-S. Kor., Feb. 4, 1964,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1351 [hereinafter GermanyKorea BIT (1964)]. BITs entered into force with other western developed economies
include Belgium (Agreement between the Republic of Korea, on the One Hand, and the
Belgo-Luxemburg Economic Union, on the Other Hand, on the Encouragement and
Reciprocal Protection on Investments, Belg.-S. Kor., Dec. 20, 1974,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/2948 [hereinafter BelgiumSouth Korea BIT (1974)]); France (Agreement between the Government of the French
Republic and the Republic of Korea on Encouragement and Reciprocal Protection of
Investments, Fr.-S. Kor., Dec. 28, 1977,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1239 [hereinafter FranceKorea BIT (1977)]); United Kingdom (Exchange of Notes between the Government of the
United Kingdom of Great Britain and Northern Ireland and the Government of the
Republic of Korea concerning the extension to the Bailiwicks of Jersey and Guernsey and
the Isle of Man of the Agreement for the Promotion and Protection of Investments,
signed at Seoul on 4 March 1976, S. Kor.-U.K., Aug. 23, 1983,
15
mid-1990s, Korea remained a net capital-importing market, and the BITs
Korea entered into from the 1960s until the 1980s were negotiated to create a
favorable investment climate for foreign investors from major European
capital-exporting economies. For that reason, the BITs ratified by Korea
during this period largely conformed to the respective Model BITs of its
European counterparties.
Korea’s parameters for inbound and outbound investment expanded
as a result of the industrialization and modernization of its economy. In the
late-1970s, Korea began to conclude BITs with other developing countries,
and by the late-1980s, the scope of its economic partnerships further
extended to include transition economies.55 Since the 1990s, Korea has
welcomed a wide variety of countries in different stages of economic
development as BIT counterparties.56
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1843 [hereinafter KoreaU.K. BIT (1983)]); Denmark (Agreement between the Government of the Republic of
Korea and the Government of the Kingdom of Denmark Concerning the Encouragement
and the Reciprocal Protection of Investments, Den.-S. Kor., June 2, 1988,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1011 [hereinafter DenmarkKorea BIT (1988)]); Italy (Agreement between the Government of the Republic of Korea
and the Government of the Republic of Italy Concerning the Encouragement and the
Reciprocal Protection of Investments, It.-S. Kor., Jan. 10, 1989,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1685 [hereinafter ItalyKorea BIT (1989)]); and Spain (Agreement on the Mutual Promotion and Protection of
Investments between the Republic of Korea and the Kingdom of Spain, S. Kor.-Spain, Jan.
17, 1994, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1831 [hereinafter
Korea-Spain BIT (1994)]).
55
For instance, Korea signed an “Agreement for the Promotion and Reciprocal Protection
of Investments” with then-Soviet Union on December 14, 1990
(http://unctad.org/sections/dite/iia/docs/bits/korea_ussr.pdf) and a similar BIT with China
on September 30, 1992.
56
See, e.g., Agreement between the Government of the Republic of Korea and the
Government of the Islamic Republic of Pakistan for the Promotion and Protection of
Investments, Pak.-S. Kor., May 25, 1988,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1816 [hereinafter PakistanKorea BIT (1988)]; Agreement between the Government of the Republic of Korea and the
Government of the Islamic Republic of Pakistan for the Promotion and Protection of
Investments, El Sal.-S. Kor., May 25, 1988,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1131 [hereinafter El
Salvador-Korea BIT (1988)]; Agreement on the Promotion and Protection of Investments
between the Government of the Republic of Korea and the Government of the Kingdom
of Morocco, Morocco-S. Kor., Jan. 27, 1999,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1811 [hereinafter MoroccoKorea BIT (1999)]; Agreement between the Government of the Republic of Korea and the
Government of the Republic of Nicaragua for the Promotion and Protection of
Investments, Nicar.-S. Kor., May 15, 2000,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1813 [hereinafter
Nicaragua-Korea BIT (2000)]; and Agreement between the Government of the Republic of
Korea and the Government of the Sultanate of Oman for the Promotion and Reciprocal
16
By the mid-1990s, Korea had emerged as one of the world’s major
trading countries, with total overseas investment growing large enough to
exceed the FDI inflow. According to the World Investment Report, FDI
outflows from Korea in 1995 (US$3.552 billion) had already at least doubled
the amount of FDI inflows for the same year (US$1.776 billion).57 This increase
in overseas investment can be attributed to the strategic focus of Korean
corporations on expanding their business overseas. Further accelerating this
trend was Korea’s accession to the OECD in 1996. Currently, Korean overseas
investment, both on an annual basis and a total accumulated basis, far
exceeds the inflow of FDI, rendering Korea a net capital exporter. In 2001, a
model BIT was developed in an attempt to accommodate the increase in
capital outflow, while simultaneously retaining high levels of investment from
abroad.
Today, Korea’s investment policy has characteristics of both a capitalimporting and capital-exporting economy, and aims to accommodate both
the inflow and outflow of capital. In recent BITs and FTAs entered into after
2000, Korea has generally positioned itself as a capital-exporting country,
seeking more investment opportunities and greater protection overseas. On
the other hand, Korea assumed a capital-importing stance when negotiating
with certain highly industrialized markets such as the European Union, Japan,
and the United States, all major sources of FDI flowing into Korea. This dual
policy recognizes both the potential benefits of entering into investment
treaties that promote and protect Korean corporations’ overseas investments,
and of creating a favorable investment climate attractive to foreign investors.
On a final note, as of December 2014, the total number of BITs and FTAs with
investment chapters signed by Korea approached 93 and twelve, 58
Protection of Investments, Oman-S. Kor., Oct. 8, 2003,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1815 [hereinafter KoreaOman BIT (2003)].
57
UNCTAD, WORLD INVESTMENT REPORT 1998: TRENDS AND DETERMINANTS, U.N. SALES
NO.E.98.II.D.5 (1998), at 364, 370.
58
Free Trade Agreement between the Republic of Colombia and the Republic of Korea,
Colom.-S. Kor., Feb 21, 2013,
http://www.sice.oas.org/TPD/Col_kor/Draft_Text_06.2012_e/June_2012_Index_PDF_e.as
p [hereinafter Colombia-Korea FTA (2013)] (Korea signed its tenth FTA with Colombia on
February 21, 2013 and is awaiting entry into force of this agreement. The first nine have all
entered into force.).
17
respectively, making Korea the second most-prolific BIT-contracting state in
Asia.59
Annexes A, B, and C provide a list of BITs and FTAs with investment
chapters ratified by China, Japan, and Korea, respectively.
59
The Korean Ministry of Foreign Affairs regularly updates international investment
treaties at:
http://www.mofa.go.kr/trade/treatylaw/treatyinformation/bilateral/index.jsp?mofat=001
&menu=m_30_50_40. For a list of FTAs Korea entered into to date, see
http://www.fta.go.kr/new2/ftakorea/ftakorea2010.asp.
18
II. Protection Against Discrimination
Under international law, it is under the exclusive competence of a
sovereign state to decide whether or not to admit foreign investors into its
territory, and once admitted, to determine the treatment it will afford to such
investors and their business conduct. Many developing states have enacted
special legislation governing the admission and treatment of foreign
investments through detailed regulation. Most of these laws and regulations
provide for control mechanisms through which foreign investment may be
admitted selectively.
In general, these mechanisms lay out criteria to
determine eligibility for admission and further stipulate screening processes,
approval requirements, joint venture requirements, maximum allowable rates
of foreign equity, and other conditions to be imposed upon approval of
admission. Certain foreign investment legislation also offers guarantees of
non-discrimination as well as incentives to foreign investors meeting a
particular set of criteria.
However, host states are not subject to any
obligation under international law to extend to foreign investors or
investment treatment equivalent to that which is offered to their own
nationals, their own investments, or those of a third state.
From the
perspective of foreign investors, securing non-discriminatory treatment and a
level playing field with competitors, whether local or foreign, is of paramount
importance to staying competitive in the market.
Almost all modern-day BITs and investment chapters of FTAs aim to
secure mutual promises from the counterparties not to discriminate on
grounds of nationality against foreign investors or investments, as compared
to the treatment each party offers to its own nationals or to investors from a
third-party state. The former is referred to as “national treatment,” whereas
the latter is termed “most-favoured-nation (MFN) treatment.” This section
focuses on the investment treaty practices of China, Japan, and Korea relating
to these two standards of treatment.
A. National Treatment
Clauses on national treatment constitute an essential component of
international economic treaties.
The simple goal of national treatment
provisions is to preclude a host state from differentiating between foreign and
19
local investors, thereby securing for the benefit of foreign investors the same
level of protection nationals of the host state receive. Traditionally, European
BITs have generally refrained from inserting any qualifying language limiting
the scope of national treatment provisions. Conversely, investment treaties
concluded by the U.S. or those modeled after the U.S.’s example have usually
specified that national treatment will only apply when either “like situations”
or “like circumstances” exist.60
One of the key issues in the discussion of national treatment is
whether national treatment is (a) provided to investors throughout the entire
investment process, including at the investment establishment and
acquisition stages (known as pre-entry or pre-establishment national
treatment), or (b) offered only after the given investment is actually admitted
into the host state (known as post-entry or post-establishment national
treatment). If national treatment is extended to the establishment and
acquisition stages, the host state is obligated, in accordance with the
applicable investment treaty, to admit foreign investors so that they may have
an opportunity to establish or acquire investments in the host state’s territory.
This more expansive variation of national treatment is typically offered when
the parties to the BIT or FTA seek to establish a legally-binding commitment
to liberalize cross-border investment.
Traditionally, the United States has adopted a more liberal stance
toward including this right of establishment in national treatment and MFN
treatment clauses.
For example, the U.S.-Chile FTA extends national
treatment and MFN treatment to the “establishment, acquisition, expansion,
management, conduct, operation, and sale or other disposition of
investments in its territory.”61 Jeswald Salacuse points out two main concerns
60
See Rudolf Dolzer and Christoph Schreuer, PRINCIPLES OF INTERNATIONAL INVESTMENT LAW
179 (Oxford University Press 2008) (general discussion of the possible differences in
nuance between these two terms).
61
The United States-Chile Free Trade Agreement, U.S.-Chile, June 6, 2003,
http://www.ustr.gov/trade-agreements/free-trade-agreements/chile-fta/final-text
[hereinafter U.S.-Chile FTA (2003)] (Emphasis added):
1. Each Party shall accord to investors of the other Party treatment no less favorabl
e than that it accords, in like circumstances, to its own investors with respect to t
he establishment, acquisition, expansion, management, conduct, operation, and
sale or other disposition of investments in its territory.
2. Each Party shall accord to covered investments treatment no less favorable than
20
with this “liberalized entry model.”62 The first problem involves politically
motivated restrictions on foreign investment in certain industries controlled
by influential domestic constituencies. Second, host states often reserve
certain preferential treatment for the benefit of national entities, particularly
in industries where domestic firms lack competitiveness compared to foreign
enterprises.
If, on the other hand, national treatment is limited to post-entry
investment and business activities, the host state retains discretion to deny
admission to any given investor from the treaty counterparty state. Such
determinations may be made in accordance with laws and regulations or
other policy objectives of the host state. In general, European BITs embrace
this “controlled entry model,”63 in which the admission of foreign investment
is determined in accordance with applicable domestic laws and regulations. In
contrast to the “liberalized entry model,” which applies national treatment to
the “establishment and acquisition” of investments, the admission of foreign
investment under this controlled approach is “subject to [the host state’s]
right to exercise powers conferred by its laws.”64
Regardless of whether national treatment is granted to foreign
investors in all phases or only to limited phases within the investment process,
treaty signatories often seek to leave room for certain circumstances in which
they may refuse to give national treatment. As a result, an explicit carve-out
may be drafted to provide for certain exceptions to the provision of national
that it accords, in like circumstances, to investments in its territory of its own inv
estors with respect to the establishment, acquisition, expansion, management, c
onduct, operation, and sale or other disposition of investments.
62
Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES 196 (Oxford University Press
2010) (Salacuse describes the “grant of a relative right of admission or establishment” as
the “liberalized entry model”; UNCTAD, ADMISSION AND ESTABLISHMENT, U.N. SALES
NO.E.99.II.D.10 (2002), at 16 (explains the basic idea of this “liberalized entry model”
resonating with concepts found in the “selective liberalization model.” This selective
liberalization model allows for the rights of entry and establishment to certain industries
enumerated on a “positive list.”)).
63
Id. at 196. (Salacuse characterizes the “admission of investment according to host
country law” as the “controlled entry model.” This controlled entry model is coterminous
with the “investment control model” explained in Admission and Establishment at 16.).
64
Agreement between the Government of the United Kingdom of Great Britain and
Northern Ireland and the Government of the Hashemite Kingdom of Jordan for the
Promotion and Protection of Investments, Jordan-U.K., Oct. 10, 1979,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1772 [hereinafter JordanU.K. BIT (1979)].
21
treatment. The extent to which a contracting party offers national treatment
is highly, if not exclusively, dependent on its set of governing investment
policies and laws. The utilization of such carve-outs, therefore, depends
largely on the specific investment policies and control mechanisms each
contracting state relies upon to screen incoming foreign investment projects.
An UNCTAD report on national treatment refers to this carve-out
mechanism as the “opt-out” or “negative list” approach and points out that,
under this approach, “it may be difficult to identify with precision all the
industries and activities to which national treatment should not apply.” 65 An
alternative would be to adopt a “positive list” approach, which would clarify a
(typically narrow) range of areas to which national treatment applies.
Consequently, the scope of national treatment is likely to be much more
limited under this latter approach, and thus a more gradual, less liberalized
investment regime may be expected.
With respect to these carve-out
provisions, the position China assumes is substantially different from that of
Japan and Korea, as will be examined below.
As to the application of and reliance on national treatment clauses in
arbitration cases, a recent study indicates that, as of January 2010, claimants
advanced national treatment claims in ten decided ICSID cases, out of which
such claims were upheld in four NAFTA-related arbitrations under the ICSID
Additional Facility Arbitration Rules.66
1. National Treatment in Chinese BIT Practice
Scope of Coverage
National treatment has historically not been commonly adopted in
Chinese BIT practice, due in part to China’s long-standing planned economy
status, and in part to the need to encourage national industries in the course
of implementing China’s successive economic development plans. China’s
first Model BIT did not include any reference to national treatment, and the
first instance in which China accepted national treatment provisions in its
investment treaty practice was in 1986, when it signed a BIT with the United
Kingdom:
65
UNCTAD, NATIONAL TREATMENT, U.N. SALES NO.E.99.II.D.16 (1999), at 64.
LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION 83, 386
(Table II D, Appendix 10).
22
66
Article 3 Treatment of Investment
(3) In addition to the [MFN provisions] of this Article either
Contracting Party shall, to the extent possible, accord
treatment in accordance with the stipulations of its laws
and regulations to the investments of nationals or
companies of the other Contracting Party the same as that
accorded to its own nationals or companies.
Article 3(3) of the China-U.K. BIT hints at China’s cautiousness toward
this standard of protection and embeds several mechanisms through which
the scope of national treatment offered could be limited. First, the “to the
extent possible” language, which could, at best, be read as requiring “best
endeavors” national treatment, confines the provision of national treatment
to an unclear, but limited extent. Furthermore, the China-U.K. BIT inserts an
additional qualification conferring national treatment only to the extent that it
is “in accordance with the stipulations of its laws and regulations.” This could
be interpreted to mean that national treatment shall be accorded by a host
state only if its laws and regulations stipulate as such. In effect, China could
maintain under this provision close control over the actual level of protection
and treatment offered to foreign investors and incoming investment, as it
would be able to determine when national treatment is, or is not, feasible or
desirable in the stipulations of its laws and regulations. For a foreign investor
unfamiliar with the complications inherent to the Chinese domestic legal
system, such treaty language may be perceived as a symbolic gesture, rather
than providing much, if any, practical comfort.
China’s second Model BIT, and the treaties it ratified during that stage
of its investment policy development, did not extend national treatment
beyond the parameters of “best endeavors” national treatment. Even during
this second Model BIT period, quite a number of Chinese BITs, such as the
China-Lithuania BIT (1994), did not contain national treatment clauses at all.67
67
See Agreement between the Government of the Republic of Lithuania and the
Government of the People’s Republic of China Concerning the Encouragement
and Reciprocal Protection of Investments, art. 2(1), China-Lith., Nov. 8, 1993,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/756 [hereinafter
China-Lithuania BIT (1993)]. See also, Agreement between the Government of the
People’s Republic of China and the Government of the Socialist Republic of
23
The third and most recent version of the Chinese Model BIT, however,
adopts a more liberal investment regime in which the national treatment
protections offered to foreign investors and investments are more tangible.
Article 3(3) of Version III specifies the extent to which national treatment
applies:
Without prejudice to its laws and regulations, each Contracting
Party shall accord to investments and activities associated
with such investments by the investors of the other
Contracting Party treatment not less favorable than that
accorded to the investments and associated activities by its
own investors.68
As is seen here, earlier “to the extent possible” language is omitted
from the current Model BIT, and a different form of qualifying language is
embedded in its place: national treatment is provided to the extent that there
is no “prejudice to [the Contracting Party’s] laws and regulations.” In theory,
the Chinese government may take measures under this provision that
discriminate against foreign investors and their investments to the extent that
Chinese laws and regulations enable the government to do so. This clause
protects foreign investors and investments from discriminatory practices of
officials or governmental agencies that lack a legal or regulatory basis. From
that perspective, this approach is a step forward from the stance taken in the
Vietnam concerning the Encouragement and Reciprocal Protection of
Investments, China-Viet., Dec. 2, 1992,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/795 [hereinafter
China-Vietnam BIT (1992)]; China-Mongolia BIT (1991); Agreement between the
Government of the People’s Republic of China and the Government of the
Hellenic Republic for the Encouragement and Reciprocal Protection of
Investments, art. 2, China-Greece, June 25, 1992,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/738 [hereinafter
China-Greece BIT (1992)]; China-Estonia BIT (1992), art. 2; and Agreement
between the Government of the People’s Republic of China and the Government
of the Republic of Slovenia Concerning the Encouragement and Reciprocal
Protection of Investments, art. 3(2) China-Slovn., Sept. 13, 1993,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/779 [hereinafter
China-Slovenia BIT (1993)] (signed and entered into effect during this Second
Model BIT phase, maintains the formulation found in Version I of the Model BIT:
“Either Contracting Party shall to the extent possible, accord treatment in
accordance with the stipulations of its laws and regulations to the investments of
investors of the other Contracting Party the same as that accorded to its own
investors.”) (Emphasis added).
68
Model BIT, Version III, Art 3(3).
24
China-UK BIT. The China-Uzbekistan BIT (2011) reflects the new Model BIT
approach:
Article 3 National Treatment
Without prejudice to its applicable laws and regulations, with
respect to the management, conduct, maintenance, use,
enjoyment, sale or disposal of the investments in its territory,
each Contracting Party shall accord to investors of the other
Contracting Party and associated investments treatment not
less favorable than that accorded to its own investors and
associated investments in like circumstances.69
In addition to confining the provision of national treatment within the
boundaries of the domestic legal system, this treaty text specifies that
national treatment shall apply exclusively “in like circumstances.”
In a significant number of other recent Chinese BITs, this qualification
relating to domestic laws and regulations has been removed from the treaty
text.
On the other hand, China also includes in its treaties a “grandfather
provision,” carving out non-conforming measures existing at the time of entry
into force with a “freezing clause,” so as not to impose restrictions on such
non-conforming measures.
To the extent that the overall level of
inconsistency is unaffected, such clauses allow China to maintain certain nonconforming measures in its BITs.70 China has, however, agreed to gradually
69
Italics added.
Agreement between the People’s Republic of China and Bosnia and Herzegovina on the
Promotion and Protection of Investments, China-Bosn. & Herz., June 26, 2002,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/465 [hereinafter ChinaBosnia-Herzegovina BIT (2002)] (the Protocol to the China-Bosnia-Herzegovina BIT
(2002) provides that national treatment does not apply to: “a) any existing nonconforming measures maintained within its territory; b) the continuation of any nonconforming measure referred to in . . . a); c) an amendment to any non-conforming
measure referred to in . . . a) to the extend (sic) that the amendment does not increase the
non-conformity of the measure, as it existed immediately before the amendment, with
those obligations.”). See also Agreement between the People’s Republic of China and the
Federal Republic of German on the Encouragement and Reciprocal Protection of
Investments, art. 2(2), China-Ger., December 1, 2003,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/736 [hereinafter ChinaGermany BIT (2003)] and Agreement between the Government of the Republic of Finland
and the Government of the People’s Republic of China on the Encouragement and
Reciprocal Protection of Investments, art. 4, China-Fin., November 15, 2004,
http://arbitrationlaw.com/files/free_pdfs/china-finland_bit.pdf [hereinafter China-Finland
BIT (2004)].
25
70
phase out any such non-conforming measures, as is reflected in the text of the
trilateral investment treaty among China, Japan, and Korea which entered
into force in May 2014:71
Article 3 National Treatment
1. Each Contracting Party shall in its territory accord to
investors of another Contracting Party and to their
investments treatment no less favorable than that it
accords in like circumstances to its own investors and their
investments with respect to investment activities.
2. Paragraph 1 shall not apply to non-conforming measures,
if any, existing at the date of entry into force of this
Agreement maintained by each Contracting Party under
its laws and regulations or any amendment or modification
to such measures, provided that the amendment or
modification does not decrease the conformity of the
measure as it existed immediately before the amendment
or modification.
Treatment granted to investment once admitted shall in no
case be less favorable than that granted at the time when
the original investment was made.
3. Each Contracting Party shall take, where applicable, all
appropriate steps to progressively remove all the nonconforming measures referred to in paragraph 2.
Note: The People’s Republic of China confirms that its
measures referred to in paragraph 2 shall not be
inconsistent with paragraph 2 of Article 3 72 of, and
paragraph 3 of the Protocol73 to, [the China-Japan BIT].
71
Agreement Among the Government of Japan, the Government of the Republic of Korea
and the Government of the People’s Republic of China for the Promotion, Facilitation and
Protection of Investment, May 2012,
http://www.meti.go.jp/press/2012/05/20120513001/20120513001-3.pdf (not yet in force)
[hereinafter Trilateral Investment Agreement among China, Japan and Korea (2012)] .
The Protocol to the China-Bosnia-Herzegovina BIT (2002) also provides that China “will be
endeavoured to progressively remove the non-conforming measures.”
72
China-Japan BIT (1988) (“The treatment accorded by either Contracting Party within its
territory to nationals and companies of the other Contracting Party with respect to
26
At first glance, paragraph 3 appears to express the Contracting Parties’
intent to address and eventually remove all non-conforming measures.
However, a more careful examination of interrelated documents (e.g., the
China-Japan BIT) reveals China’s reluctance to offer a more expansive
variation of the national treatment clause. In the Note excerpted above,
China assures that non-conforming measures shall not be inconsistent with
Paragraph 3 of the China-Japan BIT Protocol. But Paragraph 3 of this earlier
investment treaty’s Protocol conveys China’s willingness to deny national
treatment if “it is really necessary for the reason of public order, national
security or sound development of national economy.”74 Considering these
provisions in the aggregate, China is effectively reiterating its intent to
maintain steadfast control over a vague, yet wide range of activities
pertaining to “public order and security, and [the] sound development” of its
economy. This “sound development” language may theoretically prove to be
particularly problematic, in that any arbitrary measure adopted by the
Chinese government in the form of laws and regulations to minimize the
competitive disadvantage of national enterprises may be construed as
necessary for the sound development of the Chinese economy.
Thus,
although China has taken a step forward from its previous national treatment
stance, the degree of its increased liberalization may not be as dramatic as it
appears to be on the surface of recent investment treaty texts.
Stage of Application
With respect to the specific stage of investment at which national
treatment is triggered, China has not yet agreed to apply national treatment
protection standards to the establishment and acquisition of investments. As
an example, the China-Austria BIT (1986) captures the Contracting Parties’
investments, returns and business activities in connection with the investment shall not
be less favourable than that accorded to nationals and companies of the former
Contracting Party.”).
73
Id. (“For the purpose of the provisions of paragraph 2 of Article 3 of the Agreement, it
shall not be deemed “treatment less favourable” for either Contracting Party to accord
discriminatory treatment, in accordance with its applicable laws and regulations, to
nationals and companies of the other Contracting Party, in case it is really necessary for
the reason of public order, national security or sound development of national economy.”)
(Emphasis added).
74
China-Japan BIT (1988), para. 3 of Protocol.
27
reluctance to extend national treatment protections to the admission of
foreign investment:
Article 2 Promotion and Protection of Investment
1. Either Contracting Party shall encourage investment in its
territory by investors of the other Contracting Party and
permit such investment in accordance with its laws and
regulations.75
Instead, both Contracting Parties retain discretion to selectively admit
foreign investment and to rely exclusively on domestic administrative and
legal procedures in the decision-making process.
