China: Guide to obtaining investment protection for Chinese investors

Last Updated: 14 November 2012
Article by Monique Carroll and Ariel Ye

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:

  1. prompt and adequate compensation for the expropriation or nationalization (i.e. the taking or destruction) of investments;
  2. 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;
  3. protection and security for investments, including an obligation by the contracting states to take steps to protect the investment;
  4. 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);
  5. treatment as favorable as that offered to other foreign investors (referred to as "Most Favored Nation Status" or "MFN");
  6. undertakings to comply with contractual agreements made in respect of investments;
  7. guaranteed repatriation of income from investments; and
  8. 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.

4 Conclusion

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.

Footnotes

i http://www.chinalawinsight.com/2012/08/articles/dispute-resolution/arbitration-as-a-tool-to-manage-political-risk-in-foreign-investment/

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions