Bilateral Investment Treaties_e.pdf

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Mitigating political risk through the use of Bilateral Investment Treaties

January 2010


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Introduction

Anyone experienced in doing cross border business, particularly in emerging markets, will know

that the making of investments, whatever their form, is far from being a risk free venture. One ofthe risks is that the State into which the investment is made may seek to interfere with theinvestment in a variety of ways or otherwise fail to safeguard the interests of the internationalinvestor. For instance, States have been known to expel individuals, or to force the closure ortransfer of ownership in projects and companies. Equally, certain jurisdictions are prone to civilunrest or sudden regime change, in which case investors may face uncertainty as to whether theState will deploy its police and military resources to protect, for instance, an infrastructure assetoperated by a foreign entity. As ever, governments in the less stable parts of the world have totread a line between encouraging inward investment on the one hand and looking after theinterests of often impoverished nationals on the other.

Given the extensive activities of Chinese contractors and other businesses around the world and,in particular, in various African and Middle Eastern countries at this time, this is very much a

topical matter.

Whilst the risks inherent in doing business in other countries will never be eliminated altogether,investors should of course seek to minimise and manage their risks where possible. Here we setthese issues in their legal context by looking in particular at international investment treaties. Wealso touch on some related topics which should be considered alongside investment treaties.

As will be seen, international projects, if structured appropriately, can often take advantage ofbilateral investment treaties (BITs) and also rely on the influence of the World Bank in enforcingtreaty obligations against national governments. BITs should be looked upon as an importantpart of the risk management process, sitting alongside other protections such as political riskinsurance. It is important to note that BITs protect against political risk rather than business risk;accordingly BITs are not to be regarded as a panacea.

The remainder of this note is structured as follows:

Part A contains an introduction to Bilateral Investment Treaties and explains the conceptsand terminology involved.

Part B looks at Chinas BITs.

Part C looks at how BITs apply, or might apply, in the context of international constructionprojects.

These topics are complex and an introductory paper of this sort inevitably only covers the basics.It is not a substitute for taking legal advice on any project where these issues may be relevant.


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Part A : an introduction to Bilateral Investment Treaties

1 What is a Bilateral Investment Treaty (or BIT)?

1.1 As the name suggests, a BIT is a bilateral treaty where two countries each agree to givecertain protections and benefits to investments made by citizens and companies of the othercountry. To a qualifying investor, a BIT may provide additional protection beyond anythingto which the investor is entitled contractually or under its insurance, and enable the investorto have recourse against the nation hosting the investment (the Host State) in a neutralforum.

1.2 Rights under a BIT exist as a matter of international treaty law and do not depend on theinvestor being in a contractual relationship with the Host State. BITs are designed toprovide a stable environment within which foreign investors, corporate or individual, feel safeto operate.

1.3 BITs have not traditionally been the subject of extensive consideration by those involved ininternational projects. However, treaties are proliferating and this issue is likely to attractincreased attention over the coming years. As explained below, BITs are relevant bothwhen structuring an investment at the outset and when disputes arise between the investorand the Host State.

2 What benefits do BITs provide?

2.1 The rights a BIT will provide to an investor will vary depending on the terms of the relevantBIT. There is no standard form of BIT; rather, the terms of each BIT are a matter ofnegotiation and agreement between the contracting States.

2.2 Typically, however, a BIT might confer the following rights upon investors:

(a) Fair and equitable treatment - each State agrees to afford the investments madeby investors from the other State fair and equitable treatment. This is a classicformulation of international law and is the subject of much commentary as to itsapplication.

(b) Protection from expropriation/nationalisation each State agrees that it will notexpropriate or nationalise (or take any step having an equivalent effect) any assetor investment belonging to nationals from the other State. The common exceptionto this prohibition is where the expropriation or nationalisation takes place for apublic purpose, is non-discriminatory and is subject to prompt and adequatecompensation.

(c) Most favoured nation and national treatment each State agrees that it will treatinvestments made by investors from the other State in a manner that is at least asfavourable as the manner in which it treats investments made by either (i) investorsfrom other States or (ii) its own citizens.

(d) Repatriation of investment and earnings each State permits the unrestrictedtransfer of investments and returns made by nationals of the other State. Thesetransfers are to be effected without delay and in the currency in which theinvestment was originally made (or in any other convertible currency agreed by theinvestor).

(e) Observe contractual obligations each State agrees that it will observe anyobligation that it has entered into with investors from the other State. This type of


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provision (known as an umbrella clause) may therefore give treaty protection toany obligations undertaken in a contract between the investor and the State, suchas a concession contract or licence for a project. It is often argued that a failure to

honour contractual obligations is in any event a lack of fair and equitable treatment,thus providing protection to the investor even if the BIT contains no umbrellaclause.

(f) Dispute resolution this is perhaps the most useful element of any BIT forinvestors. The provisions can provide that any breach of the BIT will entitle theinvestor to commence arbitration proceedings against the relevant State. Thisenables investors to enforce their claims directly against the Host State in a neutralforum, thus avoiding the need for their own government to take action and avoidinghaving to claim against the Host State in its own courts.

2.3 The above describes the provisions typically found in BITs. Many of Chinas BITs departfrom the approach described above in various respects, as described further in Part Bbelow.

3 Who might be an investor for the purposes of a BIT?

3.1 Who amounts to an investor and what amounts to an investment will vary from BIT toBIT. There is no universally accepted notion of an investment to which BITs apply.

3.2 A BIT will normally define what amounts to an investment. Most BITs are quite broad in thisrespect, and so it is possible that various types of activity could amount to investments forBIT purposes depending on the facts in each case and the wording of the BIT. This couldwell extend beyond perhaps the most obvious types of activity such as the acquisition of allor some of the shares in a company in the Host State; the setting up of a new localsubsidiary in the Host State; or the construction or financing of a project in the Host State

which benefits the Host State. Part C below comments further in relation to constructionprojects.

