China, the EU and International Investment Law: Reforming Investor-State Dispute Settlement 2019031342, 9780367338466, 9780429322334

Table of contents :
Cover
Half Title
Series Page
Title Page
Copyright Page
Contents
Contributors
Foreword
Foreword
Acknowledgements
Abbreviations
Chapter 1 Introduction: opportunities and challenges towards a China–EU Comprehensive Agreement on Investment
1.1 China–EU investment flows and policy implications
1.2 Incentives and context in making the China–EU Comprehensive Agreement on Investment (CAI)
1.3 Structure of this book
Part I China–EU Comprehensive Agreement on Investment: core issues
Chapter 2 The China–EU investment agreement negotiations: rationale, motivations, and contentious issues
2.1 Introduction
2.2 The EU’s post-Lisbon international investment policy
2.3 The evolution of China–EU investment policy relations
2.4 Motivations
2.5 Contentious issues of the China–EU CAI
2.6 Conclusion
Chapter 3 Convergences and divergences in the China–EU and the China–US BIT negotiations
3.1 Introduction
3.2 Market access: Pre-establishment national treatment with a negative list approach
3.2.1 The US’s negative list approach: Format and content
3.2.2 The EU’s negative list approach: Format and content
3.2.3 Mexico’s negative list in the New EU-Mexico Agreement and the USMCA
3.2.4 Comparison of China’s negative lists with EU/US negative lists
3.3 Indirect expropriation and the level of compensation
3.3.1 China’s position under the China-Canada BIT
3.3.2 Differences between the China-Canada BIT and the 2012 US Model BIT expropriation provisions
3.3.3 The China–EU CAI’s stance on expropriation and compensation
3.4 SOEs
3.4.1 The status quo of SOEs
3.4.2 The notion of competitive neutrality
3.4.3 The EU’s stance on SOE-related provisions
3.5 Conclusions
Chapter 4 Elements of public policy in the making of the China–EU Comprehensive Agreement on Investment
4.1 Introduction
4.2 Public policy provisions in IIAs
4.3 The EU’s IIA-making practice on public policy provisions
4.3.1 Public policy provisions in the preamble
4.3.2 Public policy provisions as general and specific exceptions
4.3.3 Interpretative provisions for greater precision in specific circumstances
4.3.4 Stipulation of the right to regulate clause
4.4 China’s IIA-making practice on public policy provisions
4.4.1 Public policy provisions in the preamble
4.4.2 Public policy provisions as general and specific exceptions
4.4.3 Interpretative provisions for greater precision in specific circumstances
4.5 Public policy provisions in the China–EU CAI
4.5.1 Commonalities
4.5.2 Disparities
4.6 Conclusion
Chapter 5 Bridging the gap between investments and human rights protection: prospects and challenges for the China–EU CAI
5.1 Introduction
5.2 ‘Recalibration’ of bilateral investment treaties (BITs)
5.2.1 In general: BITs beyond investments
5.2.2 In particular: The EU’s comprehensive approach to BITs
5.3 The China–EU CAI
5.3.1 Human rights in the EU-China strategic partnership
5.3.2 Human rights in the China–EU CAI
5.3.3 ISDS and human rights in the specific context of the China–EU CAI
5.4 Conclusions
Part II Reforming ISDS: institutional aspects
Chapter 6 Judicialization of ISDS: the European Union’s approach to multilateral reform of investment dispute settlement
6.1 Introduction
6.2 Consistency and predictability would be improved with a standing court
6.2.1 The permanency of an adjudicatory body will provide increased predictability
6.2.2 Mechanisms for better handling of parallel or linked proceedings would increase consistency
6.2.3 An appeals mechanism could further increase consistency
6.2.3.1 A full-fledged appeals mechanism has advantages over a preliminary reference mechanism
6.2.3.2 Limiting the standard of review reduces certain risks inherent in appeal
6.2.3.3 Issues with an appeals mechanism
6.3 Independence and impartiality are better ensured by a standing court
6.3.1 Independence and impartiality of adjudicators are best ensured in a standing court
6.3.1.1 Permanent courts require competence and exclusivity
6.3.1.2 Guaranteed terms of office exist to avoid financial pressure on judges
6.3.1.3 Remuneration, privileges, and immunities
6.3.2 A standing court can be designed to be independent and impartial
6.3.2.1 A diverse body of judges increases the impartiality of a court
6.3.2.2 Mechanisms to ensure the financial autonomy of the court will be necessary
6.4 A multilateral investment court will be most effective with broad coverage
6.5 Conclusions
Chapter 7 Concrete issues in instituting an international investment court
7.1 Introduction
7.2 Brief summary of the two-tiered tribunal system of the ICS
7.3 Value of the ICS
7.3.1 A step in the right direction
7.3.2 Value of the standing tribunal
7.3.3 Value of the appellate mechanism
7.4 Deficiencies of the ICS
7.4.1 Unnecessary two-tiered system on the bilateral level
7.4.2 Impracticability on the multilateral level
7.5 Conclusions
Chapter 8 Reforming ISDS: a Chinese perspective
8.1 Introduction
8.2 China’s undecided position on ongoing ISDS reform
8.3 China’s innovative ISDS mechanisms at its domestic level and their implications
8.3.1 China’s innovative approach to ISDS
8.3.2 How this approach serves China’s strategy on international engagement
8.4 China’s experience from the WTO towards the current UNCITRAL reform work
8.5 Sharing China’s good practice of mediation in ISDS reform
8.5.1 Mediation as a proposed alternative to arbitration
8.5.2 China’s practice in the arbitration and mediation mix
8.6 Conclusion
Chapter 9 China’s policy on ISDS reform: institutional choice in a diversified era
9.1 Introduction
9.2 A rule-follower to a rule-leader? Institutional choice in a diversified era
9.2.1 China’s attitude towards main options for ISDS reform
9.2.2 Institutional competition on investor-state arbitration
9.2.3 Aspiration, capacity, and obstacles in making a China-led ISDS institution
9.2.3.1 Aspiration
9.2.3.2 Capacity
9.2.3.3 Obstacles
9.3 Conclusion
Chapter 10 Investor-state arbitration: an economic and empirical perspective
10.1 Introduction
10.2 Courts versus arbitration: Theory
10.3 Investor-state arbitration: Theory
10.4 Empirics of investor-state arbitration
10.4.1 Arbitration filing
10.4.2 Claims and awards
10.5 The critics
10.5.1 Bias against states?
10.5.2 Fast. Good. Cheap?
10.5.3 Elites?
10.6 Concluding remarks
Part III Reforming ISDS: substantive and procedural aspects
Chapter 11 European perspectives on the role of national courts in the resolution of investor-state disputes
11.1 Introduction
11.2 EU institutions’ evolving views on ISDS and the role of domestic courts
11.2.1 The position of the European Commission
11.2.2 The position of the European Parliament
11.2.3 The position of EU member states and of the EU Council
11.3 From policy to practice: Treaty innovations in current EU agreements
11.3.1 Avoidance of duplicative proceedings
11.3.2 Limitations on the application of domestic law
11.3.3 Indirect encouragement of recourse to local courts?
11.4 Policy considerations
11.5 Conclusions
Acknowledgement
Chapter 12 Is (in)consistency a problem? A close look at juridical techniques in interpreting jurisdiction clauses in Chinese BIT cases
12.1 Introduction
12.2 Definition of ‘investor’
12.3 Definition of ‘investment’
12.4 Definition of ‘dispute’
12.5 ‘Fork-in-the-road’ provision
12.6 Limitation period
12.7 MFN treatment of procedural rights
12.8 Concluding remarks
Chapter 13 Transparency of ISDS in the making of a China–EU CAI: consensus and differences
13.1 Introduction
13.2 The ‘transparency trend’ of ISDS
13.3 China’s approach to the transparency issue in IIA-making
13.3.1 China’s principled position towards transparency of ISDS
13.3.2 The transparency provisions in China’s IIAs
13.4 The EU’s approach to the transparency issue in IIA-making
13.4.1 The EU’s policy towards transparency in ISDS
13.4.2 The transparency provisions in the EU’s IIAs
13.5 The transparency issue in the making of the China–EU CAI
13.5.1 The growing consensus between China and the EU
13.5.2 Some outstanding transparency issues in the making of the CAI
13.6 Final remarks
Chapter 14 The status of state-owned enterprises in ISDS from a European perspective
14.1 Introduction
14.2 China’s socialist market economy and the role of Chinese SOEs: Implications for investment arbitration
14.3 The investment activities of Chinese SOEs in the EU and ISDS: Challenges ahead
14.4 National security review as a complement to investment arbitration: A European perspective
14.5 Conclusion
Chapter 15 The status of state-owned enterprises in ISDS from a Chinese perspective
15.1 Introduction
15.2 SOEs and international investment agreements: An overview
15.3 The issues of SOEs in investment arbitration practice
15.3.1 SOE as a claimant
15.3.2 The attribution of SOEs’ alleged wrongful acts to governments
15.4 SOEs in Chinese investment treaties
15.5 The issue of SOEs in the China–EU CAI negotiations
15.6 Conclusion
Chapter 16 Protection of victims in international investment dispute resolution: juxtaposing different topics?
16.1 Introduction
16.2 Can victims defend their rights against investors?
16.2.1 Introduction
16.2.2 Jurisdictional approach
16.2.3 Substantive approach
16.2.4 Investor obligations under international law?
16.2.5 Do victims play a role?
16.3 Options to implement human rights and environmental considerations in investment disputes
16.3.1 Implementing obligations for investors
16.3.2 Procedural adaptations
16.3.2.1 Obligatory proceedings in national courts
16.3.2.2 Dialogue-based solutions
16.3.2.3 Appeal
16.3.2.4 International investment court
16.3.2.5 Fundamental reform of investment arbitration
16.4 Recommendations
16.5 Conclusion
Chapter 17 A comprehensive chapter on anti-corruption in the China–EU CAI: a progressive or an unnecessary step?
17.1 Introduction
17.2 Cases involving corruption in international investment arbitration
17.2.1 Diverse scenarios of allegations of corruption
17.2.2 Unsatisfactory approaches to allegations of corruption
17.2.3 Its impact on IIA-making practice
17.3 The EU’s and China’s practice and policies on anti-corruption
17.3.1 The EU’s practice and policy on anti-corruption
17.3.2 China’s practice and policy on anti-corruption
17.4 Anti-corruption provisions in the China–EU CAI
17.4.1 Inserting an anti-corruption chapter is recommended
17.4.2 An anti-corruption chapter should be comprehensive
17.5 Conclusions
Index

Citation preview

China, the EU and International Investment Law

This book provides an original and critical analysis of the most contentious subjects being negotiated in the China–EU Comprehensive Agreement on Investment (CAI). It focuses on the pathway of reforming investor-state dispute settlement (ISDS) from both Chinese and European perspectives in the context of the China–EU CAI and beyond. The book is divided into three parts. Part I examines key and controversial issues of the China–EU CAI negotiations, including market access, sustainable development and human rights, as well as comparing distinct features between the China–EU CAI and the China–US BIT. Part II concentrates on the institutional reform of investor-state arbitration with an extensive analysis of the EU’s approach to replacing the private nature of investment arbitration with the public nature of an investment court. Part III addresses the core substantive and procedural issues concerning ISDS, such as the role of domestic courts in investment dispute settlement, the status of state-owned enterprises (SOEs) as investors, transparency and the protection of victims in investment dispute resolution. This book will be of interest to scholars and practitioners in the field of international investment and trade law, particularly investment dispute settlement. Yuwen Li is a professor of Chinese law and the director of the Erasmus China Law Centre at the Erasmus School of Law, Erasmus University Rotterdam, the Netherlands. Tong Qi is a professor of international economic law and the director of the Centre of Overseas Investment Law at the Law School of Wuhan University, China. Cheng Bian is a researcher at the Erasmus School of Law, Erasmus University Rotterdam, the Netherlands.

The Rule of Law in China and Comparative Perspectives Series Editors: Yuwen Li, Erasmus University Rotterdam, The Netherlands and Fu Hualing, University of Hong Kong, Hong Kong

There is no doctrine more effective than the rule of law in portraying the complex transformation of Chinese society from the rule of men towards the rule of law – a process inaugurated in post-Mao China which is continuing to advance legal reforms to the present day. In other parts of the world, striving for the rule of law is also evident: countries in transition face a similar mission, while the developed democratic countries are forced to tackle new challenges in retaining the high benchmark of the rule of law that has been established. Research on the legal system in China and in comparison with other countries in the framework of the rule of law covers broad topics of public and private law, substantive law and procedural law, citizens’ rights and law enforcement by courts. Based on this broad understanding of the rule of law, the series presents international scholarly work on modern Chinese law, including comparative perspectives, interdisciplinary approaches, and empirical studies. For a full list of titles in this series, please visit: https://www.routledge.com/law/series/ CHINARULEOFLAW

China, the EU and International Investment Law Reforming Investor-State Dispute Settlement

Edited by Yuwen Li, Tong Qi and Cheng Bian

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 selection and editorial matter, Yuwen Li, Tong Qi and Cheng Bian; individual chapters, the contributors The right of Yuwen Li, Tong Qi and Cheng Bian to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Li, Yuwen, 1962-editor. | Qi, Tong, 1972-editor. | Bian, Cheng (Legal researcher), editor. Title: China, the EU and international investment law: reforming investor-state dispute settlement / Yuwen Li, Tong Qi, Cheng Bian. Description: Abingdon, Oxon; New York, NY: Routledge, 2010. | Series: The rule of law in china and comparative perspectives | Includes bibliographical references and index. Identifiers: LCCN 2019031342 | ISBN 9780367338466 (hardback) | ISBN 9780429322334 (ebook) Subjects: LCSH: Investments, Foreign–Law and legislation–China. | Investments, Foreign–Law and legislation–European Union countries. | Investments, Foreign (International law) | China–Foreign economic relations–European Union countries. | European Union countries–Foreign economic relations–China. Classification: LCC K3830.C486 2020 | DDC 346.24/092–dc23 LC record available at https://lccn.loc.gov/2019031342 ISBN: 978-0-367-33846-6 (hbk) ISBN: 978-0-429-32233-4 (ebk) Typeset in Galliard by Deanta Global Publishing Services, Chennai, India

Contents

Contributors Foreword by Wenhua Shan Foreword by Julien Chaisse Acknowledgements Abbreviations 1 Introduction: opportunities and challenges towards a China–EU Comprehensive Agreement on Investment

vii xiii xv xvi xviii

1

YUWEN LI AND CHENG BIAN

PART I

China–EU Comprehensive Agreement on Investment: core issues 2 The China–EU investment agreement negotiations: rationale, motivations, and contentious issues

9 11

AXEL BERGER

3 Convergences and divergences in the China–EU and the China–US BIT negotiations

26

HONGYU FU AND MENG WAN

4 Elements of public policy in the making of the China–EU Comprehensive Agreement on Investment

40

CHENG BIAN AND YUWEN LI

5 Bridging the gap between investments and human rights protection: prospects and challenges for the China–EU CAI

54

MATTHIEU BURNAY

PART II

Reforming ISDS: institutional aspects

69

6 Judicialization of ISDS: the European Union’s approach to multilateral reform of investment dispute settlement

71

COLIN M. BROWN AND ELIO GAARTHUIS

vi Contents 7 Concrete issues in instituting an international investment court

87

JUN XIAO

8 Reforming ISDS: a Chinese perspective

100

HUIPING CHEN

9 China’s policy on ISDS reform: institutional choice in a diversified era

112

TONG QI

10 Investor-state arbitration: an economic and empirical perspective

124

MICHAEL FAURE AND WANLI MA

PART III

Reforming ISDS: substantive and procedural aspects

139

11 European perspectives on the role of national courts in the resolution of investor-state disputes

141

VID PRISLAN

12 Is (in)consistency a problem? A close look at juridical techniques in interpreting jurisdiction clauses in Chinese BIT cases

156

WEI SHEN

13 Transparency of ISDS in the making of a China–EU CAI: consensus and differences

170

MANJIAO CHI

14 The status of state-owned enterprises in ISDS from a European perspective

184

ALESSANDRO SPANO

15 The status of state-owned enterprises in ISDS from a Chinese perspective

198

SHENG ZHANG

16 Protection of victims in international investment dispute resolution: juxtaposing different topics?

212

MARTIJN SCHELTEMA

17 A comprehensive chapter on anti-corruption in the China–EU CAI: a progressive or an unnecessary step?

227

YUEMING YAN

Index

243

Contributors

Axel Berger is a renowned expert on EU-China investment relationships and China’s bilateral investment treaty practice. He works at the German Development Institute (Deutsches Institut für Entwicklungspolitik – DIE), Department for World Economy and Development Finance, Bonn, Germany. He is the head of the G20 Policy Research Group at DIE and leads the Think 20 (T20) Task Force on Trade, Investment and Tax. Axel Berger holds a doctorate in political science from the University of Duisburg-Essen and a master’s degree from Ludwig-Maximilians-University Munich in political science, economics, and modern history. He works on the design, effects, and diffusion patterns of international trade and investment agreements, with a focus on emerging markets and developing countries. Other areas of his current research include the impact of FTAs on upgrading within global value chains and the role of the G20 in global governance. He regularly advises developing countries, development agencies, and international organizations on trade and investment matters. Axel Berger’s publications cover a wide range of topics in IIAs, FTAs, China–EU relations, and the G20. Cheng Bian is a researcher at the Erasmus School of Law, Erasmus University Rotterdam, the Netherlands. His research interests focus on international investment law, Chinese foreign investment law, and comparative law. He holds a PhD in law from the Erasmus School of Law, Erasmus University Rotterdam, the Netherlands. His PhD thesis is titled National Security Review Regimes of Foreign Investment – A Comparative Study in China, the US and the EU. Colin M. Brown is deputy head of the Dispute Settlement and Legal Aspects of Trade Policy Unit in the Directorate General for Trade (DG Trade), European Commission. He leads a team working on ISDS in the trade and investment policy of the EU. He has been responsible for developing the EU’s approach to ISDS and led the negotiations on this issue with Canada. He was the EU delegate to UNCITRAL during the preparation of the ‘UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration’. In his career with DG Trade, he has worked on all legal aspects of the work of the European Commission in the field of trade, in particular on EU-related FTAs. He also leads a team working on the EU-US TTIP negotiations. He holds an LLB (first class Honours) from the Faculty of Law of the University of Edinburgh, Scotland; a diploma in international relations from the Bologna Centre of the School of Advanced International Studies (SAIS), Johns Hopkins University, Bologna, Italy; and an LLM in European Law from the College of Europe, Bruges.

viii Contributors Matthieu Burnay is an assistant professor in global law at Queen Mary University of London. He has an interdisciplinary background in law, political science, and history. He holds a PhD in law from the University of Leuven and a double MSc degree in international affairs from Peking University and the London School of Economics. At Queen Mary, Dr Burnay teaches courses on law and globalization as well as Chinese law and institutions. His recent works include Chinese Perspectives on the Rule of Law and the International Rule of Law (Edward Elgar, 2018); ‘Soft Legal Transplants: EU-China Relations at a Glance’, in The EU and China: Reform and Governance (Routledge, 2017); ‘Zooming out of a Triangle: The Chinese Perspectives on the Rule of Law, Democracy, and Human Rights’, in Global Constitutionalism from European and East Asian Perspectives (CUP, 2017); ‘The Rule of Law as a Strategic Priority in EU External Action – Conceptualization and Implementation of EU Law and Policies’, Asia-Europe Journal, Vol. 14 (2016); and ‘The Case for an EU-China Rule of Law Dialogue: The Squaring of a Circle?’ Asia-Europe Journal, Vol. 14 (2016). Huiping Chen is a professor of international law at Xiamen University School of Law, China, where she teaches international investment law, public international law, and international human rights law. She received her PhD degree in International Law from Xiamen University in 1999. Prof. Chen has authored a variety of publications in both Chinese and English. Her selected English publications include a monograph titled OECD’s Multilateral Agreement on Investment: A Chinese Perspective (Kluwer Law International, 2002) and Transboundary Water Cooperation: Principles, Practice and Prospects for China and Its Neighbours (ed.) (Routledge, 2017). Her published English journal articles include ‘China’s Innovative ISDS Mechanisms and Their Implications’, American Journal of International Law Unbound, Vol. 112 (2018); ‘China’s “One Belt, One Road” Initiative and Its Implications for SinoAfrican Investment Relations’, Journal of Transnational Corporations Review, Vol. 8 (2016); ‘The Expansion of Jurisdiction by ICSID Tribunal: Approaches, Reasons and Damages’, The Journal of World Investment & Trade, Vol. 12 (2011); ‘The ChinaKorea FTA: the Investment Issue’, Korean Journal of International Economic Law, Vol. 9 (2011); ‘Investor-State Dispute Settlement Mechanism: Where to Go in the 21st Century?’ The Journal of World Investment & Trade, Vol. 9 (2008); and ‘ChinaASEAN Investment Agreement Negotiations – The Substantive Issues’, The Journal of World Investment & Trade, Vol. 7 (2006). Manjiao Chi is a professor at the School of Law University of International Business and Economics, Beijing. His research fields cover international trade and investment policy and law, natural resource law, dispute settlement, and global governance. Manjiao Chi’s publications relate to a wide range of legal topics in relation to international investment and trade law, dispute resolution, and global governance, both in English and Chinese. His recent English publications include Sustainable Development Provisions in Investment Treaties: An Empirical Exploration of the Sustainable Development Provisions in BITs of Asia-Pacific Least Developed Countries and Land-Locked Developing Countries (UN Publication, 2018); ‘How Chinese Investment Treaties Address Sustainable Development Concerns?’ in China’s International Investment Strategy: Bilateral, Regional and Global Law and Policy (OUP, 2018); Integrating Sustainable Development into International Investment Law: Normative Incompatibility, System Integration and Governance Implications (Routledge, 2017); ‘The China–EU BIT as a Stepping Stone towards a China–EU FTA’, in European Yearbook of International Economic Law (Springer, 2017),

Contributors ix ‘From Europeanization to Americanization: The Shift of China’s Dichotomic Investment Treaty-Making Strategy and Its Implications’, Canadian Foreign Policy Journal, Vol. 23 (2017); ‘A Long March towards Compatibility, Coherence and Consistency: The Future of China’s Investment Agreements’, Die Zeitschrift für Europarechtliche Studien, Vol. 18 (2015); and ‘The Evolution of Investor-State Arbitration Clauses in Chinese IIAs and Its Implications: The Admissibility of Disputes for Investor-State Arbitration’, Journal of World Investment & Trade, Vol. 16 (2015). Michael Faure is a professor of comparative private law and economics and the director of the Rotterdam Institute of Law and Economics at the Erasmus School of Law, Erasmus University Rotterdam. He is also a professor of comparative and international environmental law at Maastricht University, the Netherlands. Michael Faure’s core ­ research is on international environmental law and environmental criminal law. He is also an expert on law and economics analysis, and particularly accident law. He has published and edited over 200 books and book chapters and has published over 500 journal articles and other academic outputs in top international academic journals in English, German, Dutch, and French. His most recent selected English publications include Environmental Governance of Common-Pool Resources. A Comparison of Fishery and Forestry (Routledge, 2018); Carbon Capture and Storage. Efficient Legal Policies for Risk Governance and Compensation (The MIT Press, 2017); Civil Liability and Financial Security for Offshore Oil and Gas Activities (ed.) (CUP, 2017); ‘Litigating Federalism: An Empirical Analysis of Decisions of the Belgian Constitutional Court’, European Constitutional Law Review, Vol. 13 (2017); and ‘Does the Environmental Kuznets Curve Hold for China? An Empirical Examination’, in Regulatory Reform in China and the EU. A Law and Economics Perspective (Edward Elgar, 2017). Hongyu Fu is an associate professor at Beijing Foreign Studies University School of Law, China. His research focuses on international investment law, anti-trust law, intellectual property law, and international financial law. He served as a delegate in the China–US BIT negotiations and is currently a legal adviser to the Ministry of Finance of China. Elio Gaarthuis is currently an LLM candidate at Harvard Law School, where he is pursuing research on trade and investment law and corporate law. He has worked for the European Commission as a trainee in the Dispute Settlement and Legal Aspects of Trade Policy Unit and, prior to that, for the international arbitration department of Eversheds Sutherland in Paris. Yuwen Li is a professor of Chinese law and the director of the Erasmus China Law Centre at the Erasmus School of Law, Erasmus University Rotterdam, the Netherlands. Yuwen Li’s area of expertise includes Chinese law in general, with a special focus on Chinese foreign investment law, company law, and the judicial system in China. Her current research also covers comparative investment law, international investment law, and the EU-China trade and investment policy and treaty practice. She holds a BA in Chinese law from Peking University; an MA in international law and international relations from the Institute of Social Studies, the Hague; and a PhD in international law from Utrecht University, the Netherlands. Wanli Ma is currently a PhD candidate at Erasmus School of Law, Erasmus University Rotterdam. His PhD topic is the role of domestic courts in investor-state dispute resolution. He obtained his Bachelor and Master degree in law at China University of Political Science and Law.

x Contributors Vid Prislan is a researcher at the Amsterdam Centre for International Law (ACIL), University of Amsterdam. Prior to joining ACIL, he worked as Research Fellow and PhD candidate at the Grotius Centre for International Legal Studies, Leiden University, where he lectured in the LLM program in public international law and conducted research on the role of domestic courts in investor-state arbitration. His research centres on international investment law and public international law, with a particular focus on the interaction between investment tribunals and domestic courts. He holds a Diploma (international relations) from the University of Ljubljana and an LLB (Dutch law) and an LLM (public international law) from Leiden University. In addition to his academic work, Vid Prislan provides expert advice to governments and private parties in territorial and maritime delimitation disputes, as well as in various investment arbitration proceedings. His selected publications include ‘Domestic Explanatory Documents and Treaty Interpretation’, International and Comparative Law Quarterly, Vol. 66 (2017); ‘Cases Concerning Sovereignty over Islands before the International Court of Justice and the Dokdo/Takeshima Issue’, Ocean Development and International Law, Vol. 46 (2015); ‘Mainstreaming Sustainable Development into IIAs: What Role for Labour Provisions?’ in International Investment Law and Development: Bridging the Gap (Edward Elgar, 2015); and ‘Non-Investment Obligations in Investment Treaty Arbitration: Towards a Greater Role for States?’ in Investment Law Within International Law: Integrationist Perspectives (CUP, 2010). Tong Qi is a professor of international economic law at the Law School of Wuhan University, China. He has authored over 80 publications including monographs, edited books, and journal articles both in Chinese and English. His selected English publications include ‘Multilateral Investment Court: The Gap Between the EU and China’, The Chinese Journal of Global Governance, Vol. 4 (2018); ‘Is China Ready to Recognize and Enforce International Investment Arbitral Awards?’ China and WTO Review, Vol. 3 (2017); ‘How Exactly Does China Consent to Investor-State Arbitration: On the First ICSID Case Against China’, Contemporary Asia Arbitration Journal, Vol. 5 (2012); and ‘China’s First Decade Experience in the WTO Dispute Settlement System: Practice and Prospect’, Asian Journal of WTO & International Health Law and Policy, Vol. 7 (2012). Martijn Scheltema is a part-time professor of private law at Erasmus University Rotterdam. His research centres on the effectiveness of multi-stakeholder initiatives (including their alternative dispute resolution capabilities) in the international arena in connection with business, human rights, and the environment. He is partner of Pels Rijcken & Droogleever Fortuijn. He has been involved in several international human rights landmark cases with the Dutch Supreme Court. Wei Shen is a professor at Shanghai Jiao Tong University Koguan Law School. He obtained his PhD at London School of Economics and Political Science, an LLM at Cambridge University, an LLM at the University of Michigan, and an LLM and an LLB at East China University of Political Science and Law. He qualified as a lawyer in New York and has been practising for a decade, mostly in Hong Kong, on foreign direct investment and mergers and acquisitions. His main research interests include financial regulation, corporate governance, international investment law, and commercial arbitration. He has authored more than 200 publications in Chinese and English. His monographs include Chinese Business Law – Narrative and Commentary (Wolters Kluwer, 2016); Shadow Banking in China: Risk, Regulation and Policy (Edward Elgar, 2016); Investor Protection in Capital

Contributors xi Markets – The Case of Hong Kong (Sweet & Maxwell, 2015); Corporate Law in China: Structure, Governance and Regulation (Sweet & Maxwell, 2015); How is International Economic Order Shaped? – Law, Markets and Globalization (China Law Press, 2014) (in Chinese); The Anatomy of China’s Banking Sector and Regulation (Wolters Kluwer, 2014); and Rethinking the New York Convention – A Law and Economics Approach (Intersentia, 2013). Alessandro Spano is currently a senior research associate at the Dickson Poon School of Law at King’s College London (KCL) where he conducts research in the areas of EU law, international trade law, and Chinese law. He holds a PhD in European and Chinese law from KCL; an MA in advanced European studies from the College of Europe Natolin, Poland; and a degree in law from Paris X Nanterre. He has published a number of articles on the EU-China CAI Negotiations, China’s market economy status under World Trade Organization (WTO) law, and free movement of capital from a corporate control perspective. Meng Wan is a professor at Beijing Foreign Studies University, China. His area of expertise includes international economic law, international trade and investment law, maritime law, transnational litigation, and international commercial arbitration. He has published a number of monographs, book chapters, and journal articles both in Chinese and in English. His English publications include ‘Mega-Regional Trade Agreements: Game-Changers or Costly Distractions for the World Trading System?’ World Economic Forum (2014); ‘Latest Developments in International Investment Law: Toward Greater Liberalism or Protectionism?’ Soochow Law Journal, Vol. 8 (2013); and ‘The Securities System in China’, in Financial Regulation in the Greater China Area: Mainland China, Taiwan and Hong Kong SAR (Kluwer Law International, 2000). Jun Xiao is an associate professor at the Wuhan University Institute of International Law, China. He holds an LLB from Wuhan University, China; an LLM from the University of Saarland, Germany; and a PhD from the University of Saarland. His research activities are mainly in the field of international investment law and international trade law. He has published books, journal articles, and book chapters in English, German, and Chinese. His selected publications in English include ‘How Can a Prospective China–EU BIT Contribute to Sustainable Development: In Light of the UNCTAD Investment Policy Framework for Sustainable Development’, Journal of World Energy Law & Business, Vol. 8 (2015); and ‘The ASEAN-China Investment Agreement: A Regionalisation of China’s BITs’, Frontiers of Law in China, Vol. 6 (2011). Yueming Yan is a PhD candidate at McGill University Faculty of Law, Quebec, Canada. She conducts research in the areas of international investment law, dispute resolution, labour law, and public policy. Her doctoral thesis focuses on anti-corruption issues in international investment law. Yueming Yan also works as a research assistant and a teaching assistant for several professors and is a student member of the Private Justice and the Rule of Law Research Group at McGill Law. Yueming Yan holds an LLM from Xiamen University and an LLB from Zhongnan University of Economics and Law. Sheng Zhang is an associate professor at Xi’an Jiaotong University School of Law, China. His research focuses on international investment law and comparative law. His selected English publications include ‘Legislative Development in China in 2015’, Chinese Journal of Comparative Law, Vol. 4 (2016); ‘Market Access Provisions in the Potential EU Model BIT: Toward a Global Model BIT 2.0?’ Journal of World Investment & Trade, Vol. 15

xii Contributors (2014). ‘The China-United States BIT Negotiations: A Chinese Perspective’, Columbia FDI Perspective, No.112, January 2014; ‘National Treatment for Foreign Investment in China: A Changing Landscape’, ICSID Review, Vol. 27 (2012); and ‘The Energy Charter Treaty and China: Member or Bystander?’ Journal of World Investment & Trade, Vol. 13 (2012).

Foreword Wenhua Shan

This book is a timely contribution on two aspects of the greatest importance in contemporary international investment law, namely the EU-China Comprehensive Investment Agreement (CAI) negotiations and investor-state dispute settlement (ISDS) reform. The EU-China CAI negotiations are the most important ongoing bilateral investment treaty negotiations, as they involve two of the largest but notably distinct economies of the world. According to the European Commission after the 2019 EU-China Summit, leaders from both sides ‘committed to achieving decisive progress to conclude the negotiations in 2020’.1 In a world full of tariff sanctions and retaliations, such a promise and prospect sent rare, positive signals for economic liberalization which cheered up business communities around the world, particularly those on the two sides. The ISDS reform, on the other hand, is the most hotly debated topic in international investment law, particularly after the United Nations Commission on International Trade Law (UNCITRAL) took up this task, which has attracted interest and inputs from most states as well as business and legal communities. The EU is playing a leading role by proposing a revolutionary multilateral investment court (MIC) system, whilst China seems to be taking a more pragmatic approach in this process. Obviously it is too early to say what the outcome will be, but it is likely that the world of investment dispute resolution might never be the same again. As a long-time observer of international investment law with a focus on EU-China investment relations, I am extremely delighted to see the publication of this book. International investment law books have become abundant over the last couple of decades, but little has emerged in the specific area of EU-China investment law since the publication of my monograph on this topic in 2005.2 This book fills the gap by providing a dialogue between Chinese and European scholars on two compelling issues of international investment law. It is well-structured, with its first part dealing with the EU-China CAI and the other two parts focusing on issues of ISDS reform. All the chapters are well written by established or promising scholars in the field, which makes them unique to read and a significant contribution to the development of international investment law. Moreover, the concrete suggestions provided in the book provide rich food for thought that can be used for the negotiations of both the EU-China CAI and the UNCITRAL-led ISDS reform.

1 European Commission, ‘Press Release, EU-China Summit: Rebalancing the Strategic Partnership’, 9 April 2019, , last accessed on 1 June 2019. 2 Wenhua Shan, The Legal Framework of EU-China Investment Relations: A Critical Appraisal (Oxford: Hart Publishing, 2005).

xiv Foreword As an old friend, I must congratulate Yuwen and her colleagues for materializing such a tremendous research and publication project. I have no doubt that it shall become a mustread for anyone with an interest in the EU-China economic relationship or in international investment dispute resolution. Wenhua Shan Professor and Dean of Law School Xi’an Jiaotong University 1 June 2019

Foreword Julien Chaisse

The investment negotiations between China and the European Union (EU) for a Comprehensive Agreement on Investment (CAI) do have a systemic and global magnitude in reason of their economic, legal, and political ramifications. As the editors of this volume rightly observe in their Introduction, ‘the China–EU CAI is bound to transcend what traditional BITs include and shift the paradigm towards a global new generation investment agreement’. The CAI is not just another investment agreement for either the EU or China; in fact, the CAI is a major challenge for both parties and will become a milestone in their approaches towards investment rule-making. First of all, investor–state dispute settlement (ISDS) has emerged over the last two decades as a major development in international economic law. Both the EU and China have been part of this development as their investors have been using investment dispute arbitration mechanisms, while, as host states, both the EU (through its member states) and China have faced investment claims. Through their experience, both the EU and China have learned about the merits and risks associated with investment arbitration. In this respect, the CAI negotiations will crystalize the positions of the two parties on what might well become a new standard for international investment dispute resolution. The issues are many and well identified in this volume, which critically explores each problem and also looks for potential solutions. Taking a comparative and contextual perspective, this impressive volume, edited by Yuwen Li, Tong Qi, and Cheng Bian, shows that some key issues, institutional aspects of ISDS, and substantive and procedural issues involved in ISDS can lead to negotiations on the reform of investor–state dispute resolution and to the creation of new devices to serve the management of FDI flows in two major world economies. This is an important book, rich in detail and very accessible, with a powerful message for anyone interested in understanding investment rule-making between China and the EU and, beyond that, the future evolution of the ISDS regime. Julien Chaisse Professor, School of Law City University of Hong Kong August 2019

 Acknowledgements

This book, a demonstration of effective and congenial cooperation between Chinese and European scholars, is the result of a China-Netherlands research project on ‘Reforming the Investor-State Dispute Settlement System: Dutch and Chinese Perspectives’. This project was funded by the Netherlands Royal Academy of Sciences (KNAW) for a period of two years, from 2017 to 2019. The key impetus for our undertaking of this project derives from the 2015 European Union’s (EU) proposal to establish an international investment court system in the context of the EU-US negotiations on the Transatlantic Trade and Investment Partnership (TTIP). This proposal generated salient international reactions from academia, the world of business, and civil society about reforming investor-state arbitration (ISA), even though, soon after the proposal had been launched, the TTIP negotiations were halted by US President Donald Trump. Although China and the EU launched negotiations on the Comprehensive Agreement on Investment (CAI) in 2014, the opaque nature of the negotiations resulted in only sporadic public awareness, especially when compared with the material disclosure concerning TTIP. In 2016, when Professor Tong Qi spent his sabbatical leave at the Erasmus University Rotterdam Erasmus School of Law (ESL), we often discussed and debated how China would and should respond to the EU’s proposal on creating a new court system. Since 2016, the subject of reforming the ISDS regime has undergone swift development. With respect to the EU, its initiative to create a bilateral investment court has evolved incrementally into a multilateral investment court. The EU’s leading role in heading this initiative has been consolidated by the EU Council’s endorsement of the European Commission representing the member states of the EU in the ongoing multilateral discussions in the context of the United Nations Commission on International Trade Law (UNCITRAL), with approximately 90 states participating. Also in China, in the wake of growing outbound investment resulting from the Belt and Road Initiative, investment dispute resolution is receiving unprecedented attention in both policy-making and academic circles. Chinese domestic arbitration institutions have expanded their jurisdiction to handle ISA cases, while new courts are also being established to adjudicate investment-related commercial cases. Moreover, the Chinese government is actively participating in the UNCITRAL framework. This book examines these new developments and challenges critically, as well as shedding light on their prospective progress. This book exhibits a collective wisdom and the endeavour of Chinese and European scholars working together. This collaboration arose from academic curiosity and a strong sense of the importance of developing and contributing our ideas to the evolving debate around ISA. We are extremely grateful to the KNAW for funding this project, which enabled us to achieve a number of projected results, including this book. We are also indebted to all

Acknowledgements xvii the contributors for their valuable input, their patience, and their prudence in revising their work, especially at the final stage, when they were asked to shorten their chapters to meet the limited length of the book as a whole. We would like to thank Professor Suzan Stoter, dean of the ESL, and Professor Fabian Amtenbrink, vice dean of the ESL, for their heartfelt support of the project. We are grateful to Marianne Breijer, Ipek Ören, Sanne Nordbjorn, and various Chinese PhD candidates at the ESL who offered their help at different stages to implement this research project. We are also grateful to Stephen Machon for his careful editing of the entire manuscript in English. Thanks also go to Professor Guo Feng, dean of the Law School of Wuhan University in China, and Professor Yongping Xiao, director of Wuhan University Institute of International Law, for their wholehearted support of this China-Netherlands legal cooperation project. We also express our gratitude to a number of PhD and Master students at the Law School of Wuhan University, who voluntarily made significant contributions to the conference in October 2017. This conference provided us with an encouraging platform to exchange views on each other’s draft chapters. We would like to express our appreciation for Mr. Nout Wellink, former President of the Netherlands Bank and board member of the Bank of China, Mr. Hans Peter van der Woude, Deputy Director of International Trade Policy and Economic Governance at Dutch Ministry of Foreign Affairs; Mr. Albert Marsman, Partner at De Brauw Blackstone Westbroek; and Dr. Gerard Kreijen, Attorney at Loyens & Loeff, for their contribution to the conference on the EU-China CAI held in April 2018 at Erasmus University Rotterdam, the Netherlands. Lastly, we would like to thank the two anonymous reviewers of this book and Alison Kirk and Emily Summers at Routledge for their sound advice about publication and production, which enabled this book to be made available in a timely manner. As the chapters of this book demonstrate, the landscape of international investment dispute resolution is changing in various directions. Hopefully, our modest contribution will stimulate enhanced understanding of the upcoming China–EU CAI and, in particular, a better design for the future international regime on investment dispute resolution. No doubt, this regime will have a profound impact on reshaping international investment governance, affecting many stakeholders at a global level. Yuwen Li, Cheng Bian, Rotterdam, The Netherlands Tong Qi, Wuhan, China May 2019

 Abbreviations

ADB ADR AIIB APEC ASEAN ATS BAC BIT BRI BRICS CAI CAJAC CCPIT CEE CETA CFIUS CHAFTA CICC CIETAC CJEU COMESA CPC CPTPP CRCICA CSR DPP DSB DSU EC ECJ ECT EPA EU EUR FDI FET

Asian Development Bank Alternative Dispute Resolution Asian Infrastructure Investment Bank Asia-Pacific Economic Cooperation Association of Southeast Asian Nations Alien Tort Statute of the United States Beijing Arbitration Commission Bilateral Investment Treaty Belt and Road Initiative Brazil, Russia, India, China, and South Africa Comprehensive Agreement on Investment China-Africa Joint Arbitration Centre China Council for the Promotion of International Trade Central and Eastern Europe Comprehensive Economic and Trade Agreement Committee on Foreign Investment of the United States China-Australia Free Trade Agreement China International Commercial Court China International Economic Trade Arbitration Commission Court of Justice of the European Union Common Market for Eastern and Southern Africa Communist Party of China Comprehensive and Progressive Agreement for Trans-Pacific Partnership Cairo Regional Centre for International Commercial Arbitration Corporate Social Responsibility Dispute Prevention Policy Dispute Settlement Body of the World Trade Organization Dispute Settlement Understanding of the World Trade Organization European Commission European Court of Justice Energy Charter Treaty Economic Partnership Agreement European Union Euro Foreign Direct Investment Fair and Equitable Treatment

Abbreviations xix FIE FIFD FTA GSP ICC ICJ ICS ICSID IIA ILC ILO IMI IPA IPR ISA ISDS ITLOS LCIA M&A MCCI MFN MIC MNE MOFCOM MST NAFTA NBCP NCP NDRC NGO NL OECD PCA PCA PENT PFTZ PRC PTIA RCEP SADC SASAC SCC SCIA SGCA SIAC SME SOE SPC

Foreign Invested Enterprise Friends of Investment Facilitation and Development Free Trade Agreement Generalized Scheme of Preferences International Chamber of Commerce International Court of Justice Investment Court System International Centre for Settlement of Investment Disputes International Investment Agreement International Law Commission International Labour Organization International Mediation Institute Investment Protection Agreements Intellectual Property Rights Investor-State Arbitration Investor-State Dispute Settlement International Tribunal for the Law of the Sea London Court of International Arbitration Mergers and Acquisitions Moscow Chamber of Commerce and Industry Most Favoured Nation Multilateral Investment Court Multinational Enterprise Ministry of Commerce of China Minimum Standard of Treatment North America Free Trade Agreement National Bureau of Corruption Prevention National Contact Point National Development and Reform Commission of China Non-Governmental Organization Negative List Organization for Economic Co-operation and Development Partnership and Cooperation Agreement Permanent Court of Arbitration Pre-Establishment National Treatment Pilot Free Trade Zone People’s Republic of China Preferential Trade and Investment Agreement Regional Comprehensive Economic Partnership Southern African Development Community State-Owned Assets Supervision and Administration Commission of China Stockholm Chamber of Commerce Shenzhen Court of International Arbitration Singapore Court of Appeal Singapore International Arbitration Centre Small and Medium-Sized Enterprise State-Owned Enterprise Supreme People’s Court of China

xx Abbreviations TEU TFEU TIP TIT TPP TRIPS TTIP UDHR UK UN UNCAC UNCITRAL UNCTAD UNCTOC UNGP US USD USMCA VCLT VSS WTO

Treaty on European Union Treaty on the Functioning of the European Union Treaties with Investment Provisions Trilateral Investment Treaty Trans-Pacific Partnership Agreement on Trade-Related Aspects of Intellectual Property Rights Transatlantic Trade and Investment Partnership Universal Declaration on Human Rights United Kingdom United Nations United Nations Convention against Corruption United Nations Commission on International Trade Law United Nations Conference on Trade and Development United Nations Convention against Transnational Organized Crime United Nations Guiding Principles (on Business and Human Rights) United States United States Dollars United States-Mexico-Canada Agreement Vienna Convention on the Law of Treaties Voluntary Sustainability Standard World Trade Organization

1

Introduction Opportunities and challenges towards a China–EU Comprehensive Agreement on Investment Yuwen Li and Cheng Bian

1.1 China–EU investment flows and policy implications The most striking development in China–European Union (EU) investment relations is the rapid growth of Chinese outbound foreign direct investment (FDI) into the EU over the past decade. Based on information from the Chinese Ministry of Commerce (MOFCOM), Chinese FDI in the EU started at a rather low level, with a recorded flow of around USD 0.18 billion in 2005.1 However, MOFCOM recorded about USD 2.9 billion in 2009, and this amount rose to USD 5.9 billion in 2010 and USD 10.2 billion in 2017,2 indicating an annual average increase rate of about 40% from 2005 to 2017. European investment in China has also grown at a considerable pace since the 1990s. According to MOFCOM, EU FDI in China was recorded at around USD 2.1 billion in 1995 and increased to USD 4.1 billion in 1997. The amount remained in the range of USD 4–6 billion from 1997 to 2012, and reached USD 8.7 billion in 2016, and USD 8.2 billion in 2017,3 indicating an annual average increase rate of about 6% from 1995 to 2017. Despite the robust growth in Chinese FDI in the EU, its proportion in the total inbound FDI remains low. According to the EU, in the period 2009–2015, aggregated Chinese FDI stock in the EU was recorded at EUR 34.9 billion, accounting for only 0.6% of total inbound FDI stock in the EU. In comparison, as the largest home state of FDI in the EU, the United States (US) invested a total of EUR 2,380.9 billion in the EU in the period 2009–2015, which accounted for about 41% of total inbound FDI stock in the EU.4

1  Ministry of Commerce of China (MOFCOM), ‘2006年度中国对外直接投资统计公报’ (Chinese Outbound FDI Bulletin 2006), , last accessed on 30 January 2019, p. 30. It should be noted that the accuracy of the official data from MOFCOM may not be entirely reliable. Nevertheless, in the absence of other reliable detailed sources, the figures cited from MOFCOM are deemed as illustrative. 2 MOFCOM, ‘2017年度中国对外直接投资统计公报’ (Chinese Outbound FDI Bulletin 2017), , last accessed on 30 January 2019, p. 59. 3 MOFCOM, ‘中国外资统计公报2018’ (Statistics on FDI in China 2018), , last accessed on 30 January 2019, p. 44. 4 Eurostat, ‘Archive: Foreign Direct Investment Statistics’, April 2017, , last accessed on 25 December 2018.

2 Yuwen Li and Cheng Bian In the same vein, the proportion of EU FDI in China also remains marginal. According to the EU, the EU’s total stock of outbound FDI in China accounted for only 1.8% of the EU’s global outbound investment stock in the period 1993–2013.5 According to MOFCOM, from 2007 to 2017, annual FDI flow from the EU in China stalled at around 5% of global inbound FDI in China.6 As China and the EU are the second and the third largest economies respectively in the world, the potential to increase FDI in each other’s economy can be anticipated. Various factors contribute to underdeveloped China–EU investment flows. Some European businesses complain that they face a multitude of restrictions and competitive disadvantages in both the pre-establishment and the post-establishment phases in China. Although China has introduced a series of measures to liberalize market access to foreign investors, implementation of these measures remains problematic due to the long-standing practice of strictly controlling foreign investment with a case-by-case approval system. Moreover, foreign takeovers of Chinese enterprises remain subject to the strict approval system. Other key barriers often cited by foreign investors include the compulsory transfer of technology, lack of protection of intellectual property rights, and the monopoly of Chinese state-owned enterprises (SOEs) in strategic sectors, all of which preclude the creation of a level playing field for foreign investment. Chinese investors by no means find their outbound investment in the EU smooth sailing. Even though the proportion of Chinese FDI in the EU still remains marginal, Chinese investments in the EU mostly take the form of mergers and acquisitions rather than greenfield investment, which ‘creates the perception of a strategic takeover by Chinese companies’.7 A few high-profile and contentious Chinese takeovers, such as those of the Greek Port of Piraeus, the British Hinkley Point nuclear plant, the German Kuka Robotics, and the German Leifeld Manufacturing, have resulted in mounting concerns in Europe about losing control of the EU’s critical infrastructure and cutting-edge technology. In response to Chinese takeovers, some EU member states have tightened their national law on foreign investment review systems,8 and the ‘Regulation (EU) Establishing a Framework for the Screening of Foreign Direct Investments into the Union’ entered into force on 10 April 2019.9 Although the EU remains a popular destination for Chinese investment because of its open policy, Chinese investors can be expected to face increasing regulatory barriers in the EU.

5 European Commission, ‘Staff Working Document Impact Assessment Report on the EU-China Investment Relations’, 23 May 2013, SWD (2013) 185 final, , last accessed on 29 January 2019, p. 7. 6 MOFCOM, supra note 3, p. 44. 7 European Commission, supra note 5, p. 18. 8 For instance, Germany revised its national security review law in December 2018 to cover foreign takeovers of above 10% shares of a German company in prescribed sensitive sectors, as opposed to 25% in the past. Naboth van den Broek et al., ‘EU and Germany Move to Further Tighten FDI Screening Process’, Mondaq, 27 December 2018, , last accessed on 30 January 2019. 9 European Commission, ‘EU Foreign Investment Screening Regulation Enters into Force’, 10 April 2019, , last accessed on 30 April 2019.

Introduction 3

1.2 Incentives and context in making the China–EU Comprehensive Agreement on Investment (CAI) The signing of bilateral investment treaties (BITs) was originally incentivized by a perception that BITs would promote FDI between the two contracting states. Despite a dearth of evidence to prove the correlation between the conclusion of BITs and the promotion of FDI, the proliferation of international investment agreements (IIAs) on a global scale since the 1990s illustrates states’ commitment to using these instruments to promote investment relations. There are now approximately 2,970 BITs and 383 treaties with investment provisions signed worldwide.10 More particularly, since the 2010s, the emergence of the world’s ‘mega-regional’ trade and investment agreements reflects strong competition among key economies in leading and reshaping the rule-making of international trade and investment. The Agreement on Trans-Pacific Partnership (TPP) and its subsequent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the United States-MexicoCanada Agreement (USMCA) as a new version of the North America Free Trade Agreement (NAFTA), and the ongoing negotiations of the Regional Comprehensive Economic Partnership (RCEP) are major free trade agreements (FTAs) with chapters on investment that reflect substantial advancement in most recent treaty-making. On the EU side, the EU has been active in negotiating with key economic partners on FTAs with chapters on investment since 2010. The EU-US negotiations on the Transatlantic Trade and Investment Partnership (TTIP) received overwhelming scepticism internationally due to the EU’s bold 2015 proposal on creating an international investment court system to replace ad hoc investor-state arbitration (ISA). Despite the deadlock of TTIP, the EU’s approach to the investment court has been integrated into the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the EU-Vietnam Investment Protection Agreement (IPA), and the EU-Singapore IPA. Moreover, the United Nations Commission on International Trade Law (UNCITRAL) Working Group III has responded to the EU’s proposal for reforming the investor-state dispute settlement (ISDS) by establishing a permanent multilateral investment court (MIC), eventually replacing the investment court system on a bilateral level.11 The EU and Canada are the front runners in advocating an MIC. China’s treaty-making practice is also notable, reflecting its policy to protect growing outbound investment resulting from the Belt and Road Initiative, and to meet external pressure to further open up the Chinese market. Since 2008, China has resumed BIT negotiations with the US, in which China has agreed to relax market access by introducing a new system of national treatment at the pre-establishment stage with a negative list. In response to the uncertainty of ISDS, China has adopted domestic measures to provide possibilities for settling such disputes in China. The Shenzhen Court of International Arbitration in 2016 and the China International Economic and Trade Arbitration Commission in 2017 introduced new rules to extend their jurisdiction to admit investor-state disputes. In 2018, two new international commercial courts were established by the Supreme People’s Court,

10 UNCTAD, ‘Investment Policy Hub, International Investment Agreements’, , last accessed on 30 January 2019. 11 European Commission, ‘Submission of the European Union and its Member States to UNCITRAL Working Group III, Establishing a Standing Mechanism for the Settlement of International Investment Disputes’, 18 January 2019, , last accessed on 30 January 2019.

4 Yuwen Li and Cheng Bian which mainly deal with large commercial foreign-related cases, including investment contractual disputes. Against this background, the China–EU CAI is bound to transcend what traditional BITs include and shift the paradigm towards a global new generation investment agreement.12 The EU has identified three main objectives in negotiating the China–EU CAI: (a) to improve market access conditions for both Chinese and EU investors; (b) to preserve the host state’s regulatory space in pursuing its legitimate public policy objectives, most notably in relation to the protection of the environment and labour rights; and (c) to allow for an effective investment dispute settlement mechanism by proposing an investment court system.13 China shares some of the EU’s concerns, but it may not agree with the EU on some concrete specific ambitions. This edited volume examines the ambitious yet contentious key issues involved in the China–EU CAI. It can be predicted that even though the future treaty will address most of these issues, it may not bring about consensus on some of them because the different positions on these issues are systemic and deeply rooted in the complex of institutional settings. In this context, the CAI cannot be expected to create a level playing field between Chinese and foreign investors in the near future, though any step forward in that direction is desirable. With regard to ISDS, it is the EU’s consistent policy to promote an investment court system in its bilateral trade and investment negotiations, although the notion of such a court needs to be further elaborated so as to achieve the EU’s goal of a fair and efficient dispute settlement system and to gain support from more states. China has its own policy concerns, and thus has taken a cautious attitude towards the EU’s approach. China may think it is not the right time or place to adopt an investment court system in the CAI. At the same time, China has swiftly introduced innovative reform measures to pave the way for allowing investment dispute settlement through arbitration in China. Given China’s position as the second largest economy in the world, its favour of multilateralism and its determination to be a responsible state, it can be expected that China will take a proactive stance in building a fair, efficient and transparent investment dispute settlement regime. As China shares mutually fundamental interests with the EU in international investment governance, the CAI will become China’s first attempt at demonstrating its proactivity in ISDS reform.

1.3 Structure of this book This book provides a comprehensive analysis of the most contentious subjects in the China–EU CAI negotiations from both Chinese and European perspectives, with a focus on the pathway of ISDS reform. The central theme of this book is how the investment dispute settlement mechanism in the China–EU CAI might and should be designed. To provide a profound understanding of the negotiations of the CAI, this book is divided into three parts.

12 Wenhua Shan and Lu Wang, ‘The China–EU BIT and the Emerging “Global BIT 2.0”’, ICSID Review, Vol. 30 Issue 1 (2015), pp. 260–267. 13 European Commission, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China, Final Report’, November 2017, , last accessed on 26 December 2018, pp. 27–29.

Introduction 5 Part I presents an overview of key and contentious issues in negotiating the China–EU CAI. In Chapter 2, Axel Berger assesses the key rationale and the motivations of China and of the EU, and he analyses several highly contentious issues in the China–EU CAI negotiations. He first gives an updated overview of the EU’s post-Lisbon international investment policy, going on to analyse the evolution of China–EU investment relations by looking at the substantive and procedural similarities and differences in the 26 existing BITs between China and EU member states. The author contends that the EU is mainly motivated to negotiate the CAI to improve market access and limit discriminatory treatment for EU investors in the Chinese market, whilst China’s key motivations are to limit the negative externalities of TTIP, to consolidate and update the existing 26 BITs with EU member states, and to ensure that the investment screening mechanisms in the EU will not hinder Chinese investment in Europe. In light of these different motivations between the two negotiating parties and the rather slow progress of the negotiations, various challenges need to be overcome. These challenges pertain to the depth of market access commitment, the updating of non-discriminatory substantive treaty standards, and the incorporation of nontraditional IIA rules such as the treatment of SOEs, and sustainable development provisions. Chapter 3 examines the convergences and divergences between the China–EU CAI and the China–US BIT negotiations. Hongyu Fu and Meng Wan examine three important topics: market access, the definition of expropriation, and the disposition of SOEs, as reflected in the treaty-making practice of China, the US and the EU. For market access, the authors opine that China would likely adopt the pre-establishment national treatment with the negative list approach in both BIT negotiations, even though the negative list for foreign investment in China’s domestic law and the negative lists provided in the US and EU treaty-making practices may demonstrate a number of differences in terms of their formality and contents. For the definition of expropriation, the US practice introduces additional requirements such as references to customary international law standards, where China may disagree. China and the EU may more easily reach a consensus on the definition of expropriation since the EU does not impose such additional requirements. For the disposition of SOEs, the US may insist on competitive neutrality on the treatment of SOEs, an approach that could be difficult for China to adopt. The EU’s practice on SOEs is more moderate, providing a good basis for the CAI negotiations. Chapter 4, by Cheng Bian and Yuwen Li, expounds on the similarities and differences between the public policy provisions included in the IIAs of the EU and China, and discusses ways to incorporate these public policy considerations in the CAI. Public policy provisions in IIAs refer to non-investment policy objectives – including environmental protection, labour and human rights, and other public interest considerations – that are incorporated in order to prioritize the host states’ regulatory space. By conducting a comparative assessment of China and the EU’s recent treaty-making practice, the authors contend that China’s current IIA practice suffers from a lack of incorporation of public policy provisions because of the limited scope of these public policy elements and the limited approaches adopted. The CAI poses both challenges and opportunities for China to sufficiently and effectively envisage the public policy provisions in its IIA-making. In Chapter 5, Matthieu Burnay focuses on human rights protection, which often tends to be at stake both in international investment law-making and international investment arbitration. He probes the prospects and challenges for the EU in reinforcing its position in promoting human rights in China through the negotiation of the CAI with China. The author points out that the EU is increasingly struggling to maintain a meaningful dialogue with China on human rights issues under the framework of the EU-China Strategic Partnership.

6 Yuwen Li and Cheng Bian The CAI could provide a useful platform to reach a balance between investors’ protection and the right of states to regulate in order to protect the public interest of the host state, in which the protection of human rights is one of the major concerns. However, in a context where China is gaining increasingly more presence in global economic governance, even though the EU has strong incentives to include direct or indirect references to human rights issues in the CAI, such an objective is going to be difficult and challenging to achieve. Part II focuses on the institutional aspects of reforming ISDS. Chapter 6, by Colin M. Brown and Elio Gaarthuis, identifies how a multilateral investment court could address multiple concerns about the unsatisfactory status quo of the ISDS system. They argue that an MIC could improve consistency and predictability in investment dispute resolution and increase the independence and impartiality of individual adjudicators, as well as the independence and impartiality of the court as a whole. The authors provide compelling arguments that an MIC offers significant advantages compared to the current ISA. While the authors of Chapter 6 provide a strong incentive and rationale for the EU to promote an MIC, the author of Chapter 7, Jun Xiao, provides an alternative policy choice, namely a standalone multilateral appellate body bolted on to the prevailing ISA. The author contends that a multilateral, two-tiered, and standing adjudicating mechanism might be unnecessary and impractical at the multilateral level for a number of reasons. A dispute settlement mechanism like the one used by the World Trade Organization (WTO) might be more desirable for reforming ISDS at least in the short- and mid-term. In Chapter 8, Huiping Chen addresses the pathways of ISDS reform from a Chinese perspective. She sketches an innovative landscape of measures initiated at the domestic level to create possibilities for handling investor-state disputes, especially those that may emerge from China’s Belt and Road Initiative. Considering the lessons learned from China’s missed opportunity in the WTO, she highlights the significance of China’s proactive engagement in UNCITRAL’s work on reforming ISDS. Advocating for China to engage proactively in multilateral institution building, she posits that China’s rich experience in a mediation and arbitration mix could provide valuable input to ISDS reform. In Chapter 9, Tong Qi answers the question of what China’s potential choices would be concerning the available options for ISDS reform. China aspires to become a rule-maker instead of a rule-taker in the ongoing reform, but its capacity and experience limit its role. In view of the long road to building consensus on a generally accepted and ideal path for ISDS reform, and thus the continuous proliferation of diversified ISDS mechanisms on bilateral and regional levels, the author opines that China is most likely to continue to be open to all options. China might choose different strategies across different treaties, instead of adapting to one approach exclusively. Since China takes a pragmatic approach to investor-state arbitration, it may continue to make use of this approach while proposing improvements which include Chinese elements such as alternative dispute resolution and a dispute prevention mechanism. China may attempt to establish a China-led ISDS institution exclusively for the resolution of investor-state disputes arising out of the Belt and Road Initiative. In Chapter 10, Michael Faure and Wanli Ma contribute to the debate by reviewing the economic and empirical evidence on the essential differences between adjudication and arbitration, and on the functioning of investor-state arbitration in particular. The authors demonstrate that the empirical literature on law and economics is generally critical of arbitration and of the aspect of the loss of public goods of adjudication. The perceived benefits of private or commercial arbitration in general, inter alia, lower costs, better expertise, and speedy and impartial decision-making, are not specifically realized in investor-state arbitration.

Introduction 7 Part III discusses substantive and procedural issues involved in ISDS reform. In Chapter 11, Vid Prislan provides European perspectives on the role of national courts in the settlement of investor-state disputes. The author compares different and evolving views taken by the European Commission, the European Parliament, and the EU Council, and examines how policy has been transformed into the treaty-making practice. He argues that although relevant provisions in EU IIAs that have been concluded, such as CETA, the EU-Vietnam IPA, and the EU-Singapore IPA, have the potential of contributing to a greater use of domestic courts in the resolution of investor-state disputes, the lack of trust in domestic judicial systems may hinder the use of national courts by foreign investors. Chapter 12 addresses what is considered to be one of the most distinct deficiencies of the current ISDS mechanism, namely inconsistency, from the perspective of China’s involvement in ISDS jurisprudence. In light of arbitral tribunals’ interpretative approaches to jurisdiction clauses in China-related BITs, Wei Shen reviews four cases dealt with at the International Centre for Settlement of Investment Disputes (ICSID) involving Chinese investors as claimants and three cases involving China as a respondent. The author identifies that the oftenappearing jurisdictional objections raised in Chinese BIT-related cases involve the issues of ‘investor’, ‘investment’, ‘dispute’, fork-in-the-road provisions, the limitation period, the most-favoured-nation treatment to procedural rights, and the applicability of Chinese BITs to investors from Hong Kong or Macau, which is a unique concern in China’s investment arbitration practice. In the author’s view, China-related ISDS cases indicate a high level of consistency in terms of arbitral tribunals’ interpretation of jurisdiction clauses in Chinese BITs. The author thus claims that inconsistency alone cannot be the reason for China to adopt the MIC. In Chapter 13, Manjiao Chi discusses the issue of the transparency of ISDS in the context of the making of the China–EU CAI. Given that China and the EU are major economic powers in the world today, how the parties deal with the issue of transparency in their BIT-making is likely to have exemplary impacts on global IIA-making and investor-state arbitration practice in the future. The author suggests that despite their growing normative convergence, these provisions retain some material differences. To properly address the issue of transparency in the making of an unprecedented China–EU CAI, various outstanding issues need to be properly addressed by the parties, including incorporation of the UNCITRAL Transparency Rules, publication of the relevant arbitral documents, and thirdparty participation in ISDS. In Chapter 14, Alessandro Spano discusses the status of Chinese SOEs within China’s governance and economic model, arguing that as a result of the political and financial support of the Chinese government, Chinese SOEs are managed by state authorities and have gained a predominant status in critical sectors for the development of the Chinese economy. Hence, the suspicion arises that Chinese SOEs lack independence from the Chinese government. The author further explains that this particular situation has led to controversies generated by Chinese SOEs investing in the EU for market competition considerations in the area of merger regulation. It raises further concerns about how to differentiate commercial conduct from governmental conduct by Chinese SOEs when they act as claimants in ISDS. The author suggests that a regulatory response in the EU, namely the establishment of a common national security review mechanism at the EU level, could offer a useful and complementary tool to deal coherently with concerns arising out of Chinese SOEs. As a counterpart to Chapter 14, Sheng Zhang offers a Chinese perspective on the status of Chinese SOEs in ISDS in Chapter 15. The author discusses first whether and under what circumstances an SOE has standing as a claimant and then argues under what circumstances

8 Yuwen Li and Cheng Bian the alleged wrongful acts of SOEs could be attributed to their government as a respondent state. The author proposes three principles to cover the issue of SOEs in the China–EU CAI. First, a detailed definition and a clear scope of investors should be adopted to avoid the ambiguities of the status of SOEs. Second, a framework that requires a high level of transparency and governance of SOEs could be included in the CAI to eliminate concerns about an SOE’s hidden non-commercial objectives. Third, a narrowly structured and transparent national security review regime at the EU level, as proposed by the European Commission, would be helpful in addressing concerns raised by Chinese SOEs. Chapter 16 elaborates on the protection of victims in connection with human rights or environmental violations by businesses in ISDS. Despite the considerable economic benefits IIAs entail, these IIAs have been subject to criticism because they allegedly favour investors’ interests over human rights and environmental protection. Martijn Scheltema opines that current investment dispute resolution does not take the interests of victims into sufficient account and there is a need to adapt the current system. This chapter provides policy recommendations to the European and Chinese negotiators of the CAI, which include the requirement that investors comply with the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises, the introduction of third-party participation, increasing the transparency of the procedure, and limiting the interpretive autonomy of arbitral tribunals. In Chapter 17, Yueming Yan provides a concise analysis of cases involving corruption tackled by investment arbitral tribunals, and identifies that the obscure evidentiary standards applied and the approaches adopted in addressing allegations of corruption in ISDS jurisprudence display some dissatisfaction, and that none of these tribunals relied on provisions relating to anti-corruption in the applicable IIAs when investigating submissions concerning corruption. The author discusses the EU’s IIA-making practice and China’s policies and practice with regard to the prevention and deterrence of corruption, and proposes that a comprehensive anti-corruption chapter be incorporated in the China–EU CAI as a progressive step in effectively eliminating corruption, after taking into account the anti-corruption norms in other significant IIAs, such as the USMCA and the CPTPP.

Part I

China–EU Comprehensive Agreement on Investment Core issues

2

The China–EU investment agreement negotiations Rationale, motivations, and contentious issues Axel Berger

2.1 Introduction China and the European Union (EU) are negotiating the Comprehensive Agreement on Investment (CAI), which is intended to replace the existing bilateral investment treaties (BITs) between China and all EU member states, except for Ireland, and to revive the bilateral investment relationship. The investment treaty negotiations between China and the EU are taking place against a background of international and domestic turbulence. China is in the midst of a structural transformation from an economy relying on the supply of cheap capital and low-wage labour to an economy driven by innovation and consumption. The Chinese government is promoting this transformation by adopting a forceful industrial policy which aims to develop competitive domestic companies in high-tech sectors. This aspired transformation is taking place against the backdrop of increasing geo-economic tensions between the United States (US) and China, which may escalate into a full-blown trade war, negatively affecting economic growth and structural transformation in China. Europe, for its part, has to deal with structural differences between its member states that have worsened as a result of the European financial crisis and the economic and political fallout of the decision of the United Kingdom (UK) to leave the EU. In addition, European politics are characterized by an increasing divergence between populist forces questioning the virtue and benefit of increased integration and those forces calling for more cooperation – both regarding European integration and cooperation with the rest of the world. While both China and the EU need foreign investments to tackle their respective domestic challenges, the international investment regime that is needed to promote such investments is facing a legitimacy crisis.1 As a result of investors increasingly resorting to investor-state dispute settlement (ISDS), countries are having second thoughts about the international investment agreements (IIAs) they have signed since the late 1950s. While a number of countries have started to reform the provisions of their investment treaties to reduce the likelihood of frivolous claims and to increase their regulatory space to implement public policies, others are retreating from the system by refusing to sign new treaties or by terminating existing ones.2 This increasing scepticism with regard to the worth and value of investment

1 Malcolm Langford and Daniel Behn, ‘Managing Backlash: The Evolving Investment Treaty Arbitrator?’ European Journal of International Law, Vol. 29 Issue 2 (2018), pp. 551–580. Michael Waibel, et al. (eds.), The Backlash against Investment Arbitration: Perceptions and Reality (Alphen aan den Rijn: Kluwer Law International, 2010). 2 Jonathan Bonnitcha, Lauge N. Skovgaard Poulsen, and Michael Waibel, The Political Economy of the Investment Treaty Regime (Oxford: Oxford University Press, 2017).

12 Axel Berger treaties is not only visible in developing and emerging countries such as Venezuela, South Africa, Indonesia, and India but also, most recently, in major developed countries. The US under President Trump, for example, initiated a revision of the North American Free Trade Agreement (NAFTA), now called the US-Mexico-Canada Agreement (USMCA), which resulted, among other things, in a significant restriction of the previous ISDS mechanism.3 As a result of the fierce debate about investor-state arbitration in the context of the negotiation on a Transatlantic Trade and Investment Partnership (TTIP) with the US, the EU now champions a new investment court system (ICS) that has been already included in trade agreements with Canada, Vietnam, Singapore, and Mexico. In addition, the EU wants to use the reform debates in the context of the United Nations Commission on International Trade Law (UNCITRAL) to promote a multilateral court system. Against this background, China and the EU have since the beginning of 2014 been negotiating a CAI that will not only consolidate and update existing rules on the protection of investments, included in the existing 26 BITs between China and the member states of the EU, but will also add new rules for areas such as market access and sustainable development. For the EU, the CAI offers an opportunity to further promote its new ICS approach to arbitrating disputes between investors and host states. Given the importance of the two parties in the international investment system, the China–EU CAI could potentially serve as a blueprint for future IIAs negotiated by the two signatories, if not for global treaty-making practice. The CAI is one of the most important bilateral economic cooperation initiatives between China and the EU at this time. Although the investment treaty negotiations between China and the EU remained in the shadow of the China–US BIT negotiations for a long time, the recent escalation of the trade dispute between China and the US makes the successful conclusion of the negotiations that were already launched in 2008 unlikely. In contrast, the EU and China have recently endorsed their political commitment to conclude a mutually beneficial investment agreement.4 Despite this commitment, the prospects of a successful conclusion of China–EU investment negotiations are anything but certain. This is due not only to differences between Chinese and European motivations and approaches to negotiating IIAs but also to changing attitudes and policies with regard to foreign investments. This chapter provides an overview of the current state of negotiations and analyses the motivations of the parties and the main contentious issues in the negotiations of the China– EU CAI. The remainder of this chapter is structured as follows. Section 2.2 provides a background of the changes of the institutional basis for the EU international investment policy in the wake of the Treaty of Lisbon reform. Section 2.3 provides an overview of the 26 BITs that China has negotiated with EU member states and highlights the need to consolidate these agreements. Section 2.4 assesses the motivations of China and the EU with regard to the CAI. Section 2.5 provides a short overview of the state of play of the negotiations and argues that the depth of market access commitments, the updating of substantive treaty standards, and the incorporation of non-traditional rules such as transparency of state-owned enterprises (SOEs) and sustainable development are major controversial issues. Section 2.6 provides conclusions.

3 Nathalie Bernasconi-Osterwalder, ‘USMCA Curbs How Much Investors Can Sue Countries – Sort Of’, IISD, 2 October 2018, , last accessed on 17 January 2019. 4 Council of the EU, ‘EU-China Summit, Beijing, 16/07/2018’, , last accessed on 17 January 2019.

China–EU investment agreement negotiations 13

2.2 The EU’s post-Lisbon international investment policy From the perspective of the EU, the Treaty of Lisbon and the shift of competency to negotiate investment treaties from the member states to the European level form the backdrop of the negotiations of a unified treaty between China and the EU. The institutional framework of European trade and investment policy has undergone a fundamental change because of the Treaty of Lisbon, which entered into force on 1 December 2009. The Treaty of Lisbon brings about a two-fold shift in competences, leading to greater communitarization and politicization of European trade and investment policy-making.5 The inclusion of foreign direct investment (FDI) in the common commercial policy by Article 207 of the Treaty on the Functioning of the European Union (TFEU) leads to a vertical shift of competence. EU member states, until 2009, had the exclusive competence to negotiate and conclude investment agreements. The Treaty of Lisbon, which entered into force in late 2009, transfers this competence to the EU level. Article 207 (1) TFEU determines that the overall responsibility for the conclusion of trade and investment agreements now lies with the EU: The common commercial policy shall be based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, the achievement of uniformity in measures of liberalization, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. The common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action. On the other hand, the Treaty of Lisbon provides for a horizontal expansion of competences, which gives the European Parliament more powers, as the ordinary legislative procedure now also applies to the Common Commercial Policy. Prior to the Treaty of Lisbon, investment agreements were often negotiated by the member states as largely technocratic instruments that were drafted solely with the aim of promoting foreign investments without broader parliamentary or public discourse about their goals, design, and effects. After the Treaty of Lisbon came into force, it is thus no longer just the EU Council, representing the member states, which decides on the adoption of trade and investment agreements, but also, according to Article 207 (2), the European Parliament that: […] acting by means of regulations in accordance with the ordinary legislative procedure, shall adopt the measures defining the framework for implementing the common commercial policy.

5 On the implications of the Treaty of Lisbon on the EU’s international investment treaty policy see e.g. Rafael Leal-Arcas, ‘The European Union’s Trade and Investment Policy after the Treaty of Lisbon’, Journal of World Investment & Trade, Vol. 11 Issue 4 (2010), pp. 463–514; Steven Woolcock, ‘EU Trade and Investment Policymaking after the Lisbon Treaty’, Intereconomics, Vol. 45 Issue 1 (2010), pp. 22–25; Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How will the New EU Competence on FDI Affect the Emerging Global Regime?’ Journal of International Economic Law, Vol. 15 Issue 1 (2012), pp. 1–34; Marc Bungenberg, ‘The Politics of the European Union’s Investment Treaty-Making’, in Tomer Broude, Marc Busch, and Amelia Porges (eds.), The Politics of International Economic Law (Cambridge: Cambridge University Press, 2011), pp. 133–161. Marc Bungenberg, August Reinisch and Christian Tietje (eds.), EU and Investment Agreements: Open Questions and Remaining Challenges (Oxford: Hart, 2013).

14 Axel Berger This strong formal role of the European Parliament with regard to the Common Commercial Policy implies a stronger influence of the Parliament in ongoing negotiations on trade and investment agreements. Moreover, after the entry into force of the Treaty of Lisbon, EU trade and investment agreements are covered by the principle of coherence of Article 21 of the Treaty on European Union (TEU). Article 21(2) requires that the EU’s external actions contribute to, inter alia, the promotion of democracy and human rights, sustainable development, poverty reduction, and environmental protection. Such a normative framework did not exist when the competence to negotiate and conclude investment agreements was exclusively with the member states. One of the key drivers of the transfer of the competence on FDI was the desire of the EU to be able to conclude comprehensive trade and investment agreements that had become the standard practice since the mid-1990s. This development began with the signing of the NAFTA in 1994 by the US, Canada, and Mexico. This ground-breaking agreement, which included liberalization of services and the protection of intellectual property rights and investment, in addition to the reduction of tariffs, has become a template for a series of agreements negotiated subsequently.6 From the point of view of the European Commission, the NAFTA countries and, in particular, the US, with its particular approach involving combining the protection and liberalization of foreign investors, had a competitive advantage that had a negative impact on European companies: [i]n comparison to NAFTA countries’ agreements, EU agreements and achievements in the area of investment lag behind because of their narrow content. As a result, European investors are discriminated vis-à-vis their foreign competitors and the EU is losing market shares.7 In its Communication ‘Global Europe: Competing in the world’, the European Commission has set the course for the negotiation of comprehensive trade and investment agreements. With the Treaty of Lisbon, the contractual basis was laid for this purpose. Since the entry into force of the Treaty of Lisbon, the EU has begun a series of new negotiations in which the European Commission is now also negotiating rules for investment. The most important initiative of the EU was the negotiation of TTIP with the US. The negotiations on what is potentially the largest free trade agreement in the world started in 2013 but were put on hold after the accession to office of Donald Trump as the new US president in January 2017. In the course of the TTIP negotiations, which received substantial public criticism in some EU member states, there have been major changes in European trade policy, particularly in the area of investment, as will be discussed here. The most comprehensive agreement the EU has yet completed is the Comprehensive Economic and Trade Agreement (CETA) with Canada, which was finalized in 2014 and includes a comprehensive investment chapter with rules on investment liberalization and protection as well as the new ICS. In addition, the EU concluded a comprehensive free trade agreement

6 China’s FTA practice has also, to a certain extent, been influenced by the NAFTA approach, see Axel Berger, ‘Investment Rules in Chinese PTIAs – A Partial “NAFTA-ization”’, in Rainer Hofman, Stephan Schill, and Christian Tams (eds.), Preferential Trade and Investment Agreements: From Recalibration to Reintegration (Baden-Baden: Nomos, 2013), pp. 297–333. 7 European Commission, ‘Issues Paper: Upgrading the EU Investment Policy, Note for the Attention of the 133 Committee’, 30 May 2006, , last accessed on 18 February 2019.

