Kuala Lumpur International Arbitration Week May 2017

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1 Kuala Lumpur International Arbitration Week May 2017 Reconciling Arbitral Regimes along the Silk Route Investor-State Dispute Settlement Loretta Malintoppi At this point, after four learned presentations on the subject, you should be well informed on what is China s One Belt One Road policy (or, in short, Belt & Road, it sounds like the name of a British Pub ) and what it actually entails. Yet, there are still a number of open questions. We know that, in its two components - the maritime route and the physical road on land the Belt & Road affects three continents, more than half of the entire population of the world. Sixty-five very different countries are represented, with varying degrees of economic, political and social development, and disparate records with regard to human rights, corruption and respect for the rule of law. We know that China s stated intention is to increase international trade flows, develop infrastructure and enhance economic growth and development for all countries along the road and belt, with a sea route that runs all the way from Shanghai to Venice via the African continent. But it is harder to assess what this initiative actually means in concrete terms. Is it a package of massive infrastructure projects, accompanied by trade agreements at the regional and bilateral level? Or is it an ensemble of loans and loan guarantees to the States along the route? Whatever the answers to these questions might be, and behind the muchadvertised slogan, there is a clear intention on the part of China to become a key player in a new era for international commercial relations. From the perspective of the States along the road and their companies, the initiative offers tremendous opportunities to break into the Chinese market, by partnering up with Chinese private companies and State-owned enterprises. Now, the implementation of such a complex and large scale initiative has many challenges, particularly for Chinese investments in countries whose legal and economic systems are less developed. It also has the enormous potential of developing and building ports, roads, railways, airports, power plants, oil and gas pipelines and refineries, together with all the infrastructure in support of these installations. 1

2 Given the extent of investments expected under the R&B initiative, there is also potential for disputes arising from the many contracts and projects down the road. That is when the respect of the rule of law becomes important and a variety of dispute settlement options need to be considered and assessed. In short, Chinese investors should become more interested in investment protection as the initiative takes off. My task today is to provide you with a very quick overview of China s investment protection policy, including the dramatic shift that it has experienced from a closed economy to one of the largest outward direct investment countries in the world, and the issues this gives rise to for the settlement of potential investment disputes. In particular, over the last twenty years or so, China s focus has moved from seeking to attract foreign investors to protecting its investors as their own investments in other countries grow. China has entered into 145 BITs, 21 treaties with investment provisions, and 21 investment-related instruments. In the early days, when the first BIT with Sweden was signed in 1982, China s approach to investments was very conservative and showed a marked reluctance to accept international arbitration as a dispute resolution method. It is significant that, in the early Chinese model BIT, only disputes concerning the amount of compensation to be paid in case of expropriation could be submitted to ad hoc arbitration. The Malaysia-China BIT, which came into force in 1990 contains this type of provision. Under Article 7, an investor can bring a dispute before the administrative authority or the local courts. Moreover, only disputes for the amount of compensation in case of expropriation can be brought to arbitration. There is also a reference to the fact that the tribunal, once constituted, can determine its own procedure under the ICSID or UNCITRAL Rules. However, there is no consent to ICSID arbitration proper in the treaty, although the parties signed a letter on the same day stating that once China had become a contracting party to the ICSID Convention the parties would enter into negotiations for the possible expansion of the area of investment disputes that may be submitted to ICSID arbitration. This does not appear to have been done to date even though China became a contracting State of the ICSID Convention in It was initially assumed by commentators that this type of provision means that a tribunal could only ascertain the quantum of an expropriation and not whether an expropriation has actually occurred. However, in a 2009 ICSID award in an arbitration between a Peruvian investor and China, the Tza Yap Shum case, brought under the Peru-China BIT, which contains a very similar provision, the tribunal held that the treaty wording did not limit the tribunal s jurisdiction to a ruling on the amount of compensation in case 2