3.3 The question of who amounts to a protected investor can be more difficult, especially in thecontext of a multi-national organisation. This is because in the context of a group ofcompanies based in multiple jurisdictions, the immediate or ultimate investor may be theparent company or some other group entity, rather than the entity directly participating in theproject. This has to be considered on a case by case basis.

3.4 Local legislation, especially relating to mining and natural resources and infrastructuredevelopment, often requires that the international investor incorporates a special purposevehicle (SPV) in the country where the project is located. Many BITs will extend protectionto special purpose vehicles incorporated in the Host State in circumstances where theshares of that SPV are held by foreign entities. This has to be checked on a case by casebasis.

4 At what stage in a business transaction is the consideration of BITsdesirable?

4.1 BITs should be considered at the outset, and not merely after an investment has beenaffected by an act of State interference (although of course they are obviously relevant atthat stage). In other words, BITs are not there merely as an aid to dispute resolution - theyare also relevant to due diligence and risk management decisions to be made prior tomaking an investment in the first place.


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4.2 At the stage of setting up a transaction/investment, care should be taken to seek tounderstand whether there are ways in which the matter may be structured so as to benefitfrom BIT protection. As an example, a group of companies may have a subsidiary outside

the country of the parent company whose home State has entered into a BIT with the HostState when the country of the parent has not. In such cases, it may be possible to route theinvestment through that subsidiary (or even set up a subsidiary specifically for this purpose)so as to benefit from that BIT and thus provide protection to the group which would not beavailable if the investment were to be made direct from the parent company.

4.3 This process should be more sophisticated than merely checking which States have enteredinto a relevant BIT. The terms of the various BITs in force with the Host State should bechecked to assess which BIT provides the most favourable protection, since BITs can varyconsiderably in their wording.

4.4 As already noted, BIT rights are not dependent on the investor having a contractualrelationship with the Host State. These issues are therefore relevant irrespective of whetherthe investor is dealing directly with the State or is dealing exclusively with privatecounterparties.

5 What is ICSID arbitration and why is it desirable?

5.1 As noted above, many BITs will provide for investors to enforce any claim related to abreach of the BIT through arbitration. Some BITs will provide for ad hoc arbitration (oftenunder the UNCITRAL rules) while others will provide for institutional arbitration (the mostcommon being the ICC and ICSID). Arbitration before an ICSID tribunal provides enhancedenforcement possibilities and is therefore generally regarded as the most advantageousdispute resolution forum for investors.

5.2 ICSID is the International Centre for Settlement of Investment Disputes and was established

specifically to facilitate settlement of investment disputes between governments and privateinvestors. Although ICSID is an autonomous institution, it was created by and forms part ofthe World Bank. If an ICSID member-State (of which there are currently 143) fails to honouran ICSID arbitral award, that State would find itself in breach of its international treatyobligations under the ICSID Convention. If the State in question is the recipient of WorldBank funding (which is often the case in emerging markets), that State may be reluctant toresist compliance with the award in case it risks straining its relationship with the WorldBank. Further, ICSID staff are interchangeable with World Bank staff. This strengthens theperception that non-compliance with an ICSID arbitral award may lead to difficulty inobtaining further loans and credits from the World Bank.

5.3 Regardless of whether ICSID is the applicable arbitral forum, arbitration under a BIT beforea neutral tribunal represents a substantial comfort for investors and a substantial concessionby States who are effectively conceding what would otherwise be the inherent jurisdiction oftheir own courts to determine the legality of the actions of State bodies.

6 Pitfalls

6.1 Part B of this paper looks in some detail at the terms of Chinas BITs. There are howeversome pitfalls that can apply to all BITs which can significantly curtail the investors recoveryagainst the host State under a BIT. In addition to the issues we look at in Part B below, thefollowing points need to be considered:

(a) Is the treaty in force? Many treaties have been signed but have not entered intoforce (see list in Schedule 1).


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(b) Is there a denial of benefits clause allowing a State to issue legislation excludingcertain investors or classes of investor?

(c) Are there any reservations or derogations in the treaty in relation to specificindustry sectors?

(d) Does the BIT contain a wide definition of investor, where the nationality of acompany is defined by its controlling company, or is it more restrictive?

(e) Has a State undergone changes to its sovereignty or political structure which mightaffect the validity of the treaty? For example, since the 1997 handover are treatiessigned by Hong Kong prior to the handover now applicable to the whole of China?What is the applicable treaty where there is already a treaty in place betweenChina and that country? Similar issues arise in relation to the ex Soviet States.

7 ICSID protection via contractual agreement rather than a BIT

7.1 When contracting with the State (or certain State owned entities acting on behalf of theState) it is sometimes open to agree ICSID arbitration as the forum in which disputes are tobe resolved.

7.2 In order for this to be possible, Article 25 of the ICSID Convention will need to be satisfied,which provides:

(1) The jurisdiction of the Centre shall extend to any legal dispute arising directly outof an investment, between a Contracting State (or any constituent subdivision oragency of a Contracting State designated to the Centre by that State) and anational of another Contracting State, which the parties to the dispute consent inwriting to submit to the Centre. When the parties have given their consent, no

party may withdraw its consent unilaterally.

(2) National of another Contracting State means:

(a) any natural person who had the nationality of a Contracting State other thanthe State party to the dispute on the date on which the parties consented tosubmit such dispute to conciliation or arbitration as well as on the date on whichthe request was registered pursuant to paragraph (3) of Article 28 or paragraph(3) of Article 36, but does not include any person who on either date also had thenationality of the Contracting State party to the dispute; and

(b) any juridical person which had the nationality of a Contracting State otherthan the State party to the dispute on the date on which the parties consented tosubmit such dispute to conciliation or arbitration and any juridical person whichhad the nationality of the Contracting State party to the dispute on that date andwhich, because of foreign control, the parties have agreed should be treated as anational of another Contracting State for the purposes of this Convention.

(3) Consent by a constituent subdivision or agency of a Contracting State shallrequire the approval of that State unless that State notifies the Centre that nosuch approval is required.

