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China ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“the Washington Convention”) in 1993. The Washington Convention establishes an arbitration regime for the resolution of investment disputes arising from a foreign investor and its host State. An obvious advantage of this regime is that it provides a way for foreign investors to resolve investment disputes in the context of international standards and procedures, instead of standards of the host State and the efficiency and quality of domestic court judgments.

According to statistics of the Organisation for Economic Co-operation and Development, China has become the world’s largest foreign direct investment recipient since 2003. To date, however, China has not as yet been involved in any arbitral proceedings before the International Centre for Settlement of Investment Disputes (“ICSID”).


One major reason for this is that when signing the Washington Convention, China expressed a reservation that it would only consider submitting disputes to the jurisdiction of ICSID over compensation resulting from expropriation or nationalization. This is likely attributable to the fact that in the early 1990s, the Chinese Government was struggling to reconcile its domestic reform objectives and foreign trade policies. As such, Chinese officials were tended towards a more cautious stance to what was to them, a rather unfamiliar notion of investor-state arbitration. Another probable reason could be that prior to China’s WTO entry, foreign-invested enterprises (“FIE”) often need to structure in-China entities as joint ventures. Article 25(2)(b) of the Washington Convention requires as part of its jurisdictional basis, that an investor party who is a juridical person of the host State must show that the host State has agreed to treat it as a non-national of the host State (ie, not subject to Chinese control). Under the PRC framework, this is a complex question that requires a thorough scrutiny of a joint venture’s corporate structure, among others.

A judicial interpretation issued by the Supreme People’s Court in 1987 concerning the implementation of New York Convention further created difficulties for foreign investors. It stipulates that Chinese courts only consider applying the New York Convention for arbitral awards made regarding “contractual and non-contractual commercial disputes”. Investor-state arbitration is, unfortunately, excluded from this category.


China’s cautious approach towards ICSID was also reflected in its earlier bilateral investment treaties (“BIT”). For instance, the China-United Kingdom BIT does not contain ICSID arbitration provisions, nor does the BIT between China and Australia.

Nevertheless, China’s continuing economic reform, the milestone event of its accession to the WTO and its strategy of actively strengthening bilateral and regional cooperation appear to be reshaping the landscape. From the late 1990s, this cautious stance was liberalised. This could be seen in the China-Germany BIT which under Article 9 permits a German investor to initiate an ICSID arbitral proceeding against China concerning any investment dispute, provided the dispute cannot be settled within six months from the date it has been raised by the German claimant.

It bears notice that there are comprehensive undertakings for use of the ICSID mechanism in China’s recent Free Trade Agreement (“FTA”) engagements too. Whilst China had not incorporated investor-state dispute settlement clauses in its FTA or FTA in nature deals with Hong Kong, Macao, ASEAN and Chile, it did reach an unlimited protocol with Pakistan to settle investor-state disputes at the ICSID forum. Article 54 of the China-Pakistan FTA provides that an investor may submit any legal disputes in connection with an investment in the territory of the State to ICSID.


The causes for this liberalisation remain unspoken. There is an assertion that China’s concession further optimises the country’s investment environment and improves foreign investors’ confidence. One may however question whether the concessions made in the China-Germany BIT and the China-Pakistan FTA are too generous because they arguably goes beyond treaty provisions.

Another possible reason is that China, as the world’s largest holder of foreign exchange reserves, has called upon its own enterprises to venture overseas. Therefore it needs to incorporate ICSID provisions as a protective measure in favour of Chinese investors overseas. This reason is probably sensible regarding investments in developing economies. However, the liberal ICSID clauses also appear in China’s BITs with sophisticated economies such as Germany, Holland and Finland.


In relation to those states with whom BITs have been inked before this change, it is suggested that the same liberal reference to ICSID could be used by invoking the most-favoured-nation (“MFN’) provision in the respective BITs. For example, under Article 3(c) of the China-Australia BIT, an Australian investor should enjoy the same rights available to their German or Dutch counterparts and thus could bring an investment dispute against China in ICSID. Recent ICSID arbitral awards, however, have made this contention fairly questionable. For example, in Telenor Mobile Communications AS v The Republic of Hungary (ICSID Case No ARB/04/15, at paragraph 91), the arbitral tribunal indicated four compelling reasons why a MFN clause in a BIT should not be construed as extending the jurisdiction of the tribunal:

  • Article 31 of the Vienna Convention on Treaties requires a treaty to be interpreted in good faith according to the ordinary meaning of the terms of the treaty and in the light of its object and purposes. The ordinary meaning of MFN clauses is that the investor’s substantive rights in respect of the investments are to be treated no less favourably than under a BIT between the host State and a third State, and there is no warrant for construing the above phrase as importing procedural rights as well.
  • The effect of the wide interpretation of the MFN clause is to expose the host State to treaty-shopping by the investor among an indeterminate number of treaties to find a dispute resolution clause wide enough to cover a dispute that would fall outside the dispute resolution clause in the base treaty, and even then there would be questions as to whether the investor could select those elements of the wider dispute resolution that were apt for its purpose and discard those that were not.
  • The wide interpretation also generates both uncertainty and instability in that at one moment the limitation in the basic BIT is operative and at the next moment it is overridden by a wider clause in a new BIT entered into by the State.
  • The importance to investors of independent arbitration cannot be denied, but the tribunal’s task is to interpret the BIT and to apply ordinary canons of interpretation, not to displace, by reference to general policy considerations concerning investor protection, the dispute resolution mechanism specifically negotiated by the parties. A State intends that the jurisdiction of the tribunal is to be limited to the specified categories and is not to be inferentially extended by an MFN clause. To invoke the MFN clause to embrace the method of dispute resolution is to subvert the intention of the parties to the basic treaty, who have made it clear that this is not what they wish.

The proliferation of FTAs and the possibility of inserting ICSID arbitration regime into FTAs provide a remedial avenue for countries who signed BITs with China in the 1980s (eg, Australia and Singapore). Notwithstanding the fact that both the Australia-China BIT and Singapore-China BIT have MFN clauses, the legal challenges postulated by recent ICSID awards may alert Canberra and Singapore FTA negotiators to re-think the critical importance of getting Beijing’s express unconditional consent on the ICSID regime through the FTA vehicle. On the part of China, how to reconcile treaty obligations and domestic rules, and how to respond to challenges that the liberalisation brings remain to be key issues that it has to consider.

*This article has been published by the July 2007 issue of Singapore Arbitrato, a quarterly publication of the Singapore International Arbitration Centre.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2007