3 of expropriation, but also included jurisdiction to determine whether expropriation was in accordance with the provisions of the BIT. It should be noted that there was a dispute brought by a Malaysian investor, a construction company called Ekran based in Sarawak, in 2011 against China alleging a breach of the Malaysia-China BIT arising out of the Government's revocation of the claimant's subsidiary rights to a leasehold land in a province of China. However, the dispute was settled and the case discontinued. The most recent generation of China s BITs contain a clause for the settlement of disputes between investors of one State and the other State that is much more expansive than the Malaysia-China example. If one looks at the BIT with India, concluded in 2006, the language refers to any dispute in relation to an investment. After the customary period for amicable negotiations, the dispute can be referred to arbitration, either to ICSID if both parties are parties to the Convention, or to the ICSID Additional Facility (given that India is not a party to the Convention), or to ad hoc arbitration under the UNCITRAL Rules. There is also a provision, common for this second generation of Chinese BITs, providing for the exhaustion of administrative review procedures pursuant to the laws of the disputing party prior to submission of the dispute to arbitration. I note, that unlike other Chinese BITs, there is no time-limit to complete this review in this particular treaty. Looking more generally at China s approach to investment protection as reflected in its treaties, they generally provide for fair and equitable treatment of investments. In the past, China strongly opposed the international minimum standard of fair and equitable treatment as essentially an imperialist and colonialist theory that could not be accepted. Only recently did Chinese BITs start referring to general principles of international law and including qualifications of this standard of protection. Expropriation must be carried out for a public purpose, without discrimination and subject to compensation. There are also sometimes Most-Favoured-Nation (MFN) Treatment and National Treatment provisions. Obviously, aside from these general references due to the constraints of time, the scope of protection and dispute resolution clauses differ from treaty to treaty. A useful example for our purposes is that there usually is no preestablishment protection in China s IIAs something China has opposed historically. This was a principal cause of the failure of a US-China BIT to 3

4 get off the ground in the 1990s. One wonders whether China s policy might change now given that its companies involved in projects along the R&B wouldn t benefit from pre-establishment protection. So far, China has only been the respondent State in two investor-state arbitrations. The chart on the screen shows the investment arbitrations brought against some of the Asian States along the silk route. As can be seen from the chart, India takes the lion share, with 21 cases, 11 of which are still pending, followed by Indonesia and Pakistan. Malaysia was the respondent State in three cases. The next map shows the States along the route that are parties to the ICSID Convention. Although India is the notable exception, this did not prevent investors from bringing cases against it under the Additional Facility or starting ad hoc arbitrations under the UNCITRAL Rules, depending on the dispute settlement provision of the relevant treaty. In conclusion, much is still uncertain about the future of this visionary project. Its many challenges are further compounded by the fact that it will be developed against the background of a complex geo-political background. Important questions relating to the network of investment agreements in the region will impact the success of the initiative. What will happen to the Trans-Pacific Partnership (or TPP ) now that the new US administration has announced their withdrawal? And what about the ongoing negotiations for the Regional Comprehensive Economic Partnership ( RCEP ) a regional trade agreement that excludes the United States and has been considered a China-led initiative? Will China play a greater role in influencing the negotiations of the RCEP now that the TPP seems dead in the water? There is much at stake in those negotiations and all they entail in terms of three main considerations: (a) the variety of the States involved India, China, Indonesia, Singapore, Malaysia, (b) the leadership vacuum in Asia on international trade and investment under the Trump administration, and c) the danger of increased tensions in Southeast and East Asia s trade with the US. Clearly, the preferred option is for Asian States to stop worrying about the wasted opportunity of the TPP and look ahead at new deals amongst themselves. Some of the RCEP partners currently do not have free trade agreements so this Partnership could be a game changer for the region. But I am a dispute lawyer and not a fortune teller, so I will refrain from venturing into prognostications about the future. 4

5 I can only hope that the hype surrounding the Silk Route initiative will turn into successful concrete investments and projects, supported by a solid system of dispute resolution if conflicts arise along the way. * * * 5