The maximum extent to which China has been willing to extend
national treatment has been with regard to the “expansion” of foreign
investments, as is evidenced in paragraph 1 of Article 3 of its more recent BIT
with Korea:76
Article 3 Treatment of Investment
1. Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to its own
investors and their investments (hereinafter referred to as
“national treatment”) with respect to the expansion,
operation, management, maintenance, use, enjoyment,
and sale or other disposal of investments (hereinafter
referred to as “investment and business activities”).77
The exact meaning of the word “expansion” in the China-Korea BIT is
not entirely clear. It could be interpreted to refer to any of a wide range of
investor activities in the host state, from the injection of additional capital, to
75
Agreement between the People’s Republic of China and the Republic of Austria
Concerning the Encouragement and Reciprocal Protection of Investments, Austria-China,
October 11, 1986, http://investmentpolicyhub.unctad.org/Download/TreatyFile/179
[hereinafter Austria-China BIT (1986)] (Emphasis added).
76
Agreement between the Government of the People’s Republic of China and the
Government of the Republic of Korea on the Promotion and Protection of Investments,
China-S. Korea, September 8, 2007,
http://www.mofa.go.kr/incboard/faimsif/treaty_popup.jsp?ITEM_ID=A9E34474D9812D42
49257355002B2728&ITEM_PARENT_ID=5227BBB15C5B8F02492573530019F24B
[hereinafter China-Korea BIT (2007)].
77
Italics added.
28
further development in the same industry of an already-established
“investment” in the host state, to the opening of new branches, or to growth
into related or new industries, all of which may not be accurately captured by
the words “establishment and acquisition.”
All of these interpretations,
however, are limited in scope in the China-Canada BIT (2007), which provides
that the concept of “expansion” applies only to certain sectors for which a
domestic prior approval process is not required:
Article 6 National Treatment
3. The concept of “expansion” in this Article applies only with
respect to sectors not subject to a prior approval process
under the relevant sectoral guidelines and applicable laws,
regulations and rules in force at the time of expansion. The
expansion may be subject to prescribed formalities and
other information requirements.
Limiting the application of an “expansion” provision to sectors that do
not require a prior approval process manifestly dilutes the level of national
treatment being offered by China. Although China has shown significant
progress toward liberalizing its protection standards, foreign investors may
easily find themselves empty-handed if changes in the national treatment
standard are not accompanied by corresponding revisions to Chinese
domestic laws and regulations. As long as China maintains, through its special
foreign investment laws, a high level of control over the inflow of FDI, 78 it will
be very difficult for China to accept national treatment provisions with respect
to the establishment and acquisition of foreign investments.
2. National Treatment in Japanese BIT Practice
The national treatment provision has traditionally constituted an
essential element of Japanese BITs, and it serves as a key indicator of the
progress that has been achieved in Japanese international investment treaty
practice. Prior to 2002, Japan embraced the European-style “controlled entry
model,” and thus did not seek in its BITs national treatment protection with
respect to the establishment and acquisition of investments. For example, the
Japan-Egypt BIT (1977) provides that each Contracting Party shall “admit . . .
78
See supra pp. 10-13 (China’s governmental policies relating to the admission of FDI
inflows).
29
investment [of the other Contracting Party] in accordance with [its own]
applicable laws and regulations.”79 In other words, as to the admission of
foreign investment, Japan chose to rely on internal domestic guidelines
instead of embracing a more expansive variation of national treatment. More
recently, however, Japan has been pursuing the insertion of a more aggressive
national treatment provision extending the scope of application to include
establishment and acquisition of investments.
The first investment treaty in which Japan successfully secured
national treatment with respect to establishment and acquisition was its BIT
with Korea, which entered into force on January 1, 2003.80 Reflecting the fact
that it includes a legally binding commitment to grant the right of
establishment on a national treatment basis, the treaty is titled, “Agreement
for the Liberalisation, Promotion and Protection of Investment,” in contrast to
“controlled entry model” European BITs, which typically follow a treaty title
formulation along the lines of “Agreement for Promotion and Protection of
Investment.” Article 2(1) of the Japan-Korea BIT sets out the contours of
national treatment in the following manner:
Article 2
1. Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to its own
investors and their investments . . . with respect to the
establishment,
acquisition,
expansion,
operation,
management, maintenance, use, enjoyment, and sale or
other disposal of investments . . . .81
In principle, the national treatment provisions in the most recent
Japanese investment treaties concluded after 2002 largely track that of the
Japan-Korea BIT, albeit with minor differences in specific form and language.
For example, the Japan-Colombia BIT (2011) is reflective of a more
79
Egypt-Japan BIT (1977).
Agreement between the Government of the Republic of Korea and the Government of
Japan for the Liberalisation, Promotion and Protection of Investment, Japan-S. Korea,
Mar. 22, 2002, http://unctad.org/sections/dite/iia/docs/bits/korea_japan.pdf [hereinafter
Japan-Korea BIT (2002)].
81
Italics added.
30
80
contemporary approach to “liberalized entry.” This more recent treaty first
defines the term “investment activities” to include the establishment and
acquisition of investments in a separate provision, contrary to its predecessor,
in which the definitions for “national treatment” and “investment activities”
are lumped together in the same provision. Thereafter, “national treatment”
is defined as follows:
Article 1 Definitions
For the purposes of this Agreement:
(e) the term “investment activities” means the establishment,
acquisition,
expansion,
operation,
management,
maintenance, use, enjoyment and sale or other disposal of
investments;
Article 2 National Treatment
1. Each Contracting Party shall in its Area accord to investors
of the other Contracting Party and to their investments
treatment no less favorable than the treatment it accords
in like circumstances to its own investors and to their
investments with respect to investment activities.82
As was briefly touched upon in the Japan-Korea BIT discussion above,
the BITs Japan has signed after 2002 generally include the term “liberalization”
in the title, hinting at Japan’s desire to create a more expansive and open
investment environment in the territories of its counterparties. In these
recent BITs, exceptions to national treatment are specified in so-called
“negative lists,” which identify existing non-conforming measures under the
national treatment standard and enumerate all industry sectors or activities to
which the national treatment obligation does not apply.83
82
Agreement between Japan and the Republic of Colombia for the Liberalization,
Promotion and Protection of Investment, Colom.-Japan, Sept. 12, 2011,
http://unctad.org/sections/dite/iia/docs/bits/Japan_colombia%20BIT.pdf [hereinafter
Colombia-Japan BIT (2011)]. See also Brunei-Japan EPA (2007).
83
For instance, see Japan-Korea BIT (2002), at Annex I (“Exceptional Sectors or Matters to
Article 2 (Article on national treatment and MFN protection)” excludes “fisheries within
the territorial sea and internal waters” and the “explosives manufacturing industry,”
among others, from the application of national treatment.). See also Cambodia-Japan BIT
(2002), art. 7; Agreement between Japan and the Republic of Uzbekistan for the
Liberalization, Promotion and Protection of Investment, Japan-Uzb., Aug. 15, 2008,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1737 [hereinafter JapanUzbekistan BIT (2008)].
31
The inclusion of a national treatment obligation relating to the
establishment and acquisition of investment tends to make treaty
negotiations difficult.
Capital-importing states such as China generally
express reluctance to agree to legally-binding commitments to liberalize FDI
or to put foreign investors and investments on equal footing with Chinese
nationals throughout all phases of investment activity. Thus, when Japan fails
to secure national treatment with respect to establishment and acquisition
from its capital-importing counterparties, Japan typically resorts to securing
MFN treatment as to the establishment and acquisition of investment as a
minimum, so that its nationals will not find themselves in a disadvantageous
position in relation to other foreign investors. This allows Japan to look to the
national treatment standards that have been accorded by the capitalimporting counterparty to the investors or investments of other countries.
Under such circumstances, it would not be unreasonable for Japan to expect
to benefit indirectly from national treatment protections offered to thirdparty Contracting States, as Japan could argue that its MFN status should
place its investors and investments in a position no less favorable than those
of a country to which national treatment has been granted.84 In a few
exceptional cases, Japan has been unable to obtain either national treatment
or MFN treatment with regard to the establishment and acquisition of
investments.85
3. National Treatment in Korean BIT Practice
Stage of Application: Difference in Korean BITs and FTAs
With the sole exception of its BIT with Japan, 86 Korea has not sought
application of the national treatment standard to the establishment and
84
For a more detailed description of a hypothetical in which Japan’s MFN status may
operate to expand the scope of national treatment coverage with a given counterparty
state, see supra pp. 49-52.
85
See Agreement between the Government of Japan and the Government of the
Independent State of Papua New Guinea for the Promotion and Protection of Investment,
Japan-Papua N.G., Apr. 26, 2011, http://unctad.org/sections/dite/iia/docs/bits/JapanPNG%20BIT%2026042011.pdf [hereinafter Japan-Papua New Guinea BIT (2011)].
86
Japan-Korea BIT (2002), art. 2(1) (“Each Contracting Party shall in its territory
accord to investors of the other Contracting Party and to their investments
treatment no less favourable than the treatment it accords in like circumstances
to its own investors and their investments…with respect to the establishment,
32
acquisition of investment in its stand-alone BITs.
In general, national
treatment in Korean BITs is limited to the post-establishment phase, and the
standard formulation guarantees national treatment only to the extent of the
“management, maintenance, use, enjoyment or disposal” of investments:
Article 3
2.Each Contracting Party shall in its territory accord investors of the
other Contracting Party, as regards their management,
maintenance, use, enjoyment or disposal of their investments
treatment not less favourable than that which it accords to its
own investors or to investors of any third State, whichever is
more favourable.87
In contrast, when negotiating investment chapters as an integrated
part of FTAs, Korea has typically been willing to extend national treatment
protection to the establishment and acquisition of investment. Article 10.3 of
Korea’s first ratified FTA, the Korea-Chile FTA, states:
Article 10.3 National Treatment
1.
Each Party shall accord to investors of the other Party
treatment no less favourable than that it accords, in like
circumstances, to its own investors with respect to the
establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of investments.
2.
Each Party shall accord to investments of investors of the
other Party treatment no less favourable than that it accords,
in like circumstances, to its own investors with respect to the
acquisition, expansion, operation, management, maintenance, use, enjoyment,
and sale or other disposal of investments . . . .”) (Emphasis added).
87
Italy-Korea BIT (1989), art. 3(2) (Emphasis added). See also, Agreement between the
Government of the Republic of Korea and the Government of the Republic of South Africa
on the Promotion and Protection of Investments, S. Afr.-S. Kor., July 7, 1995,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1830 [hereinafter KoreaSouth Africa BIT (1995)], Agreement between the Government of the Republic of Korea
and the Government of the Democratic People’s Republic of Algeria for the Promotion
and Protection of Investments, art. 3(2), Alg.-S. Kor., Oct. 12, 1999,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/53 [hereinafter AlgeriaKorea BIT (1999)], Agreement between the Government of the Republic of Korea and the
Government of the Hashemite Kingdom of Jordan for the Promotion and Protection of
Investments, art. 3(2), Jordan-S. Korea, July 24, 2004,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1739 [hereinafter JordanKorea BIT (2004)].
33
establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of investments.88
This text addresses foreign investors and their investments each in
two separate paragraphs, and extends national treatment to the
establishment, acquisition, and expansion stages of investment.
Korea’s rationale for taking such different approaches to national
treatment in its stand-alone BITs and in FTA investment chapters is not clear.
One possible explanation is that most of Korea’s earlier BITs were concluded
with European states whose negotiating template did not seek a legallybinding commitment to national treatment with regard to investment
establishment, and that Korea’s subsequent BITs with non-European states
were drafted against the backdrop of this tradition. Another possible factor is
that the FTAs Korea has negotiated since the late 1990s were modeled after
the NAFTA, which includes a detailed set of investment liberalization and
protection provisions as one of its essential chapters. As FTAs intend to create
free trade areas between two contracting states, the inclusion of a legallybinding commitment for the admission of foreign investors or investments
from each contracting party constitutes an integral and inseparable
component of the treaty negotiation process.
One recently ratified BIT indicates, at the very least, gradual progress
toward increased liberalization in Korea’s investment transactions with its
East Asian neighbors. The amended Korea-China BIT (2007) expands the
scope of national treatment to cover the expansion of investment, in contrast
to former Korean BITs, which limited such application to only the
“management, maintenance, use, enjoyment or disposal” of investment.89
Although subsequent Korean investment treaties have retreated to the
standard, more conservative formulation,90 Korea’s BITs with China and Japan
88
See also, Free Trade Agreement between the United States of America and the
Republic of Korea, art. 11.3(1), U.S.-S. Korea, June 30, 2007, http://www.ustr.gov/tradeagreements/free-trade-agreements/korus-fta/final-text [hereinafter U.S.-Korea FTA
(2007)].
89
See China-Korea BIT (2007), pp. 8-9 (text indicating application of national treatment to
the expansion of investment).
90
See, e.g., Agreement between the Government of the Republic of Korea and the
Government of the Kyrgyz Republic for the Promotion and Protection of Investments, art.
3(2), Kyrg.-S. Korea, Nov. 19, 2007,
http://www.mofa.go.kr/incboard/faimsif/treaty_popup.jsp?ITEM_ID=3331E6A5F25ADD33
34
point to its willingness to expand the reach of national treatment to either the
expansion or the establishment and acquisition stages as necessary.91
National Treatment Text Formulation
In its negotiations, Korea has been extremely flexible in
accommodating its counterparties’ preferences as to the appropriate level of
national treatment. Recognizing China’s hesitance to accept an expansive
national treatment provision, Korea agreed to China’s proposed unilateral
qualification language, which limits the national treatment protections that
would be afforded to Korean investment in China:
Article 3 Treatment of Investment
2.
[T]he paragraph 1 of the Article 3 [national treatment
provision] do[es] not apply to any existing non-conforming
measure maintained within its territory of . . . China or any
future amendment thereto provided that the amendment
does not increase the non-conforming effect of such a
measure from what it was immediately before the
amendment took effect . . . .
The People’s Republic of China will take all appropriate
measures to progressively remove all non-conforming
measures.92
Although the inclusion of a “freezing clause” may indirectly discourage
China from resorting to extreme non-conforming measures, the practical
reach of this soft restriction, in the absence of a specific time frame to remove
all non-conforming measures, is unclear. The acceptance of such amorphous
non-conforming measures at China’s request points, by itself, to Korea’s
openness to adjusting the precise scope of national treatment coverage.
492573E500320B7F&ITEM_PARENT_ID=3CF71C3F97518AC8492573B40003A36D
[hereinafter Korea-Kyrgyzstan BIT (2007)] and Agreement between the Government of
the Republic of Uruguay and the Government of the Republic of Korea on the Promotion
and Protection of Investments, art. 3(1), S. Kor.-Uru., Oct. 1, 2009,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1845 [hereinafter KoreaUruguay BIT (2009)].
91
See Trilateral Investment Agreement among China, Japan and Korea (2012), art. 1(5)
and art 3 (Interestingly, the Trilateral Investment Agreement does not extend national
treatment to the expansion of investment, and maintains the traditional formulation
applying national treatment to the “management, conduct, operation, maintenance, use,
enjoyment and sale or other disposition of investments.”).
92
China-Korea BIT (2007), art. 3(2).
35
On the other end of the spectrum, the Korea-U.S. FTA provides an
example in which Korea intended to limit the scope of national treatment
protections offered to its treaty counterparty. This treaty text includes a
highly detailed formulation specifying exceptions to the national treatment
standard. Article 11.12 of the Korea-U.S. FTA investment chapter, titled
“Non-Conforming Measures,” clarifies that national treatment does not apply
to “any existing non-conforming measures that are maintained by a Party” as
specified in each signatory’s schedule to Annex I, and adds that national
treatment is inapplicable to any future measure “that a Party adopts or
maintains with respect to sectors, subsectors, or activities, as set out in its
Schedule to Annex II.”93
B. Most-Favoured Nation Treatment
Virtually all investment treaties contain an MFN clause. The MFN
clause lays out the contracting parties’ mutual promise not to discriminate
among foreign investors and investments on the basis of nationality. The
underlying purpose of this clause is to secure equal, or at the very least, nondiscriminatory treatment compared to third-party foreign investors and
investments. In contrast to the general reluctance to offer national treatment
(primarily out of concern for domestic industries), contracting parties have
been more willing to grant MFN treatment, which they view as less
threatening to domestic national enterprises and investors.94
This relative lenience may be attributable to the amorphous nature of
the MFN clause. So long as a state does not grant any significant benefit to its
treaty counterparties, the MFN standard of protection may not carry much, if
any, weight. However, the utilization of an MFN clause is not without peril.
Once a given state offers a certain benefit to one contracting party, it will be
obliged to extend such treatment to the other contracting parties to which it
provided MFN treatment. Thus, in order to gauge the specific reach and
coverage of an MFN clause, a careful examination of the full range of that
state’s investment treaties is necessary. Similar to national treatment, MFN
treatment may be limited in scope and may not apply to the establishment
93
U.S.-Korea FTA (2007).
See UNCTAD, Most-Favoured Nation Treatment, U.N. Sales No. 10.II.D.19 (2010) (for a
comprehensive, introductory explanation of the origins and function of an MFN clause).
36
94
and acquisition of investments, depending on the specific wording of the
applicable treaty text.
Furthermore, BITs typically include a regional economic integration
organization (REIO) exception, in order to preserve the special treatment
particular states have agreed to accord each other in the context of regional
integration organizations or customs unions,95 and to a certain extent, REIO
exceptions dilute the principle of non-discrimination.
As UNCTAD has
pointed out, whether a REIO member is willing to extend the benefits of a
REIO investment regime to a counterparty outside the region “would seem to
depend on the relationship between, on the one hand, the degree of internal
integration in investment matters in the REIO and, on the other, the degree of
investment liberalization established in the IIA.” 96 Alternatively, a REIO
member state may rely on carve-outs to specify exclusions pertaining to
benefits intended to apply only within the REIO investment regime, and to
which MFN treatment will not apply. Another common exception to MFN
treatment is the double-taxation treaty, a specific type of agreement between
two contracting states to avoid double taxation.
Investors rely on MFN treatment in the context of their substantive
rights.
Another important but controversial issue related to the MFN
treatment obligation is whether it applies to procedural clauses in the
respective investment treaty, and in particular, to investor-state arbitration
clauses. Since this question was first addressed in the Maffezini v. Spain
case,97 it has become one of the most controversial issues on which tribunals
and arbitrators have failed to reach any consensus. According to Reed,
Paulsson and Blackaby, as of January 2010, no fewer than eleven ICSID
tribunals had considered the issue, with differing results obtained depending
upon the particular terms used in the treaty text and the nature of the MFN
treatment sought.98 In terms of disputes relating to the scope of MFN
95
See UNCTAD, The REIO Exception in MFN Treatment Clauses, U.N. Sales No.05.II.D.1.
(2004) (comprehensive discussion of the REIO exception in IIAs).
96
Id. at 2.
97
Emilio AgustÍn Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Decision of the
Tribunal on Objections to Jurisdiction (25 January 2000).
98
nd
LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION 85 (2 ed.
2011). See Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award (21
June 2011) (detailed discussion on the applicability of MFN clauses to dispute resolution).
37
treatment, claimants generally invoke the MFN clause in order to import more
favorable treatment standards from the respondent host state’s other IIAs
with third parties, rather than to claim breach of the MFN treatment clause
per se. This issue will also be briefly touched upon in discussion below, in
order to show the scope of MFN protection each East Asian state offers.
While a comparative analysis of the standard MFN clauses adopted by China,
Japan, and Korea reveals similarities in content and scope, it also illuminates
the different approaches through which each state controls its respective level
of market liberalization.
1. China
Scope of Coverage
In contrast with China’s limited and inconsistent adoption of the
national treatment provision, the MFN treatment clause is commonly found in
all Chinese BITs. MFN provisions applicable both to “investments” and to
“activities associated with such investments by the investors” are found in all
three versions of the Chinese Model BIT.99 The standard Chinese format first
presents this general rule of applicability and proceeds to limit the scope of
coverage by specifying exclusions where MFN treatment is not mandatory.
Version III of the Chinese Model BIT specifies that:
Article 3 Treatment of Investment
3. Neither Contracting Party shall subject investments and
activities associated with such investments by the investors
Id.; See also Concurring and Dissenting Opinion of Professor Brigitte Stern available at
https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=viewCa
se&reqFrom=Home&caseId=C109.
99
See also Free Trade Agreement between the Government of the People’s Republic of
China and the Government of New Zealand, art. 139, China-N.Z., April 7, 2008,
http://images.mofcom.gov.cn/gjs/accessory/200804/1208158780064.pdf [hereinafter
China-New Zealand FTA (2008)]; Bilateral Agreement for the Promotion and Protection
of Investments between the Government of the Republic of Colombia and the
Government of the People’s Republic of China, art. 3, China-Colom., Nov. 22, 2008,
http://arbitrationlaw.com/files/free_pdfs/colombia-china_bit.pdf [hereinafter ChinaColombia BIT (2008)]; and Agreement on the Trade in Goods of the Framework
Agreement on Comprehensive Economic Co-Operation between the People’s Republic of
China and The Association of Southeast Asian Nations, art. 5, November 5, 2002,
http://fta.mofcom.gov.cn/dongmeng/annex/xieyi2004en.pdf [hereinafter ASEAN-China
FTA (2002)]. But see Agreement between the Government of the United Mexican States
and the Government of the People’s Republic of China on the Promotion and Reciprocal
Protection of Investments, China-Mex., July 11, 2002,
http://arbitrationlaw.com/files/free_pdfs/mexico-china_bit.pdf [hereinafter China-Mexico
BIT (2009)] (presents an alternative approach as it breaks out two clauses and addresses
investors and investments separately in articles 4(1) and 4(2)).
38
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.
4. The provisions of Paragraph 3 of this Article shall not be
construed so as to oblige one Contracting Party to extend
to the investors of the other Contracting Party the benefit
of any treatment, preference or privilege by virtue of:
(a) any customs union, free trade zone, economic union
and any international agreement resulting in such
unions, or similar institutions;
(b) any international agreement or arrangement relating
wholly or mainly to taxation;
(c) any arrangements for facilitating small scale frontier
trade in border areas.100
As opposed to the national treatment standard, which does not
extend beyond the “expansion” of investment (Art. 3(1) of amended ChinaKorea BIT (2007)), the scope of the MFN treatment standard is generally more
expansive. The China-Finland BIT (2006) presents a relevant example and
captures the comparative difference in coverage:
Article 3 Treatment of Investments
2. Each Contracting Party shall accord to investments by
investors of the other Contracting Party treatment no less
favourable than the treatment it accords to investments by
its own investors with respect to the operation,
management, maintenance, use enjoyment, expansion, sale
or other disposal of investments that have been made.
3. Each Contracting Party shall accord to investments by
investors of the other Contracting Party treatment no less
favourable than treatment it accords to investments by
investors of any third State, with respect to the
establishment,
acquisition,
operation,
management,
maintenance, use, enjoyment, expansion, sale or other
disposal of investments. Further, neither Contracting Party
100
Italics added. Chinese Model BIT, Version III, Art 3(3).
39
shall impose unreasonable or discriminatory measures on
investments by investors of the other Contracting Party
concerning
local
content
or
export
performance
requirements.101
Article 3(2) determines that the national treatment standard shall
apply only to the “operation, management, maintenance, use enjoyment,
expansion, sale or other disposal of investments,” whereas the subsequent
Article 3(3) includes the “establishment and acquisition” of investments in
addition to the basic scope of national treatment coverage.
As mentioned above, exceptions to the general rule are often utilized
to limit the scope of MFN treatment. As an example, language in the ChinaGermany BIT signed in 2003 mirrors Paragraph 4(a) of Article 3 in the Model
BIT quoted above and specifies that MFN treatment does not apply to “any
association with any customs union, free trade zone, economic union, or
common markets,” or double taxation agreements.102 The more recent
China-Canada BIT contains an entire article of exceptions to which national
treatment and MFN protection do not apply, such as bilateral or multilateral
agreements relating to “aviation, fisheries, or maritime matters including
salvage,” among others:
Article 8 Exceptions
1.
[The MFN provision article] does not apply to:
(a) treatment by a Contracting Party pursuant to any
existing or future bilateral or multilateral agreement:
(i)
establishing, strengthening or expanding a free
trade area or customs union; or
(ii)
relating to aviation, fisheries, or maritime matters
including salvage;
(b) treatment accorded under any bilateral or multilateral
international agreement in force prior to 1 January
1994.
2.
[The MFN treatment article and national treatment article]
do not apply to:
101
102
China-Finland BIT (2004) (Emphasis added).
China-Germany BIT (2003), art. 3(4).
40
(a) (i) any existing non-conforming measures maintained
within the territory of a Contracting Party . . . ;
(b) the continuation or prompt renewal of any nonconforming measure referred to in sub-paragraph (a);
or
(c)an amendment to any non-conforming measure
referred to in sub-paragraph (a), to the extent that the
amendment does not decrease the conformity of the
measure, as it existed immediately before the
amendment . . . .
3.
Articles 5, 6 and 7 do not apply to any measure that a
Contracting Party has reserved the right to adopt or
maintain pursuant to Annex B.8.
4.
In respect of intellectual property rights, a Contracting
Party may derogate from Articles 3, 5 and 6 in a manner
that is consistent with international agreements regarding
intellectual property rights to which both Contracting
Parties are parties.
5.
Articles 5, 6 and 7, do not apply to:
(a) procurement by a Contracting Party;
(b) subsidies or grants provided by a Contracting Party,
including government-supported loans, guarantees
and insurance.