China–EU investment agreement negotiations 15 with Singapore in 2014, with Vietnam in 2015, and with Japan and Mexico in 2018.8 These agreements are still awaiting ratification by the relevant EU bodies and by the parliaments of the EU member states. With the entry into force of the Treaty of Lisbon, an intense and controversial debate has been developed over the design of the new European trade and investment policy. European institutions had to answer three questions: (i) what should happen to the approximately 1,400 BITs of the member states; (ii) which clauses should be incorporated into the new investment agreements of the EU; and (iii) how the investor-state arbitration clauses of EU investment agreements should be designed. With regard to question (i), the European Commission, the member states, and the EU Parliament reached a compromise, the ‘Transition Regulation’,9 stating that the existing member states BITs remain legally in force and will be gradually replaced by new EU-wide investment treaties. In other words, the existing member states BITs will remain in force until a new IIA between the countries and the EU has been negotiated. The China–EU CAI, for example, would replace the existing 26 bilateral treaties signed between China and the EU member states. In (ii), the question is what kind of substantive clauses should be included in the EU’s new investment agreements. Traditionally, member states’ BITs have been based on the ‘European model’, which included vaguely drafted, yet sweeping, protection standards. The agreements were concluded almost exclusively with the aim of ensuring that European companies have sufficient legal protection when investing in countries with a reputation for insufficient legal and political security. As described above, the US and its NAFTA partners have reformed their investment treaties in order to increase the regulatory space of governments and also to limit arbitration tribunals’ room for interpretation of substantive protection standards.10 In its Communication ‘Towards a Comprehensive European Foreign Investment Policy’, the Commission sets out its vision regarding the design of future EU investment agreements. In addition, the first agreements concluded by the EU, in particular CETA, which contains a comprehensive chapter on investment, suggest that the new EU foreign investment policy departs from the traditional approach of the member states and incorporates core elements of the NAFTA approach. In this sense, one can speak of a ‘NAFTA-ization’ of European foreign investment policy. The question in (iii) that has to be clarified with regard to future European investment policy is in terms of the design of investor-state arbitration. These clauses were an integral part of the bilateral investment agreements concluded by the member states and should also be an integral part of the new EU agreements. The first question is how the arbitration clauses of the new EU agreements can refer to the most common investor-state dispute

  8 The EU-Japan FTA only covers investment liberalization and does not include rules on investment protection and investor-state arbitration. See European Commission, ‘EU-Japan Economic Partnership Agreement: Texts of the Agreement’, 8 December 2017, , last accessed on 17 January 2019.   9 Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 Establishing Transitional Arrangements for Bilateral Investment Agreements between Member States and Third Countries, , last accessed on 17 January 2019. 10 Gielbert Gagné and Jean-Frédéric Morin, ‘The Evolving American Policy on Investment Protection: Evidence from Recent FTAs and the 2004 Model BIT’, Journal of International Economic Law, Vol. 9 Issue 2 (2006), pp. 357–382.

16 Axel Berger resolution forum, the International Centre for Settlement of Investment Disputes (ICSID), since the EU is not a member of the World Bank Group and therefore not an ICSID member. As a result of the TTIP negotiations, investment agreements, in particular their arbitration clauses, have been the subject of controversial discussions. Massive public criticism of the inclusion of such an arbitration clause in the agreement with the US has led the European Commission to temporarily suspend negotiations on the investment chapter and to hold an EU-wide public consultation. Due to the overwhelmingly negative reaction of the European public in the context of the consultation, the EU Commission has presented a new model for settling investment disputes – the ICS.11

2.3 The evolution of China–EU investment policy relations The international significance of the negotiations towards the China–EU CAI stems from the key role of both parties within the international investment regime. China has negotiated 148 BITs since the first treaty was signed with Sweden in 1982.12 With a total of 113 treaties that are legally in force, China has the second largest BIT network in the world, behind Germany with 129 BITs.13 In addition, China recently began to include investment rules in its FTAs.14 Seven Chinese FTAs include comprehensive rules on investment. Collectively, the member states of the EU have signed almost 1,400 BITs since the first treaty was signed between Germany and Pakistan in 1959. Since the inclusion of investment rules in EU FTAs as a result of the entry into force of the Treaty of Lisbon in 2009, the EU has concluded agreements with Singapore, Canada, Vietnam, and Mexico that include comprehensive provisions on investment. These numbers underline that both China and the EU are important stakeholders in the international investment regime and that a China–EU investment treaty will have a strong signalling effect for the international investment regime, which is currently undergoing deep structural changes. Beyond the sheer numbers, the EU member states have been instrumental in defining the substantive parameters of the international investment regime. The majority of BITs signed during the past decades are modelled on a draft treaty put forward by Hermann Joseph Abs, then director-general of Deutsche Bank, and Lord Shawcross, former UK attorney general, in the 1950s. These treaties, modelled on the Abs-Shawcross treaty template, are typically rather short and include open-ended and sweeping treaty provisions.15 China was one of the countries that were strongly influenced by the European BIT approach. China began negotiating investment treaties in the early 1980s, shortly after it started its reform and opening-up programme that formed the basis for its stellar economic rise during the past four decades. The first treaties China signed until the mid1980s were concluded with European countries, which influenced China’s treaty-making practice in the years that followed.16

11 For a discussion of the ICS, see Chapter 6 of this edited volume. 12 Axel Berger, ‘The Political Economy of Chinese Investment Treaties’, in Ka Zeng (ed.), Handbook of the International Political Economy of China (London: Edward Elgar, 2019), pp. 151–169. 13 UNCTAD, ‘Investment Policy Hub, International Investment Agreements, BITs and TIPs’, , last accessed on 17 January 2019. 14 Axel Berger, supra note 6. 15 Stephan Schill, The Multilateralization of International Investment Law (Cambridge: Cambridge University Press, 2019). 16 Axel Berger, supra note 12.

China–EU investment agreement negotiations 17 Except for Ireland, China has concluded 26 BITs with all other EU member states.17 Belgium and Luxembourg negotiated a joint BIT with China. Given the fact that these treaties have been concluded at different times, in some cases dating back to the early 1980s, the contents of these treaties differ. Twelve of these treaties have been renegotiated18 or amended by a protocol19 to update their contents.20 All treaties signed by China with EU member states are based on the ‘admission model’, which protects foreign investments only in the post-establishment phase. In other words, substantive protection clauses such as fair and equitable treatment, national and most-favoured-nation treatment, and protection against unlawful direct and indirect expropriation and financial transfers applied only after the foreign investment project had been admitted by the host state. While foreign investors can rely on sweeping provisions to protect their investments in the post-establishment phase, traditional investment treaties, like those signed by EU member states and China, provide host countries with substantial space to regulate foreign investments when they enter the market.21 As will be discussed below, the change from an approach that protects foreign investment only in the post-establishment phase to an approach where foreign investments are protected both in the pre-establishment and the post-establishment phases is one of the crucial justifications – and one of the key stumbling blocks – for the China–EU CAI. Another common feature of the 26 treaties signed between EU member states and China is that they include largely unrestrained clauses that grant substantial legal protection to foreign investments and provide arbitrators with much room to interpret them. Modern provisions, such as more detailed and restrictive fair and equitable treatment or indirect expropriation clauses, exclusions of ISDS from the scope of the MFN clause, public policy

17  For detailed accounts of China’s international investment treaty approach, see e.g. Axel Berger, ‘The Politics of China’s Investment Treaty-Making Program’, in Tomer Broude, Marc Busch, and Amelia Porges (eds.), The Politics of International Economic Law (Cambridge: Cambridge University Press, 2011), pp. 162–185; Congyan Cai, ‘Outward Foreign Direct Investment Protection and the Effectiveness of Chinese BIT Practice’, Journal of World Investment & Trade, Vol. 7 Issue 5 (2006), pp. 621–652; An Chen, ‘Distinguishing Two Types of Countries and Properly Granting Differential Reciprocity Treatment: Re-Comments on the Four Safeguards in Sino-Foreign BITs not to be Hastily and Completely Dismantled’, Journal of World Investment & Trade, Vol. 8 Issue 6 (2007), pp. 771– 795; Norah Gallagher and Wenhua Shan, Chinese Investment Treaties (Oxford: Oxford University Press, 2009); Qingjiang Kong, ‘Bilateral Investment Treaties: The Chinese Approach and Practice’, Asian Yearbook of International Law, Vol. 8 (2003), pp. 105–136; Stephan Schill, ‘Tearing Down the Great Wall – The New Generation Investment Treaties of the People’s Republic of China’, Cardozo Journal of International Law & Comparative Law, Vol. 15 (2007), pp. 73–118. 18  E.g. Germany-China BIT (first treaty signed in 1983, renegotiated in 2003); France-China BIT (1984, 2007); Belgium and Luxembourg-China BIT (1984, 2005); Finland-China BIT (1984, 2004); Netherlands-China BIT (1985, 2001); Czech Republic-China BIT (1991, 2005); Portugal-China BIT (1992, 2005); Spain-China BIT (1992, 2005). 19 E.g. Sweden-China BIT (base treaty signed in 1982, protocol signed in 2004); Bulgaria-China BIT (1989, 2007); Slovakia-China BIT (1991, 2005); Romania-China BIT (1994, 2007). 20 The following is based on data about the design features of Chinese IIAs compiled by Axel Berger in Swimming with the Tide: China and the Protection of Foreign Direct Investment, PhD dissertation (Universität Duisburg-Essen, 2016). 21 None of the treaties signed by the EU member states and China include an obligation to grant national treatment in the pre-establishment phase; the renegotiated treaty between Finland and China signed in 2004 includes a pre-establishment most-favoured-nation provision and restrictions on the use of performance requirements.

18 Axel Berger exceptions, or rules on environmental and labour issues, are missing.22 The contrast between these 26 treaties and the recently concluded investment chapters in the FTAs signed by the EU with Canada or Vietnam is substantial and justifies an updating of the existing treaties between China and the EU. Beyond these similarities, there are a number of notable differences between the 26 BITs that China has signed with EU member states. These relate to the scope of the national treatment, war and civil disturbance, transfer of funds, and entry and sojourn of key personnel clauses. Furthermore, while some treaties include an umbrella clause, the majority do not. Probably the most significant difference between the 26 BITs between EU member states and China is the scope of the ISDS clause. The design of the procedural clauses in these treaties is defined by the specific approach adopted by China at the time of their negotiation. Looking at all Chinese investment treaties, Chi and Wang distinguish narrow and broad approaches to defining the scope of ISDS provisions.23 During the 1980s and 1990s, China negotiated BITs that included ISDS clauses with a narrow scope, allowing only disputes about the amount of compensation to be adjudicated by an ISDS tribunal. The treaties China signed with ten European countries before the mid-1990s still incorporate these narrow ISDS clauses.24 The treaties signed with Austria and Italy in the early 1980s do not include an ISDS clause. Chi and Wang furthermore distinguish a second approach that has been adopted in Chinese investment treaties signed since the late 1990s, which include broad ISDS clauses that allow foreign investors to bring ‘any dispute’ to international arbitration. China signed 14 investment treaties with EU member states that include such broad ISDS clauses.25 It becomes clear that European investors in China – and for that matter Chinese investors in Europe – rely on different levels of legal protection depending on the design features of the 26 BITs.

2.4 Motivations The starting point of this chapter about the motivations of China and the EU to enter into negotiations on the CAI is two interrelated observations: (i) the investment links between China and the EU are underdeveloped, and (ii) the political environment for the promotion of bilateral investment flows has been deteriorating in recent years. Given these developments, China and the EU have different motivations for negotiating the CAI. Compared to the high volumes of bilateral trade flows, reciprocal FDI flows between China and the EU are underdeveloped, and the potential for expansion is large. In the realm

22 Exceptions to this general rule are balance of payment crisis exceptions in the Chinese BITs with Finland, Spain, and the Czech Republic and an essential security exception in the Finland-China BIT. 23 Manjiao Chi and Xi Wang, ‘The Evolution of ISA Clauses in Chinese IIAs and Its Practical Implications – The Admissibility of Disputes for Investor-State Arbitration’, Journal of World Investment & Trade, Vol. 16 Issue 5 (2015), pp. 869–898. 24 E.g. Denmark-China BIT (1985); United Kingdom-China BIT (1986); Poland-China BIT (1988); Hungary-China BIT (1991); Greece-China BIT (1992); Croatia-China BIT (1993); Estonia-China BIT (1993); Slovenia-China BIT (1993); Lithuania-China BIT (1993); Bulgaria-China BIT (1989, including the protocol signed in 2007). 25 E.g. Cyprus-China BIT (2001); Netherlands-China BIT (2001); Germany-China BIT (2003); LatviaChina BIT (2004); Sweden-China BIT (2004); Finland-China BIT (2004); Belgium and LuxembourgChina BIT (2005); Spain-China BIT (2005); Slovakia-China BIT (2005); Czech Republic-China BIT (2005); Portugal-China BIT (2005); Romania-China BIT (2007); France-China BIT (2007); MaltaChina BIT (2007).

China–EU investment agreement negotiations 19 of trade, the EU and China are each other’s main source of imports and second largest export market. In contrast, in 2015, Chinese outbound FDI to the EU accounted for 5.25% of all of China’s outward FDI, and EU’s outbound FDI to China accounted for 1.37 % of total EU outward FDI.26 To put this into perspective, by the end of 2015, while the EU has an FDI stock of USD 168 billion in China, its FDI stock in the US amounted to USD 2.6 trillion; compared to the USD 2.4 trillion that US companies have invested in the EU, the USD 35 billion of China’s FDI in the EU is a very minor phenomenon.27 While there is good reason to expect a further expansion of Chinese investments in Europe, despite increasing calls to screen Chinese investments (as will be discussed here), the further expansion of European investments in China is far from being a sure-fire success, particularly in light of growing concern on the side of European investors and policymakers with regard to China’s industrial policy as laid down in the China 2025 Strategy.28 Against this background, it is no wonder that increased market access and non-discriminatory and transparent investment conditions are high on the agenda from an EU perspective. The issue of reciprocity of market access for foreign investors, in particular, is being highlighted as a major concern of the EU.29 While the EU, on the basis of EU law, prohibits restrictions on the movement of capital within the EU and extends this principle to third countries, China upholds a number of restrictions on foreign investments. European companies complain regularly about discriminatory treatment in the Chinese market with regard to both the pre-establishment and the post-establishment phases. These complaints of European investors relate to access to a number of sectors, joint venture requirements, nontransparent and burdensome legal and administrative systems, difficult access to licences, and protection of intellectual property rights.30 In fact, China ranks among one of the most restrictive countries in the FDI Restrictiveness Index of the Organization of Economic Co-operation and Development (OECD).31 These restrictions relate not only to sectors that are closed or restricted for foreign investments, but also to performance requirements and the dominant role of SOEs in sectors that are potentially attractive for European investors. Beyond commercial interests, investment treaty negotiations are one of the key practical initiatives to support a ‘negotiated order’ between China and the EU.32 The EU attempted to update the 1985 Trade and Cooperation Agreement and negotiate a Partnership and

26 Alicia García-Herrero et al., ‘EU-China Economic Relations to 2025: Building a Common Future’, Bruegel, 13 September 2017, , last accessed on 24 March 2019, p. 17. 27 Ibid, p. 16. 28 Thilo Hanemann and Mikko Huotari, ‘EU-China FDI: Working towards Reciprocity in Investment Relations’, MERICS and Rhodium Group, May 2018, , last accessed on 17 January 2019. 29 Frank Bickenbach and Wan-Hsin Liu, ‘Chinese Direct Investment in Europe – Challenges for EU FDI Policy’, CESifo Forum, Vol. 19 Issue 4 (2018), pp. 15–22; Thilo Hanemann and Mikko Huotari, ibid; European Commission, ‘EU-China Investment Study’, June 2012, , last accessed on 17 January 2019. 30 European Chamber of Commerce in China, ‘European Business in China Position Paper 2018/19’, 18 September 2018, , last accessed on 17 January 2019. 31 Frank Bickenbach and Wan-Hsin Liu, supra note 29. 32 Michael Smith, ‘EU Diplomacy and the EU-China Strategic Relationship: Framing, Negotiation and Management’, Cambridge Review of International Affairs, Vol. 29 Issue 1 (2016), pp. 78–98.

20 Axel Berger Cooperation Agreement (PCA) that would have comprehensively dealt with economic, political, and security matters. While the PCA negotiations made some progress, in particular on political issues, the framework of the negotiations was not supportive to resolving a range of economic issues.33 In view of the deadlock in the PCA negotiations, China and the EU decided to pursue negotiations on more specific areas of cooperation that were more likely to be defined by mutual interests. One of these areas was foreign investments.34 To what extent the CAI negotiations can be used to promote broader China–EU relations remains to be seen. In particular, the EU’s interest in integrating a number of issues, such as sustainable development and labour and human rights, in an investment agreement seems to complicate the negotiations. From China’s perspective, one of the main motivations at the outset of the negotiations of the CAI with the EU was the competitive pressure exerted by the negotiations of the EU with the US on TTIP. China is a latecomer in negotiating FTAs,35 in particular in comparison to main trading nations such as the US and the EU but also regional competitors such as Korea and Japan. To date, China has concluded 16 FTAs and is negotiating another eight.36 One of the main motivations for China’s increased treaty-making activity was to offset actual or anticipated negative externalities of treaties concluded by major economies, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the EU-Japan Economic Partnership Agreement. Partly as a response to these initiatives, China entered into trilateral FTA negotiations with Japan and Korea and BIT negotiations with the US and the EU. One of China’s main concerns was the negotiations of TTIP between the EU and the US, which was hailed as a modern FTA that was to also include a comprehensive chapter on investment. Once successfully negotiated, TTIP, leading to further liberalization of transatlantic trade and investment barriers, could have negatively affected Chinese foreign investors. A comprehensive agreement negotiated by China with the EU, as well as the US, could have offset the negative economic spill-over from TTIP.37 China even proposed negotiating an FTA with the EU,38 a request the EU is hesitant to comply with. The EU made clear that it will only enter into negotiations for an FTA once the CAI has been concluded and China has made progress on internal economic reforms.39 While the prospective TTIP was a strong argument for an investment agreement between China and the EU in the beginning, the cancellation of the TTIP negotiations after the accession to office of President Trump changed the strategic policy consideration of China. The second rationale of the China–EU CAI is to update and consolidate the rules that are included in the individual BITs China has negotiated with 26 European countries. As

33 See e.g. Stanley Crossick, ‘EU-China High Level Economic and Trade Dialogue Love-in’, Blogactiv, 14 May 2009, , last accessed on 17 January 2019. 34 Michael Smith, supra note 32. 35 Axel Berger, supra note 6. 36 MOFCOM, ‘China FTA Network’, , last accessed on 18 February 2019. 37 David Hallinan, ‘The EU–China Bilateral Investment Treaty: A Challenging First Test of the EU’s Evolving BIT Model’, China–EU Law Journal, Vol. 5 Issue 1 (2016), pp. 31–53. 38 Robin Emmott, ‘China’s Top Diplomat Wants Free Trade Deal with Europe’, Reuters, 27 January 2014, , last accessed on 17 January 2019. 39 European Commission, ‘The EU and China: Trade and Investment in the Global Economy’, 25 February 2016, , last accessed on 12 January 2019.

China–EU investment agreement negotiations 21 discussed here, these treaties have been negotiated at different times and thus provide different standards for the protection of foreign investment. The China–EU CAI, however, should not only carry over the provisions included in China–EU member state BITs in a single treaty, replacing the old ones, but should also lead to an updating of the rules. China and the EU will also have to take into account the recent calls seeking a better balance between the rights granted to foreign investors and the ability of host states to regulate FDI in the public interest. To some extent, this recent turn of international investment rule-making is a result of the fact that foreign investors have been initiating numerous claims against host states. The recent discussion in Europe about the benefits and drawbacks of ISDS in the context of TTIP is just the most recent example in this respect. Also, Chinese policymakers and experts are discussing the impact of ISDS cases critically and adjusting substantive and procedural provisions of Chinese investment treaties accordingly.40 Last but not least, from China’s perspective, the CAI should serve as a reinsurance of open access to the European market. In principle, there is no danger that Chinese investors face discriminatory treatment during their entry into the European market. Chinese investors, like any investor from a third country, enjoy the same open access to the EU market as a European investor. Article 63 TFEU prohibits restrictions on capital movement both within the EU and extends that right to third countries as well. Hence, European countries have no legal basis to impose formal restrictions on the access of Chinese investors. Nevertheless, in view of increasing concerns about Chinese investments, in particular with regard to the involvement of the Chinese state, a number of EU member states have implemented or contemplated the introduction of mechanisms to screen foreign investments on the grounds of public security.41 A number of high-profile acquisitions by Chinese investors, such as the takeover of the German robotics maker Kuka by the Chinese electrical appliances manufacturer Midea in 2016 or the collapse of the takeover of the German manufacturing company Leifeld by the Chinese industry group Yantai Taihai in view of a veto by the German government, have led to a highly politicized debate about growing Chinese investments in Europe. A number of EU member states have implemented investment screening mechanisms or strengthened existing ones. However, the screening mechanisms differ across Europe, and a number of member states have not implemented such mechanisms at all.42 Attempting to promote and streamline screening mechanisms, the European Commission has proposed an overall investment screening framework.43 A new regulation that creates an EU-wide framework for better coordination and communication among member states on investment screening was adopted in late 2018 and was ratified by the European Parliament

40 Manjiao Chi and Xi Wang, supra note 23. Axel Berger, supra note 12. 41 Frank Bickenbach and Wan-Hsin Liu, supra note 29, pp. 16–20. 42 Gisela Grieger, ‘Foreign Direct Investment Screening: A Debate in Light of China–EU FDI Flows’, EPRS Briefing, May 2017, , last accessed on 18 February 2019. 43 European Commission, ‘State of the Union 2017 – Trade Package: European Commission Proposes Framework for Screening of Foreign Direct Investments’, , last accessed on 13 February 2019. A number of EU member states asked the EU Commission to develop an EU-wide framework to better coordinate domestic security screening mechanisms. In a letter to the EU Commission, France, Germany, and Italy suggested that this framework should not only address public security concerns but also cover economic criteria such as the lack of reciprocal investment conditions. ‘European Investment Policy: A Common Approach to Investment Control’, 28 July 2017, , last accessed on 13 February 2019.

22 Axel Berger and the EU Council in March 2019. Crucially, this regulation does not create a unified investment screening mechanism at the level of the EU and leaves member states with the space to implement their own systems. In light of increasing concerns among EU member states about the acquisition of advanced technology or critical infrastructure by Chinese investors, a tightening of investment screening mechanisms and the effects on Chinese investments in Europe are growing concerns for China that also affect its motivation to negotiate the CAI.

2.5 Contentious issues of the China–EU CAI The joint decision to negotiate the CAI between China and the EU dates back to the 15th China–EU Summit in February 2012. By October 2013, the EU Council had adopted a negotiation mandate authorizing the European Commission to conduct investment treaty negotiations with China. The 16th China–EU Summit in November 2013 agreed on the official launch of the negotiations, which started with a first round of talks in January 2014. From January 2014 to February 2019, 20 negotiation rounds took place.44 A key milestone in the negotiations was the agreement between China and the EU in January 2016 that the CAI should be ambitious and comprehensive, meaning that the envisaged treaty should go beyond the scope of the existing BITs between China and the member states.45 In addition to post-establishment protection provisions, the CAI would also address issues of market access and the right of establishment and issues related to the regulatory environment, such as transparency, licensing, and authorization procedures. In addition, the agreement was to include environment and labour provisions.46 This important decision shows that the China–EU CAI should be on par with the BIT between China and the US, which is being negotiated on the basis of the model US BIT that covers pre-establishment and post-establishment investment protection.47 Since the landmark decision, China and the EU entered ‘text-based’ negotiations on various issues related to common post-establishment protection clauses, a dispute settlement mechanism, and sustainable development provisions. The parties exchanged their market access offers during the 20th EU-China Summit and provided their formal feedback on the offers during the 19th round of investment treaty negotiations.48 At the 20th EU-China Summit in June 2018, both parties described the investment treaty negotiations as a ‘top priority and a key project towards establishing and maintaining an open, predictable, fair and transparent business environment for their respective investors’, and they committed to accelerate the negotiations.49

44 European Commission, ‘Report of the 20th Round of Negotiations for the EU-China Investment Agreement’, 1 March 2019, , last accessed on 23 April 2019. 45 European Commission, ‘EU and China Agree on Scope of the Future Investment Deal’, 15 January 2016, , last accessed on 14 February 2019. 46 Ibid. 47 US Department of Treasury, ‘US and China Breakthrough Announcement on the Bilateral Investment Treaty Negotiations’, 15 July 2013, , last accessed on 14 February 2019. 48 European Commission, ‘Report of the 19th Round of Negotiations for the EU-China Investment Agreement’, 13 November 2018, , last accessed on 14 February 2019. 49 Delegation of the European Union to China, ‘Joint Statement of the 20th EU-China Summit’, 17 July 2018, , last accessed on 14 February 2019.

China–EU investment agreement negotiations 23 Despite this high-level political commitment, several rounds of text-based negotiations, and discussions on the level of market access, it seems unlikely that the negotiations will be completed in the short term. This is in part due to the overall policy context. There is an intense debate at the international level about the overall legitimacy of the international investment regime, which is also reflected in discussions at the national level about the virtues of investment treaties. In Europe, a significant part of the public has been increasingly critical of the content of traditional investment treaties, in particular ISDS mechanisms, which has prompted the European Commission to suggest a reform of investor-state arbitration, including the ICS, in recent trade agreements with Canada, Singapore, Vietnam, and Mexico.50 As a result of these developments, the EU post-CETA has been incorporating the ICS in its trade and investment treaties. Another complicating factor in the investment treaty negotiations is the fundamental shift of economic power between China and the EU. While European investments in China have been stagnating over the past years, Chinese investments in Europe have been growing significantly. The traditional relationship of a capital-exporting country on one side of the equation (the EU) and a capital-importing country on the other (China) has evolved into a much more complex relationship. Both China and the EU have to strike the right balance between pursuing their offensive interests, such as increasing or maintaining market access for foreign investors, and their defensive interests, such as safeguarding against investment arbitration claims. Where this balance can be found depends crucially on the economic strategies pursued by China and the EU. While the EU is concerned that China’s industrial policy approach ‘Made in China 2025’ will lead to more (and not fewer) restrictions on European investors, China is concerned that increasing Chinese investments will stir up concerns in many EU member states, resulting in intensified screening procedures. Last but not least, the CAI is expected to depart from the lean template used in the past by EU member states to negotiate BITs with China. The current negotiating agenda between China and the EU is much more complex and detailed, thus complicating the process. Furthermore, in a number of key issues, China’s interests diverge substantially from those of the EU. Key contentious issues include market access, post-establishment provisions, sustainability issues, and dispute settlement. From an EU perspective, the main objective of the China–EU CAI would be to improve and guarantee access for European investors to the Chinese market. Technically speaking, the treaty would include national and most-favoured-nation treatment provisions that apply to the pre-establishment and the post-establishment phases. The actual liberalization should take place on the basis of a negative list approach. Apart from these modalities, there is the important question of how extensive the negative list should be. While China is experimenting with a negative list approach domestically, it appears to be in favour of a cautious and circumscribed approach, in contrast to the EU, which favours an ambitious opening up of the Chinese market for foreign investors.51 The CAI would, in addition, include restrictions on the use of performance requirements and would include transparency obligations with regard to the operation of SOEs. Whether the CAI will lead to a substantial dismantling of barriers for foreign investors in China, or will rather consolidate the level of openness that is desired by the Chinese government, remains to be seen. In contrast to the US, the EU will

50 Lisa Diependaele, Ferdi De Ville and Sigrid Sterckx, ‘Assessing the Normative Legitimacy of Investment Arbitration: The EU’s Investment Court System’, New Political Economy, Vol. 24 Issue 1 (2019), pp. 37–61. 51 Frank Bickenbach and Wan-Hsin Liu, supra note 29, at 20.

24 Axel Berger most likely not push for the coverage of market access commitments by the investor-state dispute settlement provision. With regard to substantive investor protection clauses, the question will be whether the EU will be able to remedy some of the disparities of the member states’ BITs with China. For example, despite the fact that the BITs that EU member states negotiated with China after 2000 included national treatment clauses, the level of protection was uneven. While EU member states granted full national treatment in these BITs, China was able to secure a one-sided exception for existing non-conforming measures that applied only to China.52 The potential China–EU CAI will also have to update traditional standards such as fair and equitable treatment and indirect expropriation, the two standards that are used as the legal basis in most ISDS claims, in order to limit the host country’s exposure to investment arbitration. Given the fact that both the EU and China have made significant steps in rebalancing their investment treaties,53 China and the EU will be able to find common ground in this respect. More controversial will be the extent to which the CAI will include public policy exceptions, transparency requirements and potentially also a chapter on sustainability. The challenges for a successful conclusion of the China–EU CAI do not stop at the goal of dismantling market access barriers and creating reciprocal treatment for foreign investors. The EU and China will also have to find a compromise with regard to the mechanisms that are used to adjudicate investment-related disputes. The recent shift of the EU to the ICS surely adds to the difficulty in finding a compromise in this key area of the negotiations.

2.6 Conclusion This chapter provided an assessment of the key rationale, motivations, and contentious issues of the negotiations on the CAI between China and the EU. Key policy reforms with regard to the design and substance of international investment agreements form the basis of the CAI negotiations. In Europe, a transfer of competences from the member states to the EU level as a result of the Treaty of Lisbon, which entered into force in 2009, made it possible to negotiate comprehensive investment rules in EU-wide agreements. Furthermore, the EU’s international investment policy is increasingly politicized. This is, on the one hand, a result of the Lisbon Reform, which calls for a stronger role for the European Parliament in the ratification process of trade and investment agreements and the requirement to incorporate sustainable development provisions in EU trade and investment agreements. On the other hand, the TTIP negotiations between the EU and the US have led to intensified criticism of IIAs and ISDS provisions. As a result, the EU is pursuing a substantially reformed approach to dispute settlement. China’s approaches to negotiating BITs have changed substantially since it negotiated its first treaties in the 1980s. As a result, the 26 BITs that EU member states have signed with China differ with regard to the key substantive provisions, such as transfer of funds, umbrella clauses, and, most notably, the scope of national treatment. Furthermore, BITs concluded between China and EU member states differ with regard to the coverage of the ISDS mechanism. While some China–EU member states BITs only cover a limited number of investment disputes (relating only to the amount of compensation for expropriation), others cover all types of investment disputes.

52 Axel Berger, supra note 12. 53 Axel Berger, ‘Hesitant Embrace: China’s Recent Approach to International Investment Rule-Making’, Journal of World Investment & Trade, Vol. 16 Issue 5 (2015), pp. 843–868.

China–EU investment agreement negotiations 25 The motivations to negotiate an investment agreement differ between China and the EU. This is mainly a result of a fundamental shift in economic power between China and the EU. While Chinese investments in the EU have been growing significantly in previous years, EU investments in China have been stagnating. One of the key motivations for the EU to negotiate the CAI is to enhance market access and limit discriminatory treatment. Beyond these economic motivations, the EU wants to use the investment negotiations as a means of promoting broader China–EU relations with the aim of establishing a ‘negotiated order’ between the two parties. For China, the initial motivation to negotiate the CAI with the EU was to limit the negative externalities of a potential TTIP between the EU and the US, which also incorporated comprehensive rules on the liberalization and protection of investment. In light of the TTIP negotiations being abandoned, China’s motivations currently relate to the fear that European countries, in light of growing concerns about Chinese investments in Europe, will implement investment screening mechanisms that can be used to restrict Chinese investments in Europe. In light of these different motivations and the fundamental shift of economic power between China and the EU, it is no wonder that the negotiations that started in early 2014 are still dragging on. It can be expected that it will take more time and political will on both sides to come to an agreement on the key contentious issues. These include the modalities and scope of market access granted by China and the extent to which European investors can rely on national treatment in the Chinese market. Furthermore, it remains to be seen to what extent China’s concerns about restrictive investment screening mechanisms can be addressed. Last but not least, the extent to which the CAI incorporates sustainable development provisions and the ICS will also be important to ensure ratification of the treaty from the EU’s side. Notwithstanding the difficulties that need to be overcome to successfully negotiate the envisaged China–EU CAI, the treaty has the potential to serve as a template for future IIAs negotiated by China and the EU with third countries. After two rounds of substantial reforms of the design of Chinese investment treaties at the end of the 1990s and since the late 2000s, the China–EU CAI, together with the BIT that is currently being negotiated between China and the US, could form the basis for another reform of China’s approach to IIAs. For the EU, the China–EU CAI, as a stand-alone investment treaty, could serve as a template for subsequent EU IIAs in light of the fact that the EU seems inclined to no longer include investment rules in future trade agreements due to the decision of the European Court of Justice about the ratification process of comprehensive trade and investment agreements in May 2017. Given the key role of China and the EU in the international investment regime, both as source and host countries for FDI flows and signatories to IIAs, the China–EU CAI would be of significance for the international investment regime too. At the backdrop of worldwide reform efforts to redesign IIAs to find a better balance between the rights of investors and host states and a new round of protectionist policies adopted by major economies, an agreement between the EU and China has the potential to provide guidance for current discussion on a reform of the international investment regime and for a commitment to a rules-based, open, and transparent global investment system.

3

Convergences and divergences in the China–EU and the China–US BIT negotiations Hongyu Fu and Meng Wan

3.1 Introduction The year 2016 was the one in which China turned from a net capital importing country to a capital importing and exporting country.1 China’s recent investments in the United States (US) and the European Union (EU) are comparable in size and are distributed in the same pattern across sectors.2 The change in status has prompted China to reconsider its position when negotiating bilateral investment treaties (BITs), thinking more like a capital-exporting country and looking for better treatment of and more protection for its overseas assets.3 The China-Canada BIT that entered into force in 2014 provides a good illustration of China’s recent views on bilateral investment protection issues, where China made some breakthroughs to provide more comprehensive protection for its overseas investments.4 China has been one of the most important destinations of US and EU investments. It may be so as well in the future. That is the reason why the US and the EU have been negotiating BITs with China: to offer better investment protection and promote bilateral economic cooperation. Yet, since 2016, the US has started promoting a new wave of international economic and trade negotiations devoted to constructing new international economic and trade regulations. As a major player in traditional international economic regulations, after becoming frustrated by the World Trade Organization (WTO) reform, the US pulled back from multilateral trade negotiations, notably the Trans-Pacific Partnership (TPP),5 and

1 In 2016, Chinese outbound FDI reached a record high of USD 196.15 billion, accounting for 13.5% of global foreign investment. MOFCOM, ‘2016年度中国对外直接投资统计公报’ (Chinese Outbound FDI Bulletin 2016), , last accessed on 30 January 2019, pp. 3–4. 2 The top five sectors receiving Chinese investments in the EU are mining (27.3%), manufacturing (20.1%), finance (16.6%), wholesale and retail (9.0%), and leasing and commercial services (8.1%). The sector distribution in the US is manufacturing (22.7%), finance (16.4%), mining (12.7%), leasing and commercial services (11.8%), and real estate (8.2%). Ibid, p. 25. 3 Guiguo Wang, ‘China’s Practice in International Investment Law: From Participation to Leadership in the World Economy’, Yale Journal of International Law, Vol. 34 Issue 2 (2009), pp. 575–587, at 577–578. 4 Eric Morgan and Riyaz Dattu, ‘Landmark Canada-China Investment Treaty Comes Into Force’, Osler, 6 October 2014, , last accessed on 31 January 2019. 5  USTR, ‘The United States Officially Withdraws from the Trans-Pacific Partnership’, January 2017, , last accessed on 31 January 2019.

China–EU and China–US BIT negotiations 27 shifted its focus to rebuilding regional and bilateral economic ties to its best interests, for example, the United States-Mexico-Canada Agreement (USMCA).6 The EU is also struggling with rising populism resulting from Brexit. Differences in economic perspectives among EU member states do not impede the EU from reaching agreements over international trade and investment with other countries. The recently concluded Comprehensive Economic and Trade Agreement (CETA) with Canada,7 the EU-Singapore Free Trade Agreement and Investment Protection Agreement,8 and the EU-Japan Economic Partnership Agreement9 mark the EU’s determination to enter into cooperative economic relationships with major economies, despite disagreements and oppositions among member states. China and the US negotiated a potential BIT in the 1980s but failed to reach an agreement.10 In December 2006, in the first US-China Strategic Economic Dialogue, the possibility of starting a modern BIT became an important issue.11 Negotiations began at the fourth US-China Strategic Economic Dialogue in 2008.12 Progress accelerated when the two parties committed to discussing substantively the issue of pre-establishment national treatment with a negative list (PENT+NL) at the fifth US-China Strategic Economic Dialogue.13 Both sides as from that time agreed to realize a transparent, non-discriminatory, and opening-up investment mechanism.14 By October 2016, 29 rounds of negotiations had been finished, and the two parties had exchanged a modified negative list three times.15 To be better prepared for opening up its market, China continued its efforts in promoting the Pilot Free Trade Zones even when the China–US BIT negotiation had reached a standstill. China has also continued to reform its foreign investment regulatory regime, and it promulgated the

 6 USTR, ‘United States-Mexico-Canada Agreement’, November 2018, , last accessed on 31 January 2019.   7 EU-Canada Comprehensive Economic and Trade Agreement, , last accessed on 31 January 2019.   8 EU-Singapore Free Trade Agreement and Investment Protection Agreement, , last accessed on 31 January 2019.   9 EU Japan Economic Partnership Agreement, , last accessed on 31 January 2019. 10 Tao Xu, ‘中美双边投资协定及其前景’ (China–US BIT and Its Future), 中国外汇2014年15期, China Forex, Issue 15 (2014), pp. 22–23, at 22. 11 ‘BIT谈判7年长跑将到终点, 如何改变中美投资’ (‘A 7-Year Long Run of Negotiations on a BIT Close to an End: How Will It Change China–US Investment’), 新浪财经 (Sina Finance), 28 September 2015, , last accessed on 31 January 2019. 12 Congyan Cai, ‘China–US BIT Negotiations and the Future of Investment Treaty Regime: A Grand Bilateral Bargain with Multilateral Implications’, Journal of International Economic Law, Vol. 12 Issue 2 (2009), pp. 457–506, at 457. 13 ‘China–US BIT Negotiation Reaches New Breakthrough’, Xinhua Net, 9 September 2016, , last accessed on 31 January 2019. 14 ‘中美元首重申将加快达成一项高水平投资协定’ (China and US Leaders Restate to Reach A High Level Investment Agreement Soon), 人民网 (People.cn), 26 September 2015, , last accessed on 31 January 2019. 15 Jingwei Zhang, ‘中美双边投资协定存在障碍如何破局’ (How to Break through the Dilemma in the China–US BIT), 和讯评论 (Hexun), 4 November 2016, , last accessed on 31 January 2019.

28 Hongyu Fu and Meng Wan Foreign Investment Law in March 2019.16 As both sides committed to reaching an agreement, it is expected that China and the US will conclude a BIT, if not a more comprehensive trade deal. In 2012, a consensus was reached to engage in negotiations concerning the China–EU Comprehensive Agreement on Investment (CAI).17 At the 20th EU-China Summit in July 2018, the parties exchanged market access offers for the first time. The negotiations have undergone 20 rounds as of February 2019.18 As a follower in negotiating a BIT with China, the EU will be able to benefit from the progress made during the China–US BIT negotiations.19 With similar market structures and regulatory formats on foreign investment, the EU shares common interests and similar concerns with the US when negotiating investment agreements. Since 2016, China’s outbound foreign direct investment patterns to the US and the EU have become close in size and distribution, indicating similar concerns on China’s part regarding its outbound investment, and making two investment legal regimes comparable. It could be reasonably expected that the two investment agreements will converge, covering major issues in investment protection and treatment with similar legal rules. Yet, the EU needs to consider China’s major concerns and reservations in view of China’s domestic reforms, as well as major accomplishments reached and disagreements remaining in the China–US BIT negotiations, and to conclude the CAI in a more progressive and pragmatic manner. The following sections examine the consensus and disparities between the China–US BIT and the China–EU CAI negotiations on market access, expropriation and compensation, and state-owned enterprises (SOEs). Conclusions drawn are intended to serve as benchmarks for future China–EU CAI negotiations.

3.2 Market access: Pre-establishment national treatment with a negative list approach China currently has two sets of negative lists: the Pilot Free Trade Zones Negative List (the PFTZs Negative List)20 and the Special Administrative Measures (Negative List) for the Admission of Foreign Investment (the National Negative List).21 In general, restrictions on foreign investment in both the PFTZs Negative List and the National Negative List are

16 Foreign Investment Law of China (2019), , last accessed on 23 April 2019. 17 European Parliament, ‘EU-China Comprehensive Agreement on Investment, Legislative Train Schedule’, , last accessed on 31 January 2019. 18 European Commission, ‘Report of the 20th Round of Negotiations for the EU-China Investment Agreement’, 1 March 2019, , last accessed on 23 April 2019. 19 Another advantage the EU enjoys is that China has concluded BITs with some EU member states, which may provide a basis for a more comprehensive China–EU CAI. 20 自由贸易试验区外商投资准入特别管理措施（负面清单）（2018）(Special Administrative Measures (Negative List) for Admission of Foreign Investment to Pilot Free Trade Zones) (2018) (Promulgated by NDRC and MOFCOM on 30 June 2018, effective on 30 July 2018). 21 外商投资准入特别管理措施（负面清单）（2018）(Special Administrative Measures (Negative List) for the Admission of Foreign Investment) (2018) (Promulgated by NDRC and MOFCOM on 28 June 2018, effective 28 July 2018).

China–EU and China–US BIT negotiations 29 similar and continue to be reduced compared to previous versions. Previously restricted or prohibited sectors are now open for foreign investment, and more restrictions will be lifted in a schedule set out in the lists. For example, Article 8 of the National Negative List provides that one foreign investor may establish no more than two joint ventures in China in automobile manufacturing, and a Chinese party must hold no less than 50% of shares in the joint venture company. This measure is subject to a two-year roll-out for the restriction on shareholding and a four-year roll-out for the number of joint ventures which may be established in China.

3.2.1 The US’s negative list approach: Format and content The US negative list approach has been recently applied in the TPP and the USMCA. In the USMCA, Mexico adopts two negative lists for its non-conforming measures against PENT. Annex I concerns Mexico’s existing measures that are not subject to PENT obligations, while Annex II concerns such measures that will be maintained or adopted in the future. Carve-outs for other obligations for investment treatment, including most-favourednation (MFN) treatment, performance requirements, and senior management and boards of directors, are listed in the Annexes as well.22 The format of the entries in the negative list comprises seven elements: sector, subsector, industry classification, obligations, level of government, measures, and description.23 The USMCA negative list uses a fixed format in which all negative list entries must enumerate the sectors and subsectors involved, an internationally acknowledged industry classification, obligations in the agreement that do not apply to the sectors, legal references for the reservation, and a detailed explanation of why the legal references would lead to the reservation. The format and content of the negative list may provide foreign investors with sufficient information regarding measures existing or to be maintained/adopted. Its reference to the legal basis of such measures may more effectively ensure the legality of the list, which serves as a binding legal document containing a contracting state’s commitment with respect to market access and other treatment to foreign investors and their investments. By signing more than 40 BITs and 20 FTAs with other countries, the US has successfully promulgated its negative list approach, which has become the most influential approach and a global standard for other negative lists.24

3.2.2 The EU’s negative list approach: Format and content The EU’s negative list approach is similar to the US BIT negative list approach as applied in the TPP and the USMCA. A notable example of the EU’s negative list approach is that implemented in the Modernisation of the Trade Part of the EU-Mexico Global Agreement without Prejudice (the New EU-Mexico Agreement).25 PENT is set forth in its investment

22 The USMCA, Annex I, Investment and Services Non-Conforming Measures – Mexico. 23 The USMCA Annex I, Explanatory Notes, Art. 2. 24  Lifeng Tao, ‘对标国际最高标准的自贸区负面清单实现路径—兼评2018年版自贸区负面清单的改 进’ (Benchmarking the Pilot Free Trade Zones Negative List Approach with the Highest International Standards – With Comments on the Improvements of the 2018 PFTZs Negative List), 法学论坛2018年 第5期, Legal Forum, Vol. 5 Issue 33 (2018), pp. 145–152, at 147. 25 European Commission, ‘New EU-Mexico Agreement: The Agreement in Principle and Its Texts’, 26 April 2018, , last accessed on 31 January 2019.

30 Hongyu Fu and Meng Wan chapter26 and extends to the regional level of the government of Mexico, as well as the governments of EU member states.27 Annexes I and II of the New EU-Mexico Agreement separately illustrate existing and future measures that do not conform to the obligations in investment treatment, including national treatment (including PENT), MFN treatment, performance requirements, and senior management and boards of directors.28 The format of the negative list and the function of each element, which are mainly the same as the USMCA’s negative lists, are further explained.29 With respect to measures, the negative list in the New EU-Mexico Agreement further clarifies that if such measures are EU Directives, they include any laws, regulations, or other measures which implement the relevant directive at the member state level.30 Notably, the New EU-Mexico Agreement negative lists contain one exception: if measures relate to qualification requirements and procedures, technical standards, and licensing requirements and procedures, and are not specified in the negative list, they do not constitute a violation of PENT.31 Regarding the interpretation of the scope of the existing reservations, the New EU-Mexico Agreement negative list is the same as the approach adopted in the USMCA Mexico negative list.32 It also adds a guideline for the interpretation of future reservations.33 The two annexes include both the EU’s and Mexico’s reservations. The EU’s negative lists contain reservations that are authorized by EU law and are applicable at the EU level.34 They also contain reservations specific to member states that are authorized by member state law and are applicable to a respective member state.

3.2.3 Mexico’s negative list in the New EU-Mexico Agreement and the USMCA In Annex I of the New EU-Mexico Agreement, Mexico has 30 entries in total in the negative list regarding PENT obligations. The PENT negative list covers 10 sectors and 32 subsectors. Among the 10 sectors, the energy sector has 16 subsectors, covering sectors from oil and other hydrocarbons exploration and production to electricity; and 13 measures which are the existing relevant rules of law. Taking the hydrocarbons and petroleum products subsector as an example, it first identifies its sector and specific subsector classification; it then points out that the obligation that this subsector does not apply to is national treatment in the investment chapter and states that the ‘central’ government shall be responsible for relevant examination.35 The ‘description’ identifies the relevant field of ‘investment’ and explains that EU investors or their investments may only own up to ‘49% of the ownership interest’ of a Mexican fuel or lubricant supplying enterprise in accordance with the law. Each part of the entry strictly follows the format as required in the preamble. Classification of the entry, relevant obligations and fields, and a detailed explanation of all regulations and

26 Ibid, Art. 7.1. 27 Ibid, Art. 7.3. 28 Ibid, Annex I.1 and Annex II.1. 29 Ibid, Annex I.3 and Annex II.3. 30 Ibid, Annex I.3(f) and Annex II.3(f). 31 Ibid, Annex I.8 and Annex II.6. 32 Ibid, Annex I.4. 33 Ibid, Annex II.4. 34 Ibid, Annex I.5 and II.5. 35 Ibid, Annex I, MEXICO, p. 28.

China–EU and China–US BIT negotiations 31 prohibitions are clearly stated with a direct reference to existing law. In Annex II of future measures, Mexico has three entries with two specific sectors involved. In the USMCA’s negative list, Mexico has followed the same format in designing its entries. It has 29 entries in Annex I, covering nine sectors. There is no energy sector in USMCA’s Annex I or other annexes. The focuses of Mexico in the New EU-Mexico Agreement and USMCA are clearly different.

3.2.4 Comparison of China’s negative lists with EU/US negative lists As illustrated in Table 3.1, compared with Mexico’s negative lists in the USMCA and the New EU-Mexico Agreement, both the PFTZs Negative List and the National Negative List may not be considered as meeting the standard for future China–US BIT and China–EU CAI in three aspects. First, the format of China’s negative lists is incomplete. China’s negative lists are missing certain elements, including the obligations concerned and applicable levels of the government. China’s negative lists apply to a mixture of obligations, including shareholding threshold and limitations on senior management personnel.36 But they do not match potential BIT obligations with respect to investment, including PENT, MFN, and so on. The National Negative List presumably applies to all levels of the Chinese government, as Foreign Investment Law prohibits governments of lower levels from implementing market access restrictions on foreign investment inconsistent with national laws and regulations. But considering the disparities in economic situations among different areas of China, it may be advisable to include certain local reservations in addition to those nation-wide reservations. Second, the reservations in China’s negative lists so far have not identified a legal basis. China’s negative lists do not contain references or links to the laws and regulations that form the basis of the reservations. A negative list is a formal legal document annexed to national investment law and international investment treaties. It serves as the formal notice to foreign investors with respect to those sectors and areas where their investment is prohibited or restricted.37 A negative list is one of the most important exceptions to PENT obligations, and the scope of reservations will be narrowly interpreted. Providing a legal basis for the reservations not only is a prerequisite for the legal effect of the negative list, but also provides dispositive evidence defining the scope of an existing reservation, as adopted in the US and EU negative list approaches.

Table 3.1  Comparison of formalities and content of China’s negative lists with EU/US negative lists Explanatory notes

China’s National NL 2018 US/EU BIT NLs

Elements of non-conforming measures Sectors

Obligations Government Measures Descriptions concerned levels

Yes

Yes

No

No

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

36 National Negative List, supra note 21, Instructions 1. PFTZs Negative List, supra note 20, Instructions 1. 37 Lifeng Tao, supra note 24, at 149.

32 Hongyu Fu and Meng Wan Third, China’s negative lists do not separate existing measures from potential measures to be taken in the future. The two types of measures are combined in the description part. The US and EU approaches use two separate lists for existing and future reservations. For existing reservations, the emphasis is on measures, that is, the legal basis of such reservations, which serves as due notice to foreign investors and provides a relatively clear picture of the scope of such reservations. The reasonable expectations for future reservations rest not on current laws and regulations, but on the description of the content of the reservations. Such description serves as a binding commitment of a state regarding its future restrictions on market access, which prevents states from adopting measures that are more restrictive than those which have been intended and described. Separating existing and future measures gives clearer guidance and more assurance to foreign investors.

3.3 Indirect expropriation and the level of compensation 3.3.1 China’s position under the China-Canada BIT Regarding the definition of indirect expropriation, China shares concerns with most developing countries that the definition is nebulous and its application is broader than can be reasonably expected.38 The notion of indirect expropriation has been expanded by investment tribunals in recent years, and case law involves different interpretations and applications (e.g. the effect test illustrated in AES v Hungary,39 the legitimate expectation test formulated in Methanex v US,40 and the balanced approach using the principle of proportionality as the yardstick in Tecmed v Mexico41). In the China-Canada BIT, China has embraced the notion of indirect expropriation but seems quite hesitant to incorporate the proportionality approach into the interpretation. In the China-Canada BIT, indirect expropriation is defined as ‘measures having an effect equivalent to expropriation or nationalization’.42 China resorts to the effect test to construe such measures, providing an open-ended criterion primarily on the effect of the measures, including their adverse economic impact and interference with investors’ legitimate expectations.43 But the China-Canada BIT makes a substantial exception to indirect expropriation by allowing non-discriminatory regulatory measures to be considered as expropriatory when a measure is ‘so severe in light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith’.44 This effectively rules out the application of the proportionality test and the possibility of finding ‘regulatory taking’. It is clear that China does not want to have its hands tied when fashioning its domestic economic policies, fearing that any measure or series of measures may amount to indirect expropriation, resulting in a review by investment arbitration.

38  Yiming Wu, ‘间接征收三题——兼论《外国投资法(草案)》间接征收制度之设计’ (Three Issues of Indirect Expropriation – and the Design of Indirect Expropriation System in Draft Foreign Investment Law), 河北法学2018年第7期, Hei Bei Law Science, Vol. 36 Issue 7 (2018), pp. 44–52. 39 AES Summit Generation Limited and AES-Tisza Erömü Kft v The Republic of Hungary, ICSID Case No. ARB/07/22. 40 Methanex Corporation v United States, Final Award on Jurisdiction and Merits, (2005) 44 ILM 1345. 41 Técnicas Medioambientales Tecmed, S.A. v The United Mexican States, ICSID Case No. ARB (AF)/00/2. 42 China-Canada BIT, Art. 10. 43 Ibid, Annex B.10. 44 Ibid.

China–EU and China–US BIT negotiations 33 3.3.2 Differences between the China-Canada BIT and the 2012 US Model BIT expropriation provisions The China-Canada BIT expropriation provisions for the most part parallel those in the 2012 US Model BIT.45 Regarding compensation, the China-Canada BIT requires compensation to reflect the fair market value of the investment expropriated and to be effectively realizable, freely transferable, and made without delay, which in substance is similar to the US ‘prompt, adequate and effective’ standard. Yet, between the China-Canada BIT and the US Model BIT, some notable distinctions are substantial enough to raise concerns and disagreements. First, regarding the requirement for legal expropriations, the US Model BIT requires expropriation to be ‘in accordance with due process of law’ and to conform to ‘minimum standard of treatment’ (MST), while in contrast, the China-Canada BIT’s wording is ‘under domestic due procedures of law’ (italics added). Thus, under the China-Canada BIT, China may insist that the due process requirement rests on the host state’s own domestic laws. In contrast, the US approach considers due process as an independent international legal standard, where arbitral tribunals may exercise their discretion in deciding whether host states’ acts conform with the standard. In addition to the due process standard, the US Model BIT adds another legality requirement, namely MST. A full discussion of MST is beyond the scope of this chapter, but adding MST as a legality requirement clearly imposes more pressure than what China has assumed under the China-Canada BIT. Second, a more fundamental issue is the US Model BIT’s reference to customary international law in its expropriation provisions.46 Such reference serves two functions. One is to reinstate that the treaty provisions on expropriation apply to legal expropriations and, when expropriation is not legal, customary international law on a state’s duty to compensate wronged individuals applies.47 The other is to incorporate existing customary international law standards into interpreting terms like ‘public purpose’ and ‘indirect expropriation’. The reference to customary international law makes the interpretation of expropriation provisions dynamic and uncertain and potentially beyond the intended scope of the contracting states. China may consider that the US Model BIT leaves too much discretion to tribunals on their assessment of investors’ allegations of deprived economic expectation, which may go against China’s power to regulate its domestic economic activities. China may intend to avoid the reference to vague customary international law standards and seek clearer textual evidence on excluding certain governmental regulatory activities from the scope of indirect expropriation.

3.3.3 The China–EU CAI’s stance on expropriation and compensation CETA’s expropriation provisions are in line with those of the China-Canada BIT with respect to the definitions of expropriation, including indirect expropriation and requirements for compensation.48 CETA has neither a reference to customary international law nor

45 2012 US Model BIT, Art. 6 and Annex B. 46 Ibid, Annex B.1. 47 Factory at Chorzow (Germany v Poland), Permanent Court of International Justice, No. 9 (26 July 1927). International Law Commission, ‘Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries’ (2001), , last accessed on 31 January 2019. 48 CETA, Art. 8.12 and Annex 8-A.

34 Hongyu Fu and Meng Wan MST as part of its legality requirements. It generates fewer concerns from China’s point of view notwithstanding that it uses ‘under due process of law’, indicating an intentional standard on this issue.49 Compared with the US Model BIT, China may be more willing to accept CETA’s expropriation provisions as the basis for China–EU CAI negotiations. Actually, the two sides seem to have reached agreement on this issue at an early stage.50 More detailed observations may nevertheless be required. There is a substantial gap between CETA provisions and China’s Foreign Investment Law; the latter stipulates that ‘except in rare circumstances, the state shall not expropriate foreign investments. When the state expropriates foreign investments for social public interests, it should be in accordance with legal procedures and provide fair and reasonable compensation.’51 The legality requirements and the level of compensation seem to fall short of CETA’s standard. In addition, China, especially the local government, does not have practical experience in indirect expropriation and adequate compensation. If the EU and China were to adopt CETA’s position on expropriation and compensation, more efforts may be required to further develop a working plan to ensure its full implementation.

3.4 SOEs In the China-Canada BIT, China reserves some leniency for its SOEs. Under the ChinaCanada BIT, SOEs, like government entities, may prohibit or impose limitations on the ownership or control of equity interests or assets, or impose nationality requirements relating to senior management or members of the board of directors.52 Government subsidies or grants, including government supported loans, guarantees and insurance, are also allowed.53 Considering SOEs’ vital role in China’s domestic economy as well as in its outbound investment, it is not surprising that China may insist on such reservations in its future BIT negotiations. As for the US, its recent focus on SOE issues primarily involves two aspects: its status quo, and the notion of competitive neutrality.

3.4.1 The status quo of SOEs Whether SOEs are considered market entities or state institutions has long been debated, as the Organization for Economic Co-operation and Development (OECD) takes the position that entities whose primary purpose is to exercise state powers would generally not be considered as SOEs.54 Reforms by China of its SOEs since the 1970s have been following this

49 EU Singapore Investment Protection Agreement follows the text in CETA. EU-Singapore Investment Protection Agreement, Art. 2.6 and Annex 1. 50 China and EU made progress recently on expropriation and compensation. European Commission, ‘EU-China Investment Agreement: Report of the 19th Round of Negotiations for the EU-China Investment Agreement’, 13 November 2018, , last accessed on 31 January 2019. 51 Foreign Investment Law of China (2019), Art. 20. 52 China-Canada BIT, Art. 8.2(a)(ii). 53 Ibid, Art. 8.5. 54 OECD, ‘OECD Guidelines on Corporate Governance of State-owned Enterprises (Draft for Public Comment)’, May 2014, , last accessed on 31 January 2019.

China–EU and China–US BIT negotiations 35 route of separation of functions, adopting a progressive approach in reforming its SOEs that aims primarily at modernizing their corporate governance without giving up government shareholding or control.56 SOEs are now formally governed by Chinese Company Law with respect to their governance structure and operation.57 However, the issue of independence and control remains, and the corporate status of Chinese SOEs has been criticized as they perform government functions or operate under directions from the government.58 The US adopts a functional approach to defining whether SOEs are market entities or government institutions. The US Model BIT defines SOEs as enterprises owned or controlled through ownership interests by a party state,59 and SOEs will assume state obligations when exercising regulatory, administrative, or other governmental authorities delegated by a state.60 The delegation of government authority can be direct or indirect and in various forms, including legislative grants, government orders, or other actions.61 Thus, the US considers SOEs as government institutions whenever they perform government functions, irrespective of their forms or governance structures. China’s definition of SOEs is based on their current modernized governance and harmonized legal regime.62 It can be understood as the milestone in China’s progressive approach to reforming its SOEs. To functionally separate SOEs from any government authority may be the ultimate goal, as China has recently been experimenting with restructuring ownership of SOEs, bringing in more private shareholding to form a ‘mixed ownership’.63 Other reforms are pursued by the State-owned Assets Supervision and Administration Commission (SASAC), the government branch overseeing the operation of SOEs. The reforms require the SASAC to perform only the duties of a shareholder and to make decisions based solely 55

55 The State Council Information Office, ‘资料：国有企业改革的四个阶段’ (Four Stages in SOE Reform), 19 December 2013, , last accessed on 31 January 2019. 56 Junhai Liu，’全面推进国有企业公司治理体系和治理能力现代化的思考与建议’ (Reflection and Advice on the Promotion of Modernization of the Governance System and Competence in State-Owned Enterprises), 法学论坛2014年第2期, Legal Forum, Vol. 29 Issue 2 (2014), pp. 46–57, at 46–47. 57 Chapter 1, Section 4 of Chinese Company Law (Special Provisions on Wholly State-Owned Companies) provides comprehensive legal requirements for SOE governance within its framework. 58 Xinling Wang, ‘China’s SOE Reform Wrangle’, East Asia Forum, 29 November 2017, , last accessed on 31 January 2019. 59 2012 US Model BIT, Art. 1. 60 Ibid, Art. 2.2. 61 Ibid, Note 8. 62 ‘Along the establishment of socialist market economy, SOEs are confirmed as real market participants and reformed in accordance with modern corporate rules’. Zhen Qiao, ‘中国经济体制改革中的国有企业地 位及功能变迁’ (The Transformation of the Status and Function of Chinese SOEs in China’s Economic Reform), 社会科学辑刊2018年第2期’, Social Science Journal, Issue 2 (2018), pp. 140–146, at 140. 63 中共中央关于全面深化改革若干重大问题的决定 (Decision of the CPC Central Committee on Several Major Issues of Comprehensive and Deepened Reform), 人民网 (People.cn), 12 November 2013, , last visited 31 January 2019. This document defines mixed ownership economy as ‘collective ownership as the majority, with other multiple forms of ownership economy’. By the end of 2012, 52% of SOEs controlled by the central government and their subsidiaries have changed into mixed ownership with non-state capital. Sujian Huan, ‘中国国有企业混合所有制改革研究’ (On the Mixed Ownership Reforms of Chinese State-Owned Enterprises), 经济管理2014年第7期, Economic Management Journal, Vol. 36 Issue 7 (2014), pp. 1–10, at 1.

36 Hongyu Fu and Meng Wan on commercial performance and return on investment, and not to give orders or otherwise intervene in the decision-making processes of SOEs.64 It may take some time to fully effect the reforms above, yet they provide insights into China’s efforts to not only transform SOEs into modern and well-organized enterprises, but also to sever SOEs’ ties with the government, de jure or de facto. As long as China’s SOE reform is moving towards a clear separation of functions, the US may well accept that Chinese SOEs investing in the US are commercial entities, and Chinese SOEs will compete with US investors only as corporations, not government institutions.

3.4.2 The notion of competitive neutrality The notion of competitive neutrality was introduced by Australia in the 1990s and became part of Australian competition policies.65 In May 2011, US Secretary of State Robert Hormats suggested incorporating competitive neutrality rules into investment policies.66 Later the OECD and the UNCTAD conducted a detailed analysis of this issue.67 A consensus was reached when the US and the EU jointly announced ‘Statement on Shared Principles for International Investment’, which specifically states support of the OECD’s work in the area of competitive neutrality, making sure that SOEs and private commercial enterprises are subject to the same external environment and they compete on a level playing field in a given market.68 The US introduced the notion of competitive neutrality in the TPP text. In its detailed chapter on SOEs, the US intended to regulate large SOEs engaging in commercial activities, imposing obligations of non-discrimination and commercial considerations.69 Under those provisions, the government may not provide non-commercial assistance to its SOEs to the detriment of other contracting states.70 If the definition on the status quo of SOEs focuses more on the dichotomy of their government and market functionality, the notion of competitive neutrality takes further steps, emphasizing the totality of legal environment for a level playing field. It requires SOEs and the government to engage in fair conduct (e.g. commercial considerations) and also requires fair effect to foreign investors (e.g. in non-commercial assistance). It imposes restrictions on

64 ‘To realize the separation of the ownership and management of state capital, and to ensure state capital operated on market basis.’ 国务院关于推进国有资本投资、运营公司改革试点的实施意见 (Opinion of the State Council Regarding the Promotion of Experimental Reform on State Capital Invested and Managed Companies) (Issued by the State Council on 30 July 2018, effective on promulgation). 65 Treasury of Australia, ‘Australian Commonwealth Competitive Neutrality Policy Statement’, June 1996, , last accessed on 31 January 2019. 66 Robert Hormats, ‘Ensuring a Sound Basis for Global Competition: Competitive Neutrality’, DipNote, 6 May 2011, , last accessed on 31 January 2019. 67 See OCED’s work on competitive neutrality, , last accessed on 31 January 2019. See UNCTAD’s work on competitive neutrality, , last accessed on 31 January 2019. 68 USTR, ‘Statement of the European Union and the United States on Shared Principles for International Investment, A Level Playing Field’, April 2012, , last accessed on 31 January 2019. 69 TPP, Chapter 17 Art. 17.4. 70 TPP, Chapter 17 Art. 17.6.

China–EU and China–US BIT negotiations 37 SOEs’ behaviour, pulling back any government involvement and putting SOEs in full competition with private companies with few reservations.71 It would not be a surprise that China feels uncomfortable with the restrictions imposed in the TPP’s SOE provisions. One of the bases for the requirement of non-commercial assistance is a fully developed market economy, in which a market participant has full access to adequate information in order to make well-informed business decisions. Although a discussion of whether an ideal market economy exists and, if it does, how it operates is beyond the scope of this chapter, the validity of legal rules of competitive neutrality is based on more concrete assumptions: foreign investors and domestic companies, including SOEs, only serve commercial purposes, and they both serve these well in the short and long term. A debate about such assumptions will long remain intensive between the US and China. Chinese SOEs have been afforded extraordinary responsibilities, serving as a fundamental and political basis for socialism with Chinese characteristics.72 Chinese SOEs are supposed to respond to economic urgencies and social needs, if not political orders, where costs will not be calculated and returns are not expected.73 Such responses are woven into their decisionmaking processes, even without government control or affiliation.74 Chinese SOEs have been assuming a role as the sole operator in certain sectors and in certain geographic areas, and the public has developed a reliance on their performance, irrespective of quality. The need is to substantively open up such sectors and areas to foreign investments and to provide a good basis for competition and/or cooperation. Yet, before that can happen, further analysis is needed of whether foreign investors are ‘disadvantaged’ or ‘discriminated’ against in the first place because of the lack of market access. However, the bottom line is that incorporating the current wording in the TPP regarding the notion of competitive neutrality into the China–US BIT may not be acceptable to China.

3.4.3 The EU’s stance on SOE-related provisions EU’s treaty practices regarding SOE issues express more toleration and understanding, as CETA’s SOE provisions confirm both parties’ right to maintain SOEs and to grant special

71 One reservation is the economic emergency exception to which non-discriminatory treatment, commercial considerations, and non-commercial assistance requirements do not apply. TPP, Chapter 17 Art. 17.13.1. 72 President Xi Jinping has described SOEs as ‘the fundamental material basis and political basis of Socialism with Chinese characteristics’, and they are ‘the important pillar and reliable force for the Party’s governance’, Fei Guo, ‘国有企业改革取得历史性成就’ (Historical Achievement Reached on SOE Reform), 人民网 (People.cn), 19 November 2018, , last accessed on 31 January 2019. 73 For example, ‘to connect electricity to the last 200 thousand people’ was one of the goals put forward by Premier Li Keqiang in the Report of the Government of 2013. State Grid Company, a large SOE invested heavily in high altitude areas in Sichuan Province, using over 40 contractors and over 20,000 workers working for 2 years, and provided electricity to 188,600 people of ethnic minority. ‘四川消除无 电地区，最后一批近19万人告别无电时代’ (Sichuan Eliminates No Electricity Area, the Last Group of 190 Thousand People Left the Era of No Electricity), 新华网 (Xinhua Net), 2 July 2015, , last accessed on 31 January 2019. 74 The Party’s direction over SOEs is described by President Xi as ‘glorious traditions’, ‘soul and root’, and ‘special advantage’ of Chinese SOEs. Jin Li, ‘坚持党对国有企业的领导不动摇’ (Maintaining the Party’s Leadership in SOEs), CPC News, 4 January 2017, , last accessed on 31 January 2019.

38 Hongyu Fu and Meng Wan rights and privileges to SOEs.75 SOEs require commercial consideration but enjoy exceptions as long as they act in conformity with general competition requirements and in a non-discriminatory manner when fulfilling SOEs’ public mandate.76 This forms a good basis for negotiations with China. The China–EU CAI may also include stand-alone SOE provisions, but the CAI should recognize China’s methodology in SOE reforms as well as current reservations, and should neither target Chinese SOEs nor insist too much on distinctive treatment. On the one hand, for Chinese SOEs investing in the EU, it is vital that they compete within the EU competition regulatory framework in accordance with the laws of the EU and member states. The essence is to make sure SOEs compete meaningfully and fairly in the EU. Thus, the focus should be on whether SOEs act in a manner that contradicts existing EU competition law and distort the common market to the detriment of consumers.77 If compliance with domestic law is sufficient to ensure meaningful and fair competition, special treatment provided for in the CAI may be redundant. On the other hand, although China will ensure effective competition between EU investors and Chinese SOEs at home, China may not be able to change its SOEs into companies with purely commercial considerations. The issue in China is that not only foreign investors but also domestic private companies are unable to compete with SOEs because they do not have market access to the reserved sectors or areas. A progressive approach would be to have China commit to open up its markets which, in practice, have been reserved for its SOEs to both domestic and foreign private investors. That is another function served by China adopting the PENT+NL: it is not only a method to further open up China’s domestic market to foreign investment, but also a stimulus to push forward domestic reforms on SOEs. As long as EU investments make their way into those sectors and areas, non-discriminatory treatment (in particular, post-establishment national treatment) will ensure that they will operate along with Chinese SOEs. Foreign investments may participate in China’s SOE reforms, for example, entering into mixed ownership and receiving state subsidies or other benefits in accordance with Chinese laws and policies.

3.5 Conclusions Since the introduction of the PENT+NL approach in 2013, China has been experimenting with such an approach to market access in its PFTZs and has published negative lists applicable to all PFTZs and later nation-wide lists. Although being substantially shortened, current Chinese negative lists still lack the formality and content as required in the recent practices of the EU and the US. For the current Chinese negative lists to be used in the China–US BIT and the China–EU CAI, they should delineate relevant obligations for each reservation and provide reservations which are adopted or maintained at lower government levels. They should also integrate a clear legal basis into existing measures. Future reservations should be listed separately, with more precise and detailed descriptions. A negative list conforming to such requirements will become an authoritative and effective legal foundation for US and EU investments accessing China’s domestic market.

75 CETA, Art. 18.3. 76 CETA, Art. 18.5. 77 TFEU, Art. 107.

China–EU and China–US BIT negotiations 39 With respect to expropriation and compensation, China, since the China-Canada BIT, has accepted a modernized approach in the definition of indirect expropriation and level of compensation. The EU’s treaty practices as illustrated by CETA avoid uncertainties created under the 2012 US Model BIT, and China may be more comfortable with agreeing to such provisions included in CETA’s format. Nonetheless, Chinese Foreign Investment Law does not follow such an approach, and there may be more hurdles in practice since China has never implemented or enforced domestic law with such international standards. If the EU and China were to adopt CETA’s position on expropriation and compensation, more efforts may be required to further develop a working plan to ensure its full implementation. SOEs remain a tough issue between the US and China. China and the US may agree on the 2012 US Model BIT’s treatment regarding the status quo of SOEs, but it is unlikely that China will accept the notion of competitive neutrality in its entirety. The EU’s treaty practices on SOEs express more toleration and understanding. The EU may take a progressive approach in line with China’s domestic SOE reforms, ensuring that Chinese SOEs compete fairly in the EU, and EU investment can gain market access to sectors and areas that are currently reserved for Chinese SOEs in China. The treatment of SOEs in the China–EU CAI should be a combination of market access, competition, and other related provisions. It may assist in recognizing SOEs’ functions in different stages of economic development and encourage cooperation between foreign investment and SOEs instead of isolating SOEs.

4

Elements of public policy in the making of the China–EU Comprehensive Agreement on Investment Cheng Bian and Yuwen Li

4.1 Introduction Officially launched at the 2013 China–EU Summit, the China–EU Comprehensive Agreement on Investment (CAI) had undergone 20 rounds of negotiations as of February 2019.1 Once it is concluded, the CAI will replace the 26 existing bilateral investment treaties (BITs) China has signed with EU member states. The public policy provisions in international investment treaties (IIAs) refer to those non-investment policy objectives which the host states aim to achieve in order to protect the legitimate public interests concerning human rights, labour and environmental protection, sustainable development, and public safety and health.2 There is no international consensus on the definition and scope of public policy in IIAs, and the implications of the term can be either relatively narrow or broad, depending on different provisions adopted in various IIAs. In this chapter, we use ‘public policy’, ‘public interests’, ‘non-investment policy’, and the ‘right to regulate’ interchangeably. The China–EU CAI is expected to belong to the emerging new generation of global IIAs, which transcends the scope of traditional BITs and epitomizes several innovative characteristics, inter alia the inclusion of provisions addressing a wide range of public policy concerns.3 The EU has on many occasions recognized the paramount importance of preserving the host state’s right to regulate in its IIA-making policy. This is also reflected in one of the EU’s major objectives in negotiating the CAI with China, namely prioritizing the host state’s right to pursue legitimate public policy objectives in relation to sustainable development, responsible investment, and environmental and labour protection.4 China’s objective in negotiating the CAI in this regard is less pronounced than the EU’s. To shed some light on the public policy elements in the CAI, this chapter examines the similarities and differences in the public policy provisions embedded in recent IIAs of the EU and China, and discusses ways in which the CAI could incorporate public policy considerations.

1  European Commission, ‘Report of the 20th Round of Negotiations for the EU-China Investment Agreement’, 1 March 2019, , last accessed on 8 April 2019. 2 Stephan W. Schill, ‘Enhancing International Investment Law’s Legitimacy: Conceptual and Methodological Foundations of a New Public Law Approach’, Virginia Journal of International Law, Vol. 52 Issue 1 (2011), pp. 57–102, at 67. 3 Wenhua Shan and Lu Wang, ‘The China–EU BIT and the Emerging “Global BIT 2.0”’, ICSID Review, Vol. 30 Issue 1 (2015), pp. 260–267. 4 European Commission, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China’, November 2017, , last accessed on 26 December 2018, p. 27.

Elements of public policy in China–EU CAI 41

4.2 Public policy provisions in IIAs IIAs have been questioned for insufficient respect for the public interests of host states. Without the incorporation of public policy provisions in addition to investment protection in IIAs, arbitral tribunals may – and in fact have, in some highly publicized investor-state arbitration (ISA) cases – favour investors’ private interests over the host states’ legitimate regulatory space, casting a ‘regulatory chill’ over domestic laws and regulations needed by the host state to achieve non-investment, public policy objectives.5 When facing a loss of expected profits, investors have made claims that allege promulgation or modification of the host state’s domestic law for the betterment of the public, to indirect expropriation or a breach of the fair and equitable treatment (FET) in the applicable IIA. In the last decade, under the current investor-state dispute settlement (ISDS) regime, there has been an upsurge of claims made by investors that have challenged the host state’s regulatory measures protecting the public interest. In Philip Morris Brands Sarl et al. v Uruguay and Philip Morris Asia Limited v Australia, multinational tobacco enterprises challenged anti-smoking legislation in Uruguay and Australia for the protection of public health as indirect expropriation under the applicable BITs.6 In Vattenfall AB et al. v Germany, the Swedish investor challenged the German government for its nuclear energy phase-out measures for the protection of public safety and the environment as indirect expropriation and a violation to the FET.7 Since the first PV Investors v Spain case in 2011, Spain has become a respondent over 40 times under the Energy Charter Treaty (ECT), becoming the most frequently challenged host state under the ECT.8 In all these cases, the claims arose out of the Spanish renewable energy regime, which was originally implemented by Royal Decree 661/2007 and later revised by a series of regulatory reform decrees, including a 7% tax on revenues of power generators and a reduction in subsidies in the renewable energy sector

5 The regulatory chill, or the chilling effect in international investment arbitration, has been widely covered in the literature. E.g., Stephan W. Schill, ‘Arbitration Risk and Effective Compliance: Cost-Shifting in Investment Treaty Arbitration’, The Journal of World Investment & Trade, Vol. 7 Issue 5 (2006), pp. 653–697, at 674. 6 In both cases, Phillip Morris International (PMI) sought to challenge new national law restricting the presentation and sale of cigarettes through plain packaging measures for anti-smoking purposes. The two cases have been widely reported by the media, debated in civil society, and commonly used by anti-ISDS groups as an example to demonstrate how the ISDS mechanism could undermine the host state’s policy space and cast a regulatory chill on the host state. In Philip Morris v Uruguay, the tribunal ruled in favour of the state. In Philip Morris v Australia, the tribunal declined its jurisdiction over the case. Philip Morris Brands Sarl et al. v Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award, 8 July 2016. Philip Morris Asia Limited v Commonwealth of Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015. 7 Vattenfall first filed in 2009 a claim to ICSID arbitration under ECT for a delayed permit for building a coal-fired power plant as expropriation and a violation for FET. The case was settled between the claimant and the respondent in 2011. Vattenfall AB et al. v Federal Republic of Germany, ICSID Case No. ARB/09/6, Award, 11 March 2011. In 2012, Vattenfall filed a claim to ICSID against Germany again, alleging that the German government’s nuclear energy phase-out legislation has resulted in the shutdown of Vattenfall’s two nuclear power plants in Germany, which constituted expropriation and violation of FET under the ECT. The case is still pending. Vattenfall AB et al. v Federal Republic of Germany, ICSID Case No. ARB/12/12. 8 The PV Investors v Spain, UNCITRAL rules, PCA Case No. 2012-14. This case is still pending. All these cases can be accessed on the UNCTAD Investment Policy Hub website, , last accessed on 3 August 2019.

