Guide to obtaining investment protection for Chinese investors
We recently wrote about how foreign investors can use investment treaties to protect investments made abroad from political risk i. 'Political risk' in foreign investment is the risk that an investment will be adversely effected by a host country's political or regulatory decisions. We now look more closely at how Chinese investors can gain investment treaty protection.
Whilst developed Western countries have historically been the greatest proponents of investment treaties, China has now entered into more investment treaties than any other country besides Germany. One can assume that the Chinese government's motivation for agreeing to so many treaties is to increase the protections provided to Chinese investors abroad. It also signals a willingness to provide the same protections to investments made in China.
Investors in oil and gas and electric power resources and / or in South America, Eastern Europe Central Asia or Sub-Saharan Africa, should give particular consideration to investment treaty protection as this is where the majority of investment disputes are currently arising. ii
1 Examples involving Chinese investors
Chinese investors are only beginning to take advantage of the protections provided by these investment treaties. The first known investment treaty case involving China was commenced by a Chinese investor, 'Mr Tza', against the Government of Peru. The claim arose following a tax audit of Mr Tza's business in Peru, the Peruvian authorities' re-assessment of Mr Tza's payable tax and direction to all Peruvian banks to retain any funds passing through them in connection with Mr Tza's business. This direction significantly affected Mr Tza's ability to run his business. He successfully claimed that the restrictions on the banks were arbitrary and unreasonable and destroyed his ability to conduct business, and therefore, effectively 'expropriated' his business.
The Peruvian government was ordered to compensate Mr Tza for his loss.
In September this year, Ping An (Insurance) Group, commenced a claim against Belgium. Ping An, which held a stake in Belgium's Fortis Bank, commenced the claim under the China/Belgium investment treaty following the state-organized break up of the bank and the writing off of 96% of its investment (CNY22.8billion).
On 15 October 2012, it was reported that Chinese gold miners in Ghana had been detained and one shot dead, apparently for illegal mining. However some of the Chinese parties have claimed that they were victims of fraud when profiteers sold the same mining rights to different buyers at the same time. China has entered into an investment treaty with Ghana, which could provide compensation for these loses if Ghana has failed to take adequate steps to protect the rights of Chinese nationals who have purchased mines or mining rights. iii
2 Other examples
In 1999, Ecuador granted to Occidental Petroleum the right to explore for oil in, and produce oil from, an area of 200,000 hectares in the Ecuadorian Amazon. In 2003, Occidental completed construction of the pipeline at the cost of US$1.5 billion. Production of oil began in late 2003. Over the next couple of years, due to political pressure, the Ecuadorian government alleged various breaches of contract by Occidental and in May 2006 the government cancelled the contract and ordered Occidental to surrender the project to the State-owned entity, PetroEcuador. A tribunal ordered Ecuador to pay Occidental US$1.8 billion together with interest, thought to be around US$2.3 billion.
In 2009, Venezuela nationalized several oil fields operated by US and Spanish companies, without paying compensation. In August 2012, one American company, Exterran Holdings, accepted a settlement of US$442 million from Venezuela after commencing arbitration in respect of one of these oilfields.
In July 2012, a tribunal in Stockholm ordered Russia to pay Spanish shareholders in the Yukos oil company compensation after the company, worth US$60 million, was nationalized. Yukos was dismantled at auction, and mostly sold to a Russian government run company, to provide proceeds for $30 billion in back taxes. The tribunal found that Russia had used illegitimate tax bills to bankrupt and nationalize Yukos.
3 How can Chinese investors use investment treaties?
3.1 Obtain treaty protection
A Chinese investor who is considering making an investment abroad, or has already made an investment, should consider whether there is an investment treaty between that country and China. If there is, the potential investor should seek legal advice as to whether that treaty provides adequate protection to the investment.
For example, each investment treaty will define the investors and investments which will be provided protection, the protections provided and the rights of investors to seek redress for contravention of these protections (i.e the circumstances in which an investor can commence investor-state arbitration). Investor and investment are typically broadly defined with the latter often including 'every kind of asset'. Limitations may, however, be imposed upon the investor's connection with the investment (e.g. ownership and/or control) or the investor's connection with the countries party to the investment treaty (e.g. a requirement that it not be owned or controlled by a person located in a third country). As for the nature of the protections provided, typically, investors should seek the following:
- prompt and adequate compensation for the expropriation or nationalization (i.e. the taking or destruction) of investments;
- fair and equitable treatment, in accordance with the investor's reasonable expectations as to the treatment it would receive by the host country. This can protect investors against 'arbitrary' treatment and significant alterations to the legal and business environment in which it invested;
- protection and security for investments, including an obligation by the contracting states to take steps to protect the investment;
- treatment no less favorable than that provided to domestic investors (so that, for example, the host state is prohibited from passing a tax law which only applies to foreign investors);
- treatment as favorable as that offered to other foreign investors (referred to as "Most Favored Nation Status" or "MFN");
- undertakings to comply with contractual agreements made in respect of investments;
- guaranteed repatriation of income from investments; and
- sympathetic consideration to visas for visitors.