This text encompasses a wide assortment of limitations to MFN
treatment. Paragraph 1 carves out a REIO exception and excludes bilateral or
multilateral agreement relating to certain sensitive domestic industries, which
are generally recognized through deals specifically reached among the
contracting parties. Further, subsection 1(b) presents an interesting variation
from the standard limitations: in effect, the Contracting Parties are taking out
any MFN treatment protections offered under less-refined pre-1994
investment treaties. As a result, the Contracting Parties may focus on more
recent IIAs in assessing the specific scope of MFN treatment offered under this
BIT.
41
Paragraph 2 introduces a “grandfather provision” dealing with nonconforming measures. In other Chinese BITs, non-conforming measures were
carved out as an exception to national treatment. However, in the ChinaCanada BIT, non-conforming measures are also an exception to the MFN
standard. In addition, the subsequent paragraphs in this Article address issues
such as intellectual property rights, procurement and subsidies. Assuming
that this latest BIT most accurately reflects the current stance of Chinese
investment treaty practice, one may presume that China is increasingly
espousing a higher level of detail and precision in its IIAs, and willingly
employing specific carve-outs in their drafting.103
Whereas exceptions are specifically enumerated, the exact contours of
MFN coverage are not as clearly defined. For instance, the MFN clause does
not expressly specify whether such treatment applies to dispute resolution.
Therefore, it is not clear whether the MFN clause in the current Model BIT,
Version III, may be extended to apply to procedural rights, e.g., investor-state
arbitration clauses.
Considering that recent Chinese BITs now enable
investors to resort to ICSID arbitration for investor-state disputes, the precise
scope of applicability of the MFN provision carries particular weight to foreign
investors in China and Chinese investors in foreign counterparty states. In an
attempt to provide clarification, China has included in recent investment
treaties a specific provision excluding dispute resolution mechanisms from
MFN treatment.
The China-Canada BIT examined above, for example,
clarifies that “[f]or greater certainty, [MFN treatment] does not encompass
the dispute resolution mechanisms . . . in other international investment
treaties and other trade agreements.”104 Whether China will continue to
explicitly exclude provisions relating to dispute resolution from MFN
treatment is unclear. Given the increasing level of specificity revealed in
recent Chinese international investment treaty practice, however, a
significant deviation from such tendencies is hard to imagine.
103
Contrarily, this increased level of detail may simply reflect Canada’s cautious approach
in its investment treaty practice.
104
Canada-China BIT (2012), art. 5(3). See also, China-New Zealand FTA (2008), art. 139(2)
and ASEAN-China Investment Agreement (2009), art. 5(4).
42
Another interesting facet of the scope of MFN coverage involves a
familiar qualification. Previous practice has been not to include the phrase “in
like circumstances,” (typically used to specify the subject of comparison in
applying MFN protection). However, more recent investment treaties have
occasionally incorporated such wording. 105 The China-Canada BIT, for
example, states that “[e]ach Contracting Party shall accord to investors of the
other Contracting Party treatment no less favourable than that it accords, in
like circumstances, to investors” of the home state.106 Ultimately, the carveouts and qualifying language employed in Chinese investment agreements
are reflections of China’s modern investment policy of cautious liberalization.
Tza Yap Shum Decision
In 2009, an ICSID tribunal rendered a decision relating to an MFN
clause in the BIT between China and Peru.107 Tza Yap Shum marked the first
instance in which an ICSID tribunal issued a decision interpreting provisions of
an investment treaty with China. Given the size and growth of the Chinese
market, and the corresponding massive inflow of new and prospective
incoming foreign investment into China, this decision carries particular
significance to current and potential investors who may seek to benefit from
protections offered by the various investment treaties that China has ratified.
The claimant of the dispute, Tza Yap Shum, a Chinese national
resident of Hong Kong, was a ninety percent shareholder of TSG Peru SAC
(TSG), a Peruvian food products company engaged in the manufacture,
import, export, and distribution of fish flour, operating indirectly through an
offshore entity in the British Virgin Islands.
In December 2004, the
Superintendencia Nacional de Administración Tributaria (SUNAT), Peru’s
national tax authority, imposed back taxes and fines on TSG amounting to
approximately US$4 million, based on the determination that TSG had
underreported its sales volumes. TSG subsequently filed a challenge to
105
See also China-Mexico BIT (2009), art. 4, and Trilateral Investment Agreement among
China, Japan and Korea (2012).
106
Italics added.
107
Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction
and Competence (June 19, 2009). See also Tza Yap Shum v. Republic of Peru, ICSID Case
No. ARB/07/6, Final Award on Merits (July 7, 2011); Tza Yap Shum v. Republic of Peru, ICSID
Case No. ARB/07/6, Decision on Annulment (Feb. 12, 2015) (denying Peru’s request for
partial annulment of the award against it).
43
SUNAT’s finding and tax imposition. While this legal challenge was pending,
SUNAT imposed a lien on TSG’s bank accounts in order to ensure payment of
unpaid taxes. TSG initially turned to various Peruvian administrative and
judicial procedures in order to challenge SUNAT’s actions, but these efforts
ultimately proved to be fruitless.
Claiming that SUNAT’s tax determination and lien effectively
paralyzed TSG’s business, Tza filed claims with ICSID relying on the 1995
China-Peru BIT.
Tza alleged that the “unlawful and arbitrary” tax lien
amounted to a violation of the
“Requirement of fair and equitable treatment to investments;”
“Requirement of protection to investments;”
“Requirement of compensating in case of expropriatory or similar
measures;” and
“Requirement of allowing the transfer of capital and earnings”108
provided under the China-Peru BIT.
In response, Peru raised a number of objections relating to the ICSID
tribunal’s jurisdiction. The tribunal was presented with two main jurisdictional
issues: the first issue involved the scope of disputes that may be referred to
ICSID arbitration, and the second dealt with the scope of the MFN clause. The
first issue will be revisited in Chapter Three of this paper, and the discussion
here will focus on the second jurisdiction issue, i.e., treatment of the MFN
clause.
As to the applicability of the MFN provision, Peru argued that the
instant claims were beyond the scope of the dispute settlement clause of the
China-Peru BIT. With respect to dispute settlement, Article 8, Paragraph 3 of
the China-Peru BIT provides that:
If a dispute involving the amount of compensation for
expropriation cannot be settled within six months after resort
to negotiations as specified in Paragraph 1 of this Article, it
may be submitted at the request of either party to the
international arbitration of the [ICSID] . . . . Any disputes
concerning other matters between an investor of either
108
Id. at para. 31.
44
Contracting Party and the other Contracting Party may be
submitted to the Center if the parties to the disputes so
agree . . . .109
With the exception of several recent treaties,110 the vast majority of
Chinese BITs contain dispute settlement provisions very similar to the ChinaPeru BIT provision excerpted above. Such dispute settlement provisions
(which also appear in numerous Soviet-era Russian and Eastern European BITs)
typically allow arbitration only of claims relating to the amount of
compensation for expropriation.
As such, the question presented was whether the tribunal could
exercise jurisdiction over Tza’s claims not concerning compensation for
expropriation, such as his claim of breach of the requirement of fair and
equitable treatment. Tza argued that the apparent limitation evident in the
text of the China-Peru BIT could be overcome by operation of the treaty’s
MFN treatment clause.111 According to Tza, this MFN clause entitled him to
import a less-restrictive dispute settlement provision from Article 12 of the
Peru-Colombia BIT,112 thus allowing for “any legal dispute,” including his own,
to be referred to ICSID arbitration. There, he would be able to litigate his claim
of violation of the provision on fair and equitable treatment.
In response, Peru relied on the plain meaning of the treaty text and
objected to the ICSID tribunal’s jurisdiction over issues unrelated to the
amount of compensation for expropriation. Peru specifically pointed to the
109
China-Peru BIT (1994).
See Agreement on Encouragement and Reciprocal Protection of Investments between
the Government of the People’s Republic of China and the Government of the Kingdom of
the Netherlands, China-Neth., November 26, 2001,
http://arbitrationlaw.com/files/free_pdfs/china-netherlands_bit.pdf [hereinafter ChinaFinland BIT (2001)] and China-Korea BIT (2007).
111
China-Peru BIT (1994), art. 3(2) (“The treatment and protection… shall not be less
favorable than that accorded to investments and activities associated with such
investments of investors of a third State.”).
110
112
Agreement between the Government of the Republic of Colombia and the
Government of the Republic of Peru on the Promotion and Reciprocal Protection
of Investments, art. 12(3), Colom.-Peru, April 26, 1994,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/798 [hereinafter
Colombia-Peru BIT (1994)] (The dispute settlement clause of the Peru-Colombia
BIT provides that “the dispute may be submitted . . . to the [ICSID]. Either
Contracting Party hereby consents to submit to the Centre any legal dispute
between a Contracting Party and a national or company of the other Contracting
Party in connection with an investment in the territory of the former for
settlement through conciliation or arbitration…”) (emphasis added).
45
following rules of treaty interpretation laid out in the Vienna Convention on
the Law of Treaties:
Article 31 General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and
purpose.
2. The context for the purpose of the interpretation of a
treaty shall comprise, in addition to the text, including its
preamble and annexes:
(a) any agreement relating to the treaty which was made
between all the parties in connection with the
conclusion of the treaty;
(b) any instrument which was made by one or more parties
in connection with the conclusion of the treaty and
accepted by the other parties as an instrument
related to the treaty.
3. There shall be taken into account, together with the
context:
(a) any subsequent agreement between the parties
regarding the interpretation of the treaty or the
application of its provisions;
(b) any subsequent practice in the application of the treaty
which establishes the agreement of the parties
regarding its interpretation;
(c) any relevant rules of international law applicable in the
relations between the parties.
4. A special meaning shall be given to a term if it is
established that the parties so intended.
Article 32 Supplementary means of interpretation
Recourse may be had to supplementary means of
interpretation, including the preparatory work of the treaty
and the circumstances of its conclusion, in order to confirm the
meaning resulting from the application of article 31, or to
46
determine the meaning when the interpretation according to
article 31:
(a)
leaves the meaning ambiguous or obscure; or
(b)
leads to a result which is manifestly absurd or
unreasonable.
The respondent argued that “supplementary means of interpretation,”
in accordance with Article 32 above, were inapplicable to its case, as the
meaning of the treaty left no noticeable ambiguity or obscurity as to the
scope of the dispute settlement provision. Even if the preparatory work of the
treaty were to be taken into consideration, such documents only reaffirmed
the contracting parties’ intent to limit the applicability of ICSID jurisdiction.
Furthermore, Peru presented supporting documentation on treaties signed by
China during the 1990s and argued that the default practice in Chinese BITs
was to limit disputes to issues around the amount of compensation. 113
According to these Chinese treaties, all other issues would necessitate prior
consent by both parties to the dispute, thus supporting the claim that China
did not intend the dispute settlement clause to apply to issues other than the
amount of compensation.
The tribunal sided with Peru and rejected Tza’s jurisdictional argument
on the interpretation of the MFN clause. Instead, the tribunal embraced the
plain meaning of the treaty text, relying on the aforementioned interpretive
principles established by the Vienna Convention on the Law of Treaties. The
language of the dispute settlement provision in the China-Peru BIT clearly
specified that arbitration of claims other than the amount of compensation
for expropriation would require a separate agreement between the parties to
the dispute, and in this case, Peru had not given its consent. The tribunal
therefore concluded that this specific treaty text overrode the broader
construction providing for extension of the MFN clause to dispute settlement
provisions. As a result, Tza’s claims other than those relating to the amount of
compensation for expropriation were dismissed for lack of jurisdiction.
113
Sr. Tza Yap Shum v. Republic of Peru, Decision on Jurisdiction and Competence, paras.
131-137.
47
The Tza decision may have potentially far-reaching implications for
foreign investors in China. The future application of the MFN clause in
Chinese BITs, however broadly drafted, is likely to be similarly restricted in
scope, causing claims arising out of substantive rights, such as fair and
equitable treatment, to be rejected for lack of jurisdiction.114
2. Japan
The vast majority of BITs and FTAs to which Japan is a party contain an
MFN clause. While Japan’s practice until 2002 was not to seek national
treatment protection for the admission of investment, Japan has a long
history of seeking to extend MFN treatment to admission activities. As an
example, the Japan-Sri Lanka BIT (1982) confers MFN treatment on the
admission of investment:
Article 2
1. Nationals and companies of either Contracting Party shall
within the territory of the other Contracting Party be
accorded treatment no less favourable than that accorded
to nationals and companies of any third country in regard
to the matters relating to the admission of investment.115
Since 2002, Japan has consistently taken the position that MFN
treatment should be extended to pre-establishment investment activities.116
Common exceptions to which MFN treatment does not apply in Japanese
practice include differential treatment granted by virtue of the establishment
of a customs union, free trade area, monetary union or double-taxation
treaties. For instance, the Japan-Vietnam BIT (2004) states:
Article 22
3.
The [MFN provision] shall not be construed so as to oblige a
Contracting Party to extend to investors of the other
Contracting Party and their investments any preferential
114
The Tribunal rendered its award on this dispute on July 7, 2011, and the ICSID
Secretary-General registered an application for annulment of the award filed by the
Republic of Peru on November 9, 2011.
115
Agreement between Japan and the Democratic Socialist Republic of Sri Lanka
Concerning the Promotion and Protection of Investment, Japan-Sri Lanka, March 1,1982,
http://www.bilaterals.org/IMG/pdf/srilanka_japan.pdf [hereinafter Japan-Sri Lanka BIT
(1982)].
116
Japan-Singapore EPA (2002), Japan-Papua New Guinea BIT (2011), and Japan-Thailand
EPA (2007).
48
treatment resulting from its membership of a free trade area,
a customs union, an international agreement for economic
integration or a similar international agreement.117
In other words, certain preferential treatment and advantages are
reserved exclusively for the benefit of other members with whom Japan has
concluded a specialized international agreement.
With the exception of two recent investment treaties, the Japan-Peru
BIT (2008) and the Japan-Switzerland FTA (2009), neither Japanese BITs nor
Japanese FTAs specify whether or not the MFN clause extends to the dispute
settlement provision.118 Shotaro Hamamoto and Luke Nottage point out that
many older generation BITs and recent BITs and FTAs separately address the
applicability of national treatment and MFN treatment with regard to access
to courts of the host state, and argue that such practice is an indication of
Japan’s understanding that the MFN clause does not extend to dispute
settlement unless explicitly specified otherwise.119
3. Korea
The 2001 Korean Model BIT states that the MFN treatment standard
applies to investment after establishment and to investors with respect to the
management, maintenance, use, enjoyment or disposal of their investments.
MFN treatment does not extend to the establishment, acquisition, or
expansion phases of investment. As an example, the Korea-Jamaica BIT (2007)
states:
Article 3 Treatment of Investments
(2) Each Contracting Party shall in its territory accord to investors
of the other Contracting Party, as regards management,
maintenance, use, enjoyment or disposal of their investments,
treatment which is . . . not less favourable than that which it
117
Japan-Vietnam BIT (2003).
Agreement between Japan and the Republic of Peru for the Promotion, Protection and
Liberalisation of Investment, art. 4(2), Japan-Peru, November 22, 2008,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1733 [hereinafter JapanPeru BIT (2008)] (“It is understood that the [MFN Treatment] to be accorded with respect
to investment activities does not encompass dispute settlement mechanisms . . . .”). See
also Japan-Switzerland EPA (2009), art. 88(2).
119
LUKE NOTTAGE & SHOTARO HAMAMOTO, COMMENTARIES ON SELECTED MODEL INVESTMENT
TREATIES 360 (Chester Brown ed., Oxford University Press 2013).
49
118
accords to its own investors or to the investors of any third
State.120
The Korea-Japan BIT and the investment chapters of the Korea-U.S.
FTA, on the other hand, extend the scope of national treatment and MFN
treatment to cover the establishment, acquisition, and expansion stages of
investment, and provide detailed lists of non-conforming measures in the
annexes to the respective main agreements. For instance, the Korea-Japan
BIT provides that:
Article 2
1.
Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to its own
investors and their investments (hereinafter referred to as
“national treatment”) with respect to the establishment,
acquisition,
expansion,
operation,
management,
maintenance, use, enjoyment, and sale or other disposal of
investments (hereinafter referred to as “investment and
business activities”).
2.
Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to investors of
any third country and to their investments (hereinafter
referred to as “most-favoured-nation treatment”) with
respect to investment and business activities.121
Here, the treaty first defines the scope of investment and business
activities, and thereafter in the subsequent paragraph applies MFN treatment
to this relatively expansive definition of investment.
In general, Korean BITs do not explicitly address whether the MFN
clause applies to investor-state dispute settlement provisions. A Korean
120
Agreement between the Government of the Republic of Korea and the Government of
Jamaica for the Promotion and Protection of Investments, Jam.-S. Kor., June 10, 2003,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1720 [hereinafter JamaicaKorea BIT (2003)] (emphasis added).
121
See also, U.S.-Korea FTA (2007), art. 11.12.
50
official who participated in the Korea-Japan BIT negotiation process stated
that the two Contracting Parties shared an understanding that MFN
treatment (found in Article 2, Paragraph 2 of the Korea-Japan BIT) would not
apply to dispute settlement procedures; this common understanding was
memorialized in the record of discussion prepared during the negotiation.122
4. MFN Applicability among China, Japan, and Korea
The varying scope of the national treatment provisions and MFN
clauses offered by and to China, Japan, and Korea in the respective BITs
among them illustrates how MFN treatment provisions operate in practice. In
the Japan-Korea BIT, Korea and Japan mutually grant national treatment and
MFN treatment with respect to the establishment, acquisition, and expansion
of investment:
Article 2
1. Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to its own
investors and their investments (hereinafter referred to as
“national treatment”) with respect to the establishment,
acquisition,
expansion,
operation,
management,
maintenance, use, enjoyment, and sale or other disposal of
investments (hereinafter referred to as “investment and
business activities”).123
2. Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to investors of
any third country and to their investments (hereinafter
referred to as “most-favoured-nation treatment”) with
respect to investment and business activities.
On the other hand, China and Japan accord each other MFN treatment
with respect to the admission of investment and “matters in connection
122
CHANSIK HAN, ET AL, HANIL TUJA HYUPJUNG HAESUL [COMMENTARY ON KOREA-JAPAN
BILATERAL INVESTMENT AGREEMENT] 120-121 (Korea Institute of Industry Research 2003).
123
Italics added.
51
therewith” (Art. 2(2) of China-Japan BIT (1989)),124 and no national treatment
is provided as to the admission of investment (Art. 3(2)-(3)).125 Similarly, China
and Korea extend to each other MFN treatment, but not national treatment,
of the admission of investment.126 However, the MFN provisions China has
obtained in its respective investment treaties with Japan (Article 3(1) of ChinaJapan BIT) and Korea (Article 3(3) of China-Korea BIT), can be read in relation
to the national treatment obligations Japan and Korea have exchanged with
each other, in accordance with Article 2(1) of their BIT introduced above,
Chinese investors may, by invoking MFN clauses embedded in China’s BIT
with either Japan or Korea, as is appropriate, claim treatment not less
favorable than that accorded to Japanese investors in Korea and Korean
investors in Japan. In short, Chinese investors may claim national treatment
with respect to the establishment and acquisition of their investment in Japan
124
China-Japan BIT (1988) (“Nationals and companies of either Contracting Party shall
within the territory of the other Contracting Party be accorded treatment no less
favourable than that accorded to nationals and companies of any third country in respect
of the admission of investment and the matters in connection therewith.”).
125
China-Japan BIT (1989), arts. 3(2)-3(3):
2. The treatment accorded by either Contracting Party within its territory to
nationals and companies of the other Contracting Party with respect to
investments, returns and business activities in connection with the
investment shall not be less favourable than that accorded to nationals
and companies of the former Contracting Party.
3. The term “business activities in connection with the investment” referred
to in the provisions of the present Article includes:
(a) the maintenance of branches, agencies, offices, factories and
other establishments appropriate to the conduct of business
activities;
(b) the control and management of companies which they have
established or acquired;
(c) the employment and discharge of specialists including technical
experts, executive personnel and attorneys, and other workers;
(d) the making and performance of contracts.
126
See, China-Korea BIT (2007), art. 3(1) and art. 3(3):
1. Each Contracting Party shall in its territory accord to investors of the
other Contracting Party and to their investments treatment no less
favourable than the treatment it accords in like circumstances to its own
investors and their investments (hereinafter referred to as “national
treatment”) with respect to the expansion, operation, management,
maintenance, use, enjoyment, and sale or other disposal of investments
(hereinafter referred to as “investment and business activities”).
3. Each Contracting Party shall in its territory accord to investors of the
other Contracting Party and to their investments and activities
associated with such investments by the investors of the other
Contracting Party treatment no less favourable than that accorded in like
circumstances to the investors and investments and associated activities
by the investors of any third State (hereinafter referred to as “mostfavoured nation treatment”) with respect to investments and business
activities, including the admission of investment.
52
and Korea. In contrast, China has yet to offer national treatment on the
establishment and acquisition of investment to any contracting party.
Accordingly, Japanese and Korean investors will only be able to rely on their
MFN status, and will thus be incapable of seeking national treatment relating
to the establishment and acquisition of their investments in China.
On the other hand, Japanese investors may use the MFN treatment it
has secured with China to take advantage of a comparatively lenient provision
embedded in the China-Korea BIT (2007). This latter treaty extends the
application of national treatment and MFN treatment to the “expansion” of
investment:
Article 3 Treatment of Investment
2. Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments treatment no less favourable than the
treatment it accords in like circumstances to its own
investors and their investments . . . with respect to the
expansion, operation, management, maintenance, use,
enjoyment, and sale or other disposal of investments
(hereinafter referred to as “investment and business
activities”).
3. Each Contracting Party shall in its territory accord to
investors of the other Contracting Party and to their
investments
and
activities
associated
with
such
investments by the investors of the other Contracting
Party treatment no less favourable than that accorded in
like circumstances to the investors and investments and
associated activities by the investors of any third State . . .
with respect to investments and business activities,
including the admission of investment.
Thus, through the operation of the MFN clause in Article 3(1) of the
Japan-China BIT, Japanese investors may claim the same treatment Korean
investors and investments in China receive with respect to the expansion of
investment.
C. Summary
53
This Section focused on analyzing the investment treaty practices of
China, Japan, and Korea with respect to two standards of protection, i.e.,
national treatment and MFN treatment. In terms of national treatment, China
gradually distanced itself from a planned economy legacy in which the mutual
exchange of national treatment assurances was virtually nonexistent.
However, the specific extent to which China will offer protection under the
current formulation largely depends on the degree to which its domestic legal
system differentiates locals and foreigners. With respect to the application of
MFN treatment, China has adopted a more liberal approach compared to its
stance toward national treatment. However, the more recent China-Canada
BIT displays a lack of willingness to relinquish control over the level of
protection offered to foreigners.
At the same time, China’s increasing
utilization of specific carve-outs resembles that of developed economies,
albeit in form rather than content, and shows a heightened awareness of the
treaty practices of other states.
The evolution of national treatment provision drafting in Japanese
investment treaties reveals a general progression toward market liberalization.
For instance, national treatment coverage has been expanded to encompass
the establishment and acquisition stages. Meanwhile, Japan has been careful
to carve out certain domestic sectors associated with strong political
constituencies or security concerns, such as fisheries and the explosives
industry.
Korea has displayed a course of purposeful flexibility, in which it
adopts different stances in negotiations with capital-importing and with
capital-exporting states. As such, Korea has demonstrated a certain level of
adjustability in its investment treaty practice, often accommodating specific
requests when unavoidable, but at the same time seeking to maximize the
level of protection offered to its outbound investors when possible.
54
III. Expropriation and the Fair and Equitable Treatment Standard
This section focuses on absolute protection standards embedded in
the investment treaties of China, Japan, and Korea. The discussion begins
with the issue of expropriation and subsequently proceeds to analyze the “fair
and equitable treatment” (FET) standard.
A. Expropriation
One of the main concerns common to all foreign investors involves
political risk, i.e., the possibility that a host government may unduly interfere
with the ownership, management and business activities of a foreign investor
within the given host state. The most extreme form of such interference
occurs when the host state physically seizes the assets of foreign investors
located in the host state’s territory, or deprives the investors of legal or
beneficial title thereof. The twentieth century witnessed the occurrence of a
significant number of such expropriations.127 Since the execution of the first
BIT by and between Germany and Pakistan in 1959, protection from
expropriation without compensation has been a core subject matter of
European BITs. Even in the 2000s, however, governmental expropriation of
foreign investors’ property and business has not been uncommon in certain
parts of the world; a significant number of arbitration cases arising out of
investment treaty provisions have been brought by foreign investors seeking
compensation for such state actions. According to Reed, Paulsson, and
Blackaby, as of January 2010, expropriation claims had been advanced in 53
decided ICSID investment treaty cases, out of which the tribunal involved
found expropriation in 15 cases.128
127
A substantial amount of cases on expropriation adjudicated by the Iran-US Claims
Tribunal and other ad hoc arbitral institutions is readily available. See, e.g., AMOCO
International Finance Corp. v. Government of Islamic Republic of Iran, Award of 14 July 1987,
15 Iran-US CTR 189; Philips Petroleum Company Iran v. Islamic Republic of Iran, Award of 19
June 1989, 21 Iran-US CTR 79; Mobil Oil Iran, Inc. v. Government of the Islamic Republic of
Iran, Award of 14 July 1987, 16 Iran-US CTR 3; The American Independent Oil Co. v. The
Government of the State of Kuwait, Award of 24 May 1982, 21 ILM 976 (1982); Libyan
American Oil Co. v. The Government of Libyan Arab Republic, Award of 12 April 1977, 62 ILR
141 (1982).