42 Cheng Bian and Yuwen Li after the 2008 financial crisis.9 As a result, different investors filed claims against the Spanish government for its violation of FET under the ECT because of their loss of expectations of profits. Traditional IIAs recognize some fundamental interests of the host state as exceptions to a state’s treaty obligation of investment protection. These fundamental interests are recognized as the host state’s regulatory prerogatives, usually stipulated as general exceptions to the treaty as a whole. These traditionally precluded interests of the host state are narrow in scope, usually only relating to essential security interests and taxation.10 With the rising number of cases against states and the increasing amount of compensation claimed by investors, states are stimulated to recalibrate IIAs in order to attain a better balance between the protection of investors and the preservation of the host states’ regulatory space. An emerging new generation IIA, represented by mega-regional trade and investment agreements such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the United States-Mexico-Canada Agreement (USMCA), emphasizes in generic terms the state’s right to regulate for the protection of public interests and enforcing public policy.11 The right to regulate in IIAs ‘denotes the legal right exceptionally permitting the host state to regulate in derogation of international commitments it has undertaken by means of an investment agreement without incurring a duty to compensate’.12 To guarantee the effectiveness of the host state’s right to regulate, these new generation IIAs have adopted a number of approaches to incorporate public policy provisions in addition to conventional treaty reservations. Suzanne Spears identifies three general ways to provide for public policy provisions in IIAs: (a) incorporation of public policy provisions in the preamble of IIAs to acknowledge and promote non-investment objectives; (b) general and specific exceptions in IIAs that would allow contracting states to legitimately exclude domestic regulatory measures from the coverage of the treaty; and (c) additional interpretive provisions to the substantive investment protection clauses in IIAs that result in greater precision and less interpretative autonomy of arbitral tribunals in the event of a dispute.13 In addition, since CETA, the EU has made an unprecedented innovation by including an express right to regulate clause, which positively confirms a host state’s right to regulate that covers the entire investment agreement in order to achieve domestic public policy objectives.14

 9 Ibid. 10  Suzanne Spears, ‘The Quest for Policy Space in a New Generation of International Investment Agreements’, Journal of International Economic Law, Vol. 13 Issue 4 (2010), pp. 1037–1075, at 1059. 11 On the new generation global IIAs, see Catharine Titi, ‘International Investment Law and the European Union: Towards a New Generation of International Investment Agreements’, European Journal of International Law, Vol. 26 No. 3 (2015), pp. 639–661, at 654–657; Stephan Schill and Heather Bray, ‘The Brave New (American) World of International Investment Law: Substantive Investment Protection Standards in Mega Regionals’, in Thilo Resmann (ed.), Mega-Regional Trade Agreements (Cham: Springer, 2017), pp. 123–154. 12 Aikaterini Titi, The Right to Regulate in International Investment Law (Baden-Baden: Nomos, 2014), p. 33. 13 Suzanne Spears, supra note 10, at 1048. 14 Catharine Titi, ‘The Right to Regulate’, in Makane Moïse Mbengue and Stefanie Schacherer (eds.), Foreign Investment Under the Comprehensive Economic and Trade Agreement (CETA) (Cham: Springer, 2019), pp. 159–183, at 170.

Elements of public policy in China–EU CAI 43

4.3 The EU’s IIA-making practice on public policy provisions Since 2010, a series of EU documents have emphasized public policy considerations in future EU IIA-making. The European Commission in its 2010 Communication ‘Towards a Comprehensive European International Investment Policy’ stated that: Investment agreements should be consistent with the other policies of the Union and its Member States, including policies on the protection of the environment, decent work, health and safety at work, consumer protection, cultural diversity, development policy and competition policy. Investment policy will continue to allow the Union, and the Member States to adopt and enforce measures necessary to pursue public policy objectives. A common investment policy should also be guided by the principles and objectives of the Union’s external action more generally, including the promotion of the rule of law, human rights and sustainable development (Article 205 TFEU and Article 21 TEU).15 Following this Communication, the EU Council in its 2010 ‘Conclusions on a Comprehensive European International Investment Policy’ confirms its recognition of the importance of the social and environmental dimension of FDI, and underlines that EU international investment policy should adhere to public policy objectives.16 Consequently, these public policy considerations have become a mandate in the EU Council’s Negotiating Directives with Canada, India, and Singapore17 and in the EU Council’s Negotiating Directives of TTIP.18 The European Parliament in its 2011 ‘Resolution on the Future European International Investment Policy’ particularly requires the European Commission to provide clear definitions on investment protection standards in order to avoid arbitral tribunals’ broad interpretive autonomy, and to set out specific provisions on the rights of the parties to regulate concerning the protection of national security, the environment, public health, workers’ and consumers’ rights, industrial policy, and cultural diversity. Moreover, the European Parliament stresses that the EU’s future investment agreements must promote investment that is sustainable, respects the environment, and provides good quality working conditions. It also requires the Commission to make reference to Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, corporate social responsibility clauses, and effective social and environmental clauses.19

15  European Commission, ‘Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Towards a Comprehensive European International Investment Policy’, COM(2010)343 final, 7 July 2010, p. 9. 16  Council of the EU, ‘Conclusions on a Comprehensive European International Investment Policy’, Foreign Affairs Council Meeting, 25 October 2010, , last accessed on 2 September 2019. 17 Council of the EU, ‘The Negotiating Directives Authorizing the Opening of Negotiations on Free Trade Agreements with Canada, India and Singapore’, 12 September 2011, , last accessed on 8 April 2019. 18 Council of the EU, ‘Directives for the Negotiation on the Transatlantic Trade and Investment Partnership between the European Union and the United States of America’, 9 October 2014, , last accessed on 8 April 2019, para. 23. 19 European Parliament, ‘Resolution of 6 April 2011 on the Future European International Investment Policy’, P7_TA(2011)0141, , last accessed on 16 January 2019, paras. 23–30.

44 Cheng Bian and Yuwen Li 4.3.1 Public policy provisions in the preamble In CETA, the public policy provisions are well entrenched in the preamble. It recognizes ‘the importance of international security, democracy, human rights and the rule of law for the development of international trade and economic cooperation’, and ‘the right of the Parties to regulate … to achieve legitimate policy objectives, such as public health, safety, environment, public morals and the promotion and protection of cultural diversity’. Moreover, the preamble affirms the states’ right ‘to preserve, develop and implement their cultural policies’, and reaffirms the states’ commitment to promoting sustainable development in its economic, social, and environmental dimensions. It further encourages enterprises to respect internationally recognized guidelines and principles of corporate social responsibility. The preamble also states that CETA is to be implemented consistent with the enforcement of national law concerning labour and environmental protection. Following CETA, the EU-Vietnam Investment Protection Agreement (IPA) provides another example of the incorporation of public policy provisions. The preamble stipulates that both parties are determined to ‘strengthen their economic, trade and investment relationship in accordance with the objective of sustainable development, in its economic, social and environmental dimensions, and to promote investment under this Agreement in a manner mindful of high levels of environmental and labour protection and relevant internationally recognized standards and agreements’. The preamble also recognizes the desire to ‘raise living standards, promote economic growth and stability, create new employment opportunities and improve the general welfare’, and refers to the principles articulated in the United Nations Universal Declaration of Human Rights (UDHR). The EU-Singapore IPA adopted similar provisions in the preamble as the EU-Vietnam IPA. These public-interest elements stipulated in the preamble suggest that they are more of a declaratory nature. Whether and to what extent a preamble creates actionable treaty obligations for the contracting states to abide by is uncertain in treaty practice, pursuant to different interpretative doctrines.20

4.3.2 Public policy provisions as general and specific exceptions In the EU’s IIA-making practice, general and specific treaty exceptions are enumerated at great length to preserve regulatory space. CETA has an extensive use of exceptions: CETA as a whole is subject to general exceptions such as national security (Art. 28.6), taxation (Art. 28.7), and disclosure of information (Art. 28.8). In relation to the investment Chapter 8 of CETA, the non-discriminatory treatment (national treatment, most-favourednation (MFN) treatment, and senior management and boards of directors) does not apply to measures adopted to (i) protect public security or public morals or to maintain public order, (ii) to protect human, animal or plant life or health, or (iii) to comply with national laws and regulations relating to the prevention of deceptive and fraudulent practices, the protection of personal privacy, and safety (Art. 28.3.2). In addition, provisions on market access, performance requirements, and non-discriminatory treatment do not apply to existing, amendment of existing, and future non-conforming measures (Arts. 8.15.1 and 8.15.2). Performance requirements, national treatment, and MFN treatment do not apply to intellectual property rights if permitted by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Art. 8.15.4), and provisions on market access and

20 Max Hulme, ‘Preamble in Treaty Interpretation’, University of Pennsylvania Law Review, Vol. 164 Issue 5 (2016), pp. 1281–1346, at 1342.

Elements of public policy in China–EU CAI 45 non-discriminatory treatment do not apply to government procurement and subsidies (Art. 8.15.5). According to the EU investment policy, these reservations relate to legitimate regulatory measures adopted at national law level for the protection of the public in various economic, social and environmental spheres. In the EU-Singapore IPA, national treatment (Art. 2.3) is subject to general exceptions and specific reservations. Non-compliance with the national treatment is allowed if national measures are adopted necessary to ‘protect public security, public morals or to maintain public order’; to ‘protect human, animal or plant life or health’; to preserve exhaustible natural resources; to protect national treasures of artistic, historic, or archaeological value; and to secure compliance with domestic laws and regulations relating to the prevention of fraudulent practices, data privacy and safety, and taxation (Art. 2.3.3). In addition, the EU-Singapore IPA in its entirety is subject to general exceptions including a prudential carve-out, essential security interests exceptions, taxation, activities carried out by a public monetary authority, and the non-disclosure of confidential information (Arts. 4.4 to 4.9). An almost identical approach is adopted in the EU-Vietnam IPA (Arts. 4.4 to 4.8). In comparison with BITs the EU member states concluded where there are no exceptions or only limited exceptions available, the recent EU’s IIA-making practice illustrates a new approach to drafting reservations and exceptions, including both general ones that apply to the whole of the IIA and specific ones that apply to the standards of treatment.21 These extensively used and comprehensive exceptions and reservations in the EU’s IIA-making practice represent an unprecedented approach which effectively prioritizes the host state’s regulatory prerogatives in protecting the public interest.22

4.3.3 Interpretative provisions for greater precision in specific circumstances This approach to guarantee the host state’s regulatory space is to stipulate interpretative additions to traditionally succinct provisions of IIAs to achieve greater precision, so as to prevent inconsistent and unpredictable treaty interpretation. The European Commission has stressed the importance of drafting the EU’s IIAs in a ‘detailed and precise manner’.23 As a result, these interpretative additions appear in many core provisions in the EU IIAs, especially clauses on expropriation, FET, national treatment, MFN treatment, and full protection and security. The expropriation clause in IIAs has raised concerns because of its potential limitation on the host state’s regulatory space. Under some circumstances, arbitral tribunals have considered states’ regulatory measures for a public purpose as ‘indirect expropriation’, or ‘creeping expropriation’, whereby the economic profit of the investment to be expected is affected by the host state’s regulatory activity.24 To address such a concern, the EU has adopted interpretive additions that aim at effectively excluding the possibility of an expansive interpretation of expropriation. The effect of these interpretive provisions in EU IIAs is to bring

21 Armand de Mestral, ‘When Does the Exception Become the Rule? Conserving Regulatory Space under CETA’, Journal of International Economic Law, Vol. 18 Issue 3 (2015), pp. 641–654. 22 Ibid. 23 European Commission, ‘Investment Protection and Investor-to-State Dispute Settlement (ISDS) in EU agreements, Fact Sheet’, 26 November 2013, , last accessed on 2 September 2019, pp. 1–10, at 7. 24 This is especially the case when the tribunal adopts the ‘sole effect doctrine’ as the only criterion to determine whether an indirect expropriation has occurred. OECD, International Investment Law: A Changing Landscape (Paris: OECD Publishing, 2005), pp. 47, 62–64.

46 Cheng Bian and Yuwen Li greater precision to the treaty, eventually ensuring that states’ regulatory activities for a public purpose do not constitute an indirect expropriation. In the investment chapter of CETA, expropriation (Art. 8.12) is interpreted under the meaning of Annex 8-A, which is an interpretive note that specifies the circumstances in which an expropriation occurs. Annex 8-A, among other points, provides that ‘indirect expropriation occurs if a measure or series of measures of a Party has an effect equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment’; ‘the sole fact that a measure or series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred’;25 and that except in the rare circumstance,26 ‘non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.’ The purpose of Annex 8-A is to eliminate bona fide state regulatory activities from the scope of indirect expropriation, and eventually, to give greater guidance to the Tribunal and the Appellate Tribunal on factors that should be taken into consideration in determining whether an indirect expropriation has occurred.27 In the EU-Vietnam IPA, the same approach is adopted. Expropriation is interpreted under the meaning of Annex 4 (Understanding of Expropriation), which excludes the sole effect doctrine and confirms that except in rare circumstances, measures to protect legitimate public policy objectives do not constitute expropriation. The same approach is found in the EU-Singapore IPA (Annex 1). Another example is the FET provision, which is considered ‘the broadest and most prominent standard in investment treaties’ and one of the most constantly invoked standards of treatment in investment arbitration.28 CETA, for example, has adopted a high threshold for investors to invoke the FET, stipulating that a party breaches the obligation of FET only if the host state’s measure constitutes one or several of the following scenarios (Art. 8.10.2): •• •• •• •• •• ••

denial of justice in criminal, civil or administrative proceedings; fundamental breach of due process; manifest arbitrariness; targeted discrimination on manifestly wrongful grounds; abusive treatment of investors; a breach of any further elements of the FET obligation considered by a specialized Committee under CETA.

This can be viewed as a ‘positive list’ in interpreting the FET, which effectively rules out those legitimate state regulatory measures for a public policy purpose as a breach of the FET.

25 This means CETA explicitly excludes the sole effect doctrine in determining whether an expropriation has occurred. Catharine Titi, supra note 11, at 655. 26 The rare circumstance refers to ‘where the impact of the measure or series of measures is so severe in light of its purpose that it appears manifestly excessive’. This means there is an element of proportionality in determining an expropriation in CETA. Ibid, at 655–656. For a comprehensive discussion of proportionality analysis of indirect expropriation in ISA, see Caroline Henckels, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration’, Journal of International Economic Law, Vol. 15 Issue 1 (2012), pp. 223–255. 27 Caroline Henckels, ‘Protecting Regulatory Autonomy through Greater Precision in Investment Treaties: The TPP, CETA, and TTIP’, Journal of International Economic Law, Vol. 19 Issue 1 (2016), pp. 27–50, at 40–41. 28 Rudolf Dolzer, ‘Fair and Equitable Treatment: Today’s Contours’, Santa Clara Journal of International Law, Vol. 12 Issue 1 (2013), pp. 7–34, at 10.

Elements of public policy in China–EU CAI 47 4.3.4 Stipulation of the right to regulate clause The investment chapter of CETA, the EU-Vietnam IPA, and the EU-Singapore IPA guarantee a state’s regulatory prerogative by the stipulation of a right to regulate clause that applies to the entire investment agreement. Art. 8.9 (Investment and Regulatory Measures) of the investment chapter of CETA stipulates that parties ‘reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity’, and that ‘the mere fact that a Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation’ of CETA. This right to regulate clause does not have a precedent in IIAs before CETA, reflecting the EU’s objective to establish an operational provision in the main text of the treaty to recognize the host state’s right to take measures to achieve legitimate public policy objectives.29 In the same vein, the EU-Vietnam IPA reaffirms the parties’ right to regulate with regard to their legitimate public objectives, for ‘the protection of public health, safety, environment or public morals, social or consumer protection, or promotion and protection of cultural diversity’ (Art. 2.2.1), and that the change of legal and regulatory framework of the host state, including in a manner that may negatively affect the operation of investments or the investor’s expectations of profits, does not constitute a breach of obligation of the EU-Vietnam IPA (Art. 2.2.2). The same modality is observed in the EU-Singapore IPA (Arts. 2.2.1 and 2.2.2).

4.4 China’s IIA-making practice on public policy provisions Since the first BIT signed with Sweden in 1982, China has established the world’s second largest BIT regime, including 145 BITs (109 in force) and 22 treaties with investment provisions (TIPs) (19 in force).30 The overwhelming majority of Chinese BITs follow a European style of BIT-making, which is succinct in its content and narrow in coverage, focusing on the protection of investors and their investment at the post-establishment stage with concise provisions on the standards of treatment.31 It was only after 2008 that China started to conclude BITs and free trade agreements (FTAs) with investment chapters that are under the influence of an ‘American-style’ approach, or a process of ‘NAFTA-ization’.32

29 Catharine Titi, supra note 14, at 170–171. 30 UNCTAD, Investment Policy Hub, IIAs by Economy - China, , last accessed on 3 August 2019. 31  Manjiao Chi, ‘From Europeanization toward Americanization: The Shift of China’s Dichotomic Investment Treaty-Making Strategy’, Canadian Foreign Policy Journal, Vol. 23 No. 2 (2017), pp. 158– 170, at 163–164. 32 Ibid. Yongjie Li, ‘Factors to be Considered for China’s Future Investment Treaties’, in Wenhua Shan (ed.), China and International Investment Law: Twenty Years of ICSID Membership (Leiden: Brill, 2014), pp. 173–179, at 174. Axel Berger, ‘Hesitant Embrace: China’s Recent Approach to International Investment Rule-Making’, The Journal of World Investment & Trade, Vol. 16 Issue 5 (2015), pp. 843–868. Axel Berger, ‘Investment Rules in Chinese PTIAs – A Partial “NAFTA-ization”’, in Rainer Hofmann, Stephan Schill and Christian Tams (eds.), Preferential Trade and Investment Agreements: From Recalibration to Reintegration (Baden-Baden: Nomos, 2013), pp. 297–333.

48 Cheng Bian and Yuwen Li One of the most important manifestations of this ‘Americanization’ or ‘NAFTA-ization’ movement of Chinese IIAs is a recalibration of the relationship between the level of protection for foreign investors and the regulatory space of the host state.33 As a result, Chinese IIAs signed after 2008 contain provisions to achieve non-investment objectives, although not in a coherent manner.34 Specifically, these public policy provisions are incorporated in three ways: non-investment objectives in the preamble, public policy as general and specific exceptions, and interpretative provisions for greater precision.

4.4.1 Public policy provisions in the preamble The most commonly referred to aspects of public policy in the preamble in China’s IIAmaking practice after 2008 are sustainable development and environmental protection. Axel Berger’s empirical research indicates that out of 12 IIAs China has signed from 2008 to 2013, six include a reference to sustainable development in the preamble.35 The China-New Zealand FTA (2008) marks the first Chinese IIA that incorporates sustainable development in the preamble, along with other public policy objectives,36 stipulating that both parties uphold the right of governments to regulate and preserve the flexibility to safeguard the public welfare; are mindful of sustainable development; and desire to bring economic and social benefits, to create new opportunities for employment, and to improve living standards. According to Manjiao Chi’s empirical study, the China-Guyana BIT (2003) in the preamble recognizes that investment protection ‘can be achieved without relaxing health, safety and environmental measures of general application’.37 Other public policy objectives are incorporated in Chinese IIAs sporadically. For instance, the China-Tanzania BIT (2013) encourages the parties to respect corporate social responsibilities.38

4.4.2 Public policy provisions as general and specific exceptions The China-Canada BIT (2012) adopts both general exceptions that apply to the treaty as a whole and specific exceptions that apply to certain provisions in the treaty. Art. 33 General Exceptions stipulates that the China-Canada BIT as a whole shall not apply to measures in cultural industries, prudential measures in the financial sector, public monetary authorities, the protection of essential security interests, and the protection of confidential information; and that the China-Canada BIT shall not be construed to prevent a party from taking national measures necessary, including environmental measures, to ensure compliance with national laws and regulations to protect human, animal, or plant life or health, and to conserve exhaustible natural resources. Furthermore, national treatment, MFN treatment, and the senior management provision are subject to additional specific exceptions. For instance,

33 Axel Berger, ‘Hesitant Embrace: China’s Recent Approach to International Investment Rule-Making’, ibid, at 850. 34 Ibid. 35 Ibid, at 851. 36 Ibid, at 852. 37 Manjiao Chi, ‘The “Greenization” of Chinese Bits: An Empirical Study of the Environmental Provisions in Chinese Bits and its Implications for China’s Future Bit-Making’, Journal of International Economic Law, Vol. 18 Issue 3 (2015), pp. 511–542, at 515. 38 Axel Berger, ‘Hesitant Embrace: China’s Recent Approach to International Investment Rule-Making’, supra note 32, at 853.

Elements of public policy in China–EU CAI 49 national treatment does not apply to any non-conforming measures, intellectual property rights, and governmental procurement (Art. 8). In the same vein, the China-Australia FTA (2015) (ChAFTA) adopts general and specific exceptions to ensure the host state’s regulatory space. Art. 9.8 General Exceptions stipulates that ChAFTA as a whole shall not be construed to prevent a party from taking national measures necessary, including environmental measures, to ensure compliance with national laws and regulations; to protect human, animal, or plant life or health; to conserve exhaustible natural resources; and to protect national treasures of artistic, historic, or archaeological value. In addition, national treatment and MFN treatment do not apply to any existing non-conforming measures maintained within its territory for China, or any existing nonconforming measures stipulated in annexes for Australia (Art. 9.5).

4.4.3 Interpretative provisions for greater precision in specific circumstances The China-India BIT (2006) is the first Chinese IIA that incorporates an annex clarifying the meaning of indirect expropriation by ‘copying the language of 2004 US Model BIT’, which is later adopted in several other Chinese IIAs.39 The China-Canada BIT (2012), for instance, provides an interpretative addition to expropriation for public policy objectives. Annex B.10 provides, among other definitions to expropriation, that ‘except in rare circumstances … a non-discriminatory measure or series of measures of a Contracting Party that is designed and applied to protect the legitimate public objectives for the well-being of citizens, such as health, safety and the environment, does not constitute indirect expropriation.’ Another example is the adoption of FET provisions with greater precision. Axel Berger’s study indicates that, except China-Switzerland BIT (2009) and the China-Malta BIT (2009), all Chinese IIAs signed after 2008 include a recalibrated FET clause, albeit the recalibration does not follow a unified pattern.40 The China-Colombia BIT (2008) makes a typical example, which grants investors FET ‘in accordance with customary international law’ and ‘full protection and security’, and ‘for greater certainty’, it defines that FET ‘includes the prohibition against denial of justice in criminal, civil, or administrative proceedings in accordance with the general accepted principles of customary international law’, and does not surpass the minimum standard of treatment of aliens under customary international law (Art. 2.4).

4.5 Public policy provisions in the China–EU CAI 4.5.1 Commonalities Recent IIA-making practice of China and the EU demonstrates commonalities. For a start, both China and the EU incorporate their public policy objectives in the preamble. Both parties make explicit reference to sustainable development, environmental protection, the protection of public welfare, health and safety, the improvement of living standards, the creation of new employment, corporate social responsibilities, and the right to regulate (in the declaratory sense). The G20 Guiding Principles for Global Investment Policymaking adopted under China’s leadership in 2016 propose that investment

39 Ibid, at 859. 40 Ibid, at 857.

50 Cheng Bian and Yuwen Li policy-making should be ‘consistent with the objectives of sustainable development and inclusive growth’, and ‘governments reaffirm the right to regulate investment for legitimate public policy purposes’.41 This demonstrates China’s interest in improving the international investment regime and encouraging sustainable investment.42 This objective coincides with the EU’s common investment policy guided by the EU’s external action to promote sustainable development. This implies that China and the EU share a common ground in these aspects of public policies in IIAs and are very likely to incorporate them in the preamble of the CAI. Second, both China and the EU admit general and specific exceptions in their IIAmaking practice to achieve public policy objectives of the host state as the host state’s regulatory prerogative, to be applied without invoking a duty of compensation. Considering that both China and the EU have adopted this approach in their respective IIA-making practice and share a common ground, it is anticipated that the CAI would adopt general and specific exceptions that are necessary and effective to guarantee the host state’s regulatory space. Third, both China and the EU envisage interpretative additions to, inter alia, expropriation and FET provisions in their IIA-making practice to achieve greater precision and curb potential inconsistent interpretations, so as to avoid the encroachment of the host state’s regulatory space. The adoption of interpretative provisions will bring greater precision and legal certainty to the treaty itself, and presumably induce more predictability and consistency in the interpretation of the treaty. Therefore, in the context of the CAI negotiations, both parties are likely to endeavour to reach an agreement with greater precision not only in the expropriation and FET clause, but also in a larger scope of substantive provisions, such as national treatment, MFN treatment, and full protection and security, as demonstrated in the EU’s treaty-making practice. Last but not least, the stipulation of a right to regulate clause is of crucial importance to guarantee host states’ regulatory prerogatives, because unlike the preamble, which mainly serves a declaratory function, the right to regulate clause confers a substantive right in the treaty to host states to effectively reserve its legitimate regulatory space. Even though the IIA-making practice of China and the EU indicates disparity, as China does not have a precedent in stipulating an express right to regulate clause in its IIAs, it is likely that such a clause would be included in the CAI, since this would serve both parties’ interests.

4.5.2 Disparities Despite the commonalities, the treaty-making practice of China and the EU also displays disparities in a number of ways. China still remains conservative in incorporating non-investment objectives in its IIAs in comparison to the EU’s proactive and comprehensive coverage of public policy objectives in CETA, the EU-Vietnam IPA, and the EU-Singapore IPA. While both the EU and China recognize public policy objectives such

41 Annex III: G20 Guiding Principles for Global Investment Policymaking, , last accessed on 2 May 2019. 42 Karl P. Sauvant, ‘China Moves the G20 toward an International Investment Framework and Investment Facilitation’, in Julien Chaisse (ed.), China’s International Investment Strategy: Bilateral, Regional, and Global Tracks (Oxford: Oxford University Press, 2018), pp. 311–328.

Elements of public policy in China–EU CAI 51 as essential security interests, environmental protection, and sustainable development, the EU has proven to be more ambitious and inclusive in stipulating public policy provisions in its IIAs. The promotion of democracy, the protection of human rights and labour rights, and the rule of law have become an explicit part of the EU’s IIA-making, which are elements that are missing in China’s IIA-making so far. In this regard, China and the EU may potentially have different expectations as to what is to be explicitly stipulated as their mutual public policy objectives in the CAI. Human rights issues in the CAI are expected to remain controversial.43 The EU’s approach in incorporating human rights in its IIAs is to make reference in the preamble to the UDHR in CETA, the EU-Vietnam IPA, and the EU-Singapore IPA.44 In contrast, China never makes any direct reference to human rights and international human rights treaties in its IIA history. As discussed above, the EU’s common investment policy is guided by the EU’s external action, including the promotion of respect for human rights, which means that the EU is very likely to push China for a reference to human rights in the CAI, at least in the preamble, to reaffirm both parties’ attachment to fundamental human rights laid down in the UDHR. China, as demonstrated in its IIA-making history, is reluctant to make direct reference to human rights in the preamble of its IIAs. This is presumably because, even though a preamble does not create actionable treaty obligations, it describes a treaty’s overarching objectives and could have some impact on the interpretation of the treaty as a whole by an arbitral tribunal; China would not be willing to subject itself to an ad hoc international tribunal to adjudicate investment disputes with even a remote link to China’s domestic human rights conditions, if the investor files a claim against China with a reference to international human rights law or a human rights argumentation to support an alleged breach of treaty obligations.45 Therefore, with the EU’s possible propensity to include a reference to the UDHR in the CAI and China’s possible reluctance to do so, the issue of human rights will be one that remains highly controversial and unpredictable in the CAI negotiations. In addition to human rights, the incorporation of democracy and the rule of law in the CAI is deemed equally contentious, if not more so. In the preamble of CETA, for instance, both parties ‘reaffirm their strong attachment to democracy’, and ‘recogniz(e) the importance of international security, democracy, human rights and the rule of law for the development of international trade and economic cooperation.’ China has no precedent in making reference to democracy and the rule of law in its IIA-making. China’s understanding of democracy and the rule of law ‘with Chinese socialist characteristics’ makes it unlikely to reach a consensus with the EU to incorporate these politically sensitive elements. The inclusion of labour rights protection in the CAI can also be deemed a tough bargain between the EU and China. The EU promotes labour rights protection in a way consistent with domestic labour laws and regulations of the host state and mindful of internationally

43 For a comprehensive discussion on human rights in the CAI, see Chapter 5 of this edited volume. 44 For instance, CETA in the preamble reaffirmed both parties’ ‘strong attachment … to fundamental rights as laid down in the Universal Declaration of Human Rights, done at Paris on 10 December 1948’. 45 In practice, investors have used human rights argumentation in ISDS both as an independent claim in addition to breaches of investment treaties and as a supporting argument for establishing a treaty breach in multiple cases. See in general, Vivian Kube and Ernst-Ulrich Petersmann, ‘Human Rights Law in International Investment Arbitration’, in Andrea Gattini, Attila Tanzi and Filippo Fontanelli (eds.), General Principles of Law and International Investment Arbitration (Leiden: Brill, 2018), pp. 221–268.

52 Cheng Bian and Yuwen Li recognized labour-protection standards in the preambles in CETA, the EU-Vietnam IPA, and the EU-Singapore IPA.46 In contrast, China has never made any reference to labourrights protection in its IIAs, not even in the preambular provisions. China has been criticized for its ‘lax enforcement of labour and employment laws’; violations of domestic labour standards and laws concerning overtime, adequate wages, child labour, and safe working environments continue to occur, and trade unions in China are deemed inadequate to represent workers’ interests because of their political constraints.47 China is a member of the International Labour Organization (ILO) and ratified four out of the eight Fundamental Conventions, but it has not ratified the other four Fundamental Conventions that protect workers’ right to establish unions and negotiate collective bargaining, and prohibit forced labour.48 The EU not only concerns the insufficient level of labour protection in China, but also fears that Chinese investors in the EU would bring their practice in lowering labour costs and reducing workers’ rights and spread their labour model in the EU, thereby having a negative influence on other EU businesses.49 Given the EU’s concern about China’s insufficient level of labour rights protection, it is likely that the EU would push for the addition of a direct reference to labour rights protection in the CAI.

4.6 Conclusion By providing substantive standards of treatment as clear international law obligations that protect foreign investors and their investment, IIAs are signed to achieve investment protection as a principal objective. And since the Chad-Italy BIT (1969), IIAs have included investor-state arbitration, which provides a regime for investors to challenge the host states when there are alleged breaches of treaty obligations.50 In recent years, international investment arbitration has been heavily criticized for its imbalanced jurisprudence, which grants investors protection and compensation for their losses in the case of a dispute at the expense of ignoring the public interests of the host state. Against this background, emerging new

46 CETA in preamble emphasizes that the treaty should be implemented in a manner consistent with the enforcement of domestic labour laws and that enhances the level of labour protection, and build upon their international commitments on labour and environmental matters. In the preamble of the EU-Vietnam IPA, the parties are ‘determined … to promote investment under this Agreement in a manner mindful of high levels of environmental and labour protection and relevant internationally recognised standards and agreements’. In the preamble of the EU-Singapore IPA, the parties are ‘determined … to promote investment in a manner mindful of high levels of environmental and labour protection and relevant internationally-recognised standards and agreements to which they are parties.’ 47 Sharon Hang, ‘Investing in Human Rights: Using Bilateral Investment Treaties to Hold Multinational Corporations Liable for Labour Rights Violations’, Fordham International Law Journal, Vol. 37 Issue 4 (2014), pp. 1215–1264, at 1247–1255. 48 China has ratified: Equal Remuneration Convention 1951 (No. 100); Discrimination (Employment and Occupation) Convention 1958 (No. 111); Minimum Age Convention 1973 (No. 138); and Worst Forms of Child Labour Convention 1999 (No. 182). China has not ratified: Forced Labour Convention 1930 (No. 29); Freedom of Association and Protection of the Right to Organise Convention 1948 (No. 87); Right to Organise and Collective Bargaining Convention 1949 (No. 98); and Abolition of Forced Labour Convention 1957 (No. 105). ILO, Ratification for China, , last accessed on 9 April 2019. 49 Sophie Meunier, ‘A Faustian Bargain or Just a Good Bargain? Chinese Foreign Direct Investment and Politics in Europe’, Asia Europe Journal, Vol. 12 Issue 1 (2014), pp. 143–158, at 149. 50 Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Alphen aan den Rijn: Kluwer Law International, 2009), p. 41.

Elements of public policy in China–EU CAI 53 generation IIAs are undergoing a recalibration that aims at a better balance between the protection of investors and the safeguard of the host state’s regulatory power. This is achieved by the incorporation of non-investment provisions in new generation IIAs that are comprehensive in scope, using a multitude of approaches. The EU plays a leading role in incorporating public policy provisions, as demonstrated in its IIA-making post-Lisbon. The EU has adopted a number of important public policy considerations in its IIAs such as sustainable development, environmental and labour protection, human rights, democracy, the rule of law, the protection of public welfare, health and safety, the improvement of living standards, the creation of employment, and corporate social responsibilities. The EU also adopts four approaches in tandem to effectively protect the public interests of the host state, having a paradigmatic effect on global IIA-making in terms of public policy elements. China’s IIA-making practice and its G20 leadership suggest that China is willing to participate in, and is actively pursuing, investment agreements that emphasize the government’s right to regulate. In particular, the CAI is likely to include environmental protection and promote sustainable investment since it accords with both parties’ objectives and interests. The CAI is also expected to include general and specific exceptions; interpretative provisions in substantive standards of treatment, inter alia expropriation and FET, for greater precision; and an express right to regulate clause. However, the disparities between China and the EU’s IIA-making practice and policy indicate that some public policy objectives that may be considered as politically sensitive, inter alia, human rights, labour rights, democracy, and the rule of law, are more contentious in terms of their inclusion in the CAI. Whether these public policy objectives would be referred to in the CAI depends on the extent of the EU’s insistence on pushing forward and the extent of China’s willingness to compromise. Therefore, China faces challenges in negotiating the CAI with the EU in terms of these public policy concerns. But the challenges ahead could also become opportunities to seize. The CAI could be a starting point for China to envisage public policy provisions in an adequate and effective way, and eventually serve as a template for China’s future IIA-making.

5

Bridging the gap between investments and human rights protection Prospects and challenges for the China–EU CAI Matthieu Burnay

5.1 Introduction Human rights are very often at stake in international investments: investment practices can constitute or contribute to human rights violations, states can violate an investor’s human rights (i.e. property rights), and investment arbitration requires addressing the interface between human rights protection and the rights and obligations included in international investment agreements (IIAs). In this sense, the United Nations (UN) Guiding Principles on Business and Human Rights emphasize the need for states to ‘ensure that they retain adequate policy and regulatory ability to protect human rights under the terms of such agreements, while providing the necessary investor protection.’1 This perspective is very much endorsed by the European Union (EU) Council ‘Conclusions on a Comprehensive European International Investment Policy’, which stresses that ‘the new European international investment policy should be guided by the principles and objectives of the Union’s external action, including the rule of law, human rights and sustainable development’, also with a view ‘to continue to allow the EU and the Member States to adopt and enforce measures necessary to pursue public policy objectives.’2 This chapter looks at the prospects and challenges for the EU to live up to its values included in Art. 21 Treaty on European Union (TEU) in the negotiations of the Comprehensive Agreement on Investment (CAI) with China. In fact, the ‘conceptual gaps’ that characterize the EU-China Strategic Partnership call for a consistent promotion of EU values in order to ensure the coherence of the EU external action.3 But such a promotion and mainstreaming may not only be a difficult exercise ‘at home’, but also vis-à-vis important economic partners, such as China. This chapter is divided into two parts. In the first part, this chapter analyses the connections between human rights and international investment law in general and also in the particular case of the EU with regard to its credo of ‘comprehensive’ trade and investment policies. In the second part, this chapter analyses the state of play in the structured and

1 United Nations Human Rights Council, ‘Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework’, A/HRC/17/4, 16 June 2011, General Principle 9. 2  Council of the European Union, ‘Conclusions on a Comprehensive European International Investment Policy’, Foreign Affairs Council Meeting Luxembourg, 25 October 2010, , last accessed on 18 February 2019. 3 Zhongqi Pan (ed.), Conceptual Gaps in China–EU Relations Global Governance, Human Rights and Strategic Partnerships (Hampshire: Palgrave Macmillan, 2012).

Investments and human rights protection 55 more indirect dialogues on human rights between the EU and China. It highlights the main drivers of the politicization of the debate on the China–EU CAI and the prospects and challenges for the incorporation of human rights related provisions in the CAI. Hence, the chapter critically assesses the challenges and prospects for the China–EU CAI to reinforce the EU’s human rights promotion in China, more particularly in view of the investor-state dispute settlement (ISDS) mechanism.

5.2 ‘Recalibration’ of bilateral investment treaties (BITs) 5.2.1 In general: BITs beyond investments For decades, BITs have been negotiated with the purpose of increasing investments, testifying to the readiness of states to give up sovereign powers in exchange for the promise of foreign investments.4 Hence, IIAs concluded in the 1990s barely included any reference to non-investment related clauses. In recent years, it has nevertheless been clear that most IIAs have been ‘recalibrated’ in a way in which they no longer function as an international instrument serving business interests only.5 This gradual change in the nature of IIAs has been primarily shaped by the significant changes in public perceptions of the role and potential impacts of corporate activities upon society. In view of the many stakeholders impacted by corporate activities – owners/investors, management, employees, customers, contractors/suppliers, the natural environment, and the wider community – states have been gradually pushed to recognize the broader financial, social, and environmental responsibilities of corporations.6 In fact, a greater social expectation has now emerged and signifies that those responsibilities should no longer be treated as simple economic externalities of corporate behaviour. Hence, the whole debate on corporate – social, environmental, and human rights – responsibilities have shifted from the simple reference to the integration of those concerns in business operations on a voluntary basis to a broader debate on how the international and national legal orders can better regulate corporate activities. This is particularly true in view of the search to enhance corporate accountability for human rights violations in a context where international law does not provide a clear-cut mechanism for individuals to make corporations directly liable for human rights violations.7 National jurisdictions continue to play a central role in the regulation of corporate activities and the monitoring of their potential negative impacts upon individuals.8 In that sense, the United States Alien Tort Statute (ATS) progressively emerged as a ‘principal tool for foreign

4 It has now become clear that BITs have achieved ‘mixed results’ as an instrument to encourage inward foreign direct investments. Rod Falvey and Neil Foster McGregor, ‘Heterogeneous Effects of Bilateral Investment Treaties’, Review of World Economics, Vol.153, Issue 4 (2017), pp. 631–656, at 631. 5  Jose E. Alvarez, ‘Why Are We “Re-Calibrating” Our Investment Treaties?’ World Arbitration and Mediation Review, Vol. 4 No. 2 (2011), pp. 143–162, at 144. 6 Michael Hopkins, The Planetary Bargain (Basingstoke: Macmillan, 1999); Janet Dine, Companies, International Trade, and Human Rights (Cambridge: Cambridge University Press, 2005), p. 228. 7 In that sense, Art. 25 of the Rome Statute of the International Criminal Court (ICC) provides that the Court has jurisdiction over ‘natural persons’. Legal persons are hence automatically excluded from the ICC jurisdiction. Rome Statute of the International Criminal Court, 17 July 1998, 2187 U.N.T.S. 90. 8 Jernej Letnar Černič, ‘Corporate Accountability for Human Rights: From a Top-Down to a Bottom-Up Approach’, in Jena Martin (ed.), The Business and Human Rights Landscape: Moving Forward, Looking Back (Cambridge: Cambridge University Press, 2010), pp. 193–218, at 215.

56 Matthieu Burnay victims of human rights abuses seeking to vindicate their rights under international law in US courts.’9 The diversity and unevenness of national practices10 combined with the ever-growing power of corporations in the global supply chain have moved the UN to reflect upon the relationship between business and human rights. Following his appointment as a Special Rapporteur by the UN Secretary-General, John Ruggie proposed a ‘conceptual and policy framework to anchor the business and human rights debate, and to help guide all relevant actors’.11 This framework was then operationalized in what became the UN Guiding Principles in Business and Human Rights, which refer to states’ duty to protect human rights, corporations’ responsibility to respect human rights, and individuals’ need to benefit from effective access to judicial remedies.12 These reflections on global corporate governance have had a major impact on debates surrounding IIAs. The UN Guiding Principles on Business and Human Rights emphasize, in fact, that ‘states should maintain adequate domestic policy space to meet their human rights obligations when pursuing business-related policy objectives with other States or business enterprises, for instance through investment treaties or contracts.’13 The Organisation for Economic Co-operation and Development (OECD) Policy Framework for Investment (PFI) emphasizes that ‘investment should not be seen as an end in itself’; ‘the growth and development impact of investment will depend as much if not more on the quality of the investment as it does on the quantity’.14 The G20 Trade Ministers also adopted the Guiding Principles for Global Investment Policymaking under the Chinese presidency of the G20.15 The Guiding Principles foresee that ‘investment policies and other policies that impact on investment should be coherent at both the national and international levels and aimed at fostering investment, consistent with the objectives of sustainable development and inclusive growth.’16 Generally speaking, these different soft law instruments constitute a strong appeal for states to regain control in a context of rising corporate influence in general and, more specifically, in the context of ISDS. In the absence of an international treaty governing foreign investments, states have a leverage to shape their investment relations with other states and can therefore include a

 9 Alien Tort Statute-Extraterritoriality-Kiobel v Royal Dutch Petroleum Co., Harvard Law Review, Vol. 127 (2013), pp. 308–317, at 308. 10 One should point particularly to the higher probability of individuals being exposed to corporate human rights violations in the context of ‘fragile states’. Derek G. Evans, ‘Human Rights and State Fragility: Conceptual Foundations and Strategic Directions for State-Building’, Journal of Human Rights Practice, Vol. 1 Issue 2 (2009), pp. 181–207, at 187. 11 United Nations Human Rights Council, ‘Protect, Respect and Remedy: A Framework for Business and Human Rights, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises’, A/HRC/8/5, 7 April 2008. 12  United Nations Human Rights Council, ‘Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework’, A/HRC/17/4, 16 June 2011. 13 Ibid, Principle 9. 14 OECD, ‘Policy Framework for Investment’, 11 September 2015, , last accessed on 18 February 2019. 15 G20, ‘Guiding Principles for Global Investment Policymaking’, 9–10 July 2016, , last accessed on 18 February 2019. 16 Ibid, Point 5.

Investments and human rights protection 57 number of ‘cautionary provisions’ in IIAs. In this sense, a number of BITs now reaffirm the regulatory power of the state to regulate in order to enhance corporate social responsibility (CSR), consumer protection, and environmental and labour standards, as well as human rights. All these provisions testify to states’ attempts to regain control in a context where IIAs, more particularly international investment arbitration, have often been described as a threat to state sovereignty.18 The recalibration of BITs to better shape the rights of foreign investors are best exemplified by the India Model BIT. In reaction to the fact that India had become ‘one of the most challenged countries in the field of international investment arbitration’,19 India developed a new model BIT that aims to strengthen the protection of the Indian state against foreign investors. Art. 12 of the BIT provides accordingly that ‘Corporate Social Responsibility Investors and their enterprises operating within its territory of each Party shall endeavour to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles may address issues such as labour, the environment, human rights, community relations and anti-corruption’.20 It is, nevertheless, important at this stage to emphasize that BITs in their current forms do not impose any direct human rights obligations on investors. States remain, in fact, the only subjects of international human rights law. However, this does not mean that human rights considerations cannot play any role in the context of investor-state disputes.21 While references to human rights in arbitral proceedings have remained so far ‘sparse and infrequent’,22 arbitral tribunals are increasingly expected to take human rights considerations into account. A recent example is the BIT arbitration case of Urbaser S.A. v The Argentine Republic. The dispute related to a concession for water and sewage services allocated to a Spanish company.23 The claimant brought a case to the International Centre for Settlement of Investment Disputes (ICSID) under the BIT between Argentina and Spain, arguing that changes in the regulatory framework had a negative impact on the ‘capacity to receive a return from providing services’.24 In response, Argentina referred to the ‘human right to water, together with the right to access sanitation services’ to justify the regulatory changes adopted.25 While Argentina’s counterclaim was rejected, the Tribunal nevertheless clearly 17

17 Surya P. Subedi, International Investment Law: Reconciling Policy and Principle, 2nd Edition (Oxford: Hart Publishing, 2012), p. 89. 18 Joachim Karl, ‘International Investment Arbitration: A Threat to State Sovereignty?’ in Wenhua Shan, Penelope Simons and Dalvinder Singh (eds.), Redefining Sovereignty in International Economic Law, (Oxford: Hart Publishing, 2008), p. 225. 19 Azernoosh Bazrafkan, ‘The (R)evolution of Indian Model Bilateral Investment Treaty: Escaping Liability without Mitigating Risks’, Jindal Global Law Review, Vol. 7 Issue 2 (2016), pp. 245–261, at 245. 20 Model Text for the Indian Bilateral Investment Treaty, Art. 12, , last accessed on 18 February 2019. 21 Patrick Dumberry and Gabrielle Dumas-Aubin, ‘When and How Allegations of Human Rights Violations Can Be Raised in Investor-State Arbitration’, Journal of World Investment & Trade, Vol. 13 Issue 3 (2012), pp. 349–372, at 360–368. 22 Clara Reiner and Christoph Schreuer, ‘Human Rights and International Investment Arbitration’, in PierreMarie Dupuy, Ernst-Ulrich Petersmann, and Francesco Francioni (eds.), Human Rights in International Investment Law and Arbitration (Oxford: Oxford University Press, 2009), p. 82. 23 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v The Argentine Republic, ICSID Case No. ARB/07/26, Award, 8 December 2016, p. 8. 24 Ibid, para. 94. 25 Ibid, para. 648.

58 Matthieu Burnay emphasized that it is ‘reluctant to share Claimants’ principled position that guaranteeing the human right to water is a duty that may be borne solely by the State, and never borne also by private companies like the Claimants’.26

5.2.2 In particular: The EU’s comprehensive approach to BITs It was at the ratification of the Treaty of Lisbon that the competence over foreign investments was formally transferred from the national to the EU level (Art. 207 TFEU).27 This transfer allowed the EU to emerge as a global actor in one of the fastest evolving areas of international law. From the very adoption of the Treaty of Lisbon, the addition of this new competence to the EU portfolio engendered a number of controversies: the respective roles of the EU and its member states in the negotiations and implementation of BITs need to be specified; the EU and its member states need to agree upon the normative scope and content of BITs; and BITs need to be made compliant with primary EU law.28 This chapter focuses more particularly on the second of these challenges, that is, the normative scope and content of the BITs that the EU will negotiate. In sharp contrast to the earlier practices of member states, the 2010 European Commission Communication ‘Towards a Comprehensive European International Investment Policy’ directly referred to the EU’s broad objectives enshrined in Art. 21 TEU and Art. 205 TFEU.29 It stated that ‘a common investment policy should also be guided by the principles and objectives of the Union’s external action more generally, including the promotion of the rule of law, human rights and sustainable development’.30 This approach was confirmed a year later by the European Parliament ‘Resolution on the Future European International Investment Policy’, which emphasized that BITs ‘should also be based on investor obligations in terms of compliance with human rights and anti-corruption standards as part of a broader partnership between the EU and developing countries for the purpose of reducing poverty’.31 Ever since, the EU’s comprehensive vision of trade and investment has been repeatedly stated, such as in the EU’s global trade strategy, ‘Trade for All’,32 and in a recent policy reflection paper, ‘Harnessing Globalization’.33 This vision with respect to trade and investment is,

26 Ibid, para. 1193. 27 Sophie Meunier, ‘Integration by Stealth: How the European Union Gained Competence over Foreign Direct Investment’, Journal of Common Market Studies, Vol. 55 No. 3 (2017), pp. 593–610. 28 Angelos Dimopoulos, ‘The Compatibility of Future EU Investment Agreements with EU Law’, Legal Issues of Economic Integration, Vol. 39 Issue 4 (2012), pp. 447–471, at 448. 29 Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime?’ Journal of International Economic Law, Vol. 15 Issue 1 (2012), pp. 51–84, at 62–63. 30  European Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Towards a Comprehensive European International Investment Policy’, COM(2010)343 final, 7 July 2010, p. 9. 31 European Parliament, ‘Resolution on the Future European International Investment Policy’, 6 April 2011, P7_TA(2011)0141, para. 37. 32 European Commission, ‘Trade for All: Towards a More Responsible Trade and Investment Policy’, , last accessed on 18 February 2019. 33 European Commission, ‘Reflection Paper on Harnessing Globalization’, COM(2017) 240 of 10 May 2017, , last accessed on 18 February 2019.

Investments and human rights protection 59 of course, also shared from a human rights policy perspective, such as in the ‘EU’s Action Plan on Human Rights and Democracy (2015–2019)’,34 which not only broadly identifies the need to link human rights, trade, and investment but also more specifically addresses five issues that need to be followed up by the EU and its member states: (1) the enforcement of GSP+ commitments;35 (2) the development of a sound method to analyse the effect of trade agreements on human rights; (3) ensuring that investment agreements follow human rights provisions; (4) mainstreaming the principles of CSR into trade and investment agreements; and (5) oversight of the uncontrolled exports and their effects on human rights violations, such as capital punishment and torture or through ‘dual use goods’. But the challenge is not only one ‘at home’ with regard to the mainstreaming of human rights into BITs. The EU’s challenge also rests with the fact that in order to shape rules through global governance, the EU depends on its ability to convince, persuade, and negotiate with third actors. In an interdependent and complex world, the EU’s well-being depends on the well-being of others, and vice versa. The coherent promotion of EU values in its Common Commercial Policy (i.e. foreign investment policy) appears, in this line, very much as a pre-condition for the fulfilment of what Damro described as ‘Market Power Europe’.36 In practice, this implies that the post-Lisbon Common Commercial Policy now requires balancing ‘potentially competing and often also conflicting purposes’,37 such as the search for enhanced inward direct investments, with the protection of EU public policy interests. In practice, the inclusion of public policy considerations in future EU IIAs could take three forms. First, future EU IIAs may include separate lists of exceptions that would directly address the public policy concerns relating to some specific aspects of foreign investments.38 Second, future EU IIAs may include a general clause that embraces all the exceptions applicable within the scope of the agreement.39 Third, more general references could be made to different non-investment related objectives in the preamble to the agreement. This approach has been endorsed in the EU-Vietnam Investment Protection Agreement, in which both parties reaffirm ‘their commitment to the Charter of the United Nations signed in San Francisco on 26 June 1945’ as well as ‘the principles articulated in The Universal Declaration of Human Rights adopted by the General Assembly of the United Nations on 10 December 1948’.40 A similar formulation has also been used in the preamble of the EU-Singapore Investment Protection Agreement.41

34 Council of the European Union, ‘EU’s Action Plan on Human Rights and Democracy’, December 2015, , last accessed on 18 February 2019. 35 GSP+ stands for Generalised Scheme of Preferences plus, allowing goods from certain developing countries that proved their commitment to sustainable development and good governance to be imported into the EU at a reduced or zero tariff. 36 Chad Damro, ‘Market Power Europe’, Journal of European Public Policy, Vol. 19 Issue 5 (2012), pp. 682–699, at 682. 37 Sieglinde Gstöhl and Dominik Hanf, ‘The EU’s Post-Lisbon Free Trade Agreements: Commercial Interests in a Changing Constitutional Context’, European Law Journal, Vol. 20 Issue 6 (2014), pp. 733–748, at 744. 38 Angelos Dimopoulos, EU Foreign Investment Law, (Oxford: Oxford University Press, 2011), p. 191. 39 Ibid. 40  EU-Vietnam Investment Protection Agreement, , last accessed on 18 February 2019. 41  EU-Singapore Investment Protection Agreement, , last accessed on 18 February 2019.

60 Matthieu Burnay In its long-awaited opinion on the question of mixity in the EU-Singapore Trade and Investment Agreement, the Court of Justice of the EU (CJEU) concluded that while the agreement did fall into the exclusive competence of the EU, certain provisions fall into the area of shared competences and need to be concluded as a mixed agreement. These provisions include issues related to portfolio investments and the ISDS system.42 As a consequence of the CJEU’s opinion, member states have to ratify agreements with such provisions. National parliaments, and even, under certain constitutional circumstances, regional parliaments, can become parties to the ratification. The recognition that indirect investment and the ISDS system do not fall under the exclusive competence of the EU will have ‘a considerable impact on the content and the form’ of comprehensive trade and investment agreements.43 Such procedural formalities obviously bring in a multitude of players that can shape and challenge the nature of BITs, including ISDS. In other words, not only the comprehensive nature of BITs can be scrutinized by means of normative issue linkages – is the BIT really comprehensively embracing principles and norms beyond financial investment? – but also the rules-based procedural implementation and dispute settlement mechanisms enshrined in the BIT.

5.3 The China–EU CAI 5.3.1 Human rights in the EU-China strategic partnership The importance of human rights in the context of the EU-China Strategic Partnership has been at the heart of much debate in view of the difficulties for the EU to achieve tangible results in its promotion of human rights in China.44 Still, the recently published ‘Elements for a New EU Strategy on China’ reemphasized that ‘the protection of human rights will continue to be a core part of the EU’s engagement with China’.45 Far from the very confrontational approach endorsed in the aftermath of the Tiananmen massacre (1989) – in which the EU imposed an arms embargo46 and tried to seize every single opportunity to criticize China’s human rights record within UN fora – the EU appears now to have endorsed a ‘quiet diplomacy’ approach to engage China in the area of human rights.47 The EU approach now relies upon a multiplicity of instruments to promote human rights in China. These different instruments have notably not made use of conditionality or political sanctions in support of human rights promotion.48 This is particularly clear when one looks at the EU-China Human Rights Dialogue that has been running since 1995. The Dialogue was thought to provide a ‘regular’ and

42 Opinion 2/15 of the Court of Justice of the European Union, ECLI: EU:C:2017:376, 29. 43 Rumiana Yotova, ‘Opinion 2/15 of the CJEU: Delineating the Scope of the New EU Competence in EU Foreign Direct Investment’, The Cambridge Law Journal, Vol. 77 Issue 1 (2018), pp. 29–32, at 32. 44 See generally, Mikael Mattlin, ‘Dead on Arrival: Normative EU Policy towards China’, Asia Europe Journal, Vol. 10 Issue 2 (2012), pp. 181–198. 45 European Commission, ‘Joint Communication to the European Parliament and the Council, Elements for a New EU Strategy on China’, 22 June 2016, JOIN(2016) 30 final, p. 4. 46 Scott Brown, ‘Anything but Arms? Perceptions, the European Union and the Arms Embargo on China’, Journal of Contemporary European Research, Vol. 7 No. 1 (2011), pp. 23–40, at 27. 47 Katrin Kinzelbach, The EU’s Human Rights Dialogue with China Quiet Diplomacy and its Limits (Oxon: Routledge, 2015). 48 Andrew Cottey, ‘The EU–China Partnership: Institutionalization and the Limits of Liberal Logic’, in Mario Telo, Ding Chun, and Zhang Xiaotong (eds.), Deepening the EU-China Partnership: Bridging Institutional and Ideational Differences in an Unstable World (Oxon: Routledge, 2018), pp. 45–54, at 49.

Investments and human rights protection 61 ‘confidential’ avenue for dialogue between the EU and China.49 All the original assumptions have, nevertheless, been defeated to a large extent. Not only is the dialogue now organized on an irregular basis but the overall value of the dialogue has also become increasingly contested. In this respect, ten human rights organizations claimed that the 2017 Human Rights Dialogue should be ‘cancelled’ and the exchange ‘suspended’ ‘until the meetings can bring genuine human rights improvements’.50 A key part of the problem is related to the fact that the dialogue has been based, from the very beginning, on false premises: ‘the European Union does not conceal that the dialogue is about improving the human rights situation in China; while the Chinese side sticks to the equality-and-mutual-respect label’.51 Hence, there is now a growing recognition that the dialogue speaks very much at cross-purposes and that its benefits are limited to the fact that it does force Chinese ministries to coordinate and come up with a united position. The growing difficulties for the EU in promoting human rights in its bilateral dialogue with China can be explained by a dual set of mutually reinforcing factors. On the one hand, China has become increasingly reluctant to accommodate any attempts at what it defines as external influences in its domestic affairs. Document 9, an intra-party document circulated in the aftermath of the 2014 annual plenum of the Communist Party of China (CPC), described the promotion of ‘universal values’ as ‘an attempt to weaken the theoretical foundations of the Party’s leadership’.52 In that sense, the protection of the one-party state is deeply embedded in what has been described as China’s ‘sharp power’.53 On the other hand, EU member states have grown increasingly divided as to the extent of their support of a coherent and audible EU promotion of human rights. François Godement has described the EU-China Human Rights Dialogue as a ‘fig-leaf for member states’ whose weak activism in support of the dialogue ‘might inadvertently confirm to the Chinese partners that Europe’s stand on values is extinct’.54 Two recent test cases further testify to the significant divisions among member states. First, a limited number of member states (i.e. Denmark, Finland, Germany, Ireland, the Netherlands, Sweden, and the United Kingdom) supported a statement before the UN Human Rights Council expressing concerns over ‘China’s deteriorating human rights record, notably the arrests and ongoing detention of rights activists, civil society leaders, and lawyers’.55 The socalled 709 crackdown (initiated during the night of 9 July 2015) exemplifies the fact

49 Katrin Kinzelbach and Hatla Thelle, ‘Taking Human Rights to China: An Assessment of the EU’s Approach’, The China Quarterly, Vol. 205 (2011), pp. 60–79, at 62. 50 Human Rights Watch, ‘EU: Suspend China Human Rights Dialogue - EU and its 28 Members Lack Strategy, Credibility to Bring Change’, 19 June 2017, , last accessed on 18 February 2019. 51 Katrin Kinzelbach and Hatla Thelle, supra note 49. 52 ‘Document 9: A China File Translation’, China File, 8 November 2013, , last accessed on 18 February 2019. 53 National Endowment for Democracy, ‘Sharp Power – Rising Authoritarian Influence’, , last accessed on 18 February 2019. 54 François Godement and Abigaël Vasselier, ‘China at the Gates: A New Power Audit of EU-China Relations’, ECFR, 2017, , last accessed on 18 February 2019, p. 86. 55 US Mission to International Organizations in Geneva, ‘Joint Statement on the Human Rights Situation in China Delivered by U.S. Ambassador to the Human Rights Council’, 10 March 2016, , last accessed on 18 February 2019.

62 Matthieu Burnay that ‘the regime’s commitment to law is partial and limited and law’s full potential as an autonomous force is something the Party is deeply concerned with’.56 Second, Greece opposed the adoption of a joint EU statement on the human rights situation in China to be delivered at the 35th session of the Human Rights Council (6–23 June 2017).57 In this respect, many would argue that some member states – Hungary and Greece more particularly – have gradually become ‘unwilling to criticize Beijing in light of the large amount of Chinese investment it has received in recent years’.58 Overall, the EU is facing a significant dilemma in terms of how it should continue to engage China in the area of human rights. It is really in that context that the debate on the inclusion of human rights related provisions in the China–EU CAI should be situated.

5.3.2 Human rights in the China–EU CAI Negotiations of the CAI with China are the first of their kind for the EU: ‘the China–EU CAI will be a fitting first test of the EU’s new FDI competence’.59 Before the negotiations on the CAI with China, the EU had taken the approach of negotiating an investment chapter to be included in its recent free trade agreements (FTAs) (i.e. EU-Korea FTA, EU-Canada FTA, EU-Japan FTA, EU-Singapore FTA, and EU-Vietnam FTA). While both China and the EU are committed to the conclusion of the CAI, the EU considers that it should be concluded first before starting any negotiations on an FTA with China.60 The China–EU CAI will showcase the extent to which the transfer of competence over FDI ‘should in turn strengthen the EU’s ability to shape international investment policy’.61 The question of the normative scope and content of the China–EU CAI remains, therefore, completely open. In order to understand the potential prospects for the inclusion of non-investment related provisions in the China–EU CAI, it seems to be important to understand how politicized the issue of China’s investments in the EU has become. Four factors can explain the politicization of Chinese investments within the EU. First, China’s success in securing political capital within the EU has been accompanied by a decreasing confidence within the EU in its own social (and democratic) market economy

56  Hualing Fu, ‘The July 9th (709) Crackdown on Human Rights Lawyers: Legal Advocacy in an Authoritarian State’, Journal of Contemporary China, Vol. 27 Issue 112 (2018), pp. 554–568, at 567. 57 Helena Smith, ‘Greece Blocks EU’s Criticism at UN of China’s Human Rights Record’, The Guardian, 18 June 2017, , last accessed on 18 February 2019. 58 Agatha Kratz and Angela Stanzel, ‘China’s Investment in Influence: the Future of 16+1 Cooperation’, ECFR, 14 December 2016, , last accessed on 18 February 2019. 59 David Hallinan, ‘The EU-China Bilateral Investment Treaty: A Challenging First Test of the EU’s Evolving BIT Model’, China–EU Law Journal, Vol. 5 Issue 1 (2016), pp. 31–53, at 35. 60 Alicia García-Herrero et al., ‘EU-China Economic Relations to 2025: Building a Common Future’, Bruegel, 13 September 2017, , last accessed on 18 February 2019, p. 13. 61 European Parliament, ‘The EU Approach to International Investment Policy after the Lisbon Treaty’, Directorate-General for External Policies of the Union, October 2010, , last accessed on 23 April 2019, p. 6; Sophie Meunier, ‘Divide and Conquer? China and the Cacophony of Foreign Investment Rules in the EU’, Journal of European Public Policy, Vol. 21 Issue 7 (2014), pp. 996–1016, at 1001.

Investments and human rights protection 63 model. As accurately pointed out by Kerry Brown, ‘[U]nder Xi, as never before, China has proved good at reading the doubts of Western societies and politicians’.63 In terms of its investments policy, this has induced China to challenge the unity of the EU by using the 16+1 Framework to engage with Central and Eastern Europe (CEE) countries.64 The annual 16+1 summits aim to enhance cooperation between China and CEE countries on infrastructure projects. The whole format of the 16+1 Framework has been met with great suspicion by the EU, more particularly in a context where China is increasingly attempting to enhance its political influence across Europe.65 Second, the nature of Chinese investments still remains very much in question as they may in part participate in a greater ‘geo-economics strategy’.66 In view of the emergence of a very strong discursive power on the Belt and Road Initiative (BRI),67 the genuine nature of Chinese investments remains uncertain given the possibility that ‘foreign investment is driven by grand strategy in addition to, or instead of, commercial motives’.68 Third, Chinese investments in the EU have also raised concerns in view of their potential impact on labour rights protection within the EU: ‘not least given the low-wage, labourabundant profile of China and the extensive violations of union rights and core labour standards in its own factories and abroad’.69 In line with these fears, several EU member states (i.e. France, Germany, and the United Kingdom) declined to sign the outcome document of the first BRI summit that was organized in 2017. These states were allegedly ‘uncomfortable about its omission of social and environmental sustainability as well as transparency’.70 Against these fears, reports on the investment of China’s state-owned enterprise (SOE) 62

62  John Seaman, Mikko Huotari, and Miguel Otero-Iglesias (eds.), ‘Chinese Investment in Europe: A Country-Level Approach’, French Institute of International Relations, Elcano Royal Institute, Mercator Institute for China Studies, December 2017, , last accessed on 18 February 2019, p. 18. 63 Kerry Brown, ‘China’s Strength Is in Making the West Doubt the Value of Doubt’, Chatham House, 5 June 2018, , last accessed on 18 February 2019. 64 François Godement and Abigaël Vasselier, ‘China at the Gates: A New Power Audit of EU-China Relations’, ECFR, 1 December 2017, , last accessed on 18 February 2019, pp. 65–67. 65 Thorsten Benner et al., ‘Authoritarian Advance: Responding to China’s Growing Political Influence in Europe’, Report by MERICS and GPPI, February 2018, , last accessed on 18 February 2019. 66 Jonathan Holslag, ‘Geoeconomics in a Globalized World: The Case of China’s Export Policy’, Asia Europe Journal, Vol. 14 Issue 2 (2016), pp. 173–184, at 174. 67 Jinghan Zeng, ‘Does Europe Matter? The Role of Europe in Chinese Narratives of “One Belt One Road” and “New Type of Great Power Relations”’, Journal of Common Market Studies, Vol. 55 Issue 5 (2017), pp. 1162–1176, at 1164. 68 Sophie Meunier, Brian Burgoon, and Wade Jacoby, ‘The Politics of Hosting Chinese Investment in Europe – An Introduction’, Asia Europe Journal, Vol. 12 Issue 1 (2014), pp. 109–126, at 120. 69 Brian Burgoon and Damian Raess, ‘Chinese Investment and European Labor: Should and Do Workers Fear Chinese FDI?’ Asia Europe Journal, Vol. 12 Issue 1 (2014), pp. 179–197, at 182. 70 Angela Stanzel, ‘China’s Belt and Road – New Name, Same Doubts?’ ECFR Commentary, 19 May 2017, , last accessed on 18 February 2019.

64 Matthieu Burnay China Ocean Shipping Company (COSCO) in the Greek Port of Piraeus have nevertheless demonstrated that China has not attempted to export its labour model into Europe.71 Fourth, the politicization is also explained by the very strong gap that exists between the respective regulatory frameworks of the EU and China. The negotiations of the China–EU CAI constitute, in this respect, an important avenue for the EU, not only to ensure that its own standards are being respected by China but also that some of its norms and procedures are successfully internationalized through formal and informal legal transplants.72 Regarding the former, the imbroglio concerning the construction of a railway connection between Belgrade and Budapest demonstrates the importance and potential impact of the EU’s scrutinizing power over public tenders.73 In the current debate on the negotiations of the China–EU CAI, there have been some contrasting views as to the necessity of including direct or indirect references to human rights in the CAI. On the one hand, the current stalemate in the negotiations of the EU-China Partnership and Cooperation Agreement (PCA) – in which the EU is trying to incorporate a reference to human rights – provides a strong incentive to the EU to include non-investment-related provisions (i.e. human rights) in the CAI. On the other hand, the addition of a general reference to human rights or to specific human rights requiring particular attention might make a consensus between the EU and China more difficult to achieve. This is notwithstanding the question of how the enforcement compliance with such a clause would be protected within the agreement. For all BITs, part of the challenge relates to the search for an equilibrium between the protection of investors’ rights and the right to regulate, among other things, in view of protecting the human rights of the rest of the population.74 In this line, the ‘Impact Assessment Report on the EU-China Investment Relations’ did identify two types of rights that could be potentially relevant for the BIT.75 First, the Assessment Report recognized that IIAs can have a ‘direct impact’ on ‘investors’ rights that should be protected against ‘undue interference by States’.76 The protection of property rights, in general, and intellectual property rights, in particular, still constitute key challenges in the Chinese legal system. On the one hand, ‘state expropriation and eviction is an important part of the Chinese law on immoveable property and land tenure’.77 Despite China’s Constitution recognizing that ‘citizens’

71 Sophie Meunier, ‘A Tale of Two Ports: The Epic Story of Chinese Direct Investment in the Greek Port of Piraeus’, CritCom, 14 December 2015, , last accessed on 18 February 2019. 72 Matthieu Burnay, ‘“Soft Legal Transplants”: EU-China Relations at a Glance’, in Jing Men and Annika Linck (eds.), China and EU: Reform and Governance (Oxon: Routledge, 2017), pp. 17–32. 73 Alica Kizekova, ‘China’s Belt and Road Initiative and the 16+1 Platform: The Case of the Czech Republic’, in Alessandro Arduino and Xue Gong (eds.), Securing the Belt and Road Initiative (Singapore: Palgrave Macmillan, 2018), pp. 275–297, at 285. 74 David Gaukrodger, ‘The Balance between Investor Protection and the Right to Regulate in Investment Treaties: A Scoping Paper’, OECD Working Papers on International Investment 2017/02, , last accessed on 18 February 2019. 75  European Commission Staff Working Document, ‘Impact Assessment Report on the EU-China Investment Relations’, 23 May 2013, SWD(2013) 185 final, p. 47. 76 Ibid. 77 Eva Pils, ‘Assessing Evictions and Expropriations in China: Efficiency, Credibility and Rights’, Land Use Policy, Vol. 58 (2016), pp. 437–444, at 437.

Investments and human rights protection 65 lawful private property is inviolable’, China’s property law legislation and regulations still rely very much on the broadly understood notion of ‘public interest’.79 The extensive use of notions such as ‘public interest’ sets the background for a legal environment characterized by legal uncertainty as it facilitates extensive state intervention in the realm of private property regime. Yet, the protection of intellectual property rights remains a long-standing concern for European companies operating in China. In this respect, the EU Chamber of Commerce in China considers that ‘the slow implementation of intellectual property rights (IPR) in China means technologies are spread far and wide’.80 On the other hand, the Assessment Report recognized that IIAs could have an ‘indirect impact’ on ‘rights of actors other than investors’, including civil and political rights as well as economic, social, and cultural rights.81 The Assessment Report identified potential impacts of the BIT on ‘freedom of expression, freedom of the media (press and access to websites in particular), child labour, respect of labour laws and standards, better conditions for nongovernmental organisations (NGOs) and the civil society, respect of the due process of law’.82 As an illustration, it is useful to emphasize how important access of NGOs to ISDS is in order to enhance the transparency of the arbitration procedure. In that sense, the United Nations Commission on International Trade Law (UNCITRAL) Transparency Rules, in force as of 1 April 2014, emphasized that ‘the arbitral tribunal shall […] allow, or, after consultation with the disputing parties, may invite, submissions on issues of treaty interpretation from a non-disputing Party to the treaty’.83 In practice, NGOs have become increasingly active in ISDS proceedings through their participation in hearings involving a strong public interests dimension. The enhancement of transparency of ISDS through third-party participation (i.e. civil society) in arbitral proceedings is one of the many instances in which the China–EU CAI could secure ‘rights of actors other than investors’. This is particularly true in a context where the 2016 Law of the People’s Republic of China on Administration of Activities of Overseas Nongovernmental Organizations in the Mainland of China has confirmed that ‘foreign NGOs are seen primarily as a potential threat to national security rather than a matter of good governance’.84 It remains, therefore, to be seen whether a reference to the UNCITRAL Transparency Rules will be included in the China–EU CAI similar to CETA (Art. 8.36). 78

78 Constitution of the People’s Republic of China, adopted by the National People’s Congress in 1982, subsequently amended in 1988, 1993, 1999, 2004, and 2018, Art. 12. 79 Shitong Qiao, ‘The Evolution of Property Law in China: Stick by Stick’, in Yun-Chien Chang, Wei Shen and Wen-Yeu Wang (eds.), Private Law in China and Taiwan: Legal and Economic Analyses (Cambridge: Cambridge University Press, 2016), pp. 182–211, at 202. 80 European Union Chamber of Commerce in China, ‘Overcapacity in China: An Impediment to the Party’s Reform Agenda’, (2016), , last accessed on 2 September 2019, pp. 1–50, at 7. 81 European Commission Staff Working Document, supra note 75, p. 48. 82 European Commission Staff Working Document, supra note 75, p. 47. 83 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (2014), Art. 5.1, , last accessed on 18 February 2019. 84 Joelle Hivonnet and Kolja Raube, ‘“Good Governance” and the Role of Civil Society Organisations in Reform Processes and EU-China Diplomatic Relations’, in Jing Men and Annika Linck (eds.), China and EU: Reform and Governance (Oxon: Routledge, 2017), pp. 49–65, at 59.

66 Matthieu Burnay 5.3.3 ISDS and human rights in the specific context of the China–EU CAI In both CETA and the EU-Vietnam Investment Protection Agreement, the traditional ISDS was replaced by a new system known as the Investment Court System (ICS). The new ICS departs from the ISDS in the sense that it is public, permanent, and incorporates professional and independent judges.85 It has been argued that the development of the ICS might have ‘some bearing on the balancing of economic and non-economic criticisms by some that ad hoc arbitration modelled after private dispute settlement is not the optimal mechanism for assessing the public interest regulation of states’.86 In fact, the ICS is aimed at providing stronger protection of a state’s right to regulate than the ISDS system, which did not achieve the delicate balance between an investor’s and a state’s rights.87 While the many weaknesses of China’s judicial system do not tend to affect the decision of foreign investors to invest in China, investors do tend to pay greater attention to the judicial system after making their investment and when the first disputes start to emerge.88 In those proceedings before Chinese courts, foreign corporations have to face a system that is highly bureaucratic, allows great discretionary power to judges and a weak role to lawyers, and suffers from significant shortcomings in enforcement.89 In addition, local governments do not hesitate to intervene in judicial proceedings to protect local economic interests.90 The reliance upon an ISDS mechanism can significantly enhance the protection of investors in a context where China’s legal system is characterized by a weak rule of law and strong state interventionism in the domestic economy.91 In that context, the incorporation of ISDS into the China–EU CAI could potentially have a positive impact on both the process and substantive outcome of disputes that relate to the IIA.92 For one thing, the ISDS could push China to abide by a dispute resolution mechanism characterized by higher standards of due process than those ensured by the national judicial system. In addition, ISDS jurisdiction could extend to non-investmentrelated factors and therefore help to advance the socialization of China in the protection of the environment, CSR, labour rights, and human rights. The China–EU CAI could therefore echo the positive experience of the World Trade Organization (WTO) Dispute

85  European Commission, ‘CETA Explained’, , last accessed on 18 February 2019. 86 Rumiana Yotova, ‘Balancing Economic Objectives and Social Considerations in the New EU Investment Agreements: Commitments versus Realities’, in Frank Vandenbroucke, Catherine Barnard, and Geert De Baere (eds.), A European Social Union after the Crisis (Cambridge: Cambridge University Press, 2017), pp. 271–306, at 296. 87 Nicolette Butler and Surya Subedi, ‘The Future of International Investment Regulation: Towards a World Investment Organisation?’ Netherlands International Law Review, Vol. 64 Issue 1 (2017), pp. 43–72, at 54–55. 88 Yuhua Wang, Tying the Autocrat’s Hands: The Rise of the Rule of Law in China (Cambridge: Cambridge University Press, 2015), p. 147. 89 Stephanie Balme, Chine, les Visages de la Justice Ordinaire. Entre Faits et Droit (Paris: Les Presses de Sciences Po, coll. Académique, 2016), p. 183. 90 William E. Kovacic, ‘Competition Policy and State-Owned Enterprises in China’, World Trade Review, Vol. 16 Issue 4 (2017), pp. 693–711, at 701. 91 Matthieu Burnay, Chinese Perspectives on the International Rule of Law: Law and Politics in the One-Party State, (Cheltenham: Edward Elgar, 2018). 92 Susan L. Karamanian, ‘The Role of International Human Rights Law in Re-Shaping Investor-State Arbitration’, International Journal of Legal Information, Vol. 45 Issue 1 (2017), pp. 34–41, at 38.

Investments and human rights protection 67 Settlement Mechanism, in which both the EU and China have engaged each other in dynamics that have, to a certain extent, helped enhance the international rule of law in global trade governance.93

5.4 Conclusions This chapter has demonstrated that the negotiations on the China–EU CAI are deeply anchored in the broader context of globalization. The very strong calls for IIAs to incorporate non-investment-related provisions, such as human rights, find a particular resonance in the EU-China Strategic Partnership. In a context where the EU is increasingly struggling to enter into a meaningful dialogue on human rights with China, this chapter argues that the CAI could serve as a useful avenue for the EU to further advance the promotion of human rights in line with Art. 21 TEU. The China–EU CAI will indeed impact on investors’ rights but could also potentially address the need to find a good balance between investors’ rights and the right of the EU and China to regulate foreign direct investments. The China–EU CAI constitutes a significant test case for the EU. Being the first of its kind, the China–EU CAI is expected to conform with the principles and objectives of the EU’s external action. The exercise is likely to prove difficult in a context where China seems to have made yet another authoritarian turn domestically and become more and more of a rule-shaper in global economic governance. If the EU is to be successful in its bilateral negotiations with China, it will also remain to be seen how parliaments at the EU, national, and sub-national level will debate and vote on the final agreement. China’s human rights record will undoubtedly play a critical role in that process.

93  Matthieu Burnay and Jan Wouters, ‘The EU and China in the WTO: What Contribution to the International Rule of Law? Reflections in Light of the Raw Materials and Rare Earths Disputes’, in Jianwei Wang and Weiqing Song (eds.), China, the European Union, and International Politics of Global Governance (Hampshire: Palgrave MacMillan, 2016), pp. 115–136.

Part II

Reforming ISDS Institutional aspects

6

Judicialization of ISDS The European Union’s approach to multilateral reform of investment dispute settlement1 Colin M. Brown and Elio Gaarthuis

6.1 Introduction Academics have long argued for the establishment of a standing court for the settlement of investment disputes.2 Disputes between an investor and a state are similar to domestic public law disputes and therefore necessitate safeguards similar to those available in standing courts. Investor-state dispute settlement (ISDS) in its current form is based on or derived from commercial arbitration, but disputes between an investor and a state are fundamentally different from disputes between commercial partners, or even commercial disputes between a state and a private operator. In investment disputes, all state actions can be challenged; the state’s consent to arbitration is prospective for all disputes arising out of an unknown class of investors and open-ended in terms of the subject matter of the disputes. A standing court provides the safeguards of accountability, openness, coherence, and independence necessary to provide for the legitimacy of the system. As a result of deriving from commercial arbitration, ISDS has significant flaws which make it unsuitable for deciding the types of disputes arising between investors and states. Awards cannot be reviewed for errors in law or, in fact, even manifest ones; basic information about the process can be withheld from the public; case law is inconsistent; and the financial incentives built into the system are a cause of real or perceived concern about conflicts of interest. Amid broader criticism, calls for reform have existed since the increase in disputes in the late 1990s and have generally revolved around a lack of consistency and predictability in case law as well as a lack of independence and impartiality on the part of arbitrators.3 More recently, some states have sought to address concerns. India, for instance, is seeking to subject access to investment dispute settlement to strict requirements. Its updated 2016 model bilateral investment treaty (BIT) includes a number of significant changes.4 Most notably, investors would have to exhaust local remedies before being able to lodge an ISDS claim. Brazil, which has signed BITs with ISDS provisions in the past but has never ratified them, is attempting to forego ISDS entirely and has developed mechanisms of

1 Views expressed are personal. 2 See in general, Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford: Oxford University Press, 2008). 3 See in general, Kaj Hobér, ‘Investment Treaty Arbitration and Its Future, If Any’, Yearbook on Arbitration and Mediation, Vol. 7 (2015) pp. 58–65; Detlev Vagts, ‘Foreword to the Backlash against Investment Arbitration’, in Michael Waibel et al. (eds.), The Backlash against Investment Arbitration: Perceptions and Reality (Alphen aan den Rijn: Kluwer Law International, 2010), pp. xxiii–xxvi. 4  Prabhash Ranjan and Pushkar Anand, ‘The 2016 Indian Bilateral Investment Treaty: A Critical Deconstruction’, Northwestern Journal of International Law & Business, Vol. 38 Issue 1 (2017), pp. 1–53.