(4) Any Contracting State may, at the time of ratification, acceptance or approval ofthis Convention or at any time thereafter, notify the Centre of the class or classesof disputes which it would or would not consider submitting to the jurisdiction ofthe Centre. The Secretary-General shall forthwith transmit such notification to all


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Contracting States. Such notification shall not constitute the consent required byparagraph (1).

7.3 As is evident, there are various requirements to be satisfied arising from Article 25. Careneeds to be taken in the drafting, and detailed consideration needs to be given to assesswhether the contract is one to which ICSID protection may properly be contractuallyextended; there is not complete freedom in this respect as ICSID will only accept caseswhich satisfy the various requirements. Both the Host State and the State in which theinvestor resides need to be signatories to the ICSID Convention for this route to work.Subject to those points, in theory this allows the benefits of ICSID to be brought into play byagreement between the parties irrespective of whether a BIT applies.

8 Interaction with political risk insurance

8.1 Some companies who do substantial amounts of business in jurisdictions which areperceived to be high risk take out political risk insurance.

8.2 A policy of political risk insurance will typically cover some but not all of the risks addressedby a BIT. The further-reaching aspects of BIT coverage, perhaps most notably an MFN orumbrella clause, will be unlikely to be replicated under an insurance policy.

8.3 In any event, BIT protection is an additional layer of protection to insurance rather than analternative. Whereas insurance comes at a premium and a deductible (which might besubstantial) will usually be applicable to each claim, BIT protection is free of charge, onesgovernment having effectively negotiated the treaty on ones behalf. Certain BITs containsubrogation wording, thus opening up the prospect of an investor who is (for instance)expropriated claiming against his insurance and then leaving the insurer to pursue a BITclaim in the investors name. These issues are complex and beyond the scope of anintroductory note of this sort.


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Part B: Chinas BITs

9 Countries with whom China has entered into BITs

9.1 There is no central register indicating which States have entered into BITs with which othersor, of the BITs entered into, which are in force. Neither is there any obligation on States tonotify any international body, for instance the United Nations, of its BITs. Ultimately, it is amatter of checking with both States whether they regard a BIT as having been (i) enteredinto; and (ii) brought into force domestically by any necessary ratifying legislation.

9.2 That said, the website of the United Nations Conference on Trade and Development(UNCTAD) contains a search engine which purports to set out the current status of BITsbetween all countries. We cannot confirm its accuracy, but it represents the best startingpoint for any enquiry. It can be found atwww.unctadxi.org/templates/DocSearch.aspx?id=779.

9.3 The table in Schedule 1 indicates, according to UNCTAD, the BITs entered into by China.

9.4 China has concluded at least 121 BITs, making it one of the two most prolific signatories ofBITs (the other being Germany). 20 of Chinas BITs are with African countries of which 7are known to be in force. 8 of Chinas BITs are with Middle Eastern countries, of which 7are known to be in force. Those in force are shown in italicsbelow.

Chinas BITs with African and Middle Eastern States

Africa Middle East

Algeria Bahrain

Benin Israel

Botswana JordanCongo Kuwait

DRC LebanonCote DIvoire Qatar

Djibouti United Arab Emirates

Egypt Yemen

Equatorial GuineaEthiopiaGabon

Ghana

KenyaMorocco

Mozambique

NamibiaNigeriaSouth Africa

Sudan

Uganda

ZambiaZimbabwe

9.5 Schedule 1 speaks for itself as to which countries have entered into BITs with China. Onenotable absence from the list is the United States of America. However, it has recently beenannounced that China and the USA are in the process of negotiating the terms of a BIT.


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10 Relevant multilateral treaties

10.1 Whilst BITs are of course bilateral, it will be apparent from the above that their effective

operation and enforcement of their terms is to some extent dependant on multilateraltreaties including the ICSID Convention.

10.2 China entered into the United Nations Convention on the Recognition and Enforcement ofForeign Arbitral Awards (the New York Convention) on 22 April 1987. Arbitral awardsother than ICSID awards are enforced on an international basis pursuant to the New YorkConvention. Accordingly, to the extent that Chinas BITs provide for arbitration other thanICSID arbitration, this is the relevant treaty.

10.3 China signed the ICSID Convention on 9 February 1990, and following enabling legislation itentered into force on 6 February 1993.

10.4 Whilst this paper focuses on BITs, it is worth noting in passing that the Energy Charter

Treaty (ECT) provides similar protections to those found in most BITs in the particularcontext of energy-related investments between ECT member States. China is not a fullyfledged member State of the ECT, but does have observer status. Observers have theright to attend all Charter meetings and to receive all related documentation, reports andanalysis, and to participate in the working debates taking place within the Energy Charter.The intention is that observer status should provide the chance for a country to familiariseitself with the Charter and its functions, in order to facilitate its assessment of the benefits ofaccession to the ECT.

11 General trends in Chinas BITs

11.1 Although Chinese BITs are numerous, according to public sources there have been no BITclaims made against China. Those sources reveal that a total of 48 countries have had BIT

claims made against them. The country with the most claims against it is Argentina, whichfaced a rush of claims after devaluing its currency during its recent economic crisis.

11.2 Chinese BITs have in the past been restrictive in a number of ways. For example:

(a) The definition of investment often contains certain prerequisites. For instance:

(i) In the China/Australia BIT, the investment must be authorised by thecompetent authority in China.

(ii) In the China/Singapore BIT, the investment must be made in accordancewith the laws and regulations of China.

(b) There was no concept of National Treatment. This is discussed in more detailbelow.

11.3 Most significant, however, is the fact that many of Chinas early BITs (Old GenerationBITs) contained dispute resolution provisions that did not enable investors to enforce theirrights against Host States directly. For the investor, this of course markedly reduces theeffectiveness of any BIT. The approach tends to have become less restrictive since Chinasaccession to the ICSID Convention in 1993, and we refer to the less restrictive BITs as NewGeneration BITs. We discuss the approach to arbitration under Chinas BITs in moredetail below.