128
Reed, Paulsson and Blackaby at 90. See, e.g., Nykomb Synergetics Technology Holding
AB, Stockholm v. The Republic of Latvia, ARB SCC, Award of December 16, 2003;
Occidental Exploration and Production Company v. The Republic of Ecuador, LCIA Case No.
UN3467, Award of July 1, 2004; EnCana Corporation v. Republic of Ecuador, LCIA UN3481,
Award of February 3, 2006, and Tza Yap Shum v. Republic of Peru, ICSID Case No.
ARB/07/6, Final Award on Merits, dated July 7, 2011.
55
While outright expropriation or nationalization continues to takes
place, host-states often manipulate their legislative and regulatory authority
in more subtle ways, with an objective to interfere with a foreign investor’s
property rights or investment operations. In extreme cases, such interference
may rise to the level of an indirect expropriation, even as the investor
maintains nominal possession or ownership of its investment. In an attempt to
address this issue, a majority of IIAs include the concept of indirect
expropriation in their definition of expropriation. The investment practices of
China, Japan, and Korea are generally in line with this modern trend.129
Following the introduction of the U.S. Model BIT in 2004, serious
efforts have been exerted in the investment chapters of certain FTAs to
determine the dividing line between protecting investors’ property rights and
preserving host-state governments’ legitimate right to regulate foreign
investment. However elaborate the treaty language may be, the appropriate
point of differentiation has been hard to ascertain. An analysis of the KoreaU.S. FTA, to be discussed below, will serve as an illuminating example of such
difficulties.
In general, most IIAs condition the legality of an act of expropriation
on four requirements, which are considered to reflect customary international
law. Rudolf Dolzer and Christoph Schreuer succinctly summarize these four
conditions as follows:
-
The measure must serve a public purpose . . . .
-
The measure must not be arbitrary and discriminatory
within the generally accepted meaning of the terms.
-
[T]he procedure of expropriation must follow principles of
due process.
-
The expropriatory measure must be accompanied by
prompt, adequate, and effective compensation . . . .130
Dolzer and Schreuer point out that determining “the measure of
compensation has been by far the most controversial” element of these
conditions. 131 After a few decades of debate over what constitutes an
129
See, e.g., China-Korea BIT (2007), art. 4 and Japan-Korea BIT (2003), art. 10(2).
Dolzer and Schreuer at 91.
131
Id.
56
130
appropriate level of compensation, the fair market value determination
method has been established as the generally accepted standard. The phrase,
“prompt, adequate, and effective” also known as the “Hull formula,” has been
embraced as the representative terminology relied upon to refer to the fair
market value standard.132 As has been the case with European traditional
capital-exporting states, Japan and Korea have increasingly shown a
willingness to embrace this Hull formula in their BITs.133 In contrast, Chinese
BITs employ a rather conservative approach, requiring that “compensation
shall . . . be made without delay, be effectively realizable and freely
transferable.”134 However, in recent years, China has gradually become more
receptive to the Hull formula. The following discussion will explore the
parameters of the expropriation clauses found in Chinese, Japanese, and
Korean BITs.
1. Expropriation in Chinese BITs
Each of the three versions of China’s Model BIT includes an
expropriation clause. Some experts point to the expropriation clause as one
of the most controversial aspects of China’s attitude toward foreign
investment.135 Assessing the validity of such claims necessitates a greater
level of scrutiny of the specific language the most recent Model BIT, Version III,
employs:
Article 4: Expropriation
1. Neither Contracting Party shall expropriate, nationalize or
take other similar measures (hereinafter referred to as
132
Dolzer and Schreuer further discuss the difficulty involved in determining specific
method of valuation in accordance with the fair market value standard. For a more
detailed examination on the issue of expropriation, see id. at 89-118.
133
See, e.g., Agreement between Japan and the Republic of Turkey Concerning the
Reciprocal Promotion and Protection of Investment, art. 5(3), Japan-Turk., Feb. 12, 1992,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1736 [hereinafter JapanTurkey BIT (1992)]; Agreement between the Government of Hong Kong and the
Government of Japan for the Promotion and Protection of Investment, art. 5(1), H.K.Japan, May 15, 1997, http://www.bilaterals.org/IMG/pdf/hongkong_japan.pdf [hereinafter
Hong Kong-Japan BIT (1997)]; Japan-Korea BIT (2003), art. 10(3); Agreement between the
Government of the United Mexican States and the Government of the Republic of Korea
for the Promotion and Reciprocal Protection of Investments, art. 5(2), Mex.-S. Kor., Nov.
2000, http://www.sice.oas.org/Investment/BITSbyCountry/BITs/MEX_Korea_e.asp
[hereinafter Mexico-Korea BIT (2000); and Morocco-Korea BIT (1999), art. 5(2).
134
Chinese Model BIT, Version III, Art 4(2).
135
Kong Qingjiang, Bilateral Investment Treaties: The Chinese Approach and Practice,
1998-1999 ASIAN YEARBOOK OF INTERNATIONAL LAW (Vol. 8) 106, 125.
57
‘expropriation’) against the investments of the investors of
the other Contracting Party in its territory, unless the
following conditions are met:
(a)for the public interests;
(b)
under domestic legal procedure;
(c) without discrimination;
(d)
against compensation.136
Version III of the Chinese Model BIT addresses both direct
expropriation and “other similar measures,” which may be interpreted as
incorporating the concept of “indirect expropriation” into the scope of
coverage for protection against expropriation. As is standard in expropriation
clauses in the BITs of other states, four prerequisites are delineated so as to
enable expropriation under certain limited circumstances.
However,
conditions (b) and (d) cited above, relating to domestic legal procedure and
compensation, respectively, unveil a not insignificant variation from the
international standard.
First, contrary to a significant number of expropriation clauses in the
IIAs of other states, no reference is made in the most recent Chinese Model
BIT to the requirement that an expropriation be conducted in compliance with
“due process.” Instead, the Model BIT specifies that expropriation shall be
made in accordance with “domestic legal procedure.”
The degree of
divergence between the terms “due process” and “domestic legal procedure”
is not clear, and the significance of such difference is yet to be determined. It
is possible to infer, at the very least, that the level of divergence will not be
great if Chinese domestic legal procedures concerning expropriation satisfy
customary international law standards regarding due process. If, however,
this is not the case, it is more likely that there exists a significant distance
between the Chinese domestic standards for expropriation and the commonly
accepted international practice in this area.
On the other hand, Shan and Gallagher express doubt as to whether
any significant difference exists between Chinese legal procedure and
international due process standards, since the domestic law in China relating
136
Chinese Model BIT, Version III, Art 4(1).
58
to expropriation requires that certain commonly accepted prerequisites be
met, e.g., that the given expropriation be made for the public interest and that
appropriate compensation be paid.137 As will be discussed below, in more
recent treaties introduced after the adoption of Version III of the Chinese
Model BIT, China has shown a willingness to adapt to more common due
process terminology and international standards.
China’s second noticeable deviation from the more widely accepted
international expropriation formulation involves China’s reluctance to include
in its BITs any reference to certain accepted principles, such as “prompt,
adequate and effective compensation.” Instead, the Model BIT employs a
rather vague “against compensation” formulation.
In providing further
clarification as to this principle of valuation, Paragraph 2 of Article 4 adds to
the excerpt above:
2. The compensation mentioned in Paragraph 1 of this Article
shall be equivalent to the value of the expropriated
investments immediately before the expropriation is taken
or the impending expropriation becomes public knowledge,
whichever is earlier. The value shall be determined in
accordance with generally recognized principles of
valuation. The compensation shall include interest at a
normal commercial rate from the date of expropriation
until the date of payment. The compensation shall also be
made without delay, be effectively realizable and freely
transferable.138
Here, the Chinese Model BIT once again distinguishes itself from the
international norm – in this case, the norm of referring to “fair market value”
and the Hull formula to determine the appropriate level of compensation. As
was the case in the analysis above of the Model BIT’s “domestic legal
procedure” language, one may similarly inquire into the significance of such
different wording.
Since the Model BIT requires timely, realizable
compensation with liquidity, it may be that the actual compensation provided
137
Norah Gallagher & Wenhua Shan, China, in COMMENTARIES ON SELECTED MODEL
INVESTMENT TREATIES, at 163.
138
Italics added.
59
in response to expropriation under this treaty text is not substantially different
from the “prompt” and “effective” compensation the Hull formula requires. It
is unclear what specific distinction China intended to effect as a result of this
differentiated phrasing and absence of reference to “fair market value.” Shan
and Gallagher are of the opinion that “[o]n balance . . . China’s position on
expropriation and the laws that an international tribunal would apply are not
so different to most other States.”139 If, as Shan and Gallagher suggest, the
compensation computation formula provided for under domestic legal
procedures is consistent with international standards in actual practice, one
may question why China prefers to rely on its specific text formulation, when
it could raise uncertainty for foreign investors who would otherwise take more
comfort in the common formulation referring to “fair market value” and
“prompt, adequate and effective” compensation.
Applying the Model BIT to Recent IIAs
The China-Uzbekistan BIT, which entered into force on September 1,
2011, captures the essence of the Version III Model BIT approach while
simultaneously reflecting an increased level of comfort with global standards
relating to expropriation.140 Article 6 of this BIT provides as follows:
Article 6 Expropriation
1. Neither Contracting Party shall expropriate, nationalize or
take any other measure the effects of which would be
equivalent to expropriation or nationalization against the
investments of the investors of the other Contracting Party
in its territory (hereinafter referred to as expropriation),
unless the following conditions are met:
(a) for the public interests;
(b) in accordance with domestic legal procedure and
relevant due process;
(c) without discrimination;
139
Norah Gallagher & Wenhua Shan, China, in COMMENTARIES ON SELECTED MODEL
INVESTMENT TREATIES, at 163.
140
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, China-Uzb., Apr. 19, 2011,
http://tfs.mofcom.gov.cn/article/h/au/201111/20111107819511.shtml [hereinafter ChinaUzbekistan BIT (2011)].
60
(d) against compensation.
“Measure the effects of which would be equivalent to
expropriation or nationalization” means indirect expropriation.
2. The determination of whether a measure or a series of
measures of one Contracting Party constitutes indirect
expropriation in Paragraph 1 requires a case-by-case, factbased inquiry that considers, among other factors:
(a) the economic influence of a measure or a series of
measures, although the fact that a measure or a series
of measures of the Contracting Party has an adverse
effect on the economic value of investments,
standing alone, does not establish that an indirect
expropriation has occurred;
(b) the extent to which the measure or the series of
measures grant discrimination in scope or application
over investors and associated investments of the
other Contracting Party;
(c) the extent to which the measure or the series of
measures cause damage to reasonable investment
expectation of investors of the other Contracting
Party: such expectation arises from the specific
commitments made by one Contracting Party to the
investors of the other Contracting Party;
(d) the character and purpose of a measure and a series of
measures, whether it is adopted for the purpose of
public interest in good faith, and whether it is in
appropriation to the purpose of expropriation.
3. Except in exceptional circumstances, such as the measures
adopted severely surpassing the necessity of maintaining
corresponding
reasonable
public
welfare,
non-
discriminatory regulatory measures adopted by one
Contracting Party for the purpose of legitimate public
welfare, such as public health, safety and environment, do
not constitute indirect expropriation.
61
4. The compensation mentioned in Paragraph 1 of this Article
shall be equivalent to the fair market value of the
expropriated
investments
immediately
before
the
expropriation is taken or the impending expropriation
becomes public knowledge, whichever is earlier. The
compensation shall also include interest at a reasonable
commercial rate until the date of payment. The
compensation shall be made without unreasonable delay,
be effectively realizable and freely transferable.141
Notice, for example, that in addition to the traditional “in accordance
with the local legal procedure” language, Article 6(1)(b) adds the phrase
“relevant due process” as a necessary component of the second prerequisite
to legitimate expropriation.142 As examined above, the “due process” phrase
is commonly used in numerous other IIAs, and thus, the inclusion of such a
phrase may be indicative of China’s intent to follow other advanced
economies’ treaty practices, to the extent practicable. The Korea-China BIT
(2007) goes a step further in referring to the international standard, requiring
that the expropriation be “in accordance with domestic law and international
standard of due process of law.”143 It is also noteworthy that Paragraph 4 of
the BIT states that compensation “shall be equivalent to the fair market value.”
At the same time, Paragraphs 2 and 3 limit the scope of indirect
expropriation and adopt a case-by-case approach to corresponding
determinations, in line with the formula set forth in Annex B of the 2004 US
Model BIT, with some minor modifications.144 Paragraph 3 further clarifies
141
Italics added.
See, e.g., Trilateral Investment Agreement among China, Japan and Korea (2012), art.
11(1)(c) (China’s demonstration of “due process” formulation acceptance).
143
China-Korea BIT (2007), art. 4(1).
144
Annex B Expropriation
(a) The determination of whether an action or series of actions by a Party,
in a
specific fact situation, constitutes an indirect expropriation, requires a
case-by case,
fact-based inquiry that considers, among other factors:
(i) the economic impact of the government action, although the fact
that an
action or series of actions by a Party has an adverse effect on the
economic
value of an investment, standing alone, does not establish that an
indirect
62
142
that measures adopted “for the purpose of legitimate public welfare, such as
public health, safety and environment, do not constitute indirect
expropriation.”145 In other words, China is treading carefully in the vast waters
of indirect expropriation, an issue that inevitably entails a high level of political
sensitivity.
As such, recent Chinese investment treaty practice reveals both a
greater degree of awareness toward the global norm, and simultaneously a
higher level of precision in limiting the scope of protections China intends to
offer, when the provision of certain benefits (relating, in general, to state
sovereignty) are impracticable.
Indirect Expropriation Claim in Tza Yap Shum Case
Returning to the Tza Yap Shum case, in which a Chinese claimant
invoked an indirect expropriation claim against Peru, Tza claimed that
SUNAT’s audit conclusions and subsequent imposition of interim measures,
which precluded Peruvian banks from conducting regular transactions with
TSG, amounted to an unjustified indirect expropriation in breach of the
expropriation clause embedded in the China-Peru BIT.146 The text of the
expropriation clause in the China-Peru BIT provides that:
Article 4
1. Neither Contracting Party shall expropriate, nationalize
or take similar measures (hereinafter referred to as
“expropriation”) against investments of investors of the
other Contracting Party in its territory, unless the
following conditions are met:
(a)
for the public interest;
expropriation has occurred;
(ii) the extent to which the government action interferes with distinct,
reasonable investment-backed expectations; and
(iii) the character of the government action.
(b) Except in rare circumstances, non-discriminatory regulatory actions by
a Party
that are designed and applied to protect legitimate public welfare
objectives, such
as public health, safety, and the environment, do not constitute indirect
expropriations.
2004 US Model BIT available at:
http://www.state.gov/documents/organization/117601.pdf.
145
China-Uzbekistan BIT (2011), art. 6(3) (Emphasis added).
146
China-Peru BIT (1994).
63
(b)
under domestic legal procedure;
(c)
without discrimination;
(d)
against compensation.
The Tribunal found that the interim measures imposed by the
Peruvian tax authority were arbitrary and thus constituted an indirect
expropriation, due to, among other reasons, the severe impact caused by
requiring Peruvian banks to freeze TSG-related funds and SUNAT’s failure to
abide by its own guidelines and procedures. In so determining, the Tribunal
recognized the regulatory and administrative authority of SUNAT and
concluded that the audit conducted by SUNAT did not itself constitute an
expropriation, as it did not deviate significantly from audits of previous years.
With respect to the interim measures, however, the Tribunal pointed to TSG’s
heavy reliance on Peruvian banks for business transactions and noted that
TSG’s sales dropped approximately S/. 76.6 million in 2005-2006. On the
question of noncompliance with internal procedures, the Tribunal pointed out
that SUNAT is allowed to impose interim measures to ensure tax payment in
“exceptional circumstances.” According to the Tribunal, however, SUNAT’s
allegation that inaccurate total sales volume were recorded on TSG’s books
lacked precise identification and detailed evidentiary support.147 The Tza Yap
Shum decision thus sheds light on what sort of measures may constitute
indirect expropriation in violation of IIAs with China. In the instant case,
ordering banks to retain a foreign investor’s funds for taxation purposes
amounted to illegal expropriation.
As to the question of the appropriate level of compensation, the treaty
text found in Article 4(2) of the China-Peru BIT provides as follows:
2. The compensation . . . shall be equivalent to the value
of the expropriated investments at the time when
expropriation is proclaimed, be convertible and freely
147
Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Final Award on Merits (July
7, 2011) (Other reasons in support of the arbitrariness determination include: (i) the
ineffectiveness of SUNAT’s interim measures; (ii) lack of effective due process; and (iii) the
fact that TSG had mitigated its damages and did not act in bad faith.); see also Tza Yap
Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Annulment (Feb. 12, 2015)
(denying Peru’s request for partial annulment of the award against it).
64
transferable. The compensation shall be paid without
unreasonable delay.
Pursuant to this provision, the Tribunal required that the Claimant be
put in the same position he would have been placed in had the expropriation
not occurred. The Claimant and Respondent agreed in theory that the
appropriate level of compensation should cover the value of TSG.
The
Tribunal rejected Tza’s proposed discounted cash flow method and embraced
an “adjusted book value” valuation, concluding that the applicable interest
rate should be tied to the average monthly figure on 10-year U.S. treasury
bonds.148 As a result, whereas Tza had initially sought approximately US$25
million, he was eventually awarded US$786,306.24 in compensation, plus
interest awarded until the date of the Award of an additional
US$227,201.30.149
2. Expropriation in Japanese BITs
In general, Japanese practices regarding expropriation track those of
the model treaties of Western European capital-exporting states. Article 10 of
the Japan-Korea BIT provides an example of Japan’s approach toward the
issue of expropriation in its investment treaties:
Article 10
2. Neither Contracting Party shall expropriate or nationalize
investments in its territory of investors of the other
Contracting Party or take any measure tantamount to
expropriation or nationalization (hereinafter referred to as
“expropriation”) except:
(a)
for a public purpose;
(b)
in a non-discriminatory manner;
(c)
upon payment of prompt, adequate and effective
compensation; and
(d)
in accordance with due process of law.
3. Compensation shall be equivalent to the fair market value
of the expropriated investment immediately before the
expropriation occurred. The fair market value shall not
148
149
Id. at 8-9.
Id.
65
reflect any change in value occurring because the
expropriation had become publicly known earlier. The
compensation shall be paid without delay and shall carry
an appropriate interest, taking into account the length of
time until the time of payment. It shall be effectively
realisable and freely transferable and shall be freely
convertible into the currency of the Contracting Party of
the investors concerned, and into freely usable currencies
as defined in the Articles of Agreement of the International
Monetary Fund, at the market exchange rate prevailing on
the date of expropriation.
4. Without prejudice to the provisions of Article 15
[Investment Dispute Provision], the investors affected shall
have a right of access to the courts of justice or
administrative tribunals or agencies of the Contracting
Party making the expropriation for a prompt review of the
investors’ case and the amount of compensation in
accordance with the principles set out in this Article.150
All of Japan’s BITs and FTAs expand the scope of expropriation
regulation to include both direct and indirect expropriation. This is achieved
by including broadly drafted language, such as the “any measure tantamount
to expropriation” phrase used above, to define expropriation.
All Japanese BITs and FTAs, with the exception of the Japan-China BIT,
present four conditions, in accordance with customary international law, to be
satisfied in order to constitute lawful expropriation. As seen in the treaty text
above, direct or indirect expropriation is not lawful unless it is (i) undertaken
for a public purpose, (ii) carried out on a non-discriminatory basis, (iii)
conditioned upon payment in line with the Hull formula and (iv) carried out in
accordance with due process of law. The Japan-China BIT, on the other hand,
accommodates China’s particular stance as analyzed in the preceding
section,151 by replacing the standard “due process of law” language with an “in
150
151
Japan-Korea BIT (2002) (discussion of Fair and Equitable Treatment.) Emphasis added.
China-Japan BIT (1988), pp. 56-58.
66
accordance with laws and regulations” formulation, one which omits the word
“domestic” generally preferred in Chinese investment treaty practice:
Article 5
2.
Investments and returns of nationals and companies of
either Contracting Party shall not be subjected to
expropriation, nationalization or any other measures the
effects of which would be similar to expropriation or
nationalization,
within
the
territory
of
the
other
Contracting Party unless such measures are taken for a
public purpose and in accordance with laws and regulations,
are
not
discriminatory,
and,
are
taken
against
compensation.
3.
The compensation referred to in the provisions of
paragraph 2 of the present Article shall be such as to place
the nationals and companies in the same financial position
as that in which the nationals and companies would have
been if expropriation, nationalization or any other
measures the effects of which would be similar to
expropriation or nationalization, referred to in the
provisions of paragraph 2 of the present Article, had not
been taken. Such compensation shall be paid without delay.
It shall be effectively realizable and freely transferable at the
exchange rate in effect on the date used for the
determination of amount of compensation.
4.
Nationals and companies of either Contracting Party
whose investments and returns are subjected to
expropriation, nationalization or any other measures the
effects of which would be similar to expropriation or
nationalization, shall have the right of access to the
competent courts of justice and administrative tribunals
and agencies of the other Contracting Party taking the
measures concerning such measures and the amount of
compensation in accordance with the applicable laws and
67
regulations of such other Contracting Party.152
Furthermore, instead of requiring application of the Hull formula, the
China-Japan treaty text simply states that the expropriation shall not be taken
“against compensation,” and specifies that such compensation shall be
“effectively realizable and freely transferable.”
Although Japanese
investment treaty practice has shown consistently with other industrialized
western states, Japan has also been willing to accommodate certain Chinaspecific treaty formulations.
Standard of Compensation
With respect to the standard of compensation, Article 12 of the JapanCambodia BIT (2007) captures the essence of the standard protections offered
in Japan’s newest generation of investment agreements. Key concepts include
compensation (i) at the “fair market value of the expropriated investments at
the time the expropriation was publicly announced or occurred, whichever is
earlier,” (ii) “paid without delay,” and (iii) “effectively realizable and freely
transferable:”153
Article 12
2.
Compensation shall be equivalent to the fair market value
of the expropriated investments at the time when the
expropriation was publicly announced or when the
expropriation occurred, whichever is earlier. The fair
market value shall not reflect any change in value
occurring because the expropriation had become publicly
known earlier.
3.
The compensation shall be paid without delay and shall
include interest at a commercially reasonable rate, taking
into account the length of time until the time of payment.
It shall be effectively realizable and freely transferable and
shall be freely convertible into the currency of the
Contracting Party of the investors concerned, and into
freely usable currencies as defined in the Articles of
Agreement of the International Monetary Fund, as may be
152
Id. (Article 5(1) lays out a general principle that investment shall receive protection and
security in the other Contracting Party’s territory.) (Emphasis added).
153
Cambodia-Japan BIT (2002), art. 12(2)-12(3).
68
amended, at the market exchange rate prevailing on the
date of expropriation.154
In short, the basic principles of compensation for expropriation set out
in the Hull formula and interrelated, generally accepted methods of fair
market value determination are commonly found in recent Japanese
treaties.155
Taxation and Expropriation
As to the issue of whether taxation may constitute expropriation,
Japanese investment treaty practice has not revealed any noticeable
consistency. Certain BITs and FTAs simply state that a taxation measure may
amount to expropriation.156 For instance, Article 23(1) of the Japan-Peru BIT
first introduces a principle that “[n]othing in this Agreement shall apply to
taxation measures except as expressly provided for in this Article.” 157
Thereafter, Article 23(3) explicitly lays out a few articles, including a provision
on expropriation, that apply to taxation measures.
Other more recent investment treaties exclude taxation measures, to
varying degrees, from protection against expropriation. For instance, the
Japan-India FTA (2011) generally takes the issue of taxation measures out of
the scope of the investment treaty itself: “Unless otherwise provided for in
this Agreement, the provisions of this Agreement shall not apply to any
taxation measures.”158 Neither the Chapter on Investment nor any other
provision in this agreement expressly links investment and expropriation to
taxation measures, thus rendering expropriation inapplicable to taxation.
In contrast, the Japan-Mexico FTA (2005) takes a different approach:
Article 170 Taxation
4.
(b) The investor shall refer the issue . . . to the competent
authorities of both Parties to determine whether such
measure is not an expropriation. If the competent
154
Id., emphasis added.
China-Japan BIT (1988), art. 5(3) (serves as an outlier to this general treaty practice of
Japan).
156
See, e.g., Japan-Singapore EPA (2002), art. 87; Japan-Malaysia EPA (2005), art. 81(5);
Cambodia-Japan BIT (2002), art. 22; Japan-Peru BIT (2008), art. 23(3).
157
Japan-Peru BIT (2008).
158
Comprehensive Economic Partnership Agreement between Japan and the Republic of
India, art. 10(1), India-Japan, Feb. 16, 2011, http://www.mofa.go.jp/region/asiapaci/india/epa201102/pdfs/ijcepa_ba_e.pdf [hereinafter India-Japan EPA (2011)].
69
155
authorities of both Parties do not consider the issue or,
having considered it, fail to determine that the measure is
not an expropriation within a period of 180 days of such
referral, the investor may submit its claim to arbitration
under Article 79 [Provision on Submission of a Claim to
Arbitration].159
This FTA first defers the issue of taxation to the competent authorities
of both the host and home states, and provides that investor-state arbitration
is not available with respect to taxation measures determined not to be
expropriation by these authorities.
If the competent authorities of the
contracting state involved fail to timely respond or determine that a taxation
measure is an expropriation within a 180-day time frame, the foreign investor
is entitled to submit a claim to arbitration.
In sum, Japanese investment treaty practice relating to the issue of
expropriation has generally tracked that of major European capital exporting
economies, with the exception of its BIT with China, in which Japan
accommodated certain deviations from common international practice that
were insisted on by China.
3. Expropriation in Korean BITs
Korea’s investment treaty practice relating to expropriation is
generally consistent with that of western capital-exporting states. The term
“expropriation” in this practice incorporates both direct and indirect
expropriation. For instance, the 2001 Korean Model BIT states:
Article 5: Expropriation
1.
Investments of investors of one Contracting Party shall not
be nationalized, expropriated or otherwise subjected to
any
other
measures
having
effect
equivalent
to
nationalization or expropriation (hereinafter referred to as
‘expropriation’) in the territory of the other Contracting
Party except for public purpose and against prompt,
adequate and effective compensation. The expropriation
159
Japan-Mexico EPA (2004). See also, Japan-Chile EPA (2007), art. 194(5); Japan-Thailand
EPA (2007), art. 110(3); Indonesia-Japan EPA (2007), art. 73(4); and Japan-Peru BIT (2008),
art. 23(5).
70
shall be carried out on a non-discriminatory basis in
accordance with legal procedures.
2.
Such compensation shall amount to the fair market value
of the expropriated investments immediately before
expropriation
was
taken
or
before
impending
expropriation became public knowledge, whichever is the
earlier, shall include interest at the applicable commercial
rate from the date of expropriation until the date of
payment, and shall be made without undue delay, be
effectively realizable, and be freely transferable. In both
expropriation and compensation, treatment no less
favourable than that which the Contracting Party accords
to its own investors or to investors of any third State shall
be accorded.
3.
Investors
of
one
Contracting
Party
affected
by
expropriation shall have a right to prompt review by a
judicial or other independent authority of the other
Contracting Party, of their case and of the valuation of
their investments in accordance with the principles set out
in this Article.
4.
Where a Contracting Party expropriates the assets of a
company which is incorporated or constituted under its
laws and regulations, and in which investors of the other
Contracting Party own shares, debentures or other forms
of participation, the provision of this Article shall be
applied.
As such, “any other measures having an effect equivalent to
nationalization or expropriation” may constitute expropriation, even if the
specific form may not amount to direct expropriation.160 As presented above,
most of the BITs to which Korea is a party enumerate four conditions under
which an expropriation may be deemed lawful, i.e., that such measures shall (i)
160
See also, Agreement on the Promotion and Protection of Investments between
Government of the Republic of Korea and the Government of the Arab Republic of Egypt,
art. 5(1), Mar. 18, 1996, http://arbitrationlaw.com/files/free_pdfs/korea-egypt_bit.pdf
[hereinafter Egypt-Korea BIT (1996)]; Morocco-Korea BIT (1999), art. 5(1); NicaraguaKorea BIT (2000), art. 5(1).
71
be for a public purpose, (ii) entail prompt, adequate and effective
compensation, (iii) be carried out on a non-discriminatory basis, and (iv) be in
accordance with legal procedures.161 With respect to this third condition, that
the expropriation be executed on a non-discriminatory basis, Paragraph 2 in
the excerpt above specifies that national treatment and MFN treatment will
apply to both expropriation and the corresponding compensation. As to the
fourth condition, requiring that the expropriation be “in accordance with legal
procedures,” Korean investment agreement practice reveals a number of
variations in its approach.
A more detailed approach, similar to that of the 2004 U.S. Model BIT,
is reflected in the expropriation clause in the investment chapter of the KoreaU.S. FTA:
the expropriation or nationalization, whether direct or
indirect, must be in accordance with due process of law
and in accordance with customary international law,
including FET treatment and full protection and
security.”162
Here, the rather vague “in accordance with legal procedures” language
in Article 5(1) of the aforementioned 2001 Korean Model BIT is replaced with a
more specific reference to due process of law as well as customary
international law encompassing the FET standard and general protection and
security issues. Another interesting example is found in the Korea-China BIT
(2007), in which the Contracting Parties employ unusually strict wording for a
China-ratified investment treaty, requiring that lawful expropriations be “in
161
See, e.g., Agreement between the Government of the Republic of Korea and the
Government of the Republic of Latvia for the Promotion and Reciprocal Protection of
Investments, art. 5(1), Lat.-S. Kor., Oct. 23, 1996,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1803 [hereinafter LatviaKorea BIT (1996)]; Agreement between the Government of the Republic of Korea and the
Government of the Kingdom of Sweden on the Promotion and Reciprocal Protection of
Investments, art. 5(1), S. Kor.-Swed., Aug. 30, 1995,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1833 [hereinafter KoreaSweden BIT (1995)]; and Agreement between the government of the Republic of Korea
and the Government of the Republic of Bolivia and the Reciprocal Promotion and the
Protection of Investments, art. 6(1), Bol.-S. Kor., Apr. 1, 1996,
http://investmentpolicyhub.unctad.org/IIA/country/111/treaty/586 [hereinafter BoliviaKorea BIT (1996)].
162
U.S.-Korea FTA (2007), art. 11.6(1)(d).
72
accordance with domestic law and international standard of due process of
law.”163
Standard for Compensation
Most BITs ratified by Korea require that expropriation be accompanied
by prompt, adequate, and effective compensation and are thus generally in
line with the Hull formula. For instance, the Korea-Jordan BIT (2004) reads:
Article 5 Expropriation
1.
Investments of investors of one Contracting Party shall not
be nationalized, expropriated or otherwise subjected to
any other measures having an effect equivalent to
nationalization or expropriation . . . in the territory of the
other Contracting Party except for public purpose and
against prompt, adequate and effective compensation.
The expropriation shall be carried out on a nondiscriminatory basis in accordance with due process of law.
2.
Such compensation shall amount to the fair market value
of the expropriated investments immediately before
expropriation
was
taken
or
before
impending
expropriation became public knowledge, whichever is the
earlier, shall include interest at the applicable commercial
rate from the date of expropriation until the date of
payment and shall be made without undue delay, be
effectively realizable and be freely convertible and
transferable. In both expropriation and compensation,
treatment no less favorable than that which the
Contracting Party accords to its own investors or to
investors of any third State shall be accorded.164
As shown here, in determining the adequacy of compensation, Korean
BITs typically use the standard formula of “fair market value of the
expropriated investments immediately before expropriation was taken or
before impending expropriation became public knowledge, whichever is the
earlier.”165 The Korea-Japan and Korea-China BITs of 2003 and 2007 further
163
China-Korea BIT (2007), art. 4(1).
Jordan-Korea BIT (2004).
165
See also, Korean Model BIT (2001), art. 5(1).
73
164
clarify the process of how fair market value is determined. The texts of the
treaties between these two neighbors state that “fair market value shall not
reflect any change in value occurring because the expropriation had become
publicly known earlier.” 166
With respect to the effectiveness of compensation, most Korean BITs
follow the text in Article 5(2) of the 2001 Model BIT and permit free
transferability and convertibility into freely usable currencies. The text of the
treaty with Jordan presents this standard formulation, requiring that
compensation for expropriation be “effectively realizable and be freely
convertible and transferable.”
As was noticeable in Japan’s case, Korean treaty practice with respect
to protection against expropriation does not deviate from the standard
practice of Western European economies.
Indirect Expropriation
The Korea-U.S. FTA of 2011 devotes an entire annex to the issue of
expropriation, a significant portion of which concentrates on specifying
whether a particular measure constitutes an indirect expropriation:
Annex 11-B
3. The second situation addressed by Article 11.6.1 [indirect
expropriation] is indirect expropriation, where an action or
a series of actions by a Party has an effect equivalent to
direct expropriation without formal transfer of title or
outright seizure.
(a)
The determination of whether an action or a series
of actions by a Party, in a specific fact situation,
constitutes an indirect expropriation, requires a
case-by-case, fact-based inquiry that considers all
relevant factors relating to the investment,
including:
(i) the economic impact of the government action,
although the fact that an action or a series of
actions by a Party has an adverse effect on the
economic value of an investment, standing
166
Japan-Korea BIT (2002), art. 10(3) and China-Korea BIT (2007), art. 4(2).
74
alone, does not establish that an indirect
expropriation has occurred;
(ii) the extent to which the government action
interferes
with
distinct,
reasonable
investment-backed expectations . . . and
(iii) the character of the government action,
including its objectives and context. Relevant
considerations could include whether the
government action imposes a special sacrifice
on the particular investor or investment that
exceeds what the investor or investment
should be expected to endure for the public
interest.
(b)
Except in rare circumstances, such as, for example,
when an action or a series of actions is extremely
severe or disproportionate in light of its purpose or
effect, non-discriminatory regulatory actions by a
Party that are designed and applied to protect
legitimate public welfare objectives, such as public
health, safety, the environment, and real estate
price stabilization (through, for example, measures to
improve the housing conditions for low-income
households),
do
not
constitute
indirect
expropriations.167
The great level of precision observed in the treaty text above indicates
the Contracting Parties’ heightened levels of sensitivity, particularly with
respect to differentiating legitimate governmental regulation from unlawful
indirect expropriation. First, Paragraph 3(a) indicates that an expropriation
determination “requires a case-by-case, fact-based inquiry that considers all
relevant factors relating to the investment.” Second, Paragraph 3(b) clarifies
that certain non-discriminatory measures based upon public welfare
objectives do not constitute indirect expropriation, specifically excluding real
estate price stabilization from being considered expropriation. In so doing,
167
U.S.-Korea FTA (2007), Annex 11-B (Emphasis added).
75
the treaty text goes so far as to provide an example of housing condition
improvements for low-income households. As such, the FTA with the U.S.
represents a case in which Korea adopted a highly detailed approach in order
to clarify the precise scope of protections offered under the treaty, while
preserving sufficient room to accommodate legitimate regulation and policymaking.
Finally, recent Korean BITs generally do not directly address the issue
of whether taxation measures may constitute expropriation.168 The KoreaJapan BIT (2003) serves as an exception to this tendency, as it explicitly states
that nothing in the BIT “shall apply to taxation measures except as expressly
provided in paragraphs 2, 3 and 4 of this Article.” 169 The subsequent
paragraph adds that Article 10, i.e., the provision that addresses the issue of
expropriation, “shall apply to taxation measures.”170
The investment chapter in the Korea-U.S. FTA (2011) includes an
annex clarifying whether taxation measures constitute expropriation.
In
Annex 11-F, it is provided that “[t]he determination of whether a taxation
measure, in a specific fact situation, constitutes an expropriation requires a
case-by-case, fact-based inquiry that considers all relevant factors relating to
the investment” and that the following issues that should be taken into
consideration in such a determination:
(a)
The imposition of taxes does not generally constitute an
expropriation. The mere introduction of a new taxation
measure or the imposition of a taxation measure in more
than one jurisdiction in respect of an investment generally
does not in and of itself constitute an expropriation;
(b)
A taxation measure that is consistent with internationally
recognized tax policies, principles, and practices should
not constitute an expropriation. In particular, a taxation
measure aimed at preventing the avoidance or evasion of
taxation measures generally does not constitute an
expropriation;
168
See, e.g., Korea-Libya BIT (2007), art. 5; Jamaica-Korea BIT (2003), art. 5; KoreaKyrgyzstan BIT (2007), art. 5.
169
Japan-Korea BIT (2002), art. 19(1).
170
Id., art. 19(2).
76
(c)
A taxation measure that is applied on a nondiscriminatory basis, as opposed to a taxation measure
that is targeted at investors of a particular nationality or
at specific taxpayers, is less likely to constitute an
expropriation; and
(d)
A taxation measure generally does not constitute an
expropriation if it was already in force when the
investment was made and information about the
measure was publicly available.171
Summary
As has been examined above, the approaches to expropriation taken
by China on the one hand, and Japan and Korea on the other hand, have
displayed substantial divergence. In particular, China’s investment treaty
practice relating to expropriation has revealed a heightened level of caution,
reflecting its discomfort with delegating this sensitive political issue to
standards established in accordance with international law. As a result,
modern Chinese investment treaties often tweak standard international
investment treaty formulations (e.g., using the “domestic legal procedure”
phrase in lieu of the “due process” language, and avoiding the commonly
adopted “prompt, adequate and effective” phrase) in an attempt to retain
interpretive control.
On the other hand, Japan and Korea have generally been receptive to
international standards governing the issue of expropriation. Each state
embraces the generic four-condition formulation under which expropriation
may be lawful and accepts compensation standards conforming to the Hull
formula.
The contrast between their approach and China’s may be
attributable, in part, to the fundamentally different economic systems found
among the three East Asian states, or more specifically, to differences in each
market’s capital flows (Japan and Korea, as net capital exporters, may be less
concerned about the issue of domestic control over expropriation compared
to China, one of the two largest capital importers), and to differences in the
general standards of compensation each state applies to its domestic
171
U.S.-Korea FTA (2007), Annex 11-F.
77
expropriation cases. However, as discussed above, China’s recent IIAs unveil
China’s gradual progression toward international norms on expropriation.
B. Fair and Equitable Treatment
The promise to secure “fair and equitable” treatment (FET) to foreign
investors and investments is a core concept found in modern investment
treaty practice.172 Although the precise formulation of the FET provision
varies by each individual investment agreement, it is almost universally
embraced in modern international investment treaties. While the term itself
is rarely defined in IIAs, FET is one of the most oft-invoked treatment
standards in the course of investor-state arbitrations.173 As a result of the
repetitive invocation of this standard in numerous arbitrations, a substantial
body of arbitration decisions and awards interpreting and applying this
principle has accumulated. According to Reed, Paulsson, and Blackaby, as of
January 2010, FET claims had been advanced in 50 decided ICSID cases, out of
which ICSID tribunals upheld FET claims in 26 cases.174
Tribunals have encountered difficulties in interpreting and applying
this elusive “fair and equitable” language. Jeswald Salacuse points out three
factors compounding such complexities. The first and second factors involve
the inherent vagueness of the term itself, and the interrelated issue that the
treaty provisions in which the FET standard is found fail to provide a clear
definition or guideline for applying the standard. With respect to the third
factor, Salacuse emphasizes that the “application of the [FET] standard is so
tied to the facts of the specific cases as to limit the utility of the arbitral
decisions and doctrinal analysis.”175
In order to make sense of this vague language, Dolzer and Schreuer
examine a wide range of factual situations to which tribunals have responded
and identify several guiding principles, the violation of which would likely
constitute a breach of the FET standard.176 The several principles introduced
172
For a theoretical discussion and background information relating to the fair and
equitable treatment standard, see Dolzer and Schreuer, pp. 218-244.
173
See R. Dolzer, “Fair and Equitable Treatment: A Key Standard in Investment Treaties,”
39 INT’L LAWYER 87 (2005).
174
LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION, at 75.
175
Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES, at 221.
176
For a more detailed discussion of these principles, see Dolzer and Schreuer at pp 133149.
78
by Dolzer and Schreuer include: (i) transparency, stability, and the
corresponding protection of the investor’s legitimate expectations; 177 (ii)
observance of contractual obligations; 178 (iii) fair procedure; 179 (iv) good
faith;180 and (v) freedom from coercion and harassment.181
Regardless of whether a host state has promised protection in
accordance with the national treatment and MFN treatment standards,
foreign investors may still believe that such level of protection is insufficient,
particularly when the nationals of the host state and investors from other
most favored nations are perceived as receiving an inadequate level of
protection. In such cases, the FET standard ensures that the foreign investor
will receive, at the very least, a minimum level of protection based on widely
accepted notions of fairness and equity. In international investment treaty
arbitrations, claimants typically advance multiple, simultaneous claims based
upon direct expropriation, indirect expropriation, and/or violation of the FET
standard. Reed, Paulsson, and Blackaby point out that “[t]he reluctance of
many ICSID tribunals to find States liable for expropriation by indirect
measures has contributed to the growing prominence of the fair and equitable
treatment standard.”182
FET Standard and International Law
One of the key issues relating to the FET standard as to which treaty
practice has shown divergence is the relationship between the FET standard
and international law – in particular, the minimum standard of treatment
177
The basic principle clarifies that such legitimate expectations shall be grounded on the
relevant laws and regulations of the host state as it stands at the time of acquisition of
investment by the investor. Id. at 134. Case law related to this principle includes, see, e.g.,
Mondev v. USA, Award, October 12, 2002, 42 ILM (2003) 85, Azinian v. Mexico, Award,
November 1, 1999, 39 ILM 2000, Maffezini v. Spain, Award on the Merits, November 13,
2000, 16 ICSID Review-FILJ (2001) 248.
178
For relevant case law, see, e.g., SGS v. Philippines, Decision on Jurisdiction, January 29,
2004, 8 ICSID Reports 518; Noble Ventures v. Romania, Award, October 12, 2005; RFCC v.
Morocco, Award, December 22, 2003, 20 ICSID Review-FILJ (2005).
179
For relevant case law, see, e.g., Metalclad Corp. v. Mexico, Award, August 30, 2000, 5
ICSID Reports 209; Middle East Cement v. Egypt, Award, April 12, 2002, 18 ICSID ReviewFILJ (2003) 602.
180
For relevant case law, see, e.g., Bayindir Insaat Turizm Ticaret Ve Sanayi A. S. v.
Pakistan, Decision on Jurisdiction, November 14, 2005, Saluka v. Czech Republic, Partial
Award, March 17, 2006.
181
For relevant case law, see, e.g., Pope & Talbot v. Canada, Award on Merits, April 10,
2001, 122 ILR (2002) 352, TECMED v. Mexico, Award, May 29, 2003, 43 ILM (2004) 133.
182
LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION, at 92.
79
under customary international law. Salacuse introduces two different
approaches to understanding the nature of the FET standard: (i) that FET
“merely reflects the international minimum standard,” and (ii) that the FET
standard is “autonomous and additional to general international law.”183 The
narrower former interpretation is represented in the 2004 U.S. Model BIT:
Article 5: Minimum Standard of Treatment
1. Each Party shall accord to covered investments treatment
in accordance with customary international law, including
fair and equitable treatment and full protection and security.
2. For greater certainty, paragraph 1 prescribes the customary
international law minimum standard of treatment of aliens
as the minimum standard of treatment to be afforded to
covered investments. The concepts of “fair and equitable
treatment” and “full protection and security” do not require
treatment in addition to or beyond that which is required by
that standard, and do not create additional substantive
rights.184
First, the heading of the article, i.e., “Minimum Standard of
Treatment,” suggests that the provision is concerned primarily with setting
the baseline of treatment and does not guarantee treatment beyond the
prescribed minimum level of protection. Second, the treaty text indicates
that the minimum standard of treatment is clearly tied to customary
international law and does not extend beyond such parameters.
On the other hand, a substantial number of other BITs provide for FET
as an autonomous standard without linking it to international law, while still
others link FET with the rather vague notion of international law. This
formulation could be interpreted to embrace the FET standard as a higher
standard of treatment as compared to customary international law, and
Salacuse suggests that the difference between the two may be that the
former is “intended to provide investors with a basic level of protection in
situations where the other substantive provisions of international and national
183
Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES, at 222. (For a comprehensive
discussion on the differing concepts of the FET standard, see pp. 222-228).
184
2004 U.S. Model BIT, Art 5(1)-(2). (available at:
http://www.state.gov/documents/organization/117601.pdf)
80
law are inapplicable.”185 The broader conception of the FET standard may
thus be understood as a catch-all or fall-back provision, intended to fill the
gaps not directly addressed under customary international law or specific
treaty provisions.
In general, recent investment treaties of China, Japan, and Korea
commonly include the FET standard. The specific formulation of such FET
provisions (e.g., their reference to international law) differs treaty by treaty, in
large part depending on the relative leverage and position of the treaty
counterparties.
1. FET in Chinese Treaties
A number of earlier Chinese investment treaties did not include any
reference to the FET standard. This approach was embraced in China’s BITs
with its two East Asian neighbors. For example, the China-Japan BIT (1989)
simply states:
Article 5
1.
Investments and returns of nationals and companies of
either Contracting Party shall receive the most constant
protection and security within the territory of the other
Contracting Party.
The China-Korea BIT of 1992 (preceding the 2007 amendment) adopts
a similar stance and does not mention the FET standard in its text.186
The standard language employed in later Chinese BITs resembles the
following text from Version III of the Model BIT: “Investments of investors of
each Contracting Party shall all the time be accorded fair and equitable
treatment in the territory of the other Contracting Party.”187 One of the most
significant conceptual differences between China’s traditional approach
toward the FET standard and that of other states has been the fact that China
purposefully avoids tying the FET standard to customary international law. 188
As an example, the China-Chile BIT (1995) states:
185
Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES, at 227.
China-Korea BIT (2007), art. 5(1).
187
Model BIT, Version III, Art 3(1).
188
See N. Gallagher and W. Shan, Chinese Investment Treaties: Policies and Practice
(Oxford University Press, 2009), paras 3.1-3.13 (discussion of interpretive methodology
relating to such Chinese FET provisions).
81
186
Article 3 Treatment and Protection
1.
Investment and activities associated with investments of
investors of either Contracting Party shall be accorded fair
and equitable treatment and shall enjoy protection in the
territory of the other Contracting Party.
2.
The treatment and protection referred to in Paragraph 1 of
this Article shall not be less favourable than that accorded
to investment and activities associated with such
investments of investors of a third State.189
In addition, the above model treaty text ties the MFN concept to the
FET standard.
In contrast to earlier investment treaties, the incorporation of explicit
references to an “international law minimum standard of treatment” in certain,
more recent Chinese BITs represents, to a certain degree, an increasing level
of comfort with this widely accepted international investment treaty practice.
For example, the China-Mexico BIT (2009) embeds this phrase in its FET
provision:
Article 5 Minimum Standard of Treatment
1. Each Contracting Party shall accord to investments of
investors of the other Contracting Party treatment in
accordance with international law, including fair and
equitable treatment and full protection and security.
2. For
greater
certainty,
this
Article
prescribes
the
international law minimum standard of treatment to be
afforded to investments of investors of the other
Contracting Party. The concepts of “fair and equitable
treatment” and “full protection and security” do not require
treatment in addition to or beyond that which is required by
189
Agreement between the Government of the People's Republic of China and the
Government of the Republic of Chile concerning the Encouragement and the Reciprocal
Protection of Investment, Chile-China, Mar. 23, 1994,
http://www.wipo.int/wipolex/en/other_treaties/text.jsp?file_id=248721 [hereinafter ChileChina BIT (1994)]. See also China-U.K. BIT (1986), art. 2(2) and Austria-China BIT (1986),
art. 2(2) (both accept the FET standard, but include neither general nor specific reference
to international law).
82
the international law minimum standard of treatment of
aliens as evidence of State practice and opinion juris.190
The China-Mexico BIT thus generally tracks the 2004 U.S. Model BIT
formulation and similarly uses the “Minimum Standard of Treatment” title.
As another variation, the Trilateral Investment Agreement among
China, Japan, and Korea displays creative maneuvering by the Contracting
Parties, as the “generally accepted rules of international law” phrase is used in
lieu of the “international law minimum standard language:”
Article 5 General Treatment of Investments
1.
Each Contracting Party shall accord to investments of
investors of another Contracting Party fair and equitable
treatment and full protection and security. The concepts of
“fair and equitable treatment” and “full protection and
security” do not require treatment in addition to or beyond
any reasonable and appropriate standard of treatment
accorded in accordance with generally accepted rules of
international law. A determination that there has been a
breach of another provision of this Agreement, or of a
separate international agreement, does not ipso facto
establish that there has been a breach of this paragraph.191
This clause resembles the language in the Note of Interpretation192
issued by the NAFTA Free Trade Commission on July 31, 2001, interpreting the
NAFTA minimum standard of treatment provision and the FET standard, i.e.,
Article 1105, except for the fact that references to international minimum
190
Italics added.
Trilateral Investment Agreement among China, Japan and Korea (2012), emphasis
added. See also China-Mexico BIT (2009), art. 5(2) (Although embedded in a provision
titled, “Minimum Standard of Treatment,” the text reveals that the international law
standard is set as the maximum required level of treatment: “The [concept] of “fair and
equitable treatment” do[es] not require treatment in addition to or beyond that which is
required by the international law minimum standard of treatment of aliens as evidence of
State practice and opinio juris.” Emphasis added.).
192
Notes of Interpretation of Certain Chapter 11 Provisions (NAFTA Free Trade
Commission, July 31, 2001):
Minimum Standard of Treatment in Accordance with International Law
1. Article 1105(1) prescribes the customary international law minimum standard of t
reatment of aliens as the minimum standard of treatment to be afforded to inves
tments of investors of another Party.
2. The concepts of “fair and equitable treatment” and “full protection and security”
do not require treatment in addition to or beyond that which is required by the c
ustomary international law minimum standard of treatment of aliens.
83
191
standard of treatment under customary international law have been replaced
in the Trilateral Agreement with “generally accepted rules of international law”
language. As a result, at a certain point, either the three Contracting Parties
or a tribunal presented with an investment dispute arising out of this
Agreement may necessarily have to address what such “generally accepted
rules of international law” entail, i.e., whether they are the same as the
international minimum treatment standards under customary international
law or something else.
In addition, a handful of recent Chinese investment agreements
include examples of what the FET standard specifically refers to. For instance,
the China-ASEAN Cooperation Agreement states that “fair and equitable
treatment refers to the obligation of each Party not to deny justice in any legal
or administrative proceedings.”193 In addition, the China-Uzbekistan BIT (2011)
similarly provides more color to this inherently vague standard of treatment:
Article 5 Fair and Equitable Treatment
1.
Each Contracting Party shall ensure to accord to investors
of the other Contracting Party and associated investments
in its territory fair and equitable treatment and full
protection and security.
2.
“Fair and equitable treatment” requires that investors of
one Contracting Party shall not be willfully rejected to fairly
judicial proceedings by the other Contracting Party or be
treated with obvious discriminatory or arbitrary measures.
This treaty text expressly sets out two circumstances which would
constitute a violation of the FET standard, i.e., willful rejection to fair judicial
proceedings and discriminatory or arbitrary treatment.
The former
circumstance is consistent with the definition of the FET standard provided in
the China-ASEAN Cooperation Agreement. The latter, on the other hand,
does not provide much clarification and could be understood as overlapping,
to a certain extent, with the national treatment and MFN protection against
discrimination examined in Chapter Two. Nevertheless, these efforts to
specify FET coverage signify a growing eagerness to make more sense of an
193
ASEAN-China FTA (2002), art. 7(2)(a).
84
otherwise amorphous standard of protection. In essence, China’s treatment
of the FET standard has shown a gradual progression from categorical
exclusion to qualified acceptance and detailed specification.
2. FET in Japanese Treaties
The application of FET in Japanese investment treaties has not been
consistent. For instance, certain earlier BITs did not even include any form of
FET clause.194 Even among the majority of agreements which do provide for
FET, the specific extent and form of FET inclusion has been incoherent. A
minority approach is reflected in the Japan-Korea BIT (2003), in which the FET
standard and the concepts of “full and constant protection and security” are
lumped together, without any reference to international law.195
The most basic form of FET clause requires each Contracting Party to
accord FET to the other Contracting Party and generally embraces
international law as the standard to follow:
Article 4
1.
Each Contracting Party shall accord to investments of the
other Contracting Party treatment in accordance with
international law, including fair and equitable treatment
and full protection and security.196
Another variation of FET clause relies on “notes” to provide further
specification (often in the form of qualifications). As an example, a note in
Article 59 of the Japan-Brunei FTA stipulates that “[t]he concepts of ‘fair and
equitable treatment’ and ‘full protection and security’ do not require
treatment in addition to or beyond that which is required by customary
international law minimum standard of treatment of aliens.”197 The content of
194
Egypt-Japan BIT (1977); Japan-Sri Lanka BIT (1982) (For instance, in Article 5(1) of the
Japan Sri-Lanka BIT, only reference to the “most constant protection and security” is
included, and no explicit provision relating to the FET standard is found.); China-Japan BIT
(1988); Japan-Turkey BIT (1992); Agreement between Japan and the People’s Republic of
Bangladesh Concerning the Promotion and Protection of Investment, Bangl.-Japan, Nov.
10, 1998, http://www.bilaterals.org/IMG/pdf/bangladesh_japan.pdf [hereinafter
Bangladesh-Japan BIT (1998)]; Agreement between Japan and the Islamic Republic of
Pakistan Concerning the Promotion and Protection of Investment, Japan-Pak., Mar. 10,
1998, http://www.bilaterals.org/IMG/pdf/pakistan_japan.pdf [hereinafter Japan-Pakistan
BIT (1998)]; Japan-Mongolia BIT (2001).
195
Japan-Korea BIT (2002), art. 10(1). See also Japan-Uzbekistan BIT (2008), art. 3(1)-3(3).
196
Cambodia-Japan BIT (2002).
197
How this language, as applied in practice, differs from the text in the Japan-Cambodia
BIT above is unclear.
85
this note generally follows the format of the 2004 U.S. Model BIT and serves
the function of limiting the expansive applicability of the FET standard.
A handful of more recent Japanese investment treaties provide further
clarification as to the scope of FET coverage. The Japan-Chile FTA (2007)
represents this more detailed approach toward the provision of FET to foreign
investors and investment.198 The Article begins with the basic formulation of
requiring that treatment in line with customary international law shall be
conferred:
Article 75 General Treatment
Each Party shall accord to investments made in its Area by
investors of the other Party, treatment in accordance with
customary international law, including fair and equitable
treatment and full protection and security.
After setting out the general principle, the provision proceeds to
clarify the precise scope of FET in three separate Notes. As examined above
in the China-Mexico BIT (2009) example, the first notes of Article 75 delineate
the maximum extent, i.e., the “customary international law minimum
standard of treatment of aliens,” to which FET is required:199
Note 1: Article 75 prescribes the customary international law
minimum standard of treatment of aliens as the minimum
standard of treatment to be afforded to investments made in the
Area of a Party by investors of the other Party. The customary
international law minimum standard of treatment of aliens
refers to all customary international law principles that protect
the economic rights and interests of aliens. The concepts of “fair
and equitable treatment” and “full protection and security” do
not require treatment in addition to or beyond that which is
required by the customary international law minimum standard
of treatment of aliens.
Note 2: A determination that there has been a breach of another
provision of this Agreement, or of a separate international
198
199
Japan-Chile EPA (2007). See also Japan-Peru BIT (2008), art. 5(2) Note.
See China-Mexico BIT (2009), pp. 80-83 (discussion of the Chinese investment treaty
practice with respect to setting an FET “cap”).
86
agreement, does not establish that there has been a breach of
Article 75.
Finally, Note 3 points to what FET is intended to cover; in the instant
case, the Contracting Parties explicitly refer to procedural justice, as they
require non-discriminatory access to courts and administrative tribunals and
agencies:
Note 3: Each Party shall accord to investors of the other Party,
non-discriminatory treatment with regard to access to the courts
of justice and administrative tribunals and agencies of the
former Party in pursuit and in defense of rights of such investors.
As such, Japanese investment treaty practice relating to the FET
clause has experienced a course of evolution similar to that of China, moving
from general omission to cautious inclusion, with the most noticeable
divergence between the two states being their different attitudes toward
referring to customary international law.
3. FET in Korean Treaties
Korean practice relating to the FET standard of protection reveals a
certain level of flexibility. Earlier Korean BITs, particularly those concluded
with Western European capital-exporting states, generally accept the
template of Korea’s Western treaty counterparty on the issue of FET. For
instance, the Korea-U.K. BIT (1976) reads:
Article 2 Promotion and Protection of Investment
2.
Investment of nationals or companies of either Contracting
Party shall at all times be accorded fair and equitable
treatment and shall enjoy full protection and security in the
territory of the other Contracting Party. Each Contracting
Party shall ensure that the management, maintenance, use,
enjoyment or disposal of investments in its territory of
nationals or companies of the other Contracting Party is not
in any way impaired by unreasonable or discriminatory
measures. Each Contracting Party shall observe any
obligation it may have entered into with regard to
investments of nationals or companies of the other
Contracting Party.
87
As such, the Korea-U.K. BIT juxtaposes the issues of FET and the
guarantee of “full protection and security,” but does not provide further
guidance as to the scope and applicability of the FET standard.200 Similarly,
the FET clause in the 2001 Korea Model BIT is free from qualifying language:
Article 2 Promotion and Protection of Investments
2.
Investments made by investors of each Contracting Party
shall at all times be accorded fair and equitable treatment
and shall enjoy full protection and security in the territory of
the other Contracting Party.201
A few more recent Korean BITs have added specificity to this Model
BIT language and base the FET standard on principles of international law.
For example, the Korea-Kuwait BIT (2007) reads as follows:
Article 2 Promotion and Protection of Investment
(6) Investments by investors of either Contracting Party shall at
all times enjoy fair and equitable treatment and full
protection and security in the territory of the other
Contracting Party in a manner consistent with recognized
principles of international law and the provisions of this
Agreement. Neither Contracting Party shall in anyway
impair by arbitrary or discriminatory measures the use,
management, operation, maintenance, enjoyment, or
disposition of investments.202
This treaty text ties the FET standard to “recognized principles of
international law,” and the paragraphs immediately subsequent to the
provision present concrete examples explaining the content of the FET
standard:
(7) Each Contracting Party shall, in accordance with its laws
and regulations, promptly publish, or otherwise make
publicly available, its laws, regulations, procedures,
200
See also, Belgium-South Korea BIT (1974), art. 1(1) and 1(2).
Article 2(1) addresses the admission of foreign investment and 2(3) prohibits arbitrary
or discriminatory measures in the “operation, management, maintenance, use,
enjoyments or disposal” of foreign investments of the other Contracting Party.
202
Agreement between the Government of the Republic of Korea and the Government of
the State of Kuwait for the Promotion and Protection of Investments, Kuwait-S. Kor., July
15, 2004, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1801 [hereinafter
Korea-Kuwait BIT (2004)] (emphasis added).
88
201
directives, guidelines and administrative rulings and judicial
decisions of public application as well as international
agreements which pertain to or may affect the operation of
the provisions of this Agreement or investments in its
territory of investors of the other Contracting Party.
(8) Each Contracting Party shall provide effective means of
asserting claims and enforcing rights with respect to
investments. Each Contracting Party shall ensure to
investors of the other Contracting Party, the right of access
to its courts of justice, administrative tribunals and agencies,
and all other bodies exercising adjudicatory authority, and
the right to mandate persons of their choice, who qualify
under its laws and regulations for the purpose of the
assertion of claims and the enforcement of rights with
respect to their investments.
(9) Investments by investors of either Contracting Party shall
not be subjected in the host Contracting Party to
sequestration, confiscation or any other similar measures
except under process of law and in conformity with
applicable principles of international law and other relevant
provisions of the Agreement.
For instance, Paragraph 7 emphasizes the importance of transparency,
whereas Paragraphs 8 and 9 deal with the issues of fair procedure, due
process, and freedom from coercion.
On the other hand, the investment chapter of the Korea-U.S. FTA
generally follows the approach espoused in the 2004 U.S. Model BIT and
requires FET amounting to no more than a generally accepted baseline, i.e.,
the customary international law minimum standard of treatment of aliens:
Article 11.5 Minimum Standard of Treatment
1. Each Party shall accord to covered investments treatment
in accordance with customary international law, including
fair and equitable treatment and full protection and security.
2. For greater certainty, paragraph 1 prescribes the customary
international law minimum standard of treatment of aliens
89
as the minimum standard of treatment to be afforded to
covered investments. The concepts of “fair and equitable
treatment” and “full protection and security” do not require
treatment in addition to or beyond that which is required by
that standard, and do not create additional substantive
rights. The obligation in paragraph 1 to provide:
(a) “fair and equitable treatment” includes the obligation
not to deny justice in criminal, civil or administrative
adjudicatory proceedings in accordance with the
principle of due process embodied in the principal legal
systems of the world . . . .
Summary
In sum, the investment treaty practices of the three East Asian states
embrace the FET standard in principle, but with different formulations. It is
noteworthy that in recent IIAs, the three states generally follow the recent
trend of inserting qualifications to clarify the scope of this rather elusive
protection standard in order to limit potential expansive interpretations of this
standard by arbitration tribunals.
90
IV. Investor-State Dispute Settlement
A. Introduction
Limitations of Domestic Judicial Proceedings and Diplomatic Channels
This Chapter examines dispute settlement provisions embedded in the
IIAs of China, Japan, and Korea. While the IIAs of the three countries include
state-to-state dispute resolution mechanisms, as is common in IIAs, this paper
focuses exclusively on the issue of how investor-state investment disputes
may be resolved. Under customary international law on foreign investment,
investors who suffer loss to their investment as a result of actions in violation
of international law by the host state have no effective means to recover such
losses. Investors may turn to local courts of the host states, but they will most
likely face direct and indirect disadvantages of having to litigate as a foreign
entity.
Dolzer and Schreuer point out a few reasons why reliance on domestic
courts of the host state may be either insufficient or problematic. First, the
outcome of proceedings may be influenced by the lack of an independent
judiciary or executive involvement in the domestic judicial proceedings. In
particular, when the host state takes drastic measures affecting foreign
investment, such as nationalization or expropriation, the neutrality of local
courts of such host state would correspondingly be put to serious question.
Moreover, local laws, which could be politically motivated, may come into
play to preclude the application of international legal rules securing the rights
of investors. In addition, the local court concerned may not possess the
requisite level of competence to address international investment disputes,
particularly where large amounts of money or highly technical issues are
involved.203 The usefulness of ordinary local courts of the host state may thus
be limited.
Under public international law, upon exhaustion of local remedies in
the host state, foreign investors may rely on diplomatic channels for redress of
injury. However, the decision of the International Court of Justice in the
Barcelona Traction case, in which Belgium brought action against Spain on
behalf of its citizens, the principal shareholders of a Canadian investor in Spain,
203
Dolzer and Schreuer at 214.
91
demonstrates the inadequacy of such diplomatic protections in securing
effective remedies for foreign investors. 204
Furthermore, diplomatic
protection carries the potential to unnecessarily escalate an investment
dispute and engender serious diplomatic tensions between the host and home
states without according any effective remedies to private investors.
In order to address this issue in an effective manner, the Executive
Directors of the International Bank for Reconstruction and Development
(World Bank) formulated a multilateral treaty, i.e., the ICSID Convention. The
Convention was aimed toward removing major impediments to the
international movement of capital and investment and was intended to create
an impartial international forum for the resolution of international investment
disputes. The Convention entered into force on October 14, 1966. Shortly
thereafter, IIAs began to incorporate clauses providing for the settlement of
investor-state disputes via ICSID arbitration.
The Netherlands-Indonesia BIT, signed on July 7, 1968, was the first to
include an ICSID clause. It provided for the submission of investment disputes
“either to the judicial procedures provided by the Contracting Party concerned
or to international arbitration or conciliation,” and further effected consent on
the part of each Contracting Party, “to submit any legal dispute arising
between that Contracting Party and a national of the other Contracting Party
concerning an investment of that national in the territory of the former
Contracting Party” to ICSID.205 Numerous subsequent IIAs followed suit, and
now, a substantial number of IIAs provide for a dispute settlement mechanism,
allowing an aggrieved investor to directly submit a request for arbitration
204
The dispute involved Barcelona Traction, Light and Power Company, a Canadian utility
company operating business in Spain, but with a majority of shares owned by Belgians.
Barcelona Traction issued corporate bonds to foreign investors, but as a result of the
Spanish Civil War, the Company was disallowed from paying interest to its bondholders in
British pounds, the initially designated bond currency. A few Spaniards acquired some of
these bonds and brought a bankruptcy filing under the Spanish legal system for failure to
pay the above bond interest. The Spanish court declared the Company bankrupt, and its
corresponding assets were sold through a public auction. The proceeds from the auction
were first distributed to the creditors, and the minuscule remainder was allotted to
shareholders, most of whom were Belgians. Belgium brought a suit before the
International Court of Justice on behalf of its citizens to no avail. See, Belgium v. Spain,
Judgment of February 5, 1970, ICJ 3 (1970).
205
Agreement between the Government of the Kingdom of the Netherlands and the
Government of the Republic of Indonesia on Promotion and Protection of Investment, art.
9(4), Indon.-Neth., Apr. 6, 1994, http://arbitrationlaw.com/files/free_pdfs/netherlandsindonesia_bit.pdf [hereinafter Indonesia-Netherlands BIT (1994)].
92
against a host state. At the very least, this provision presents a means for
resolving disputes and securing payment of compensation to injured investors
without the involvement of home states. Furthermore, this mechanism may,
to a certain extent, deter host states from disregarding treaty commitments
to foreign investors, in fear of the tangible possibility of being subjected to
arbitration.
In addition to the ICSID Convention, the United Nations Commission
on International Trade Law (UNCITRAL) adopted the UNCITRAL Arbitration
Rules on April 28, 1976, further enriching the body of procedural rules upon
which international methods for dispute settlement relating to investment
may be developed. Upon such adoption, the UNCITRAL rules have also been
frequently included in the arbitration clauses of IIAs. The first instance of
investor-state arbitration before ICSID recognizing an IIA dispute settlement
clause as a basis for jurisdiction was the AAPL v. Sri Lanka case of 1990.206
According to a recent UNCTAD report, the total number of known treatybased investor-state dispute settlement cases amounted to 514 as of the end
of 2012.207
Process of Investor-State Dispute Settlement
In terms of specific process, IIAs generally delineate a two-step
procedure for dispute settlement. The preliminary stage involves investorstate consultations and negotiations, typically a prerequisite to filing an
arbitration claim. A number of IIAs provide for a cooling-off period for this
consultations and negotiations process, with the required duration ranging
from three to eighteen months. If negotiations fail, the investor may proceed
and submit a request for arbitration or conciliation.
In certain cases, resort to domestic courts may have to precede
submission of a case to arbitration. Under public international law, foreign
investors traditionally were subject to the requirement to exhaust local
remedies in accordance with the host state’s judicial system before seeking
diplomatic protection from their home states.
Article 26 of the ICSID
Convention, in principle, removed this requirement as a pre-condition to filing
206
See AAPL v. Sri Lanka, Award of June 27, 1990, 4 ICSID Reports 256 (1997).
UNCTAD, UNCTAD IIA Issues Note No.1, May 28, 2013, at 1, available at
http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf.
93
207
an arbitration. The Convention, however, adopts a permissive, yet nonmandatory stance, as Article 26 provides that a Contracting State may
establish the “exhaustion of local administrative or judicial remedies as a
condition of its consent to arbitration under [the ICSID Convention]”.208 In
actuality, however, such conditions are not commonly adopted by host states.
The jurisdictional basis for dispute settlement via arbitration is
established by mutual consent of the parties involved, and the context of
investor-state arbitration is not an exception to this general principle. As an
example, the ICSID Convention’s jurisdictional provision stipulates as follows:
Article 25
(1) The jurisdiction of [the ICSID] shall extend to any legal
disputes arising directly out of an investment, between a
Contracting State . . . and a national of another Contracting
State, which the parties to the dispute consent in writing to
submit to [the ICSID]. When the parties have given their
consent, no party may withdraw its consent unilaterally.209
In many cases, the investor-state arbitration clause in international
investment treaties functions as a Contracting State’s consent to embrace
arbitration as a means to deal with investment disputes. However, some IIAs
simply provide for an obligation of the Contracting States to consent.
Furthermore, the specific scope and conditions to which the Contracting
States are willing to be subject are stated in the arbitration clause. Therefore,
a particular foreign investor may request arbitration against a Contracting
State in reliance on, and in accordance with, such an arbitration clause. The
requirement for the “parties to consent in writing” will be satisfied by an
investor’s election, in writing, to file arbitration against a Contracting State
which has given its consent in an IIA. While some IIAs allow both an investor
and a host state to file an arbitration, a majority of recent IIAs allow only
investors to file an arbitration.
Prior to analyzing the specific treaty language that has been adopted
with respect to dispute settlement and arbitration by China, Japan, and Korea,
208
ICSID Convention, Regulations and Rules, Apr. 2006, ICSID/15, available at
https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf.
209
Id. (emphasis added).
94
their statuses as ICSID Member States will be briefly touched upon. The
specific timing of each state’s membership, to a certain degree, reflects its
stance toward and level of comfort with international arbitration as a means
to resolve investment disputes with private foreign investors. The ICSID
Convention was put to signature by participating states in March 1965, and
went into effect in October 1966. As of April 2015, there are 159 signatory and
contracting States to the ICSID Convention.210 Among the three East Asian
states, Japan was the first to have signed the Convention (September 23,
1965), but in terms of the date of entry into force, Korea preceded Japan by a
few months.211 China signed the Convention in February 1990, and its
membership entered into force in February 1993.
The following paragraphs will discuss how the issues of investor-state
dispute settlement and arbitration have been approached in Chinese,
Japanese, and Korean investment agreements.
B. Investor-State Arbitration involving China
The investor-state dispute resolution clauses adopted in China’s BITs
have engendered a substantial amount of debate and skepticism in the past.
The controversy has largely centered on the limited scope of the disputes
China was willing to subject to arbitration. Prior to the late 1990s, most
Chinese BITs conceded to arbitration as a means of dispute settlement solely
on issues relating to ascertaining the appropriate amount of compensation for
expropriation.212 Also, instead of accepting any institutional international
210
For a comprehensive list of the signatories, date of signature, ratification and entry into
effect for each respective state, see
https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=Sh
owDocument&language=English.
211
ICSID Convention entered into force for Korea and Japan on March 23, 1967 and
September 16, 1967, respectively.
212
See, e.g., Agreement between the Government of the Democratic Socialist Republic of
Sri Lanka and the Government of the People’s Republic of China on the Reciprocal
Promotion and Protection of Investments, art. 13(3), China-Sri Lanka, Mar. 13, 1986,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/781 [hereinafter China-Sri
Lanka BIT (1986)]; Agreement between the Government of the People’s Republic of China
and the Government of the Argentine Republic on the Promotion and Reciprocal
Protection of Investments, art. 8(3), Arg.-China, Nov. 5, 1992,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/79 [hereinafter ArgentinaChina BIT (1992)]; Agreement between the Government of the Republic of Indonesia and
the Government of the People’s Republic of China on the Promotion and Protection of
Investments, art. IX(3), China-Indon., Nov. 18, 1994,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/743 [hereinafter ChinaIndonesia BIT (1994)]; Agreement between the Government of the Lebanese Republic
95
arbitral proceedings, or international arbitration rules, earlier Chinese BITs
relied heavily on the use of an ad hoc tribunal for the settlement of disputes.
As a capital-importing state, China approached the issue of investor-state
dispute settlement with a high level of cautiousness, and thus attempted to
limit the scope of disputes that could be submitted to international arbitration.
The China-U.K. BIT (1986) provides a vivid example of these two
characteristics:
Article 7 Settlement of Disputes between a National or
Company and a Host State
(1) A dispute between a national or company of one
Contracting Party and the other Contracting Party
concerning an amount of compensation which has not been
amicably settled after a period of six months from written
notification of that dispute shall be submitted to
international arbitration.
First, the China-U.K. BIT text specifically refers to disputes
“concerning an amount of compensation,” but does not include investment
disputes arising out of other issues within the scope of the investor-state
dispute settlement provision. As such the BIT does not identify how all other
non-compensation related investor-host state disputes are to be resolved.
Furthermore, Article 7(1) requires an initial time period of six months for the
purpose of encouraging mutual communication and amicable settlement prior
to submission of a dispute to international arbitration.
and the Government of the People’s Republic of China Concerning the Encouragement
and Reciprocal Protection of Investments, art. 8(3), China-Leb., June 13, 1996,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/755 [hereinafter ChinaLebanon BIT (1996)]; Agreement between the Government of the People’s Republic of
China and the Government of the Syrian Arab Republic concerning the Reciprocal
Promotion and Protection of Investments, art. 9(3), China-Syria, Dec. 9, 1996,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/785 [hereinafter China-Syria
BIT (1996)]; Agreement between the Government of the Kingdom of Cambodia and the
Government of the People’s Republic of China for the Promotion and Protection of
Investment, art. 9(3), Cambodia-China, July 19, 1996,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/571 [hereinafter CambodiaChina BIT (1996)]. As examined in Section III, the ICSID tribunal in the Tza Yap Shum case
interpreted this qualification to cover “not only the mere determination of the
[compensation] amount but also any other issues normally inherent to an expropriation,
including whether the property was actually expropriated in accordance with the BIT
provisions . . . .” Tza Yap Shum V Peru (ICSID Case No ARB/07/6, Decision on Jurisdiction
and Competence of 19 June 2009), para 188.
96
Second, China’s preference for ad hoc arbitration is reflected in
Paragraph 2:
(2) Where the dispute is referred to international arbitration,
the national or company and the other Contracting Party
concerned in the dispute may agree to refer the dispute
either to:
(a) an international arbitrator appointed by the parties to
the dispute; or
(b) an ad hoc arbitral tribunal to be appointed under a
special agreement between the parties to the dispute;
or
(c) an ad hoc arbitral tribunal established under the
Arbitration Rules of the United Nations Commission
on International Trade Law.
This treaty text presents a set of options with respect to the method of
arbitration to the parties involved, of which the first relies on a sole arbitrator,
whereas the remaining two involve ad hoc arbitral tribunals. A number of
other earlier China BITs lay out the process of establishing an ad hoc arbitral
tribunal, usually composed of three arbitrators. For instance, the ChinaSingapore BIT (1986) specifies that “each party . . . shall appoint an arbitrator.