72 Colin M. Brown and Elio Gaarthuis dispute resolution as an alternative to ISDS. Its 2015 model BIT provides for an ombudsperson mechanism to facilitate what it calls dispute prevention and state-to-state dispute settlement.5 It is suggested, however, that these types of reforms are insufficient. If one accepts the premise that it is desirable to encourage investment, and that there ought to be an effective set of rules which can be enforced once the investment has been made (i.e. the investor has sunk costs into the investment), then it is essential to provide for rules and effective dispute settlement to enforce those rules. The key problem with the current system is that the system of dispute settlement is not effective, is too much of a hit-or-miss experience, and lacks legitimacy. It is only via establishing a standing court for the adjudication of investment disputes that these shortcomings can be addressed.6 The European Union (EU) has embraced this approach within a broader attempt to reform ISDS both bilaterally and multilaterally. Bilaterally, the EU has been updating investment protection provisions that are either included in its trade agreements or in the investment protection agreements that accompany the trade agreements. Multilaterally, the EU has been working to establish such a multilateral investment court. While it announced its intention to establish such a court in 2015, it was only in early 2018 that more details about the shape that the EU intends such a court to have emerged.7 This chapter seeks to provide an assessment of the broad strokes presented by the EU. It will look at the possible options for increased consistency and predictability as well as independence and impartiality, mechanisms to implement such options, and models for possible inspiration.8 This also builds on the conclusions reached in the United Nations Commission on International Trade Law (UNCITRAL) process. The UNCITRAL Working Group III is examining the functioning of the ISDS mechanism and has concluded that reform is desirable.9 At the time of writing, the Working Group III is about to move towards examining which reform options to pursue. This chapter is divided into three parts. The first part deals with whether or how elements available in a standing court, such as the very existence of a standing court, consolidation of proceedings, and others, impact the consistency and predictability of decisions in investment disputes. The second part addresses mechanisms that could be implemented in a standing court to ensure the independence and impartiality of the court and of its judges. Since the achievement of consistency and predictability and of independence and impartiality will in large part rest on broad coverage of existing BITs, the third part assesses mechanisms through which states could bring existing BITs under the jurisdiction of the court, possibly gradually over time.

5 Brazil Model BIT (2015), Art. 18. 6 Gus Van Harten, ‘A Case for an International Investment Court’, Society of International Economic Law Inaugural Conference Paper (2008), , last accessed on 6 February 2019. 7 Council of the European Union, ‘Negotiating Directives for a Convention Establishing a Multilateral Court for the Settlement of Investment Disputes’, 12981/17 ADD 1 DCL 1, 1 March 2018. 8 Colin M. Brown, ‘A Multilateral Mechanism for the Settlement of Investment Disputes – Some Preliminary Sketches’, ICSID Review, Vol. 32 Issue 3 (2017), pp. 673–690. 9 UNCITRAL, ‘Draft Report of Working Group III (Investor-State Dispute Settlement Reform) on the Work of Its Thirty-Sixth Session’, A/CN.9/964, 6 November 2018, , last accessed on 6 February 2019.

Judicialization of ISDS 73

6.2 Consistency and predictability would be improved with a standing court Both claimants and respondents need consistency and predictability of decisions in investment disputes. Investors require these in order to clearly understand the standards of protection by which they can expect to be shielded, as well as to assess the validity of a possible claim under an investment agreement. States need consistency to ensure that public money is transferred to foreign investors only as the result of a sound award. More generally, both benefit from an optimization of resources dedicated to litigation, as litigants will have a clearer indication of their odds of winning a case, which in turn gives them an indication of whether to settle it. Unpredictability, on the other hand, fosters an environment of uncertainty which results in increased costs for all players. It makes it necessary to litigate cases that might have been settled, could have been dismissed early in the process, or should never have been brought in the first place. Investors will be more prone to initiate litigation as it will be harder to predict the manner in which a tribunal will rule; states will be reticent to settle as the possibility of prevailing will always exist. Arguments that might otherwise not have been pursued will need to be made for the sake of thoroughness. This is because it is never clear which way any particular three-person tribunal will rule. As noted by Schreuer, there are two major kinds of inconsistency in ISDS.10 The first is an inconsistency that arises out of similar questions that arise in similar cases. The second is inconsistent outcomes of parallel proceedings concerning the same dispute. There are clear examples of both in case law. The former can be found in the often-cited conflicting decisions on whether a Spanish roll-back of subsidies for the production of renewable energy constituted a breach of investor protection.11 The latter kind can be found in the widely cited CME/Lauder cases, which illustrates how two cases that are closely related to one another and that revolve around similar questions of law arising out of the same events may nonetheless give rise to conflicting awards.12 Such cases create concerns among respondent states that they will have to comply with an award of which the reasoning is contradicted by another tribunal, creating issues of accountability as well as of allocation of public resources. ISDS as it currently stands does not allow for reconciliation or avoidance of such conflicting awards, with some authoritative commentators calling cases such as CME/Lauder the ultimate fiasco in investment arbitration.13 Unlike ISDS, permanent international courts allow for a higher degree of consistency through a mixture of the inherent workings of a permanent institution, specific mechanisms to avoid the multiplication of cases arising out of the same events, and the implementation of mechanisms for appeals. ISDS includes limited mechanisms to address deficiencies in awards, such as annulment and refusal of recognition or enforcement, but they are not designed to bring about consistency.

10 Christoph Schreuer, ‘Diversity and Harmonization of Treaty Interpretation in Investment Arbitration’, in Malgosia Fitzmaurice, Olufemi Elias and Panos Merkouris (eds.), Treaty Interpretation and the Vienna Convention on the Law of Treaties: 30 Years On (Leiden: Brill, 2010), pp. 129–151, at 129. 11 Eiser Infrastructure Limited and Energía Solar Luxembourg S.à.r.l. v Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award, 4 May 2017. Isolux Netherlands, BV v Kingdom of Spain, SCC Case V2013/153, Final Award, 17 July 2016. 12 CME Czech Republic B.V. v The Czech Republic, UNCITRAL, Final Award, 14 March 2003. Ronald S. Lauder v The Czech Republic, UNCITRAL, Final Award, 3 September 2001. 13 August Reinisch, ‘The Proliferation of International Dispute Settlement Mechanisms’, in Isabelle Buffard et al. (eds.), International Law between Universalism and Fragmentation (Leiden: Brill, 2009), pp. 107– 126, at 107.

74 Colin M. Brown and Elio Gaarthuis 6.2.1 The permanency of an adjudicatory body will provide increased predictability The establishment of a standing court would result in increased predictability. A permanent pool of adjudicators would result in the same group of adjudicators deciding cases. In turn, judges in the same institution follow previous decisions as a matter of principle. Judges would also socialize with and influence one another, influencing one another’s legal thinking and leading to an alignment of opinions. In ISDS, the number of arbitrators is too significant to allow for a natural convergence towards consistency, but above all, there is no institutional mechanism creating predictability. Recent data has shown that in the more than 1,000 known investment arbitrations, over 600 individuals have sat as arbitrators.14 Although these individuals are not isolated and regularly refer to one another’s awards, the sheer quantity of disputes, awards, and adjudicators, as well as the lack of permanent institutional mechanisms, means that it is impossible to ensure predictability. A permanent court would provide an institutional basis for permanent deliberation between adjudicators. This would create a natural effect of seeking to ensure consistency between judgments. Mechanisms would be expected to develop to permit discussions and ensure coordination between the different adjudicators. An example of how this happens is the World Trade Organization’s (WTO) Appellate Body. Finally, a common legal culture of the court could be facilitated by geographic factors. The physical location of the court would play a role in judges mutually influencing one another, as it would ensure that they work in close proximity. For instance, some authors have found that the relative isolation of Strasbourg, where judges at the European Court of Human Rights are statute-bound to reside, has assisted them in assimilating the common legal culture of the court.15

6.2.2 Mechanisms for better handling of parallel or linked proceedings would increase consistency A significant problem with the current system is the lack of mechanisms to deal with multiple or parallel proceedings. As noted, this is problematic from many perspectives, not only in terms of multiple cases at the international level but also in terms of the possibility of parallel cases also arising under domestic law, and international adjudication being insufficiently sensitive to issues arising under domestic law, such as the link to other creditors of the investor. It has been argued that consolidation could be implemented as a tool to limit contradictory awards dealing with related situations.16 The multiplication of proceedings arising out of the same event has been deemed by some authors to be abusive. Gaillard has argued that the multiplication of proceedings under different investment protection agreements, when, for instance, both the parent

14  Malcolm Langford, Daniel Behn and Runar Hilleren Lie, ‘The Revolving Door in International Arbitration’, Journal of International Economic Law, Vol. 20 Issue 2 (2017), pp. 301–332. 15 Erik Voeten, ‘The Impartiality of International Judges’, American Political Science Review, Vol. 102 No. 4 (2008), pp. 417–433. 16 Gabrielle Kaufmann-Kohler et al., ‘Consolidation of Proceedings in Investment Arbitration: How Can Multiple Proceedings Arising from the Same or Related Situations Be Handled Efficiently?’ ICSID Review, Vol. 21 Issue 1 (2006), pp. 59–125.

Judicialization of ISDS 75 company and a subsidiary can initiate an arbitration under different instruments, could amount to an abuse of process.17 While each of the disputes taken individually would not be problematic, a respondent state would have to prevail over the investors in all of the disputes, while the claimant, albeit in different corporate forms, would only have to prevail in a single dispute. Finally, better case management can also result in significant savings. Multiple proceedings all require pleadings, hearings, and decisions, resulting in a multiplication of efforts and of resources spent. ISDS does not allow for the avoidance of contradictory awards arising out of the same events. For instance, arbitral tribunals faced with multiple proceedings initiated by related but not identical corporate entities under different BITs have not recognized the multiple claims as an abuse of process but have instead stated the situation to be undesirable but merely the result of a factual situation. In Ampal, the tribunal found that it was reasonable for a party to seek litigation under different agreements as it was unclear whether any of the tribunals had jurisdiction.18 It is a common feature of international tribunals to try to effectively manage multiple or parallel disputes. A very prominent example of this is the WTO. The Dispute Settlement Understanding (DSU), the instrument regulating dispute settlement at the WTO, establishes that a single panel should be established when more than one state requests the establishment of a panel related to the same matter.19 The DSU also allows for ad hoc consolidation in instances in which the DSU does not opt for consolidation, suggesting an insofar as possible identical composition of separate panels hearing complaints related to the same matter. At the International Court of Justice (ICJ), the Court itself has a wide margin for joining cases.20 The Court can join proceedings in two or more cases at any time, and it can alternatively direct that written and oral proceedings be in common. Finally, it may direct common action between different cases by a broad standard. Identical provisions exist for the International Tribunal for the Law of the Sea (ITLOS).21 These are state-to-state examples. However, the likelihood of parallel proceedings is significantly higher in investor-to-state cases where investors will be structured across different countries and, depending upon their particular structure, may potentially be able to bring cases under multiple agreements. They are often also frequently able to litigate at the domestic level. Only a permanent mechanism covering multiple agreements can seek to manage multiple parallel proceedings. This implies that a future multilateral mechanism must have a flexible structure as such that it can cover multiple international agreements. If the EU, its member states, and their respective treaty partners were to use such a permanent mechanism, it would result in more than 1,300 BITs being covered.

17 Emmanuel Gaillard, ‘Abuse of Process in International Arbitration’, ICSID Review, Vol. 32 No. 1 (2017), pp. 17–37. 18 Ampal-American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, para. 330. 19 WTO, ‘Understanding on Rules and Procedures Governing the Settlement of Disputes or Dispute Settlement Understanding’ (1994), Art. 9(1). 20 ICJ, ‘Rules of the Court’ (1978), Art. 47. 21 ITLOS, ‘Rules of the Tribunal’ (1997), Art. 47.

76 Colin M. Brown and Elio Gaarthuis 6.2.3 An appeals mechanism could further increase consistency The idea of an appeals mechanism in ISDS is not new. Scholars have long argued for its establishment.22 Some states have also included provisions in their agreements to allow for the establishment of an appeals mechanism. For instance, an annex to the 2004 US Model BIT established that within three years of entry into force of the agreement, the parties would consider the establishment of an appellate mechanism.23 The annex in question was removed from the 2012 Model BIT, which, however, retained the possibility of subjecting awards to a possible future appellate mechanism.24 The EU is also in the process of establishing appellate mechanisms bilaterally in agreements with Canada, Singapore, and others. Nevertheless, appellate mechanisms established bilaterally have some drawbacks. Schreuer argues that bilateral appellate mechanisms may well be incapable of reaching consistent jurisprudence except for disputes arising under the same agreement.25 He argues that only an appellate mechanism that covers multiple agreements can reach consistency in investment treaty case law. Schreuer is clearly correct, and this is the direction in which the EU intends to move. For one, EU agreements provide for the replacement of these mechanisms with a multilateral investment court. They are, therefore, temporary in their nature. Furthermore, these appellate mechanisms work through a roster of adjudicators that can be called upon to serve when cases arise, on a model not unlike that at the WTO Appellate Body. It is not excluded that there will be overlap in membership between different appellate mechanisms established under different EU investment agreements. While an appeals mechanism would most crucially allow for the review of awards rendered at first instance, increased consistency and predictability of jurisprudence would not be limited to the mechanism’s corrective capacity. For instance, some authors have argued that the permanency of the institution would result in the increased authority of its awards, resulting in a closer observance of findings made by an appeals mechanism by other tribunals.26 Furthermore, compliance with appellate awards would be improved, as it would be harder for states to argue that not one but two tribunals that have ruled against them were somehow mistaken.27 Other authors have argued that the knowledge by adjudicators at first instance that awards will be reviewed would increase consistency. Dimitropoulos has applied nudge theory to the reform of investment dispute settlement and has considered the possibility of implementing nudges as a debiasing mechanism.28 He considers that an appeals

22 Susan D. Frank, ‘The Legitimacy Crisis in Investment Treaty Arbitration’, Fordham Law Review, Vol. 73 Issue 4 (2005), pp. 1521–1625. 23 US Model BIT (2004), Annex D. Some BITs such as the US-Uruguay BIT closely follow the 2004 Model BIT. 24 US Model BIT (2012), Art. 28(10). 25 Christoph Schreuer, supra note 10, at 129. 26 Gabrielle Kaufmann-Kohler and Michele Potestà, ‘Can the Mauritius Convention Serve as a Model for the Reform of Investor-State Arbitration in Connection with the Introduction of a Permanent Investment Tribunal or an Appeal Mechanism?’ CIDS-Geneva Centre for International Dispute Settlement, 3 June 2016, , last accessed on 6 February 2019. 27 Ibid, p. 122. 28 Georgios Dimitropoulos, ‘Investor-State Dispute Settlement Reform and Theory of Institutional Design’, Journal of International Dispute Settlement, Vol. 9 Issue 4 (2018), pp. 535–569.

Judicialization of ISDS 77 mechanism is a nudge, with judges at first instance having to consider an outside viewpoint when adjudicating a case. Judges, the theory goes, would not only reason in a manner that they subjectively consider correct, but would also have to consider how their reasoning would be reviewed on appeal. This would create an incentive to consider the outside viewpoint of the appeals mechanism. Finally, it should be noted that attempts have been made to develop an appeals mechanism in the past. In the early 2000s, ICSID circulated a paper proposing an ICSID Appeals Facility.29 While the ICSID Appeals Facility was never successful, research on its establishment provides useful considerations for the establishment of an appeals mechanism.

6.2.3.1 A full-fledged appeals mechanism has advantages over a preliminary reference mechanism Some authors have argued that a preliminary reference mechanism might be preferable to a full-fledged appeal. Schreuer argues that an appeal needs the identification of a flaw in the appealed award, while a preliminary reference mechanism allows for the prevention of such a flaw.30 He argues that a preliminary reference procedure has very effectively been used in the EU to ensure the application of EU law by domestic courts. This is of course true, but the preliminary reference mechanism in EU law serves a different purpose, as EU law forms part of the domestic law of the member states of the EU and may be relevant in any dispute. Furthermore, there can always be an appeal in such disputes. In investment disputes where the dispute is purely an international law dispute and where there is a direct question of the correctness of the first instance decision, such a preliminary reference procedure would not make sense. Rather, the appropriate comparison is more to a domestic first instance court dealing with a public or administrative law matter and the possibility of appeal from that court. Furthermore, an appeals mechanism allows for certain tools to dissuade frivolous or unfounded appeals, such as a requirement of security for costs, thereby limiting abuse of the system.

6.2.3.2 Limiting the standard of review reduces certain risks inherent in appeal A further issue raised by the establishment of an appeals mechanism is that of the standard of appeal. Two options seem to be available. First, awards could be reviewed in their entirety, de novo, by the appeals mechanism. In this scenario, the entire case would have to be re-litigated from scratch. Second, a certain deference could be granted to some findings in the award at first instance. It would seem that a certain balance needs to be struck between ensuring consistency and avoiding a multiplication of litigation costs, suggesting that de novo review might not be the best answer to the issue of consistency. For instance, re-litigation of the entire case

29 ICSID, ‘Possible Improvements of the Framework for ICSID Arbitration’, ICSID Secretariat Discussion Paper, 22 October 2004, , last accessed on 6 February 2019, Annex. 30 Christoph Schreuer, supra note 10.

78 Colin M. Brown and Elio Gaarthuis has the potential to result in systematic appeals due to accountability reasons of either the state or of the investor.31 This, in turn, would result in a ballooning of litigation costs. The increased consistency resulting from an appeals mechanism must therefore be balanced with the avoidance of an exponential increase in litigation costs. A common mechanism implemented to this effect is the limitation of appeal to certain specific standards, such as, for instance, an error in law or a manifest error of fact. This is an approach that was already proposed for previous attempts at establishing an appeals mechanism, for instance, for the ICSID Appeals Facility, on grounds that a certain amount of deference, in particular to the fact-finding function of the first tribunal, was necessary.32 It would therefore seem that appeals would have to be limited to certain specific standards in order to avoid making appeals systematic as well as to avoid higher litigation costs. These standards could be error of law and manifest error of fact on the model of certain other dispute settlement mechanisms. Ultimately, these will be considerations that negotiators of a multilateral investment court will have to make.

6.2.3.3 Issues with an appeals mechanism An appeals mechanism could enter into conflict with certain provisions of the ICSID Convention, under which a large number of awards are issued. Article 53 of the ICSID Convention establishes that awards shall not be subject to review, a provision that could create friction with an appeals mechanism. Nevertheless, mechanisms to amend Article 53 among the states acceding to a possible appeals mechanism seem to be available under international law. An ICSID discussion paper found that Article 41 of the Vienna Convention on the Law of Treaties would allow for the modification of the ICSID Convention between the parties to a treaty establishing an appeals mechanism.33 This is a technique similar to the one the EU uses to ensure the enforcement of awards under its bilateral agreements. Furthermore, the interplay between an appeals mechanism and Article 52 of the ICSID Convention will have to be considered. Schreuer points to the fact that an appeals mechanism would result in the exclusion of the Article 52 annulment procedure.34 Annulment could be entrusted to an appeals tribunal, although some have pointed to the fact that it would be preferable to include autonomous formulations without combining them with the grounds of appeal under Article 52, as this would raise interpretative issues and would result in overlap.35 EU bilateral agreements have indeed melded annulment and appeal. There could be little doubt that awards of a permanent mechanism could be enforced under the New York Convention. This would be because the New York Convention provides in Article I(2) that ‘[t]he term “arbitral awards” shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted.’ Furthermore, there is no reason why a permanent mechanism could not provide for its own system of enforcement, ensuring enforcement among parties to the convention establishing the permanent mechanism.

31 Gabrielle Kaufmann-Kohler and Michele Potestà, supra note 26. 32 ICSID, supra note 29. 33 Ibid. 34 Christoph Schreuer, supra note 10. 35 Gabrielle Kaufmann-Kohler and Michele Potestà, supra note 26.

Judicialization of ISDS 79

6.3 Independence and impartiality are better ensured by a standing court Judges and courts need to be independent and impartial. Eminent scholars such as Ronald Dworkin have stated that in order for justice to be done, all parties to a case need to be treated equally, and elements that do not relate to the case must not be considered by adjudicators in determining a case.36 This principle is enshrined in transnational legal instruments such as the Charter of Fundamental Rights of the European Union and the European Convention on Human Rights, and it is also a part of the constitutions of many of the world’s legal systems.37 What exactly do the terms independent and impartial indicate? An attempt at a definition has been made by the European Union Court of Justice in a recent case in which it stated that the concept of independence presupposes that a court exercises its judicial functions autonomously, without being subject to a hierarchy, without taking instructions from any source whatsoever, and without there being any external interventions or pressure capable of influencing the decisions of judges.38 The term impartiality has been defined by academics who have argued that it indicates the absence of subjective elements that judges and courts can take into consideration when reaching a judgment.39 These elements should be seen broadly and they can include personal views on topics such as morals, a preference for certain interpretations dictated by the legal system in which a judge has been trained, and so forth. Both independence and impartiality apply to judges individually and to courts as a whole. Each individual judge must be independent and impartial, and a court taken as a whole also needs to be independent and impartial. The independence and impartiality of a court taken as a whole does not automatically flow from the independence and impartiality of each individual judge. It is not sufficient for independence and impartiality to exist, but it is necessary to avoid the very suspicion of their absence. Best practices in this area, as we will see, embrace the famed maxim by Lord Hewart that states that ‘[n]othing is to be done which creates even a suspicion that there has been an improper interference with the course of justice’.40 In the case in question, a defendant challenged a judgment on grounds that a court clerk had a relationship with the firm of solicitors that was acting against him. Although the clerk had not participated in the deliberations of the court, the mere appearance of improper interference with the course of justice was sufficient to quash the judgment.

6.3.1 Independence and impartiality of adjudicators are best ensured in a standing court Oellers-Frahm identified the major mechanisms ensuring the independence and impartiality of individual judges of international courts.41 She found that states have included

36 Ronald Dworkin, Taking Rights Seriously (London: Bloomsbury, 2013). 37 Charter of Fundamental Rights of the European Union, Art. 47; European Convention on Human Rights, Art. 6. 38 Associação Sindical dos Juízes Portugueses v Tribunal de Contas, ECJ Case C-64/16 (2008), Judgement of the Court, para. 44. 39 Georgios Dimitropoulos, supra note 28. Erik Voeten, supra note 15. 40 R v Sussex Justices, Ex parte McCarthy (1924) 1 KB 256, 259. 41  Karin Oellers-Frahm, ‘International Courts and Tribunals, Judges and Arbitrators’, Max Planck Encyclopaedia of Public International Law, July 2013, , last accessed on 28 February 2019.

80 Colin M. Brown and Elio Gaarthuis elements such as competency and exclusivity requirements for judgeship, carefully crafted appointment processes, provisions regulating terms of office, remuneration and privileges, and immunities of judges. ISDS arbitrators are undoubtedly highly qualified and could well fulfil competency requirements. Nevertheless, other mechanisms developed for permanent international courts do not exist in ISDS, nor are mechanisms of equivalent efficacy present.

6.3.1.1 Permanent courts require competence and exclusivity Statutes of international courts generally include certain requirements for a judgeship. Competence and high moral character are one requirement. The classic wording for this is that judges must be of high moral character and must either be fit for appointment to the highest judicial office of their home country or be jurists of recognized competence.42 Another requirement is that judges must be independent and must forfeit other professional activities. Judges are expected to be exclusive, which means that they may not practise advocacy in other cases nor engage in any other profession, with the general understanding that teaching law is an acceptable exception.43 There are multiple reasons behind such a requirement. A judge cannot have, or cannot be seen to have, an interest in the resolution of a case before them. Such a situation can arise, for instance, when a similar question arises in both a case which the judge is adjudicating and a case in which the judge is acting as counsel. In such instances, the judge would have an interest in giving the question in the case that he or she is adjudicating an answer that would favour or support the argument that the judge is making in the case in which he or she is counsel. Most judges would of course not engage in such behaviour, but whether they do or do not is irrelevant, since the mere appearance of circumstances that could have tainted the process are to be avoided, as we have already seen. ISDS does not include provisions of equivalent strength. Double-hatting, a term that indicates the practice of acting in different capacities within the ISDS system, is pervasive, as has been shown by some authors.44 Participants in the system routinely act as arbitrators, counsel, and expert witness, often at the same time. Although ISDS does seem to have some self-correcting mechanisms, with arbitrators routinely recusing themselves due to conflicting professional obligations, this is not always the case and, in some instances, conflicts of interest have only become known after an award has been rendered.45 It is hard in such a system to avoid the appearance of a lack of independence and impartiality. While the system itself may well be independent and impartial, the perception of the lack of such traits may well reduce the trust that users of the system put in it. This is even more disconcerting given that it would not be possible for such perceived conflicts to even arise if provisions similar to those present in the statutes of international courts were implemented, since judges would be barred from engaging in other potentially conflicting professional activities. A multilateral investment court could include provisions modelled on

42 Provisions to this effect are included, for instance, in the Statute of the ICJ, Art. 2, and in the European Convention on Human Rights, Art. 21. 43 Arts. 16 and 17 of the Statute of the ICJ; Art. 21 of the European Convention on Human Rights; and Art. 4 of the Statute of the Court of Justice of the European Union. 44 Malcolm Langford, Daniel Behn and Runar Hilleren Lie, supra note 14. 45 ‘Spain Seeks to Overturn ECT Defeat’, Global Arbitration Review, 27 July 2017, , last accessed on 6 February 2019.

Judicialization of ISDS 81 those regulating the conduct of judges of other permanent courts, eliminating the issue of an appearance of conflicts at the root.

6.3.1.2 Guaranteed terms of office exist to avoid financial pressure on judges A second mechanism is the implementation of terms of office. Such mechanisms exist in order to ensure that judges will have sufficient financial security over a number of years to minimize the possibility for states party to an international court to exert pressure on them in order to obtain favourable treatment. Most international courts have opted for a relatively long term of office. At the ICJ, judges are appointed for nine-year terms with the possibility of being reappointed an unlimited number of times.46 At the European Court of Justice, terms are of six years and may also be renewed.47 Similar provisions are present in the statutes of other institutions, such as at the WTO, where members of the Appellate Body are elected for four-year terms and may be reappointed once.48 Some authors have stressed that the possibility of judges being reappointed creates some concerns about independence and impartiality. Voeten argues that given the strong role played by national governments in the appointment and reappointment of judges to international courts, it does not seem unreasonable to suspect that judges have an incentive to favour the country that appoints them.49 A government can be suspected of being more likely to reappoint a judge who has consistently voted in its favour or to appoint him or her to another position. Consequences on the careers of international adjudicators are not merely theoretical. For instance, the failed reappointment of the WTO’s Appellate Body member Seung Wha Chang after the expiry of his first term happened due to disagreements with Chang’s judicial opinions.50 Some institutions have attempted to address such concerns. Some courts have opted to increase the duration of terms of office and to eliminate the possibility of reappointment. This is what was done at the European Court of Human Rights, where judges served for six-year renewable terms up until 2004. The six-year renewable term was replaced with a nine-year non-renewable term in 2004 in order to address similar concerns.51 The stated purpose of the change was increased independence and impartiality of judges.52 Interestingly, a similar solution has been suggested for the WTO as well, with Chang himself advocating the elimination of reappointment of Appellate Body members and an

46 Statute of the ICJ, Art. 13. Judge Oda served for numerous consecutive terms for a total of 27 years at the ICJ, from 1976 to 2003. 47 Treaty on the Functioning of the European Union, Art. 253. 48 WTO, ‘Understanding on Rules and Procedures Governing the Settlement of Disputes or Dispute Settlement Understanding’ (1994), Art. 17(2). 49 Erik Voeten, supra note 15. 50 US Mission in WTO, ‘Statement by the United States at the Meeting of the WTO Dispute Settlement Body’, 23 May 2016, last accessed on 6 February 2019. 51 Council of Europe, ‘Protocol No. 14 to the Convention for the Protection of Human Rights and Fundamental Freedoms’, Council of Europe Treaty Series No. 194, 13 May 2004, , last accessed on 6 February 2019. 52 Council of Europe, ‘Explanatory Report to Protocol No. 14 to the Convention for the Protection of Human Rights and Fundamental Freedoms’, Council of Europe Treaty Series No. 194, 13 May 2004, , last accessed on 6 February 2019.

82 Colin M. Brown and Elio Gaarthuis increase in the terms of office from four to six or seven years.53 The EU has also advocated such a change at the WTO. Longer terms are primarily necessary to compensate for the lack of reappointment, but longer terms also reduce judges’ concerns about their future careers more generally. It would seem that a long, non-renewable term could be an option that allows for the minimization of influence by states on judges and a strengthening of the independence of judges.

6.3.1.3 Remuneration, privileges, and immunities Besides ensuring that judges be remunerated for a sufficient amount of time, states seem to have agreed on the necessity of compensating judges in an amount sufficient to ensure their financial independence. Authoritative commentators have stated that salaries are necessary to guarantee the absolute independence of members of an international court and are a natural and logical provision of a court’s statute.54 Besides guaranteeing independence, salaries must also be sufficient to attract people of the calibre required by the requirements set for adjudicators.55 Remuneration of judges seems to include certain characteristics common to many courts and tribunals. Certain common elements include an annual salary to be paid to all judges as well as a further special allowance for the president and possibly the vice-president of the tribunal.56 It also seems to be well established that salaries may not be decreased during terms of office.57 Some judges, such as the vice-president of the ICJ when acting as president, or all of the ITLOS judges, also receive an allowance for each day in which they exercise their functions.58 Finally, statutes also provide for the exemption of taxation of salaries granted to members of international courts.59 It would seem that courts that are expected to work full time are more closely connected to a salary for judges, while courts for which the future workload is unclear prefer systems that tie remuneration to actual days worked. For instance, Esposito Massicci argues that that an annual allowance was preferred for judges at the Permanent Court of International Justice due to the fact that nobody believed that the court would be particularly busy.60 Similarly, the ITLOS has had fewer cases than the ICJ, and it is not surprising to find that each judge’s remuneration is closely tied to days served.

6.3.2 A standing court can be designed to be independent and impartial We have up to this point focused on the independence and impartiality of each individual judge, but it should not be forgotten that it is not only the independence and impartiality of

53 WTO, ‘Farewell Speech of Seung Wha Chang at the DSB on 26 September 2016’, , last accessed on 6 February 2019. 54 Carlos Esposito Massicci, ‘Article 32’, in Andreas Zimmermann et al. (eds.), The Statute of the International Court of Justice, A Commentary, 2nd Edition (Oxford: Oxford University Press, 2012), pp. 507–524. 55 Ibid. 56 Statute of the ICJ, Arts. 32(1) and 32(2); Statute of the ITLOS, Arts. 18(1) and 18(2). 57 Statute of the ICJ, Art. 32(5); Statute of the ITLOS, Art. 18(5). 58 Statute of the ICJ, Art. 32(3); Statute of the ITLOS, Art. 18(1). 59 Statute of the ICJ, Art. 32(8); Statute of the ITLOS, Art. 18(8). 60 Carlos Esposito Massicci, supra note 54.

Judicialization of ISDS 83 each individual judge that matters, but also the independence and impartiality of the court as a whole. These two elements are distinct. Even accepting that all judges of a court are individually independent and impartial, the court as a whole may not be so.

6.3.2.1 A diverse body of judges increases the impartiality of a court The greater the diversity in the court, the more likely it is to be able to effectively ensure impartiality. The most recurrently implemented technique is an increase in the diversity of the judges sitting on the court. At the ICJ, for instance, the major world cultures and the principal legal systems of the world are to be represented on the court.61 Other courts have also implemented diversity requirements, some similarly simple, others more complex. Similar requirements exist at the ITLOS, with the addition of the fact that equitable geographical distribution must be ensured.62 A more sophisticated mechanism has been developed for the International Criminal Court, where, besides representation of the principal legal systems of the world and equitable geographical representation, a fair representation of gender, as well as a balance of expertise of judges, are also provided for.63 A document by the Assembly of States Parties to the Rome Statute establishes that during proceedings for the election of a new judge, each state may indicate a number of preferences and that at least a minimum number of such preferences shall be of the underrepresented gender on the court.64 A multilateral investment court would necessitate provisions for diversity, as diversity is necessary for public trust and is also a sign of democratic representation.65 Even a single judge who does not share the biases of other judges can reduce the bias of a court as a whole. For instance, such a judge would have an incentive to strenuously defend his or her position, as it would otherwise be ignored by a majority of judges. Other judges would be forced to thoroughly consider the arguments of the minority judge in order to rebut them, resulting in either the embracing of the minority argument or at the very least a better-reasoned and conscious embracing of the original argument. The more diverse the court is, the stronger the argument becomes, as the risk of a dominant bias is reduced further and the likelihood of a well-reasoned argument taking over increases. This can also only happen in a permanent body. Ultimately, this suggests that besides attempts to increase the independence and impartiality of each individual adjudicator, it is important to increase diversity among the members of the court itself in order to reduce the collective bias of the court. Inspiration could be drawn not only from existing provisions to this effect, such as those common to major international courts and tribunals, but also from less-common provisions such as gender representation requirements at the International Criminal Court.

61 Statute of the ICJ, Art. 9. 62 United Nations Convention on the Law of the Sea, Annex VI, Art. 2. 63 Rome Statute of the International Criminal Court, Arts. 36(5) and 36(8)(a), 64 International Criminal Court, ‘Procedure for the Nomination and Election of Judges, the Prosecutor and Deputy Prosecutors of the International Criminal Court’, ICC-ASP/3/Res.6. 65 Katia Fach Gomez, ‘Diversity and the Principle of Independence and Impartiality in the Future Multilateral Investment Court’, The Law & Practice of International Courts and Tribunals, Vol. 17 Issue 1 (2018), pp. 78–97.

84 Colin M. Brown and Elio Gaarthuis 6.3.2.2 Mechanisms to ensure the financial autonomy of the court will be necessary The workings of a standing court are in large part dependent on its funding, making this aspect central to the independence of a court. Most statutes of international courts provide for the funding of the court through contributions by the states parties to the court, through the international organization within the framework of which the court is established or through a combination of the two. The ICJ, for instance, is funded by the United Nations in a manner decided by the General Assembly of the United Nations.66 Some courts have been impacted by their dependence on funding from states party. The International Criminal Court, for instance, depends on the assembly of states party to the Rome Statute for its annual budgets. When cases are referred to the International Criminal Court by the United Nations Security Council, Article 115 of the Rome Statute establishes that expenses of the court shall be borne by the United Nations, although the United Nations still owes millions of dollars for expenses incurred by the court.67 Furthermore, states parties themselves have outstanding contributions amounting to millions of euros.68 The designers of at least one international court have opted to make the court independent from national governments for its financing. This is the case of the Caribbean Court of Justice, for which a trust fund was established in 2004 with the aim of funding the court in perpetuity.69 The trust fund’s initial capital was raised by the Caribbean Development Bank, and scholars have noted that the model seems to be working as expected, with people involved with the workings of the court noting it as an element worthy of praise.70 Malleson notes that such a funding mechanism aids in the long-term independence of a court and could well shield it from withdrawal of funding as a reaction to potentially politically unpopular decisions.71 Finally, it should be noted that the budget of many international courts is established within the financial framework of another international institution. While such arrangements generally allow an international court to rely on the administrative services of the international institution in question, it has been noted that a self-sustaining international court has significant benefits, such as the possibility of tailoring structures and procedures to the functioning of an international court rather than to institutions that are larger and are not solely engaged in adjudication.72

66 Statute of the ICJ, Art. 33. 67 International Criminal Court, ‘Resolution of the Assembly of States Parties on the Proposed Program Budget for 2017, the Working Capital Fund for 2017, the Scale of Assessment for the Apportionment of Expenses of the International Criminal Court, Financing Appropriations for 2017 and the Contingency Fund’, Resolution ICC-ASP/15/Res.1 (2016), Sec. P. 68 International Criminal Court, ‘Report of the Committee on Budget and Finance on the Work of its Twenty-Seventh Session’, ICC-ASP/15/15 (2016). 69 Revised Agreement Establishing the Caribbean Court of Justice Trust Fund (2004). 70  Kate Malleson, ‘Promoting Judicial Independence in the International Courts’, International & Comparative Law Quarterly, Vol. 58 No. 3 (2009), pp. 671–687. 71 Ibid. 72 Cesare Romano and Thordis Ingadottir, ‘The Financing of the International Criminal Court’, ICC Discussion Paper No. 2, , last accessed on 6 February 2019.

Judicialization of ISDS 85

6.4 A multilateral investment court will be most effective with broad coverage The considerations that have been made in this chapter outline different manners in which a multilateral investment court could be designed in order to increase not only the consistency and predictability but also the independence and impartiality of ISDS. Nevertheless, these elements depend on the share of ISDS that will ultimately be adjudicated at the multilateral investment court. For instance, it will be hard to achieve consistency between awards if only a small share of investment disputes takes place at a multilateral investment court, except perhaps between awards rendered under the same investment agreement. Therefore, mechanisms designed to bring a large number of investment disputes under a multilateral investment court would need to be designed. Some scholars have identified the Mauritius Convention as a possible model.73 In 2013, UNCITRAL adopted rules on transparency in order to address concerns about a lack of transparency in investment dispute settlement. The rules would, however, only apply to treaties concluded after April 2014.74 In order to extend application of the rules to BITs concluded before that date, UNCITRAL developed the Mauritius Convention. The Mauritius Convention establishes that the rules on transparency shall apply in arbitrations where both the respondent state and the state of which the investor is a national are parties to the Mauritius Convention.75 This Convention also presents a standing offer to apply the transparency rules, as the claimant in an arbitration may choose to apply the rules when litigating against a state that is a party to it.76 Kaufmann-Kohler and Potestà argue that a similar model for a multilateral investment court presents several advantages.77 First, this approach relieves states from the burden of individually amending a large number of bilateral investment agreements; numerous treaties would effectively be amended at once. Second, such a mechanism would ensure the creation of a truly global investment dispute settlement mechanism, increasing guarantees of consistency and eliminating the need to develop bilateral improvements to the system. Third, given the controversy concerning reform of substantive standards of protection, it is simply more likely for reform focusing only on dispute settlement to succeed. Fourth, it has been argued that the opt-in nature of the mechanism would further strengthen the chances of success of a multilateral investment court given the possibility of states joining gradually, once the court is functioning. A further model similar to that implemented in the Mauritius Convention is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS Convention). The BEPS Convention was designed to apply reforms previously developed by the OECD to bilateral tax treaties. Such reforms would allow for the filling of gaps that allow corporations to exploit mismatches in bilateral tax treaties to shift profits to tax havens. Given the need to apply such measures to a large

73 Gabrielle Kaufmann-Kohler and Michele Potestà, supra note 26. 74 Art. 1(1) of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration stipulates that ‘the UNCITRAL Rules on Transparency … shall apply to investor-State arbitration initiated … pursuant to a treaty providing for the protection of investments or investors … concluded on or after 1 April 2014’. 75 United Nations Convention on Transparency in Treaty-based Investor-State Arbitration, Art. 2(1). 76 Ibid, Art. 2(2). 77 Gabrielle Kaufmann-Kohler and Michele Potestà, supra note 26.

86 Colin M. Brown and Elio Gaarthuis number of bilateral tax treaties, a mechanism to collectively amend them was developed. Article 1 of the BEPS Convention establishes that all treaties in force between parties and listed in an annex shall be amended. An opt-in mechanism to a multilateral court could potentially also allow states to consent to investors bringing disputes under a bilateral investment treaty against them in a multilateral investment court, regardless of the fact that the state of nationality of the investor has not acceded to the court. Given that the BIT itself would continue to remain in force, an investor would remain capable of bringing a claim under the BIT but could be given the option of instead doing so under the mechanism established by a multilateral court, thereby waiving their capacity to do so under the BIT.

6.5 Conclusions The EU has presented certain broad strokes for the establishment of a multilateral investment court, and such broad strokes would need to be further defined in due course. This chapter has presented some of the considerations that can arise out of mechanisms for increased consistency and predictability of decisions as well as of increased independence and impartiality of adjudicators and of the court. For consistency and predictability, a standing court would in itself result in increased predictability and consistency. It would also allow for the creation of mechanisms that would facilitate better management of multiple proceedings. Furthermore, a standing court would also positively impact on independence and impartiality. Judges would be more independent, both in real terms as well as in perceived terms, and a standing court would be collectively less biased. It would seem that a standing court offers significant advantages over the current system of ISDS.

7

Concrete issues in instituting an international investment court Jun Xiao

7.1 Introduction For the ongoing negotiations of the China–EU Comprehensive Agreement on Investment (CAI), investor-state dispute settlement (ISDS) will be a crucial issue due to controversies about its legitimacy and needed reforms. Among all proposed reforms, the Investment Court System (ICS) proposal by the European Union (EU) will be the most crucial.1 In this chapter, the notion of ICS refers to the two-tiered tribunal system, which constitutes the essential and unique character of the EU’s proposal. Whether and to what extent the future China–EU CAI and the Transatlantic Trade and Investment Partnership (TTIP) would accept the ICS should be decisive for its fate, because China, the EU and the United States (US) are the most important home as well as host economies for foreign investments, and they are active participants in and contributors to the international investment agreements (IIAs). Their treaty practice will have a significant impact on the development of international investment rules. Would China agree with the inclusion of ICS in the China–EU CAI? There has been no official statement from the Chinese government to date. Hence, this chapter will provide an academic analysis of the ICS proposal and China’s possible attitude, in particular with a view to the development of ISDS in general. In doing so, it will also contribute to the broader debate on establishing a viable design for an international investment regime. China’s general interests in ISDS do not prevent its acceptance of possible reforms of ISDS. As summarized by Alschner,2 states may learn from investment claims and alter their treaty design in two ways. As Bayesian learners, states may learn generally from investment disputes around the world. On the other hand, states are Bounded Rational learners. This means that they only react to investment claims when they feel the detrimental consequences of ISDS themselves and not by learning about claims against others. This means that a state as a host country of abundant inward foreign investments would be concerned about the negative consequences of investment claims. Indeed, China has been for a long time one of those host countries, and it is sensitive to such consequences. Reforms of European and US IIAs have been widely regarded as responses to developments in investment arbitration, in particular disputes where they were respondent states,

1 Elsa Sardinha, ‘The New EU-Led Approach to Investor-State Arbitration: The Investment Tribunal System in the Comprehensive Economic Trade Agreement (CETA) and the EU-Vietnam Free Trade Agreement’, ICSID Review, Vol. 32 Issue 3 (2017), pp. 625–672, at 626. 2 Wolfgang Alschner, ‘The Impact of Investment Arbitration on Investment Treaty Design: Myth versus Reality’, Yale Journal of International Law, Vol. 42 No. 1 (2017), pp. 1–66, at 31.

88 Jun Xiao for example the Loewen case for the US, and the Vattenfall cases for Germany.3 However, up until June 2018, China had been challenged in the International Centre for Settlement of Investment Disputes (ICSID) arbitration only three times, namely in Ekran,4 Ansung Housing,5 and Hela Schwarz.6 In these cases, what is involved are not laws and regulations of general application but rather specific measures taken by the local government. Hence, there has been no public grievance triggered by these cases. On the other hand, in known cases where Chinese investors are claimants,7 namely Ping An, China Heilongjiang et al., and Beijing Urban Construction, claims have failed more or less because of the restrictiveness of the relevant Chinese BITs.8 Therefore, from the perspective of Bounded Rational learners, there have been no detrimental consequences of ISDS for China yet; on the contrary, the need for ISDS may be enhanced by the failed experience of Chinese investors as claimants. From the perspective of Bayesian learners, China is fully aware of the possible ‘chilling effect’ of ISDS. Consequently, China will insist on ISDS, but will welcome reforms which can enhance the legitimacy of ISDS. It is noteworthy that the attitude of the EU to ISDS in negotiations of the China–EU CAI is totally different from that in negotiations of the Comprehensive Economic and Trade Agreement (CETA) with Canada and TTIP. There were intense debates about the inclusion of ISDS in CETA and TTIP. But for the China–EU CAI, there seems to be no such opposition. On the contrary, the inclusion of ISDS in TTIP was an argument for the need for ISDS in the CAI, since it is politically difficult to claim that the EU must avoid ISDS with the US because of its dangerous nature but must insist on it in the BIT with China at the same time. Hence, the China–EU CAI will certainly provide for ISDS. The open question is: what kind of ISDS will it be? Is the ICS an appropriate model?

7.2 Brief summary of the two-tiered tribunal system of the ICS The ICS was first proposed by the EU in the context of TTIP and then incorporated in CETA and the EU-Vietnam Investment Protection Agreement (IPA). According to CETA and the EU-Vietnam IPA, a Tribunal (of first instance) and an Appellate Tribunal will be established to hear investors’ claims. The Tribunal of First Instance is composed of Members appointed by the contracting parties for a five-year term in CETA or a four-year term in the EU-Vietnam IPA, renewable once. Each third of the Members shall be nationals of EU member states, of Canada (in CETA) or Vietnam (in the EU-Vietnam IPA), and of third countries, respectively.

3 For different views in this respect, see ibid, at 40–52. 4 Ekran Berhad v People’s Republic of China, ICSID Case No. ARB/11/15. The proceedings were discontinued prior to the constitution of the tribunal. 5  Ansung Housing Co., Ltd. v People’s Republic of China, ICSID Case No. ARB/14/25. On 9 March 2017, the tribunal rendered the award dismissing all claims by the Claimant, pursuant to ICSID Arbitration Rule 41(5). 6 Hela Schwarz GmbH v People’s Republic of China, ICSID Case No. ARB/17/19. The case is still pending, the tribunal was constituted on 8 January 2018. 7 Cases are not taken into account where investors of Hong Kong or Macao SAR tried to submit claims under a relevant Chinese BIT, due to the controversial issue of the applicability of the BITs, for example the Sanum case. 8 In both Ping An v Belgium, ICSID Case No. ARB/12/29, and China Heilongjiang et al. v Mongolia, PCA Case No. 2010-20, the tribunal declined to exercise jurisdiction. In Beijing Urban Construction v Yemen, ICSID Case No.ARB/14/30, the tribunal confirmed its jurisdiction to hear only those claims related to allegations of expropriation. On 7 June 2018, the tribunal issued a procedural order taking note of the discontinuance of the proceedings pursuant to the parties’ agreement.

Instituting international investment court 89 Each case will be heard by a division consisting of three Members of the Tribunal, of whom one shall be a national of an EU member state, one a national of Canada (or Vietnam), and one a national of a third country who chairs that division. The constitution of divisions are pre-established on a rotational, random, and unpredictable basis, while giving equal opportunity to all Members to serve. Therefore, the constitution of the Tribunal of First Instance, and of the Appellate Tribunal, is different from the ad hoc tribunal formed in each case under traditional ISDS, and in this sense, they can be called standing or permanent tribunals. While the disputing parties have the right to appoint arbitrators of the ad hoc tribunal, they have been deprived of this right in the ICS. In particular, the investor as a claimant will not have any say in the choice of adjudicators, while the states still have power over the constitution of the Tribunal. The Members of the Tribunal shall ‘possess the qualifications required in their respective countries for appointment to judicial offices, or be jurists of recognized competence’. At the same time, they shall have expertise in public international law. Detailed ethical standards imposed on Members have been provided for in both treaties in order to ensure their independence. In particular, they shall, upon appointment, not act as counsels or partyappointed experts or witnesses in any pending or new investment disputes. Members of the Tribunal are employed on a part-time basis. They are required to be available and able to perform their function. In order to ensure their availability, the Members will be paid a monthly retainer fee. Other fees and expenses of the Members will be determined pursuant to the ICSID financial regulations. In the future, the contracting parties may decide to transform the retainer fee and other fees and expenses into a regular salary, and Members would then be employed on a full-time basis. While CETA and the EU-Vietnam IPA have very similar provisions on the Tribunal of First Instance, the provisions on the Appellate Tribunal in the two treaties are quite different. The constitution of the Appeal Tribunal in the EU-Vietnam Investment Protection Agreement is in many respects like the Tribunal of First Instance. Members of the Appeal Tribunal are appointed by the contracting parties, with the equal national representation and four-year term, like the Tribunal of First Instance. Similarly, each case will be heard in divisions constituted according to the same rotation principle. Members of the Appeal Tribunal are also employed on a part-time basis with payment of a retainer fee. With respect to their constitution, the only difference is that there is a higher qualification requirement for the Members of the Appeal Tribunal – they shall possess ‘the qualification required in their respective countries for appointment to the highest judicial offices or be jurists of recognized competence.’ On the other hand, in CETA, several administrative and organizational aspects of the Appellate Tribunal have been left to the decision of the Joint Committee, while they are explicitly provided for in the EU-Vietnam IPA. Both CETA and the EU-Vietnam IPA contain a commitment of the contracting parties to pursue the establishment of a multilateral investment tribunal and appellate mechanism. Indeed, the EU is actively promoting the establishment of a multilateral investment court (MIC). In March 2018, the EU Council authorized the European Commission to negotiate an MIC and adopted the Negotiating Directives therefor.9

9 Council of the EU, ‘Negotiating Directives for a Convention Establishing a Multilateral Court for the Settlement of Investment Disputes’, 20 March 2018, , last accessed on 4 March 2019.

90 Jun Xiao

7.3 Value of the ICS 7.3.1 A step in the right direction The background of the EU’s proposal on the ICS is a wider public debate about ISDS in TTIP involving European politicians and civil society. The intense opposition to ISDS in that debate indicates that ‘the backlash against ISDS’ does really exist.10 In fact, the criticisms ‘range from the highly critical to the more nuanced concerns about the operation of specific features of the system,’ and sometimes, they could reflect ‘broader philosophical questions about the relationship between national and international law’.11 This chapter will not discuss the reasons why we need international investment law and a dispute settlement mechanism, and, more specifically, establishment of investors standing.12 Rather, the starting point of this chapter is that ISDS is needed, which should be the basic position of China and the EU in the China–EU CAI negotiations. The ICS is an international adjudicatory mechanism granting investors standing, but, in the words of the EU and Canada, it represents ‘an important and radical change’ to traditional ISDS.13 Unsurprisingly, the reactions to the ICS proposal are mixed in light of the wide range of criticisms of ISDS. For example, Van Harten made accusations that ‘ICS is mainly a re-branding exercise for ISDS’, because firstly, ICS judges would continue to have a financial interest in future claims because they are still paid a (lucrative) daily fee; and secondly, they would not be barred from working on the side as ISDS arbitrators.14 On the other hand, Venzke praised the proposal since it ‘provides, in principle, a welcome response to some of the more egregious shortcomings of investor-state arbitration’.15 Sardinha argued that the ICS ‘more closely resembles an international court proper, rather than ISDS as traditionally understood’, and recognized that it ‘promise[s] to palliate some of the concerns commonly associated with ISDS’.16 The focal point of Van Harten’s criticism is that there are no tenured judges making decisions in the ICS. In this respect, the change in the terms used for adjudicators in the ICS is noteworthy. Initially, the EU used the term judge in its TTIP Proposal. CETA and the EU-Vietnam IPA use the title Members of the Tribunal/Appellate Tribunal. For the future negotiations of a MIC, one of the principles set out by the EU is that the judges should be tenured and qualified and receive permanent remuneration. Although

10 Michael Waibel et al. (eds.), The Backlash against Investment Arbitration: Perceptions and Reality (Austin: Wolters Kluwer, 2010), p. xxxvii. 11 Elsa Sardinha, ‘The Impetus for the Creation of an Appellate Mechanism’, ICSID Review, Vol. 32 Issue 3 (2017), pp. 503–527, at 505. 12 For a discussion of the reasons, see Stephan Schill, ‘Private Enforcement of International Investment Law: Why We Need Investor Standing in BIT Dispute Settlement’, in Michael Waibel et al. (eds.), The Backlash against Investment Arbitration: Perceptions and Reality (Austin: Wolters Kluwer, 2010), pp. 29–50. 13  Council of the EU, ‘Joint Interpretative Instrument on the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States’, 27 October 2016, , last accessed on 4 March 2019. 14 Gus Van Harten, ‘Key Flaws in the European Commission’s Proposals for Foreign Investor Protection in TTIP’, Osgoode Legal Studies Research Paper Series, Vol. 12 Issue 4 (2016), pp. 1–7, at 1–2. 15 Ingo Venzke, ‘Investor-State Dispute Settlement in TTIP from the Perspective of a Public Law Theory of International Adjudication’, The Journal of World Investment & Trade, Vol. 17 Issue 3 (2016) pp. 374–400, at 374. 16 Elsa Sardinha, supra note 1, at 629, 671.

Instituting international investment court 91 the symbolic effect of Members replacing the term arbitrators in traditional ISDS should not be underestimated,17 the use of a more neutral term Members, rather than judges or arbitrators, indicates that the ICS in CETA and the EU-Vietnam IPA is to a certain extent transitional and experimental. Moreover, there are still uncertainties about the ICS. Firstly, the title of the adjudicators is not the only difference that exists in the TTIP Proposal, CETA, and the EU-Vietnam IPA. A comparison of provisions on the Appellate Tribunal in CETA and the EU-Vietnam IPA indicates that the structure of the ICS could be adjusted to accommodate the specific situations of the contracting states. Secondly, the opinion of the ‘selfish’ Court of Justice of the European Union (CJEU) on the ICS is also uncertain. For example, ‘it is doubtful whether the CJEU would agree to the ICS, given that no preliminary reference mechanism is envisaged with a binding ruling of the CJEU’.18 While this could be remedied by including a preliminary reference system, the other contracting state, such as the US and China, can hardly agree with that solution, which requires that the CJEU take over the role as the main interpreter of the relevant investment treaty.19 Alternatively, that role would be reciprocally granted to the constitutional or supreme courts of the other contracting state. It would be a re-introduction of domestic courts into ISDS. Although this may be politically welcomed, the value of the ISDS would be undermined.20 Therefore, it is possible as well as necessary to improve the design of the ICS, considering that it is a step in the right direction. This chapter joins the circle of optimism because the ICS has two valuable features, namely the standing tribunal and the appellate mechanism, which can address some of the concerns about the current ad hoc investment arbitration.

7.3.2 Value of the standing tribunal There are criticisms of ‘double hatting’ or a ‘revolving door’, referring to the practice that individuals play sequentially or even simultaneously multiple roles, especially as arbitrator and counsel, across cases within the ad hoc arbitration system.21 Although it is natural that disputing parties tend to choose candidates with good ‘track records’, but if arbitrators decide issues which they are confronted with in other cases acting as counsel, there could be conflicts of interest. Furthermore, when those candidates are from a relatively homogenous group which has been slated for its ‘pale, male and stale’ character,22 there could be scepticism from developing countries. Recent research using statistical data has proved that the practice of ‘revolving door’ actually exists. Moreover, since treaty-based investment

17 Elsa Sardinha, supra note 1, at 633. 18 Szilard Gaspar-Szilagyi, ‘A Standing Investment Court under TTIP from the Perspective of the Court of Justice of the European Union’, Journal of World Investment & Trade, Vol. 17 Issue 5 (2016), pp. 701–742, at 737. 19 Ibid, at 740. 20 On the other hand, Schill argued that, from the perspective of EU constitutional law, it seems possible to establish an ISDS mechanism without the CJEU’s prior involvement. Stephan Schill, ‘Editorial: Opinion 2/13 – The End for Dispute Settlement in EU Trade and Investment Agreements?’ Journal of World Investment & Trade, Vol. 16 Issue 3 (2015), pp. 379–388, at 387. 21 Malcolm Langford et al., ‘The Revolving Door in International Investment Arbitration’, Journal of International Economic Law, Vol. 20 Issue 2 (2017), pp. 379–388, at 301. 22 Susan Franck, ‘The Diversity Challenge: Exploring the “Invisible College” of International Arbitration’, Columbia Journal of Transnational Law, Vol. 53 (2015), pp. 429–506, at 429.

92 Jun Xiao arbitration is initiated by investors only, there are concerns about the commercial incentives for arbitrators’ pro-investor decisions: arbitrators might depend on investors for future appointments and, ultimately, for work, which would make arbitrators more inclined to cater to investors’ interests. For that reason, commentators accuse arbitrators and law firms of ‘profiting from injustice’.23 More generally, the party-appointed arbitrators in the traditional arbitration mechanism raise the question of ‘moral hazard’, that is, the potential partisanship of arbitrators as ‘representatives’ of their nominators. Hence, as one commentator argues, the best way to avoid ‘moral hazard’ in ISDS is to abandon the practice of party appointment.24 Whether the controversies about the issues mentioned above25 are perceived or actual, they have indeed engendered a lack of confidence in ISDS. Because much of the criticism targets the traditional ad hoc arbitral tribunal consisting of party-appointed arbitrators, the core element of the ICS proposal by the EU is to establish a standing, instead of a traditional ad hoc tribunal. The Members of the tribunal are appointed for a fixed term, and they may not act as counsel or party-appointed expert or witness in investment dispute cases. Each division hearing a specific case is constituted on a rotational basis; thus, the incentives for reappointment are reduced. The appointment of Members of the tribunals by both contracting parties could potentially enlarge the group of adjudicators. The establishment of the standing tribunal is clearly a response to criticism of ad hoc arbitration. On the other hand, how far concerns could be dispelled may depend on the design of the standing tribunal. In this respect, there are several tentative questions. The most crucial one might be that the Members of the tribunal are still paid a daily fee and therefore continue to have a financial interest in future claims, as criticized by Van Harten. But the rotational appointment of division members should diminish the influence of such financial interest on individual Members. If there is any financial interest in future claims, it would impact Members as a whole, rather than individuals. Since state parties control the initial appointment of Members and their reappointment, an individual Member making ‘proinvestor’ decisions would possibly not be re-nominated, and the financial interest would be counterbalanced. Would Members also then tend to make ‘pro-state’ decisions, because only states will be their nominators? The answer to this question relates, in turn, to other issues including the length of the term, the appointment process, and remuneration. A longer term with (quasi-)automatic reappointment would help Members to resist the influence of their nominators. Nevertheless, states may not always prefer to nominate ‘pro-state’ adjudicators, especially if they are also capital-exporting countries. Remuneration is an important and difficult issue for the standing tribunal. ‘Compensation for adjudicators is also generally considered as a core issue for judicial independence and for attracting good judges in good institutional design for courts.’26 Obviously, if the remuneration is too low, it cannot attract good adjudicators; therefore, per-day fees may

23 Pia Eberhardt and Cecilia Olivert, Profiting from Injustice: How Law Firms, Arbitrators and Financiers Are Fuelling an Investment Arbitration Boom (Brussels/Amsterdam: Corporate Europe Observatory and the Transnational Institute, 2012), pp. 1–73, at 7–9. 24 Jan Paulsson, ‘Moral Hazard in International Dispute Resolution’, ICSID Review, Vol. 25 Issue 2 (2010), pp. 339–355, at 339. 25 For a review of the controversial arguments, see Elsa Sardinha, supra note 11, at 508–526. 26 David Gaukrodger, ‘Adjudicator Compensation Systems and Investor-State Dispute Settlement’, OECD Working Papers on International Investment, 2017/05, , last accessed on 4 March 2019, pp. 1–37, at 3.

Instituting international investment court 93 be necessary. But this results in high costs as criticized in the current ad hoc arbitration. Without daily fees, the remuneration should be high enough to compensate for the potential income the Member could have made working as a counsel or an expert; otherwise, first-class lawyers would not agree to serve. In addition, the Members will lose income if not reappointed, and if a Member making decisions against a state is not to be reappointed, would this interfere with the ability of Members to act independently?27 In addition, whether a Member of the tribunal is employed on a part-time or full-time basis certainly results in different amounts of remuneration. Hence, it is understandable that CETA and the EU-Vietnam IPA authorize the Joint Committee to determine the remuneration of Members later, while the EU initially proposed a quite low retainer fee in its TTIP Proposal. In short, some core issues which are important for the well-functioning of the tribunal remain to be addressed. Nevertheless, the standing tribunal itself should be a welcome response.

7.3.3 Value of the appellate mechanism The second valuable feature of the ICS is the establishment of the appellate mechanism. Inconsistent awards have been one of the important reasons for the legitimacy crisis in investment arbitration.28 Establishing an appellate mechanism has been proposed to remedy that inconsistency. In fact, there have been debates about the benefit, the necessity, and the possibility of an appellate mechanism for some time. The US has incorporated the possibility of acceding to a future, in particular multilateral, appellate body in its 2004 Model BIT and all IIAs signed thereafter. In 2004, the ICSID initially proposed an optional appeals facility under its framework, but it ultimately suspended the plan due to the lukewarm response from states.29 This development triggered intense academic discussion on the pros and cons of the appellate mechanism. CETA has taken concrete action for the first time and provides for the establishment of an Appellate Tribunal, which has led once again to active discussions.30 Hence, in light of the existing numerous monographs and the purpose of this chapter, various arguments for and against the appellate mechanism will not be delved into here. Rather, some critical points for the assessment of the appellate mechanism in CETA and the EU-Vietnam IPA will be summarized. Firstly, there are different reasons for inconsistent awards. In light of the current network of over 3,300 IIAs,31 one may doubt whether states really want the coherence of investment treaty rules. Sardinha comments on the development of treaty practice with regard to the appellate mechanism: ‘it might be that States have tolerated (and may continue to tolerate) a degree of inconsistency given the costs and complications involved in creating an appellate mechanism’.32 But Kurtz argued that state parties are often repeating players

27 Ibid, at 32. 28 Susan Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions’, Fordham Law Review, Vol. 73 (2005), pp. 1521–1625, at 1521. 29  ICSID, ‘Suggested Changes to the ICSID Rules and Regulations’, Working Paper of the ICSID Secretariat, 12 May 2005, , last accessed on 4 March 2019. 30 Accordingly, there is a special issue of ICSID Review in 2017 which collects articles discussing this topic. 31 UNCTAD, World Investment Report 2016 (Geneva: United Nations Publication, 2016), p. 101. 32 Elsa Sardinha, supra note 11, at 507.

94 Jun Xiao within investment arbitration and ‘thus have inherent incentives to manage not only the case before them but also their prospective risk profile’; therefore, we should aim for a certain level of consistency.33 It is obvious that while an appellate body in a bilateral agreement can only eliminate inconsistent interpretation of that agreement, it is unable to address different interpretations of other treaties. Inconsistencies across treaties could be remedied by a multilateral appellate body only. That said, for a multilateral appellate body, commentators rightly point out that ‘caution must be expressed that the role of a multilateral appellate mechanism would not be to “standardize” investment treaty law by reading down the subtle (and not too subtle) differences between treaties’.34 Moreover, there are ‘skeletally drafted and generally worded treaty provisions that confer broad discretion on arbitrators and are thus capable of generating broad and/or idiosyncratic interpretations’.35 Thus, a more detailed drafting of treaty provisions could lessen the possibility of inconsistency. Nevertheless, generally speaking, the power of a multilateral appellate body to harmonize different interpretations of treaty law is clear, especially in instances where not only similar provisions across different investment treaties but also provisions of the same treaty in relation to virtually identical facts have been interpreted differently. Secondly, the other function of the appellate mechanism is to correct errors in specific cases. However, there is a real difficulty in identifying wrong decisions because of the generally worded treaty provisions and complicated underlying factual matrixes in each case.36 As pointed out by a commentator, ‘most awards that are susceptible to being labelled “wrong decided” are cases in which one disagrees with the normative choices underlying the reasoning rather than with an identifiable error of law’.37 Indeed, ad hoc arbitrators are typically elite jurists with a high level of expertise and experience. The ‘wrong decided’ awards are, in fact, rather inconsistent decisions from a given point of view, which are a result of differences in the normative choices and the form and expression of legal reasoning. Therefore, the second function of the appellate mechanism, namely error correction, should be subordinate to its first function, namely contribution to consistency. Insofar as inconsistent awards would be modified and reversed by the appellate body, ‘wrong’ decisions would also be eliminated. The ‘correctness’ of awards should be derived from consistency. A related question is ‘the gap between consistent and accurate treaty interpretation’, more precisely, ‘gains in the consistency of treaty interpretation by a standing, permanent appellate body would not guarantee corresponding gains in the accuracy of treaty interpretation’.38 In other words, what is the basis of the legal authority of an appellate body to correct decisions of the Tribunal of First Instance? It would not be the difference of the qualifications of Members of tribunals – all of those Members should be highly qualified individuals. Whether an individual possesses the qualifications required ‘for appointment to the highest

33 Jürgen Kurtz, ‘Building Legitimacy through Interpretation in Investor-State Arbitration: On Consistency, Coherence and the Identification of Applicable Law’, in Zachary Douglas et al. (eds.), The Foundation of International Investment Law: Bringing Theory into Practice (Oxford: Oxford University Press, 2014), pp. 257–296, at 270. 34 Mark Huber and Greg Tereposky, ‘The WTO Appellate Body: Viability as a Model for an Investor-State Dispute Settlement Appellate Mechanism’, ICSID Review, Vol. 32 Issue 3 (2017), pp. 545–594, at 585. 35 Elsa Sardinha, supra note 11, at 524. 36 Ibid, at 512. 37 Ibid, at 514. 38  Mark Feldman, ‘Investment Arbitration Appellate Mechanism Options: Consistency, Accuracy, and Balance of Power’, ICSID Review, Vol. 32 Issue 3 (2017), pp. 528–544, at 528.

Instituting international investment court 95 judicial offices’, as provided for in the EU-Vietnam IPA, does not necessarily mean that he/ she would interpret treaties more accurately. There are two reasons for the legal authority of an appellate body. With respect to ‘wrong’ decisions, from a technical point of view, different lines of treaty interpretation in themselves could be deemed accurate. On the other hand, the essence of provisions of IIAs is a commitment made by states to protect foreign investors. Therefore, the accurate treaty interpretation should be the one which accurately identifies what the contracting states have actually committed to. Hence, the first reason for the legal authority of an appellate body is the close relationship between consistency and accuracy. Since consistency enhances predictability, and thus the legitimacy of ISDS, and states would know the consequences of their commitments better, consistent awards could be accepted as accurate. The second reason is the institutional design of the appellate mechanism, which is different from the ad hoc tribunals. In particular, this includes the control mechanisms pointed out by Feldman, such as ‘budget, power, appointments, specificity in rulemaking, joint interpretations, and soft law’.39 By means of those mechanisms, an appellate body would know better what states have not committed to and could accurately interpret the treaty provisions. In sum, not all but certainly some problems of the ad hoc arbitration can be addressed by an appellate mechanism. It is part of a solution. The most persuasive policy arguments for the appellate mechanism are based on goals of achieving greater consistency, coherence, and predictability. The correctness of awards and accuracy of treaty interpretation would be derived from the enhanced consistency.

7.4 Deficiencies of the ICS The concepts of the standing tribunal and appellate mechanism are the core and valuable elements of the ICS, thus they greatly contribute to the reform and development of ISDS. But the assessment of the value of those two elements indicates that the essential characteristic of the ICS, namely the two-tiered tribunal system, is neither necessary on the bilateral level nor practical on the multilateral level.

7.4.1 Unnecessary two-tiered system on the bilateral level Because of the lack of some administrative and organizational aspects of the Appellate Tribunal in CETA, the analysis here will be based on the provisions of the EU-Vietnam IPA. The constitution of the Tribunal of First Instance and of the Appeal Tribunal have very similar features. Both are standing tribunals, consisting of Members appointed by contracting states, and cases will be heard by divisions constituted on a rotational basis. The only difference between the two groups of adjudicators is their qualifications, that is, Members of the Tribunal of First Instance shall possess the qualifications required for appointment to the national judicial office, and Members of the Appeal Tribunal shall possess the qualifications required for appointment to the highest national judicial office. In fact, a state should be able to nominate enough nationals of equally high calibre in the field of public international law for both tribunals. It would be absurd if the state were to intentionally choose less qualified individuals for the nomination of Members of the Tribunal of First Instance in order to guarantee the authority of the Appeal Tribunal. Since two tribunals have almost the same

39 Ibid, at 544.

96 Jun Xiao institutional design, except for the qualifications requirement, the only effect that difference seems to instil is a belief that Members of the Appeal Tribunal are better. The greater consistency enhanced by an appellate mechanism is the first reason for its authority and its most important contribution. The contribution, however, is limited in the case of a BIT. More importantly, the significant contribution of an appellate mechanism comes from its ‘small and stable membership’,40 in comparison with the ad hoc arbitral tribunals. That contribution, and hence the necessity of the appellate mechanism, decreases to a considerable degree if there is already a standing Tribunal of First Instance which also has a small and stable membership, because the possibility of inconsistent and incorrect awards of that standing tribunal has been diminished too. However, under the framework of a BIT, there would not be so many ISDS cases. A small group of adjudicators constituting a standing tribunal should be capable of hearing those cases and ensuring the consistency of decisions. The nomination of highly qualified individuals and other control mechanisms mentioned above would suffice to ‘correctly’ interpret and apply provisions of the treaty. If such an institution could not resolve the problems of consistency and legitimacy, what else could the Appeal Tribunal contribute? Moreover, as pointed out by Huber and Tereposky, ‘because of the low caseload, there is little opportunity to build consistency and coherency, the argument for an appellate mechanism is less convincing for investment agreements that are likely to have low usage, which also raises questions about the cost of maintaining it’.41 Therefore, the two-tiered system of the ICS is unnecessary on the bilateral level. One standing tribunal suffices.

7.4.2 Impracticability on the multilateral level Arguably, the necessity and the practicability of the two-tiered tribunal system on the multilateral level are more important for the assessment of the system. Since the ICS in CETA and the EU-Vietnam IPA is transitional and experimental or, in the words of Sardinha, ‘progressive, albeit imperfect’,42 the ultimate goal of the EU is the establishment of a MIC, as explicitly declared by the EU: the ICS proposals ‘are intended as the stepping stones towards the establishment of a multilateral system’.43 Accordingly, Article 8.29 CETA states that Canada and the EU will join the multilateral mechanism and make appropriate transitional arrangements. Article 15 the EU-Vietnam IPA provides for the same. The reasons why the two-tiered tribunal system is unnecessary on the bilateral level should principally apply on the multilateral level too. A counterargument may be that the caseload faced by the multilateral tribunal is much higher than the caseload on the bilateral level, and the possibility of making erroneous decisions would be accordingly higher, so that an appellate body to correct errors is needed. That said, precisely because of the potential of a heavy caseload, the two-tiered tribunal system is impractical on the multilateral level. The caseload of the future MIC cannot be exactly forecasted yet, and thus it might be appropriate to refer to the statistics of the ICSID: since 2011, approximately 45 cases per

40 Susan Franck, supra note 28, at 1607. 41 Mark Huber and Greg Tereposky, supra note 34, at 584. 42 Elsa Sardinha, supra note 1, at 671. 43 European Commission, ‘Investment in TTIP and Beyond – The Path for Reform’, , last accessed on 4 March 2019, pp. 1–12, at 11.

Instituting international investment court 97 year, 53 in 2017, have been registered at the ICSID.44 This is much higher than the caseload of other multilateral adjudicatory mechanisms. Moreover, the investment disputes are commonly complex and also document-intensive cases. Among the multilateral adjudicatory mechanisms, the World Trade Organization (WTO) dispute settlement has a caseload that mostly resembles that of the ICSID, namely approximately 15 disputes initiated per year since 2011. It should be noted that it is not uncommon in the WTO practice that several disputes concern the same measures of the respondent state. Hence, the number of panels established per year, that is, an annual average of 11 in the same period, would be more indicative of the caseload of the WTO.45 Another comparison could be made with the caseload of the WTO Appellate Body, a standing tribunal which hears cases in divisions on a rotational basis. The Appellate Body issued 122 reports between 1996 and 2015, averaging 6.1 reports per year and ranging between one and ten reports per year. The annual average caseload can be adequately handled by the seven sitting Members, while the caseload above average in recent years appears to be exceeding its capacity.46 It is noted that the scope of review of the WTO Appellate Body is limited to legal issues, and the work of the possible investment Tribunal of First Instance would be far more fact-extensive and documentintensive; on the basis of the workload of the WTO dispute settlement, one may speculate that the multilateral standing Tribunal of First Instance must have more than 40 Members to hear 45 cases per year.47 Such a tribunal would be too large in comparison with other standing multilateral judicatory mechanisms. For example, the International Court of Justice has 15 judges, plus judges ad hoc in a specific case; the International Criminal Court has 18 judges; and the International Tribunal for the Law of the Sea is composed of 21 Members. The WTO Appellate Body is composed of just seven Members. A standing tribunal with too many Members not only raises questions of financial burden. More importantly, its work could also be damaged by its large membership. When the International Court of Justice was being established, scholars pointed out that the Court could work only if there were fewer than 20 judges. In the discussion of a possible expansion of the membership of the WTO Appellate Body, WTO Members, former Members of the Appellate Body, and scholars expressed reservations because an increase might affect collegiality among the Appellate Body Members.48 For example, Ehlermann stated that the small number has had extremely positive effects on the intimacy and collegiality of the deliberations of the Appellate Body, and he commented on the role of collegiality: The system of ‘exchange of views’ among all members has proved to be of enormous benefit to the work of the Appellate Body. As intended, the exchanges have permitted divisions to draw on the individual and collective expertise of all members. In addition, they have contributed greatly to consistency and coherence of decision-making.49

44  ICSID, ‘The ICSID Caseload – Statistics (Issue 2018-1)’, , last accessed on 4 March 2019, pp. 1–35, at 7–8. 45  WTO, ‘Annual Report 2017’, , last accessed on 4 March 2019, pp. 1–182, at 108. 46 Mark Huber and Greg Tereposky, supra note 34, at 583. 47 It is a speculation only, without solid mathematical basis. 48 Mark Huber and Greg Tereposky, supra note 34, at 572. 49 Claus-Dieter Ehlermann, ‘Six Years on the Bench of the “World Trade Court”: Some Personal Experiences as Member of the Appellate Body of the World Trade Organization’, Journal of World Trade, Vol. 36 Issue 4 (2002), pp. 605–639, at 612.

98 Jun Xiao Hence, for a Multilateral Investment Tribunal of First Instance, a small membership would not suffice for the caseload; a large membership would not ensure the collegiality of its work and thus would diminish the consistency of awards, a key value of the standing tribunal. A Multilateral Investment Tribunal of First Instance is therefore simply impractical. On the other hand, a multilateral appellate body of a relatively small membership could still be practicable, insofar as its scope of review is limited to legal issues.

7.5 Conclusions A stand-alone multilateral appellate body bolted on to the prevailing ad hoc arbitration system might be a better solution, one which assimilates the WTO Appellate Body.50 In this regard, Pauwelyn has made an interesting comparative analysis between ISDS and the WTO dispute settlement mechanism, especially their ‘judges’,51 which might be instructive. Recently, the WTO dispute settlement mechanism has been receiving increasing support. It is a two-tiered system of ad hoc panels and a standing Appellate Body. The panellists tend to be relatively low-key diplomats with government backgrounds, often without law degrees or legal expertise. This provides for sufficient political participation and opportunities for expressing preferences. The relative inexperience of panellists is compensated for by the existence of the Appellate Body and other factors. Thus, two instances play different, and complementary, roles in the system. As explained above, the ICS of two instances, namely the Tribunal of First Instance and the Appellate Tribunal, cannot bring beneficial effects of ‘1+1>2’, if not ‘1+1, last accessed on 6 February 2019, p. 3. 12 China as a respondent won in Ansung Housing v China, ICSID Case No. ARB/14/25; and Chinese investors as claimants won in Tza Yap Shum v Peru, ICSID Case No. ARB/07/6, and Sanum v Laos, PCA Case No. 2013-13. Chinese investors lost in Ping An v Belgium, ICSID Case No. ARB/12/29; and China Heilongjiang et al. v Mongolia, PCA Case No. 2010-20 (2010). 13 Anthea Roberts, supra note 3, at 414. 14 Anthea Roberts and Zeineb Bouraoui, supra note 6. 15 Anthea Roberts, supra note 3, at 413.