11.4 The general backdrop to this is of course that Chinas place in the world economy hasshifted and continues to shift. Traditionally, the PRC has been a major importer of


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international offshore investment. Following the implementation of the Chinesegovernments so-called Going Abroad Strategy in 1998, the PRC has now developed akeen interest in exporting capital, and this burgeoning outward foreign direct investment

(OFDI) has made it imperative for the PRC to establish an OFDI protection system in whichBITs play an important role. Recent Chinese BIT practice has demonstrated the PRCsdetermination to offer OFDI protection to Chinese investors investing offshore. This placesa different dynamic on how China approaches its BITs, with increasing emphasis now beingplaced by the Chinese Government when negotiating BITs on investor protection for its ownnationals.

11.5 In addition to what is mentioned below, the New Generation BITs are often more useful in anumber of other ways including:

(a) a clearer standard in relation to the amount of compensation available onexpropriation;

(b) more liberal currency transfer provisions; and

(c) the proliferation of umbrella clauses.

12 Dispute resolution under Chinas BITs

Old Generation BITs

12.1 Old Generation BITs typically give limited scope for investors to seek redress against theHost State directly following a breach of the BIT. In the first treaty China signed, withSweden (1982), there was no ability for the investor to pursue the Host State at all. Thiswould leave the investor powerless following a breach of the BIT by the Host State unlessthe investor carried insurance and/or could persuade its own State to take the matter up on

a State to State basis.

12.2 Other Old Generation BITs allow the investor to claim directly in arbitration but only in limitedcircumstances rather than (as is more normal in modern BITs) across the board.

12.3 For example, the China/Kuwait BIT, which entered into force in December 1986, in effectonly allows the investor to seek legal redress in the local courts to establish the liability ofthe Host State. Only a dispute concerning the amount of compensation may be referred toan arbitral tribunal. Article 8 provides as follows:

(1) Disputes or differences between one Contracting State and an investor of theother Contracting State concerning an investment of that investor in the territoryand maritime zones of the former Contracting State shall, if possible, be settledamicably.

(2) If such disputes or differences cannot be settled according to the provisions ofParagraph (1) of this Article within a period of six months from the date eitherparty requested amicable/ settlement and the parties have not agreed to anyother dispute settlement procedures, the investor concerned may choose one orboth of the following means of resolutions:

(a) file complaint with and seek relief from the competent administrativeauthority or agency of the Contracting State in whose territory or maritimezones the investment was made;

(b) file suit with the competent court of law of the Contracting State in


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whose territory or maritime zones the investment was made.

(3) The dispute relating to the amount of compensation and any other dispute

agreed upon by both parties may be submitted to an international ArbitralTribunal .

12.4 In any country where there may be a question mark over the independence of the courts,such a provision would be of concern to an investor, for obvious reasons. Any attempt torefer questions of liability, rather than quantum, to an arbitral tribunal would fail, beingcontrary to the terms of the treaty.

12.5 Further, this limited right to pursue the Host State in arbitration is limited further by the factthat in reality the Host State is unlikely to consent to arbitration at the time that such adispute arises. Without both parties consent, the arbitral tribunal has no jurisdiction to hearthe dispute. Further, the treaty does not set out what type of arbitration is to apply (ICC,UNCITRAL etc), leaving this to be agreed at the time.

12.6 Accordingly, whilst the Old Generation BITs may well have been of diplomatic value forChina and its trading partners as a whole, from the investors point of view they have littleappeal given the difficulty an investor would have enforcing its rights following a breach.

New Generation BITs

12.7 As noted above, the ICSID Convention entered into force in China in 1993. Following thisand in view of the PRCs foreign policy objectives under OFDI, China began to agree BITswith more wide ranging protection for its investors and the investors of its counterparties.

12.8 For instance, the BIT concluded between China and Germany (which entered into force on11 November 2005) provides for ICSID arbitration of any dispute arising under the treaty. Itprovides the following:

(1) Any dispute concerning investments between a Contracting Party and aninvestor of the other Contracting Party should as far as possible be settledamicably between the parties in dispute.

(2) If the dispute cannot be settled within six months of the date when it has beenraised by one of the parties in dispute, it shall, at the request of the investor ofthe other Contracting State, be submitted for arbitration.

(3) The dispute shall be submitted for arbitration under the Convention of 18 March1965 on the Settlement of Investment Disputes between States and Nationals ofOther States (ICSID), unless the parties in dispute agree on an ad-hoc arbitraltribunal to be established under the Arbitration Rules of the United Nations

Commission on the International Trade Law (UNCITRAL) or other arbitrationrules.

(4) Any award by an ad-hoc tribunal shall be final and binding. Any award under theprocedures of the said Convention shall be binding and subject only to thoseappeals or remedies provided for in this Convention. The awards shall beenforced in accordance with domestic law.

12.9 Other New Generation BITs give the investor the option between ICSID and another form ofad hoc arbitration. This is the case in, for instance, the China/Botswana BIT (signed on 12June 2000, but not known yet to be in force).


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12.10 It should be noted, however, that certain restrictions sometimes remain even in the NewGeneration BITs. These typically take the form of pre-requisite steps to be taken before theinvestor can commence arbitration proceedings, namely:

(a) a cooling off period of 6 months; and/or

(b) the requirement to exhaust any domestic review procedure in place in the HostState.

12.11 A provision along the lines of (b) above appears in a number of post 2000 Chinese BITs,following the introduction of the new Administrative Review Procedure in 1999. Forexample, Article 8 of the BIT between China and Bosnia Herzegovina (in force in January2005) provides as follows:

1. Any dispute between a Contracting Party and an investor of the other ContractingParty, related to an investment, shall be as far as possible settled amicably through

negotiations.

2. If the dispute cannot be settled amicably through negotiations within six monthsfrom the date it has been raised by either party to the dispute, it shall be submitted:

(i) to the competent court of the Contracting Party that is a party to the dispute;or

(ii) to the International Center for Settlement of Investment Disputes (theCentre) under the Convention on the Settlement of Disputes between Statesand Nationals of Other States, done at Washington on March 18, 1965provided that the Contracting Party involved in the disputes mayrequire the investor concerned to go through the domesticadministrative review procedures specified by the laws and regulationsof that Contracting Party before the submission to the Centre.

