What is investment treaty protection?
Modern investment treaties as we know them have been around for approximately 60 years. In addition to providing qualifying international investors with substantive protections against unfair treatment, discrimination, and asset expropriation by the host State into which they have invested, one of the key benefits of investment treaties is that they allow investors – companies and even natural persons – to bring arbitration claims directly against States for wrongful treatment of their investments.
This innovation in the world of international dispute resolution originated in the early 1960s and significantly improved the position of foreign investors vis-à-vis host States because a foreign investor would not have to rely on the domestic courts of the host State in seeking redress; an option which may not be attractive concerning the actions of the State itself.
The right to bring arbitration claims against host States is becoming increasingly important to Chinese investors in circumstances where the volume and financial value of an outbound investment by Chinese investors have been increasing substantially over the past two decades – a trend that is highly likely to continue. It is an important means of protecting Chinese investment abroad.
A Chinese investor may not have to exercise such a right by way of actually filing the arbitration claim to protect its investment from the host State’s wrongful treatment. The host State will likely be more hesitant to conduct wrongful acts knowing the existence of such a right from the investor, and when wrongful treatment does happen, threatening to exercise such a right itself puts the investor in a better position for negotiating a settlement with the host State.
Additionally, with the enabling framework of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention“) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention“), foreign investors are able directly to enforce arbitral awards in their favor against host States.
Under the New York Convention, States parties are obliged to recognize arbitral awards as binding and enforce them, with limited exceptions, and under the ICSID Convention, States parties are obliged to recognize an ICSID award as binding and enforce it as if it were a final judgment of a court in that State. The coverage of both these conventions is extensive with the New York Convention having 166 States as parties and the ICSID Convention having 155 Contracting States.
This means that investors are able to bring enforcement claims against host States in various countries in order to obtain payment of compensation due under arbitral awards, ensuring the efficacy of the dispute resolution system. For example, in May last year, a US appeals court upheld a decision for Swedish investors to enforce a USD 356 million arbitral awards against Romania.
Given the benefits of investment treaties and China’s large and growing investment treaty network, Chinese investors are well placed to protect their foreign investments when they are treated in a manner that contravenes international investment treaty protections.
China’s investment treaties
China’s economy has experienced extraordinary changes over the last few decades. One remarkable aspect of these changes is the growth in China’s capital exports which are mainly in the form of foreign direct investment (“FDI“). It has been reported that as of the end of 2019, China’s FDI covered more than 190 countries and regions around the world and totaled USD 120 billion, an amount significantly larger than many countries’ entire economies.
China’s investment treaty network reflects this large number of outbound investments. Today, China has the second-largest number of investment treaties in place, with over 120 in force. Yet, for a long time, relatively few Chinese investors took advantage of the protections provided by these investment treaties. Indeed, prior to 2010, there was only one known investment treaty case filed by a Chinese investor against Peru concerning an investment in a fish-based food business. Nevertheless, it should be noted that the tribunal found for the Chinese investor and awarded it compensation of almost USD 800,000 plus interest.
One of the reasons for this paucity of claims filed by Chinese investors may be that China’s earlier investment treaties in the 1980s and 1990s contained more restrictive investor-State dispute settlement (“ISDS“) clauses. A typical clause in these investment treaties would provide for arbitration regarding disputes as to the “amount of compensation for expropriation“. While such provisions can potentially narrow arbitration claims by foreign investors against China, they may have correspondingly reduced the possibility of Chinese investors bringing such claims against other countries for breaches of their rights under the treaties.
Perhaps recognizing this, the Chinese Government, since the turn of the new millennium, has entered into investment treaties with notably broader ISDS clauses which allow investors to submit all disputes concerning the investment to arbitration. Since 2010, Chinese investors have filed a further six publicly-listed treaty cases, the most recent of which was filed against South Korea and registered with the International Centre for Settlement of Investment Disputes (“ICSID“) on 3 August 2020.
Investment treaty protection for Chinese investors
China’s investment treaty network provides Chinese investors and investments with significant protections against political and regulatory risk in other countries. Knowledge of these protections will put investors in a stronger position should such political and regulatory risks occur and help guide their effective resolution.