China’s policy on ISDS reform 115 on current rules such as the UNICITRAL arbitration rules and the New York Convention. Hence, it appears that the change in such structures will not be sufficient to solve the legitimacy question and will need more thorough improvement. Rather than a bilateral ICS, China may prefer a multilateral investment court (MIC) with Chinese elements. These elements may include a strong dispute-prevention mechanism and a flexible alternative dispute resolution (ADR) mechanism, as well as an ICS included not only in new BITs but also in ‘old’ BITs by an ‘opt-in’ mechanism like the Mauritius Convention on Transparency. While the ICS can be considered EU-driven, the position of the EU as a unilateral supporter may undermine the ICS’s adoption by other states. In contrast, for the promotion of an MIC, UNCITRAL might be a better place, as it is wellaccepted, global, inter-governmental, open to all stakeholders, and has the competence and experience to launch a multilateral treaty negotiation.16 Moreover, the MIC option might also involve costs and budgetary issues with the establishment of a new international body.17 In consideration of China’s important role and impact in the field of international investment agreements and global capital flows, it could be anticipated that it would be helpful if the EU could garner China’s support for the MIC proposal.18 Thirdly, the fundamental difference between China and a paradigm shifter is that China is not resistant to embracing investment arbitration, nor, owing to China’s growth in outward investments, will it abandon ISDS. However, China may find shared values with paradigm shifters in certain aspects. For instance, China might be interested in dispute prevention policies (DPP) and investment facilitation measures, which are included in Brazil’s Model Cooperation and Facilitation Investment Agreement.19 China also might adopt a similar attitude towards state-state dispute settlement in line with South Africa’s preferred option. In light of its investment in countries in the Belt and Road Initiative (BRI), China’s first choice would not be inefficient domestic courts and local remedy.20 Also, China’s current view of investment arbitration is that it is adversarial and costly, which is opposed to its preference for amicable dispute settlement. This preference is evidenced by China implementing the BRI, which is aimed at cooperation and co-development.21 Thus, the establishment of a BRI dispute settlement mechanism that incorporates Chinese elements such as mediation is recommended by some Chinese scholars22 and is being seriously considered by the

16 UNCITRAL, ‘Report of the United Nations Commission on International Trade Law of Its Fiftieth Session’, UN Doc. A/72/17 (2017), para. 264. 17 Caio Cesar Esteves Soares, ‘Investor-State Dispute Settlement: An Analysis of the Reform Proposals on its Institutional Structure’, 11 May 2017, , last accessed on 28 December 2018, pp. 1–51, at 36. 18 Tong Qi and Hongling Ning, ‘论欧盟投资法院系统与中国的选择’ (On the EU’s Investment Court System and China’s Choice), in《中国国际法年刊2017》（北京：法律出版社2018年）Chinese Yearbook of International Law (Beijing: China Law Press, 2018), pp. 156–180, at 178. 19 Brazil Model Cooperation and Facilitation Investment Agreement (2015), Arts. 1 and 25. 20 States with strong interests as capital-exporters may be reluctant to empower domestic courts in certain developing states owing to concerns about the quality and timeliness of the justice they dispense. 21  David Gaukrodger and Kathryn Gordon, ‘Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community’, OECD Working Papers on International Investment, 31 December 2013, , last accessed on 28 December 2018. pp. 1–101, at 19, 71. 22 Guiguo Wang, ‘一带一路战略争端解决机制’ (Dispute Settlement Mechanism in the Belt and Road Initiative), 《中国法律评论》2016年第2期, Chinese Law Review, Issue 2 (2016), pp.33–38. Tong Qi and Liping Huang, ‘构建一带一路争议解决中心的若干思考’ (On the Establishment of ‘The Belt and Road Centre for Dispute Settlement’),《一国两制研究》2017年第4期, Journal of One Country Two Systems, Vol. 34 Issue 4 (2017), pp.121–129.

116 Tong Qi Chinese government.23 ADR such as consultation and mediation have clear advantages in improving efficiency, creating cost savings,24 and achieving mutually acceptable solutions.25 The substance of consultation and mediation is not entirely limited to the damages,26 the interpretation of treaty, and the determination of the breach of contract. More importantly, resolving disputes through independent negotiations is also conducive to maintaining good investment relations and follow-up cooperation between investors and the host states.27 The Chinese government has exhibited a strong interest in promoting investment facilitation, as found in declarations by the BRICS Summit28 and the dialogue on investment facilitation at the World Trade Organization (WTO).29 The Chinese government has also exhibited an interest in the dispute coordination mechanism in its draft Foreign Investment Law 2015,30 and it is working on investment facilitation issues.

9.2.2 Institutional competition on investor-state arbitration The main problem with the current ISDS system is that it is based on a model of commercial arbitration. It relies on ad hoc tribunals and party-appointed arbitrators to resolve one-off disputes, even though the disputes may involve public law and policy.31 However, institutions involved include international organizations such as the ICSID, business organizations such as the International Chamber of Commerce (ICC), and even domestic institutions such as the London Court of International Arbitration (LCIA), and all of them play important roles in dispute resolution services.32 At present, there is no one unified institution with compulsory jurisdiction in the field of international investment law such as the WTO Dispute Settlement

23 On 21 April 2017, in the meeting with WTO director general Roberto Azevêdo, Mr. Zhou Qiang, President of the Supreme People’s Court, said that China is willing to improve the investment dispute settlement mechanism, protect the rights and interests of investors, and promote the legalization of investment dispute settlement mechanism. 24 UNCITRAL, ‘Possible Reform of Investor-State Dispute Settlement (ISDS), Note by the Secretariat’, A/CN.9/WG.III/WP.142, 18 September 2017, , last accessed on 28 December 2018. 25 ‘Note: Mediation of Investor-State Conflicts’, Harvard Law Review, Vol. 127 No. 8 (2014), pp. 2543– 2564, at 2552. 26 UNCTAD, Investor-State Disputes: Prevention and Alternatives to Arbitration (Geneva: UN Publication, 2010), pp. 23–24. 27 Rebecca Golbert, ‘The Global Dimension of the Current Economic Crisis and the Benefits of Alternative Dispute Resolution’, Nevada Law Journal, Vol. 11 Issue 2 (2011), pp. 502–522, at 509. 28 BRICS, ‘Outlines for BRICS Investment Facilitation’, 31 August 2017, , last accessed on 6 February 2019. 29 WTO, ‘Joint Ministerial Statement on Investment, Facilitation for Development’, WT/MIN(17)/59, 13 December 2017. WTO, ‘DG Azevêdo Addresses the Informal Dialogue on Investment Facilitation’, 23 April 2018, , last accessed on 28 December 2018. 30 In China’s Draft Foreign Investment Law (2015), Chapter 8 specially addressed the ‘Coordination of Disputes’. 31  Sergio Puig and Gregory Shaffer, ‘Imperfect Alternatives: Institutional Choice and the Reform of Investment Law’, American Journal of International Law, Vol. 112 Issue 3 (2018), pp. 361–409, at 366. 32 In addition to the ICSID and commercial arbitration institutions, some international dispute settlement institutions with more public law features such as the ICJ and its former PCIJ, the European Court of Justice, the European Court of Human Rights, the Inter-American Committee, and the Inter-American Court of Human Rights also have certain jurisdiction over disputes between investors and host countries, and are recognized by some international investment agreements.

China’s policy on ISDS reform 117 Body (DSB) under WTO law. ISDS cases can be brought before different institutions. Since the introduction of ISA half a century ago, the number of arbitration institutions that can administer ISDS cases has gradually increased, and the diversification of ISDS institutions has occurred in tandem with the increase in ISDS cases in recent years.33 According to the statistics of the UNCTAD, the main administering institutions for known ISDS cases includes the ICSID (542), the Permanent Court of Arbitration (PCA) (118), the Stockholm Chamber of Commerce (SCC) (46), the ICC (14), the LCIA (5), the Moscow Chamber of Commerce and Industry (MCCI) (3), and the Cairo Regional Centre for International Commercial Arbitration (CRCICA) (2).34 The ICSID is generally considered to be the most prevalent permanent arbitration institution for resolving investment disputes between investors and host countries, although the arbitral tribunal in each case under the ICSID mechanism is formed pro hac vice. With fixed dispute settlement locations, dedicated administrative staff, and a complete institutional system, ICSID is the most important institution in administering investment arbitration cases.35 The PCA is one of the oldest dispute settlement bodies in the world. For investor-state disputes, it has specifically developed Alternative Rules for Arbitration of Disputes between State and Non-State Parties, and it updated its Arbitration Rules in 2012 based on the 2010 UNCITRAL Arbitration Rules with changes made in order to reflect elements of public international law, indicating the role of the secretary-general, and emphasizing flexibility and party autonomy.36 The ICC is an arbitration institution with a leading position in the field of international commercial dispute resolution. Like the PCA, the ICC offers a wide range of services for dispute resolution through arbitration. In 2017, the ICC created the Belt and Road Commission to target the service market for dispute resolution from BRI projects.37 The LCIA is another of the oldest arbitration institutions in the world, providing a wide range of dispute resolution services for disputing parties. The latest version of the LCIA’s arbitration rules was published in October 2014. In order to facilitate the arbitral procedure, the LCIA issued the Guidance Notes for Participants in April 2016 and the Guidance Notes for Arbitrators in October 2017. It is worth noting that the LCIA’s administrative charges, and the fees charged by the tribunals it appoints, are not based on the dispute at issue. In order to ensure cost-effective services, a registration fee is payable with the request for arbitration and, thereafter, hourly rates are applied by the arbitrators and by the LCIA.38 This

33 Given the diversity of views of ISDS reform and the likely reality of pluralism for many decades to come, it makes sense for states and institutions like the ICSID, the OECD, the UNCTAD, and the UNCITRAL to be looking at identifying and developing a range of incremental and systemic ISDS reform options. Anthea Roberts, ‘UNCITRAL and ISDS Reform: Pluralism and the Plurilateral Investment Court’, EJIL: Talk, 12 December 2017, , last accessed on 28 December 2018. 34 UNCTAD, ‘Investment Dispute Settlement Navigator, Institutions’, , last accessed on 28 December 2018. 35 As of 30 June 2018, the ICSID had registered 676 cases under the ICSID Convention and Additional Facility Rules. ICSID, ‘The ICSID Caseload – Statistics’, Issue 2 (2018), , last accessed 28 December 2018, pp. 1–35, at 7. 36 PCA Arbitration Rules (2012). 37 ICC, ‘Belt and Road Dispute Resolution’, , last accessed on 28 December 2018. 38 LCIA, ‘LCIA Releases Updated Costs and Duration Analysis’, 3 October 2017, , last accessed on 28 December 2018.

118 Tong Qi proves again that costs and duration have become the battleground for competition among arbitration institutions for business. In addition, many traditional commercial arbitration institutions have expressed their interest in administrating investment arbitration, and new actors keep emerging. For instance, in December 2016, the Singapore International Arbitration Centre (SIAC) released the first edition of its Investment Arbitration Rules to ‘search for new ways of maximizing business opportunities’.39 Chinese arbitration institutions also began to show a strong interest in international investment arbitration. China has more than 250 domestic arbitration institutions, but none has yet heard any investor-state arbitration cases. In recent years, in order to provide strong legal support for the ‘going-out’ Chinese companies, with the encouragement and support of the relevant government authorities and on the basis of an in-depth investigation of domestic and overseas companies, Chinese arbitration institutions began to explore the possibility of providing services for investor-state disputes. The Shenzhen Court of International Arbitration (SCIA) took the lead and updated its arbitration rules in December 2016, becoming the first institution in mainland China that can accept investor-state arbitration cases.40 In 2017, the China International Economic and Trade Arbitration Commission (CIETAC) issued its new rules governing the arbitration of international investment disputes.41 In February 2019, the Beijing Arbitration Commission (BAC) launched a public consultation on its Draft International Investment Arbitration Rules.42 These rules are intended to support Chinese companies to ‘go out’ in furtherance of China’s BRI and to provide an alternative for Chinese investors who may be concerned about the potential bias against them in offshore forums due to their lack of understanding of Chinese law and practice.43

9.2.3 Aspiration, capacity, and obstacles in making a China-led ISDS institution 9.2.3.1 Aspiration China has incentives for developing its own unique paradigm in governing international investment, including ISDS. At present, China is actively promoting the BRI, and there has been a call for the establishment of a BRI dispute resolution mechanism. The existing international dispute resolution mechanisms are characterized by confrontational proceedings which are lengthy and costly, and far from meeting the needs of the BRI. In particular, most of the arbitrators come from Western developed countries and may not understand the particular situation and interests of developing countries. Therefore, Chinese scholars

39 Jonathan Mackojc, ‘SIAC’s 2017 Investment Arbitration Rules: An Overview and Key Changes’, Kluwer Arbitration Blog, 4 February 2017, , last accessed on 28 December 2018. 40 Art. 2.2 of the SCIA Arbitration Rules accepts arbitration cases related to investment disputes between states and nationals of other states. 41  CIETAC International Investment Arbitration Rules (For Trial Implementation), adopted on 12 September 2017, effective on 1 October 2017. 42  BAC, Draft International Investment Arbitration Rules, , last accessed on 23 April 2019. 43  CIETAC, ‘CIETAC Released China International Economic and Trade Arbitration Commission Arbitration Rules on International Investment Disputes and Annual Report on International Commercial Arbitration in China 2016’, , last accessed on 28 December 2018.

China’s policy on ISDS reform 119 have proposed that the development of a set of effective dispute resolution mechanisms is conducive to the implementation of the BRI, which should be applied to both trade and investment disputes. The establishment of an appeal mechanism, and the combination of mediation and arbitration, will result in a fair, coordinated, and amicable solution to the disputes that have occurred in the BRI regions.44 Moreover, ‘in view of the fact that most of the countries along the BRI are developing countries, the establishment of this independent dispute settlement body can also make developing countries more integrated into the mainstream of the world economy’.45 Against this background, the Chinese government has in recent years shown unprecedented enthusiasm for the creation of a China-led dispute resolution. In January 2018, the Communist Party of China (CPC) Central Leading Group for Deepening Overall Reform approved the Opinions on Establishing the ‘Belt and Road’ Dispute Settlement Mechanism and Institutions. According to the design plan, the Supreme People’s Court (SPC) set up its First and Second China International Commercial Court (CICC), in Shenzhen and Xi’an respectively, in June 2018.46 In addition, according to the relevant arrangements, the China Council for the Promotion of International Trade (CCPIT) will take charge of cooperating with foreign institutions to jointly build a new international dispute prevention and resolution organization.47 There are still some preconditions that need to be clarified before the establishment of a new international dispute prevention and resolution organization for investor-state disputes. For instance, is this a new and formal international organization like the ICSID based on an inter-governmental convention, or a purely civil institution similar to other commercial arbitration institutions, like the LCIA? Does China want to build a unified dispute resolution mechanism to resolve various types of disputes, like the PCA, or is it a dispute resolution mechanism only for investor-state disputes? Currently, the prevailing opinion among Chinese scholars is that a non-governmental institution approach should be taken, since a formal institution based on an inter-governmental treaty seems very difficult to achieve. However, those who favour the establishment of an inter-governmental institution opine that a new civil institution does not seem to offer any competitive advantages since there are a number of civil institutions to administer investor-state disputes. An inter-governmental dispute settlement institution which operates through negotiations with other countries – such as the Asian Infrastructure Investment Bank (AIIB), whose mission is to improve social and economic outcomes in infrastructure construction in Asia, including the BRI countries – might be more advisable.48

44 Guiguo Wang, supra note 22. 45 Ibid, at 37. 46 The CICC is a permanent adjudication organ established by the SPC to deal with international commercial disputes; investor-state disputes are excluded. 47 CCPIT, ‘A Symposium on the Establishment of International Dispute Prevention & Settlement Centre Held in Beijing’, 31 January 2018, , last accessed on 28 December 2018. 48 Tong Qi, 《一带一路国际经贸法律问题研究》 (Research on International Economic and Trade Legal Issues Related to the Belt and Road), （北京：高等教育出版社2018年） (Beijing: Higher Education Press, 2018), p. 135.

120 Tong Qi 9.2.3.2 Capacity With the growth of integrated power and international impact, China is expected to take more responsibilities in international investment governance. In 2014, the Central Committee of the CPC advocated strengthening China’s ‘discourse power and influence in international legal affairs’ and ‘us[ing] legal methods to safeguard [China’s] sovereignty, security and development interests’.49 At the international level, the successful experience of the establishment of the AIIB, the agreement on the Guiding Principles for Global Investment Policies at the G20 Hangzhou Summit, the release of the Outlines for BRICS Investment Facilitation, and the new initiatives on investment facilitation at the WTO’s 11th Ministerial Conference have demonstrated China’s leading capacity in international investment governance. Accompanied by doubts and controversy in some Western countries,50 the establishment of the AIIB in 2014 was believed to be an important step for China in adapting to its new position in institutional power and its global governance role. As a new international financial institution which operates outside of the Bretton Woods system and is led by a developing country that focuses on regional infrastructure investment, the successful establishment of the AIIB has shown itself to be a necessary response to the currently unfavourable attitudes of financial institutions and orders within the Bretton Woods system. The AIIB can also help promote the reform of international financial governance from outside the system.51 Due to the special status of China – one of the world’s largest developing countries, and where the legal culture differs from Western values – it is conceivable that China might also have to address the same doubts if it wants to introduce China-specific characteristics to the international dispute settlement system as an option for current ISDS reform. The G20 Guiding Principles demonstrate that a multilateral consensus on investment matters has been reached between a group of developed, developing, and transitioning economies, representing more than two-thirds of the global outward FDI. The Guiding Principles were agreed during the G20 Ministerial Meeting, which took place in July 2016 in Shanghai, China, and were endorsed by the G20 leaders at the Hangzhou Summit in September 2016. The Guiding Principles are non-binding and are meant to serve as a guiding instrument for reviewing and formulating national investment policies and strategies. They are also meant to serve as an important reference for drafting and negotiating international investment treaties. In January 2017, the G20 Trade and Investment Working Group was convened in Berlin under the German G20 presidency. Investment-related discussions covered, amongst other things, investment facilitation52 and anti-protectionism

49 中国共产党第十八届中央委员会第四次全体会议公报 (The Communique of the Fourth Plenary Session of the Eighteenth Central Committee of the CPC), in 中国共产党新闻网 (CPC News), 23 October 2014, , last accessed on 28 December 2018. 50 Evan A. Feigenbaum, ‘China and the World: Dealing with a Reluctant Power’, Foreign Affairs, Vol. 96 Issue 1 (2017), pp. 33–40. 51  Tong Qi, ‘论亚投行对全球金融治理体系的完善’ (The Asian Infrastructure Investment Bank in Improving the Global Financial Governance)，《法学杂志》2016年第6期, Law Science Magazine, No. 6 (2016), pp. 13–21. 52  In February 2017, UNCTAD launched a review of policy practices in investment facilitation. The review also highlights the key outcomes of the intergovernmental deliberations during the 63rd session of UNCTAD’s Trade and Development Board, which dedicated a full day for discussion on the Global Action Menu for Investment Facilitation in December 2016. UNCTAD, ‘Global Action Menu for Investment Facilitation’, May 2017, , last accessed on 28 December 2018.

China’s policy on ISDS reform 121 monitoring. Germany’s G20 presidency in 2017 followed the Chinese presidency in 2016, which inherited and further developed the Guiding Principles for Global Investment Policymaking adopted in July 2016.54 Leaders from China, Russia, India, Brazil, and South Africa met at the Ninth BRICS Summit 2017 and adopted the Outlines for BRICS Investment Facilitation as a part of the BRICS Leaders Xiamen Declaration.55 The concept of investment facilitation involves a set of various measures, mechanisms, and actions that contribute to a favourable national investment environment with strong procedural and practical components. By focusing discussions strictly on investment facilitation, it offers a constructive and effective approach to international investment, which is different from the past approach.56 An announcement was made in December 2017 during the final day of the WTO’s 11th Ministerial Conference in Buenos Aires, Argentina, which included new initiatives on investment facilitation. As a result, 70 WTO members have recognized the links between investment, trade, and development and announced plans to pursue structured discussions with the aim of developing a multilateral framework on investment facilitation.57 The proponents of Friends of Investment Facilitation for Development (FIFD), which accounted for approximately 73% of global trade and 66% of global FDI flow, agreed to meet in early 2018 to discuss organizing expanded activities and structured discussions on the topic of investment facilitation. Signatories of the Joint Ministerial Statement on Investment Facilitation for Development also encouraged all other WTO members to actively participate in this work. As an important member of the FIFD,58 China actively contributes to promoting this Joint Ministerial Statement.59 The past several years have witnessed a rising tide of trade protectionism and antiglobalization sentiment, characterized by a series of unexpected events such as Brexit and Donald Trump’s presidency in the US. In contrast, China is gradually growing into a powerful promoter of economic globalization, and it plays an important role in actively participating in the formulation of international rules and promoting sustainable development of the global economy. It is reasonable to expect China to contribute materially to ISDS reform. 53

53 UNCTAD, ‘Joint UNCTAD-OECD Reports on G20 Investment Measures’, , last accessed on 28 December 2018. 54  UNCTAD, ‘UNCTAD Facilitates G20 Consensus on Guiding Principles for Global Investment Policymaking’, 11 July 2016, . UNCTAD, ‘Investment Policy Monitor’, Issue 16, November 2016, , last accessed on 28 December 2018. 55 BRICS, supra note 28. 56 Felipe Hees and Pedro Mendonça Cavalcante, ‘Focusing on Investment Facilitation – Is It That Difficult?’ Columbia FDI Perspectives No. 22, 19 June 2017, , last accessed on 28 December 2018. 57 WTO, supra note 29. 58 FIFD consists of the following 12 WTO members: Argentina, Brazil, Chile, China, Colombia, Hong Kong, Kazakhstan, Korea, Mexico, Nigeria, Pakistan, and Qatar. 59 WTO, ‘Possible Elements of Investment Facilitation – Communication from China’, JOB/GC/123, 26 April 2017, , last accessed on 28 December 2018.

122 Tong Qi 9.2.3.3 Obstacles In theory, it would be ideal if there were a unified dispute resolution mechanism that fits the needs of the BRI. However, such an ideal involves many practical challenges. China’s BRI is an economic framework developed to increase the connectivity between China and more than 100 countries and international organizations, based on the ancient Silk Road land and maritime routes. The BRI aims to link different regions through infrastructure construction, transport, and economic corridors and to build bridges that connect China with the rest of the world physically, financially, digitally, and socially. An obvious feature of the BRI cooperation framework is that it is more of a project-oriented cooperation than a rule-based system. Lacking the legal protection and support of international law, China faces the possibility of losing money or inciting opposition. In fact, there was a heated debate on whether it is wise to pour such huge amounts of financial resources into lowreturn projects in high-risk countries.60 In a word, regional diversity greatly limits the level of cooperation along the BRI countries, which is also a realistic challenge to the establishment of a China-led ISDS institution. That explains why some Chinese scholars believe that investment facilitation and cooperation, including a dispute prevention mechanism, might be the best choice for China at present.61 Due to China’s limited level of development of the rule of law, it is also doubtful if China has sufficient political and legal influence to obtain support from the BRI countries. To develop a China-led institution, China first needs to overcome many barriers resulting from domestic legislation. China has a large number of arbitration institutions, but it has never administered any investor-state cases. As mentioned above, the Chinese mainland arbitration institutions represented by the CIETAC are trying to ‘test the waters’ in international investment arbitration by publishing its new investment arbitration rules in 2017. However, a legal basis in domestic law for Chinese arbitration institutions needs to be found in order to admit international investment arbitration cases. Article 2 of the 1994 Arbitration Law of China limits the scope of arbitrable matters in commercial disputes between equal subjects, and Article 3.2 of the Arbitration Law clearly provides that administrative disputes should not be submitted to arbitration.62 Moreover, Article 2 of the Notice on the Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which was issued by the SPC in 1987, clearly states that ‘contractual and non-contractual commercial legal relations’ do not include ‘disputes between foreign investors and host governments’.63 Therefore, China’s primary task is to modify and modernize its arbitration law as soon as possible.

60 François Godement, ‘“One Belt, One Road”: China’s Great Leap Outward’, European Council on Foreign Relations China Analysis, June 2015, , last accessed on 28 December 2018. 61 Tong Qi, ‘论’一带一路’国际投资争议的预防机制’ (On the Prevention Mechanism of the ‘Belt and Road’ Investment Disputes)，《法学评论》2018年第3期, Law Review, Vol. 36 Issue 3 (2018), pp.79–87. 62 Article 2 states that ‘disputes over contracts and disputes over property rights and interests between citizens, legal persons and other organizations as equal subjects of law may be submitted to arbitration.’ Article 3 states that ‘the following disputes shall not be submitted to arbitration: … administrative disputes falling within the jurisdiction of the relevant administrative organs according to law.’ 63 最高人民法院关于执行我国加入的《承认及执行外国仲裁裁决公约》的通知 (Notice of the Supreme People’s Court of China on the Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards) (Issued on 10 April 1987).

China’s policy on ISDS reform 123

9.3 Conclusion The current intense debate and institutional competition over ISDS indicate that there is still a long way to go to achieving a widely accepted and ideal ISDS mode. It is more likely that the ISDS mechanism will take on elements of diversification in the next few decades. The basic goal of China in terms of ISDS reform is that the investor-state arbitration regime should be effective and efficient, striking a proper balance between investors’ protection and governments’ right to regulate, without any inherent pro-investor or pro-state bias. Any option that is conducive to this goal would be considered and welcomed by China. As discussed above, incremental reform is not enough to address all concerns about the current system, while judicialization of ISDS would cut off the potential commercial link between arbitrators and the appointing parties and would raise concerns about pro-state bias. Therefore, the mixed feature of investor-state dispute resolution might imply that neither traditional commercial arbitration (even with some incremental reform) or a pure judicial investment court (as a result of a systemic reform) is the best choice for ISDS reform. It is reasonable to speculate that China will remain open to all options, instead of making a simple choice among the current options, either incremental or systemic reform. This choice of policy constitutes three parts: first, China should take advantage of the current ISDS system while improving it by addressing China’s concerns; second, China should actively promote multilateral negotiations under the UNCITRAL and reach consensus with other important participants, such as the EU; and third, China should try to establish a Chinaled ISDS institution along the BRI and build it with more features similar to the paradigm shifters, such as an emphasis on dispute prevention policy and state-to-state coordination. To end my chapter, I quote Mencius’s famous saying: ‘After the disorder, there must be great governance’.64

64 Mencius, a Chinese philosopher who lived 373-288 BCE.

10 Investor-state arbitration An economic and empirical perspective Michael Faure and Wanli Ma

10.1 Introduction The previous chapters discussed the proposals at the European Union (EU) level for changing from an arbitration system to a court system and for creating a multilateral investment court. A number of issues are being debated as to whether such investment court system and its specific design features are desirable.1 This chapter presents the law and economics perspective on this debate. We use basic law and economics theory to describe essential differences between the court system and arbitration, and we review the available empirical evidence on the functioning of the current investor-state arbitration (ISA) mechanism. After this introduction, we first sketch the theoretical differences between dispute settlement via courts or via arbitration in Section 10.2, and then we briefly discuss particular features that make ISA different in Section 10.3. We then turn to the empirics related to ISA by outlining some basic facts about arbitration filings, claims, and awards in Section 10.4. Section 10.5 makes further use of the empirics by showing how the data can be used to evaluate the current system of ISA. Section 10.6 presents our conclusions.

10.2 Courts versus arbitration: Theory Landes and Posner used to make the simple but rather straightforward point that arbitration will be sought by the parties in order to benefit their own interests, but not necessarily society’s.2 Their point is that adjudication generally creates large positive externalities: public goods to society as a whole. Courts create not only benefits for the parties; as a result of the publicity awarded to court decisions, there are also external benefits for other parties, that is, for society at large.3 Courts create precedents and provide information on issues that were in dispute. In arbitration, so Landes and Posner argue, precedents will be under-produced as arbitrators might deliberately choose not to explain their decisions at all. This is because clarifications of the meaning of the law could entail the risk that the incidents of the disputes referred to by those arbitrators would be cut down in the future.4 Posner also claims that

  1 For a detailed discussion of the EU’s proposal on the investment court system, see Chapter 6 of this edited volume.   2 William M. Landes and Richard A. Posner, ‘Adjudication as a Private Good’, The Journal of Legal Studies, Vol. 8 Issue 2 (1979), pp. 235–284.  3 For a detailed analysis of law-making through adjudication, see Francesco Parisi and Vincy Fon, The Economics of Lawmaking (New York: Oxford University Press, 2009).   4 William M. Landes and Richard A. Posner, supra note 2, at 238–239.

Investor-state arbitration 125 the underlying cause behind the phenomenon that most arbitrators do not write opinions is that the opinions would mostly benefit people who, however, do not contribute to the expenses of arbitration.5 Steven Shavell is much more positive than Posner. In a 1995 article, Shavell discussed why parties would ex ante choose private dispute resolution prior to the emergence of a dispute.6 Shavell mentions three advantages of arbitration for the parties concerned: it may lower the costs and risks of dispute resolution, create better incentives to perform because of the greater accuracy of private dispute resolution, and reduce the number of disputes. The reason why Shavell expects greater accuracy is related to the fact that usually experts make decisions in arbitration and may therefore be better qualified than judges who generally deal with a great many different cases. The general insight of Shavell is that alternative dispute resolution (ADR) systems, like arbitration, provide clear private benefits to the parties and should for that reason be enforced.7 Benson also seems to be a defender of arbitration. He once indicated that commercial arbitration can be depicted as a cooperative endeavour intended to minimize the costs of dispute resolution.8 Unlike judges, arbitrators tend to be specialized in particular types of disputes. The advantage of specialization is that a decision can be rendered more quickly and with less need for information transfer from the parties to the arbitrator. Given that arbitrators may be more highly informed in specialised areas of expertise, costs due to errors may be lower. Moreover, parties usually have veto power in selecting arbitrators, and thus arbitrators have strong incentives to develop their own expertise and to render unbiased decisions.9 In addition, the perspective on the difference between adjudication versus arbitration is to a large extent related to the incentives to provide high-quality decisions. There is substantial law and economics scholarship on the incentives of stakeholders which may provide interesting lessons, and this could also be useful for the design of a potential multilateral investment court. In a few remarkable publications, Richard Posner, himself a judge, has argued that judges maximize ‘the same as everybody else’, in other words, utility. That then begs the question of what precisely utility maximization means for a judge. Posner argues that, like everybody else, money may play some role for a judge, but it is definitely not the only component.10 Judges also derive utility from non-pecuniary goods such as leisure time and prestige. The problem is that judges do not receive pay raises as a reward for good work. Increasing judicial caseloads will not lead judges to work harder, as that would mean sacrificing leisure time, but it may instead lead to judges spending less time on each case.11 There are many empirical studies that have shown that when caseloads of the judiciary are high, judges will react by

  5 Richard A. Posner, Economic Analysis of Law (Austin: Wolters Kluwer, 2007), p. 558.   6 Steven Shavell, ‘Alternative Dispute Resolution: An Economic Analysis’, The Journal of Legal Studies, Vol. 24 Issue 1 (1995), pp. 1–28. For a summary of Shavell’s reasoning, see Lewis A. Kornhauser, ‘Judicial Organisation and Administration’, in Boudewijn Bouckaert and Gerrit De Geest (eds.), Encyclopedia of Law and Economics, Vol. V, The Economics of Crime and Litigation (Cheltenham: Edward Elgar, 2000).  7 Steven Shavell, ibid, at 9.   8 Bruce L. Benson, ‘Arbitration’, in Boudewijn Bouckaert and Gerrit De Geest (eds.), Encyclopedia of Law and Economics, Vol. V, The Economics of Crime and Litigation (Cheltenham: Edward Elgar, 2000), pp. 159–193, at 161.  9 Ibid, at 162. 10 Richard A. Posner, supra note 5, at 570. 11 Ibid.

126 Michael Faure and Wanli Ma making a change in case law as a result of which, for example, appeals may be reduced and therefore caseloads reduced as well.12 Arbitrators clearly want to maximize their own utility as well, but since they are under more competitive stress than judges, the influence of market pressures may be much stronger in the case of arbitrators. Arbitrators, as we have already mentioned, will principally make decisions in order to satisfy the preferences of the parties or of potential parties who could use their services in the future.13 In the case of our topic, ISA, it has been argued that this may provide a structural incentive to arbitrators not to deny jurisdiction for the simple reason that this can guarantee them a continued stream of income from the case.14 In the words of Kovacs, ‘arbitrators have their own interests which, among other things, can include such factors as earning income, enjoying leisure time, providing “justice”, establishing or preserving their reputation, advancing their own career and so on’.15 This brief discussion of the law and economics literature with respect to the incentives of arbitrators versus judges shows that the incentives for delivering high-quality decisions with the judiciary may be limited. Leisure time may be a more important factor to maximize for judges, although reputation may equally provide incentives to strive for quality. Incentives for high-quality decisions could be stronger for arbitrators as a result of the competitive pressure. However, precisely because of that competitive pressure and the desire of arbitrators to be guaranteed a stream of income, there may be a tendency to split the difference, that is, to dispense partial victory to all the parties to arbitration, instead of always providing a ‘just’ decision.

10.3 Investor-state arbitration: Theory Much of the law and economics literature discussed so far dealt with arbitration in general or, at least implicitly, with commercial arbitration. An important feature of investment ­arbitration is that one of the parties involved is a sovereign state. There is also some literature discussing the specific features of international or specifically investor-state arbitration. Kirby compares the objectives of international arbitration to a sign at a drycleaner in the United States (US) that says ‘Fast. Good. Cheap. Pick two’.16 With this funny example she refers to the same dilemma in international arbitration: ideally parties want arbitration to be fast, good, and cheap, but it may be impossible to realize this ‘iron triangle’ all at the same time. The interesting parallel shows that obviously in practice there are trade-offs to be made between the speed of the decision-making, the quality, and the costs involved, as it may ultimately be impossible to reach those three objectives simultaneously. In addition, Kovacs

12 See for an example and for further discussion of the ‘lazy judges’ literature, Jef De Mot, Michael Faure and Jonathan Klick, ‘Appellate Caseload and the Switch to Comparative Negligence’, International Review of Law and Economics, Vol. 42 (2015), pp. 147–156. 13 Anne van Aaken and Tomer Broude, ‘Arbitration from a Law & Economics Perspective’, SSRN, 28 October 2016, , last accessed on 19 March 2019, pp. 1–25, at 14. 14 Ibid, at 17. 15 Robert B. Kovacs, ‘Efficiency in International Arbitration: An Economic Approach’, American Review of International Arbitration, Vol. 23 Issue 1(2012), pp. 155–170, at 159. 16 Jennifer Kirby, ‘Efficiency in International Arbitration: Whose Duty Is It?’ Journal of International Arbitration, Vol. 32 Issue 6 (2015), pp. 689–696, at 690.

Investor-state arbitration 127 observes that there are currently substantial barriers to efficiency in international arbitration, including information failures, agency cost problems, and dilatory tactics.17 It is important to indicate that a large part of the law and economics literature points to the advantages of arbitration. However, those advantages to a large extent relate to commercial arbitration. There are, however, specific reasons which make arbitration where a state is involved different. Markert points to a few characteristics of ISA which make it different from commercial arbitration. He argues that this has important consequences for the interpretation of the notion of efficiency in international arbitration.18 A first important element is that the mere involvement of the state implies that the speed of the resolution of the dispute may not necessarily do justice to the legitimate concerns of all the citizens of the respondent state party.19 Second, the public interest involved may lead to a stronger argument in favour of the transparency of the proceedings.20 Third, because of state involvement and the corresponding demand for transparency, there may be a demand for publication of the arbitral award.21 Fourth, since a greater public interest is at stake, the tribunal should take into account not only the interests of the parties, but also the broader public interest involved, which may also lead to less party autonomy in the proceedings.22 Given the higher interests involved, and also the public interest, one cannot assess the gains of dispute settlement by looking at the interests of the disputing parties alone. That could imply that higher investments in the dispute resolution (in time and costs) may in some cases be justified (given the public interest involved), whereas the same conclusion would not be reached for international commercial arbitration.23 There is one additional argument in favour of arbitration (compared to the court) which is related to the international aspect of the dispute. One reason that international arbitration has become very popular for commercial dispute settlement relates to the fact that it provides a neutral forum. Using the court system in international commercial dispute settlement has the major disadvantage that the case will be decided in the courts either of the claimant or of the defendant. As a result, one party would then always have a ‘home ground advantage’. Domestic courts are often considered to be too biased and partial. International arbitration has the major advantage of providing neutrality.24 However, the question arises whether investment arbitration today is indeed as neutral as could be expected.

10.4 Empirics of investor-state arbitration 10.4.1 Arbitration filing Behn conducted empirical research by taking into consideration all the fully and partially solved ISA cases from September 2011 to September 2014 to assess whether the regime has developed in an evolutionary trajectory and what the empirical evidence would say in relation to the complaints about legitimacy lodged against ISA. Behn identifies that

17 Robert B. Kovacs, supra note 15, at 156. 18  Lars A. Markert, ‘Improving Efficiency in Investment Arbitration’, Contemporary Asia Arbitration Journal, Vol. 4 Issue 2 (2011), pp. 215–246, at 220. 19 Ibid. 20 Ibid. 21 Ibid. 22 Ibid, at 221. 23 Ibid. 24 This aspect is also discussed at length in Chapter 11 of this edited volume.

128 Michael Faure and Wanli Ma although there is some diversity in the type of cases as seen from the dataset, the degree of diversity is far from enough and could raise concerns. A large number of cases have been dominated by particular economic sectors, including the extractive industry sector and the electric power sector.25 A large number of cases were brought against less developed countries and regions, notably countries in Latin America, Eastern Europe, and Central Asia.26 By contrast, those who brought cases to international tribunals were largely corporations from developed countries, especially those from Western Europe and North America.27 As a result, most of the cases were between claimants from developed states and respondents from developing states, which forms a distinct pattern in the dataset with a percentage of 76%. Behn proposes that the legitimacy of ISA could benefit from increased diversification, particularly in regard to small-scale investors and investors from developing states (on the claimant side) and in regard to developed states and geographically diverse states (on the respondent side).28 In an effort to improve the existing literature,29 Wellhausen also conducted an empirical study of ISA cases for fact-finding. Through exploring data on ISA cases from 1990 to 2014, Wellhausen attempted to document the recent trends of ISA practice via a political lens. She found that, while a large number of cases are focused on industries with ‘immobile assets’, such as utilities, oil, and gas, investors from sectors like services and manufacturing also filed a wealth of arbitrations against host states.30 Her study shows that investors from as many as 73 home states have filed for investor-state dispute settlement (ISDS), but 87% of the cases were brought to investment tribunals by the investors from the top 15 states.31 The study also provides a picture of respondent states involved in ISA cases. Two Latin American countries, Argentina and Venezuela, topped the ranking of frequency of being sued in ISA. The other countries included in the ranking are as diverse as the Czech Republic, Mexico, Ecuador, Canada, Egypt, Poland, Ukraine and the US.32 She predicts, on the basis of more IIAs between developed countries having been signed, more countries in the North will be put on the defensive.33 Schultz and Dupont also conducted quantitative empirical research on ISA cases by including more than 500 cases between 1972 and 2010 as the sample data. However, their intention differs from the previous two contributions in the sense that the study seeks not only to understand the factual perspectives of ISA but also to verify the accuracy and credibility of the three proposed functional effects of ISA by virtue of data analysis. The first

25  Daniel Behn, ‘Legitimacy, Evolution, and Growth in Investment Treaty Arbitration: Empirically Evaluating the State-of-the-Art’, Georgetown Journal of International Law, Vol. 46 Issue 2 (2015), pp. 363–416, at 390. 26 Ibid, at 396–397. 27 Ibid, at 394–395. 28 Ibid, at 412–413. 29 Wellhausen specifically mentions her intention to update Susan Franck’s ‘Empirically Evaluating Claims about Investment Treaty Arbitration’ and to complement Thomas Schultz and Cedric Dupont’s ‘Investment Arbitration: Promoting the Rule of Law or Over-Empowering Investors? A Quantitative Empirical Study’. Rachel L. Wellhausen, ‘Recent Trends in Investor-State Dispute Settlement’, Journal of International Dispute Settlement, Vol. 7 Issue1 (2016), pp. 117–135, at 118. 30 Ibid, at 123. 31 These countries include the United Kingdom (UK), France, Germany, Canada, Spain, Italy, Belgium, Luxembourg, Switzerland, Cyprus, Greece, Austria, and Russia. Ibid, at 124. 32 Ibid, at 126. 33 Ibid, at 128.

Investor-state arbitration 129 function of ISA that they checked is the statement that ISA could be referred to as neo-colonialism. The data show that until the mid to late 1990s, investment arbitration mostly followed the pattern of ‘rich vs poor’ and ‘developed vs developing’; thus, the neo-colonization argument seems to fit the reality of investment arbitration in that period of time. However, from the mid to late 1990s on, investors from developed states started to sue developed host states with ever higher frequency, making the ‘developed vs developed’ pair even slightly exceed the ‘developed vs developing’ pair. Based on this comparison, Schultz and Dupont then conclude that the neo-colonization argument does not seem to gain enough support from the dataset of the later period.34 The second functional effect of ISA that they checked in the study is ISA ‘substituting for the rule of law in the host state’. They find that before the mid to late 1990s, the average annual polity scores and average annual law and order scores of respondent states were quite low, offering some support for the idea that investment arbitration is a substitution for the lack of rule of law in certain countries. However, this idea is not as plausible when data derived from since the mid-1990s are considered, as countries with a higher democratic level and better respect for the rule of law were sued at international tribunals with even higher frequency. The authors also observe that as a consequence of the imbalanced distribution of claims,35 it still remains plausible that substituting for domestic rule of law is a function of certain investment arbitrations, but it is not true to the same extent for another important part of investment arbitration targeting countries with a good record of respect for the rule of law.36

10.4.2 Claims and awards The compensation claimed by investors and the amount of compensation awarded to them by arbitral tribunals have become the object of empirical quantitative research. According to Wellhausen, the claims for compensation filed by investors range from tens of thousands to billions of US dollars (USD). The average amount of compensation pursued by investors is USD 884 million. However, of those cases in which investors won, the amount of compensation awarded to them by arbitral tribunals averages at USD 508 million. It should be noted that large awards, either demanded by investors or accorded to them, have pulled up the mean results significantly. Insofar as the publicly available information permits, she also finds that in 50% of the rulings confirming victory of the investors, the investors won less than 33% of their original claims. On average, the investors won 40% of the claim. There are only six instances in which investors were granted the full amount of compensation that they claimed or even greater.37 The recent empirical study on damages and costs in investment treaty arbitration conducted by Matthew Hodgson and Alastair Campbell contributes to the updates on this issue. The research identifies that, as compared to the mean amount of USD 491.7 million claimed by investors in investment arbitration as of the end of 2012, the mean amount claimed since 2013 onwards has skyrocketed to USD 2,316 million. The study

34 Thomas Schultz and Cedric Dupont, ‘Investment Arbitration: Promoting the Rule of Law or OverEmpowering Investors? A Quantitative Empirical Study’, European Journal of International Law, Vol. 25 Issue 4 (2015), pp. 1147–1168, at 1151–1157. 35 They find that there is a general tendency that some claims seem to cluster around those countries with either the best or the worst level of democracy and the rule of law. Ibid, at 1162. 36 Ibid, at 1160–1162. 37 Rachel L. Wellhausen, supra note 29, at 132–133.

130 Michael Faure and Wanli Ma also determines that the average amount claimed in those cases where the claimants were unsuccessful is much higher than that in cases where the investors claimed victory. This comparison leads the authors to contend that those cases with failed claims have driven up the average amount claimed.38 In terms of the amount awarded, they find that the mean amount awarded to the successful claimants has risen from USD 76.3 million in their last survey to USD 1.08 billion since the end of 2012. This is undoubtedly a significant increase against the amount retrieved in the last survey. When it comes to the median amount of damages awarded, they find that the median amount since 2013 is USD 40 million while that as of the end of 2012 was USD 10.7 million. It is also noted that the ratio of the mean amount awarded in comparison to the mean amount claimed fell from 40% to 32%. This evidences that claimants continue the trend of overvaluing their own investments or the losses that they suffered.39 In addition, another empirical research by Van Harten and Malysheuski demonstrates, at least prima facie, where the monetary compensation accorded by investment tribunals mostly has gone and who has benefited most significantly, as the claimant in investment arbitration, in terms of financial transfers from the ISDS mechanism. They attempt to discern the relationship between smaller businesses and ISDS, because the ‘sociological legitimacy’ of ISDS partly lies in the fact that it not only avails multinational enterprises and the super wealthy individuals but also benefits small and medium-sized enterprises.40 In a bid to unfold this research, they collected data on the basis of the known ISDS cases as of the time of research and linked the amount of awarded compensation with the size and wealth of the claimants. Their research finds that, financially speaking, large companies (with annual revenue of over USD 1 billion), especially extra-large companies (with annual revenue of over USD 10 billion), as well as individuals with a net worth of over USD 100 million are overwhelming winners of ISDS. 94.5% of the aggregate compensation (93.5% if pre-award interest is included) went to the aforementioned companies and individuals, while the residual 5.5% (or 6.5%) was shared by companies with annual revenue of less than USD 1 billion, unknown companies, and not-so-wealthy individuals.41 An incidental finding of this research is that extra-large companies appear to have a much higher success rate (82.9% over 41 cases) than other claimants (57.9% over 121 cases) when the case comes to the merit stage.42 Despite the caveat that ‘one should approach all of the numbers presented here as approximate and keep in mind that variations in the experiences of different actors may be coincidental’,43 this disparity of success rates between extra-large companies and the others might lead to the assumption that economic might has a massive sway in ISDS.

38  Matthew Hodgson and Alastair Campbell, ‘Damages and Costs in Investment Treaty Arbitration Revisited’, Global Arbitration Review Online News, 14 December 2017, , last accessed on 19 March 2019, pp. 1–9, at 3, 5. 39 Ibid, at 5. 40  Gus Van Harten and Pavel Malysheuski, ‘Who Has Benefited Financially from Investment Treaty Arbitration? An Evaluation of the Size and Wealth of Claimants’, Osgoode Legal Research Paper No. 14, Vol. 12 Issue 3 (2016), pp. 1–18, at 1. 41 Ibid, at 1–2. 42 Ibid, at 2, 9. 43 Ibid, at 2.

Investor-state arbitration 131

10.5 The critics 10.5.1 Bias against states? As mentioned, developing countries have a strong feeling that they are the ‘victims’ of the ISA system and that decisions would be systematically against them. There are consequentially a few notable empirical studies that have been conducted to verify the credibility of the alleged bias. Schultz and Dupont examine the extent to which the dispute settlement regime contributes to the international rule of law.44 The researchers reach the conclusion that the contribution of investment arbitration to the international rule of law is not as much as what many people might expect. The data show that the host states of a higher degree of development stand a higher chance of winning a case than those of a lower degree of development. Precisely, outcome data from 1972 to 2010 show that low-income countries won 50% of the cases while high-income countries had a higher winning probability of 69%. This difference in success rate becomes more proportionally meaningful in the 1998–2010 period, because during this boom period of investment arbitration, the winning rates of developing countries and developed countries were 27% and 46% respectively. It is the researchers’ opinion that ‘when a dispute settlement system favours the stronger parties to such an extent, the international rule of law is pursued less than fully’.45 Behn, Berge, and Langford’s research findings are very much in line with the conclusions reached by Schultz and Dupont. In one study, they intended to verify the validity of the statement – which has been gaining quite some support among scholars – that any propensity for developing countries is due to the lack of good quality governance within their own territories. However, based on a larger sample size, they contradict this arguably faulty ascription of the blame. Their ‘expanded multivariate models’ demonstrate a manifest and consistent correlation between the level of economic development and the investment arbitration outcomes. In other words, countries with higher status in terms of economic development are less likely to lose in investment arbitrations, and the inverse applies to countries with a lower status of economic development. Therefore, the accusation that the current investment arbitration regime is biased, in the sense that developing countries are suffering to an extent of inequality, is not without grounds.46 The empirical study mentioned in the above by Wellhausen would also contribute to our knowledge of the outcomes from ISA cases from 1990 to 2014. It is found that across the data, the respondent states won 38% of the time and settled 33% of the time. This study also identifies that prominent users (such as US investors and British investors) do not have a systematic prevalence in ISA practice. Another finding is that, measured against the aggregate state win rate of 38%, states in the Middle East, North Africa, and Europe (and the former Soviet Union) have a higher rate of success in investment arbitration. While the average success rate for Asian countries is around the mean, American countries and Sub-Saharan African countries tend to suffer from a lower probability of winning. In addition, of the 31

44 The meaning of rule of law employed in that research is formal legality. ‘Formal legality requires, for instance, that the rules be formulated in general terms, that they be accessible and understandable by their addressees, and that they be applied coherently, consistently, competently, and impartially.’ See Thomas Schultz and Cedric Dupont, supra note 34, at 1163–1164. 45 Ibid, at 1165–1167. 46  Daniel Behn, Tarald Berge and Malcolm Langford, ‘Poor States or Poor Governance? Explaining Outcomes in Investment Treaty Arbitration’, Northwestern Journal of International Law & Business, Vol. 38 Issue 3 (2018), pp. 333–389, at 381.

132 Michael Faure and Wanli Ma ISA cases against the Organization for Economic Co-operation and Development (OECD) states concluded by the end of 2014, the respondent states won 55% of the time.47 Behn also finds that the outcome percentages do not seem to show a pro-investor bias among the tribunals because less than half of the claims were successful. Measured against the ICSID caseload, the data set shows an increase in cases where the tribunals denied jurisdiction.48 Another interesting empirical study was conducted by Van Harten, who aimed to check the validity of the hypothesis that systemic bias exists in the resolution of contested jurisdictional issues in investment treaty law. Drawing on the database of 115 ISA cases, he takes a unique perspective to examine the prevailing perception of bias within ISA. This research is unique at least because of the following two aspects: first, it does not intend to cover the resolution of all the issues that distribute interests between the disputing parties, but rather focuses on specific issues related to jurisdiction, such as ‘corporate person investor’, ‘natural person investor, ‘concept of investment’, and so on;49 second, it opts for a contentanalysis approach instead of an outcome-analysis approach, thus enabling legal expertise to contribute in tandem with statistical expertise.50 The conclusion that the author reaches is that in the context of several jurisdictional issues, arbitrators seem to favour the stance of investors over that of sovereign states. In other words, this research provides ‘tentative support for expectations of systemic bias arising from the interests of arbitrators in light of the system’s asymmetrical claims structure and the absence of conventional markers of judicial independence’.51

10.5.2 Fast. Good. Cheap? As we indicated earlier, theoretical literature mentions as advantages of arbitration that it would be ‘Fast. Good. Cheap’. But the literature with respect to ISA already mentioned that it is difficult to reach those three goals simultaneously.52 There is also empirical research with respect to the cost and speed of ISA. The first issue addressed in many studies is the costs of the proceedings. Recall that from the law and economics studies just presented, it was held that arbitration would have the major advantage of speedier decision-making at a lower cost, given the greater expertise of the arbiters involved. There are some studies that cast doubts on these starting points. Kovacs, for example, holds that ‘international arbitration is becoming too slow, too formalized and too expensive’.53 A similar statement is made by Markert, who holds that arbitration proceedings are a process that ‘has become too costly and inefficient’.54 Several empirical, more detailed studies have been conducted by Susan Franck. She found that the costs in investment treaty arbitration have become substantial and that even partial costs could

47 Rachel L. Wellhausen, supra note 29, at 130. 48 Daniel Behn, supra note 25, at 373. 49 Gus Van Harten, ‘Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration’, Osgoode Hall Law Journal, Vol. 50 Issue 1 (2012), pp. 211–268, at 211, 233–234. 50 Ibid, at 251. 51 Ibid, at 252. 52 Jennifer Kirby, supra note 16. 53 Robert B. Kovacs, supra note 15, at 155. 54 Lars A. Markert, supra note 18, at 216.

Investor-state arbitration 133 represent more than 10% of an average award. She equally found that there is large uncertainty with respect to those costs.56 It is almost self-evident that both parties involved in ISA must be concerned with the time it takes to carry out an arbitral proceeding and the costs incurred throughout the process.57 It is identified that the costs of arbitration include fees for arbitrators, administration, legal representation, witnesses, and experts.58 The OECD suggests that the mean cost of recent ISA cases has totalled over USD 8 million, with the cost exceeding USD 30 million in some cases.59 Hodgson and Campbell’s empirical study shows that as far as the dataset of 177 cases is concerned, the mean party cost is USD 7.4 million for claimants and USD 5.2 million for respondent states.60 The high costs incurred in the arbitral proceeding have been identified as one of the two gravest concerns among inhouse counsels about international arbitration, while the other one is the excessively long time.61 The lion’s share is said to end up in the pockets of those legal counsels who represent disputing parties throughout the proceeding. It is estimated to average about more than 80% of the cost of an ISA case.62 Arbitration lawyers charge several hundred dollars per hour per person, while the price can reach USD 1,000 for elite law firms – with the whole team being responsible for a case.63 The fees paid to arbitrators average about 16% of the whole sum of costs of an individual case.64 Hodgson and Campbell found that the mean tribunal costs at the end of 2012 were USD 746,000, while the mean tribunal costs, taking into account only cases from 2013 onwards, were USD 1,118,000. The data signal an increase of about 50% in the mean tribunal costs.65 Administration and registration fees payable to arbitral institutions only account for a minor part of the overall costs, at about 2%.66 In terms of the cost allocation among disputing parties, there are actually no unified rules in place to guide arbitrators. But the most prevailing method applied by arbitral tribunals is ‘pay your own way’, requiring each side to cover its own counsel and expert fees and share 55

55 Susan D. Franck, ‘Rationalizing Costs in Investment Treaty Arbitration’, Washington University Law Review, Vol. 88 Issue 4 (2011), pp. 769–852, at 814. 56 Ibid, at 838–839. 57 Albert Jan van den Berg, ‘Time and Costs: Issues and Initiatives from an Arbitrator’s Perspective’, ICSID Review, Vol. 28 Issue 1 (2013), pp. 218–222, at 218. 58 Pia Eberhardt and Cecilia Olivet, ‘Profiting from Injustice: How Law Firms, Arbitrators and Financiers Are Fuelling an Investment Arbitration Boom’, Corporate Europe Observatory and the Transnational Institute, November 2012, , last accessed on 19 March 2019, pp. 1–73, at 15. See also Diana Rosert, ‘The Stakes Are High: A Review of the Financial Costs of Investment Treaty Arbitration’, IISD, July 2014, , last accessed on 19 March 2019, pp. 1–26, at 8. 59 OECD, ‘Investor-State Dispute Settlement, Public Consultation’, 16 May–9 July 2012, , last accessed on 19 March 2019, pp. 1–101, at 18. 60 Matthew Hodgson and Alastair Campbell, supra note 38, at 2. 61 OECD, supra note 59, at 18. 62 OECD, supra note 59, at 18; Pia Eberhardt and Cecilia Olivet, supra note 58, at 15. 63 Diana Rosert, supra note 58, at 9; OECD, supra note 59, at 19; Pia Eberhardt and Cecilia Olivet, supra note 58, at 19. 64 OECD, supra note 59, at 18. 65 Matthew Hodgson and Alastair Campbell, supra note 38, at 2. 66 OECD, supra note 59, at 18; Diana Rosert, supra note 58, at 12.

134 Michael Faure and Wanli Ma the tribunal costs. This means that whatever the outcome of arbitration is, taxpayers have to pay millions in legal fees.67 But more recent cases have seen a switch in the method employed by arbitrators to at least shifting some of the costs.68 This cost-shifting approach, however, would be regarded as a double-edged sword for sovereign states.69 While there is mixed evidence as to whether investors are more favoured in terms of cost allocation,70 a recent study by Rosert finds that some indications help to contend that ‘states are slightly more likely to be ordered to pay a share of the investors’ costs when the investor wins than the inverse is the case’.71 Webster also points to an imperfection of the ICSID cost-shifting approach by concluding, based on an empirical study, that it is doubtful whether the current rules on cost-allocation within ICSID sufficiently deter unmeritorious claims.72 As far as the duration of arbitral proceedings is concerned,73 it seems that the increasing size and complexity of investor claims have also driven up the length of proceedings. Compared to the mean length of 3.7 years recorded in the 2012 study by Hodgson and Campbell, the 2017 study finds that the average length of arbitral proceedings since 2013 is 4.3 years. Taking all the dataset in the 2017 study into consideration, the total length would become 4 years.74

10.5.3 Elites? Arbitration practitioners, including arbitrators, legal counsels, experts, and tribunal secretaries, are of crucial importance for the legitimacy of the ISA regime. In fact, the impartiality and independence of arbitrators, as the adjudicators in this asymmetrical decision-making system – ISA – have been subject to voices of doubt for a long time. Eberhardt and Olivet believe that investment arbitrators form a small and cohesive community, and that thereby they are able to ‘have a tight grip on the investment arbitration system and can exert immense influence over it’. Their research finds that arbitrators from Western Europe and North America take charge of 69% of cases handled at ICSID. When arbitrators who have sat on more than ten cases are taken into account, the proportion of arbitrators from the two regions jumps to 83%. Of the arbitrators considered in this research, only 4% of them

67 Eberhadt and Olivet quoted the case Plama Consortium v Bulgaria, in which the arbitral tribunal found that the claims filed by the investor were fraudulent. However, in the award, Bulgaria only obtained US$ 7 million as the compensation for the legal fees incurred, accounting for slightly more than the half of the total sum. OECD, supra note 59, at 21; Pia Eberhardt and Cecilia Olivet, supra note 58, at 15. 68 OECD, supra note 59, at 21. 69 Joachim Pohl, ‘Societal Benefits and Costs of International Investment Agreements: A Critical Review of Aspects and Available Empirical Evidence’, OECD Working Papers on International Investment 2018/01, , last accessed on 19 March 2019, pp. 1–76, at 46. 70 OECD, supra note 59, at 22. 71 Diana Rosert, supra note 58, at 14. 72 Thomas H. Webster, ‘Efficiency in Investment Arbitration: Recent Decisions on Preliminary and Cost Issues’, Arbitration International, Vol. 25 Issue 4 (2009), pp. 469–514, at 505–506. 73 The duration of an arbitral proceeding is measured from the request/notice of arbitration through to final award. 74 Matthew Hodgson and Alastair Campbell, ‘Investment Treaty Arbitration: Cost, Duration and Size of Claims All Show Steady Increase’, Allen & Overy, 14 December 2017, , last accessed on 19 March 2019.

Investor-state arbitration 135 are women, with two of them dominating three-quarters of the cases arbitrated with the participation of female arbitrators.75 In other words, there is an apparent lack of diversity in the constitution of investment arbitrators in terms of nationality and gender. The freshly launched World Investment Report 2018 also expresses concerns of the same kind. Out of the 13 arbitrators alleged to have been appointed to more than 30 cases, as identified by the Report, all of them but one are citizens of European or North American countries, while 11 of them are men. However, through the lens of gender, the interesting part is that the only two female arbitrators who made it on to the list also see their names among the top three arbitrators who have been appointed the most.76 Eberhardt and Olivet also assert that evidence has shown that arbitrators have close links with the corporate world and share the vision of businesses that there is extraordinary importance in the protection of private interests.77 Besides, contrary to an eminent arbitrator’s dismissal of the existence of an elite group of arbitrators, Eberhardt and Olivet confirm the existence of a group of 15 elite arbitrators.78 This outcome is identical to the list of 13 arbitrators who were most frequently appointed to sit on tribunals contained in the World Investment Report 2018.79 Their statistical work also finds that together the 15 have decided 55% out of 450 IIA-based disputes known as of the time of the research, 64% out of 123 IIA-based disputes of at least USD 100 million, and 75% out of 16 IIA-based disputes of at least USD 4 billion.80 By virtue of a figure depicting the frequency of elite arbitrators sitting side by side, they claim that all the members of the elite 15 have sat at least once with another elite arbitrator on the same panel, and many have done so more than twice. This is unsettling because non-legal factors would also impact the outcomes of investment arbitration, such as arbitrators’ policy preference and their social and personal background.81 In addition, the revolving door that is claimed to feature in investment arbitration might be a more questionable and worrisome concern. The revolving door indicates that at least some arbitration practitioners are liable to switch their roles in investment arbitration practice among different identities, including arbitrator, legal counsel, expert witness, or tribunal secretary. It is deemed as a threat of encroachment on the impartiality and independence of arbitrators and even a fundamental challenge to the whole regime of ISA. Eberhardt and Olivet discover that there are a significant number of cases where one of the elite 15 sat on the arbitral panel, while another member of that group acted this time as legal counsel defending the case of either the investor or the state. Some cases have even seen the concurrence of the existence of up to four members of the elite 15.82 In a research paper by Langford, Behn, and Lie, the authors purport to have conducted the first-ever comprehensive empirical analysis of the individuals making up the entire investment arbitration community, with a dataset covering 1,039 investment arbitration cases

75 Pia Eberhardt and Cecilia Olivet, supra note 58, at 36. 76 UNCTAD, World Investment Report 2018 (Geneva: UN Publication, 2018), p. 95. 77 Pia Eberhardt and Cecilia Olivet, supra note 58, at 36. 78 The rest on the list include Brigitte Stern (France), Charles Brower (US), Francisco Orrego Vicuna (Chile), Marc Lalonde (Canada), L. Yves Fortier (Canada), Gabrielle Kaufmann-Kohler (Switzerland), Albert Jan van den Berg (Netherlands), Karl-Heinz Bockstiegel (Germany), Bernard Hanotiau (Belgium), Stephen M. Schwebel (US), Henri Alvarez (Canada), Emmanuel Galliard (France), William W. Park (US), and Daniel Price (US). Pia Eberhardt and Cecilia Olivet, supra note 58, at 38–41. 79 UNCTAD, supra note 76, at 95. 80 Pia Eberhardt and Cecilia Olivet, supra note 58, at 38. 81 Ibid, at 42. 82 Ibid, at 43.

136 Michael Faure and Wanli Ma (including ICSID annulment proceedings) and 3,910 arbitration practitioners. The empirical study reveals that the revolving door continues to exist in investment arbitration and the accusation of double-hatting can be partly substantiated. This is because the double-hatting is not a widespread or rampant practice in investment arbitration; however, it is exclusive to a small core group of arbitration practitioners who are incredibly important and influential in this field.83 Despite the limitations of the scale of the revolving door, the researchers argue that it suffices to raise concerns about the perceived bias, the lack of impartiality and independence, and legitimacy.84

10.6 Concluding remarks This chapter attempted to sketch the law and economics, as well as the empirical literature, with respect to arbitration in general and with respect to ISA more specifically. There was quite intentionally no attempt yet to link this literature to the current debate, for example on the reform of the ICSID or on discussions concerning the move from arbitration towards a bilateral or multilateral investment court. Still, we hope that the discussion of these general insights from the economic and empirical perspective can somewhat structure the debate on the necessary reforms. Therefore, conclusions can only be very tentative. One striking issue after reviewing the literature is that there seems to be some difference between assumptions concerning the functioning of arbitration and the reality. The traditional law and economics literature assumed that arbitration would be speedy and low cost. But it is not clear to what extent those assumptions are really fulfilled in practice. The literature increasingly complains about relatively high costs and about the length of proceedings, which is almost equal to the US judiciary.85 In that respect, it is not surprising that calls for reform are being formulated, since some of the traditional benefits of arbitration do not always seem to hold. An interesting issue is that the law and economics literature is generally critical about arbitration for the following reason: although it does clearly provide private benefits to the parties (at least the assumed benefits of lower cost, better information, and speedy decisionmaking), there may be a problem from a social-cost perspective. The public-good aspect of adjudication would be lost as a result of the secrecy in arbitration. Precisely for that reason, one can understand the calls for transparency, especially in ISA. Given the public interest involved (going beyond the mere interest of the private parties in the dispute), it can be understood that transparency is desired, which would also have the advantage that the positive externalities from the decision-making could be obtained. For the same reason, it can also be understood that calls are being made to allow appeals against arbitral awards. Not only could this be a means of correcting errors, but it could also equally have the harmonizing effect of preventing inconsistent decisions, and it could equally have an important incentive effect for a higher quality decision-making by arbitrators. Interestingly, the law and economics literature shows that both judges and arbitrators strive for utility maximization. But judges are, in most legal systems, nominated for life and, especially at the highest level, they cannot obtain more income by providing better quality.

83 Malcolm Langford, Daniel Behn and Runar Lie, ‘The Revolving Door in International Investment Arbitration’, Journal of International Economic Law, Vol. 20 Issue 2 (2017), pp. 301–331, at 301, 328. 84 Ibid, at 328. 85 Lars A. Markert, supra note 18, at 216.

Investor-state arbitration 137 The incentive structure of the judiciary is therefore different from that for arbitrators. Those different incentives, of course, have to be taken into account as well, for example if dispute resolution concerning investment was to indeed move from arbitration towards a court system. The literature shows that there are also calls for how guarantees can be provided so that judges will still have adequate incentives for high-quality decision-making in the public interest. It is also interesting to note that increasingly the literature with respect to investmentrelated disputes is not only theoretical but also largely empirical. It is especially striking that there are an important number of studies showing why developing countries do indeed have negative sentiments concerning the ISA mechanism. Most of the claimants are investors from the developed world and most of the claims are launched against developing states. The amounts claimed (but not necessarily the amounts awarded) are also rising to frightening levels for developing countries. There also seems to be some evidence of a bias in favour of investors from the North, even though the empirical studies are not one-dimensional. But the subjectively negative perception of the ISA system is understandable, and equally so since the arbitrators largely come from the North and have very strong connections to the corporate world to which the claiming investors are connected. For that reason, it is also not surprising that a large amount of the literature deals with suggestions on reforming the system, either working within the current ICSID model or moving towards alternatives. In that respect, there is undoubtedly much more to be addressed, including issues not explicitly addressed in this chapter. For example, the fundamental question of whether investor-state disputes could be better addressed via a court system or via arbitration can, of course, be inspired by the law and economics literature discussed in this chapter. The same could be the case for one of the current debates on whether a multilateral court system should, in that case, be preferred to a bilateral system. At this stage, those issues cannot be discussed in any amount of detail. But it may be clear that some of the literature discussed could also provide useful insights for those issues. Arguments to support judicialization of ISA can certainly be found in the law and economics literature. The most important argument against arbitration stressed in the law and economics literature is that the positive externalities from decision-making are not generated through arbitration. Arbitration does not, as the literature indicates, generate public goods. It is also questionable whether the traditional economics argument to support arbitration can be fully generated. Commercial arbitration is supposed to be fast, cheap, and able to provide high-quality, impartial decision-making. It is questioned by many whether the current ICSID system meets those goals. Some argue that decision-making via the ICSID is slow, extremely expensive, and (as a result of the bias in selecting arbitrators) also not as impartial as more countries, in particular developing countries, would like it to be. Empirical evidence also supports the fact that the ISA is extremely costly and that the proceedings are quite lengthy. The fact that elite arbitrators, largely connected to the corporate world, often arbitrate the cases also provides at least a suggestion of bias towards investors and against developing countries. In that sense, it is not surprising that more particularly those developing countries are very critical of the current ICSID model. An interesting question is whether it is possible to develop a third way, in other words, a hybrid model between pure arbitration and a pure court system that would in some way or another keep ‘the best of both worlds’. Judicialization would have the (economic) advantage of generating public goods as a result of transparent and public decision-making. But some of the positive lessons from the ‘commercial’ arbitration system (like the information advantage and higher expertise of the arbitrators) could provide input for the reform of the system. As a result, for

138 Michael Faure and Wanli Ma example, an advantage of providing public goods could be afforded by a case being adjudicated via courts with independent judges who are specialized in investor-state disputes. These specialized judges would benefit from capacity building, and their expertise would in turn guarantee effective and speedy decision-making. If those judges were to come from different regions in the world (and not only the ‘white’ North), a higher degree of acceptability in the developing world could be guaranteed. Moreover, under these conditions, decisionmaking would probably be even cheaper and speedier than under the current ICSID model.

Part III

Reforming ISDS Substantive and procedural aspects

11 European perspectives on the role of national courts in the resolution of investor-state disputes Vid Prislan

11.1 Introduction Before the Treaty of Lisbon (2009), the protection of European Union (EU) investments abroad was largely a prerogative of individual EU member states’ policies, with the consequence that such investments today are not subject to a uniform regime. An area where the divergent practice of various EU states remains perhaps best visible is in relation to the system of investor-state dispute settlement (ISDS). While the availability of investor-state arbitration is by and large the rule in the almost 1,600 bilateral investment treaties (BITs) to which EU member states are parties, differences exist as to the types of disputes that can be submitted to arbitration, as well as the conditions under which this is to occur. However, the vagaries of individual policy-making are gradually expected to make room for common regimes of protection, which the EU will attempt to secure in negotiating agreements pursuant to its newly acquired competences in the field of foreign investment. The purpose of this chapter is to examine an issue on which the EU is bound to develop its own approach when negotiating agreements with third states: the role foreseen for national courts in the settlement of investment disputes. To that end, this chapter explores in Section 11.2 the various positions adopted by EU institutions towards this issue and discusses in Section 11.3 the extent to which these positions have begun to already materialize in EU agreements currently in the making. This chapter then sets out in Section 11.4 the competing policy considerations concerning the role that domestic courts could play in the broader structure of ISDS and concludes in Section 11.5 with some final observations.

11.2 EU institutions’ evolving views on ISDS and the role of domestic courts With the transfer of competences resulting from the Treaty of Lisbon, EU institutions not only gained a say in the shaping of dispute settlement procedures under the soon-to-be EU investment treaties; as this shift of competences coincided with the beginning of broader discussions pertaining to the future of the ISDS system, EU institutions were at once also provided with the opportunity to re-think the relationship between domestic and international mechanisms, and to re-define the role to be played by domestic courts in the resolution of investment disputes. The potential for reform, however, has not materialized.1

1 On this potential, see further Mavluda Sattorova, ‘Return to the Local Remedies Rule in European BITs? Power (Inequalities), Dispute Settlement, and Change in Investment Treaty Law’, Legal Issues of Economic Integration, Vol. 39 Issue 2 (2012), pp. 223–248.

142 Vid Prislan 11.2.1 The position of the European Commission Over the years, the European Commission has not maintained a uniform position as to the role that domestic judicial remedies are to play in the resolution of investment disputes. The role was rather to depend on the parties to the agreement. The Commission has strongly opposed the use of investor-state arbitration as a means for the settlement of disputes involving EU member states and investors from other EU member states.2 In many arbitrations brought pursuant to ‘intra-EU’ BITs, the Commission thus actively intervened on behalf of respondent member states, alleging the incompatibility of such instruments with mandatory provisions of EU law and with the EU’s judicial system.3 The Commission was initially concerned about the risk of arbitral awards being rendered without relevant questions of EU law being submitted to the Court of Justice of the European Union (CJEU), a situation which would undermine the principle of the primacy of EU law.4 Later, however, its concerns were equally directed towards the discriminatory treatment that was deemed to necessarily result from the fact that some EU investors were covered under BITs and were granted the opportunity to resort to investor-state arbitration, while others were not.5 As the Commission made clear in Achmea, resorting to outside dispute settlement mechanisms by EU subjects revealed a ‘mistrust in the courts of EU member states’ which had ‘no place’ in the European legal order.6 In 2018, its views eventually found endorsement by the CJEU, which ruled investor-state arbitrations based on intra-EU BITs to be incompatible with EU law.7 On the other hand, the Commission took an entirely different position in relation to the availability of investor-state arbitration in ‘extra-EU’ BITs. In the first policy document prepared pursuant to its newly acquired competences in the field of foreign investment, the Commission was favourably disposed towards including ISDS provisions in future EU

2 The Commission’s steadfast opposition to intra-EU BITs eventually resulted in 2015 in the commencement of formal infringement proceedings against Austria, the Netherlands, Romania, Slovakia, and Sweden, which were requested to terminate their intra-EU BITs. European Commission, ‘Commission Asks Member States to Terminate Their Intra-EU Bilateral Investment Treaties’, 18 June 2015, , last accessed on 18 February 2019. 3 Eastern Sugar B.V. (Netherlands) v The Czech Republic, SCC Case No. 088/2004, Partial Award of 27 March 2007; Achmea B.V. v The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko B.V. v The Slovak Republic), Award on Jurisdiction, Arbitrability and Suspension of 26 October 2010; PL Holdings S.à.r.l. v Republic of Poland, SCC Case No. V 2014/163, Award of 28 June 2017. The European Commission’s opposition was not limited to intra-EU BITs but extended to the use of investor-state arbitration in the context of the Energy Charter Treaty. See AES Summit Generation Ltd and AES-Tisza Erömü Kft v Republic of Hungary, ICSID Case No. ARB/07/22, Award of 23 September 2010; Electrabel S.A. v Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability of 30 November 2012. 4 Eastern Sugar v The Czech Republic, ibid, paras. 119 and 126. 5 Achmea B.V. v The Slovak Republic, supra note 3, paras. 183ff. 6 Ibid, para. 185. 7 Slovakische Republik (Slovak Republic) v Achmea BV, C-284/16, Judgment of 6 March 2018, in particular paras. 34 and 58. The case was brought to the CJEU by the German Federal Court of Justice, which requested a preliminary ruling on this issue as part of the setting aside proceedings relating to the Achmea v Slovakia award rendered on the basis of the Netherlands-Slovakia BIT. On that count, the CJEU did not follow the opinion of Advocate General Wathelet, who came to the contrary conclusion that arbitration clauses in intra-EU BITs were compatible with EU law. Slovak Republic v Achmea BV (Case C-284/16), Advocate General’s Opinion of 19 September 2017.

National courts and investor-state disputes 143 agreements. It even considered that, insofar as ISDS was ‘a key part of the inheritance that the Union receives from member states BITs’, the EU was to ‘build on’ member state practices to arrive at a state-of-the-art ISDS mechanism.9 At this early stage, however, the priority of the Commission was not to determine the proper role to be played by domestic courts in the overall architecture of investment dispute settlement, but primarily to devise ways to fix the ISDS system as such. It was only once the Commission became engaged in the negotiations of the first EU agreements pursuant to its newly acquired competences that the relationship between domestic courts and investment tribunals began to receive its consideration. The proposed Comprehensive Economic and Trade Agreement (CETA) with Canada and the Transatlantic Trade and Investment Partnership (TTIP) with the United States (US) sparked discussions on the necessity of providing ISDS in the context of developed legal systems, which were normally considered capable of adequately adjudicating disputes between foreign investors and the host state.10 To respond to those concerns, the Commission organized public consultations in 2014–2015, which were to address the question of investment protection and investor-state arbitration in TTIP. Not unexpectedly, the consultations revealed a divergence of opinions on this issue between those representing the views of potential claimants (i.e. large companies and business associations) and the views of civil society (non-governmental organisations [NGOs] and academics) that were arguably more favourable to the standpoint of respondent states. The former cautioned against any attempt at introducing any obligatory requirements to exhaust local remedies, pointing not only to the risk that this could create unnecessary delays, but also to the usual limitations existing in domestic legal orders (such as the problem of immunity of state organs or the non-applicability of specific treaties in domestic law) that may often make recourse to domestic courts less advantageous. At the same time, large businesses also pointed to the fact that certain claims, such as those concerning the constitutionality of a particular domestic measure, could not be dealt with at the international level. Hence, their standpoint was that the investor had to be free to choose either a legal path, and such a choice was not to be an irreversible one.11 Many NGOs, in contrast, considered that domestic courts are better placed to address disputes between investors and the host state, and hence should be the preferred if not exclusive forum for the settlement of investment disputes. Many of them considered those treaty provisions that were merely intended to prevent parallel proceedings as insufficient, and thus argued for the introduction of the requirement of exhaustion of local remedies as a pre-condition for resorting to investment arbitration. The majority of these NGOs and academics, however, were not against investment arbitration in principle, and thus essentially supported 8

 8  European Commission, ‘Communication from the Commission to the Council, the European Parliament, the European Economic & Social Committee and the Committee of the Regions: Towards a Comprehensive European International Investment Policy’, COM(2010)343 final, 7 July 2010, , last accessed on 24 April 2019, pp. 1–12, at 9–10.  9 Ibid, at 9–10. 10 Armand de Mestral, ‘Investor-State Arbitration between Developed Democratic Countries’, in Armand de Mestral (ed.) Second Thoughts: Investor State Arbitration between Developed Democracies (Waterloo: Centre for International Governance Innovation, 2017), pp. 9–56. 11 Commission Staff Working Document, ‘Report on Online Public Consultation on Investment Protection and Investor-to-State Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP)’, SWD(2015) 3 final, 13 January 2015, , pp. 1–140, at 19–20.