3. Once the investor has submitted the dispute to the jurisdiction of the concernedContracting Party or to the Centre, the choice of one of the two procedures shallbe final.

12.12 In practice, this provision has the effect that the Host State can, if it elects to do so, force theinvestor into using the Host States national courts and procedures before proceeding toarbitration. Whilst this provision might have been intended to ensure that any claim againstChina should be referred to the Administrative Review Procedure, since the treaty isreciprocal it will also bring into play any equivalent process in Bosnia Herzegovina.

12.13 An Addendum to Article 9 of the China/Germany BIT mentioned above also contains acaveat which sets out the pre-requisites to access to arbitration. However, in this case theprovision is not reciprocal, since it imposes a limitation only on claims against China and notclaims by Chinese investors against Germany. It is rather unusual to see restrictions whichapply to investors of one State only; presumably this reflects the relative bargaining strengthwhich China enjoyed over Germany at the time of the BIT being negotiated.

With respect to investments in the Peoples Republic of China an investor of the FederalRepublic of Germany may submit a dispute for arbitration under the following conditionsonly:

(a) the investor has referred the issue to an administrative review procedureaccording to Chinese law,


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(b) the dispute still exists three months after he has brought the issue to the reviewprocedure, and

(c) in case the issue has been brought to a Chinese court, it can be withdrawn bythe investor according to Chinese law.

12.14 Notwithstanding such restrictions where they exist, the New Generation BITs aresignificantly more useful for investors than the Old Generation BITs.

13 National Treatment provisions in Chinas BITs

13.1 The Old Generation BITs often did not contain a right for a foreign investor protected underthe treaty to be treated in the same way as nationals of the Host State. Where it was given,this was usually limited. Article 3(3) of the UK/China BIT provides that:

either Contracting Partyshall to the extent possible, accord treatmentin accordance

with the stipulations of its laws and regulations to the investments of nationals orcompanies of the other Contracting Party the same as that accorded to its own nationals orcompanies.

13.2 In effect, this allows the Host State to legislate in a way which positively favours domesticinvestors over foreign investors, thereby significantly undermining the level of protectionprovided by the treaty.

13.3 New Generation BITs often include wider National Treatment provisions. For example,Article 3(2) of the China/Germany BIT provides:

each Contracting Party shall accord to investments and activities associated with suchinvestments by the investors of the other Contracting Party treatment not less favourable

than that accorded to the investments and associated activities by its own investors.

13.4 This is a more standard clause. However, it is noteworthy that these clauses still sometimescontain restrictions in the form of so-called Grandfather clauses. These preserve theapplicability of prejudicial measures passed prior to the BIT in question. The protectionafforded in the China/Germany BIT is restricted in this way, and in addition contains a carveout in relation to tax matters and activities which relate to public health, morality and publicsecurity and order. The Addendum to that BIT provides:

With regard to the People's Republic of China paragraph 3 of Article 2 and paragraph 2 ofArticle 3 do not apply to

(a) any existing non-conforming measures maintained within its territory;

(b) the continuation of any such non-conforming measure;

(c) any amendment to any such non-conforming measure to the extent that theamendment does not increase the nonconformity of these measures.

The People's Republic of China will take all appropriate steps in order to progressivelyremove the non-conforming measures.

4. Ad Article 3

(a) The following shall more particularly, though not exclusively, be deemed "activity"within the meaning of Article 3 (2): the management, maintenance, use,


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enjoyment and disposal of an investment. The following shall, in particular, bedeemed "treatment less favourable" within the meaning of Article 3: unequaltreatment in the case of restrictions on the purchase of raw or auxiliary materials,

of energy or fuel or of means of production or operation of any kind as well asany other measures having similar effects. Measures that have to be taken forreasons of public security and order, public health or morality shall not bedeemed "treatment less favourable" within the meaning of Article 3.

(b) The provisions of Article 3 do not oblige a Contracting Party to extend toinvestors resident in the territory of the other Contracting Party tax privileges, taxexemptions and tax reductions which according to its tax laws are granted only toinvestors resident in its territory.

14 Most Favoured Nation provisions

14.1 It is of course possible that the Old Generation BITs will be affected by the New Generation

BITs if and to the extent that Most Favoured Nation are included. It seems to be that casethat virtually all Chinese BITs contain MFN clauses. Thus, as explained in general termsabove, it ought to be possible for the MFN clause in an older BIT to be invoked in order forthe investor to be granted the higher level of protection afforded by a newer BIT. This ofcourse will operate on a bilateral basis and so will be just as advantageous to a Chineseinvestor as to a foreign investor doing business in China.

14.2 MFN clauses clearly apply to the substantive rights contained in BITs.

14.3 However, a debate ensues as to whether the benefit of dispute resolution clauses can beextended to other BITs by using the MFN clause. Specifically, a difficult question arises asto whether an agreement to arbitrate can effectively be introduced via another treaty intoone which does not contain such an agreement, as (as explored above) is the case in many

older Chinese BITs. The decisions from existing BIT cases on this issue are inconsistentand the argument between the two schools of thought is finely balanced.

14.4 Given the large number of BITs into which China has entered, the MFN clause is anextremely effective tool for an investor into China, given that he has at least 116 othertreaties to compare against his own to find the most favourable terms.

14.5 For a Chinese investor investing in other countries, that position is reversed. It is a questionof comparing the precise wording of the relevant Host States BITs.


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Part C: BITs in the context of international construction

15 Introduction

15.1 As will be apparent from the above, what amounts to an investment, who amounts to aninvestor and what amounts to a breach of a BIT are all questions which depend on thewording of the BIT and the facts in any given case.

15.2 It is therefore not possible to provide definitive guidance for all purposes as to precisely howand when BITs will be of utility to individual clients. In this section, however, we attempt toset out some comments and pose some questions which will typically apply when BITs areanalysed as against the background of a construction project.