The two arbitrators shall appoint a third arbitrator as Chairman . . . .”213
As a final resort, if all aforementioned processes fail after three
months have passed since referral to arbitration, the China-U.K. BIT requires
that said investment dispute be submitted to arbitration in accordance with
the UNCITRAL Arbitration Rules.
One of the main reasons for China’s reliance on ad hoc tribunals for
arbitration, as opposed to utilizing ICSID tribunals, was because it was
previously not a member of the ICSID Convention. Before China became a
213
Agreement between the Government of the People’s Republic of China and the
Government of the Republic of Singapore on the Promotion and Protection of
Investments, art. 13(4), China-Sing., Nov. 21, 1985,
http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/968 [hereinafter ChinaSingapore BIT (1985)]. See also Agreement between the Government of the Kingdom of
Thailand and the Government of the People’s Republic of China for the Promotion and
Protection of Investments, art. 9(3)(a), China-Thai., Mar. 12, 1985,
http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/981 [hereinafter ChinaThailand BIT (1985)].
97
member to the Convention in 1993, a substantial number of Chinese BITs
included a clause specifying that the ad hoc tribunal would “determine its own
arbitral procedures with reference to the ICSID Convention.”214 Essentially,
the ICSID Convention was used as a nonbinding reference point in conducting
the arbitration procedures of dispute resolution.
After China obtained ICSID membership in 1993, its investment treaty
practice relating to dispute settlement reveals a gradual progression from use
of the ICSID merely as a reference point to selective acceptance, but only to
the extent that China and its counterparties provide prior mutual written
consent as to the institution’s jurisdiction.215 For instance, the China-Greece
BIT (1993) stipulates:
Article 10 Settlement of Disputes between an Investor and a
Host State
1. Disputes between an investor of a Contracting Party and the other
Contracting Party concerning an obligation of the letter under this
Agreement, in relation to an investment of the former, shall, as far
as possible, be settled by the disputing parties in an amicable way.
2. If such disputes cannot be settled within six months from the date
either party requested amicable settlement, the investor
concerned may submit the dispute either to the competent court
of the Contracting Party, or to an international arbitration tribunal if
214
China-Singapore BIT (1985), art. 13(6). See also Austria-China BIT (1986), Protocol art.
3(2); Agreement between the Government of the People’s Republic of China and the
Government of the State of Kuwait for the Promotion and Protection of Investments, art.
8(3), China-Kuwait, Nov. 23, 1985,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/752 [hereinafter ChinaKuwait BIT (1985)]; China-Sri Lanka BIT (1986), art. 13(6); Agreement between the
Government of Australia and the Government of the People’s Republic of China on the
Reciprocal Encouragement and Protection of Investments, art. 12(4), Austl.-China, July 11,
1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/148 [hereinafter
Australia-China BIT (1988)]; China-Malaysia BIT (1990), Art 7(4); Agreement between the
Republic of Hungary and the People’s Republic of China Concerning the Encouragement
and Reciprocal Protection of Investments, art. 10(3), China-Hung., May 29, 1991,
http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/910 [hereinafter ChinaHungary BIT (1991)]; China-Yemen BIT (1998), art. ___ (“[O]ther disputes [not relating to
amount of compensation] shall be submitted to ICSID on agreement between the
parties.”).
215
The first BIT entered into force after China obtained ICSID membership with Papua
New Guinea (entry into force on February 12, 1993) does not present ICSID arbitration as
an option, and the second BIT with Hungary (entry into force on April 1, 1993) specifies in
the Protocol that the Contracting Parties will enter into a separate, supplementary
agreement in order to address and clarify issues that may be submitted to ICSID for
arbitration.
98
the dispute concerns the amount of compensation referred to in Art.
4. Any other dispute between an investor and a Contracting Party,
may be submitted to an international arbitration tribunal, only by
mutual consent. Each Contracting Party herewith declares its
acceptance of such an arbitration procedure . . . .
4. In the case both Contracting Parties have become members of
the . . .
[ICSID] Convention . . . , disputes between either
Contracting Party and the investor of the other Contracting
Party . . . may, by mutual consent be submitted for settlement by
conciliation of arbitration to the International Centre for
Settlement of Investment Disputes.216
In short, the China-Greece BIT allows for submission of disputes to an
international arbitration tribunal for issues concerning the amount of
compensation, but additionally requires mutual consent between the investor
and host state concerned for any other disputes to be submitted to an
international tribunal. Paragraph 4 of Article 10 further specifies that ICSID
arbitration in particular may be available upon both China and Greece
becoming members of the ICSID Convention,217 so far as both parties to the
dispute mutually provide consent as to ICSID jurisdiction.
Tza Yap Shum Case and the Scope of Dispute Resolution
The limited scope of the disputes China has been willing to subject to
arbitration was an essential issue at play in the Tza Yap Shum case. The
Chinese claimant argued that the applicable “dispute involving the amount of
compensation for expropriation” language 218 allowed him not only to
216
Italics added. The “Agreement between the Government of the People’s Republic of
China and the Government of the Hellenic Republic for the Encouragement and
Reciprocal Protection of Investments,” was signed on June 25, 1992, and entered into
force on December 21, 1993, available at
http://unctad.org/sections/dite/iia/docs/bits/china_greece.pdf.
217
The ICSID Convention entered into force on May 21, 1969 for Greece, and therefore, by
the time the China-Greece BIT entered into force, both Contracting States had become
members to the ICSID Convention, thus rendering Article 10(4) effective.
218
The investor-state dispute settlement provision in the China-Peru BIT (1995) reads as
follows:
Article 8
1. Any dispute between an investor of one Contracting Party and
the other Contracting Party in connection with an investment in
the territory of the other Contracting Party shall, as far as possible,
be settled amicably through negotiations between the parties to
the dispute.
99
“determine the amount [of compensation] but also any other issues normally
inherent to an expropriation, including whether the property was actually
expropriated in accordance with the BIT provisions . . . as well as the [above
determination].”219 The claimant’s application of the MFN provision, in an
attempt to incorporate into his case the more expansive provisions of Article
12 of the Peru-Colombia BIT, was rejected by the Tribunal.220 However, the
Tribunal was willing to closely examine the aforementioned treaty’s language
on jurisdiction, determining that in addition to conferring jurisdiction over the
basic determination of the value of compensation owed, the “dispute
involving the amount of compensation for expropriation” clause also
conferred jurisdiction over the determination of whether an expropriation had
in fact taken place under the applicable BIT.221
Contemporary Chinese Approach
In contrast with China’s past practice, the currently adopted Version III
of the Chinese Model BIT further expands the reach of the investor-state
arbitration clause and reveals China’s willingness to be subject to ICSID
arbitration in a wider range of disputes. China’s investment treaty practice
relating to dispute settlement and ICSID arbitration thus has been a multistep process of evolution, moving from minimal utilization of the ICSID
Convention as a reference point, to selective use of the Convention, limiting
2.
3.
If the dispute cannot be settled through negotiations within six
months, either party to the dispute shall be entitled to submit the
dispute to the competent court of the Contracting Party
accepting the investment.
If a dispute involving the amount of compensation for
expropriation cannot be settled within six months after resort to
negotiations as specified in Paragraph 1 of this Article, it may be
submitted at the request of either party to the international
arbitration of the International Center for Settlement of
Investment Disputes (ICSID), established by the Convention on
the Settlement of Investment Disputes between States and
Nationals of Other States, signed in Washington D.C., on March
18, 1965. Any disputes concerning other matters between an
investor of either Contracting Party and the other Contracting
Party may be submitted to the Center if the parties to the
disputes so agree.
219
Tza Yap Shum v Peru, Decision on Jurisdiction and Competence, para 188 (unofficial
translation).
220
See supra pp. 41-46 (comprehensive discussion of the MFN treatment issue in the Tza
Yap Shum case and the application of the MFN provision to the issue of dispute
resolution).
221
Tza Yap Shum v. Peru, paras 143-188.
100
its applicability to disputes relating to the amount of compensation unless
there was mutual consent as to ICSID jurisdiction over other kinds of disputes,
to broader acceptance of the international arbitration tribunal as a viable
option generally available to the parties involved. The main driving force
behind such development has been the exponential increase of Chinese
overseas investment.
The most recent Model BIT dispute settlement provision covers “any
legal dispute between an investor of one Contracting Party and the other
Contracting Party,”222 without limiting eligible disputes to those based upon
the violation of the treaty. As such, it can be interpreted as even going
beyond current standard international BIT practice:
Article 9: Settlement of Disputes between an Investor and a
Host State
1. Any legal dispute between an investor of one Contracting
Party and the other Contracting Party in connection with an
investment in the territory of the other Contracting Party
shall, as far as possible, be settled amicably through
negotiations between the parties to the dispute.
2. If the dispute cannot be settled through negotiations within
six months from the date it has been raised by either party
to the dispute, it shall be submitted by the choice of the
investor:
(a) to the competent court of the Contracting Party that is
a party to the disputes;
(b) to [ICSID] under the [ICSID Convention], provided that
the Contracting Party involved in the dispute may
require the investor concerned to go through the
domestic administrative review procedures specified
by the laws and regulations of that Contracting Party
before the submission to ICSID.223
222
223
Model BIT, Version III, Art 9(1), (2).
Italics added.
101
Once the investor has submitted the dispute to the competent
court of the Contracting Party concerned or to ICSID, the choice
of one of the two procedures shall be final.
In contrast to certain earlier treaties in which submission to arbitration
was limited to the issue of compensation for expropriation, recent China IIAs
have generally followed the model above and introduced a more liberal stance.
The specific language used to convey such broad coverage takes various
forms. For instance, Article 8(1) of the China-Uganda BIT (2004) mirrors the
Model BIT text by addressing itself to “[a]ny legal dispute . . . in connection
with an investment,” whereas the China-Finland BIT (2004), Art 9(1) opens
“[a]ny dispute arising out of an investment” to arbitration.
After
experimenting between the more liberal “any legal dispute . . . in connection
with an investment” language and the more specified “any dispute arising out
of an investment” clause, more recent Chinese treaties have generally settled
on the latter model, revealing a preference for greater specificity. As an
example, the China-Korea BIT (2007) states:
Article 9 Settlement of Disputes between
Investors and One Contracting Party
1. For the purposes of this Article, an investment dispute
is a dispute between one Contracting Party and an
investor of the other Contracting Party that has
incurred loss or damage by reason of, or arising out of,
an alleged breach of this Agreement with respect to an
investment of an investor of that other Contracting
Party.
As such, the disputes that may be submitted for resolution under
international arbitration must be tied to investment and a specific breach of
the IIA concerned. The China-Uzbekistan BIT (2011) takes the level of detail a
step further:
Article 12 Settlement of Disputes between
Investors and One Contracting Party
2. If the dispute that an investor of one Contracting Party
claiming that the other Contracting Party has breached an
obligation under Article 2 through 9, or Article 13, cannot be
102
settled through negotiations within six months from the
date it has been raised by either party to the dispute, the
disputing investor who incurred loss or damage from that
breach may, by his choice, submit the claim [to either
domestic litigation of host state or international
arbitration].224
Instead of merely providing a standard definition for the term,
“investment dispute,” specific “causes of action” are laid out in this treaty text,
meaning that investors can explicitly claim only the breaches of obligations
which are stipulated within “Article[s] 2 through 9, or Article 13”
(encompassing standard BIT content, such as the FET or MFN standards) of
the China-Uzbekistan BIT.
Local Remedies
China limits the ability of an investor to submit an investment dispute
to arbitration by relying on the following language: “provided that the
Contracting Party involved in the dispute may require the investor . . . to go
through the domestic administrative review procedures specified by the laws
and regulations of that Contracting Party before the submission to ICSID.”225
In other words, if China is involved in an investment dispute as a host state, it
retains discretion to require the investor concerned to exhaust Chinese
domestic remedies prior to resorting to ICSID. This requirement is intended to
give an opportunity to the host state to revisit the problem raised by the
private investor and to resolve the disputes without delay. To minimize the
time lag caused by such domestic review procedures, certain BITs impose
short time limits, such as three months (China-Finland BIT) or four months
(China-Mexico BIT), within which domestic administrative review must be
completed.226 An investor may proceed to international arbitration only after
that specified time period has passed. Nevertheless, complying, however
briefly, with such domestic requirements may be difficult for investors lacking
understanding of what the administrative review procedures specified by
224
Italics added.
Model BIT, Version III, Art 9(2)(b).
226
China-Finland BIT (2004), Protocol to art. 9 and China-Mexico BIT (2009), Annex C and
para. 2.
103
225
Chinese law precisely entail. Requiring exhaustion of local remedies may, in
effect, hinder a foreign private investor from receiving timely redress.
Governing Law
China has inserted clauses in its investor-state dispute settlement
provisions specifying the governing law to be relied upon in the resolution
process. The China-Uzbekistan BIT (2011) includes the following clause:
Article 12 Settlement of Disputes between
Investors and One Contracting Party
6. The Tribunal shall decide a dispute in accordance with such
rules of law as may be agreed by the disputing parties. In
the absence of such agreement, the Tribunal shall apply
the law of the Contracting Party to the dispute (including
its rules on the conflict of laws), and such rules of
international law as may be applicable, in particular, this
Agreement.
Unless the disputing parties agree to a particular set of rules in
advance, the default governing law is the law of the host state to the dispute,
along with such rules of international law as may be applicable. The treaty
text above reveals an increasing level of comfort with international law by
identifying it as a valid source of law.
The China-Canada BIT (2012) takes specificity to an unprecedented
level and adopts a highly detailed approach with respect to the investor-state
dispute settlement mechanism:
Article 30 Governing Law
1. A Tribunal established under this Part shall decide the
issues in dispute in accordance with this Agreement, and
applicable rules of international law, and where relevant and
as appropriate, take into consideration the law of the host
Contracting Party.
2. Where a disputing Contracting Party asserts as a defence
that the measure alleged to be a breach is within the scope
of the reservations and exceptions set out in Article 8(1), (2)
and (3), on request of the disputing Contracting Party, the
Tribunal shall request the interpretation of the Contracting
104
Parties on the issue. The Contracting Parties, within 60 days
of delivery of the request, shall submit in writing their joint
interpretation to the Tribunal. The interpretation shall be
binding on the Tribunal. If the Contracting Parties fail to
submit an interpretation within 60 days, the Tribunal shall
decide the issue.227
As was seen in the China-Uzbekistan example, the China-Canada BIT
embraces “rules of international law” as a source of governing law. As
opposed to the China-Uzbekistan BIT, however, in which the law of the host
state assumes a primary role, the China-Canada BIT downplays the status of
domestic laws by specifying that the law of the host Contracting Party shall be
“[taken] into consideration,” “where relevant and as appropriate.” 228
Moreover, the treaty recognizes the authority of the Contracting Parties to
interpret its provisions and asserts that their interpretations “shall be binding
on the Tribunal.”
C. Investor-State Arbitration involving Japan
Japan has focused on entering into IIAs with developing states and has
yet to execute a BIT with a Western European capital-exporting state. As a
result, Japan has entered into BIT treaty negotiations assuming the position of
a capital exporter, and has thus primarily concentrated on securing protection
for its investors.
Correspondingly, the investor-state dispute resolution
provisions in Japanese BITs have generally adopted a liberal, pro-investor
stance.
With the exception of the Japan-Philippines FTA (2008), all of Japan’s
international investment agreements include investor-state arbitration
provisions, and even this sole exception does not rule out arbitration, as the
FTA specifies that “the Parties shall enter into negotiations after the date of
entry into force of this Agreement to establish a mechanism for the
settlement of an investment dispute between a party and an investor of the
227
Emphasis added. The specificity of the China-Canada BIT is, in part, attributable to the
detailed investment treaty practice of the Canadian government. This BIT with China
raised a great degree of concern within the Canadian civil society, particularly with respect
to the issue of state sovereignty.
228
Canada-China BIT (2012), art. 30(1).
105
other Party.”229 As such, Japan and the Philippines may still designate
arbitration as a means for dispute settlement in follow-up negotiations.
In contrast to earlier Japanese BITs, which allow referral to arbitration
for “any legal dispute that may arise out of investment[s]”230 made by a
foreign investor, recent new-generation Japanese investment agreements are
introducing highly detailed and elaborate provisions dealing with the scope of
investor-state arbitration. For example, the Japan-Korea BIT (2003) inserts a
separate provision defining the precise scope of “investment dispute”:
Article 15
1. For the purposes of this Article, an investment dispute is a
dispute between a Contracting Party and an investor of the
other Contracting Party that has incurred loss or damage by
reason of, or arising out of, an alleged breach of any right
conferred by this Agreement with respect to an investment
of that other Contracting Party.231
Consent to Arbitration
The issue of consent to arbitration similarly reflects an increasing level
of specification. Japan’s first BIT in 1978 (Japan-Egypt) simply required the
host state to consent to arbitration at the request of the foreign investor
involved:
Article 11
Each Contracting Party shall consent to submit any legal
dispute that may arise out of investment made by a national or
company of the other Contracting Party to conciliation or
arbitration, in accordance with the provisions of the [ICSID
Convention], at the request of such national or company . . . .
In the event of disagreement as to whether conciliation or
229
Japan-Philippines EPA (2006), art. 107.
Egypt-Japan BIT (1977), art. 11. See also Hong Kong-Japan BIT (1997), art. 9(1). Not
surprisingly, the Japan-China BIT serves as an exception to this general tendency of
Japanese treaty practice in the past. Submission to arbitration is restrictively permitted
only for “a dispute concerning the amount of compensation” or by mutual agreement
between the foreign investor involved and the host state, China-Japan BIT (1988), art.
11(2).
231
Japan-Korea BIT (2002), art. 15(1).
106
230
arbitration is the more appropriate procedure the national or
company affected shall have the right to choose.232
On the surface, the above language appears to provide the injured
investor with significant leverage, requiring the host state concerned to
consent to conciliation or arbitration, as is requested by the investor, and
further enabling the investor to choose between conciliation and arbitration.
However, the treaty text overlooks the possibility that the host state may, in
actual practice, refuse to provide such consent contrary to the treaty text.233
In order to address this potential issue, more recent BITs adopt
wording amounting to immediate consent to international arbitration and
ICSID procedures.
For instance, the Japan-Korea BIT (2003) assumes a
permissive stance toward arbitration and provides three main options: (i)
ICSID arbitration under the ICSID Convention, (ii) arbitration in accordance
with the UNCITRAL Arbitration Rules, or (iii) any other arbitration institution
or arbitration rules as is agreed upon by the parties. Thereafter, the treaty
text clarifies that “[e]ach Contracting Party hereby gives its consent to the
submission of an investment dispute to international arbitration” in
accordance with either of the two primary arbitration choices available to the
foreign investor involved:234
Article 15
3. If the investment dispute cannot be settled within three
months from the date on which the investor requested the
consultation or negotiation in writing and if the investor
concerned has not submitted the investment dispute for
resolution under paragraph 2 (a) of this Article or judicial or
administrative settlement, the investor concerned may
submit the investment dispute for settlement by binding
arbitration:
(a) to the Centre, if both Contracting Parties are parties to
ICSID Convention;
232
Egypt-Japan BIT (1977).
For similar consent-by-default approach, see also Japan-Turkey BIT (1992); JapanPakistan BIT (1998); and Japan-Mongolia BIT (2001).
234
Japan-Korea BIT (2002), art. 15(3). See also Japan-Singapore EPA (2002), art. 82(4); and
Japan-Uzbekistan BIT (2008), art. 17(4).
107
233
(b) in accordance with the UNCITRAL Arbitration Rules; or
(c) if agreed by both parties to the dispute, to any other
arbitration institution or in accordance with any other
arbitration rules.
Unless otherwise agreed by both parties to the
investment dispute, once the investor concerned
submits the investment dispute for resolution under
paragraphs 2 and 3 of this Article, the investor
concerned may not submit the investment dispute for
settlement by any of the other alternatives set out in
paragraphs 2 and 3 of this Article.
Each Contracting Party hereby gives its consent to the
submission of an investment dispute to international
arbitration as set out in sub-paragraphs (a) and (b) of
this paragraph.235
Instead of merely requiring host states to consent to the submission of
investment disputes to arbitration, such investment agreements by
themselves directly provide such consent.
Moreover, Japanese negotiators seem to make efforts to cover or
clarify issues of potential controversy in the treaty text. For instance, the
Japan-Cambodia BIT (2008) goes a step further and specifies that certain
fundamental requirements of international arbitration conventions pertaining
to the issue of consent must be satisfied:
Article 17
(a) Each Contracting Party hereby consents to the
submission of investment disputes by a disputing
investor to conciliation or arbitration set forth in
paragraph 4 chosen by the disputing investor.
(b) The consent given by subparagraph (a) and the
submission by a disputing investor of a claim to
arbitration shall satisfy the requirements of:
(i) Chapter II of the [ICSID Convention], for written
consent of the parties to a dispute; and
235
Italics added.
108
(ii) Article II of the [New York Convention], for an
agreement in writing.
In addition to the consent to submission of investment laid out in
paragraph (a), paragraph (b) specifies that the requirements of Chapter II of
the ICSID Convention and Article II of the New York Convention must also be
satisfied. As the Japan-Cambodia BIT effectively serves as written consent in
accordance with the ICSID Convention and the New York Convention, a
foreign investor seeking relief under this BIT would not face any problem as to
the issue of host state consent in submitting an investment dispute to
conciliation or arbitration.
Forum and Rules of Arbitration
With respect to the choice of forum and rules of arbitration, certain
more recent Japanese investment agreements have provided for a broad
range of forum choices for arbitration. For instance, the Japan-Cambodia BIT
(2008) presents the following five different options:
Article 17
4. (a) If any investment dispute cannot be settled through
such consultation or negotiation, the disputing investor
may submit the investment dispute to one of the following
alternatives:
(i) competent courts of justice or administrative tribunals
or agencies within the Area of the disputing Party;
(ii) conciliation or arbitration in accordance with the [ICSID
Convention], so long as ICSID Convention is in force
between the Contracting Parties;
(iii) conciliation or arbitration under the Additional Facility
Rules of the [ICSID], as may be amended, so long as
ICSID Convention is not in force between the
Contracting Parties;
(iv) arbitration under the Arbitration Rules of the
[UNCITRAL], as may be amended; and
(v) if agreed with the disputing Party, any arbitration in
accordance with other arbitration rules.236
236
Cambodia-Japan BIT (2002).
109
A distinctly pro-investor approach toward the selection of forum for
dispute resolution is noticeable here, as the primary choice of forum
determination is conferred upon the foreign investor, and a comprehensive
set of alternatives is offered.
Cooling-Off Period
As to a cooling-off period required prior to submission of a dispute to
arbitration, the durations specified in Japan’s BITs vary from three months
(Japan-Korea BIT) to seven months (Japan-Colombia BIT).237 According to the
Korea-China BIT (2007), the three-month cooling-off period begins on the
date “on which the investor requested the consultation in writing.”238
D. Investor-State Arbitration involving Korea
A majority of recent Korean BITs include a provision on investor-state
dispute settlement mechanisms and provide for submission of disputes to
arbitration. Changes in the specific content of the investor-state dispute
settlement provision in Korean IIA practice has tracked the evolution of
Korea’s economy from a capital-importing to a capital-exporting state. Earlier
in its economic development, Korea adopted a pro-investor approach to
investor-state dispute settlement as part of its efforts to create a more
palatable investment environment for incoming foreign investors. Since the
2000s, this liberal stance has been further reinforced in order to protect the
interests of Korean investors and their outbound investments. As an example,
the Korea-Mexico BIT (2002) and Korea-Vietnam BIT (amended in 2004) both
address the issue of investor-state arbitration in multiple articles under a
separate chapter dealing with settlement of disputes.239 Another investment
treaty, the Korea-U.S. FTA (2011), similarly includes a highly detailed and
comprehensive investor-state dispute settlement provision.
During the
ratification process, concerns over the litigious nature of U.S. investors (as
237
Japan-Korea BIT (2002), art. 15(3) and Colombia-Japan BIT (2011), art. 27(5).
Japan-Vietnam BIT (2003), art. 14(3).
239
Mexico-Korea BIT (2000), arts. 7-15 and Agreement between the Government of the
Republic of Korea and the Government of the Socialist Republic of Vietnam for the
Promotion and Protection of Investments, arts. 8-16, S. Kor.-Viet., Sept. 15, 2003,
http://www.kluwerarbitration.com/CommonUI/document.aspx?id=ipn29547 [hereinafter
Korea-Vietnam BIT (2003)].
110
238
perceived by the general Korean public) had generated serious political
controversy.240
In terms of the scope of disputes subject to the possibility of
arbitration, Article 8(1) of the Model BIT casts a wide net and refers to “[a]ny
dispute between a Contracting Party and an investor of the other Contracting
Party including expropriation or nationalization of investments.”
This
language is similar to, and arguably even broader than, earlier Japanese
investment agreements relying on the “any legal dispute that may arise out of
investment”
241
formulation.