144 Vid Prislan approaches aimed at preventing parallel proceedings and double compensation.12 Based on the outcome of these consultations, the Commission ultimately identified the relationship between domestic judicial systems and ISDS as one of the four areas where further improvements to the EU’s approach should further be explored. It was in the Concept Paper of 2015, which paved the way for ISDS reform, that the Commission also set out concrete ideas as to how the relationship between domestic courts and investment arbitration could be improved.13 Unlike its proposals in relation to ISDS reform, which were far reaching, the Commission appeared more reserved in its delineation of the roles foreseen for domestic courts. The starting point for the Commission was that international investment arbitration was not on the same footing as domestic judicial remedies: the mandate of investment arbitral tribunals was to determine the compatibility of the conduct of state authorities with the state’s international obligations, which was not to be equated with a form of appeal from domestic law. The Commission was, nevertheless, of the opinion that it ‘makes sense to try and manage better’ the relationship between the two, and it singled out the need to avoid the risk of double compensation as one of the reasons why this would be desirable.14 Furthermore, the Commission expressed concerns with respect to the compatibility of investment arbitration with the principle of legal autonomy of the EU legal order, especially if investment tribunals were to interpret EU law in a manner that would be binding on EU institutions.15 The Commission did not favour the inclusion of the local remedies requirement, fearing it could increase the cost and duration of litigation. Instead, the primary concern was to preclude parallel litigation of claims so as to avoid the risk of double compensation. The Commission identified two ways to achieve this: either through the use of ‘fork-in-theroad’ provisions, which it considered advantageous to the extent that they could contribute to shortening the duration and the cost of litigation; or through the use of ‘no U-turn’ clauses, which it saw as having the advantage of not discouraging recourse to domestic courts and thus having the potential of reducing the number of potential ISDS claims. The Commission was of the opinion that either approach, or a combination of both, could be used, depending on the agreement negotiated.16 The Commission was furthermore of the opinion that, with a view to accommodating the principle of the legal autonomy of the EU legal order, provisions would have to be added ensuring that investment tribunals would not be directly applying domestic law, while stipulating that such law could only be taken into account as a fact, and any interpretations given to such law by investment tribunals would not be binding on domestic courts.17 Though developed for the purposes of the negotiations on TTIP, the Commission’s Concept Paper of 2015 set out the standard to be used for further development of investment protection provisions and investment arbitration in all future EU investment n ­ egotiations.18 Indeed, while the negotiations on TTIP have in the meantime stalled, as Section 11.3 demonstrates, the solutions proposed in the Concept Paper have already been implemented in several EU investment agreements in the making.

12 Ibid, pp. 19–20. 13 European Commission, ‘Investment in TTIP and Beyond – the Path for Reform,’ Concept Paper, 2015, , last accessed on 18 February 2019, pp. 1–12. 14 Ibid, at 9–10. 15 Ibid, at 10. 16 Ibid, at 11. 17 Ibid, at 11. 18 Ibid, at 4.

National courts and investor-state disputes 145 11.2.2 The position of the European Parliament The stance of the European Parliament towards the use of local courts is one that has changed noticeably over the years. Initially, the Parliament considered that a greater role could be played by local judicial remedies in the resolution of controversies between investors and host states. In its Resolution of 6 April 2011 on future European international investment policy, the Parliament maintained that whilst investor-state procedures had to remain available in addition to state-to-state dispute settlement procedures,19 the ISDS regime had to be adjusted so as to provide for ‘the obligation to exhaust local judicial remedies where they are reliable enough to guarantee due process’.20 Yet, the Parliament’s demands concerning the mandatory use of domestic courts soon waned. Already in its Resolution of 9 October 2013 addressing the EU-China negotiations for a BIT, no mention is made of re-introducing the obligation to exhaust local remedies. Instead, the Parliament considered that such bilateral agreement should, ‘as a key priority’, include effective state-to-state and investor-to-state dispute settlement mechanisms ‘in order, on the one hand, to prevent frivolous claims from leading to unjustified arbitration, and, on the other, to ensure that all investors have access to a fair trial, followed by enforcement of all arbitration awards without delay’.21 Rather than on increasing the role of domestic judicial remedies, the Parliament’s focus gradually shifted to the importance of delineating the proper scope of operation of domestic and international procedures. In its Resolution of 8 July 2015 containing recommendations to the Commission on the negotiations for TTIP, the Parliament urged the Commission to negotiate a solution that would ensure that ‘the jurisdiction of courts of the EU and of the Member States is respected’.22 In its Resolution of 5 July 2016 on a future strategy for trade and investment – by which it otherwise endorsed the Commission’s efforts with respect to the new investment court system, as well as its ambition of eventually establishing a multilateral court system – the Parliament further stressed that this system ‘must be in compliance with the EU legal order, the power of the EU courts in particular, and, more specifically, EU competition rules’.23

11.2.3 The position of EU member states and of the EU Council EU member states may have parted ways with the European Commission on the issue of intra-EU BITs, and the desirability, as well as permissibility, of using investor-state arbitration for the settlement of disputes between EU investors and member states.24 But their

19 European Parliament Resolution of 6 April 2011 on the Future European International Investment Policy (2010/2203(INI)), para. 32. 20 Ibid, para. 31, emphasis added. 21 European Parliament Resolution of 9 October 2013 on the EU-China Negotiations for a Bilateral Investment Agreement (2013/2674(RSP)), para. 42. 22 European Parliament Resolution of 8 July 2015 Containing the European Parliament’s Recommendations to the European Commission on the Negotiations for the Transatlantic Trade and Investment Partnership (TTIP) (2014/2228[INI]), para. 2(d)(xv), emphasis added. 23 European Parliament Resolution of 5 July 2016 on a New Forward-Looking and Innovative Future Strategy for Trade and Investment (2015/2105[INI]), para. 68. 24 In all fairness, the views of EU member states were not uniform on this issue. Those of them appearing as respondents in intra-EU investment arbitrations (i.e. primarily the capital-importing states that joined the EU in the latest rounds of enlargement) shared the view of the Commission, whereas the major capitalexporting EU member states considered that an appropriate level of substantive and procedural protection for EU investors should nonetheless be preserved in addition to that which was available under EU law already. On the different positions, see Teis Andersen and Steffen Hindelang, ‘The Day After: Alternatives to Intra-EU BITs,’ Journal of World Investment & Trade, Vol. 17 Issue 6 (2016), pp. 984–1014, at 989ff.

146 Vid Prislan views have largely been aligned with that of the Commission on the need to maintain ISDS in future EU investment agreements with third states. In its conclusions on a comprehensive European international investment policy in 2010, the first policy document adopted by the Council of the EU following the transfer of competences, the Council expressed the view that the goal of a common EU international investment policy was to ‘increase’ the current level of protection and legal security for European investors abroad, and it thus stressed that the new legal framework was not supposed to negatively affect investor protection and guarantees enjoyed under the existing bilateral investment agreements.25 The Council emphasized the need to provide an ‘effective’ ISDS mechanism, which was considered to be one of the ‘main pillars’ of future EU investment agreements, alongside certain ‘fundamental’ standards pertaining to the substantive treatment of investors.26 Thus, in the first negotiation mandates that the Council provided to the Commission in 2011, which set the terms on which the Commission was to negotiate the agreements with Canada, India, and Singapore, the possibility of direct recourse to investor-state arbitration was not questioned. Rather, the Council expected the agreements to provide for an ‘effective investor-to-state dispute settlement mechanism’.27 In the subsequent negotiating directives for TTIP in 2013, the Council similarly called for the inclusion of ‘an effective and state-of-the-art investor-to-state dispute settlement mechanism’.28 This time, however, it directed the Commission to also give consideration ‘to the possibility of creating an appellate mechanism applicable to investor-to-state dispute settlement under the Agreement, and to the appropriate relationship between ISDS and domestic remedies’.29 The Council did not further elaborate on what this ‘appropriate’ relationship could be. In some EU member states, ideas were advanced at the level of the highest policy-makers that such a relationship could entail the requirement of the exhaustion of local remedies, or the inclusion of ‘fork-in-the-road’ provisions requiring the investor to make a choice between domestic and international remedies.30 In certain others, however, the inclusion of an ISDS mechanism in TTIP began to be questioned altogether.31 By then, the question of the availability of ISDS in future EU investment and trade agreements had further become complicated by the internal power struggle between EU

25 Council of the European Union, ‘Conclusions on a Comprehensive European International Investment Policy’, 3041st Foreign Affairs Council meeting, 25 October 2010, , last accessed on 18 February 2019, paras. 8–9. 26 Ibid, paras. 14, 18. 27 ‘EU-Canada (CETA), India and Singapore FTAs – EC Negotiating Mandate on Investment (2011)’, Council Negotiating Directives of 12 September 2011 (leaked), , last accessed on 18 February 2019. 28  Council of the European Union, ‘Directives for the Negotiation on the Transatlantic Trade and Investment Partnership between the European Union and the United States of America’, 17 June 2013, , last accessed on 18 February 2019, pp. 1–18, at 9. 29 Ibid, emphasis added. 30 See answers of the Minister for Foreign Trade and Development Cooperation of the Netherlands in relation to parliamentary questions concerning ISDS in TTIP, reproduced in ‘Vragen gesteld door de leden der Kamer, met de daarop door de regering gegeven antwoorden’, Parliamentary Materials, Second Chamber, 2013–2014, ah-tk-20132014-727, p. 2. 31 This is the case for Germany, for example. German Federal Council Resolution of 11 July 2014, BR-Drs 295/14, , last accessed on 18 February 2019, para. 9.

National courts and investor-state disputes 147 member states and the European Commission pertaining to the scope of EU’s competences in the field of investment policy-making.32 The nature of these competences has a bearing on the form in which future EU agreements will be concluded. The matter was eventually resolved with the CJEU’s Opinion (2/15) on the EU-Singapore FTA of May 2017, which ruled that the EU is not endowed with exclusive competence in relation to (1) non-direct (i.e. portfolio) foreign investments (at least in the absence of EU rules that could currently be affected in this field), and (2) the regime governing investor-state dispute settlement.33 As a consequence of this ruling, any future EU investment agreement offering investor-state arbitration will have to be concluded as a mixed agreement, requiring ratification by individual member states. This, of course, may provide in some cases the policy incentive not to include ISDS.

11.3 From policy to practice: Treaty innovations in current EU agreements Having sketched the various positions taken and policy proposals advanced by various EU institutions, it is now possible to examine how these considerations and proposals have begun to translate into treaty drafting practice. The EU has already completed negotiations for comprehensive free trade/investment protection agreements (IPAs) with Singapore (17 October 2014),34 Vietnam (1 February 2016),35 and Canada (5 July 2016).36 By reference to these finalized treaty texts, as well as to the publicly available drafting proposals of some of the agreements currently under negotiation, it is now possible to provide an initial appraisal of the approaches taken in dealing with the relationship between ISDS and domestic courts. Notwithstanding slight variations in wording, the agreements examined all take a consistent approach to regulating the relationship between the use of domestic judicial procedures and of investment arbitration in the resolution of investment disputes. None of the agreements foresees a greater role for domestic judicial procedures in the resolution of investment disputes by imposing some form of mandatory recourse to local remedies – either in the stricter form of a requirement of exhaustion, or in the less strict form of compulsory domestic litigation for a defined period of time. Rather, in line with the Commission’s draft paper, the primary policy goals are the avoidance of duplicative proceedings and the maintenance

32 As is known, the Commission perceived this competence to be a comprehensive and exclusive one, whereas the member states – which were not particularly keen on relinquishing the prerogatives that they traditionally enjoyed in relation to the conclusion of treaties dealing with the promotion and protection of foreign investment – have generally insisted that the competence was a shared one (at least in relation to portfolio investments). Robert Basedow, ‘A Legal History of the EU’s International Investment Policy’, Journal of World Investment & Trade, Vol. 17 Issue 5 (2016), pp. 743–772, at 743. 33 Opinion 2/15 of the CJEU, 16 May 2017, paras. 227–256 and 285–293. 34 Provisions on investment protection initially featured as a separate chapter of the Free Trade Agreement, which was finalized in 2014 (and subsequently amended in 2017). Following CJEU Opinion 2/15, however, the provisions have been moved into a standalone treaty, the EU-Singapore Investment Protection Agreement. This was formally signed on 19 October 2018. 35 Trade and investment negotiations with Vietnam were completed in December 2015. As in the case of the EU-Singapore agreements, the result of negotiations with Vietnam was later adjusted to create a Free Trade Agreement and an Investment Protection Agreement. The final texts of the FTA and IPA were agreed upon in July 2018. 36 The agreement with Canada already entered into force provisionally on 21 September 2017, pending domestic ratification process in the EU member states.

148 Vid Prislan of the integrity of the EU legal order. Hence, the bulk of the provisions relevant to the position of local courts are those dealing with the concurrent use of domestic and treaty remedies (11.3.1) and those addressing the use of domestic law in the resolution of disputes (11.3.2). It is argued here that, on the whole, the provisions included in the present EU agreements, nonetheless, have the potential to contribute to the greater use of domestic courts in the settlement of investment disputes (11.3.3).

11.3.1 Avoidance of duplicative proceedings In the EU agreements currently in the making, the primary concern has clearly been the avoidance of duplicative proceedings and the risk that these could lead to conflicting legal outcomes and allow the investors to obtain double recovery. Though leaving open in its concept paper which treaty device could best be employed to address this concern, the Commission refrained from insisting on the inclusion of ‘fork-in-the-road’ clauses, which were previously commonly used in EU member states’ BITs. Instead, the primary device adopted to regulate the relationship between investment arbitration and domestic courts in the EU agreements thus far has been the ‘no U-turn’ clause, which allows covered investors to commence arbitration under the agreement provided that the investor discontinues any other proceedings regarding the dispute. Thus, pursuant to Article 8.22(1)(f) of CETA, the claimant ‘may only submit’ a claim to arbitration if it ‘withdraws or discontinues any existing proceeding before a tribunal or court under domestic or international law with respect to a measure alleged to constitute a breach referred to in its claim’. Similar requirements are invariably present in the other agreements.37 In most of these agreements, use is made of ‘no U-turn’ clauses proper, which not only place restrictions on the simultaneous use of local remedies and investment arbitration but also prevent claims being submitted to local courts subsequent to investment arbitration, which could result in contradictory decisions and the possibility of double recovery. Pursuant to Article 8.22(1) (g) of CETA, a claimant is expected to waive ‘its right to initiate any claim or proceeding before a tribunal or court under domestic or international law with respect to a measure alleged to constitute a breach referred to in its claim’. Similar waiver requirements are present in the other agreements.38

37 Cf. Article 3.7(1)(f) EU-Singapore IPA (referring to a ‘claim submitted to a domestic court or tribunal concerning the same treatment as alleged to breach the provisions of Section A (Investment Protection)’); Article 3.34 EU-Vietnam IPA (referring to a ‘pending claim […] before any other domestic […] court or tribunal concerning the same measure as that alleged to be inconsistent with the provisions referred to in Article 1(1) (Scope) and the same loss or damage’); or Article 14(1) TTIP draft (referring to a claim submitted ‘to any other domestic or international court or tribunal concerning the same treatment as that alleged to be inconsistent with the provisions referred to in Article 1(1)’). 38 See Article 14(2)(b) TTIP draft (requiring a claimant to submit ‘a declaration that it will not initiate any claim or proceeding before any domestic or international court or tribunal under domestic or international law concerning the same treatment as that alleged to be inconsistent with the provisions referred to in Article 1(1).’); Article 3.34(4)(b) EU-Vietnam IPA (stipulating that ‘the claimant shall provide […] a waiver of its right, and where applicable, of the locally established company, to initiate any claim referred to in paragraph 1’); or Article 3.7(1)(f) EU-Singapore IPA (requiring that claimant ‘declares that it will not submit such a claim [i.e. one concerning the same treatment as alleged to breach the provisions of Chapter Two (Investment Protection), brought to any other domestic or international court or tribunal under domestic or international law] in the future’).

National courts and investor-state disputes 149 The current ‘no U-turn’ clauses are formulated capaciously so as to prevent them being sidestepped in the absence of identity of the cause of action and/or of the parties, which has usually constituted the grounds for investment tribunals not giving effect to ‘fork-in-the-road’ clauses. Hence, instead of referring to the same ‘dispute’ as the latter, the ‘no U-turn’ clauses in EU agreements prevent duplicative/concurrent proceedings before domestic courts and arbitral tribunals with respect to the same ‘measure’,39 or concerning the same ‘treatment’.40 The clauses apply to all actions with a legal basis derived from the same conduct on the part of host state authorities that have adversely affected the investor or its investment. Furthermore, the clauses invariably attempt to limit duplicative proceedings commenced by, or on behalf of, connected legal persons. In CETA, for example, the limitations on duplicative proceedings apply both to the investor and to the locally established enterprise that the investor owns or controls directly or indirectly if the claims are those for loss or damage to that enterprise or to an interest in such enterprise.41 The EU-Singapore IPA goes a step further in that it excludes not only claims concurrently brought by the investor and a locally established company but also claims brought by ‘all persons who directly or indirectly have an ownership interest in, or who are controlled by the investor or, where applicable, the locally established company’.42 Similar broad stipulations are found in the EU-Vietnam IPA43 and the TTIP draft proposal.44 Then again, not all recourse to domestic courts is prohibited while arbitral proceedings are pending. With the exception of CETA (which is silent on the matter), the EU agreements considered expressly provide for the possibility of claimants resorting to domestic judicial or administrative organs with a view to obtaining injunctive or declaratory relief.45 However, in the case of the EU-Vietnam IPA, this possibility is subject to the proviso that the relief sought does ‘not involve the payment of monetary damages’,46 whereas the EU-Singapore IPA excludes relief that would ‘involve the payment of damages or the resolution of the substance of the matter in dispute’.47 The availability of interim relief on the part of domestic courts is, of course, necessary since provisional measures of protection, which can otherwise be ordered by investment tribunals, may not have direct effect in the domestic legal orders of the contracting states. Besides, CETA, the TTIP draft, and the EU-Vietnam IPA, while expressly conferring the general competence on arbitral tribunals to order interim measures of protection,48 exclude such competence from measures involving the seizure of assets or those aimed at enjoining the application of the impugned measures.49

39 Article 8.22(1)(f) CETA (referring to a ‘proceeding […] with respect to a measure alleged to constitute a breach referred to in its claim’); or Article 3.34(1) EU-Vietnam IPA (referring to ‘a pending claim […] concerning the same measure as that alleged to be inconsistent with the provisions referred to in Article 1(1) (Scope) and the same loss or damage’). 40 Article 3.7(1)(f)(i) EU-Singapore IPA (referring to a ‘claim […] concerning the same treatment as alleged to breach the provisions of Chapter Two (Investment Protection)’); or Article 14(1) TTIP draft (referring to ‘a claim […] concerning the same treatment as that alleged to be inconsistent with the provisions referred to in Article 1(1)’). 41 Article 8.22(2) CETA. 42 Article 3.7(2) EU-Singapore IPA. 43 Article 3.34 EU-Vietnam IPA. 44 Article 14(3) TTIP draft. 45 Article 14(1) TTIP draft. 46 Article 3.34(7) EU-Vietnam IPA. 47 Article 3.7(4) EU-Singapore IPA. 48 The EU-Singapore IPA is silent on this matter. However, most arbitration rules grant arbitral tribunals the capacity to order provisional measures. Cf. relevant ICSID / UNCITRAL Rules. 49 Article 8.34 CETA; Article 19 TTIP draft; and Article 3.47 EU-Vietnam IPA.

150 Vid Prislan 11.3.2 Limitations on the application of domestic law Not insignificant to the relationship between domestic and international remedies is also the fact that the EU agreements currently in the making avoid the creation of any direct jurisdictional overlap between domestic courts and investment arbitration. Most significant in this respect is the limited scope of the dispute settlement clauses, which are invariably restricted to claims concerning violations of discrete standards of protection provided by the applicable treaty.50 By not using the ‘any dispute’ formula that has otherwise customarily been employed in many of EU member states’ BITs, the EU agreements effectively preclude investment tribunals from taking cognizance of claims relating to simple breaches of contract or breaches of specific domestic law. The narrower dispute settlement clauses thus preserve investment arbitration as an exceptional remedy, preventing it from devolving into a form of appeal from domestic jurisdictions. While limiting the scope of claims of which investment tribunals now can take cognizance, the current EU agreements also limit the scope of the law that such tribunals will apply in deciding whether or not the provisions of the agreement have been breached. Pursuant to the choice-of-law provisions, arbitral tribunals are accordingly only entitled to apply the agreement in question and other rules and principles of international law that may be applicable between the parties.51 To the extent that they may have to consider domestic law with a view to determining the consistency of a measure with the standards imposed by the agreements, they can only do so ‘as a matter of fact’ and by following ‘the prevailing interpretation given to the domestic law by the courts or authorities’ of the relevant party.52 Furthermore, most of the current EU agreements explicitly preclude investment tribunals from determining the legality of impugned measures under the domestic law of the disputed party.53 The primary purpose of these provisions is apparently to preserve the integrity of the EU legal order by not allowing adjudicatory bodies operating outside the European judicial order to conclusively determine points of European law. But these provisions also significantly diminish the potential jurisdictional overlap – and thus jurisdictional competition – between investment tribunals and domestic courts; they also further strengthen the function of investment tribunals as exceptional remedies and prevent these from devolving into a mechanism of appellate review from domestic jurisdictions.

11.3.3 Indirect encouragement of recourse to local courts? On the face of it, the current EU agreements may seem primarily concerned with the avoidance of parallel proceedings and the maintenance of the integrity of the EU legal order. Effectively, however, the provisions currently employed may, in many ways, encourage recourse to domestic courts as opposed to investment arbitration. Not insignificant, of course, is the use of ‘no U-turn’ clauses, instead of ‘fork-in-the-road’ or other mandatory choice of forum provisions. By not foreclosing investment arbitration once the investor has brought the matter before the host state’s courts, the ‘no U-turn’

50 Article 8.18 CETA. 51 Article 8.31(1) CETA; Article 3.13(2) EU-Singapore IPA; Article 3.42(2) EU-Vietnam IPA; and Article 13(3) TTIP draft. 52 Article 8.31(2) CETA; provisions to the same effect are found in Article 13(3) TTIP draft, and Article 3.42(2) EU-Vietnam IPA. 53 Article 8.31(2) CETA; Article 13(4) TTIP draft; and Article 3.42(3) EU-Vietnam IPA.

National courts and investor-state disputes 151 provisions not only do not discourage resorting to local remedies, but in fact, when considered with other provisions, they also encourage investors to seek redress for wrongs before domestic courts before they are raised to the international level. Such an encouragement, for example, comes in the form of extensions of the time limits within which a claim may be submitted to international arbitration, in the event that the impugned measures had first been challenged through domestic judicial procedures. To remain with the example of CETA, whereas the claimant would otherwise have to submit a request for consultations (which is a precondition for the commencement of arbitration) within three years after first having (or having been in a position to have) acquired knowledge of the alleged breach and of the loss or damage incurred thereby, it is instead allowed that they submit such a request within two years after ‘ceas[ing] to pursue claims or proceedings before a tribunal or court under the law of a Party, or when such proceedings have otherwise ended’ (though no later than 10 years after first having, or having been in a position to have, acquired knowledge of the alleged breach and of the thereby incurred loss or damage).54 Similar extensions can be found in the other agreements.55 Apart from such direct incentives, the EU agreements also provide several less direct incentives for investors to seek redress in domestic courts. First, as already noted, the limited scope of dispute settlement clauses and choice-of-law provisions prevent tribunals from taking cognizance of domestic law claims and thus direct the investors to have such claims submitted to domestic courts. Especially where controversy could exist on points of domestic law – such as in relation to threshold questions as to whether an investor actually possessed a proprietary right capable of constituting a protected investment – these limitations could make prior recourse to domestic courts advisable so as to have certain matters of domestic law first conclusively determined by domestic courts. Second, it is also not immaterial that several of the key standards of treatment imposed by current EU agreements are now formulated less expansively, by way of exhaustive definitions and limitative language, instead of through open-ended formulations as used to be the practice under the European BITs. Particularly noteworthy in this respect is that the content of the Fair and Equitable Treatment (FET) standard is now limited to a set of most egregious instances of misconduct involving cases of denial of justice, fundamental breaches of due process in judicial and administrative proceedings, instances of ‘manifest arbitrariness’, ‘targeted discrimination on manifestly wrongful grounds’, and ‘harassment, coercion, abuse of power or similar bad faith conduct’.56 The setting of a higher threshold to establish violations of the FET standard is not unlikely to operate as a disincentive for investors to immediately resort to investment arbitration, leading them more frequently to seek recourse to local remedies instead. An additional deterrent in this respect comes in the form of more narrowly formulated ‘observance of obligations’/‘umbrella’ clauses. As their scope of protection is now expressly limited to adverse measures adopted by the host state in the exercise of governmental authority (puissance publique),57 simple contractual breaches can no longer serve as predicates for such claims. Last but not least, the addition of clarificatory language

54 Article 8.19(6) CETA. 55 Cf. Article 4(5)(b) TTIP draft; Article 3.30(2)(b) EU-Vietnam IPA; and Article 3.3(3) EU-Singapore IPA. 56 Article 8.10(2) CETA; Article 2.4(2) EU-Singapore IPA; Article 2.5(2) EU-Vietnam IPA; and Article 3(2) TTIP draft. 57 Cf. 2.4(6) EU-Singapore IPA; 2.5(6) EU-Vietnam IPA; and Article 7 TTIP draft. CETA does not contain such provision.

152 Vid Prislan – such as stipulations to the effect that the host state’s decision not to issue, renew, or maintain a subsidy, or to request its reimbursement, will not normally amount to a violation of the treaty58 – may equally become a hurdle to direct recourse to arbitration in some cases. Third, an additional factor that could incentivize the pursuit of local remedies first is the inclusion in several EU agreements of provisions aiming at early exclusion of frivolous and unmeritorious claims. These take the form of (1) a fast-track system allowing the rejection of claims that are ‘manifestly without legal merit’59 already at the first session of the tribunal or promptly thereafter;60 (2) the alternative possibility of having the tribunal address, as a preliminary question, an objection that a claim is ‘unfounded as a matter of law’;61 and (3) stipulations to the effect that the losing party in principle bears all costs of the proceedings.62 Although these provisions will not prevent treaty claims being brought without recourse to local remedies, their combined effect will likely be to discourage the use of arbitration as a mere alternative to domestic remedial processes, as claimants will want to make sure that their treaty claims also have sufficient prospects of success. The pursuit of local remedies may frequently increase such prospects. In general, an indication that a domestic measure is illegal under domestic law, though not in itself determinative of the question of liability under international law, has frequently been considered as valuable to determining treaty claims in practice.63 More specifically, especially when the impugned measures complained of are those stemming from lowerlevel state officials, proceedings before domestic courts will likely reveal whether the failure on their part is also one which displays insufficiently in the system, so as to rise to the level of treaty breach.64 Of course, resorting to domestic judicial remedies may not only clarify the factual predicate of a treaty claim but may also amplify it, insofar as improper treatment on the part of the domestic judiciary – in the form of denial of justice or fundamental breaches of due process – will separately be capable of giving rise to violations of the FET standard.

11.4 Policy considerations How is one to then evaluate the current EU agreements in terms of the use of domestic remedies for the resolution of investment disputes? That these do not do away with investor-state arbitration does not come as a surprise, given that the replacement of investor-state arbitration

58 Article 8.9(3) and (4) CETA; Article 2.2(3) EU-Vietnam IPA; Article 2(3) and (4) TTIP draft. 59 This resembles the expedited procedure provided for under Rule 41(5) of the ICSID Arbitration Rules, which was introduced in 2006 to dispose of unmeritorious claims at the preliminary stage of a proceeding. 60  Article 8.32 CETA; Article 3.14 EU-Singapore IPA; Article 16(1) TTIP draft; and Article 3.44 EU-Vietnam IPA. 61 Article 8.33 CETA; Article 3.15 EU-Singapore IPA; Article 17 TTIP draft; and Article 3.45 EU-Vietnam IPA. The possibility of invoking the objection that a claim is ‘manifestly without legal merit’ is without prejudice to the objection that the claim is ‘unfounded as a matter of law’. The distinction between the two objections appears to pertain to the applicable standard of review. A claim which is ‘manifestly without legal merit’ appears to be one that is so obviously defective from a legal point of view that it can be subject to summary determination, whereas a claim that is ‘unfounded as a matter of law’ will probably require more elaborate argument or factual enquiry for its disposition. 62 Article 8.39(5) CETA; Article 3.21(1) EU-Singapore IPA; Article 28(4) TTIP draft; and Article 3.53(4) EU-Vietnam IPA. 63 Cf. Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, Decision on Annulment, ICSID Case No ARB/97/3, 3 July 2002, para.101 (noting that ‘municipal law will often be relevant […] in assessing whether there has been a breach of the treaty’.). 64 Cf. Helnan International Hotels A/S v Arab Republic of Egypt, Decision of the ad hoc Committee, ICSID Case No ARB/05/19, 14 June 2010, paras. 48–50.

National courts and investor-state disputes 153 with other types of remedies would probably only be acceptable where such other remedies are deemed equivalent to, or at least approximately substitutable with, investor-state arbitration. As investor-state arbitration operates at a different level than domestic courts, it may often be difficult to treat the latter as a functional equivalent of the former. One of the decisive advantages of investor-state arbitration over domestic remedies is precisely the fact that such arbitration operates independently from the domestic legal order of the host state – with the consequence that it cannot be affected by possible domestic immunities applicable to state organs, or by possible legislative changes introduced by the host state in the exercise of its sovereign powers (puissance publique), nor be otherwise constrained by domestic constitutional limitations that can possibly prevent domestic courts from reviewing impugned conduct against internationally-prescribed standards.65 In the absence of this external positioning, the only way for domestic remedies to offer a functional alternative to investor-state arbitration is in combination with state-to-state dispute settlement mechanisms – an alternative, however, which is generally seen as leading to the politicization of investment disputes. This is not to dismiss the possibility that, in practice, domestic and international remedies may actually operate as alternatives in some cases, even if genuine comparisons on this point are difficult to make for want of reliable information.66 Despite the lack of reliable data, the argument is sometimes made in favour of abandoning ISDS mechanisms in relation to countries with well-functioning judicial systems, such as in the context of TTIP, CETA, or the EU-Japan FTA. Though attractive in theory, this possibility will be difficult to implement in practice, as any differential treatment when it comes to the inclusion of ISDS will be difficult to sell to other treaty partners without the EU being accused of pursuing a new form of imperialism. Besides, the proposition that the judicial systems of EU member states invariably provide for sufficient guarantees for the effective resolution of investment disputes remains open to rebuttal, especially in light of the low scores that some EU member states obtain on international indexes pertaining to the quality of the domestic judiciary,67 not to mention the fact that violations of the right to a fair trial are among the most common violations of the European Convention on Human Rights on the part of EU member states.68 Absenting concrete evidence that domestic judicial procedures really offer an alternative to investor-state arbitration, it is not surprising that the question of the relationship between domestic and international remedies has become a much politicized one. There are certainly arguments in favour of reverting the resolution of investment disputes to domestic courts. First, there is the question of fairness. The fact that foreign investors enjoy greater rights

65 On domestic courts’ competence to adjudicate private treaty-based claims and their inadequacy for deciding investment disputes, see Marco Bronckers, ‘Is Investor-State Dispute Settlement (ISDS) Superior to Litigation before Domestic Courts? An EU View on Bilateral Trade Agreements’, Journal of International Economic Law, Volume 18 (2015), pp. 655–677, at 659ff. 66  On this problem, see Martins Paparinskis, ‘Investors’ Remedies under EU Law and International Investment Law’, Journal of World Investment & Trade, Vol. 17 Issue 6 (2016), pp. 919–941. 67 ‘Rule of Law Index 2016’, World Justice Project, , last accessed on 18 February 2019, pp. 1–204, at 41 and 43. 68 In the period between 1959 and 2015, more than 41% of the violations found by the European Court of Human Rights have concerned Article 6 of the Convention, whether on account of the fairness or the length of the proceedings. See Council of Europe, ‘Overview 1959-2015: ECHR’, March 2016, , last accessed on 18 February 2019, pp. 1–12, at 6. In the judgments delivered by the Court in 2015, nearly a quarter of the violations (still) concerned Article 6. See Council of Europe, ‘The ECHR in Facts & Figures 2016’, , last accessed on 18 February 2019, pp. 1–11, at 7.

154 Vid Prislan than investors of domestic origin creates unequal competitive conditions and distorts the level playing field in the global economy. Another is the problem of legitimacy, resulting from the fact that arbitrators, unlike domestic judges, have no relation to the political constituencies in the host state and are thus unaccountable to those most likely to be affected by their decisions.69 Last but not least, there is also the issue of local institution-building. The availability of international adjudicatory alternatives has the effect of disempowering local judicial institutions.70 But there are equally strong arguments in favour of not leaving investment disputes entirely to resolution by national courts. Most important is probably the problem of the rule of law.71 The non-independence, inefficiency, and/or incompetence of domestic courts provide perhaps the most cogent reasons why maintaining an external mechanism for the resolution of investment disputes is necessary.72 The approach adopted in current EU investment agreements attempts to balance these competing considerations by retaining the possibility of direct recourse to investor-state arbitration, while at the same time encouraging resorting to domestic judicial remedies. Arguably, one may wonder whether the current treaty provisions have not gone far enough by failing to make resorting to local remedies compulsory. In response to this, the argument is usually made that subjecting recourse to international arbitration to some prior resort to, or even exhaustion of, local remedies will end up increasing the duration and the costs of litigation.73 But this argument rests on the presumption that domestic courts are inherently incapable of resolving disputes between the foreign investor and the host state, and that such disputes will necessarily persist even in the event of a positive outcome of domestic litigation. One may equally proceed, however, from the opposite assumption that mandatory recourse to local judicial remedies may actually decrease the costs of litigation, for where investment disputes are satisfactorily resolved by domestic courts, investors are less likely bring their claims to arbitration. In the end, the question turns on the extent to which one believes that investment disputes are capable of disposition by domestic courts, which is ultimately a question of trust. Economically, the addition of an extra layer of proceedings may not add much to the overall costs of litigation, at least not when compared to the total costs of investment arbitration. And as a matter of legal principle, the introduction of compulsory resort to domestic judicial remedies would certainly not be an extraordinary measure given the wide prevalence of such a requirement in the context of human rights courts.

69 UNCTAD, ‘UNCTAD’s Reform Package for the International Investment Regime’, , last accessed on 18 February 2019, pp. 1–119, at 44. 70 Tom Ginsburg, ‘International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance,’ International Review of Law and Economics, Vol. 25 Issue 1 (2005), pp. 107–123, at 107. 71  Stephan Schill, ‘Reforming Investor-State Dispute Settlement (ISDS): Conceptual Framework and Options for the Way Forward’, E15 Task Force on Investment Policy, Think Piece, , last accessed on 18 February 2019, pp. 1–11, at 7. 72  Jeswald Salacuse, ‘Explanations for the Increased Recourse to Treaty-Based Investment Dispute Settlement: Resolving the Struggle of Life against Form?’ in Karl P. Sauvant (ed.), Appeals Mechanism in International Investment Disputes (Oxford: Oxford University Press, 2008), pp. 105–125. 73 Nicolas Hachez and Jan Wouters, ‘International Investment Dispute Settlement in the Twenty-First Century: Does the Preservation of the Public Interest Require an Alternative to the Arbitral Model?’ in Freya Baetens (ed.), Investment Law within International Law: Integrationist Perspectives (Cambridge: Cambridge University Press, 2013), pp. 417–449, at 441.

National courts and investor-state disputes 155

11.5 Conclusions In spite of calls on the part of some EU institutions to increase the role of domestic courts in ISDS, and even to (re-)introduce the requirement of exhaustion of local remedies, not much has changed in relation to the use of domestic courts to resolve controversies between foreign investors and host states. Under the EU investment agreements currently in the making, recourse to domestic judicial procedures remains facultative, although several incentives are nonetheless provided that promote recourse by foreign investors to domestic courts. Given the lack of trust even among EU member states themselves in each other’s domestic judicial systems, it is difficult to expect any significant changes to occur in treaty-making practice involving third states and their legal systems of which EU member states may have even less trust in the independence, efficiency, and/or competence.

Acknowledgement The research leading to this article has received funding from the European Research Council (ERC) under ERC Grant Agreement N° 313355, as part of the research project on ‘Transnational Private-Public Arbitration as Global Regulatory Governance: Charting and Codifying the Lex Mercatoria Publica’ (LexMercPub) carried out at the University of Amsterdam.

12 Is (in)consistency a problem? A close look at juridical techniques in interpreting jurisdiction clauses in Chinese BIT cases Wei Shen 12.1 Introduction The European Commission published the ‘Concept Paper: Investment in Transatlantic Trade and Investment Partnership (TTIP) and Beyond – The Path for Reform’ in May 2015, which set out the European Union’s (EU) future path with regard to its policy on investment protection and investment dispute resolution, including the establishment of the investment court system in bilateral investment treaties (BITs).1 In November 2015, the European Union (EU) agreed on the promotion of the investment court system on the bilateral level to be proposed in TTIP, other free trade agreements (FTAs) and stand-alone BITs that the EU has been negotiating with its trading partners.2 The EU’s ultimate objective is to establish a permanent multilateral investment court (MIC) to adjudicate international disputes between investors and governments; the MIC is an integral part of the EU’s ongoing efforts to develop a coherent, unified, and effective policy on investment dispute resolution. The EU and China started negotiations on a Comprehensive Agreement on Investment (CAI) in 2014. This agreement will be a critically important legal instrument in the international investment sphere for both the EU and China with geopolitical significance. China’s BIT negotiations with the EU and the United States (US) could further open up China’s domestic market to greater competition and deepen China’s economic ties with the rest of the world. From a legal perspective, BITs between China and its major economic partners such as the EU and the US could create a rule-based international economy and strengthen international rule of law in the economic sphere. These BITs will incorporate international standards into China’s domestic legal system and improve China’s economic governance. China will have a greater stake in global trade and investment, and Chinese companies are likely to have easier access to the EU and the US markets. One issue faced by China is to make a sensible response to the EU’s initiative to have a permanent MIC. China has not made any formal response in the negotiations. Whether China accepts this proposed court depends on a number of ‘technical’ or specific factors relating to investor-state dispute settlement (ISDS). The EU claims that a permanent MIC can improve

1 European Commission, ‘Concept Paper: Investment in TTIP and Beyond – The Path for Reform’, 5 May 2015, , last accessed on 18 March 2019. 2 European Commission, ‘TTIP Textual Proposal on Investment Protection and Investment Court System’, 12 November 2015, , last accessed on 18 March 2019.

Is (in)consistency a problem? 157 consistency in adjudicating investor-state disputes by removing the fragmenting forces behind multiple ad hoc arbitration tribunals. China may investigate the existence of (in)consistency in China-related investment arbitration cases and affirm whether this claim of inconsistency is serious enough to harm China’s interest in these cases, typically as a respondent. Under current records, Chinese companies are claimants in four cases before the International Centre for Settlement of Investment Disputes (ICSID), including Beijing Urban Construction Group Co., Limited v Republic of Yemen; Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v Kingdom of Belgium; Standard Chartered Bank (Hong Kong) Limited v Tanzania Electric Supply Company Limited; and Tza Yap Shum v Republic of Peru. China is the respondent in three cases, namely, Ansung Housing Co., Limited v China; Ekran Berhad v People’s Republic of China; and Hela Schwarz GmbH v China.3 The purpose of this chapter is to conduct a jurisprudential review of these cases and to see if ad hoc arbitral tribunals are consistent in adjudicating jurisdictional issues based on China-related BITs in these cases. The usual jurisdictional objections are raised on the issues of ‘investor’, ‘investment’, ‘dispute’, ‘fork-in-the-road’ provision, limitation period, and most-favoured-nation (MFN) treatment of procedural rights, which often appeared in Chinese BIT cases.4 Sections 12.2–12.7 of this chapter discuss these issues in the context of China-related BIT cases. The conclusions follow in Section 12.8.

12.2 Definition of ‘investor’ In the case of Beijing Urban Construction Group Co., Limited v Republic of Yemen,5 Beijing Urban Construction Group (BUCG), a state-owned enterprise (SOE) in China, won a tender process for the selection of a construction contractor for a new international terminal at Sana’s International Airport in Yemen, and entered into a construction contract with the Yemen Civil Aviation and Meteorology Authority (CAMA) in 2006. The claimant commenced ICSID arbitration proceedings, alleging that Yemen had unlawfully deprived it of its investment by employing military forces and security apparatus, thereby rendering the claimant incapable of performing its contractual obligations. Yemen used this incident as an excuse for CAMA to terminate BUCG’s contract. BUCG claims that Yemen was in violation of Article 4 of the China-Yemen BIT. One of the jurisdictional objections raised by Yemen was that BUCG, being an SOE, should not be regarded as a ‘national of another Contracting State’ as required by Article 25(1) of the ICSID Convention.6

3 A German-owned investor on 21 June 2017 initiated a third known claim against China, under the ChinaGermany BIT. The notice of arbitration is not public, and information about the case is scarce. Hela Schwarz GmbH v People’s Republic of China, ICSID Case No. ARB/17/19. 4 Some uncommon issues did appear in Chinese BIT cases. For instance, the case of Ping An was about the black hole or a gap created by two successive BITs which deprived valid claims of a jurisdictional basis. Sebastian Green Martinez, ‘Case Comment: Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v Kingdom of Belgium – A Jurisdictional Black Hole Between Two BITs?’ Transnational Dispute Management, No. 1 (2017). 5 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017. 6 The ICSID Convention provides a forum for the settlement of investment disputes brought by foreign investors against host states but excludes state-to-state disputes without specifically addressing the standing of SOEs.

158 Wei Shen BUCG contended that the question of whether or not it qualified under Article 25(1) must be considered in the specific context of the investment. It argued that its investment in Yemen was made while acting as a commercial enterprise and did not involve the exercise of governmental or public powers. The Tribunal held that, notwithstanding the fact that BUCG was an SOE, the evidence demonstrated that the claimant was acting as a commercial contractor and was neither an agent of the Chinese government nor fulfilling governmental functions in the fact-specific context.7 In this regard, the Tribunal found it particularly noteworthy that BUCG’s bid was selected on its commercial merits. Yemen further argued that, under Chinese law, for SOEs, the Chinese government was the ultimate decision-maker. The Tribunal further found that ‘the assertion that “the Chinese State is the ultimate decision maker” for BUCG is too remote from the facts of the Sana’s International Airport project to be relevant’.8 In the case of China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, the claimants asserted that they are ‘qualifying investors’ under Article 1(2) of the BIT.9 Mongolia suggested applying a narrow formulation of ‘economic entities’. As the Tribunal focused on the ‘involving’ formulation and ‘fork-in-the-road’ provision to deny jurisdiction, it did not elaborate on the standing of SOEs in the BIT. One contentious issue is who qualifies for protection as a ‘Chinese investor’. The main controversy is whether individuals or companies from ‘special administrative regions’ of China, namely Hong Kong and Macau, can be covered by this definition. Two tribunals have answered this in the affirmative. In Tza Yap Shum v Peru, an ICSID Tribunal held that a Hong Kong resident was entitled to claim damages under the ChinaPeru BIT. The 2009 case later resulted in an award of compensation to Tza, the Hong Kong resident, for expropriating a fish-ball manufacturing factory he owned in Peru. In the case of Sanum v Lao Republic, a Tribunal under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules held in 2013 that a Macauincorporated company could enjoy the protection of the China-Laos BIT. Sanum was challenged by the Lao government in the courts of Singapore, where the arbitration was based. In 2015, a single judge of the Singapore High Court annulled the jurisdictional ruling, holding that Macau investors could not avail themselves of the BIT because ‘the People’s Republic of China (PRC)-Laos BIT does not apply to Macau’. But in September 2016, the Court of Appeal, Singapore’s highest court (the SGCA) restored the award, holding, on its own independent review of the China-Laos BIT, that its terms covered Macau investors. The SGCA’s ruling does not quell the controversy over this issue. In October 2016, the PRC’s Ministry of Foreign Affairs reacted by stating that it disagreed with this decision, that only mainland Chinese investors are entitled to treaty protection, and that Hong Kong and Macau investors should not be allowed to take advantage of Chinese nationality for such purposes. The issue is complicated by the fact that Macau and Hong Kong still have their own independent investment treaties with some countries, as highlighted recently by Philip Morris v Australia, in which Philip Morris Asia Limited, the claimant, attempted to use

7 BUCG v Yemen, Decision on Jurisdiction, para. 39. 8 Ibid, para. 43. 9 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, PCA Case No. 2010-20, Award, para. 228.

Is (in)consistency a problem? 159 the Hong Kong-Australia BIT and, more specifically, its UNCITRAL arbitration clause as a basis for challenging Australia’s Tobacco Plain Packaging Act, which, as the claimant argued, amounted to an expropriation of its intellectual property rights. The case was dismissed by the Tribunal established under the auspices of the Permanent Court of Arbitration (PCA) on non-jurisdictional grounds, without any discussion of the status of Hong Kong.10 Peru argued in Tza Yap Shum v Peru that, by virtue of Tza’s residency in Hong Kong, he lacked standing to assert a claim under the Peru-China BIT. Peru made objections to Tza’s documentary evidence of his nationality. Tza argued that China did not file a notice with the ICSID to exclude Hong Kong residents from seeking protection under Chinese BITs.11 Similarly, the definition of ‘investor’ in the Peru-China BIT does not attach any domicile or residence qualifier.12 The Tribunal ruled that the claimant prima facie validly held Chinese nationality13 on the grounds that Tza was descended from Chinese parents and held Chinese nationality consistently. The Tribunal accepted Tza’s documents as sufficient evidence. The Tribunal technically relied upon both Article 25 of the ICSID Convention and the Peru-China BIT to establish its jurisdiction.14 Article 25 does not explicitly exclude Chinese nationals resident in Hong Kong and, in accordance with Article 70 of the ICSID Convention, China sent no written notice to the ICSID to exclude Hong Kong residents.15 In connection with the Peru-China BIT, neither the definition of ‘investor’ nor any other provisions exclude Hong Kong residents from the scope of application of the treaty. In applying Article 31 of the Vienna Convention on the Law of Treaties (VCLT), the Tribunal is bound to interpret the Peru-China BIT ‘in good faith’. The Tribunal’s position was clear that the nationality is fundamentally a question of domestic law and the Tribunal must strictly apply domestic laws. Similarly, in response to the respondent’s analysis of the legislation governing any other particular in Hong Kong, the Tribunal adhered to the language of the BIT and concluded that legislation other than those laws strictly determining the nationality of its residents was of little relevance to the jurisdiction.16 The Tribunal’s approach to interpreting the BIT term was consistent. The Tribunal’s ultimate dismissal of Peru’s objections to the claimant’s Chinese nationality effectively established the jurisprudence that a Hong Kong resident holding Chinese nationality, depending on the language of the BIT in question, is not only able to bring an investment treaty claim under a Hong Kong BIT but also a Chinese BIT. By contrast, a Hong Kong resident who is not a Chinese national would not be able to invoke Chinese BITs, while a Chinese national who is not a resident of Hong Kong could not invoke Hong Kong BITs. This is confirmed by the Hong Kong BIT, which usually protects ‘physical

10 The decisive objection was that the claimant’s claim configured an abuse of rights as the claimant changed its corporate structure to obtain BIT protection for an existing or foreseeable dispute; this therefore constituted abuse of rights and was inadmissible. Philip Morris Asia Limited v Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015. 11 Tza Yap Shum v Peru, ICSID Case No. ARB/07/6, Award, 7 July 2011, para. 50. 12 Ibid, para. 51. 13 Ibid, para. 61. 14 Ibid, para. 70. 15 Ibid, para. 44. 16 Ibid, para. 75.

160 Wei Shen persons who have the right of abode in its area’.17 However, Tza Yap Shum only addressed the nationality of a natural person, not all issues surrounding legal persons, corporate ownership, or nationality. It is not clear whether a Hong Kong incorporated entity is entitled to treaty protection under a Chinese BIT. In theory, a company incorporated in Hong Kong should not be regarded as the same as a company incorporated in China and should not have standing to pursue claims under Chinese BITs.18 In the Sanum v Laos case, the question that the SGCA had to struggle with was whether the China-Laos BIT, which was signed and entered into force in 1993, became applicable to Macau following the handover from Portugal to PRC in 1999. According to the Vienna Convention on the Succession of States in respect of Treaties, the SGCA held that ‘the PRCLaos BIT will be presumed to automatically apply to the territory of Macau upon restoration of Chinese sovereignty with effect from 20 December 1999’. The SGCA seriously considered the ‘moving treaty frontier’ rule in this case with an extensive review of the evidence. Notably, even though the Laos government produced formal diplomatic correspondence between itself and the PRC in 2014 and 2015 expressing both governments’ views that the China-Laos BIT was not applicable to Macau, the SGCA declined to place any weight on such evidence. The issue of jurisdiction in this case was not only limited to interpreting the scope and application of the China-Laos BIT but also involved a fundamental question of whether the China-Laos BIT extended to the territory in question. The inquiry into the applicability of the China-Laos BIT to a particular territory necessitated the application of principles of treaty interpretation and other customary international law rules. Of particular importance is the emphasis by the court on Article 31 of the VCLT,19 which encapsulates the principles relating to the interpretation of treaties in international law. The implications for future determinations of the applicability of PRC BITs to Chinese Special Administrative Regions (Hong Kong and Macao) remain unclear.

12.3 Definition of ‘investment’ Yemen argued in arbitration that BUCG was purely a paid contractor, and this did not qualify as an ‘investment’.20 BUCG contended that its investment consisted of rights acquired under the contract under Article 1(1) of the BIT.21 As claimed by Yemen, BUCG had failed to register its investment ‘in accordance with the laws and regulations of Yemen’.22 BUCG discounted the registration requirement under Yemeni law.23 The Tribunal held that the registration requirement could not expressly be inferred from the BIT. The Tribunal seemed to keep a distance from the widely held but not uniform view that a qualified investment does not have to satisfy the required element of investment under both

17 Thailand-Hong Kong BIT (2005), Article 1(4)(b)(i). 18 E.g., Article 126 of the Peru-China FTA (2009) provides that ‘investor’ for China means ‘economic entities established in accordance with the laws of the PRC and domiciled in the territory of the PRC […]’. 19 Article 31of Vienna Convention on the Law of the Treaties (1969). 20 BUCG v Yemen, Decision on Jurisdiction, para. 122. 21 Ibid, para. 123. 22 Ibid, para. 122. 23 Ibid, para. 123.

Is (in)consistency a problem? 161 the BIT and the ICSID Convention. Nevertheless, it did hold that there was ‘no difficulty’ in concluding that there was an ‘investment’ both under the ICSID Convention and the BIT25 where BUCG had made a contribution to Yemen’s economic development.26 In the case of China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, three Chinese companies claimed that Mongolia unlawfully expropriated their investment pursuant to the China-Mongolia BIT (1991). Mongolia objected to the jurisdiction on a series of grounds. One objection was that Chinese companies had not made a qualifying investment.27 In Mongolia’s view, Chinese claimants in this case faced ‘state policy risk’ instead of ‘investment risk’.28 In addition, Chinese claimants did not make any contribution to Mongolia’s economic development.29 Chinese claimants argued for an ordinary interpretation of Article 1(1) of the ChinaMongolia BIT, as any recourse to supplementary means of interpretation is not supported by the VCLT, and it emphasized its investment risks in Mongolia.30 The Tribunal did not elaborate on the concept of ‘investment’ in the award while completely relying on the narrow interpretation of ‘dispute’ in declining its jurisdiction. The claimant later brought the case to the District Court of Southern New York petitioning for an order to set aside the award. In the Tza Yap Shum v Peru case, Tza did not directly own the local company incorporated in Peru. Rather, Tza owned the shareholding in a holding company incorporated in a third-party jurisdiction which, in turn, owned the local company. Tza’s investment in Peru constituted ‘indirect investment’. The Tribunal interpreted the intention of the BIT in a strict manner as protecting all kinds of investments through an ample formulation.31 Indirect investment, based on the BIT, is not excluded from the scope of treaty protection.32 As the Tribunal rightly pointed out, ‘it would expect that such a limitation would have been included explicitly in the BIT’.33 The definition of ‘investment’ in the Peru-China BIT includes a requirement that the categories of assets admitted as ‘investments’ must be in accordance with the laws and regulations of the host state, which means that investments which would be illegal in the territory of the host state are disqualified from the protection of the BIT. The Tribunal’s way of interpreting and applying the formula ‘in accordance with host state law’ is consistent with the general jurisprudence. The Tribunal did not use this formula to justify an exclusion of ‘indirect investment’ by reference to the host state’s law, and usually rejecting it. The rationale is that the reference to the host state’s domestic law concerned the legality of the investment other than the term of ‘investment’.34 The Tribunal which made use of this phrase to 24

24 Ibid, para. 128. 25 Ibid, para. 138. 26 Ibid, para. 137. 27 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, Award, para. 278. 28 Ibid, para. 280. 29 Ibid, para. 281. 30 Ibid, para. 281. 31 Tza Yap Shum v Peru, Award, para. 106. 32 Ibid, para. 106. 33 Ibid, para. 107. 34 Salini Construttori SpA and Italstrade SpA v Morocco, ICSID Case No ARB/00/4, Decision on Jurisdiction, para. 46; Consortium RFCC v Morocco, ICSID Case No ARB/00/6, Award; Bayindir Insaat Turizm Ticaret VeSanayi AS v Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Decision on Jurisdiction, para. 109.

162 Wei Shen deny jurisdiction also focused on the legality of the investment in order not to run counter to the general principle ex turpi causa non oritur actio.35 It is apparent that the Tribunal was unwilling to exclude indirect investment from the treaty protection, as doing so would effectively amend the BIT’s definition of ‘investor’ or ‘investment’ arbitrarily. However, it is less apparent that the Tribunal was ready to extend investment protections to an ultimate shareholder who channelled the investment through a company incorporated in a third-party jurisdiction.

12.4 Definition of ‘dispute’ The phrase ‘involving the amount of compensation for expropriation’ was a heavily contentious issue in the case of Tza Yap Shum v Peru. According to Article 8(3) of the Peru-China BIT, Peru interpreted ‘involving’ restrictively, as meaning ‘limited to’ or ‘exclusively’. The dispute that can be arbitrated covers only ‘disputes related to the determination of the value of the investment’ but excludes such ‘potentially important matters’ as ‘whether expropriation has taken place’ and ‘whether any compensation must be paid’.36 Therefore, Peru made the most significant challenge to jurisdiction: Tza’s claims fell outside of the scope of Article 8(3) of the BIT, and the Tribunal did not have jurisdiction over the liability of expropriation. The claimant, on the contrary, took an expanded approach.37 While acknowledging that ‘such wording seemed to seek certain limitations’, the Tribunal tried to ascertain the ‘exact scope of such limitations’.38 In resolving such a ‘core interpretation issue’,39 the Tribunal followed the guidance outlined in Article 31 of the VCLT.40 Instead of viewing the phrase as imposing some ‘limitations’, the Tribunal held that the phrase ‘may have a great variety of possible meanings’.41 The Tribunal relied on the Oxford English Dictionary, which defines the word ‘involving’ as meaning ‘to enfold, envelope, entangle, include’.42 This led the Tribunal to endorse the claimant’s ‘broadest interpretation’ as the ‘most appropriate’ approach.43 The Tribunal found that a narrow interpretation of ‘involving the amount of compensation’ would ‘invalidate’ the arbitration clause. This narrow interpretation would make the host state’s consent to arbitration illusory.44 As a result, given the sub-elements (of expropriation) listed in Article 4 of the BIT45 and the inclusive nature of the term ‘involving’, the Tribunal drew the broadest spectrum and permitted arbitration of claims concerning all aspects of expropriation.46 The Tribunal further resorted to ‘the wording of the Preamble of the BIT’ partly to lay down more supportive grounds for its ‘broadest interpretation’ approach. The Tribunal was well aware that the ‘purpose of including the entitlement to submit certain disputes to ICSID

35 Inceysa Vallisoletana SL v Republic of El Salvador, ICSID Case No ARB/03/26, Award, paras. 190–207. 36 Tza Yap Shum v Peru, Award, para. 150. 37 Ibid, para. 150. 38 Ibid, para. 145. 39 Ibid, para. 149. 40 Ibid, para. 146. 41 Ibid, para. 150. 42 Ibid, para. 151. 43 Ibid, para. 150. 44 Ibid, para. 148. 45 Article 4 of the Peru-China BIT (1994). 46 Tza Yap Shum v Peru, Award, para. 152.

Is (in)consistency a problem? 163 arbitration is that of conferring certain benefits to promote investments’.47 Considering the surrounding context, inter alia, the importance of granting the investor the benefits of submitting an expropriation-related dispute to ICSID arbitration, the Tribunal felt satisfied that the right of submission to arbitration should not be excluded by the phrase in interpretation controversy. Otherwise, the Tribunal would be sceptical of the real purpose of Article 8.48 In the case of Sanum v Laos, one of Laos’s major jurisdictional objections was that Sanum’s claims fell outside the scope of the dispute resolution clause in Article 8(3) of the China-Laos BIT since the clause only permits arbitration where the issue in dispute is the amount of compensation payable upon on expropriation but not the liability itself. Sanum argued for a broader reading of Article 8(3) as long as the claims include a dispute over the amount of compensation. As to jurisdiction ratione materiae, Sanum sought to rely on Art 8(3) of the China-Laos BIT. The Tribunal concluded that the arbitration clause made the existence of an expropriation arbitrable.49 The first instance court in Singapore disagreed. The SGCA accepted the broad reading approach. It held that ‘the Laos Government’s interpretation of Art 8(3) of the PRC-Laos BIT is not tenable’, which contained a ‘fork-inthe-road’ provision to the effect that once an expropriation claim is referred to the national court, no aspect of that claim can then be brought to arbitration. In this regard, the SGCA was mindful that cases of direct expropriation were becoming increasingly rare, and even in those rare cases with only the amount of compensation being in dispute, host states could effectively avoid arbitration by simply denying that they had engaged in acts of expropriation. Echoing the Tribunal’s sentiments in the Tza Yap Shum v Peru decision, the SGCA observed that this ‘would lead to an untenable conclusion – namely that the investor could never actually have access to arbitration’. In addition, the Court agreed with Sanum that the broad interpretation of Art 8(3) ‘is also consistent with the BIT’s objective of protecting investments’. This is the first time the SGCA issued a decision on a jurisdictional challenge concerning an investor-state arbitration. This decision is an unprecedented triumph for investors in Macau (and Hong Kong), who may potentially rely on its favourable outcome in order to take advantage of the benefits and protections accorded under over 130 BITs to which the PRC is a party. The Tribunal in the case of BUCG v Yemen followed suit with Tza Yap Shum v Peru and Sanum v Laos. In the award handed down on 31 May 2017, the Tribunal held in BUCG v Yemen that it had jurisdiction on the basis that a clause in the China-Yemen BIT granted jurisdiction over ‘any dispute relating to the amount of compensation for expropriation’. Similar to other treaties negotiated by China prior to 1998, the BIT in its Article 10 contemplates ICSID arbitration for ‘any dispute relating to the amount of compensation for expropriation’. Yemen argued that the Tribunal’s jurisdiction was limited to disputes concerning the calculation of ‘the amount of compensation’ where there is admitted liability by the host state. Yemen’s narrow reading of Article 10 would lead to the Tribunal’s lack of jurisdiction if liability was not conceded by the host state or if the investor complained about anything other than the host state’s monetary assessment of its alleged loss. In contrast, BUCG advocated

47 Ibid, para. 153. 48 Ibid, para. 153. 49 Sanum v Laos, PCA Case No. 2013-13, Award on Jurisdiction, 13 December 2013, paras. 3 and 42.

164 Wei Shen for a broad interpretation to extend jurisdiction to both the liability of a claim for expropriation and an assessment of compensation. The Tribunal accepted BUCG’s position and found that Article 10 allows an investor to bring expropriation claims relating to issues of both liability and quantum. As the ordinary meaning of the BIT was not conclusive in favour of either the broad interpretation or the narrow interpretation, the Tribunal’s task of interpretation moved to consider the text, context, and purpose of the BIT. The Tribunal in the case of China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia examined the question of whether Article 8(3) of the China-Mongolia BIT applied to a particular type of controversy, that is, a dispute over whether an expropriation had occurred. The Tribunal in this case adopted an extremely narrow construction. In its view, the only matter that is arbitrable is the amount of compensation for an expropriation. Further, the Tribunal held that it is the allegedly offending state that can determine whether it expropriated property.50 The District Court of Southern New York disagreed with the Tribunal’s interpretation, as this would leave an investor in the perverse position that only if the state’s executive or legislative organ admits that it has expropriated the investment, or if the state’s own courts can be persuaded so to declare, can that investor then proceed to international arbitration. The Court held that the arbitration clause in the China-Mongolia BIT was to give tribunals jurisdiction to determine, inter alia, whether an expropriation has occurred and whether the expropriation was effected legally. Therefore, the Court set aside the award and held that Article 8(3) supports the arbitrability of questions of whether expropriation occurred.51

12.5 ‘Fork-in-the-road’ provision The Tribunal in China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia analysed the specific wording and overall structure of Article 10. The Tribunal noted that Article 10.2 ‘clearly indicates a fork-in-the-road’. In the Tribunal’s view, ‘an interpretation that nullifies either of the choices granted to the investor is to be avoided’. The interconnected, heavily contentious procedural issue in Tza Yap Shum was related to the ‘fork-in-the-road’ (electa una via) provision in the Peru-China BIT. More specifically, the contentious issue was about how the Tribunal should adjudicate multiple proceedings before national and international fora under Article 8 of the BIT. A simple reading of Article 8 does create an impression that the domestic court and ICSID arbitration are organized in chronological order and on a ‘first come, first exhausted’ basis. The Peru-China FTA confirms this sequence.52 Simply based on the plain meaning of Articles 8(2) and 8(3), the investor’s right to international arbitration will be lost.53

50 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, Award, paras. 435–454. 51 US District Court of Southern New York, ‘Petition to Vacate Arbitral Award Declining to Exercise Arbitral Jurisdiction and Compel Arbitration’, Case 1:17-cv-07436-ER, , last accessed on 3 September 2019. 52 Article 139(2) of Peru-China FTA (2009). 53 Pamela B. Gann, ‘The US Bilateral Investment Treaty Program’, Stanford Journal of International Law, Vol. 21 Issue 2 (1985), pp. 373–460, at 437–438; Antonio R. Parra, ‘Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on Investment’, ICSID Review, Vol. 12 Issue 2 (1997), pp. 287–364, at 334–335, 351–352.

Is (in)consistency a problem? 165 The Tribunal looked into the ‘ordinary meaning’ of Articles 8(2) and 8(3) but reached an opposite conclusion. Thus, as the award spelled out, the claimant was entitled to institute arbitration directly without first exhausting the remedies offered by local courts. This mode of interaction between the local court and ICSID arbitration was confirmed by both ICSID54 and non-ICSID tribunals55 in various cases. A similar ‘fork-in-the-road’ provision appears in the China-Laos BIT. Article 8(2) of the China-Laos BIT gave an option to the investor to submit the dispute to a competent court of the contracting state accepting the investment, while Article 8(3) provided for a dispute involving the amount of compensation for expropriation to be submitted to an ad hoc arbitral tribunal, and further provided that Article 8(3) would be inapplicable if the investor had resorted to the procedure in Article 8(2). As noted by the SGCA, a ‘fork-in-the road’ provision requires a party to make an election, and once the election is made, the other remedy would not be available. As contended by Sanum and accepted by the SGCA, a narrow interpretation of Article 8(3) would have meant that an investor would first have to approach a court to determine whether an impermissible expropriation has occurred. Once the investor approached the court under Article 8(2), the remedy of arbitration in Article 8(3) would no longer be available, thus rendering Article 8(3) otiose. The SGCA agreed with the Tribunal that a narrow interpretation would be against the principle of effet futile (effective interpretation).56 The SGCA noted that a similar conclusion was reached in the ICSID decision in Tza Yap Shum v Peru while interpreting a similarly worded BIT between China and Peru.57 The SGCA distinguished the cases cited by Laos, favouring a narrow interpretation,58 inter alia, on the language and structure of the BITs in question, and that they did not involve similar ‘fork-in-the-road’ provisions. The SGCA concluded in favour of a broad interpretation to Article 8(3). Singapore courts have consistently ruled in favour of the broad, effective interpretation of arbitration clauses. This re-emphasizes the pro-arbitration stance of the judiciary in Singapore.

12.6 Limitation period In Ansung Housing Co., Ltd. v China, China, firstly being a respondent state at the ICSID, raised several objections concerning jurisdiction, the most debated being the limitation period.

54 Amco Asia Corporation and others v Indonesia, ICSID Case No ARB/81/1, Decision on Annulment, 16 May 1986, para. 63; Lanco International v Argentina, ICSID Case No ARB/97/6, Decision on Jurisdiction, 8 December 1998, para. 39; Generation Ukraine, Inc. v Ukraine, ICSID Case No ARB/00/9, Award, 16 September 2003, paras. 13.1–13.6. 55 CME v Czech Republic, Final Award, 14 March 2003, 9 ICSID Reports 264 (2006), para. 412; Yaung Chi Oo v Myanmar, ICSID Case No ARB/01/1, Award, 31 March 2003, 42 ILM 540 (2003), para. 40; Nycomb Synergetics Technology Holding AB v Latvia, Stockholm Chamber of Commerce (SCC) Case No 118/2001, Award, 16 December 2003, Sec. 2.4. 56 Sanum v Laos, Award on Jurisdiction, para. 128. 57 Tza Yap Shum v Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009. 58 Plama Consortium Limited v Republic of Bulgaria, ICSID Case No ARB/03/24, Decision on Jurisdiction, 8 February 2005; Austrian Airlines v Slovakia, UNCITRAL Final Award, 9 October 2009. ST-AD GmbH v The Republic of Bulgaria, PCA Case No 2011-06, Award on Jurisdiction, 18 July 2013; Vladimir Berschader and Moise Berschader v The Russian Federation, SCC Case No 080/2004, Award, 21 April 2006; RoInvest Co UK Ltd v The Russian Federation, SCC Case No V079/2005, Award on Jurisdiction, 1 October 2007.

166 Wei Shen The claimant invested in a golf course and condominium development project in Sheyang County. On 12 December 2006, Ansung entered into an investment agreement with the local government. Ansung was unable to start its construction work due to the failure to transfer all the land needed for the construction of the project under the investment agreement. Ansung had no alternative but to dispose of all its assets in the golf business in October 2011 and finally transferred the shares on 17 December 2011. Ansung then filed the claim on 7 October 2014. The respondent submitted that Ansung’s claim was time-barred under Article 9(7) of the BIT as Ansung instituted the proceedings more than three years after the date on which it had acquired the knowledge that it had incurred loss or damage. Ansung countered that its claim was timely on the grounds that (1) it first acquired the knowledge that it had incurred loss or damage only more than one year after the government had failed to provide the additional land promised for a second phase of the project; (2) it had made a claim through submission of its Notice of Intent or on filing its Request for Arbitration. Pursuant to the ICSID Arbitration Rule 41(5), China requested the Tribunal to dismiss Ansung’s claim because the claim was time-barred and manifestly lacked legal merit. The Tribunal granted China’s request. From the perspective of the Tribunal, the claimant ignored the plain meaning of the determinative words ‘first’ and ‘loss or damage’ in Article 9(7). In the Tribunal’s view, the claimant was neither required nor permitted to wait and observe the complete extent of the damage for purposes of Article 9(7). Accordingly, the Tribunal determined the dies a quo for the limitation period to be October 2011 or earlier.59 Here, the Tribunal emphasized that the limitation period started on the first date on which the investor knew there was loss or damage, even if there was a continuing breach. Turning to the dies ad quem, the Tribunal found that, on the basis of the plain language in Article 9(7) of the China-Korea BIT, the end date was electronically 7 October 2014 and physically on 8 October 2014.60 The Tribunal held that the ‘notice of intent’ was not submitted to the ICSID and it was also not reasonable to fix the date as the uncertain date of registration of a request for arbitration. The Tribunal found that the effect of Article 9(7) was that the investor must commence arbitration by submitting a request for arbitration with the ICSID prior to the expiry of the limitation period. Neither providing the respondent state with a written notice of intent to submit the dispute to ICSID nor registering the request for arbitration was sufficient. Therefore, the Tribunal held that the claim was time-barred, and therefore dismissed the case.61 The case suggests that the scope of the time-bar provisions often turns on its precise wording, and the clear wording of the time-bar provisions will often be given full effect and can form the basis of any early dismissal where the relevant arbitration rules permit this for claims which are manifestly without merit.62

59 Ansung Housing Co., Ltd. v China, ICSID Case No. ARB/14/25, Award, 9 March 2017, paras. 73, 92. 60 Ibid, paras. 73, 92. 61 Ibid, paras. 73, 92. 62 In other investment arbitration cases, the guidance on early dismissal of claims which are manifestly without merit may also extend beyond the interpretation of the ICSID rules. The SCC commercial arbitration and SIAC commercial arbitration and investment arbitration rules contain similar provisions allowing for the early dismissal of unmeritorious claims.

Is (in)consistency a problem? 167

12.7 MFN treatment of procedural rights There has been significant controversy over the extent to which MFN clauses should apply to substantive rights or procedural rights, or both. Arbitration practice indicates that the broader the language used, the more likely that the Tribunal will extend the MFN standard to cover procedural rights. Unlike other earlier cases63 which have seen a substantial contradiction in the reasoning of the tribunals adjudicating the extension of the MFN treatment to procedural rights in BITs, the tribunals in China-BIT-related cases indicate some consistency, not only in rejections but also in interpretative techniques. In Tza Yap Shum v Peru, the Tribunal was faced with the claimant’s concerned attempts to extend the scope of jurisdiction to issues not covered by the arbitration clauses in the disputed China-Peru BIT according to the Peru-Columbia BIT64 without limited jurisdiction ratione materiae. From its language, it is clear that the MFN clause in the China-Peru BIT applies only to fair and equitable treatment and constant protection rather than to all matters under the BIT. Further, the MFN clause in Article 3 of the BIT applies only to investment and not to dispute settlement rights. The Tribunal found and determined that the ‘specific wording of Article 8(3) should prevail over the general wording of the MFN clause in Article 3’.65 The Tribunal was selfdisciplined in not exaggeratedly broadening its discretion without having any clear indications in the disputed BIT.66 In the case of BUCG v Yemen, one defence raised by the respondent was that the YemenChina BIT’s MFN clause could not be used to circumvent the limited jurisdiction of its dispute resolution clause.67 The Tribunal dismissed most of the respondent’s jurisdictional objections but agreed that the wording of the MFN clause tied it to activities that took place ‘in the territory’. The Tribunal’s focus was unique when it came to the issue of applying the MFN provisions to dispute resolution provisions. It focused on the issue of whether the text of the BIT lent itself to such an application.68 The Tribunal’s approach demonstrated its tendency to interpret BIT clauses in line with the text, context, and purpose of the disputeresolution clauses and the BIT as a whole. In Ansung Housing Co., Ltd. v China, Ansung sought to invoke the MFN clause in Article 3(3) of the China-Korea BIT to save its claim from being time-barred, since other Chinese BITs do not prescribe a three-year limitation period.69 Relying on a plain reading of the MFN clause,70 the Tribunal held that the MFN clause did not extend to a state’s

63 Plama v Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005; Maffezini v Spain, ICSID Case No. ARB/97/7, Award on Jurisdiction, 25 January 2000; Salini et al. v Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, 42 ILM 609 (2003). 64 Tza Yap Shum v Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009, paras. 189–190. 65 Ibid, para. 216. 66 However, the Tribunal appeared to be mistaken in its reasoning. The Tribunal took an effet utile approach by differentiating between the application of the MFN clause based on an a priori categorization of general and specific provisions. This is unsound, as the purpose of the MFN clause is to establish and maintain at all times fundamental equality without discrimination among all the countries concerned. 67 BUCG v Yemen, Decision on Jurisdiction, para. 110. 68 Ibid, para. 114. 69 Ansung Housing Co., Ltd. v China, Award, paras. 125–126. 70 China-Korea BIT (2007), Article 3(3).

168 Wei Shen consent to arbitrate with investors nor to the temporal limitation period for investor-state arbitration in Article 9(7).71 Further, the Tribunal pointed out that the BIT offers specific MFN p ­ rotection in relation to an investor’s rights of dispute settlement without making any ­reference to international dispute resolution such as arbitration under the BIT.72 Accordingly, the Tribunal dismissed the case.73 This case appears to suggest that MFN provisions are not to provide a way to escape limitation periods, even though this may turn on the precise wording of the MFN provisions in question. In response to the debate on MFN clauses and procedural rights, recent Chinese BITs have tried to eliminate all potential controversies by making it clear that MFN treatment does not cover procedural rights. The relevant provision, for example, in the New ZealandChina FTA reads: For greater certainty, the obligation in this Article does not encompass a requirement to extend to investors of the other Party dispute resolution procedures other than those set out in this Chapter.74 There is a clarification in the EU-Canada Comprehensive Economic and Trade Agreement (CETA) that MFN treatment should not be extended to dispute settlement provisions,75 which effectively avoids any Maffezini-like interpretations of the MFN clause.76

12.8 Concluding remarks In the BUCG case, the Tribunal’s approach to the dispute-resolution clause demonstrates a willingness to interpret such clauses in line with the text, context, and purpose of the disputeresolution clause and the treaty as a whole. This is actually the most common approach taken by various tribunals in interpreting and determining the jurisdictional provisions in China’s BITs. This chapter mainly focuses on the key jurisdictional hurdles faced by tribunals and their approaches to resolving the ambiguity surrounding these hurdles. This conventional approach to a certain extent guarantees the legitimacy and consistency of ISDS. As a result, both host state governments and foreign investors can reasonably predict the arbitral outcome. Looking at China’s inward and outward foreign direct investment (FDI), China is more likely to be represented on the investor’s side. Nonetheless, the current economic transition marks a turning point in China’s foreign investment policy towards renewed attention to attracting foreign investment, and China may be more often on the respondent’s side. The new normal may comprehensively deepen China’s economic reform. The past four decades of domestic consolidation and opening-up further require the reconstruction of a

71 Ansung Housing Co., Ltd. v China, Award, paras. 140–141. 72 China-Korea BIT (2007), Article 3(5). 73 Ansung Housing Co., Ltd. v China, Award, paras. 136–141. 74 New Zealand-China FTA (2008), Article 139(2). 75 CETA, Article 8.7(4). 76 Maffezini v Spain, ICSID Case No ARB/97/7, Decision on Jurisdiction, 25 January 2000, paras. 38–64. See, among others, Martins Paparinskis, ‘MFN Clauses and International Dispute Settlement: Moving beyond Maffezini and Plama?’ ICSID Review, Vol. 26 Issue 2 (2011), pp. 14–58; Yannick Radi, ‘The Application of the Most-Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the “Trojan Horse”’, European Journal of International Law, Vol. 18 No. 4 (2007), pp. 757–774.

Is (in)consistency a problem? 169 legal state and the rule of law, and the integration of outbound FDI and the broadening of foreign policy. These may trigger more investment disputes between foreign investors and the Chinese government. Against this backdrop, jurisprudential review is also meaningful in the sense of shaping our understanding of the application of Chinese BITs in practice. This may also help policy-makers to adjust their stance in crafting and negotiating BITs, in particular ISDS clauses per se. As far as ISDS reform is concerned, the major defect of ISDS as claimed by the EU is inconsistency. In some extreme cases, tribunals can vary greatly on the same legal issue based on the same or similar clauses. While inconsistency of these investment arbitration awards is understandable given the ad hoc nature of arbitration, inconsistency may undermine the legitimacy of these duly and lawfully formed tribunals and of ISDS as a whole. This is a strong reason relied on by the EU to justify reforming the current ISDS by proposing a permanent MIC. China has not put forward its official position paper in response to the EU’s proposal. The jurisprudential review of China-related investment arbitration cases indicates a quite high level of consistency in terms of the tribunals’ treaty interpretive approaches and opinions on the key jurisdictional hurdles faced by these tribunals. It appears that inconsistency alone may not be a strong argument to convince China to accept this new MIC. Having said this, China still needs to figure out and put forward its official stance on ISDS reform. An ex post approach dealing with various negotiating partners is not in China’s best interest. Early participation would give China some credit in international investment rulemaking and the build-up of a global investment body. This would conform with China’s proactivity in the evolving global governance regime in recent years.