16 Is there an investment?

16.1 A normal and unrestrictive investment definition will often contain wording such as:

The term investments means every kind of asset made by investors of one ContractingParty as investments in accordance with the laws and regulations of the Contracting Partyaccepting the investment in its territory, including mainly: (i) movable and immovableproperty and other property rights; (ii) shares in companies or other forms of interest insuch companies; (iii) a claim to money or to any performance having an economic value;(iv) copyright, industrial property, know-how and technological processes; (v) any rightconferred by law or under public contract or any license, permit on concessions issued bylaw.(China/Bahrain BIT, in force 27 April 2000)

16.2 Whether the activity being carried out by the intended claimant amounts to an investmentunder the BIT is a question that will be considered at the jurisdiction stage of any arbitration.As there is no precedent in investment treaty arbitration, there are no rules which must be

followed by tribunals when assessing whether or not an activity is an investment. Further,there is no definition of investment for the purposes of Article 25 of the ICSID Convention.Instead, case law has shown that a number of factors may be considered by tribunals.Commentators have identified the following four common considerations:

1 A substantial commitment. Any significant financial resource or transfer of knowhow, equipment and personnel will usually satisfy this requirement; and

2 A certain duration, for example, over 2 years; and

3 An element of operational risk. This includes the commitment of resources in theearly phase; and

4 Significance for the Host States development. This can be the source of muchdebate. However, commentary suggests that while this can be the subject of somedisagreement, once the first three requirements have been met, it should not bedifficult to establish this requirement.

16.3 There are of course a variety of degrees of involvement which an international contractormight have in a project overseas. At one end of the spectrum is the company acting asmain contractor for both design and construction, perhaps also maintaining and operatingthe completed facility long term and who might have a direct equity stake in the companywhich owns the project once it is complete. At the other extreme, an entity might beproviding a limited consultancy service and not conducting many if any activities on site orholding a long term interest in the project, but nevertheless still contributing to the successfuldelivery of the project.


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16.4 Each case will turn on its facts and the definition of investment in the BIT. The four-limbedtest referred to above is for guidance only. It is therefore not possible to say for all purposeswhat the threshold is for a project participant to be making an investment. It would stand to

reason, however, that according to more or less any notion of investment, the main designand build contractor of a substantial project is very likely to be making an investment;indeed, there is academic commentary to the effect that a construction contract of that typeis of itself an investment.

16.5 We have looked at what has been decided in the past, insofar as past decisions are in thepublic domain. The important sources break down into reported arbitral decisions and astudy undertaken by the OECD. We comment as follows.

(a) In the case of Salini Construttori SpA v Morocco (ICSID Case No ARB/00/4,Decision on Jurisdiction, 23 July 2001):

(i) The claimants had a contract to construct a 50km length of highway in

Morocco over a 32 month period. The works were completed four monthsafter the scheduled completion date.

(ii) Two Italian contractors filed proceedings against Morocco claiming that itsfailure to pay was contrary to the obligation of fair and equitable treatmentand amounted to indirect expropriation.

(iii) In considering whether an investment arose, the tribunal commented that aconstruction that stretches out over many years, for which the total costcannot be established with certainty in advance, creates an obvious riskand that this construction contract was an investment within the meaning ofArticle 25 of the ICSID Convention.

(b) Where there is no construction contract, the tribunal is unlikely to find that there isan investment, unless there is explicit wording in the BIT to the contrary. In MihalyInternational Corporation v. Democratic Socialist Republic of Sri Lanka (ICSIDCase No. ARB/00/2):

(i) The Sri Lankan Government sought expressions of interest from privatecompanies to build a new power generation facility on a build own transferbasis.

(ii) Mihaly was part of a consortium which submitted an expression of interest,which in itself involved considerable work and expense.

(iii) During the negotiations the Sri Lankan Government entered into a letter ofintent, a letter of agreement and a letter of extension with Mihaly which

included understandings on matters such as take or pay obligations.

(iv) Considerable effort and sums of money were expended by Mihaly in thenegotiations and planning the financial and economic modelling to reach theunderstanding.

(v) No contract for the project was ever entered into between the parties.

(vi) The tribunal made the following observations and findings:

(A) The contingent and non-binding character of the three letters wasemphasised.


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(B) The Sri Lankan Government had clearly signalled that it was notwilling to acknowledge that an investment had been made until acontract had been entered into.

(C) It is ultimately a matter for the parties to determine at what point toengage the Convention by entering into a contract.

(D) The Tribunal did state that expenditure during negotiations could beregarded as an investment retrospectively if the contract was enteredinto.

(E) Costs incurred in negotiations made with a view to entering a contractdo not constitute an investment when no contract is entered into.

(c) Since this decision, there have been further cases in which pre-contractexpenditures of this kind were treated as an investment. This is mostly because a

number of BITs now expressly include pre-investment expenditure within thedefinition of investment. However, the relevant wording does not appear in theChinese BITs we have reviewed.

(d) In 2006, OECD undertook a review of some 28 ICSID cases which had involvedconstruction in some way or another (which included both infrastructure servicesand the construction of infrastructure). The following findings were made:

(i) In 17 of the 28 cases the investor was the contractor, working pursuant to aconcession contract, construction contract or some other form of contract (oroccasionally no contract at all). Such contractors were in some casesinvolved indirectly, through subsidiaries.

(ii) In 8 of the 28 cases, the Host State had taken action which had had aneffect on the Claimants shareholding in a company involved in the project.In other words, the investor was a finance party or other equity participant inthe construction project, and the loss claimed was a diminution in the valueof shares.

17 Is there an investor?

17.1 To some extent this is indivisible from the question addressed above. However, assumingthe project itself is of a type which might count as an investment, the corporate structure ofthe intended claimant needs to be examined to see who (if anyone) might have jurisdictionas an investor under the relevant BIT.

17.2 In construction projects there is often the requirement to incorporate a local company tomake the investment/implement the project. For the purposes of an ICSID arbitration, wherean investment is made through a locally incorporated vehicle for this reason, its nationalitywill be defined by the nationality of the company that controls it.