The investor should also consider whether its investment is exposed to risk of particular government action, such as the cancellation of or refusal to renew a license, and bearing this risk in mind, what steps can be taken to enhance protection under the treaty.
If there is no applicable treaty, or if the available treaty does not provide adequate protections, the investor can seek legal advice as to what alternative means are available for obtaining investment treaty protection. This might involve a restructuring of the investment or taking advantage of the other investment treaties entered into by the country hosting the investment.
3.2 How can a Chinese investor commence investor-state arbitration?
When the foreign government takes steps which harm your investment, as an investor with a protected investment under the treaty, you can take advantage of the dispute resolution procedure provided in the treaty. The Chinese investor must follow the procedure stipulated in the investment treaty for dispute resolution. These often contain 'pre-conditions' to arbitration that must be satisfied, such as a requirement that the parties attempt to resolve the dispute amicably or that the investor first seek remedies in local courts.
In many cases, China's treaties provide that the investor can choose to submit disputes to an 'ad-hoc' international tribunal which will operate according to the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules, or to the International Centre for Settlement of Investment Disputes (ICSID ). ICSID is an institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or Washington Convention) for the resolution of investor-state disputes. It is an arbitral institution, similar to the ICC iv or SIAC v, which provides rules and administrative assistance for the conduct of arbitrations. ICSID's jurisdiction, unlike the ICC or SIAC, is limited to investment disputes.
Despite the terms of the treaty, ICSID arbitration will only be available to the investor if both contracting states are parties to the Washington Convention. vi China is a party to the Washington Convention, so Chinese investors can commence ICSID arbitration if it is provided for by the investment treaty and the other contracting country is also a party to the ICSID convention.
We are aware of at least 357 investor-state arbitrations: 225 of which were filed with ICSID and 91 were conducted under UNCITRAL Rules. The majority of recent cases reported by ICSID relate to investments in oil and gas or electric power resources and arise in respect of actions taken by the governments in South America, Eastern Europe and Central Asia. Government action in Sub-Saharan Africa is also a significant basis for investor commenced arbitration before ICSID.
3.3 Arbitration process
The basic procedure of 'investor-state' arbitration mirrors the procedure often adopted in international commercial arbitration. The first steps usually involve the forming of the tribunal and the exchange of a notice of claim and notice of defence. Each party will have the opportunity to request limited document disclosure, have witnesses appear before the tribunal and be cross-examined, and to make oral submissions to the tribunal.
Absent any contrary agreement between the parties, the law governing these disputes is primarily international law, though the law of the host country is also likely to affect the tribunal's decision, depending upon the facts of the case and the terms of the treaty.
Before commencing arbitration, it is advisable that the investor engage legal representation experienced in investment treaty arbitration. Legal counsel will prepare the investor's submissions on law and evidence to establish the investor's right (or jurisdiction) to commence the arbitration and the basis for its claim to compensation. In most cases, clear evidence of the effect of the government act complained of on the investment will be necessary to establish the investor's claim. The investor will obtain a strategic advantage if these matters are well prepared before commencement of the arbitration.
Chinese nationals making investments abroad should make use of the available protections in investment treaties provided by the Chinese government. This is particularly so for investors in oil and gas and electric power resources and/or in South America, Eastern Europe and Central Asia where a significant number of investment disputes arise, and where Chinese entities currently have and are continuing to make significant investments. Whilst commencing arbitration against the country hosting your investment may be considered 'the last resort', it is important to ensure as early as possible that you have the right to do so. An investment treaty claim may be your only redress against government action which harms your investment, and further, the mere existence of a potential investment treaty claim may mean that the host country is more willing to resolve the dispute amicably.
ii ICSID Statistics for 2011 and FY2012.
iii As the China-Ghana BIT restricts an investor's right to commence arbitration to disputes concerning the amount of compensation for expropriation, much would depend upon the nature of any government acts or the investor's ability to rely upon more favorable dispute resolution provisions in other Ghana investment treaties.
iv International Chamber of Commerce.
v Singapore International Arbitration Centre.
vi The exception being where the non-signatory state subsequently agrees to be subject to ICSID arbitration under the Additional Facility Rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.