13 Transparency of ISDS in the making of a China–EU CAI Consensus and differences Manjiao Chi

13.1 Introduction International investment agreements (IIAs), including bilateral investment treaties (BITs) and the investment chapters of free trade agreements (FTAs), are a major legal and policy tool for investment protection, promotion, and liberalization. The world has witnessed a sharp increase in the number of IIAs since the 1990s.1 In 2013, the People’s Republic of China (China) and the European Union (EU) launched negotiations for a China–EU Comprehensive Agreement on Investment (CAI).2 China and the EU are important trading partners,3 and a BIT is an important step in furthering their bilateral economic relations. While the EU puts a BIT with China as central to its long-term bilateral relations with China,4 China stresses the strategic significance of concluding an agreement with the EU and considers the CAI negotiations as ‘one of the most important BIT negotiations of China’.5 As of February 2019, the two parties had already concluded 20 rounds of negotiations. As China and the EU are major economies, the CAI will have a profound impact on the parties and global investment governance. Among the various topics on the negotiation agenda, issues relating to investmentstate dispute settlement (ISDS) or investor-state arbitration (ISA) seem outstanding.6 Both the EU and China highlight transparency in ISDS in the making of the CAI.7 As the EU stated, by January 2016, when the parties were ready to enter ‘a phase of specific text-based negotiations’, they felt that the transparency challenge remains, and that they were determined to address ‘key challenges of the regulatory environment, including those related to

1 A list of the world’s IIAs can be found at United Nations Conference on Trade and Development (UNCTAD), , last accessed on 19 May 2019. 2  European Commission, ‘EU and China Begin Investment Talks’, 20 January 2014, , last accessed on 25 March 2019. 3  European Commission, ‘Trade Policy – China’, , last accessed on 19 May 2019. 4 Ibid. 5 Ministry of Commerce of the People’s Republic of China (MOFCOM), ‘中欧投资协定谈判稳步推进’ (China–EU BIT Negotiation Proceeds Steadily), 4 June 2015, , last accessed on 19 May 2019. 6 Strictly speaking, ISDS includes, but is not limited to, ISA. For the simplicity of discussion, these two terms are used interchangeably. 7 François Godement and Angela Stanzel, ‘The European Interest in an Investment Treaty with China’, European Council on Foreign Relations Policy Brief, , last accessed on 19 May 2019.

Transparency of ISDS in China–EU CAI 171 transparency’, confirming that ‘the negotiators will continue working intensively throughout 2016 in order to hammer out the details of the agreement’.8 In light of such developments, this chapter discusses the issue of transparency in ISDS in the making of the CAI. This chapter is composed of six sections. Section 13.1 is the Introduction and Section 13.2 presents a review of the ‘transparency trend’ of the development of the ISDS mechanism. Section 13.3 and Section 13.4, from policy and normative perspectives respectively, discuss the relevant policy statements and IIA-making practices of China and the EU and explore their approaches to the transparency issue. Section 13.5 discusses the parties’ growing consensus and selected outstanding issues in addressing the transparency issue, including the incorporation of the United Nations Commission on International Trade Law Rules on Transparency in Treaty-based Investor-State Arbitration (UNCITRAL Transparency Rules), the publication of relevant arbitral documents, and third-party participation in ISDS. Section 13.6 includes final remarks and opines that China and the EU are likely to incorporate one or more transparency provisions in the CAI, but that difficulty remains in designing the ‘technical issues’ of such provisions. Refreshed study and closer observation of the parties’ positions and practices and their future negotiations of the CAI are needed.

13.2 The ‘transparency trend’ of ISDS Confidentiality is considered a distinct feature of international (commercial) arbitration. Though the term confidentiality is seldom clearly defined in international and national laws and institutional arbitration rules, it is traditionally perceived that arbitration should be conducted in a non-transparent manner. Not only are arbitral proceedings not open to the public, but also the relevant arbitral information and documents, including the existence of a dispute, should be kept confidential.9 As the current ISDS system, ISA in particular finds its origin in commercial arbitration; it shares material similarities with commercial arbitration.10 Today, while the confidentiality of commercial arbitration remains largely intact in practice, there appears to be a growing aspiration to greater transparency in ISDS, due to its public nature. There are several reasons to justify such an aspiration: (1) it reflects the international community’s increasing awareness of the difference between ISDS and commercial arbitration and the public nature of ISDS; (2) it represents a timely response and possible remedy to the legitimacy crisis of ISDS, to which the lack of transparency is a key contributing factor;11 (3) it is also necessary for a better rule of law. States are frequently sued by foreign investors for taking regulatory measures or conducting administrative practices that are inconsistent with their IIA obligations. If the host states ‘lose the case’, they will be obligated to compensate the investors out of their state revenues, which may give rise to the issue of accountability of the states to their citizens. ISDS plays a function of review and remedy by allowing foreign investors to sue states directly in arbitration.

 8 European Commission, ‘EU and China Agree on Scope of the Future Investment Deal’, 15 January 2016, , last accessed on 19 May 2019.   9 Filip De Ly, Mark Friedman, and Luca Radicati Di Brozolo, ‘Confidentiality in International Commercial Arbitration’, Arbitration International, Vol. 28 Issue 3 (2012), pp. 355–396. 10 Gary Born and Ethan Shenkman, ‘Confidentiality and Transparency in Commercial and Investor-State International Arbitration’, in Catherine A. Rogers and Roger P. Alford (eds.), The Future of Investment Arbitration (Oxford: Oxford University Press, 2009), pp. 5–42, at 6. 11 Susan Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions’, Fordham Law Review, Vol. 73 Issue 4 (2005), pp. 1521–1625.

172 Manjiao Chi In this sense, ISDS is not only a dispute settlement mechanism, but must also be seen as a factor that helps define and shape the public–private relationship from a public law perspective.12 Obviously, the concepts of confidentiality and transparency are contradictory. Existing arbitration rules provide for a limited level of transparency and offer insufficient guidance concerning the transparency issue.13 From a practical perspective, to strike a proper balance between confidentiality and transparency in ISDS, a reform of ISDS with a view to greater transparency is needed. To respond to the growing call for greater transparency in ISDS, the UNCITRAL plays a pioneering role. Under its auspices, the UNCITRAL Transparency Rules were adopted in 2014.14 The Rules are to be applied to ISDS cases initiated under the UNCITRAL Arbitration Rules pursuant to an IIA concluded on or after 1 April 2014, unless the contracting states have agreed otherwise.15 Other related law-making efforts were also made by the UNCITRAL. In particular, the UNCITRAL Arbitration Rules were revised in 2013 to incorporate the UNCITRAL Transparency Rules.16 Also, to increase the chances that the UNCITRAL Transparency Rules would be applied in arbitration arising under IIAs concluded before 1 April 2014,17 the United Nations Convention on Transparency Rules in Treaty-based Investor-State Arbitration (Mauritius Convention) was concluded in 2014 and entered into force in 2017.18 These instruments are helpful in laying the foundation for an international legal system that is necessary to improve and guarantee transparency in ISDS. In IIA-making, the concept of transparency in ISDS remains largely undefined or unclearly defined, despite it frequently being used in legal instruments, policy statements, and academic literature. Contracting states may have different understandings as necessitated by their attitudes and needs. Such differences result in a lack of a fixed model for transparency provisions in IIAs at the global level. Some IIAs include provisions that are expressly called ‘transparency provision’, mainly requiring the publication of investment-related laws, regulations, and policies. Other IIAs, especially recent ones, contain provisions that may go beyond mere information publication. They may require open access to ISDS documents and arbitral proceedings, such as publication of awards, opening of hearings, and third-party participation (amicus curiae). Although these provisions are rarely called ‘transparency provision’ in IIAs, they obviously serve the purpose of enhancing the transparency of ISDS. In sum, transparency provisions in IIAs may take different forms, address different issues, and contain different contents, in the absence of a clear and uniform definition of ‘transparency’ in IIAs. In light of such diversity and ambiguity, it is proposed that transparency in ISDS should be understood in a broad and holistic manner. The following two sections discuss how China and the EU deal with transparency in ISDS in IIA-making from policy and rule-making perspectives.

12 See generally Gus van Harten, Investment Treaty Arbitration and Public Law (Oxford: Oxford University Press, 2008). 13  OECD, ‘Transparency and Third Party Participation in Investor-State Dispute Settlement Procedures’, OECD Working Papers on International Investment 2005/01, , last accessed on 19 May 2019, pp. 1–24, at 2. 14 The status, history and text of the UNCITRAL Transparency Rules is available at , last accessed on 19 May 2019. 15 Art. 1.1 of the UNCITRAL Transparency Rules. 16 Art. 1.4 of the 2013 UNCITRAL Arbitration Rules. 17 Art. 1.1 of the Mauritius Convention on Transparency. 18 UNCITRAL, United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (2014), , last accessed on 19 May 2019.

Transparency of ISDS in China–EU CAI 173

13.3 China’s approach to the transparency issue in IIA-making At the end of the 1970s, China started economic reforms and began to open up to the world. As an important step in and a policy tool of the reforms, China started to conclude BITs in an effort to attract foreign direct investment (FDI). To date, China hosts one of the largest number of IIAs in the world, including over 130 BITs, one trilateral investment treaty (China-Japan-Korea TIT),19 and over a dozen FTAs with investment chapters.20 The majority of Chinese IIAs contain an ISDS provision, granting foreign investors direct access to international arbitration.21 As China’s IIAs increase, China is also becoming increasingly friendly towards ISDS. However, almost none of China’s ISDS provisions explicitly deal with transparency of ISDS. Notwithstanding this fact, China’s recent policy statements and IIA-making practices suggest that the transparency issue has become an important aspect of its IIA-making, including in the making of the CAI.

13.3.1 China’s principled position towards transparency of ISDS China has come to realize that in future IIA-making, the existing ISDS mechanism should be improved for more legitimacy.22 However, as China seldom states its explicit support of greater transparency in ISDS, it remains publicly unclear whether China would like to make ISDS more transparent. During the G20 Ministerial Meeting under China’s presidency in July 2016, trade ministers of the world’s largest economies agreed on a set of non-binding ‘G20 Guiding Principles for Global Investment Policymaking’. An objective of the Guiding Principles is to ‘foster an open, transparent and conducive global policy environment for investment’, and with particular regard to ISDS, the Guiding Principles clearly state that ‘dispute settlement procedures should be fair, open and transparent, with appropriate safeguards to prevent abuse’.23 In its comments, the UNCTAD highlights transparency as a key feature of the Guiding Principles, stating that: The Principles urge governments to avoid protectionism and to establish open, non-discriminatory, transparent and predictable conditions for investment. They call for strong protection of investor interests and fair and transparent procedures for the settlement of disputes.24

19 A full list of Chinese BITs and the TIT currently in force is available at MOFCOM, , last accessed on 19 May 2019. 20 A full list of Chinese FTAs, including FTAs that are concluded, under negotiation, and under consideration, is available at MOFCOM, , last accessed on 19 May 2019. 21 Manjiao Chi and Xi Wang, ‘The Evolution of ISA Clauses in Chinese IIAs and Its Practical Implications: The Admissibility of Disputes for Investor-State Arbitration’, Journal of World Investment & Trade, Vol. 16 Issue 5 (2015), pp. 869–898, at 898. 22 Yongjie Li, ‘Factors to be Considered for China’s Future Investment Treaties’, in Wenhua Shan and Jinyuan Su (eds.), China and International Investment Law: Twenty Years of ICSID Membership (Leiden: Brill, 2014), pp. 173–179, at 179. 23 OECD, ‘Annex III: G20 Guiding Principles for Global Investment Policymaking’, , last accessed on 20 May 2019. 24  UNCTAD, ‘UNCTAD Facilitates G20 Consensus on Guiding Principles for Global Investment Policymaking’, 11 July 2016, , last accessed on 20 May 2019.

174 Manjiao Chi Strictly speaking, the Guiding Principles should not be deemed as China’s policy statement alone. They are a reflection of the joint consensus of the G20 countries in improving the existing global investment governance regime, including ISDS. Thus, at this point, it might be premature to affirm that China has already forged a consistent policy of supporting greater transparency in ISDS. However, as discussed below, China’s recent IIA-making clearly demonstrates that China actually is adopting a ‘pro-transparency’ policy.

13.3.2 The transparency provisions in China’s IIAs Only about 15 Chinese IIAs incorporate transparency provisions, including BITs and FTA investment chapters. The transparency provisions can be roughly divided into several types, mainly depending on the legal obligations they impose on the contracting states. The first type is ‘aspirational provisions’, which typically use various declaratory phrases such as ‘creating transparent investment conditions’ or ‘promoting greater transparency measures’. Such provisions can be found in the China-Bosnia & Herzegovina BIT (2002),25 the China-New Zealand FTA (2008),26 the China-ASEAN FTA (2009),27 and the ChinaJapan-Korea TIT (2012).28 They do not address the specific issue of transparency of ISDS but show only the aspiration to create and maintain a (more) transparent foreign investment governance system. From an international treaty law perspective, as these provisions are aspirational, they can hardly impose enforceable transparency obligations on the contracting states in ISDS.29 The second type deals with the publication of investment-related laws, regulations, and policies. They represent the majority of transparency provisions in China’s IIAs and can be found in, among others, the China-Australia BIT (1988),30 the China-Finland BIT (2004),31 the China-Korea BIT (2007),32 the China-New Zealand FTA (2008),33 the China-ASEAN FTA (2009),34 the China-Canada BIT (2012),35 the China-Korea-Japan TIT (2012),36 the China-Chile BIT (2012),37 and the China-Korea FTA (2015).38 Similar to the first type, this second type of provision does not actually deal with ISDS, though the promulgation, implementation, or violation of domestic laws and regulations by the host states are the primary reason which gives rise to investment disputes. On a practical level, publishing laws and regulations are becoming far less provocative to China, as China has made profound transparency commitments to regularly publish its trade-related laws and regulations upon its accession to the World Trade Organization (WTO).39

25 Art. 2 of the China-Bosnia & Herzegovina BIT (2002). 26 Art. 147 of the China-New Zealand FTA (2008). 27 Art. 2 of the China-ASEAN FTA (2009). 28 Art. 9 of the China-Japan-Korea TIT (2012). 29 Gerald Fitzmaurice, ‘The Law and Procedure of the International Court of Justice 1951–1954’, British Yearbook of International Law, Vol. 33 (1957), pp. 203–293, at 229. 30 Art. 6 of the China-Australia BIT (1988). 31 Art. 12 of the China-Finland BIT (2004). 32 Art. 11 of the China-Korea BIT (2007). 33 Art. 146 of the China-New Zealand FTA (2008). 34 Art. 19 of the China-ASEAN FTA (2009). 35 Art. 17 of the China-Canada BIT (2012). 36 Art. 10 of the China-Korea-Japan TIT (2012). 37 Art. 25 of the China-Chile BIT (2012). 38 Art. 12.8 of the China-Korea FTA (2015). 39 Art. X, GATT 1994.

Transparency of ISDS in China–EU CAI 175 The third type deals with the contentious issue of the transparency of ISDS, but to a limited degree, namely the publication of awards and some other types of arbitral documents. Only three Chinese IIAs contain such provisions, namely, the China-Cuba BIT (2007),40 the China-Mexico BIT (2008),41 and the China-Australia FTA (2015).42 China’s IIA-making position on this issue is not consistent. The provisions in the first two BITs deal only with the publication of awards, and they are of conflicting positions. While the default mode of the China-Cuba BIT (2007) is that awards shall not be made public unless the parties have agreed otherwise, the China-Mexico BIT (2008) provides for the opposite. In comparison, the China-Australia FTA (2015) investment chapter seems more comprehensive and covers a broader range of arbitral documents for publication purposes. It is not only the first Chinese IIA that contains a comprehensive provision dealing exclusively with the transparency of ISDS; more importantly, the transparency standards established seem quite high. Under this FTA, three types of arbitral documents ‘shall be made available to the public’, including (1) the request for consultations, (2) the notice of arbitration, and (3) orders, awards, and decisions of the tribunal.43 In addition, two other types of arbitral documents ‘may be made available to the public’, including (1) pleadings, memorials, and briefs submitted to the tribunal by a disputing party and any written submissions submitted; and (2) minutes or transcripts of hearings of the tribunal, where available.44 In a sense, this FTA substantially narrows the transparency gap between Chinese IIAs and those of some developed states. The fourth type of transparency provisions deals with the essence of the transparency issue, that is, the transparency of the arbitral proceedings, including, but not limited to, the participation of third-party (amicus curiae) and non-disputing states in ISDS, consolidation of arbitration, and opening of arbitral hearings to the public. Such provisions are mainly found in some most recent IIAs with developed states, such as the China-Canada BIT (2012)45 and the China-Australia FTA (2015).46 To some extent, the making of such provisions can be seen as a response to the current call for greater transparency in ISDS. It is neither possible nor necessary to discuss each and all of the transparency provisions in these Chinese IIAs in detail. Some general observations can be made to help illustrate China’s changing attitude towards the transparency issue. First and foremost, the transparency trend of Chinese IIAs is rather a ‘new phenomenon’. Except for the China-Australia BIT (1988), all Chinese IIAs containing transparency provisions were concluded after the new millennium. Roughly speaking, the more recent an IIA is, the larger number of transparency provisions it incorporates. While the majority of Chinese IIAs contain only one transparency provision, the latest IIAs contain multiple transparency provisions, touching upon a wide range of transparency issues, including transparency of ISDS and third-party (amicus curiae) participation in arbitration. In this sense, one may identify an emerging ‘transparency trend’ in China’s IIA-making. It is particularly noteworthy that the China-Australia FTA (2015), for the first time in China’s IIA-making history, not only explicitly deals with the contentious issues of

40 Art. 9 of the China-Cuba BIT (2007). 41 Art. 20 of the China-Mexico BIT (2008). 42 Art. 9.17 of the China-Australia FTA (2015). 43 Art. 9.17.2 (a) of the China-Australia FTA (2015). 44 Art. 9.17.2 (b) of the China-Australia FTA (2015). 45 Arts. 27, 28, and 29 of the China-Canada BIT (2012). 46 Arts. 9.16, 9.17, and 9.21 of the China-Australia FTA (2015).

176 Manjiao Chi participation of amicus curiae in arbitration and opening of arbitral hearings to the public,47 but also, more importantly, it clearly refers to the UNCITRAL Transparency Rules, though the application of the Rules is made conditional.48 This provision represents a bold step forward in China’s IIA-making and could help align China’s IIA practice with the latest international standard. This is also likely to have profound impacts on China’s future IIAmaking, including the CAI. Second, despite the emerging ‘transparency trend’ of Chinese IIAs, the transparency provisions of China’s IIAs bear a substantive difference. Such difference defines the varying levels of transparency obligations codified in Chinese IIAs. As discussed, the transparency provisions in China’s IIAs are of several types, each representing a different level of ‘intrusiveness’ to the existing ISDS mechanism. The majority of these provisions deal only with the publication of investment-related laws, policies, and regulations. This fact seems to suggest that the overall level of transparency of China’s IIAs remains at a low level. These provisions fail to address the issue of transparency of ISDS since they do not mention the participation of amicus curiae in arbitration and opening of arbitral hearings to the public.

13.4 The EU’s approach to the transparency issue in IIA-making Unlike China, the EU seems to be a strong advocate of a more transparent ISDS mechanism in IIA-making. This can be demonstrated by the EU’s relevant policy statements and its recent IIA-making practice.

13.4.1 The EU’s policy towards transparency in ISDS The EU has consistently and strongly adhered to a policy that aims to create a highly transparent ISDS mechanism in its IIA-making. In this sense, the EU holds a ‘pro-transparency’ policy in its IIA-making. As early as 2010, the EU made this position clear. In its Communication towards a Comprehensive European International Investment Policy, the European Commission explicitly stated that the issue of transparency of ISDS is one of the major challenges of its future treaty-making: In line with the EU’s approach in the WTO, the EU should ensure that investor-state dispute settlement is conducted in a transparent manner (including requests for arbitration, submissions, open hearings, amicus curiae briefs and publication of awards).49 This somewhat early statement reveals several distinct features of the EU’s position on the transparency issue. First, it shows that the EU is strongly determined to reform the ISDS mechanism and steer it towards becoming more transparent. Second, the WTO (dispute settlement) transparency standards may serve as a ‘benchmark’ for such reform. Third, the EU highlights some key aspects of the transparency obligations in ISDS, some of which remain

47 Art. 9.16.3 of the China-Australia FTA (2015). 48 Art. 9.12.9 of the China-Australia FTA (2015). 49 European Commission, ‘Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – Towards a Comprehensive European International Investment Policy’, COM(2010)343 final, , last accessed on 25 March 2019, pp. 1–12, at 10.

Transparency of ISDS in China–EU CAI 177 contentious in international investment law and dispute settlement, such as opening hearings to the public and amicus curiae in ISDS. To some extent, the year 2007 marks an important turning point in the IIA-making of the EU. In that year, the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community (Lisbon Treaty) was signed. As Bungenberg has pointed out, the Treaty of Lisbon significantly changed the constitutional structure of the EU, and the inclusion of FDI in the Common Commercial Policy in the Treaty of Lisbon is seen as ‘the largest change’ in EU’s IIA-making landscape.50 The Treaty of Lisbon grants the EU exclusive competence over FDI, though this term is not defined in the Treaty of Functioning of the European Union.51 Despite the fact that the term FDI could be construed differently, the EU has acquired exclusive IIA-making competence.52 Formerly, the EU only had shared competence in international investment matters with its member states.53 With the exclusive IIA-making power, the EU has engaged actively in negotiating a number of IIAs.54 While many of these IIAs are still being negotiated, some have been concluded. During the negotiation process, the EU has an opportunity to build and interpret its position on transparency of ISDS. There is no compelling need to trace each and all of the EU’s policy statements on this issue. It is of interest to highlight the EU’s proposal put forward in 2015 for reforming the existing ISDS mechanism through establishing an investment court system,55 because, as stated by the European Commission, one of the main purposes of this proposal is to enhance the transparency of ISDS: In order to stay up-to-date with the highest standards of legitimacy, transparency and neutrality, in November 2015 the EU agreed on a reformed investment dispute settlement approach.56 The EU’s ‘pro-transparency’ position in IIA-making is consistent. Indeed, some of the EU’s IIAs, either concluded or under negotiation, are quite typical with regard to the transparency issue and have attracted wide attention. The Transatlantic Trade and Investment Partnership (TTIP), the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the EU-Singapore Investment Protection Agreement (IPA), and the EU-Vietnam IPA are typical examples. When making these IIAs, the EU repeatedly stressed the importance of a transparent ISDS mechanism. For instance, when discussing the TTIP investment

50 Marc Bungenberg, ‘Going Global? The EU Common Commercial Policy after Lisbon’, in Christoph Herrmann and Jörg Philipp Terhechte (eds.), European Yearbook of International Economic Law 2010 (Berlin: Springer, 2010), pp. 123–152, at 151. 51 Arts. 206 and 207 of the Treaty on the Functioning of the European Union (TFEU). 52 Wenhua Shan and Sheng Zhang, ‘The Treaty of Lisbon: Halfway towards a Common Investment Policy’, European Journal of International Law, Vol. 21 Issue 4 (2011), pp. 1049–1073, at 1060–1065. 53 Wenhua Shan, ‘Towards a Common European Community Policy on Investment Issues’, Journal of World Investment, Vol. 2 Issue 3 (2001), pp. 603–628, at 603. 54 European Commission, ‘Overview of FTA and Other Trade Negotiations’, , last accessed on 19 May 2019. 55 European Commission, ‘Commission Proposes New Investment Court System for TTIP and other EU Trade and Investment Negotiations’, Press Release, 16 September 2015, , last accessed on 19 May 2019. 56 European Commission, ‘Dispute Settlement’, , last accessed on 20 May 2019.

178 Manjiao Chi chapter, the European Commission, in its ‘Concept Paper Enhancing the Right to Regulate and Moving from Current Ad Hoc Arbitration towards an Investment Court’, reviewed its recent IIAs, such as the investment chapter of CETA and the EU-Singapore IPA, and highlighted the incorporation of greater transparency provisions, especially the recently adopted UNCITRAL Transparency Rules. The Concept Paper states that We have introduced full, mandatory transparency of the arbitration process. CETA incorporates the UNCITRAL rules on transparency which will mean that all documents (submissions by the disputing parties, decisions of the tribunal) will be made publicly available. All hearings will be open to the public. Interested parties (NGOs, trade unions) will be able to make submissions.57 Currently, CETA and the EU-Singapore IPA provide for the possibility that the arbitration tribunal ‘may’ accept amicus curiae briefs from third parties under certain conditions, in line with recently agreed the UNCITRAL Transparency Rules.58 The EU’s IIA-making shows a clear preference for a more transparent ISDS mechanism. The EU has already included ‘full and mandatory’ transparency provisions in its recent FTAs. This foreshadows that the EU is prepared to incorporate high-level transparency provisions in its future IIAs, including the CAI.

13.4.2 The transparency provisions in the EU’s IIAs It is useful to briefly examine the transparency provisions in the EU’s existing IIAs for the purpose of the current study.59 To date, the EU has concluded only a few FTAs and is negotiating some others. Developments in the EU’s IIA-making have attracted global attention, especially the making of CETA and TTIP. As mentioned, in the context of TTIP negotiations, the EU raised its comprehensive proposal of ISDS reform, which has given rise to worldwide discussion. In addition, the negotiation and ratification of CETA had been subject to wide debate in Canada and the EU, especially in relation to the ISDS mechanism.60 In 2015, the EU also sought the opinion of the Court of Justice of the European Union (CJEU) to clarify the EU’s competence to sign and ratify the 2014 EU-Singapore FTA,61 and the CJEU Opinion of 2017 confirms,

57 European Commission, ‘Investment in TTIP and Beyond – The Path for Reform: Enhancing the Right to Regulate and Moving from Current ad hoc Arbitration towards an Investment Court’, Concept Paper, , last accessed on 19 May 2019, pp. 1–12, at 2. 58 Ibid, at 7. 59 A list of the EU’s trade agreements with different countries and regions, including FTAs and BITs, may be found at , last accessed on 19 May 2019. 60 ‘Germany Changes Tack on ISDS in EU-Canada Trade Deal’, ICTSD, 4 December 2014, ; David Schneiderman, ‘Why CETA Is Unlikely to Restore the Legitimacy to ISDS’, Investor-State Arbitration Commentary Series No.7, 27 May 2016, ; Julie Levy-Abegnoli, ‘CETA Talks Reach Conclusion, But Controversial ISDS Remains’, The Parliament Magazine, 1 March 2016, , last accessed on 19 May 2019. 61 European Commission, ‘Singapore’, , last accessed on 19 May 2019.

Transparency of ISDS in China–EU CAI 179 inter alia, that the ISDS issue falls within the shared competence of the EU and its member states.62 Consequently, while the multidimensional ramifications of the EU’s FTAs have not yet been fully revealed, there is no denying that these FTAs are of profound importance to the EU and the world, as they are shaping and changing the EU’s foreign investment landscapes. Bearing in mind the recent developments of the EU’s investment treaty-making policy with regard to ISDS reform, a brief review of the transparency provisions of the above FTAs is worthwhile. All of these FTAs contain at least one transparency provision, and some incorporate multiple transparency provisions. The EU seems to have adopted two major modes in dealing with the transparency issue in its IIA-making. The first mode is to incorporate the UNCITRAL Transparency Rules in an FTA. For instance, though the EU-Vietnam IPA contains only one transparency provision, it incorporates the UNCITRAL Transparency Rules.63 The negotiators of this FTA stated that the incorporation serves the following purpose: Proceedings before the Tribunal System will therefore be fully transparent and interested third persons will be allowed to make submissions. The UNCITRAL provisions will apply to all proceedings under the EU-Vietnam agreement, before the Tribunal of First Instance and before the Appeal Tribunal.64 The second mode is for an FTA to incorporate a set of transparency provisions specially designed by the contracting parties, instead of incorporating the UNCITRAL Transparency Rules. For instance, the EU-Singapore IPA includes a comprehensive set of transparency rules, which are listed in Annex 8. As clearly indicated by its title, ‘Rules on Public Access to Documents, Hearings and the Possibility of Third Persons to Make Submissions’, this Annex deals with almost all the important aspects of the transparency issue pertaining to ISDS. Without referring to the UNCITRAL Transparency Rules, this Annex actually plays a similar role in addressing the transparency issue in a more country-specific manner. Both modes aim to set a high transparency standard in the EU’s IIAs. Despite the already high-level transparency standard adopted in its existing FTAs, the EU is still seeking to raise this standard. For instance, the leaked text of TTIP not only clearly incorporates the UNCITRAL Transparency Rules but also inserts additional obligations on top of these Rules.65 For instance, it provides that ‘a disputing party may disclose to other persons in connection with proceedings, including witnesses and experts, such unredacted documents as it considers necessary in the course of proceedings under this Section’.66

62 Court of Justice of the European Union, Opinion 2/15 of the Court, 16 May 2017, , last accessed on 19 May 2019. 63 Art. 3.46 of the EU-Vietnam IPA. 64 Delegation of the European Union to Vietnam, ‘Guide to the EU-Vietnam Free Trade Agreement’, , last accessed on 19 May 2019, pp. 1–89, at 55. 65 Art. 18.1 of the Investment Chapter of TTIP. 66 Art. 18.5 of the Investment Chapter of TTIP.

180 Manjiao Chi

13.5 The transparency issue in the making of the China–EU CAI As mentioned above, the transparency issue is likely to be an important and contentious one during the CAI negotiations. The information officially released is far from sufficient for an accurate assessment of the transparency provisions in this BIT. Based on the previous discussions of the policies and IIA-making practices of China and the EU, this section explores how the transparency issue is likely to be dealt with by the two parties during the making of the CAI.

13.5.1 The growing consensus between China and the EU As can be seen from their respective policy statements and IIA-making practices, China and the EU share a consensus on making the ISDS mechanism more transparent. The transparency provisions of China’s and the EU’s IIAs also reveal a growing normative convergence, since they are growing increasingly similar in both structure and content. In particular, China made bold progress in improving the transparency of ISDS in the China-Australia FTA (2015). Furthermore, both China and the EU acknowledge similar transparency obligations by clearly referring to the UNCITRAL Transparency Rules in their recent IIAs, though they have substantive differences with regard to what role the Rules should play in ISDS. The consensus on policy and treaty convergence form the baseline and a starting point for negotiating the transparency provisions between China and the EU. Practically speaking, they may imply that both parties will at least be open to discussing the transparency issue, and that transparency provisions are likely to be included in their future BIT. They may further imply that the parties are likely to agree on some fundamental aspects of the transparency issue. For instance, as China and the EU have committed to publicizing investmentrelated laws, regulations, and policies in several IIAs, it is reasonable for them to adhere to this position in the making of the CAI.

13.5.2 Some outstanding transparency issues in the making of the CAI The transparency provisions of China’s and the EU’s IIAs have material differences, forming a profound ‘transparency gap’. Such a gap not only indicates that the two parties may encounter difficulties in their negotiations, but also helps to identify the major areas of debate where more joint efforts are needed in the negotiations. Thus, from a realistic perspective, such gap defines the transparency level of the CAI. Recognizing that the EU’s IIAs enshrine higher transparency standards than China’s IIAs in general, selected transparency issues that best exemplify the ‘transparency gap’ will be discussed here. First, China and the EU have different attitudes towards the UNCITRAL Transparency Rules. They will need to consider whether the Rules should be incorporated in the CAI and, if so, what restrictions should be imposed on the application of these Rules. Almost all of the EU’s recent IIAs incorporate the Rules, while only the China-Australia FTA (2015) clearly refers to them. In addition, China and the EU have different approaches to dealing with the application of these Rules. The EU-Vietnam IPA and CETA state that ‘the UNCITRAL Transparency Rules shall apply to disputes under this Section’, subject to the discretional decision of the arbitral tribunal on certain aspects.67 Yet, though the China-Australia FTA

67 Art. 3.46.1 of the EU-Vietnam IPA, Art. 8.36.1 of CETA.

Transparency of ISDS in China–EU CAI 181 (2015) refers to the Rules in several places,68 application of the Rules is conditional, as the arbitral tribunal is to conduct the arbitral proceedings in accordance with the Rules ‘except as modified by this Agreement and the Side Letter on Transparency Rules Applicable to ISDS’.69 In the CAI negotiations, the two parties may need to strike a proper balance between the ‘compulsoriness’ and ‘voluntariness’ of the application of the Rules. Also, as the Rules normally apply to arbitration administered under the UNCITRAL Arbitration Rules, they do not necessarily apply to ICSID arbitration. The two parties will also need to discuss whether and how to align the transparency standard in ICSID arbitration with the Rules. This issue is particularly important since the majority of the investment arbitration cases are ICSID cases. Second, China and the EU may need to discuss making arbitral documents available to the public, especially awards. Arbitration rules seldom specify how arbitration documents should be published. Publication is often decided pursuant to the agreement of the disputing parties and the discretion of the arbitral tribunal or the arbitration institution. China and the EU have different attitudes on this issue, as can be seen in the ICSID cases which rely on the IIAs of China and EU member states.70 China and Chinese investors seem reluctant to publish arbitration documents. In ICSID cases relying on Chinese BITs, some key arbitration documents are confidential. It is unknown if this is the result of the position of the host states or of the investors. In Ping An v Belgium, most arbitration documents are confidential, except the award.71 In Heilongjiang International Economic and Technical Corp. et al. v Mongolia, even the award is confidential,72 though the award was later made public because of the setting aside petition heard in a US court.73 In contrast, though the EU itself has not been involved in any ISDS cases as a disputing party, its IIA-making practice shows that the EU is supportive of a high standard of transparency, which includes making arbitration documents available to the public. Many EU member states, based on their ISA experience, have also shown a clear preference for the publication of arbitration documents. Third, China and the EU also have different positions on opening arbitral hearings to the public. In fact, they seem to have conflicting positions. The EU’s position seems to be that arbitral hearings should be made public unless otherwise decided. The EU-Singapore IPA provides that ‘the Tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements. However, any disputing party that intends to use information designated as protected information in a hearing shall so advise the Tribunal. The Tribunal shall make appropriate arrangements to protect this information from disclosure’.74 China seems to hold that the tribunal should not make the arbitral hearing public unless the respondent state agrees. The China-Australia FTA (2015) provides that ‘with the agreement of the respondent, the tribunal shall conduct

68 Arts. 9.12.9 and 9.21.9 of the China-Australia FTA (2015). 69 Art. 9.12.9 of the China-Australia FTA (2015). 70 For a list of these ICSID cases, , last accessed on 19 May 2019. 71 Ping An Life Insurance Company, Limited and Ping An Insurance (Group) Company, Limited v The Government of Belgium, ICSID Case No. ARB/12/29. 72 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, PCA Case No. 2010-20. 73 US District Court Southern District of New York, Petition to Vacate Arbitral Award Declining to Exercise Arbitral Jurisdiction and Compel Arbitration, Case 1:17-cv-07436-ER. 74 Annex 8 Art. 2 of the EU-Singapore IPA.

182 Manjiao Chi hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements.’75 Such a difference is fundamental, and the parties will need to reach a compromise on this issue. Last but not least, as amicus curiae in ISA is highly contentious and no uniform and clear rules have been established so far,76 it could be a thorny issue for the making of the CAI. An important reason is that the two parties have divergent attitudes towards potential third parties, especially to non-governmental organizations (NGOs) and civil societies. Though amicus curiae is not an equivalent of an NGO, NGOs are the predominant type of amicus curiae in ISA. The EU seems to be friendly towards NGOs and does not object to NGOs participation in ISA as amicus curiae. The European Commission strongly supports improving the transparency of ISDS, including by granting greater possibilities for NGOs to access arbitration documents, attend hearings, and make submissions.77 In contrast, China traditionally views NGOs (especially foreign NGOs), civil societies, and other organizations that are not controlled or supervised by the government as a ‘sensitive’ issue.78 More recently, however, China’s IIA-making seems to show a different picture. The China-Australia FTA (2015) clearly allows conditional amicus curiae participation in ISA, upon the satisfaction of several requirements and at the discretion of the arbitral tribunal.79 While, up to the present, there is no ISA case that relies on this FTA, this FTA seems to suggest that China’s position is shifting on the issue of amicus curiae participation, which substantially narrows down the ‘transparency gap’ between China and the EU. In this sense, the two parties could figure out a way to reconcile their positions. The issues discussed here do not constitute an exhaustive list of the outstanding issues in the making of the CAI. Other issues may also be contentious, especially considering that the EU has proposed an investment court system in its IIA-making. It would not be surprising if China and the EU had a difficult time seeking common positions on other ISDS issues.

75 Art. 9.17.3 of the China-Australia FTA (2015). 76 UNCTAD, Transparency - Series on Issues in International Investment Agreements II (New York and Geneva: UN Publication, 2012); OECD, supra note 13; Howard Mann, ‘Reconceptualization International Investment Law: Its Role in Sustainable Development’, Lewis & Clark Law Review, Vol. 17 Issue 2 (2013), pp. 521–544, at 524; Eugenia Levine, ‘Amicus Curiae in International Investment Arbitration: The Implications of an Increase in Third-Party Participation’, Berkeley Journal of International Law, Vol. 29 Issue 1 (2011), pp. 200–224; Aníbal Sabater, ‘Towards Transparency in Arbitration (A Cautious Approach)’, Berkeley Journal of International Law Publicist, Vol. 5 Issue 1(2010), pp. 47–53; Barnali Choudhury, ‘Recapturing Public Power: Is Investment Arbitration’s Engagement of the Public Interest Contributing to the Democratic Deficit?’ Vanderbilt Journal of Transnational Law, Vol. 41 (2008), pp. 775–832; Andrew Newcombe and Axelle Lemaire, ‘Should Amici Curiae Participate in Investment Treaty Arbitrations?’ Vindobona Journal of International Law & Arbitration, Vol. 5 (2001), pp. 22–40. 77 European Parliament Research Service, ‘Investor-State Dispute Settlement (ISDS): State of Play and Prospect for Reform’, Briefing 21/01/2014, , last accessed on 19 May 2019, pp. 1–9, at 6–7. 78 Ankit Panda, ‘China to Regulate Foreign “NGOs”’, The Diplomat, 23 December 2014, ; Stanley Lubman, ‘China’s Government’s Ambivalence toward NGOs’, Berkeley Law, 24 May 2010, , last accessed on 19 May 2019. 79 Arts. 9.16.3 and 9.16.4 of the China-Australia FTA (2015).

Transparency of ISDS in China–EU CAI 183

13.6 Final remarks China and the EU share a growing consensus on pursuing greater transparency in ISDS. However, the IIAs of the two parties do have a substantial ‘transparency gap’ with regard to some outstanding aspects, including the incorporation of the UNCITRAL Transparency Rules, making relevant arbitration documents available to the public, and third-party participation in ISDS. The growing consensus and material differences may profoundly impact the making of the CAI. Although the convergence of the transparency provisions of China’s and the EU’s IIAs suggests that they are likely to compromise on some fundamental aspects of the transparency issue, they may have difficulty in reaching agreement on some outstanding issues. These issues are likely to form the real ‘battlefield’ in the negotiation of the transparency provisions in the making of the China–EU CAI. At this point, it is difficult to accurately assess how the two parties will deal with the transparency issue. Yet, as both China and the EU are major economies, how they deal with the transparency issue in the CAI negotiations is likely to have exemplary impacts on global IIA-making and ISA practice in the future.

14 The status of state-owned enterprises in ISDS from a European perspective Alessandro Spano

14.1 Introduction This chapter discusses the status of Chinese state-owned enterprises (SOEs) in investorstate dispute settlement (ISDS) from a European perspective. The chapter is divided in five sections. Section 14.1 is an introduction. Section 14.2, by analysing the process of reform of Chinese SOEs, highlights the role and status of Chinese SOEs within China’s system of governance and economic model to better understand the unprecedented challenges posed by these companies to the current system of investment arbitration. As a result of the political and financial support of the Chinese government, Chinese SOEs have become dominant players globally. At the same time, in China, state assets are centrally managed by state authorities, which do not hide their intention to maintain control over strategic industries crucial for national security and for the development of the Chinese economy. Within the context of this economic model and system of governance, it is not easy to identify what level of independence Chinese SOEs enjoy and, accordingly, major concerns have arisen about the real intentions of their investment activities abroad. However, under the current system of investment arbitration, any attempt to establish evidence of actual control, or at least substantial coordination, of Chinese SOEs by state authorities in specific cases has yielded no success. Section 14.3 explains that in the EU, this situation has led, inter alia, to tighter scrutiny by the European Commission in the area of merger regulation of Chinese SOEs’ investment activities in the EU. This section then moves on to discuss the many controversies concerning the formulation of investment arbitration within the context of the China–EU Comprehensive Agreement on Investment (CAI). Section 14.4 suggests that the establishment of a common national security review mechanism at EU level could offer a useful complementary tool in order to deal more coherently with the concerns arising in the area of investment arbitration from the sui generis status of Chinese SOEs. This section then discusses the EU’s recently adopted regulation to establish a common legislative framework to screen foreign direct investment (FDI) from third countries on grounds of security and public order in the EU. Section 14.5 presents final comments and conclusions.

14.2 China’s socialist market economy and the role of Chinese SOEs: Implications for investment arbitration The Chinese government has formulated a series of policies over the years to promote the development of national companies and, in particular, SOEs, with the goal of establishing national champions capable of competing at the global level.

State-owned enterprises in ISDS: European perspective 185 In the late 1970s, the Chinese government started intensive economic reforms and privatization of SOEs. This process sought to release SOEs from central planning administration and to progressively re-orient them to the principles of market economies. At a macro level, this reform focused on moving from the central planned economy to a more marketoriented system; at a micro level, the aim was to convert SOEs into modern corporations.1 Over the years, the strategy of a mere adjustment of the relationship and allocation of corporate powers between the government and enterprises was gradually abandoned in favour of a system based on property rights. The key aspect of this approach was the creation of a shareholding system whereby different categories of shareholders could exercise rights over companies’ assets.2 During this phase, the Chinese government implemented the ‘holding on to the big and letting go of the small policy’. Thus, the government maintained control over large SOEs operating in strategic industries by developing them into larger groups of companies, and at the same time it restructured most small and medium-sized enterprises (SMEs) and sold them to private investors.3 In 1999, the Chinese government inaugurated the ‘going out policy’. Chinese authorities started to offer substantial financial support to promote the investment and business activities of SOEs abroad. Often also shielded from the competition of foreign corporations on the domestic market by means of ad hoc legislative and regulatory instruments, Chinese companies as a result have been able to raise their international competitiveness and, ultimately, that of the Chinese economy as a whole.4 Institutionally, the reform of the SOE sector culminated in 2003 with the establishment of the State-owned Assets Supervision and Administration Commission (SASAC).5 Since then, SASAC, in its mission to exercise the government’s power of ownership, has been developing its own agenda for the reform of SOEs. For instance, in 2006, it released a list of seven industries strategic to the national economy and where public ownership was considered necessary.6 These industries include armaments, electric power and distribution, oil and chemicals, telecommunications, coal, aviation, and shipping.7 On that occasion, Li Rongrong, former chairman of SASAC, noted that ‘state capital must play a leading role in these sectors, which are the vital arteries of the national economy and essential to national security’, and that ‘[t]he Chinese government will inject more capital into large state-owned companies in these priority sectors, optimize their structure and make them more competitive’.8

1 For a discussion on the process of reform of Chinese SOEs, see Xiao Geng, Xiuke Yang and Anna Janus, ‘State-Owned Enterprises in China: Reform Dynamics and Impacts’, in Ross Garnaut, Ligang Song, and Wing Thye Woo (eds.), China’s New Place in a World in Crisis (Canberra: ANU E-Press, 2010), pp. 155–178. 2 Kuo-Tai Cheng, ‘State-Owned Enterprise Reform in People’s Republic of China’, 屏东教育大学学报-人 文社会类2007年第27期 (Journal of Pingtung University of Education - Liberal Arts & Social Sciences), Vol. 27 (2007), pp. 1–38, at 10. 3 Ibid, at 12. 4 Hongying Wang, ‘A Deeper Look at China’s “Going Out” Policy’, CIGI Commentary, March 2016, , last accessed on 25 March 2019. 5 Mikael Mattlin, ‘Chinese Strategic State-Owned Enterprises and Ownership Control’, Brussels Institute of Contemporary China Studies Asia Paper, Vol. 4 Issue 6 (2007), pp. 1–28. 6 ‘China Defines Key National Economic Sectors’, China Daily, 18 December 2006, , last accessed on 25 March 2019. 7 Ibid. 8 Ibid.

186 Alessandro Spano This trend appears particularly evident in relation to industries considered by the Chinese government as strategic for the national economy. Barry Naughton noted that the Chinese government, through SASAC, […] sees a mission for state ownership in certain sectors such that value maximization must be combined with strategic government objectives. SASAC’s official line is that state ownership should ‘both advance and retreat’ in specific sectors in whatever way is necessary to further government steerage of the economy and value maximization.9 Interestingly, in more recent years, state authorities informed to have opted for a reform strategy encouraging a ‘mixed ownership’ model for the privatization of SOEs.10 This point, however, merits further attention. It was noted that ‘policies and official statements […] have indicated that privatisation will play at most a subsidiary role in broader efforts to boost the efficiency of SOEs’.11 In this sense, when compared to previous reform initiatives in the state sector wherein the emphasis was on privatization, the current vision of the Chinese government is to keep ownership (and control) over SOEs.12 One crucial factor for a better understanding of the status of SOEs in China is the analysis of the influence the state has over the Chinese economy, which, although largely reduced, remains prevalent. In the words of Jiang Zemin, one of the founders of China’s socialist market economy, this economic model will continue to operate ‘under the macro-economic control of the socialist state’.13 The role of the state within this socialist framework is therefore the element which differentiates China’s market economy from that of EU member states. It follows that, within the context of China’s existing system of governance, the relationship between the Chinese government and SOEs also has particular implications for the investment activities of Chinese SOEs abroad. Nowadays, the importance of SOEs lies in their dominant status in the Chinese economy in terms of fiscal revenue, employment, and social service function. Despite their number having been substantially reduced, SOEs still control key industries in China, including infrastructure construction, telecommunications, financial services, energy, and raw materials.14

  9 Barry Naughton, ‘Claiming Profit for the State: SASAC and the Capital Management Budget’, China Leadership Monitor No. 18 (2006), , last accessed on 25 March 2019, pp. 1–9, at 3. 10 Barry Naughton, ‘SASAC and Rising Corporate Power in China’, China Leadership Monitor No. 24 (2008), , last accessed on 25 March 2019. 11 Gabriel Wildau, ‘China SOE’s Restructuring Leaves State Ownership Intact’, Financial Times, 12 March 2015, , last accessed on 25 March 2019. 12 Ibid. 13 ‘Full Text of Jiang Zemin’s Report at 14th Party Congress’, Beijing Review, 29 March 2011, , last accessed on 25 March 2019. 14 Xin Liu, ‘China’s State-Owned Enterprises Reform: Will It Work?’ China Business Knowledge Platform of CUHK, 5 January 2016, , last accessed on 25 March 2019.

State-owned enterprises in ISDS: European perspective 187 Indeed, a fundamental aspect of China’s reform process has been the expansion of the role of the market and the progressive reduction of the role of the state in the economy.15 Since the late 1970s, with the implementation of Deng Xiaoping’s ‘open door’ policy, the Chinese government has coherently pursued market reforms within a context of political and social stability by gradually prioritizing the regulatory role of legislation.16 However, transforming a planned economy into a market economy has required more than the mere dismantling of the traditional economic apparatus. Market rules can have a dramatic impact on the distribution of resources and wealth in Chinese society. Thus, how these rules are conceived and implemented is crucial. The decision to expand the role of the market has been only one of the many critical decisions taken by the Chinese leadership in its effort to move away from Maoist China. When formulating new policies and laws, Chinese leaders have been confronted with unprecedented choices, such as the need to reconsider the nature and the extent of the role of the state in the market. It has been noted that […] Over the years all Chinese leaders have made it quite clear that the country’s cultural and ideological purity may not be sacrificed for temporary economic growth and, in this regard, the authority and validity of socialist thought appears therefore to stand beyond challenge.17 This vision stands at the heart of the establishment of China’s socialist market economy. It follows that, in its essence, China’s socialist market economy is not an economy free from state regulation. The Chinese government considers the formulation of market rules as a new, though more indirect, form of state intervention in the economy.18 The Chinese government retains control over the economic system in the pursuit of industrial policies, such as the protection of strategic industries, the establishment of national champions, the promotion of domestic SMEs, and the maintenance of social stability.19 China has thus embraced a ‘socialist market economy’. Such an economic model finds its origin in an ideological framework which is inclined to minimize the intrinsic value of market rules and of the competitive process in the allocation of economic resources.

15 Linda Yueh, ‘A Gradualist Approach to Economic Transition: Lessons from China?’ LSE Research Online, 10 March 2004, ; Alwyn Young, ‘The Razor’s Edge: Distortions and Incremental Reform in the People’s Republic of China’, Quarterly Journal of Economics, Vol. 115 Issue 4 (2000), pp. 1091–1135; Kiichiro Fukasaku and Henri-Bernard Solignac Lecomte, ‘Economic Transition and Trade Policy Reform: Lessons from China’, OECD Development Centre Working Paper No. 112, July 1996, , last accessed on 25 March 2019. 16  Donald C. Clarke, Peter Murrell, and Susan Whiting, ‘The Role of Law in China’s Economic Development’, in Thomas Rawski and Loren Brandt (eds.), China’s Great Economic Transformation (Cambridge: Cambridge University Press, 2008), pp. 375–428. 17 Carlos Wing-Hung Lo, ‘Socialist Legal Theory in Deng Xiaoping’s China’, Columbia Journal of Asian Law, Vol. 11 (1998), pp. 469–486, at 485. 18 Ibid; Alessandro Spano, ‘The EU-China CAI Negotiations and ISDS Mechanisms: The Role and Status of Chinese SOEs’, EU-China Observer, Issue 2 (2017), pp. 13–17; Donald C. Clarke, ‘Regulation and Its Discontents: Understanding Economic Law in China’, Stanford Journal of International Law, Vol. 28 (1991–1992), pp. 283–322, at 284. 19 Alessandro Spano, ibid; Chak Kwan Chan, King Lun Ngok, and David Phillips, Social Policy in China: Development and Well-Being (Bristol: The Policy Press, 2008); Litao Zhao and Tin Seng Lim (eds.), China’s New Social Policy: Initiatives for a Harmonious Society (Singapore: World Scientific, 2010).

188 Alessandro Spano In conclusion, although China’s attitude towards the principles of a market economy has undergone a definite reversal, any step in this direction remains instrumental in achieving the economic goals pursued by the Chinese government. Accordingly, until such an instrumental vision becomes prevalent, the investment activities of Chinese SOEs will never enjoy an entirely autonomous status. Most likely, these will continue to be regarded as closely connected to government policies viewed as strategic for the development of China’s socialist market economy.20 In this regard, the sui generis market status and role of Chinese SOEs within the context of China’s system of governance and economic model have started to generate imbalances and asymmetries in the application of ISDS globally. This is particularly evident in two recent cases in which arbitral tribunals had to decide the standing of Chinese SOEs as claimants in relation to ISDS. In the International Centre for Settlement of Investment Disputes (ICSID) arbitration case Beijing Urban Construction Group Co., Ltd. v Republic of Yemen (BUCG v Yemen) within the context of the China-Yemen bilateral investment treaty (BIT),21 the Yemeni government argued that the Tribunal lacked jurisdiction ratione personae over the dispute because BUCG (a Chinese SOE responsible for building an airport terminal) did not qualify as ‘a national of another Contracting State’ under the ICSID Convention Article 25(1). By considering the criteria under the well-known ‘Broches test’, the Yemeni government considered the Chinese SOE BUCG to be ‘both an agent of the Chinese Government and discharge[d] governmental functions even in its ostensible commercial undertakings’.22 Accordingly, the Tribunal could not have jurisdiction ratione personae since BUCG was both an agent of the Chinese government and discharged governmental functions.23 As supporting evidence, the Yemeni government relied on multiple official publications and directives of the Chinese government to prove the role of BUCG in advancing China’s national interest.24 Furthermore, it was noted that […] The Communist Party committees in State-owned enterprises such as BUCG are required to focus not only on supervising human resources, finance and materials but are as well responsible for monitoring the implementation of the scientific concepts of development and national policies, to promote enterprises to play a leading role in carrying out political and social responsibility.25 Similarly, in the case of China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co., Ltd. v Mongolia (Heilongjiang v Mongolia) within the context

20 Lauren Gloudeman and Nargiza Salidjanova, ‘Policy Considerations for Negotiating a US-China Bilateral Investment Treaty’, US-China Economic and Security Review Commission Staff Research Report, 1 August 2016, , last accessed on 25 March 2019, pp. 1–39, at 24. 21 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017. 22 Ibid, para. 29. 23 Ibid, para. 37. 24 Ibid, paras. 37–38. 25 Ibid.

State-owned enterprises in ISDS: European perspective 189 of the China-Mongolia BIT,26 the Mongolian government argued that the two Chinese companies, Beijing Shougang and China Heilongjiang, could not be considered investors since they were ‘quasi-instrumentalities of the Chinese government’.27 It is worthwhile noting that, in the area of Chinese competition law, this phenomenon is usually defined as sectoral monopolies. This is when SOEs integrate administrative and business functions and assume a regulatory role in a certain sector of the Chinese economy. Furthermore, these SOEs are often directly affiliated with governmental departments and, accordingly, receive preferential treatment by them when they operate on the market.28 In BUCG v Yemen, however, the Tribunal argued that the ‘Broches test’ must be considered in relation to the specific context of the investment concerned under dispute, and that any correlation that the Chinese SOE could have with the Chinese government and its role and status in China were irrelevant from the point of view of the locus standi of BUCG within the context of the China-Yemen BIT.29 In its decision, the Tribunal emphasized that there was no sufficient evidence to support the view that BUCG was exercising governmental functions in relation to the specific investment.30 Similarly, in Heilongjiang v Mongolia, the Tribunal argued, inter alia, that no evidence existed about whether the two Chinese companies were acting as ‘quasi-instrumentalities of the Chinese government’. The political and financial support of the Chinese government has allowed Chinese SOEs to become dominant players in the international market. At the same time, in China, state assets are centrally managed by state authorities which explicitly profess their intention to maintain control over strategic industries vital for national security and for the development of the Chinese economy. Within the context of this economic model and system of governance, it is not easy to identify what level of independence Chinese SOEs enjoy from the Chinese government and, accordingly, major concerns arise about the actual intentions of the investment activities of Chinese SOEs abroad. Furthermore, mechanisms of corporate governance and the internal organization structure of Chinese SOEs are still extremely opaque. Nevertheless, from a legal point of view, it is often difficult to ascertain evidence of actual control or, at least substantial coordination, of Chinese SOEs by state authorities in specific cases. For instance, direct communication between state bodies and the company’s management is not indispensable for coordination to occur.31

14.3 The investment activities of Chinese SOEs in the EU and ISDS: Challenges ahead Similar considerations have also emerged in the EU, where increasing vigilance concerning the investment activities of Chinese SOEs has coincided, for example, with tighter scrutiny by the European Commission in the area of merger regulation. It was noted that, since

26 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, UNCITRAL, PCA Case No.2010-20, Award, 30 June 2017. 27 Ibid, para. 27. 28 Chaowu Jin and Wei Luo, Competition Law in China (Buffalo: William S. Hein, 2002), pp. 82–83. 29 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017, para. 39. 30 Ibid. 31  Angela Huyue Zhang, ‘The Anti-Competitive Effects of State Ownership’, Competition Policy International, 6 March 2017, , last accessed on 25 March 2019.

190 Alessandro Spano 2011, the Commission has been applying a ‘worst case scenario’ approach in the process of review of merger transactions involving Chinese SOEs.32 In this regard, the Commission tries to consider the anti-competitive effect of a proposed transaction by assuming that all Chinese SOEs operating in the industry are treated as a single entity.33 However, as Angela Zhang notes, Paradoxically, addressing both the over-inclusion and under-inclusion problems that Chinese SOEs have posed to the existing legal framework would require the Commission to simultaneously narrow and expand the concept of control, a mission impossible to achieve within the EU Merger Regulation.34 In the EU, major concerns about Chinese SOEs’ investment activities in the EU depend on the prominent role that these companies play in terms of Chinese outward FDI. European public authorities and business associations, in their respective roles, complain particularly about the unfair competitive advantages that Chinese SOEs enjoy on the market as a result of the political and financial support of the Chinese government.35 This issue has also started to have a more general impact on EU-China relations. This is the case, for example, with the EU’s refusal to grant China market economy status, even though China expressly claims that, since its accession to the World Trade Organization (WTO) in 2001, it has implemented a myriad of market-oriented laws and policies.36 The view of the European Commission is that the involvement of the Chinese government in business activities […] amounts to a level of intervention that substantively negates deserving market economy status. This includes Chinese state ownership in a majority of China’s largest and most strategically important enterprises, the entrenchment of top cadres and their family members in significant managerial posts and state financing through state ownership of state and commercial banks, for example.37 In recent years, Chinese SOEs’ investment activities in Europe have therefore been subject to greater scrutiny from member states when considering the potential implications not only for market competition but also for social stability and, ultimately, national security. For instance, one of the envisaged risks is that domestic technology, resources, and jobs may move from Europe to China and, consequently, undermine the development of local business operators and local communities.38 Although these worries seem, at least in part, excessive, the matter clearly demonstrates the close connection of political and economic issues with reference to the investment activities of Chinese SOEs in the EU. And moving to

32 Ibid, at 4. 33 Ibid, at 4–5. 34 Ibid, at 8. 35 Fan He and Bijun Wang, ‘Chinese Interests in the Global Investment Regime’, EABER Working Paper Series No. 90 (2014), pp. 1–40. 36  Alessandro Spano, ‘China’s Market Economy Status under WTO Law: A European Perspective’, EU-China Observer, Issue 1, (2016), pp. 25–28. 37 Kerry Brown and Sam Beatson, ‘The European Union and China: The Need for a More Politicised Relationship’, Asia & the Pacific Policy Studies, Vol. 3 (2016), pp. 412–419, at 419. 38 Fan He and Bijun Wang, supra note 35, at 4.

State-owned enterprises in ISDS: European perspective 191 the area of investment arbitration, debate has focused on the use of ISDS within the context of the China–EU CAI.39 From a European perspective, indeed, investment arbitration is likely to remain the preferred method for BITs, albeit the most controversial. Opponents of investment arbitration emphasize that, inter alia, ISDS has the potential to confer upon foreign investors more extensive rights than those of domestic investors. Furthermore, they leave the possibility open to bypass the jurisdiction of national courts. For instance, within the context of negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States (US), a contentious issue has been the impact of ISDS on the right of effective judicial protection, which is an essential aspect of the rule of law within the EU legal order.40 From a procedural perspective, opponents further argue that ISDS may alter the EU’s judicial architecture. Judicial prerogatives are currently shared between the EU level and the national level and, accordingly, the task is conferred on EU courts and national courts, in their respective jurisdiction, to ensure the harmonious interpretation and application of EU law across member states.41 Finally, there are also fears about potential tension between the doctrine of supremacy of EU law and ISDS.42 When it comes to ISDS, it is difficult to distinguish between myth and reality. Certainly, the existence of so many conflicting views on the matter reveals the existing shortcomings and inconsistencies in the design of arbitration mechanisms within the context of international investment agreements. With reference to the EU legal system, the need to consider the implications of ISDS on the principle of effective judicial protection and the rule of law, and to subject these mechanisms to a more transparent and, possibly, democratic scrutiny, also depends on the singularity of the EU’s multi-level institutional architecture. And when referring to the China–EU CAI negotiations, the classic debate about ISDS is enriched by further controversies. Again, the main reason behind this is China’s system of governance and its economic model, and their relationship with Chinese SOEs.43 By conducting their investment and business operations on the EU market as de facto ‘emanations of the state’ in the pursuit of the objectives of the Chinese socialist market economy, Chinese SOEs may generate imbalances and asymmetries in the use of ISDS as a result not only of the design of arbitration mechanisms but also of the unique characteristics of the claimants. Thus, the questions which have characterized the academic debate on whether BITs

39 At the 16th EU-China Summit held on 21 November 2013, the launch of negotiations of a comprehensive EU-China Investment Agreement was announced. The first round of negotiations was held in Beijing on 21–23 January 2014. European Commission, ‘EU and China Begin Investment Talks’, 20 January 2014, , last accessed on 25 March 2019. 40 For a general discussion on the TTIP negotiations, see European Parliament, ‘European Parliament Resolution of 8 July 2015 Containing the European Parliament’s Recommendations to the European Commission on the Negotiations for the Transatlantic Trade and Investment Partnership (TTIP)’, ; European Commission, ‘Concept Paper: Investment in TTIP and Beyond – The Path for Reform’, , last accessed on 25 March 2019. 41  For a discussion on ISDS in the context of the EU legal system, see Angelos Dimopoulos, ‘The Involvement of the EU in Investor-State Dispute Settlement: A Question of Responsibilities’, Common Market Law Review, Vol. 51 Issue 6 (2014), pp. 1671–1720. 42 Daniele Gallo and Fernanda G. Nicola, ‘The External Dimension of EU Investment Law: Jurisdictional Clashes and Transformative Adjudication’, Fordham International Law Journal, Vol. 39 Issue 5 (2016), pp. 1081–1152. 43 Alessandro Spano, supra note 18.

192 Alessandro Spano should be available to SOEs as claimants when acting in a governmental capacity and, if not, how to differentiate commercial from governmental conduct by SOEs become even more intricate when considering the status of Chinese SOEs.44 China’s socialist market economy, with its authoritarian and centralized system of governance, the declared industrial policy goals of the Chinese government, and the interconnection between governmental and commercial functions of Chinese SOEs in the domestic market at all levels virtually make most potential SOE claims state-to-state disputes. Accordingly, claims submitted to investment arbitration by SOEs, whose conduct could be attributable to the state under the rules of customary international law, could be considered as claims of a state rather than that of an investor.45 This solution, however, seems to be difficult to apply to the case of China. China would be reluctant to allow international tribunals to broadly interpret international norms and to establish precedents which may limit its ‘bilateral sovereignty’.46 Should any attempt in this direction be made, the perception of the Chinese government would be that Chinese SOEs had been treated unfairly. With reference to the case of Europe, this would most likely have the potential to raise diplomatic tensions between the EU and China and thus affect other areas of their strategic relationship. Ironically, this would contradict the primary reason behind the decision to use investment arbitration. In general, by considering the nature of the problem, it also seems difficult that the introduction of safeguards mechanisms which are traditionally used to minimize the abuse of ISDS, such as the prohibition for arbitral panels to overturn EU rules or the limitation of monetary compensation for breaches of a treaty, may offer an effective solution. In the EU, there are already large concerns about the risk that, similar to what happens in their domestic market, Chinese SOEs will tend to perpetrate unfair business practices to the detriment of the environment, labour standards, and competition on the EU market. The potential imbalances and asymmetries in the use of ISDS deriving from the status of the Chinese claimants would likely affect the possibility of European investors enjoying fair treatment and effective judicial protection for their rights when investing in the EU market.

14.4 National security review as a complement to investment arbitration: A European perspective As has been seen, discussion of the new challenges posed by investment activities of Chinese SOEs in the EU has highlighted the shortfalls of the existing EU merger control regime and, accordingly, the necessity either to look for new approaches or to review existing normative instruments. It has been suggested that the European Commission should view a national security review as complementary to its merger review system.47 Arguably, a common national security review mechanism at EU level could also serve as a complementary tool to investment arbitration in order to deal more coherently and systemically with the challenges associated with the status and role that Chinese SOEs have in China’s socialist market economy.

44 Mark Feldman, ‘State-Owned Enterprises as Claimants in International Investment Arbitration’, ICSID Review, Vol. 31 Issue 1 (2016), pp. 24–35; Alessandro Spano, supra note 18. 45 Mark Feldman, ibid, at 25. It is also worthwhile recalling that only claims brought by SOEs in a commercial capacity may be submitted against states under the ICSID Convention. 46 For a discussion on China’s concept of ‘bilateral sovereignty’, see Amos Irwin, ‘Crossing the Ocean by Feeling for BITs: Investor-State Arbitration in China’s Bilateral Investment Treaty’, GEGI Working Paper 3, May 2014, , last accessed on 25 March 2019. 47 Angela Huyue Zhang, supra note 31, at 8.

State-owned enterprises in ISDS: European perspective 193 In the EU, however, national security, defence issues, and, consequently, national security review mechanisms for foreign investment still fall under the competence of member states. As a result, the lack of a common national security review system at EU level has prevented national legislation from being harmonized.48 It follows that, also as a result of the increasingly competitive power of Chinese SOEs on the EU market, some EU member states have in recent years taken autonomous steps to implement more restrictive rules in their national security review regimes.49 For the purpose of this discussion, it is worthwhile looking in more detail, inter alia, at the cases of France and Germany. In 2014, the French government issued Decree 2014/479 to revise national legislation for blocking proposed acquisitions by foreign investors of domestic companies operating in strategic sectors.50 The Decree extends, inter alia, the list of industries where foreign investors are required to obtain prior authorization from the French Ministry of Economy before proceeding with a proposed operation. The Decree specifically expands the control of national authorities already in place in a series of strategic sectors (such as national defence and information technology) to six additional industries, including energy, transport, water, public health, and telecommunications.51 Furthermore, French legislation broadens the power of intervention of the French Ministry of Economy to block a deal. From a procedural point of view, foreign investors are now required to file a formal application for prior authorization with the office of the French Minister of the Economy, which has two months to make its decision. If the Minister of the Economy does not render a decision within this time limit, the proposed operation will be deemed to have been approved.52 In July 2017, the German federal government amended the Foreign Trade and Payments Regulation by introducing more stringent review mechanisms for foreign takeovers of domestic companies operating in security-sensitive industries and providing critical infrastructure (such as energy, information technology, telecommunications, transport and traffic, health, water supply, food, finance, and insurance).53 Under the new version of the Regulation, the Federal Ministry for Economic Affairs and Energy has the power

48 Frank Bickenbach, Wan-Hsin Liu, and Guoxue Li, ‘The EU-China Bilateral Investment Agreement in Negotiation: Motivation, Conflicts and Perspectives’, Kiel Policy Brief No. 95, October 2015, , last accessed on 25 March 2019. Currently, only 12 member states have implemented an investment review mechanism. These are Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom. 49 It is also worth noting that 27 EU member states currently have a BIT with China. European Commission, ‘Towards a Comprehensive European International Investment Policy’, COM(2010)343 final, 7 July 2010, , last accessed on 25 March 2019. 50 It is worthwhile recalling that the Decree was issued during the days of the proposed takeover of the French Energy Company Alstom by General Electric. Alison Jones and John Davies, ‘Merger Control and the Public Interest: Balancing EU and National Law in the Protectionist Debate’, in Barry E. Hawk (ed.), International Antitrust Law and Policy: Fordham Competition Law 2014 (Huntington: Juris Publishing, 2015), pp. 63–116, at 74. 51 Ibid. 52 Ibid, at 75. 53  Uwe Goetker and Alexa Ningelgen, ‘An Update on Foreign Investment Control in Germany’, McDermott Will & Emery, 4 October 2017, ; Tobias Heinrich, Lars Ole Petersen, and Sabine Kueper, ‘German Government Tightens Rules for German Investment Control Covering M&A Transactions by Foreign Acquirers’, White&Case Alert, 26 July 2017, , last accessed 25 March 2019.

194 Alessandro Spano to prohibit the acquisition by non-EU investors of at least 25% of the shares in German companies if the proposed operation may endanger national public order or security. It is worthwhile noting that the amended Regulation broadens the concept of ‘public order and security’ to include critical infrastructure. It follows that proposed takeovers in this sector are now subject to mandatory prior notification to the Ministry for Economic Affairs and Energy. Furthermore, the prescribed three-month time period within which German authorities are required to start their assessment will now only run when they are aware of the proposed deal. If the parties concerned fail to notify the Ministry and the Ministry is unaware of the operation, an investigation may then be started up to five years after the transaction has been concluded.54 It appears that this legislative trend in major member states to enact new national review mechanisms for foreign investment reflects their growing concerns about the investment initiatives of Chinese SOEs. Consistent with EU principles of non-discrimination and transparency, national policies and rules should be applied by national authorities in a fair and transparent manner, irrespective of the origin of foreign investment. Interestingly, EU member states, perhaps as a consequence of the prolonged effects of the financial and economic crisis in Europe, have shown themselves to date to be relatively open to investment operations by Chinese SOEs.55 However, the constant increase in investment by Chinese SOEs in key industries of member states’ economies makes the harmonization of rules regulating foreign investments at EU level a priority in order to avoid the risk of arising protectionist national policies and Chinese SOEs posing a threat to national security.56 It is within this context that in September 2017, the European Commission released the draft of a proposed regulation to establish a common legislative framework to ‘[…] screen foreign direct investments from third countries on grounds of security and public order in the EU, together with a cooperation mechanism among Member States as well as a framework for screening at the EU level’.57 The proposed Regulation does not require member states to adopt or maintain a review mechanism for FDI. The proposed goal is the creation of an enabling framework for member states that have already implemented, or are willing to implement, screening mechanisms, and to ensure that these mechanisms meet some basic requirements, such as the right

54 Ibid. 55 Alessandro Spano, supra note 18; Lawrence Eaker and Tao Sun, ‘Chinese Investment in the European Union & National Security’, Frontier of Law in China, Vol. 9 Issue 1 (2014), pp. 42–64, at 53; Elena Forchielli, ‘Chinese Investment in the EU: A Challenge to Europe’s Economic Security’, GMF Paper Series, 16 January 2015, , last accessed on 25 March 2019. 56 Françoise Nicolas, ‘China’s Direct Investment in the European Union: Challenges and Policy Responses’, China Economic Journal, Vol. 7 Issue 1 (2014), pp. 103–125. 57 European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Screening of Foreign Direct Investments into the European Union’, COM(2017) 487 final, , pp. 1–47. The European Commission also released an explanatory memorandum and a communication to the European Parliament and other EU bodies with information about the proposed regulation and indicating a number of complementary measures. European Commission, ‘Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, Welcoming Foreign Direct Investment while Protecting Essential Interests’, COM(2017) 494 final, , last accessed on 25 March 2019.

State-owned enterprises in ISDS: European perspective 195 of judicial review of adverse decisions, non-discrimination between different third countries, and transparency. The idea is to further enhance cooperation between member states and the Commission to share information on investment activities by foreign investors that may threaten security or public order. The proposed cooperation mechanism should favour an in-depth discussion between member states and the Commission and promote coordination when considering the effect of a proposed transaction by member states. The cooperation mechanism would promote awareness at national and at EU level about FDI which may affect security or public order.58 Finally, the proposed Regulation provides that the Commission may review investment activities from non-EU investors, on grounds of security and public order, in situations where these activities may affect projects or programmes of Union interest. Hence, the proposed Regulation would create ‘a complementary tool to protect such projects and programmes alongside existing sectorial Union legislation’.59 Various commentators have noted that the proposed Regulation is a response to pressure from countries such as France, Germany, and Italy for the enactment of a common foreign investment review system at EU level, mirroring the review system under what is known as the Exon-Florio Amendment and enforced by the Committee of Foreign Investment in the United States (CFIUS).60 From this point of view, the proposed Regulation clearly demonstrates the intention of major EU member states to enhance the effectiveness of existing national review mechanisms and to harmonize rules across the EU. The European Commission therefore aims to resolve the phenomenon of member states implementing mutually competing foreign economic and investment policies by consolidating investment screening through EU-level BITs, at the same time, ensuring both market access and effective enforcement of foreign investors’ rights.61 In order to guide member states and the Commission in the application of the Regulation, Article 4 of the draft Regulation indicates a non-exhaustive list of factors that may be considered when reviewing FDI on the grounds of security or public order. This list aims to provide further clarity to non-EU foreign investors planning to make or having made FDI in the EU. In screening whether FDI activities may affect security or public order, member states and the Commission should take all relevant factors into account, including the effects on critical infrastructure; critical technologies; and inputs which are essential for security or the maintenance of public order.62 Notably, the proposed Regulation adds that ‘[…] member states and the Commission should also be able to take into account whether a foreign investor is controlled directly or indirectly by the government of a third country, including through significant funding.’63 In this sense, this legislation would favour the development of new common standards to

58 European Commission, ‘Proposal for a Regulation Establishing a Framework for Screening of Foreign Direct Investment into the European Union’, ibid, at 3. 59 Ibid. 60 David K. Lakhdhir and Anna L. Christie, ‘Paul Weiss Discusses Screening of Foreign Investments in EU’, The CLS Blue Sky Blog, 6 October 2017, , last accessed on 25 March 2019. 61 Ibid. 62 European Commission, ‘Proposal for a Regulation Establishing a Framework for Screening of Foreign Direct Investments into the European Union’, supra note 57, at 12. 63 Ibid.

196 Alessandro Spano screen the investment activities of Chinese SOEs in strategic sectors of the markets of member states and, in particular, in cases of projects or programmes in the EU’s interest. In September 2017, the ministers of economic affairs of Germany, France, and Italy expressed in a joint declaration their appreciation for the Commission’s proposal, emphasizing the importance of implementing common rules on investment that are fair, but also may protect the national strategic interests of member states.64 Although the proposed Regulation would not confer review powers on the European Commission as stringent as the powers available to the CFIUS in the US, it would introduce for the first time the possibility that the Commission would have a say in relation to foreign investments by Chinese SOEs in EU member states. Furthermore, with reference to strategic projects and programmes in industries such as energy, critical infrastructure, and technology, which see the contribution of EU funding and/or which are in the EU’s interest, the Commission will play a major role in the review process of foreign investments.65 In this regard, it was noted that Although the framework for Commission screening in its current form is described as a ‘complementary tool’ and the Commission may only issue ‘opinions’, the proposed Regulation nevertheless provides the European Union with an instrument that could have an impact on a significant amount of investments in strategic sectors, as they would fall under EU scrutiny.66 Nevertheless, by looking at the US experience, it appears that the effective application of the review mechanisms introduced by the proposed Regulation may face unexpected challenges. This would be the case, for example, with the issue of transparency. The goal of transparency may often conflict with the intention of the relevant parties to a proposed operation to keep confidentiality about the details of the deal. Furthermore, national authorities may have an interest in situations that have potential implications on national security matters.67 Another critical aspect would refer to the principle of non-discrimination. Various commentators consider that Non-discrimination is unlikely to be achieved in a process where the nature of the investor (e.g. state ownership) and its government’s policies (e.g. in relation to politicalmilitary matters, or the protection of intellectual property) may be central to an evaluation of the risk to security or public order that may arise as a result of the proposed foreign investment.68

64 Federal Ministry for Economic Affairs and Energy, ‘Joint Press Release by Germany, France and Italy: EU Proposal on Investment Vetting is an Important Step towards Level Playing Field in Europe and Better Protection in Cases of Corporate Acquisitions’, 13 September 2017, , last accessed on 25 March 2019. 65 Ibid. 66 Ibid. 67 David K. Lakhdhir and Anna L. Christie, supra note 60. 68 Ibid.

State-owned enterprises in ISDS: European perspective 197 However, despite the many difficulties that the new screening system might encounter in concrete cases, its enactment would certainly represent a first significant step for the establishment of a more harmonized and coherent system for reviewing foreign investments in the EU.

14.5 Conclusion The challenges posed by the investment activities of Chinese SOEs in strategic sectors of EU member states have huge political significance, not only for the future of EU-China relations but also for the EU system of governance. Achieving the objectives of smart, sustainable, and inclusive growth set out in the Europe 2020 Strategy requires a higher level of legal harmonization and more coordination between national and supranational institution actors. In this sense, the implementation of new EU policy and legislative instruments should be viewed as necessary steps to complement the existing EU legal regime and to lead to more political and economic cohesion in the EU. Following this path, however, calls for reconsideration of the current EU model of governance to progressively move away from a tradeoriented dimension to one incorporating more ‘political’ responsibilities for EU institutions on the international scene. Failure to do this would incur the risk not only of provoking a rise in protectionist investment policies in member states but also, more generally, of turning back the clock on European integration.

15 The status of state-owned enterprises in ISDS from a Chinese perspective Sheng Zhang

15.1 Introduction State-owned enterprises (SOEs) have become a strong competitor in global investment. Compared with privately owned enterprises, SOEs are more capable of maintaining the stability of the market and they are better positioned to deal with the debt crisis.1 Recent years have witnessed an upsurge in SOEs. In 2017, the United Nations Conference on Trade and Development (UNCTAD) identified close to 1,500 SOEs, with more than 86,000 foreign affiliates operating around the globe.2 Yet, SOEs have become a subject of close review in some developed countries. As most SOEs are located in emerging economies, there are concerns that SOEs mainly participate in industries of political and economic significance and that they could pursue political or other non-commercial goals. China’s SOEs, in particular, have generated more concerns due to their large share in the global economy and different institutional and corporate structures.3 Although SOEs’ share has been decreasing in recent years, SOEs still prevail over privately owned enterprises in China’s outward foreign direct investment (FDI) stocks.4 Not surprisingly, investment by China’s SOEs in the European Union (EU) is facing greater scrutiny. The issue of SOEs is also believed to be one of the main obstacles in the EU-China Comprehensive Agreement on Investment (CAI) negotiations.5 The surge of SOEs poses challenges to the international investment treaty regime as well. Against this background, this chapter seeks to mitigate the issue of SOEs in the China–EU CAI negotiations from a Chinese perspective and to contextualize the discussion of SOEs in the changing landscape in international investment treaties and the relevant arbitration practice.

1 Ji Li, ‘State-Owned Enterprises in the Current Regime of Investor-State Arbitration’, in Shaheeza Lalani and Rodrigo Polanco Lazo (eds.), The Role of the State in Investor-State Arbitration (Leiden: Brill, 2015), pp. 380–404, at 384. 2 UNCTAD, World Investment Report 2017, Investment and the Digital Economy (New York and Geneva: UN Publication, 2017), p. 31. 3 Ji Li, supra note 1, at 384. 4 Ministry of Commerce of People’s Republic of China (MOFCOM), 2015 Statistics Bulletin of China’s Outward Foreign Direct Investment (Beijing: MOFCOM, 2016). 5 Alicia García-Herrero and Jianwei Xu, ‘How to Handle State-Owned Enterprises in EU-China Investment Talks, Policy Contributions’, Bruegel Policy Contribution No.18, June 2017, , last accessed on 20 May 2018.