17.3 This is acknowledged in Article 25(2)(b) of the ICSID Convention, under which a companyincorporated in the Host State can be considered a national of another Convention state, if:

because of foreign control, the parties have agreed [it] should be treated as anational of another of another Contracting State for the purposes of this Convention

17.4 Therefore, if (for instance) a Chinese company makes an investment through a locallyincorporated Ghanaian company, the Ghanaian company will be of Chinese nationality for


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the purposes of ICSID jurisdiction in circumstances where both parties have agreed that theit may be treated as such. The essential requirements to fulfil are:

(a) foreign control; and

(b) agreement between the parties that a company incorporated in the Host Stateshould be treated as foreign.

17.5 The requirement of foreign control is objective:

(a) ICSID tribunals examine the actual control by reference to a number of elementsincluding shareholding, indirect control, voting powers and managerial control. Inthe absence of such actual control, tribunals generally decline jurisdiction.

(b) Tribunals have taken differing approaches in relation to indirect control. Sometribunals may attribute a subsidiary with the nationality of its ultimate parent rather

than its immediate parent company.

17.6 As to the requirement to show an agreement between the parties:

(a) An express agreement on nationality (for example in an investment contractbetween the investor and the Host State or a State body) forms a strong butrebuttable presumption.

(b) In such agreements, ICSID tribunals have inferred an agreement to treat a localcompany as a national of another State based on the inclusion of a contractualICSID arbitration clause (see section A above).

(c) Many BITs have provisions agreeing to treat companies incorporated locally but

controlled by the nationals of the other State as nationals of the other State.

17.7 Accordingly, this question is to be assessed on a case by case, project by project basis, asthe solution depends entirely on the facts and the wording of the relevant BIT and anycontract with a State entity.

18 What amounts to a breach of substantive BIT rights?

18.1 As will be apparent from the above, there are potentially a number of bases on which theacts and omissions of the Host State or a body within in the Host State whose acts andomissions may be attributed to the State, may amount to a breach of a BIT by the HostState.

18.2 Since each case depends entirely on its facts, the relevant BIT, the terms of any contractand the views of the tribunal (there being no doctrine of precedent in these cases), it isimpossible to provide a definitive guide to when a substantive BIT right might have beenbreached. We can however offer some observations and look at some prior cases.

18.3 It is often the case that an investor who has suffered at the hands of the Host State willcouch its claim on various alternative grounds. For instance, it might allege that the samefacts amount to a breach of fair and equitable treatment, a breach of the anti-discriminatoryprovisions in the MFN and National Treatment clauses, and to expropriation. The boundarybetween those concepts, and particularly between a lack of fair and equitable treatment andcreeping expropriation, is hard to draw and the concepts are perhaps more correctly to beviewed as overlapping rather than mutually exclusive.


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18.4 Accordingly, rather than attempt to separate out different species of breach, we haveidentified below some factual circumstances which depending on the wording of the BITmight enable the investor to seek redress under one or other of the terms of a BIT.

(a) Nationalisation of the locally incorporated company formed by the investor (i.e.forced share transfer) or physical seizure by the State of the project itself. Thesewould usually be classic examples of expropriation.

(b) Seizure of plant and equipment required for construction, either by the State/aState body, or by criminals or insurgents in circumstances where the State oughtreasonably to have provided protection.

(c) Excessive levels of taxation in breach of local laws or, where relevant, contractualstability arrangements.

(d) Tax treatment which is unfavourable compared to that afforded to other foreign

investors or to nationals of the Host State engaged in the same activities.

(e) Denial of import licences. For instance, in Goetz v Burundi, 2 September 2008, 6ICSID Reports 5 and Middle East Cement v Egypt, Award, 23 April 2002, 7 ICSIDReports 178, the relevant authorities revoked free zone certificates for theinvestors, effectively depriving their investments of any effect.

(f) Revocation of Licences. For instance, in Tecmed v Mexico (ICSID Case NoARB(AF)/00/2, Award, 29 May 2003), the State revoked a licence required for theoperation of a landfill site. This was found to be expropriation.

(g) Failure to provide access. For instance, in Generation Ukraine Inc. v Ukraine(ICSID Case No ARB/00/09, Award, 16 September 2003), an American propertydeveloper sought damages against a local authority. A number of factors takentogether (including the cancellation of leases, the failure to issue amended leases,and the failure to provide access to adjoining land) were found to amount toexpropriation.

(h) Obstructive failure to issue work permits/licences. Many construction projects areheavily reliant on cooperation from Host States government or governmentagencies to issue work permits and licences. In the case of MTD Chile v Republicof Chile (ICSID Case No ARB/01/07, Award on the merits, 25 May 2004), theForeign Investment Commission of Chile approved the construction project. Theinvestor (the funder) transferred funds into a local SPV for the purposes ofpurchasing the site and progressing the project. The local government thenrefused to issue work permits because the project was contrary to its policy. Thiswas seen to be contrary to fair and equitable treatment of the investor. The term

was considered to be a broad and widely accepted standard encompassing suchfundamental standards as good faith, due process, non-discrimination andproportionality.

18.5 The above examples assume that a construction contract is already in place and that it isthe contractors on-site activities which are impeded, thus enabling the contractor or a funderto make a claim. However, can a failure by the Host State to award a construction contractin the first place amount to a breach of the BIT? Given the case of Mihalyabove, this isarguable. Clearly, where a tenderer has simply lost out on a contract/concession awardedby the government, this is unlikely to trigger a breach of a BIT, and ICSID tribunals wouldprobably be very wary of contractors who have simply lost a bid dressing up their loss as atreaty claim. However, where the facts and wording of the BIT are right this argument does


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seem to be a potentially valid one. In particular, if there was an element of discrimination(for instance deliberately awarding the contract to a local contractor whose bid was weaker)together with clear evidence of an investment within the meaning of Article 25, a tribunal

may find that the failure to award a construction contract contravenes the BIT.