The Model BIT text explicitly includes
expropriation and nationalization as subject matters that may be submitted to
arbitration, but does not expressly require that disputes submitted to
arbitration arise out of any particular investment. Furthermore, the Korean
Model BIT language does not necessarily require any correlation between a
dispute submitted to arbitration and to the specific provisions of the
investment treaty involved. Nonetheless, the title of Article 8, “Settlement of
Investment Disputes,” suggests that disputes submitted to arbitration in
accordance with the above Model BIT text should be limited to those cases
relating to investment disputes. The actual text of the 2001 Korean Model BIT
is presented below in order to provide a clearer illustration:
Article 8: Settlement of Investment Disputes between a
Contracting Party and an Investor of the Other Contracting
Party
1. Any dispute between a Contracting Party and an investor
of the other Contracting pParty including expropriation or
nationalization of investments shall, as far as possible, be
settled by the parties to the dispute in an amicable way . . . .
In actual Korean investment treaty practice, the scope of the investorstate dispute settlement provision varies drastically across BITs. A number of
240
See Lee Joo-hee, ISD remains a sore spot in Korea-U.S. FTA, THE KOREA HERALD, Nov. 22,
2012, available at http://www.koreaherald.com/view.php?ud=20121122001006 (detailed
discussion of the partisan clash over the investor-state dispute settlement clause in the
U.S.-Korea FTA (2007)).
241
Egypt-Japan BIT (1977), art. 11. See also Hong Kong-Japan BIT (1997), art. 9(1). ChinaJapan BIT (1988) (Not surprisingly, the Japan-China BIT serves as an exception to this
general tendency of Japanese treaty practice in the past. Submission to arbitration is
restrictively permitted only for “a dispute concerning the amount of compensation,” or by
mutual agreement between the foreign investor involved and the host-state.).
111
BITs wholly embrace the Model BIT approach and do not include any
qualifications to the scope of investor-state dispute settlement.
As an
example, the Korea-U.K. BIT (1976) allows “any legal dispute” relating to the
investment in the host state to be submitted to arbitration.242
In contrast, a more narrowly drafted alternative version of the
provision enables submission to arbitration only to the extent that an
investment “has incurred loss or damage by reason of, arising out of, an
alleged breach” of the given BIT.243 This limited approach has been followed in
certain recently concluded BITs, such as those with Kuwait and China.244 For
example, the Korea-Kuwait BIT (2004) provides that:
Article 8 Settlement of Investment Disputes between a
Contracting Party and an Investor of the Other Contracting
Party
(1) For the purposes of this Article, an investment dispute is a
dispute between a Contracting Party and an investor of the
other Contracting Party that has incurred loss or damage
by reason of, or arising out of, an alleged breach of any
right conferred by this Agreement with respect to an
investment of an investor of that other Contracting Party.
In other words, this particular BIT requires that there be (i) a breach; (ii)
of a right conferred by the respective BIT; (iii) with respect to an investment of
the foreign investor concerned. Regardless, the dominant approach to
arbitration in Korea’s existing BITs remains the less-restrictive version of
investor-state dispute settlement found in the 2001 Korean Model BIT.
As has been the case in other areas of investor protection, the KoreaU.S. FTA (2011) is an outlier when compared to other Korean investment
treaties. To permit arbitration, Article 11.16 of the Agreement requires a
breach of an obligation under the investment chapter therein, an investment
242
Korea-U.K. BIT (1983), art. 8(1). See also Agreement between the Government of the
Republic of Korea and the Government of the Republic of Uzbekistan for the Promotion
and Reciprocal Protection of Investments, art. 9(1), S. Kor.-Uzb., June 17, 1992,
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1846 [hereinafter KoreaUzbekistan BIT (1992)].
243
Korea-Kuwait BIT (2004), art. 8(1).
244
Korea-Kuwait BIT (2004), art. 8(1) and China-Korea BIT (2007), art. 9(1).
112
authorization or an investment agreement, and that the “claimant . . .
incurred loss or damage by reason of, or arising out of, that breach . . . .”245
In sum, Korean investment treaty practice with respect to dispute
settlement enables, for the most part, a highly general, wide-ranging scope of
cases to be submitted to arbitration. A minority of treaties retreat to a more
reserved, detailed approach and specify that only breaches relating to rights
arising out of the given agreement may be subject to arbitration.
Local Remedies
With respect to the issue of local remedies, the 2001 Korean Model BIT
does not necessitate exhaustion of domestic procedures prior to proceeding
with arbitration. Instead, it offers local remedies to foreign investors on the
basis of either national treatment or MFN treatment, whichever provides a
more favorable option:
2. The local remedies under the laws and regulations of one
Contracting Party in the territory of which the investment
has been made shall be available for investors of the other
Contracting Party on the basis of treatment no less
favourable than that which would be accorded to
investments of its own investors or investors of any third
State, whichever is more favourable to investors.
3. If the dispute cannot be settled within six (6) months from
the date on which the dispute has been raised by either
party, and if the investor waives the rights to initiate any
proceedings under paragraph (2) of this Article with respect
to the same dispute, the dispute shall be submitted upon
request of the investor of the Contracting Party to the
[ICSID].
The Model BIT does, however, assume a “fork-in-the-road” stance,
presenting the foreign investor with a choice between two mutually exclusive
options, i.e., either (i) international arbitration or (ii) local legal proceedings in
accordance with either national treatment or MFN treatment. Submission of
an investment dispute to ICSID arbitration thus effectively precludes litigation
in local judicial institutions.
245
U.S.-Korea FTA (2007), arts. 11.16(1)(a)(i)-(ii).
113
More recent Korean BITs exclude the above reference to local
remedies being based on either the national treatment or MFN standard.
Instead, recent BITs with Japan and Kuwait replace such language with what
amounts to a choice among three dispute settlement alternatives: (i) dispute
settlement in accordance with specific dispute settlement procedures agreed
to in advance; (ii) judicial or administrative local remedies; or (iii) investorstate arbitration.246 In terms of investor-state arbitration, the following three
options are presented: (i) ICSID; (ii) an arbitral tribunal established under the
UNCITRAL rules; and (iii) an arbitral tribunal established in accordance with
arbitration rules agreed to in advance.
Moreover, the amended Korea-China BIT of 2007 further clarifies that
once an investor submits an investment dispute in accordance with one of
these three options, its choice is final: “Once the investor has submitted the
dispute to the competent court of the [host state], to ICSID, or to the ad hoc
arbitration tribunal . . . , the choice of one of the three procedures shall be
final.”247 As was seen above in the discussion on China’s investment practice
relating to dispute settlement, the Korea-China BIT enables the host state to
retain a certain amount of control over investment disputes by providing an
option to require domestic administrative review procedures prior to the
submission of a dispute to arbitration.248
On the opposite end of the spectrum, BITs with the United Kingdom
and Hungary, representing the minority stance, do not include a provision
adopting the “fork-in-the-road” approach. Another interesting approach is
found in the Korea-U.S. FTA (2011), which, on the one hand, requires a written
waiver from a Korean investor claimant, and on the other, precludes
arbitration when an investor of the United States “has alleged . . . breach of an
obligation . . . before a court or administrative tribunal of Korea.” 249 In the
aggregate, these few examples may be considered anomalies in Korean
246
Japan-Korea BIT (2002), arts. 15(2)-15(3) and Korea-Kuwait BIT (2004), arts.
8(2)-8(3).
247
China-Korea BIT (2007), art. 9(4).
China-Korea BIT (2007), art. 9(3).
249
U.S.-Korea FTA (2007), art. 11.18(2)(b) and Annex 11-E(1).
114
248
investment treaty practice, and the general position of Korea as to the issue of
local remedies has been to adopt a “fork-in-the-road” approach.
Forum and Rules of Arbitration
As to choice of forum and rules of arbitration, the 2001 Korean Model
BIT and certain earlier Korea BITs restrict the submission of investment
disputes to ICSID.250 Certain more recent Korean investment agreements
have allowed for more choice, permitting an investor claimant to submit
disputes in accordance with ICSID, the UNCITRAL Arbitration Rules, or other
alternatives to which the disputing parties have agreed in advance.251 For
example, according to the Korea-U.S. FTA, an investor claimant may submit a
claim under the ICSID Convention and the ICSID Rules of Procedure, ICSID
Additional Facility Rules, UNCITRAL Arbitration Rules, or “to any other
arbitration institution or under any other arbitration rules” to which the
parties have agreed to.252
Consent
4. Each Contracting Party hereby consents to the submission
of a dispute to arbitration in accordance with the
procedures set out in this Agreement.
Article 8(5) of the 2001 Korean Model BIT provides that by entering
into the particular BIT, the Contracting Parties are effectively giving consent
to arbitration. As such, an arbitrable agreement comes into effect when the
foreign investor concerned provides its consent to arbitration. A majority of
Korea’s more recent BITs follow the sample text introduced in the Model
BIT.253 On the other hand, the Korea-Hungary BIT (1988) distinguishes
disputes arising out of nationalization and expropriation from any other kind
250
Korea-U.K. BIT (1983), art. 8(1); Agreement between the Government of the Republic
of Korea and the Government of the Democratic Socialist Republic of Sri Lanka for the
Promotion and Protection of Investments, art. 10(1), S. Kor.-Sri Lanka, Mar. 28, 1980,
available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/1832
[hereinafter Korea-Sri Lanka BIT (1980)]; Agreement between the Government of the
Republic of Korea and the Government of the Hungarian People’s Republic for the
Encouragement and Reciprocal Protection of Investments, arts. 10(3)-10(4), Hung.-S.
Kor., Dec. 28, 1988, available at
http://investmentpolicyhub.unctad.org/Download/TreatyFile/1528 [hereinafter HungaryKorea BIT (1988)].
251
Japan-Korea BIT (2002), art. 15(3) and China-Korea BIT (2007), art. 9(3).
252
U.S.-Korea FTA (2007), art. 11.16(3).
253
See, e.g., Korea-Iran BIT (2006), Art 12(7); Korea-Kuwait BIT (2004), art. 8(5); KoreaDominican Republic BIT (2008), Art 8(5).
115
of dispute and allows for unilateral decision-making on the part of the injured
investor in determining whether or not to submit such cases to arbitration:
Article 10
3. If any dispute concerning expropriation or nationalization
cannot be settled within six months from the date either
party requested amicable settlement, it shall upon request
of either the investor or the Contracting Party be
submitted to the [ICSID].
4. If a dispute not referred to in paragraph 3 of this Article
cannot be settled within six months from the date either
party requested amicable settlement, it shall be submitted,
upon agreement on such submission by both parties to the
dispute, to the [ICSID].
In
essence, this
treaty text differentiates expropriation
or
nationalization from other types of government measures and makes
submission to ICSID relatively easier for the former kind of disputes. Disputes
relating to expropriation or nationalization thus do not require the consent of
the opposing host state, in contrast to other disputes which necessitate
mutual agreement as to the submission of a dispute to arbitration. This BIT
represents a minority case in which Korea may have accommodated
Hungary’s hesitance to agree to investor-state arbitration beyond issues of
nationalization and expropriation, similar to China’s earlier state practice.
Cooling-Off Period and Further Developments
With respect to the cooling-off period required prior to the submission
of a dispute to arbitration, the durations specified in Korea’s BITs vary from
three months (Korea-U.K. BIT) to twelve months (Korea-Sri Lanka BIT).254
According to the Korea-China BIT (2007), the four-month cooling-off period
begins on the date either Contracting Party seeks consultation relating to the
investment dispute.255
A number of recent BITs build on the text of the 2001 Korean Model
BIT and incorporate specific details and clarification on issues such as notice of
arbitration and effective deadlines for submitting disputes to arbitration. For
254
255
Korea-U.K. BIT (1983), art. 8(1) and Korea-Sri Lanka BIT (1980), art. 10(2).
China-Korea BIT (2007), art. 9(2).
116
instance, the Korea-Japan BIT introduces what may be interpreted as a
“statute of limitations” for arbitration, that bars the foreign investor
concerned from submitting a dispute “if more than three years have elapsed
from the date on which the investor first acquired, or should have acquired,
knowledge that the investor had incurred loss or damage.”256 In addition,
specific issues such as procedures, consolidation, awards and enforcement are
elaborated in the Korea-Vietnam BIT.
E. Summary
This chapter was devoted to a detailed discussion of investor-state
dispute settlement provisions embedded in the investment treaties of China,
Japan, and Korea.
As has been the case with respect to other treaty
provisions, the dispute settlement mechanism espoused by China has evolved
from a previous stance of cautious and restrictive acceptance (e.g., limiting
jurisdiction to cases arising out of the amount of compensation for
expropriation) to the current position of cautious internationalization (e.g.,
embracing ICSID arbitration as one of the main fora) without limiting the
scope of disputes to issues pertaining to the amount of compensation.
Japan, on the other hand, has traditionally sought to include dispute
settlement clauses in its BITs providing for submission of investment disputes
to ICSID or other international arbitration tribunals. In addition, certain of its
recent treaty provisions aim to make the dispute submission process more
convenient for the aggrieved foreign investor by clarifying potentially unclear
technical points which may be raised in the arbitration or recognition and
enforcement procedures.
The Korean international investment practice relating to dispute
resolution shows similarities to the Japanese equivalent, but may arguably be
even more liberal in terms of the scope of legal conflicts potentially covered
by the dispute settlement provision. At the same time, Korea has not adopted
a categorical, uniform standard in terms of treaty text formulation, and has
shown flexibility in key theoretical concepts such as whether or not to adopt a
“fork-in-the-road” approach.
256
Japan-Korea BIT (2002), art. 15(5).
117
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
Annex A
Bilateral Investment Treaties of China
Country
Date of Entry into Force
Sweden
March 29, 1982
Denmark
April 29, 1985
Norway
July 10, 1985
Thailand
December 13, 1985
Singapore
February 7, 1986
United Kingdom
May 15, 1986
Austria
October 11, 1986
Kuwait
December 24, 1986
Sri Lanka
March 25 ,1987
Italy
August 28, 1987
Australia
July 11, 1988
Poland
January 8, 1989
New Zealand
March 25, 1989
Japan
May 14, 1989
Malaysia
March 31, 1990
Pakistan
September 30, 1990
Ghana
November 22, 1991
Papua New Guinea
February 12, 1993
Hungary
April 1, 1993
Ukraine
May 29, 1993
Laos
June 1, 1993
Vietnam
September 1, 1993
Mongolia
November 1, 1993
Greece
December 21, 1993
Tajikistan
January 20, 1994
Uzbekistan
April 12, 1994
Estonia
June 1, 1994
Lithuania
June 1, 1994
Turkmenistan
June 4, 1994
Croatia
July 1, 1994
Argentina
August 1, 1994
Kazakhstan
August 13, 1994
Turkey
August 20, 1994
Bulgaria
August 21, 1994
United Arab Emirates
September 28, 1994
Slovenia
January 1, 1995
Belarus
January 14, 1995
Peru
February 1, 1995
Georgia
March 1, 1995
Moldova
March 1, 1995
Armenia
March 18, 1995
Azerbaijan
April 1, 1995
Indonesia
April 1, 1995
Chile
August 1, 1995
Oman
August 1, 1995
Albania
September 1, 1995
Kyrgyzstan
September 8, 1995
118
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
Philippines
Egypt
Jamaica
Bolivia
Serbia
Iceland
Saudi Arabia
Mauritius
Ecuador
Lebanon
Macedonia
Uruguay
Zimbabwe
South Africa
Sudan
Barbados
Morocco
Cambodia
Qatar
Bahrain
Ethiopia
Cape Verde
Syria
Mozambique
Yemen
Cyprus
Myanmar
Algeria
Trinidad and Tobago
Netherlands
Guyana
Bosnia and Herzegovina
Iran
Democratic People’s Republic of Korea
Germany
Latvia
Czech Republic
Tunisia
Guinea
Finland
Slovakia
Madagascar
India
Republic of Korea
Spain
Portugal
Cuba
Israel
Gabon
Malta
119
September 8, 1995
April 1, 1996
April 1, 1996
September 1, 1996
September 13, 1996
March 1, 1997
May 1, 1997
June 8, 1997
July 1, 1997
July 10, 1997
November 1, 1997
December 1, 1997
March 1, 1998
April 1998
July 1, 1998
October 1, 1999
November 27, 1999
February 1, 2000
April 1, 2000
April 27, 2000
May 1, 2000
January 1, 2001
November 1, 2001
February 26, 2002
April 10, 2002
April 29, 2002
May 21, 2002
January 28, 2003
May 24, 2004
August 1, 2004
October 26, 2004
January 1, 2005
July 1, 2005
October 1, 2005
November 11, 2005
February 1, 2006
September 1, 2006
July 1, 2006
November 15, 2006
November 15, 2006
May 25, 2007
June 1, 2007
August 1, 2007
December 1, 2007
July 1, 2008
July 26, 2008
December 1, 2008
January 13, 2009
February 16, 2009
April 1, 2009
98
98
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
Russia
May 1, 2009
Mexico
June 6, 2009
Mali
July 16, 2009
Romania
September 1, 2009
Belgium and Luxembourg
December 1, 2009
Nigeria
February 18, 2010
Switzerland
April 13, 2010
France
August 20, 2010
Uzbekistan
September 1, 2011
Colombia
July 2, 2013
Canada
October 1, 2014
BITs not yet entered into force, as of March 2015
Zambia
Signed on June 21, 1996
Democratic Republic of Congo
Signed on December 18, 1997
Belize
Signed on January 16, 1999
Congo
Signed on March 20, 2000
Botswana
Signed on June 12, 2000
Brunei
Signed on November 17, 2000
Sierra Leone
Signed on May 16, 2001
Kenya
Signed on July 16, 2001
Jordan
Signed on November 15, 2001
Cote d’Ivoire
Signed on September 23, 2002
Djibouti
Signed on August 18, 2003
Benin
Signed on February 18, 2004
Uganda
Signed on May 27, 2004
Equatorial Guinea
Signed on October 20, 2005
Namibia
Signed on November 17, 2005
Vanuatu
Signed on April 7, 2006
Seychelles
Signed on February 10, 2007
Costa Rica
Signed on October 24, 2007
Chad
Signed on April 26, 2010
Libya
Signed on August 4, 2010
Democratic Republic of the Congo
Signed on August 11, 2011
Tanzania
Signed on March 24, 2013

1
2
3
4
5
6
7
8
9
10
An updated full list of BITs China has concluded may be found at:
http://www.unctad.org/sections/dite_pcbb/docs/bits_china.pdf
Free Trade Agreements of China
Country
Date of Entry into Force
Chile
April 1, 2004
Singapore
March 2, 2006
EFTA
September 1, 2006
ASEAN
September 1, 2009
India
January 1, 2010
EU
July 1, 2011
Peru
August 1, 2011
United States of America
March 15, 2012
Turkey
May 1, 2013
Colombia
Signed on February 21, 2013 (not yet in force)
120

For up-to-date information on FTAs China entered into, see:
http://fta.mofcom.gov.cn/english/fta_qianshu.shtml
121
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1
2
3
4
5
6
7
8
9
10
11
12
13
Annex B
Bilateral Investment Treaties of Japan
Country
Date of Entry into Force
Egypt
January 14, 1978
Sri Lanka
August 4, 1982
China
May 14, 1989
Turkey
March 12, 1993
Hong Kong
June 18, 1997
Bangladesh
August 25, 1999
Russian Federation
May 27, 2000
Mongolia
March 24, 2002
Pakistan
May 29, 2002
Republic of Korea
January 1, 2003
Vietnam
December 19, 2004
Cambodia
July 31, 2008
Laos
August 3, 2008
Uzbekistan
September 24, 2009
Peru
December 10, 2009
Papua New Guinea
January 17, 2014
Kuwait
January 24, 2014
Myanmar
August 7, 2014
Mozambique
August 29, 2014
BITs not yet entered into force, as of March 2015
Colombia
Signed on September 9, 2011
Iraq
Signed on June 7, 2012
Saudi Arabia
Signed on May 1, 2013
Kazakhstan
Signed October 23, 2014
Uruguay
Signed January 26, 2015
Ukraine
Signed February 2, 2015
Country
Mexico
Malaysia
Singapore
Chile
Thailand
Indonesia
Brunei
Philippines
Switzerland
ASEAN
Vietnam
India
Peru

Free Trade Agreements of Japan
Date of Entry into Force
April 1, 2005
July 13, 2006
November 30, 2006
September 3, 2007
November 1, 2007
July 1, 2008
July 31, 2008
December 11, 2008
September 1, 2009
December 1, 2009
October 1, 2009
August 1, 2011
March 1, 2012
Updated information on IIAs Japan concluded may be found at:
122
http://www.meti.go.jp/english/policy/external_economy/trade/FTA_EPA/index.html
and http://unctad.org/sections/dite_pcbb/docs/bits_japan.pdf
123
Annex C
Bilateral Investment Treaties of Korea
Country
Date of Entry into Force
1
Germany
January 15, 1967
2
Netherlands
June 1, 1975 (amendment: March 1, 2005)
3
Tunisia
November 28, 1975
4
Great Britain
March 4, 1976
5
Belgium-Luxembourg
September 3, 1976 (amendment: December 20, 2006)
6
France
February 1, 1979
7
Sri Lanka
July 15, 1980
8
Senegal
September 2, 1985
9
Denmark
June 2, 1988
10 Bangladesh
October 6, 1988
11 Hungary
January 1, 1989
12 Malaysia
March 31, 1989
13 Thailand
September 30, 1989
14 Poland
February 2, 1990
15 Pakistan
April 15, 1990
16 Mongolia
April 30, 1991
17 Russian Federation
July 10, 1991
18 Austria
November 1, 1991
19 Italy
June 26, 1992
20 Uzbekistan
November 20, 1992
21 China
December 4, 1992 (amendment: December 1, 2007)
22 Paraguay
August 6, 1993
23 Vietnam
September 4, 1993 (amendment: June 5, 2004)
24 Lithuania
November 9, 1993
25 Indonesia
March 10, 1994
26 Peru
April 20, 1994
27 Turkey
June 4, 1994
28 Spain
July 19, 1994
29 Romania
December 30, 1994 (amendment: January 11, 2008)
30 Czech Republic
March 16, 1995
31 Tajikistan
August 13, 1995
32 Greece
November 4, 1995
33 India
May 7, 1996
34 Finland
May 11, 1996
35 Laos
June 14, 1996
36 Portugal
August 11, 1996
37 Argentina
August 24, 1996
38 Philippines
September 25, 1996
39 Kazakhstan
December 26, 1996
40 Latvia
January 26, 1997
41 Cambodia
May 12, 1997
42 Egypt
May 25, 1997
43 Bolivia
June 4, 1997
44 South Africa
June 6, 1997
124
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
Sweden
June 18, 1997
Hong Kong
July 30, 1997
Belarus
August 9, 1997
Ukraine
November 3, 1997
United States of America
July 30, 1998
Nigeria
February 1, 1999
Qatar
May 16, 1999
Morocco
May 8, 2001
Nicaragua
June 22, 2001
Honduras
July 19, 2001
Algeria
September 30, 2001
Panama
February 8, 2002
El Salvador
May 25, 2002
Mexico
June 27, 2002
Guatemala
August 17, 2002
Costa Rica
August 25, 2002
Japan
January 1, 2003
Saudi Arabia
February 19, 2003
Israel
June 19, 2003
Brunei
October 30, 2003
Trinidad and Tobago
November 27, 2003
Oman
February 10, 2004
United Arab Emirates
June 5, 2004
Jordan
December 25, 2004
Slovakia
February 7, 2006
Iran
March 31, 2006
Albania
May 18, 2006
Croatia
May 31, 2006
Mauritania
July 21, 2006
Guyana
August 20, 2006
Bulgaria
November 16, 2006
Lebanon
December 21, 2006
Libya
March 28, 2007
Kuwait
August 31, 2007
Jamaica
November 5, 2007
Azerbaijan
January 25, 2008
Mauritius
March 7, 2008
Dominican Republic
June 10, 2008
Kyrgyz
July 8, 2008
Gabon
August 9, 2009
Burkina Faso
April 14, 2010
Tanzania
July 3, 2011
Republic of Congo
August 13, 2011
Uruguay
December 8, 2011
Rwanda
February 16, 2013
BITs not yet entered into force, as of March 2015
90 Brazil
Signed on September 1, 1995
125
91 Democratic Republic of Congo
92 Zimbabwe
93 Colombia

1
2
3
4
5
6
7
8
9
10
An updated full list of BITs Korea concluded may be found at:
http://unctad.org/Sections/dite_pcbb/docs/bits_korea_republic.pdf
Country
Chile
Singapore
EFTA
ASEAN
India
EU
Peru
United States of America
Turkey
Colombia

Signed on March 17, 2005
Signed on May 24, 2010
Signed on July 6, 2010
Free Trade Agreements of Korea
Date of Entry into Force
April 1, 2004
March 2, 2006
September 1, 2006
September 1, 2009
January 1, 2010
July 1, 2011
August 1, 2011
March 15, 2012
May 1, 2013
Signed on February 21, 2013 (not yet in force)
For up-to-date information on FTAs Korea entered into, see:
http://www.mofat.go.kr/ENG/policy/fta/status/overview/index.jsp?menu=m_20_80_10
126
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Ekran Berhad v. People’s Republic of China, ICSID Case No. ARB/12/29.
LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/25.
Maffezinii v. Spain, ICSID Case No ARB/97/7 (Award on Jurisdiction) (January 25, 2000).
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.
Saluka Investments BV v. Czech Republic, IIC 210 (2006).
Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and
Competence of June 19, 2009
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