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Schedule 1

Chinas BITs (source: UNCTAD)

Partner Date of signature Date of entry intoforce

Albania 13-Feb-93 1-Sep-95Algeria 17-Oct-96

Argentina 5-Nov-92 1-Aug-94

Armenia 4-Jul-92 18-Mar-95Australia 11-Jul-88 11-Jul-88

Austria 12-Sep-85 11-Oct-86Azerbaijan 8-Mar-94 1-Apr-95Bahrain 17-Jun-99 27-Apr-00

Bangladesh 12-Sep-96 25-Mar-97Barbados 20-Jul-98 1-Oct-99

Belarus 11-Jan-93 14-Jan-95Belgium and Luxembourg 6-Jun-05Belize 16-Jan-99

Benin 18-Feb-04

Bolivia 8-May-92 1-Sep-96Bosnia and Herzegovina 26-Jun-02 1-Jan-05Botswana 12-Jun-00

Brunei Darussalam 17-Nov-00

Bulgaria 27-Jun-89 21-Aug-94Cambodia 19-Jul-96 1-Feb-00

Cape Verde 21-Apr-98 1-Jan-01Chile 23-Mar-94 1-Aug-95Colombia 22-Nov-08

Congo 20-Mar-00Congo, Democratic Republic of 18-Dec-97Costa Rica 24-Oct-07

Cte d' Ivoire 23-Sep-02Croatia 7-Jun-93 1-Jul-94

Cuba 24-Apr-95 12-Sep-00

Cyprus 17-Jan-01 29-Apr-02Czech Republic 8-Dec-05 1-Sep-06Denmark 29-Apr-85 29-Apr-85

Djibouti 18-Aug-03

Ecuador 21-Mar-94 1-Jul-97Egypt 21-Apr-94 1-Apr-96

Equatorial Guinea 20-Oct-05

Estonia 2-Sep-93 1-Jun-94Ethiopia 11-May-98 1-May-00

Finland 15-Nov-04 15-Nov-06France 30-May-84 6-Nov-99Gabon 9-May-97

Georgia 3-Jun-93 1-Mar-95Germany 1-Dec-03 11-Nov-05

Ghana 12-Oct-89 22-Nov-91

Greece 25-Jun-92 21-Dec-93Guinea 18-Nov-05

Guyana 27-Mar-03 26-Oct-04Hungary 29-May-91 1-Apr-93


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Iceland 31-Mar-94 1-Mar-97

India 21-Nov-06 1-Aug-07Indonesia 18-Nov-94 1-Apr-95

Iran, Islamic Republic of 22-Jul-00 1-Jul-05

Israel 10-Apr-95Italy 28-Jan-85 28-Aug-87

Jamaica 26-Oct-94 1-Apr-96Japan 27-Aug-88 14-May-89Jordan 15-Nov-01

Kazakhstan 10-Aug-92 13-Aug-94Kenya 16-Jul-01Korea, Democratic People's Republic of 22-Mar-05

Korea, Republic of 7-Sep-07 1-Dec-07Kuwait 23-Nov-85 24-Dec-86

Kyrgyzstan 14-May-92 8-Sep-95Lao People's Democratic Republic 31-Jan-93 1-Jun-93Latvia 15-Apr-04 1-Feb-06Lebanon 13-Jun-96 10-Jul-97

Lithuania 8-Nov-93 1-Jun-94

Macedonia, TFYR 9-Jun-97 1-Nov-97Madagascar 21-Nov-05

Malaysia 21-Nov-88 31-Mar-90Mauritius 4-May-96 8-Jun-97Mexico 11-Jul-08

Moldova, Republic of 6-Nov-92 1-Mar-95Mongolia 25-Aug-91 1-Nov-93Morocco 27-Mar-95 27-Nov-99

Mozambique 10-Jul-01 26-Feb-02Myanmar 12-Dec-01 21-May-02

Namibia 17-Nov-05

Netherlands 26-Nov-01 1-Aug-04New Zealand 22-Nov-88 25-Mar-89Nigeria 27-Aug-01

Norway 21-Nov-84 10-Jul-85

Oman 18-Mar-95 1-Aug-95Pakistan 12-Feb-89 30-Sep-90

Papua New Guinea 12-Apr-91 12-Feb-93Peru 9-Jun-94 1-Feb-95Philippines 20-Jul-92 8-Sep-95

Poland 7-Jun-88 8-Jan-89Portugal 9-Dec-05 26-jul-08Qatar 9-Apr-99 1-Apr-00

Romania 12-Jul-94 1-Sep-95Russian Federation 9-Nov-06

Saudi Arabia 29-Feb-96 1-May-97

Serbia 18-Dec-95 13-Sep-96Seychelles 10-Feb-07Sierra Leone 16-May-01

Singapore 21-Nov-85 7-Feb-86

Slovakia 7-Dec-05 25-May-07Slovenia 13-Sep-93 1-Jan-95

South Africa 30-Dec-97 1-Apr-98


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Spain 14-Nov-05 1-Jul-08

Sri Lanka 13-Mar-86 25-Mar-87Sudan 30-May-97 1-Jul-98

Sweden 27-Sep-04

Switzerland 12-Nov-86 18-Mar-87Syrian Arab Republic 9-Dec-96 1-Nov-01

Tajikistan 9-Mar-93 20-Jan-94Thailand 12-Mar-85 13-Dec-85Trinidad and Tobago 22-Jul-02 24-May-04

Tunisia 21-Jun-04Turkey 13-Nov-90 19-Aug-94Turkmenistan 21-Nov-92 4-Jun-94

Uganda 27-May-04Ukraine 31-Oct-92 29-May-93

United Arab Emirates 1-Jul-93 28-Sep-94United Kingdom 15-May-86 15-May-86Uruguay 2-Dec-93 1-Dec-97Uzbekistan 13-Mar-92 12-Apr-94

Vanuatu 7-Apr-06

Vietnam 2-Dec-92 1-Sep-93Yemen 16-Feb-98 10-Apr-02

Zambia 21-Jun-96Zimbabwe 21-May-96 1-Mar-98

Documents

Bilateral Investment Treaties_e.pdf