State-owned enterprises in ISDS: Chinese perspective 199

15.2 SOEs and international investment agreements: An overview The role of SOEs has been minor in the era of investment-driven globalization, and this situation began to change only after the recent financial crisis.6 As a result, the issue of SOEs is still relatively new in international investment law. Bilateral investment treaties (BITs) were originally developed to stimulate private investment.7 One of the main objectives of the United States (US) BIT programme, for instance, is to protect private investment.8 This objective is also established in the preamble of the US 2012 Model BIT, which provides that the contracting parties recognize that BITs will stimulate the flow of private capital and economic development.9 The first issue concerning SOEs is whether or not they could be protected under the specific investment treaties. Things would be much easier if SOEs are expressly included in the definitions of entities or enterprises. The concept of ‘enterprise’ in the 2012 US Model BIT, for instance, covers any entity owned or controlled by the government.10 One BIT goes even further to include the government itself as one form of enterprise.11 Accordingly, SOEs would enjoy to the same extent as privately owned enterprises the benefits of the treatments and guarantees agreed by the contracting parties in the investment treaties. Even for treaties that do not contain provisions protecting SOEs, the term enterprise is usually broad enough to cover any form of legal entity constituted or organized under applicable domestic law. Absent any expression to the contrary, SOEs, or the government itself, are normally protected under international investment agreements.12 Similar positions can be found in the opinion of the Swiss Federal Department of Foreign Affairs; when considering whether states and public entities qualify as investors under the Swiss BITs, it submits that Swiss BITs do protect states and state entities investing abroad except when they act jure imperii and therefore enjoy immunity under the rules of state immunity.13

 6 Michael V. Gestrin, ‘State-Owned Enterprises: Finding Bigger Role in Global Investment’, East Asia Forum, 27 November 2014, , last accessed on 20 May 2018.   7 Paul Blyschak, ‘State-Owned Enterprises and International Investment Treaties: When are State-Owned Entities and Their Investments Protected?’ Journal of International Law and International Relations, Vol. 6 Issue 2 (2011), pp. 1–52, at 2.  8 United States Trade Representative (USTR), ‘Bilateral Investment Treaties’, , last accessed on 20 May 2018.  9 USTR, ‘2012 US Model Bilateral Investment Treaty’, , last accessed on 20 May 2018. 10 Ibid. 11 For example, the Czech Republic-Kuwait BIT (1996) defines investors as covering, in addition to natural persons holding the nationality of the contracting state in accordance with its law, the government of the contracting state and any legal entity constituted under the laws and regulations of the contracting state and having its head office in the contracting state. Art. 1(2) of the Czech Republic-Kuwait BIT (1996), , last accessed on 20 May 2018. 12 UNCTAD, The Protection of National Security in IIAs (New York and Geneva: UN Publication, 2009), p. 43. 13 Swiss Federal Department of Foreign Affairs, ‘Avis de droit du 20 Novembre 2007, Accords de promotion et protection des investissements: Qualité d’investisseur octroyée à un Etat et traitement à donner à ses investissements’, JAAC (2008), pp. 183–188, at 183, cited from Claudia Annacker, ‘Protection and Admission of Sovereign Investment under Investment Treaties’, Chinese Journal of International Law, Vol. 10 Issue 3 (2011), pp. 531–564, at 534–535.

200 Sheng Zhang Some treaties also consider the circumstances under which the behaviour of SOEs can be attributed to the state in order to prevent a government from evading its obligations by delegating its authority to an SOE. For instance, the US specifies in its 2012 Model BIT that if a state enterprise or other person exercising ‘any regulatory, administrative, or other governmental authority delegated to it’ is within the authority of one contracting party, the obligation of this contracting party applies. It also clarifies that ‘government authority that has been delegated includes a legislative grant, and a government order, directive or other action transferring to the state enterprise or other person, or authorizing the exercise by the state enterprise or other person of, governmental authority’.14 Recent treaty practice demonstrates that SOEs have been receiving intensive attention. The size and governance structure of SOEs enable them to bear high risks and make long-term investments, which is essential for the stability of the economy. However, SOEs may raise different considerations compared to those raised by privately owned enterprises when making investments. The primary concern is that SOEs may pursue non-commercial objectives, thus causing concerns about national security and the loss of control over national resources. To ensure that SOEs and privately owned enterprises can compete on a level playing field, the principle of ‘competitive neutrality’ has been introduced by the US and the EU in the Transatlantic Trade and Investment Partnership (TTIP) negotiations.15 This principle is also endorsed in Chapter 17, ‘State-Owned Enterprises’, of the TransPacific Partnership Agreement (TPP). The chapter on SOEs in the TPP reveals the ambition of the US to ensure that ‘businesses, regardless of ownership, compete fairly through enforceable rules’.16 Chapter 17 of the TPP, through a set of 15 Articles and 6 Annexes, addresses coverage, commercial considerations and non-discriminatory treatment, immunity and impartial regulation, non-commercial assistance, transparency, and exceptions and dispute settlement. Chapter 17 goes beyond the World Trade Organization (WTO) rules and the previous free trade agreements (FTAs) concluded by the US by broadening non-discrimination rules so that they apply to all commercial purchases and sales of SOEs whenever they operate in the TPP trade area.17 Meanwhile, it defines SOEs on the basis of government ownership or control through ownership interests.18 In its position to renegotiate North American Free Trade Agreement (NAFTA), the US goes further by seeking to develop a fact-finding mechanism based on the WTO Agreement on Subsidies and Countervailing Measures to help overcome the evidentiary problems with litigation on SOEs.19

14 Art. 2(2) of the 2012 US Model BIT. 15 European Commission, ‘EU and US Adopt Blueprint for Open and Stable Investment Climates’, 10 April 2012, , last accessed on 20 May 2018. 16 USTR, ‘TPP Chapter Summary: State-Owned Enterprises’, , last accessed on 20 May 2018. 17 Ibid. 18 Art. 17.1 of the TPP, , last accessed on 20 May 2018. 19 USTR, ‘Summary of Objectives for the NAFTA Renegotiation’, 17 July 2017, , last accessed on 20 May 2018.

State-owned enterprises in ISDS: Chinese perspective 201

15.3 The issues of SOEs in investment arbitration practice In international investment arbitration, the issue of SOEs mainly involves two parallel parts: (1) whether an SOE has standing as a claimant to bring an International Centre for Settlement of Investment Disputes (ICSID) claim and under what circumstances it could do so, and (2) under what circumstances would the alleged wrongful acts of SOEs be attributed to their government.

15.3.1 SOE as a claimant According to Article 25(1) of the ICSID Convention, to meet the jurisdiction requirement of an ICSID arbitral tribunal, two elements should be satisfied. An investment should be made in the territory of a contracting state, or jurisdiction ratione materiae. At the same time, the investor should be a national of another contracting state, or jurisdiction rational persone. In practice, the question concerning the jurisdiction rational persone is more complicated. The basic idea underlining Article 25(1) is to bridge a procedural gap to settle disputes between states and foreign investors. To grant individuals direct access to an international forum is a stunning feature of the ICSID Convention, which is helpful when addressing the uncertainties of diplomatic protection and supports the growing recognition of individuals as a subject of international law. The travaux préparatoires of the ICSID Convention reveals that the term ‘national’ in Article 25(1) is not restricted to privately owned companies, thus permitting a wholly or partially government-owned company to be a party to ICSID arbitration.20 Therefore, states acting as investors would not meet the jurisdiction rational persone requirement and would have no access to ICSID arbitration.21 In other words, an SOE intending to bring a case under the ICSID Convention has to show that it is a non-state investor. Normally, the admission of government-controlled entities as investors under the ICSID Convention must meet some criteria, varying between more structural and more functional tests.22 As pointed out by Aron Broches in 1972, In today’s world the classic distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated. There are many companies which combine capital from private and governmental sources and corporations all of whose shares are owned by the government, but who are practically indistinguishable from the completely privately owned enterprise both in their legal characteristics and in their activities. It would be seemed, therefore, that for the purposes of the Convention a mixed economy company of government-owned corporation should not be disqualified as a ‘national of another Contracting State’ unless it is acting as an agent for the government or is discharging an essentially government function.23

20 Antonia Parra, The History of ICSID (Oxford: Oxford University Press, 2012), p. 230. 21  Christoph H. Schreuer et al., The ICSID Convention: A Commentary, 2nd Edition (Cambridge: Cambridge University Press, 2009), p. 161. 22 Ibid. 23 Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’, Recueil des Cours, Vol. 136 (1972), pp. 331–410, at 354–355.

202 Sheng Zhang Given that the distinction on the basis of the sources of capital had become outdated, Broches proposed two alternative factors to distinguish public and private investment: whether an SOE is acting as an agent for the government, and whether an SOE was discharging an essentially governmental function. The criteria established by Broches are regarded as the ‘Broches test’, which has been applied by arbitral tribunals to consider whether SOEs meet the jurisdiction requirement of the ICSID Convention. Despite SOEs frequently acting as claimants in commercial arbitration, SOEs as claimants in investment arbitration are less common, which would involve more complex issues as well. A closer look at these cases demonstrates that the tribunals varied in their positions towards SOEs. In the cases of CDC v Seychelles,24 Telenor v Hungary,25 HEP v Slovenia,26 and Rumeli v Kazakhstan,27 all of the claimants hold close ties to their governments, and the tribunals confirmed that they each still qualify as a ‘national of another Contracting State’, without any further analysis. The case of CSOB v Slovakia28 is the first that examines the details of the issue of SOEs as claimants. CSOB is a commercial bank mainly owned by the Czech Republic. Slovakia contested that CSOB was controlled or owned by the Czech Republic, and that CSOB acted as a government agency which has been discharging essentially governmental functions.29 The Tribunal held that whether a company qualifies as a ‘national of another Contracting State’ does not rest on whether or not the company is partially or wholly owned by the government. Instead, the accepted test for making the determination is the ‘Broches test’.30 The analysis to determine whether CSOB exercised governmental functions should be focused on the nature but not the purpose of the activities.31 The activities in facilitating or executing international banking transactions were essentially commercial rather than governmental in nature, even though these activities were made to promote governmental policies or purposes.32 The Tribunal further held that CSOB’s activities in the process of privatization or restructuring did not differ in nature from measures a private bank might take.33 By elaborating on the jurisdictional requirement of the ICSID Convention, the decision of CSOB v Slovakia helps to advance certainty relating to the standing of SOEs, yet there is also criticism that the Tribunal failed to consider the potential relevance of an SOE’s motivations, as in this case CSOB’s activities were driven by state policies.34 Furthermore, the Tribunal considered only the essential governmental function test, but failed to sufficiently address the government agent test, which is the other limb of the ‘Broches test’,35 even though the Tribunal acknowledged that the Slovak Republic contested that CSOB is an agent of the Czech Republic. In actual fact, the two limbs of the test are disjunctive but not conjunctive,

24 CDC Group plc v Seychelles, ICSID Case No. ARB/02/14. 25 Telenor Mobile Communications AS v Hungary, ICSID Case No. ARB/04/15. 26 Hrvatska Elektroprivreda D.D. v Republic of Slovenia, ICSID Case No. ARB/05/24. 27 Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v Republic of Kazakhstan, ICSID Case No. ARB/05/16. 28 Ceskoslovenska Obchodni Banka, A.S. v The Slovak Republic, ICSID Case No. ARB/97/4. 29 Ceskoslovenska Obchodni Banka, A.S. v The Slovak Republic, ICSID Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 14 May 1999, paras. 18–19. 30 Ibid, para. 17. 31 Ibid, para. 20. 32 Ibid. 33 Ibid, paras. 22–25. 34 Ibid, para. 21. 35 Paul Blyschak, supra note 7, at 29–34.

State-owned enterprises in ISDS: Chinese perspective 203 and the test imposes two separate and distinct inquiries: it first asks whether the claimant SOE is acting as an agent for the government; it then asks whether the claimant SOE is discharging an essentially governmental function.36 The limb of acting as government agent of the ‘Broches test’ was considered in the case of Abengoa S.A. y COFIDES S.A. v Mexico.37 Abengoa S.A. and COFIDES S.A.’s investment in Mexico was made through a local company, Sistemas de Desarrollo Sustentable (SDS). COFIDES S.A. is a state enterprise owned by Spain. Mexico contested that COFIDES S.A. acted as an ‘agent’ of the Spanish government. The Tribunal held that ‘an agent is a person authorized to act and to conclude contracts, represent and act in the name of a third party’, yet in this case, COFIDES S.A. only acted in its own name. The majority of the Tribunal also noted that COFIDES S.A. was not ‘integrated within the general administration of the state and does not exercise any prerogative of a public authority’. Hence COFIDES S.A. did not act as an agent of the Spanish government.38 Given that the majority of Chinese outward FDI is made by SOEs, the issue of SOEs as claimants is crucial for Chinese investors. Two recent cases in which investors from China acted as claimants serve as good examples for us to consider. The case of BUCG v Yemen is the first ICSID arbitration case to apply the ‘Broches test’ to a Chinese SOE.39 By referring to the China-Yemen BIT, BUCG claimed that its assets and contract concerning a project for the construction of an airport terminal were unlawfully deprived. Yemen contested that the Tribunal lacked jurisdiction ratione personae, alleging that BUCG, an SOE, was both an agent of the Chinese government and discharged governmental functions.40 In support of its position, Yemen relied on various Chinese laws, government publications, and directives to demonstrate that BUCG is expected to advance China’s national interest.41 In response, BUCG contended that the ‘Broches test’ must be considered in the specific context of the investment out of which the dispute arises, and that any structural links BUCG may have with the government of the People’s Republic of China (PRC) or that the fact that it may discharge certain public functions in China has no bearing on BUCG’s standing to bring a claim under the ICSID Convention. In this case, BUCG explained that its investment in Yemen was made while acting in a commercial capacity and it did not act under the direction or control of the government.42

36 Ibid, at 34. 37 Abengoa S.A. y COFIDES S.A. v United Mexican States, ICSID Case No. ARB(AF)/09/2. 38 Filip Balcerzak and Luke Eric Peterson, ‘Newly Obtained Mexican BIT Award Reveals that Arbitrators Disagreed on Jurisdiction over State-owned Claimant; Details Emerge of Final Settlement Sum’, Investment Arbitration Reporter, 21 May 2014, , last accessed on 20 May 2018. 39 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen, ICSID Case No. ARB/14/30. 40 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017, para. 29. 41 Ibid, para. 37. 42 Ibid, para.30; Freshfields Bruckhaus Deringer LLP, ‘BUCG v Yemen Decision Clears Jurisdictional Hurdles for Investment Claims by Chinese State-owned Enterprises under the ICSID Convention’, Lexology, 7 August 2017, , last accessed on 20 May 2018.

204 Sheng Zhang The Tribunal agreed that the relevant analysis under the ‘Broches test’ is to focus on a context-specific analysis of the commercial function of the investment43 and to consider whether BUCG functioned as an agent of the Chinese government in the fact-specific context.44 The Tribunal found that the evidence did not support that BUCG was acting as an agent in building the airport terminal.45 The Tribunal further noted that ‘the corporate controls and mechanisms are not surprising in the context of PRC State-owned corporations’,46 and it took the view that Yemen’s positioning of BUCG in the broad context of the PRC’s state-controlled economy and the structural links with the PRC government was ‘largely irrelevant’.47 The Tribunal held that ‘the assertion that “the Chinese State is the ultimate decision maker” for BUCG is too remote from the facts of the Sana’a International Airport project to be relevant’.48 Accordingly, the Tribunal concluded that there was no evidence to suggest that BUCG was fulfilling Chinese government functions within the sovereign territory of the Republic of Yemen.49 Rather, BUCG participated in the airport project as a general contractor following an open tender, and its bid was selected on its commercial merits. Moreover, the Tribunal noted that according to Yemen’s case, BUCG’s contract had been terminated not for reasons associated with ‘the PRC’s decisions or policies’ but for reasons associated with BUCG’s performance of its ‘commercial services on the airport site’.50 The issue of an SOE acting as a claimant was also discussed in another case concerning Chinese investors, namely Heilongjiang v Mongolia.51 Mongolia argued that a narrow approach should be adopted when interpreting the term ‘economic entities’, which disqualified China Heilongjiang and Beijing Shougang as investors under the BIT.52 Mongolia further argued that two Chinese SOE claimants in the case did not qualify as investors under the China-Mongolia BIT as they are ‘quasi-instrumentalities of the Chinese government’.53 It also argued that another investor, Qinglong, lacked requisite ‘separateness’ from other Chinese instrumentalities.54 The Tribunal rejected these objections, finding that nothing in the treaty’s language allowed for the restrictions advanced by Mongolia, and that any entity ‘engaging in economic or business activities’ could qualify as an investor, irrespective of its form or owner. Similarly, nothing proved that the claimants had acted as ‘quasi-instrumentalities of the Chinese government’ in pursuance of its foreign policy goals.55

43 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017, para. 35. 44 Ibid, para. 39. 45 Ibid, para. 39. 46 Ibid, para. 39. 47 Ibid, para. 42. 48 Ibid, para. 43. 49 Ibid, para. 44. 50 Ibid, para. 40. 51 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, UNCITRAL, PCA Case No.2010-20. 52 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia, UNCITRAL, PCA Case No.2010-20, Award, 30 June 2017, paras. 268–269. 53 Ibid, para. 271. 54 Ibid, para. 272. 55 Damien Charlotin, ‘In-Depth: A First Look inside the Now-Surfaced Award in the Case of China Heilongjiang v Mongolia Award; Claimants Now Pursuing Set-Aside’, Investment Arbitration Reporter, 1 October 2017, , last accessed on 20 May 2018.

State-owned enterprises in ISDS: Chinese perspective 205 15.3.2 The attribution of SOEs’ alleged wrongful acts to governments The issue of SOEs in investment arbitration not only concerns their standing as claimants. SOEs’ involvement may also raise issues when foreign investors attempt to attribute alleged wrongful acts of SOEs to their governments. One established source to consider whether the conduct of a non-state actor should be attributed to a state is the International Law Commission Draft Articles on Responsibility of States for Internationally Wrongful Acts (ILC Draft Articles). Article 4, Article 5, and Article 8, in particular, are relevant. With respect to Article 8, the ILC Commentary further explains that the provisions of Article 8 are intended to apply under two circumstances where (1) a specific factual relationship exists between the person or entity engaging in the conduct and the state, and (2) the private persons or entities act on the instructions of the state in carrying out the wrongful conduct, or the private persons act under the state’s direction or control.56 In the case of EDF v Romania,57 the Tribunal needed to consider whether the acts of the two SOEs could be attributed to Romania. By applying Article 8 of the ILC Draft Articles, the Tribunal held that the two SOEs’ conduct ‘was clearly designed to achieve a particular result within the meaning of the Commentary to Article 8 of the ILC Draft Articles. As such, this conduct was attributable to Romania’.58 It is argued that given the policy objective of the ICSID Convention to protect transnational investment, the attribution rule should be loosely applied; otherwise, sovereign states would simply expropriate through SOEs acting as their agents.59 Yet the tribunal in each case should consider the facts in the specific context and make its decision on a case-by-case basis. If the treaty provision expressly addresses the issue of attribution of the conducts of SOEs, such text should prevail. In the case of AI Tamimi v Oman,60 AI Tamimi claimed that the Omani SOE Oman Mining Company LLC (OMCO) wrongfully terminated lease agreements, and that the conduct of OMCO should be attributed to Oman. AI Tamimi argued that OMCO is an organ of the Omani State by virtue of being a governmental company exercising ‘governmental authority’ under the US-Oman FTA and that OMCO acted pursuant to the directions of the Omani Ministry of Environment and Climate Affairs.61 The Tribunal noted that ‘Article 10.1.2 of the US-Oman FTA sets out a relatively narrow test for the circumstances under which the actions of a state enterprise may be attributed to the States’.62 The Tribunal held that the test under this Article ‘may be narrower in some respects than the test for State responsibility under customary international law’,63 and it constituted lex specialis that limited the circumstances under which the acts of an entity would

56 United Nation, ‘Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries 2001’ (2008), , last accessed on 20 May 2018, p. 47. 57 EDF (Services) Limited v Romania, ICSID Case No. ARB/05/13. 58 EDF (Services) Limited v Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 213. 59 Ji Li, supra note 1, at 384. 60 Adel A Hamadi Al Tamimi v Sultanate of Oman, ICSID Case No. ARB/11/33. 61 Adel A Hamadi Al Tamimi v Sultanate of Oman, ICSID Case No. ARB/11/33. Award, 3 November 2015, para. 315. 62 Ibid, para. 318. 63 Ibid, para. 320.

206 Sheng Zhang be attributed to the states.64 Its effect was to limit Oman’s responsibility for the acts of an SOE to the extent that (a) the state enterprise must act in the exercise of ‘regulatory, administrative or governmental authority’; and (b) that authority must have been delegated to it by the State.65 The Tribunal noted that the US-Oman FTA did not define the meaning of ‘regulatory, administrative or governmental authority’. The respondent submitted that such ‘requirement for attribution in the FTA closely parallels that in Article 5 of the ILC Draft Articles’.66 Thus the conduct at issue must be governmental or sovereign in nature.67 The Tribunal further noted that Article 10.1.2 refers not only to the exercise of ‘governmental’ authority but also to that of ‘regulatory’ and ‘administrative’ authority. Article 5 of the ILC Draft Articles nevertheless provides a useful guide for distinguishing sovereign from commercial acts.68 While the Tribunal did agree that the Omani Ministry of Oil and Minerals exercised ‘effective control’ over OMCO through its 99% shareholding, this finding was not relevant under the US-Oman FTA.69 Instead, following the test laid down in Article 10.1.2, the Tribunal found that OMCO had not exercised any delegated ‘regulatory, administrative or governmental authority’ in any of its dealings with the claimants, much less in its decision to terminate the lease agreement.70 Moreover, the Tribunal observed that, when terminating the leases, OMCO had relied only on its commercial rights,71 not acting, or purporting to act, in the exercise of any regulatory, administrative, or governmental authority.72 The Tribunal therefore rejected the investor’s first argument in relation to attribution. As for direction by the Omani Ministry of Environment and Climate Affairs, the Tribunal found no evidence of this, or of any ‘broader political scheme’ against the investor. Instead, the Tribunal considered that OMCO’s decision was purely commercial, driven by OMCO’s frustration with the investor’s continual non-payment offences.73 In any event, the Tribunal observed that direction by state organs was not an element of the FTA’s test for attribution.74 Based on these observations, the Tribunal concluded that OMCO’s conduct was held to be not attributable to Oman.75

64 Ibid, para. 321. 65 Ibid, para. 322. 66 Ibid, para. 323. 67 Ibid, para. 323. 68 Ibid, para. 324. 69 Ibid, para. 322. 70 Ibid, para. 325. See also, Jarrod Hepburn and Luke Eric Peterson, ‘In Rejecting Claims of U.S. Investor against Oman, Arbitrators Reckon with Free Trade Agreement’s Narrow Definition of What Constitutes a “State-Enterprise”’, Investment Arbitration Reporter, 4 November 2015, , last accessed on 20 May 2018. 71 Ibid, para. 334. 72 Ibid, para. 332. 73 Ibid, para. 338. 74 Jarrod Hepburn and Luke Eric Peterson, supra note 70. 75 Adel A Hamadi Al Tamimi v Sultanate of Oman, ICSID Case No. ARB/11/33. Award, 3 November 2015, para. 335.

State-owned enterprises in ISDS: Chinese perspective 207 It should be pointed out that when interpreting whether the alleged SOE’s wrongful acts should be attributed to the state, the ‘Broches test’ is less relevant. The ‘Broches test’ is designed to be invoked where an SOE attempts to file an investment arbitration with the ICSID tribunal and the respondent seeks to deny the standing of the SOE as an investor because of its state-owned or state-controlled nature.76 Meanwhile, most ICSID tribunals take the position that the issue of attribution is an issue of merit but not one of jurisdiction. According to Article 25(1) of the ICSID Convention, when determining jurisdiction, the tribunal mainly considers whether ‘any legal dispute arose directly out of an investment’ exists between a contracting state and a national of another contracting state. If a contracting state is named as the respondent in the arbitration under the ICSID Convention, it is sufficient for the tribunal to uphold jurisdiction ratione personae to establish that the dispute is prima facie with the respondent state.77 Some ICSID tribunals, however, have applied the prima facie test in a more general manner. The Tribunal of Amco v Indonesia, for instance, applied the test when determining whether the claim fell within its jurisdiction.78

15.4 SOEs in Chinese investment treaties Despite that fact that SOEs’ share in China’s outward FDI stock has been decreasing in recent years, outbound investment made by SOEs still accounts for more than a half of the total stock.79 If the protection of SOEs falls outside the scope of Chinese investment treaties, the investment treaties are far from effective in protecting China’s outward investment.80 Most earlier Chinese BITs adopt a broad definition of ‘investment’, covering ‘every kind of assets’ owned or controlled by the investors, following an illustrative list of examples. Although these treaties do not specifically refer to SOEs, as discussed here, a presumption in favour of the protection of SOEs should be followed. Moreover, under such a broad definition, the sources of investment and the motivation are deemed to be irrelevant.81 A more certain conclusion would be drawn if we proceed to look at the preamble of the ChinaGermany BIT (2003), which provides that the general goal is to stimulate the business initiatives of the investors and increase prosperity. Some more recent investment treaties expressly use wording that covers SOEs. Article 135 of the China-New Zealand FTA (2008) defines enterprises ‘to cover any entity constituted or otherwise organized under applicable law, whether or not for profit, and whether privately owned or governmentally owned or controlled, including any corporation, trust, partnership, sole proprietorship, joint venture, association or similar organization’. Identical or similar wording can be found in the China-ASEAN Investment Agreement (2009), the

76 Paul Blyschak, supra note 7, at 38–39. 77 Claudia Annacker, supra note 13, at 557. 78 Ibid, at 558. 79 MOFCOM, ‘2016年度中国对外直接投资统计公报’ (2016 Statistical Bulletin of China’s Outward Foreign Direct Investment), , last assessed on 20 May 2018, p. 27. 80 Wenhua Shan and Hongrui Chen, ‘China–US BIT Negotiation and the Emerging Chinese BIT 4.0?’ in Chin Leng Lim (ed.), Alternative Visions of the International Law on Foreign Investment (Cambridge: Cambridge University Press, 2016), pp. 223–254, at 250. 81 Claudia Annacker, supra note 13, at 543.

208 Sheng Zhang China-Japan-South Korea Trilateral Investment Treaty (2012), the China-Canada BIT (2012), the China-Australia FTA (2015), and the China-South Korea FTA (2015).82 A slightly different version is provided in the China-Mexico BIT (2008). Article 1 reads: […] ‘enterprise’ means any entity constituted or organized under the applicable law, whether or not for profit, and whether privately owned or governmentally owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association. This definition of ‘enterprise’ seems to only cover government-owned enterprises, but with no express reference to enterprises controlled by the government. It is noted that an enterprise’s status as ‘governmentally owned’ does not entail government control, as the standard for ‘control’ under international law is strict, and in some cases the level of ownership does not always indicate the level of control due to the complexity of the shareholding structure.83 Thus, such a definition does not resolve whether an SOE could qualify as an ‘investor’ when its investment activities are controlled by the government.84 However, the effect of this omission would be limited since such a definition is not made in an exhaustive list. Current case law also indicates that even when a BIT does not include ‘governmentally owned’ in the definition, the claimant can still argue that the treaty does not prevent SOEs from filing a claim against the host states as a qualified investor.85

15.5 The issue of SOEs in the China–EU CAI negotiations The close connection between Chinese SOEs and the Chinese government has generated increasing concerns. In recent years, there has been a surge in Chinese investment in Europe, and the EU has become one of the key destinations of Chinese outward FDI in developed economies.86 Of all Chinese investments in the EU, SOEs still account for a majority of these investments.87 It can be expected that the issue of SOEs would be one of the main obstacles to a successful conclusion of the China–EU CAI.88 In particular, when adopting the Resolution on China–EU negotiations for a BIT, the European Parliament stressed, inter alia, the need to establish a level playing field for both SOEs and private-sector companies in market access, and to include provisions on the transparency and governance of SOEs.89 This chapter recommends the following principles for dealing with the issue of SOEs in the negotiations.

82 Art. 1(f) of the China-ASEAN Investment Agreement (2009), Art. 1(10) of the China-Canada BIT (2012), Art. 9.1 of the China-Australia FTA (2015), and Art. 12.1 of the China-South Korea FTA (2015). 83 Mark Feldman, ‘State-Owned Enterprises as Claimants in International Investment Arbitration’, ICSID Review, Vol. 31 Issue 1 (2016), pp. 24–35, at 28. 84 Ibid, at 29. 85 Ibid, at 29. 86 Alicia García-Herrero and Jianwei Xu, supra note 5. 87  Thilo Hanemann and Mikko Huotari, ‘A New Record Year for Chinese Outbound Investment in Europe’, Merics and Rhodium Group, February 2016, , last accessed on 20 May 2018. 88 Alicia García-Herrero and Jianwei Xu, supra note 5. 89 European Parliament, ‘Resolution of 9 October 2013 on the EU-China Negotiations for a Bilateral Investment Agreement (2013/2674(RSP))’, 9 October 2013, , last accessed on 20 May 2018.

State-owned enterprises in ISDS: Chinese perspective 209 First, a detailed wording could be adopted to avoid ambiguities with respect to the status of SOEs. The clear and detailed wording of the treaty language would express the intentions of the contracting states and provide a clearer guideline for tribunals to use to interpret the treaties. Recent treaties have already established disciplined policies concerning SOEs, which aim to create a level playing field for SOEs and privately owned enterprises.90 In the context of the China–EU CAI negotiations, SOEs could be clearly covered in the definition of ‘investors’ or ‘enterprises’. This complies with the best practice of EU member states’ BITs, which are normally broad enough to cover SOEs. Indeed, a survey held by the European Commission reveals that a majority of member states did not see special issues linked to Chinese SOEs’ investment in the EU.91 This position would also take the economic realism of China into account, as Chinese SOEs still play a significant role at both domestic and international levels. It is not expected that China will sign a treaty that did not offer effective protection of outward investment by SOEs. Meanwhile, the future China–EU CAI could clarify under what circumstances the acts of SOEs would be attributed to the contracting states. Both the EU and China could adopt a narrower test than that in the ILC Draft Articles, similar to what the US proposed in its 2012 Model BIT, which specifies that the contracting party’s obligation shall only apply to an SOE or other person when it exercises any regulatory, administrative, or other governmental authority delegated to it by the contracting parties.92 A provision like this can prevent the host country from falling into the passive situation of being frequently challenged in ISDS. Second, following the baseline to offer SOEs BIT protection, a framework could be built concerning the transparency and governance of SOEs. A higher level of transparency requirement in management and corporate governance would be helpful to eliminate concerns that SOEs could be tools to pursue political objectives. Some soft laws already exist to address these concerns. The Santiago Principles, for instance, define the principles applicable to the governance and the institutional structure of sovereign wealth funds and to the transparency of their investment strategies. Given the close link between sovereign wealth funds and SOEs, the Santiago Principles could serve as a solid basis for both sides to enhance the transparency of SOEs’ governance structure. This is also in line with the position of the European Parliament.93 In practice, some of China’s SOEs have been actively implementing the Santiago Principles. China became a signatory party to the Santiago Principles in October 2008. The Chinese Investment Corporation, which is a sovereign wealth fund and an SOE, already voluntarily agrees to uphold the Santiago Principles.94

90 Sean Miner, ‘Commitments on State-Owned Enterprises’, in Jeffrey J. Schott and Cathleen CiminoIsaacs (eds.), Trans-Pacific Partnership: An Assessment (Washington: Peterson Institute for International Economics, 2016), pp. 335–348, at 335. 91 European Commission, ‘Summary of Contributions to the European Commission’s Public Consultation on “The Future Investment Relationship between the EU and China”’, 1 August 2011, , last accessed on 20 May 2018. 92 Article 2(2)(a) of the 2012 US Model BIT. 93 European Parliament, supra note 89. 94  Indeed, as mentioned by the Chinese Investment Corporation in its annual report, the Chinese Investment Corporation is honoured to its solemn commitment to the Santiago Principles. Chinese Investment Corporation, ‘2015 China Investment Corporation Annual Report’ (2016), , last accessed on 20 May 2018, p. 43.

210 Sheng Zhang Third, a narrowly tailored national security review system should be established. With its focus on advanced industrial assets, modern services, and real estate, China’s outward investment in Europe is facing tightened regulation. The European Commission published a legislative proposal seeking to establish a screening mechanism across the EU for foreign investment on the grounds of security or public order in 2017, which was adopted by the European parliament in March 2019 and is currently in force.95 In parallel, the European Commission initiated a detailed analysis of FDI into the EU and set up a coordination group with the member states to jointly identify strategic concerns and solutions.96 It is pointed out that such a regulation comes to a large extent as a reaction to the rise in Chinese investment in the EU.97 Although such a screening system to address national security concerns would establish a unified framework among the member states, efforts should be made to avoid such a system becoming a form of disguised protectionism. The Netherlands, Nordic countries, and Greece have already voiced their concerns as it may affect free trade.98 Concrete measures should be taken to maintain transparency and to avoid overlap between the EU and the member states on the review, as 12 member states have already established national security review systems at the domestic level.99

15.6 Conclusion When compared with those of privately owned enterprises, the activities of SOEs are conducive to the steady development of the global economy. The standing of SOEs should not be limited to a position distinct from other commercial entities when they are acting in a purely commercial manner. An SOE is entitled to bring a claim under the ICSID Convention when ICSID arbitration is available, the SOE has made a lawful investment, and the applicable BIT grants protection to foreign investment without expressly excluding SOEs. With the steady growth in China’s outward FDI, the number of disputes between China’s SOEs and the host states is expected to rise. And increasingly more Chinese enterprises are willing to refer their investment disputes to international arbitration.100

 95  Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 Establishing a Framework for the Screening of Foreign Direct Investments into the Union, OJEU, L 79 I, 21.3.2019.   96 European Commission, ‘State of the Union 2017 – Trade Package: European Commission Proposes Framework for Screening of Foreign Direct Investments’, 14 September 2017, , last accessed on 20 May 2018.   97 ‘Europe: Foreign Direct Investment under Scrutiny’, FTI Consulting, 19 September 2017, , last accessed on 20 May 2018.  98 ‘Juncker to Lay out Plans for Screening Foreign Takeovers in EU’, Financial Times, 11 September 2017, , last accessed on 20 May 2018.   99 These member states are Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom. 100  Recently, two Chinese SOEs, Chinese Railway Construction Corporation and China Railway Construction Corporation International, appeared to purse an investment arbitration against Mexico under the 2008 China-Mexico BIT. For details, see Damien Charlotin and Luke Eric Peterson, ‘BIT Dispute Involve Chinese State-Owned Investors Leads Government to Hire Lawyers’, Investment Arbitration Reporter, 4 December 2017, , last accessed on 20 May 2018.

State-owned enterprises in ISDS: Chinese perspective 211 A consensus on the SOE issue in the China–EU CAI negotiations would be helpful to eliminate concerns about China’s investment in Europe and would serve as a good template in international investment law. Meanwhile, China’s CAI negotiations with the EU will help China to develop a full-fledged SOE policy in its future BIT negotiations, which is of significance in the implementation of the Belt and Road Initiative. In fact, SOEs, in particular the central SOEs (Yang Qi), play a pivotal role in driving this initiative.101 Given that both the EU and China are significant economies in the world, the implications of the policy on SOEs will also go beyond these two economies, and the policy on SOEs will serve as a template for other countries to consider when negotiating similar treaties. It can also contribute to a more balanced regime in international investment law, as it will shed light on the issue of SOEs from a developing country’s perspective. The debate about the issue of SOEs partly reflects the divided position between Western countries and developing countries.102 A successfully concluded China–EU CAI will be helpful in bridging that gap. Further, the negotiations with the EU on SOEs will push China’s domestic SOE reform forward. Indeed, opening-up and domestic reform have been launched as an integral part of China’s policy, and these strategies mutually reinforce one another. In China, it has been an economic rationale to advance domestic reform through further opening-up. Such a rationale is reaffirmed when domestic reform steps into a ‘deep-water zone’. A well-drafted SOE clause in the BIT would facilitate domestic SOE reform and help to establish wellfunctioning and transparent governance of SOEs.

101 Zhong Nan, ‘SOEs to Take Lead Role along Belt and Road’, China Daily, 9 May 2017, , last accessed on 12 December 2018. 102 Paul Blyschak, supra note 7, at 2.

16 Protection of victims in international investment dispute resolution Juxtaposing different topics? Martijn Scheltema

16.1 Introduction Most recent international investment agreements (IIAs) and free trade agreements (FTAs) concluded by the European Union (EU) include chapters on sustainable development.1 To date, most of these chapters include obligations for the contracting states but not for investors. Thus, IIAs and FTAs have been subject to criticism because, amongst other reasons, they allegedly favour investors’ interests over human rights or environmental protection.2 This chapter evaluates whether dispute resolution in connection with IIAs and FTAs sufficiently takes the position of victims of such abuses into account.3 It not only focuses on the negotiations of an IIA between the EU and China, but also has broader relevance for other IIAs and FTAs.4 That said, this chapter assesses whether the current dispute resolution systems are equipped to adequately address victims’ interests.5 Some policy recommendations to the EU and Chinese investment agreement negotiators, which would strengthen the position of victims in investment and free trade disputes, are then given that could be implemented in the future China–EU Comprehensive Agreement on Investment (CAI).

1  Chapter 22 of the EU-Canada FTA (CETA), ; Chapter 13 of the EU-Vietnam FTA, ; and Chapter 12 of the EU-Singapore FTA, , last accessed on 27 March 2019. 2 Cf. Katharina Hausler, Karin Lukas, and Julia Planitzer, ‘Non-Judicial Remedies’, in Juan Jose Alvarez Rubio et al. (eds.), Human Rights in Business (London: Routledge, 2017), pp. 78–118, at 108; Joachim Pohl, ‘Societal Benefits and Costs of International Investment Agreements’, OECD Working Papers on International Investment 2018/01, , last accessed on 27 March 2019, pp. 1–76, at 42. 3 These abuses play a significant role in several investment disputes. For example, of the 135 arbitrations dealt with by the Permanent Court of Arbitration in the Hague in 2015 (of which 76 were investment arbitrations), 10% had a human rights component. See Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2, at 107–108. 4 Thus, it has a broader reach which may be important in connection with the current negotiations in the UNCITRAL Working Group III on reform of investor-state dispute settlement (ISDS). For these negotiations, see UNCITRAL, ‘Working Group III, 2017 to Present: Investor-State Dispute Settlement Reform’, ; see also UNCTAD, ‘UNCTAD’s Reform Package for the International Investment Regime 2018’, , last accessed on 27 March 2019, pp. 1–119, at 22 ff. 5 The term victim is used to identify an entity or person who is affected by acts or omissions of the investor in connection with an investment and has a reasonable interest in a complaint against this investor.

Protection of victims  213

16.2 Can victims defend their rights against investors? 16.2.1 Introduction Recourse of victims in the case of investors violating, for example, human rights or environmental norms in connection with investment agreements might, in theory, be conceivable in two ways.6 The host state might regulate or take other measures to terminate the abuses by the investor.7 These measures may or may not give rise to a claim in an investment dispute by the investor. The host state may also implement measures which are not aimed at terminating such abuses by the investor. The investor may equally object to these measures and instigate an investment claim. The question arises as to whether the investor is eligible for protection against these other measures not aimed at terminating the abuse by the investor. If an investor has instigated a claim in an investment arbitration, this begs the question of whether he or she is eligible for protection if he or she has violated human rights or environmental rules or even whether the host state might file a counterclaim. However, states do not often have the possibility of filing a counterclaim against the investor.8 This is not allowed, for example, under the EU-Canada Comprehensive Economic and Trade Agreement (CETA).9 This question raises multiple issues. First of all, the host state should primarily point to such abuses. However, it might be difficult, especially for developing host states, to properly defend themselves in the International Centre for Settlement of Investment Disputes (ICSID) arbitration, for example by pointing to human rights abuses by investors, because of the large number of cases; the costs associated with investment arbitration, particularly in engaging skilled counsel; and the costs of obtaining the requisite expertise.10 Furthermore, host states may be hesitant to raise such concerns as they may be collaborating with the investor in these abuses or may favour economic interests over strict human rights compliance.

  6 The UN recommends that human rights are explicitly embedded in all trade or investment agreements. UN, ‘Human Rights and Transnational Corporations and Other Business Enterprises’, A/72/162, 18 July 2017, , last accessed on 2 September 2019, pp. 1–25, at 24.   7 Furthermore, it is conceivable that the host state is not willing to take action. See for the possibilities for victims under such conditions, Axel Marx et al., ‘Dispute Settlement in the Trade and Sustainable Development Chapters of EU Trade Agreements’, Leuven Centre for Global Governance Studies (2017), pp. 1–99, at 20–22, 27, 31–33, 45, and 46. For example, Art. 23.2 CETA includes a right to regulate in compliance with international labour commitments, and Art. 24.3 CETA includes a right to regulate on environmental issues. The ability to challenge public regulation in such arbitrations may trigger the need for higher standards of transparency than those existing under the ISDS system which by and large follows the private commercial arbitration model if the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration are not applicable. These Rules are available at: . Furthermore, modes to modernize the existing body of investment agreements are currently being discussed at UNCTAD, Phase 2 of IIA Reform 9-11 October 2017, the proposal is available at: , last accessed on 27 March 2019, pp. 98–154, at 131 ff.  8  Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, Arbitrating the Conduct of International Investors (Cambridge: Cambridge University Press, 2018), pp. 15–16; Kevin Crow and Lina Lorenzoni Escobar, ‘International Corporate Standards, Human Rights, and the Urbaser Standard’, Transnationalen Wirtschaftrecht, Heft 144 (2017), , last accessed on 27 March 2019, pp. 1–31, at 5.   9 Art. 8.40 of CETA. 10 Huaqun Zeng, ‘Balance, Sustainable Development, and Integration: Innovative Path for BIT Practice’, Journal of International Economic Law, Vol. 17 Issue 2 (2014), pp. 299–332, at 317, 321, and 322. Cf. Joachim Pohl, supra note 2, at 45.

214 Martijn Scheltema In practice, arbitral tribunals have chosen a jurisdictional and substantive approach to address these issues. Both will be described below. However, it should be noted that this type of decision is scarce. Substantive human rights such as indigenous people’s rights or water rights are rarely referred to by tribunals.11 Arbitral tribunals generally rule that they have no jurisdiction over purely human rights claims, but they sometimes incorporate human rights considerations in their decision on expropriation, in the scope of defining property rights and proportionality, especially if these are invoked by investors.12 This reluctance also exists in connection with environmental standards, which are sometimes mentioned by arbitrators but do not seem to be of great significance for the decision in most cases.13 This has led to criticism, and better alignment with the public interest and human rights and environmental norms has been proposed.14

16.2.2 Jurisdictional approach If a tribunal refers to these norms, this is sometimes connected to jurisdiction. Tribunals only assume jurisdiction when a lawful, ‘good faith’, or bona fide investment is made, provided that an IIA or an FTA includes such requirements.15 Other investment agreements restrict the scope of the subject-matter for investment arbitration or include a more precise definition of investment, which might also exclude protection in the case of human rights abuses.16 In such cases, a tribunal will not hear investors’ claims if the establishment of the investment caused abuses of national or international laws, for example by violating human rights, and might even require a certain human rights due diligence or impact assessment in order to consider the investment as bona fide.17 However, the latter is still highly contested.18 If the human rights abuse is contrary to national or international law or renders the investment not bona fide, a tribunal might consider that these investments fall outside the jurisdiction of investor-state arbitration, but such an allegation has to be made and proven by the host state.19 An example of an investment not made in accordance with national law is the Metal-Tech v Uzbekistan case, which dealt with bribery and not with human rights as such, but might well serve as an example.20 The Tribunal held that parties to the treaty may limit

11 Vivian Kube and Ernst-Ulrich Petersmann, ‘Human Rights Law in International Investment Arbitration’, EUI Working Paper Law 2016/02 (2016), at 2 and 19. See, for an example, Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Bizkaia Ur Partzuergoa v The Argentine Republic, ICSID Case No. ARB/07/26, Final Award, 8 December 2016. 12 Border Timbers Limited et al. v Republic of Zimbabwe, ICSID Case No. ARB/10/25; Bernhard von Pezold et al. v Republic of Zimbabwe, ICSID Case No. ARB/10/15. See also Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 7; Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 5, 9, and 18. 13 Metaclad Corporation v The United Mexican States, ICSID Case No. ARB(AF)/97/1. See also Gabriel Bottini and Martijn Scheltema, ‘Future Outlook: Bridging Gaps between Environment and Investment Law’, in Yulia Levashova et al. (eds.), Bridging the Gap between International Investment Law and the Environment (The Hague: Eleven, 2016), pp. 467–482, at 477. 14 OECD Watch, ‘Submission to the OECD Investment Committee Consultations with Stakeholders’, 17 March 2015, , last accessed on 27 March 2019, pp. 1–4, at 1–2. It proposes not only embedding investment liberalization but also human rights, environmental, and sustainability norms. Cf. Joachim Pohl, supra note 2, at 42. 15 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 10. 16 Cf. Liang-Ying Tan and Amal Bouchenaki, ‘Limiting Investor Access to Investment Arbitration – A Solution without a Problem?’ Transnational Dispute Management, Issue 1 (2014), , last accessed on 27 March 2019, pp. 1–54, at 17–19. 17 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 25. 18 Ibid, at 20, 22 and 23; OECD Watch, supra note 14, at 4. 19 Ibid, at 20. 20 Metal-Tech Ltd. v The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013.

Protection of victims  215 investor protection to investments made in accordance with national laws.21 The Tribunal further held that corruption laws fall within the requirement ‘in accordance with national laws’ at the time the investment was initially made.22 In this case, the bribes were made in the form of payments for ambiguous services rendered under contracts with ‘consultants’ who lacked the relevant qualifications but had significant connections with the government.23 These payments were considered unlawful under Uzbek law, and therefore the investment was deemed to be made in abuse of national Uzbek law.24 The consequence was that the Tribunal decided it had no jurisdiction.25 Another example of an investment considered to have violated international laws also connected to bribery is World Duty Free v Kenya.26 The payments made to the president of Kenya were not disputed by the investor and thus were held to be confirmed by the Tribunal.27 These payments were deemed to constitute a bribe which was legally imputed to the investor.28 Although corruption was considered to be widespread in Kenya, the Tribunal held this to be no excuse for bribery and contrary to transnational public policy.29 Therefore, the Tribunal held that claims based on contracts obtained by corruption could not be upheld and the contract could be voided.30 Although the Tribunal considered this to be harsh on the investor as the president of Kenya solicited the bribe, the Tribunal decided that public policy does not protect the host state as such but society at large.31 Thus, the investment was not considered to be made bona fide and therefore was not protected under the investment agreement. However, the foregoing is mainly considered to be relevant if the investor violated human rights at the time the investment was made. Subsequent human rights abuses, for example in the course of the operation of the project, cannot be addressed under these clauses in IIAs or FTAs.32

16.2.3 Substantive approach The second approach implemented by tribunals is a substantive approach, occasionally connected to fair and equitable treatment clauses. Sometimes, human rights law will even be a direct part of the law applicable to the dispute.33 For example, it may be included in concessions or contracts with the host state. However, the applicable human rights norms vary

21 Ibid, para. 127. The investor could not rely on the most-favoured-nation clause as it does not extend to the definition of investment, see ibid, paras. 144–163. See also Xian Yu Huang and David Chi Yu Cheng, ‘Protection of International Investment – The Study of Establishing Appellate Mechanisms in International Investment Arbitration’, International Review of Management and Business Research, Vol. 3 Issue 4 (2014), pp. 1819–1827, at 1822. 22 Ibid, paras. 165 and 193. 23 Ibid, paras. 218, 221, 225, and 226. 24 Ibid, paras. 282–374. 25 Ibid, para. 374. 26 World Duty Free v The Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006. 27 Ibid, para. 132. 28 Ibid, paras. 136, 167, and 168. 29 Ibid, para. 156. 30 Ibid, paras. 157, 179, and 188. The Tribunal held that the bribe is not severable from the contract, see ibid, para. 174. 31 Ibid, para. 181. 32 However, some contend that this requirement might also relate to subsequent abuses. See Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 21–22. 33 Some suggest that it should limit Fair and Equitable Treatment as included in many international investment agreements. Yulia Levashova and Tineke Lambooy, ‘Proposal for Reforming the Fair and Equitable Treatment (FET) Standard in International Investment Agreements’, , last accessed on 27 March 2019.

216 Martijn Scheltema widely.34 An investor’s misconduct is also taken into account by some tribunals in calculating damages.35 However, any coherence or systematic methodology in the drafting of IIAs or FTAs in connection with the human rights performance of the investor is lacking.36 This makes it rather difficult for tribunals to implement any coherent human rights considerations in their decisions on this topic. Moreover, investment law is sometimes not even deemed to protect against abuses of the most fundamental rights, for example, protection against torture or human trafficking.37 This may be less so in connection with FTAs, whereas market access is not intended to increase or facilitate human rights or environmental abuses.

16.2.4 Investor obligations under international law? If human rights or environmental abuses by companies are considered by tribunals either in connection with jurisdiction or with substantive norms, this begs the question of whether companies have obligations under international law. This question is especially relevant if IIAs do not include provisions on labour, environmental, and human rights obligations of investors in the operative text.38 By and large this is true for older IIAs.39 In Urbaser v Argentina, the Tribunal acknowledged the existence of obligations for investors in connection with a counterclaim of a host state based on a human rights abuse by an investor.40 The award addressed the relationship between the right to water and the applicable IIA.41 Argentina privatized its drinking water and sewage services in the 1990s. After the Argentinian financial crisis in the early 2000s, Argentina froze tariffs in a manner that many companies that had invested in the water and sewage business considered expropriatory. Thus, several of these companies, amongst them Urbaser, instigated investment arbitration at the ICSID.42 Argentina filed a counterclaim, alleging that Urbaser and CABB’s failure to invest in the expansion of the drinking water (and sewage) services violated the human right to water.43 The Tribunal held that the investment agreement should be interpreted in harmony with other rules of international law, including human rights.44 It pointed out that if an investor claims protection under international law, it should also accept being subject

34 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 21. 35  Ibid, at 23 and 26. See also Art. 23 of the Dutch Model BIT 2018. Furthermore, Art. 8.39(3) of CETA entails the option to reduce damages if the property is returned or the burdensome legal regime is changed. 36 Ibid, at 27. 37 Ibid, at 19. 38 Cf. Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2, at 112; Joachim Pohl, supra note 2, at 38–39. 39 Based on the empirical research undertaken by UNCTAD, the number of more recent treaties that have incorporated the corporate social responsibility (CSR) provisions is growing; out of 1,958 agreements, 249 refer to CSR either in provisions or in the preamble. UNCTAD, ‘IIA Mapping Project 2016’, , last accessed on 27 March 2019. 40 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Bizkaia Ur Partzuergoa v The Argentine Republic, ICSID Case No. ARB/07/26, Final Award, 8 December 2016. See also on this case Kevin Crow and Lina Lorenzoni Escobar, supra note 8; OECD Watch, supra note 14. 41 The Argentina-Spain BIT (1991). 42 Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 8–9. 43 Ibid. 44 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Bizkaia Ur Partzuergoa v The Argentine Republic, ICSID Case No. ARB/07/26, Final Award, 8 December 2016, paras. 1194 and 1200.

Protection of victims  217 to international law. The Tribunal, in this context, distinguished between obligations not to act contrary to human rights and obligations not to act in ways prohibited by peremptory norms, and it ruled that both underpin obligations of corporations in treaties or in international law.46 That said, the Tribunal found no positive duty of the corporation, but only a negative duty not to violate the right to water and sanitation.47 Thus, an investor may not perform its contractual obligations in such a manner that it interferes with the positive obligations of the host state to protect human rights.48 However, this is case-specific.49 Moreover, the Tribunal did not accept an actual obligation of the investor. 45

16.2.5 Do victims play a role? As described above, the host state would be the primary party to address abuses by investors, especially if no strong civil society is present. Strong civil society organizations are often indispensable to making victims’ voices heard. Some IIAs allow third parties to intervene as amicus curiae.50 However, most IIAs restrict this option.51 For example, Article 37 of the ICSID rules allows submissions by non-disputing parties at the discretion of the tribunal, after having consulted the disputing parties, if this would assist the tribunal in its decision, if this would address a matter within the scope of the dispute, if the non-disputing party has a significant interest in the proceeding, and if the submission does not disrupt the proceedings or unduly burden or unfairly prejudice either party.52 Therefore, acceptance of amicus curiae briefs by arbitrators under the ICSID rules is mainly based on the public interest of the matter, the assumption that the perspectives as well as expertise of the third parties are expected to assist the tribunal in its decision-making, and the presumption that these submissions are likely to increase transparency and legitimacy.53 In order to enable third parties to intervene, the transparency of the dispute settlement is important.54 The United

45 Ibid, para. 1195. This is also recommended by the United Nations (UN), see UN, supra note 6, at 24. See also Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 13–15. 46 Ibid, paras. 1210 and 1215. See also Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 15–17. 47 Ibid, paras. 1207 and 1210. However, the Tribunal ruled that no activity generally prohibited by international law (whether or not ius cogens) was at stake in this case. See also Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 19. 48 Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 20–21. 49 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Bizkaia Ur Partzuergoa v The Argentine Republic, ICSID Case No. ARB/07/26, Final Award, 8 December 2016, para. 1195. See Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 23–25 for the CSR policies implemented by Urbaser at the time, which entailed a reference to human rights (and thus international law). 50 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 14. The UN recommends that victims should also have access to effective remedies through investment agreements. See UN, supra note 6, at 15 and 17. 51 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 15. 52 ICSID, ‘ICSID Convention, Regulation and Rules, Chapter IV Written and Oral Procedures’, , last accessed on 27 March 2019. See also Arts. 32(2) and 48(4) of ICSID Rules and Art. 34 of the Permanent Court of Arbitration (PCA) Rules 2012. 53 Cf. Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 15–16. 54 Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2, at 112. See also the UNCITRAL Transparency Rules 2014, , last accessed on 27 March 2019, although Art. 7 acknowledges some exemptions to this transparency. See also UNCTAD, supra note 4, at 50.

218 Martijn Scheltema Nations Commission on International Trade Law (UNCITRAL) developed a model, the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration 2014, which is applicable if an investment treaty refers to the UNCITRAL Arbitration Rules and was concluded after 1 April 2014.55 These Rules incorporate a third-party involvement in Article 4 and entail broader transparency options.56 The UNCITRAL Rules include a discretionary power of the tribunal to allow third-party submissions and disclosure requirements that third parties have to meet in order to be allowed to file a submission.57 Furthermore, the US Bipartisan Trade Promotion Authority Act (Provision 19 USC §3802(b)(3)(F)(G) and (H)) implements requirements on arbitral mechanisms in US investment disputes. Under (H) of this provision, amongst others, a mechanism for acceptance of amicus curiae submissions from businesses, unions, and non-governmental organisations (NGOs) needs to be established.58 That said, third-party submissions are not always allowed, for example, if their informal land rights are considered too fragile.59 However, most IIAs and FTAs only allow third-party submissions if third parties do not engage in proceedings in domestic courts.60 This is an important restriction, as one should realize that the third-party submission option does not allow third parties to file any claims for reparation or an injunction in the investment arbitration, but are predominantly a feature to increase the functionality of the tribunal.61 This is reflected by the UNCITRAL Rules on Transparency, which include the possibility of third-party submissions and the possibility for third parties to receive documents, but exclude the possibility for third parties to file claims against the investor based on environmental or human rights abuses.62 The possibility of receiving documents, for example, impact assessments or technical information exchanged by the host state and the investor, is an advantage vis-à-vis litigation in national courts. After all, victims have to gather evidence and documents themselves to substantiate a claim in national courts. Furthermore, withholding protection of the investor may have a forward-looking effect for victims if this ends the abuses. However, such interventions by third parties are considered very expensive because external counsel has to be engaged. Beyond that, it is often difficult for third parties to gather evidence on the human rights or environmental abuses by the investor or a contractor or subsidiary involved in these abuses and to gain access to relevant information or expertise if this is

55 For example, Art. 8.36(5) of CETA and Art. 3.16 of the EU-Singapore Investment Protection Agreement (IPA) incorporate the UNCITRAL Rules on Transparency. Furthermore, becoming signatory to the Mauritius Convention (which came into force on 18 October 2017) makes states accept the applicability of these UNCITRAL Rules to investment disputes arising out of existing international investment agreements (concluded before 1 April 2014). See e.g. Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2, at 112. 56 In connection with this, Art. 8.36 CETA and Art. 3.16 of the EU-Singapore IPA declare hearings open to the public, and Art. 8.38 CETA stipulates that the non-disputing party receives relevant documents and submissions. 57 See Arts. 4 and 5 of the UNCITRAL Rules. In connection with this, Art. 8.26 of CETA and Art. 3.8 of the EU-Singapore IPA allow third-party funding, for example. 58 Huiping Chen, ‘The Investor-State Dispute Settlement Mechanism: Where to Go in the 21st Century?’ Journal of World Investment & Trade, Vol. 9 Issue 6 (2008), pp. 467–496, at 484. 59 Border Timbers Limited et al. v Republic of Zimbabwe, ICSID Case No. ARB/10/25; Bernhard von Pezold et al. v Republic of Zimbabwe, ICSID Case No. ARB/10/15. 60 Axel Marx et al., supra note 7, at 44. 61 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 16. 62 Axel Marx et al., supra note 7, at 44.

Protection of victims  219 not submitted by any of the parties in the investment arbitration.63 Furthermore, the cost of arbitration can be an issue.64

16.3 Options to implement human rights and environmental considerations in investment disputes As is clear from this discussion, the position of victims in investment arbitrations could be improved, to say the least.65 Different innovative avenues for improving the position of victims, either substantively or procedurally, are explored below. They may add up to the current options, such as third-party submissions and transparency in investment arbitrations.

16.3.1 Implementing obligations for investors Governments may decide to implement corporate social responsibility (CSR) considerations in protection chapters in IIAs or FTAs in order to strengthen the notion mentioned here of the obligations of companies under international law because of their CSR/business humanrights strategies. Thus, voluntary adherence to the Organisation for Economic Co-operation and Development (OECD) Guidelines or other CSR standards by investors is encouraged in several IIAs.66 For example, Article 7(2 and 3) of the Dutch Model Bilateral Investment Treaty (BIT) 2018 urges contracting states to reaffirm the human rights due diligence obligations of investors under the OECD Guidelines as well as the United Nations Guiding Principles on Business and Human Rights (UNGP), and Article 7(4) reaffirms the liability of investors in case of human rights abuses.67 Thus, these CSR/business human rights standards may fill in the obligations of the investor, for example, if human rights are referred to in

63 Cf. on the issue of acquiring evidence, see Cees van Dam and Filip Gregor, ‘Corporate Responsibility to Respect Human Rights vis-à-vis Legal Duty of Care’, in Juan José Álvarez Rubio and Katerina Yiannibas (eds.), Human Rights in Business: Removal of Barriers to Access to Justice in the European Union (London: Routledge, 2017), pp. 119–138. Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2. 64 A financial assistance fund might be an option. Cf. on (adaptation of) the PCA Financial Assistance Fund for developing states, Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2, at 110. See for the rules governing this fund, PCA Financial Assistance Fund for Settlement of International Disputes, Terms of Reference and Guidelines, , last accessed on 28 March 2019. Although Art. 8.39(5) CETA implements the ‘loser pays’ principle, this will not be of assistance to the victims as they are not a party to the dispute. 65 See for suggestions for improvement, UNCTAD, supra note 4, at 49–59. Besides the options given here, UNCTAD also suggests referring some sensitive cases to state–state dispute resolution. See UNCTAD, supra note 4, at 56–58. 66 See e.g. Art. 31 of the Norway Model BIT and cf. Benin-Canada BIT (2013), Cameroon-Canada BIT (2014), Canada-Mali BIT (2014), and Colombia-France BIT (2014). See also UNCTAD, supra note 4, at 66–67; Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 130. A session at the UN Forum on Business and Human Rights 2018 discussed improvements to investment agreements to enhance human rights compliance by business. In this session, several suggestions for improvements were made. See UN, ‘IIAs and Human Rights’, , last accessed on 28 March 2019. 67  Dutch Model BIT (2018), , last accessed on 28 March 2019.

220 Martijn Scheltema a policy of the company.68 The implementation of and compliance with the CSR policy can also be made a requirement for protection or influence damages awarded to the investor.69 However, many of these CSR policies have to become more specific in order to fulfil that function.70 Non-compliance with such policies is often difficult to assess, and thus more specific standards might be required, especially if they are enforced by third parties.71 Private voluntary sustainability standards (VSS) may perform better, although many of these also need to become more specific and enforceable. If VSS are applicable, third parties may complain about non-compliance; and if this is observed, sanctions may be imposed by the VSS owner, such as the withdrawal of a certificate.72 If the certificate is withdrawn, the investor does not benefit from protection under the protection chapter of the IIA or FTA. However, the inclusion of VSS might raise concerns because some disadvantages of certification, such as high costs and de facto trade barriers.73 Furthermore, the effectiveness of VSS has been questioned, and issues might arise in connection with state sovereignty to regulate.74 The Morocco-Nigeria BIT is an example of a BIT which implements obligations for investors, for example, in Article 14, the obligation to conduct a pre-investment environmental and social impact assessment and to implement the precautionary principle.75 Furthermore, pursuant to Article 18, an investor has to maintain an ISO 14001 compliant environmental management system, must respect human and labour rights, and may not operate the investment in a manner that circumvents international environmental, human rights, and labour obligations to which the contracting parties are signatory.76 Beyond this, pursuant to Article 19, the investor has to uphold internationally or nationally accepted corporate governance standards and maintain local community liaison processes in accordance with internationally accepted standards.77 If such internationally accepted standards are lacking, the Joint Committee of the contracting parties may establish such standards pursuant to Article 19(4). Beyond that, Article 21 implements an obligation for investors to provide information to the host state, which information may be shared with the community where the investment is located, except for confidential business information. Taking it a step further, Myanmar adopted workers’ rights, human rights, and environmental obligations for investors in Articles 51, 65, and 71 of its investment law and also introduced a grievance mechanism in Article 82 operated by its Investment Commission (as mentioned in Article 6), which seems to allow victims to submit claims against an investor.78

68 Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 22, 23, 25 and 26. See also UNCTAD, supra note 4, at 66–67. 69 Cf. Gabriel Bottini and Martijn Scheltema, supra note 13, at 473–475. See, in connection with damages, Art. 23 of the Dutch Model BIT (2018). 70 Cf. Axel Marx et al., supra note 7, at 85, in connection with Voluntary Sustainability Standards. 71 Cf. Joachim Pohl, supra note 2, at 38–39. 72 Axel Marx et al., supra note 7, at 85–86. 73 Ibid, at 86; Martijn Scheltema, ‘Assessing Effectiveness of International Private Regulation in the CSR Arena’, Richmond Journal of Global Law & Business, Vol. 13, Issue 2 (2014), pp. 263–375, at 324. 74 Axel Marx et al., supra note 7, at 86–87; Martijn Scheltema, ibid, at 263 ff. 75 Morocco-Nigeria BIT (2016). This BIT is signed but not yet in force. 76 Cf. Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 140. 77 See also Art. 24 of Morocco-Nigeria BIT (2016). 78 According to Arts. 4 and 67 of the law, it applies to existing and future investments. Pursuant to Arts. 25 and 74–78, the Investment Commission has governmental powers including in connection with permits granted to the investor. See Myanmar Investment Law, 18 October 2016, , last accessed on 28 March 2019. 79 Cf. Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 123–125 and 127–147; Kevin Crow and Lina Lorenzoni Escobar, supra note 8, at 26; Axel Marx et al., supra note 7, at 90. 80 Art. 15 of the Brazil-Chile BIT (2015), Art. 9 of the Brazil-Malawi BIT (2015), and Art. 13 of the BrazilMexico BIT (2015). See also Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 130. 81 Art. 15.1 of the Southern African Development Community Model BIT (2012). See Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 131. 82 Cf. Axel Marx et al., supra note 7, at 16 and 66. 83 Ibid, at 87. 84 Ibid, at 87. 85 Ibid, at 87–88.

222 Martijn Scheltema local options fail.86 Victims often have the possibility of intervening in local proceedings. However, such local proceedings provide a viable avenue to investors and victims only if the host state is unable to invoke state immunity. Furthermore, whether domestic remedies have to be exhausted, or attempted during a certain period of time before investment arbitration may be instigated, varies widely in IIAs and is not always considered to be a solution or part of international customary law.87 It may not be beneficial to victims to use such a national avenue, not only because it may generate additional costs, but also because the victims’ avenues for gathering evidence against the investor may not be easily accessible, as well as because of a justified lack of trust in the national court system. Beyond this, enforcement against the investor of judgments of local courts outside the host country is a challenge.88 Furthermore, if proceedings were instigated against the investor in the home country, it is questionable whether the reach of the courts in the home country would be sufficient to adjudicate such a claim.89 Moreover, enforcement may be difficult against the investor, especially if the investor filed a counterclaim.90 A more radical option might be to dispose of investment arbitration altogether and leave investment disputes to national courts.91 The United States (US) and Australia have done so in their investment treaty because of the unique and longstanding economic ties and shared legal traditions and sophisticated domestic legal systems that provide adequate scope for investors and allow investors to seek local remedies.92 This might strengthen the position of those communities or workers affected, as it might be easier to intervene in local proceedings at a lower cost, especially in countries such as the US and Australia, which have a well developed court system. However, this may not hold for all countries, and this solution might therefore not be very helpful there. Therefore, proceedings in national courts may not always be beneficial to victims. Another interesting option was adopted in the Morocco-Nigeria BIT. As has been described here, this BIT implements several obligations for investors. If the investor does not meet these obligations, it may pursuant to Article 20 be sued in its home state, provided the non-compliance has resulted in significant damage, personal injury, or loss of life. Although this option may provide for jurisdiction of the courts in the home state of the investor, it is questionable whether provisions in the BIT are sufficient. The BIT may not have a direct effect in a national legal order. Usually it does not because it is primarily designed as an agreement between two states and provides for investor protection. By and large, it has no direct regulatory effect in the legal systems of the contracting parties. Although it seems advisable to implement investor

86 See also UNCTAD, supra note 4, at 51–52. 87 Liang-Ying Tan and Amal Bouchenaki, supra note 16, at 20, 21, 36, 37, 40, 41, and 42. 88 Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 8 and 13. 89 Ibid, at 8–9. 90 Ibid, at 10. 91 UNCTAD, supra note 4, at 58–59; Daria Davitti, Kathryn Greenman, and Ntina Tzouvala, ‘Designing a Human Rights-Compatible International Investment Agreement’, UN Forum on Business and Human Rights, , last accessed on 28 March 2019, pp. 1–5, at 3. Some suggest abandoning arbitration only if a claim implicates a decision on human rights of third parties. See Tara Van Ho, Anil Yilmaz Vastardis, and Luis Felipe Yanes, ‘Proposed Investment Treaty Provisions 2018’, Essex Business & Human Rights Project, , last accessed on 28 March 2019. 92 Huiping Chen, supra note 58, at 493–494. OECD Watch proposes this option for all countries with a mature legal system. See OECD Watch, supra note 14.

Protection of victims  223 obligations in IIAs, as is described below, dispute resolution mechanisms in local courts of the home state may be rather ineffective as those mechanisms are not paired with investor protection implemented in the IIA or the FTA. In connection with investor protection, these obligations may be applied if they are considered to be a requirement for protection. However, that does not seem to be the case in the Morocco-Nigeria BIT. Thus, local courts in the home state will not have the jurisdiction and power to establish liability as long as it is not clear whether the BIT has direct effect in the legal order of this home state.

16.3.2.2 Dialogue-based solutions Some IIAs require an investor to attempt to negotiate or consult with the host state during a certain period of time before investment arbitration is possible, although not all IIAs consider this to be a real solution, and to date this has not often been used as a preliminary stage to investment arbitration.93 For example, Article 8.20 CETA recognizes mediation as a means to resolve issues.94 Such a clause might also pertain to other affected parties in addition to the host state. Therefore, this might be a way in which the interests of victims, either the communities or workers affected, could also be taken into account. That said, such mediations require additional skills from mediators in order to be able to take the victims’ interests meaningfully into account and to reconcile diverging interests in the dialogue. Moreover, if the dialogue or mediation fails, the investor will still be granted investor protection under the IIA as considered fit by the arbitral tribunal.

16.3.2.3 Appeal Another option to address inconsistency is the introduction of appeal in investment disputes. This topic is discussed in depth in Chapter 7 of this edited volume.

16.3.2.4 International investment court An international investment court may address in particular the issue of independence of arbitrators in the current system of investment arbitration.95 This topic is discussed in depth in Chapter 6 of this edited volume.

93 Liang-Ying Tan and Amal Bouchenaki, supra note 16, at 37, 41, and 42. See also UNCTAD, supra note 4, at 54–55. 94 See also Art. 3.4 of the EU-Singapore IPA and Art. 17 of the Dutch Model BIT 2018. Furthermore, see Annex 29-C of CETA. 95 The ICSID rate was USD 3,000 per day in 2013. See Diana Rosert, ‘The Stakes Are High: A Review of the Financial Cost of Investment Treaty Arbitrations’, IISD, July 2014, , last accessed on 28 March 2019, pp. 1–26, at 10. To decrease the financial dependency on appointments in new cases, Art. 8.27(12) CETA includes a retainer fee which might, according to Art. 8.27(15), be transformed into a regular salary if appropriate. See UNCTAD, supra note 4, at 50; Katharina Hausler, Karin Lukas, and Julia Planitzer, supra note 2, at 109. Furthermore, see Art. 20 Section 5 Dutch Model BIT (2018).

224 Martijn Scheltema 16.3.2.5 Fundamental reform of investment arbitration A proposal has been made to fundamentally reform investment arbitration in order to adapt it to claims of victims arising out of investments. It envisages four models: (1) direct claims of affected nationals against investors or agencies of the home state, (2) assignment of claims by affected nationals to the host state, (3) affected nationals representing the host state, and (4) a combination of (2) and (3).96 Although fundamental reform may be preferable in the long term, it does not seem feasible in the China–EU CAI as it is remote from current approaches. Moreover, it is questionable whether the advantages of the proposed models would materialize in practice. For example, in several disputes between investors and the communities or individuals affected, the host states are unwilling or unable to intervene, for example, because they favour economic development over the interests of the communities or individuals or fear the high cost of investment arbitration. The costs of engaging in investment arbitration as a representative of the host state may also be problematic for the communities or individuals affected. Beyond that, it is questionable whether they will trust such a mechanism and would be able to engage and pay for sufficient expertise to support their claim. In particular, if the investor does not file a claim, those communities or individuals affected would have to substantiate their claims because no evidence has been submitted by the investor, unlike the situation already mentioned here whereby the investor filed its own claim. In addition, jurisprudence should be developed to assess which victims would have a sufficient interest to have standing. It may also be questionable whether it would be possible to alter existing IIAs in order to make investors accept these new model or models for arbitration by host state nationals if their investment was made prior to the alteration.97 Also, if claims of host state nationals are assigned to the host state and are successful, the funds awarded may not always be paid in full to the nationals affected. One may also feel that withholding protection may be a more compelling threat for an investor than the chances of having to pay damages to host state nationals. Thus, the proposed models may not be the right avenue, at least not for the current negotiations. Furthermore, some issues inherent to these models may make it preferable to connect disputes between investors and host state nationals with investor protection and to settle them through other binding means better suited than investment arbitration to tackle the issues mentioned here.98

16.4 Recommendations It has become clear the current position of victims of human rights or environmental abuses by investors under IIAs or FTAs may be improved, to say the least. One reason for this is that ISDS and, more generally speaking, current investment arbitration systems include limited

96 Jose Daniel Amado, Jackson Shaw Kern, and Martin Doe Rodriguez, supra note 8, at 42, 43, 55, 56, 66, and 67. 97 Ibid, at 91 and 93. 98  See for example, IRBC Agreements, Agreement on Sustainable Garment and Textile, Section 1.3, ; for the procedural rules, see IRBC Agreements, Rules of Procedure of the Complaints and Dispute Mechanism of the Agreement Sustainable Garment and Textile, , last accessed on 28 March 2019.

Protection of victims  225 means to address human rights and environmental abuses by investors, although they obviously include property rights and procedural fairness rules.99 That said, one could question whether IIAs should pave the way to address this issue. It can be held that investors relying on the protection of international law should accept obligations under international law in order to acquire protection, amongst other things, in connection with human rights and environmental standards. Furthermore, especially in countries that do not have a strong civil society, protection of victims against investors may become illusory if the host state does not protect the victims’ interests, for example, in investment arbitration instigated by the investor. Either civil society organizations or the host state is required to enable victims to voice their concerns in the majority of cases. Therefore, in terms of policy advice to the negotiators of the China–EU CAI in connection with the ISDS mechanism, this chapter recommends improving the position of victims in the following manner. First of all, the agreement should make clear that investors have obligations under international law. This may be achieved by requiring compliance with the OECD Guidelines for Multinational Enterprises and underlying sectoral guidance, paired to a form of information-sharing with the host state about performance, in order to be eligible for protection under the IIA.100 An interesting example, although it does not explicitly refer to the OECD Guidelines, is the Morocco-Nigeria BIT, which, as has been discussed, implements several investor obligations. Obviously, withholding investor protection should be proportionate to the abuse of human rights or environmental standards. To enhance the possibilities for victims or civil society organizations representing them to raise their concerns, this requirement should be paired to the obligation of the investor to engage with NCPs if complaints are filed, and to implement either an agreement reached in the NCP process or the recommendations made by the NCP.101 However, not all investors will have a seat in an OECD country. For those investors, the agreement should at least include a mediation/dialogue option which allows for victim engagement. That said, it would be better if both parties to the agreement implement the NCP function. Furthermore, implementing obligations for investors allows and even obliges the tribunal in investment arbitration to take these obligations into account. Moreover, these obligations emphasize that the host state has a right to regulate or implement measures to counter human rights or environmental abuses by investors. In order to facilitate the engagement of victims in investment arbitrations, for example, to point to non-observance of the OECD Guidelines, the following procedural adaptations could be of assistance. First of all, victims should be allowed to voice their concerns in investment arbitration as third-party interveners. This also requires sufficient transparency. Thus, the UNCITRAL Rules on Transparency 2014 should be adopted in the agreement. Beyond that, one could, as has been done in CETA, limit the interpretative power of arbitrators by allowing the parties to the agreement to issue a joint statement on interpretation to be followed in future cases.

99 Vivian Kube and Ernst-Ulrich Petersmann, supra note 11, at 28. 100 China adheres to the OECD. 101  Cf. Alessandra Arcuri, ‘The Great Asymmetry and The Rule of Law in International Investment Arbitration’, in Lisa Sachs, Lise Johnson, and Jesse Coleman (eds.), Yearbook on International Investment Law and Policy 2018 (Oxford: Oxford University Press, forthcoming 2019), , last accessed on 28 March 2019.

226 Martijn Scheltema

16.5 Conclusion This chapter has discussed whether the current ISDS mechanisms are equipped to adequately address victims’ interests in connection with human rights or environmental abuses by investors, and whether there is a need to adapt these mechanisms or even to develop new mechanisms. The discussion in this chapter has shown that it should be made explicit that, in order for investors to be eligible for investor protection, investors have obligations under international human rights, labour, and environmental law and have to comply with those norms, including after the investment has been made. As has been recommended to the EU and Chinese policymakers currently negotiating the China–EU CAI, this could be achieved by requiring compliance with the OECD Guidelines in order to be eligible for protection under an investment agreement, as well as by accepting the jurisdiction of the NCP mechanism and its decision if complaints are filed in connection with the project to which the investment dispute relates. Furthermore, some procedural adaptations are proposed, namely the possibility of third-party submissions, transparency, and limitation of the interpretative powers of the tribunal.

17 A comprehensive chapter on anticorruption in the China–EU CAI A progressive or an unnecessary step? Yueming Yan

17.1 Introduction While the need to combat corruption is undisputed in all states, the approaches to addressing corruption in investor-state dispute settlement (ISDS) and in the making of an international investment agreement (IIA) have always been controversial. Investment arbitral tribunals have dealt with some allegations of corruption in international investment disputes and the number of such allegations has risen over the years. However, the criticism of approaches adopted by tribunals continues because these approaches have allegedly resulted in the asymmetry of responsibilities for the parties. Notably, none of these tribunals relied on provisions relating to anti-corruption in the applicable IIAs when investigating submissions of alleged corruption. The underlying reason for this phenomenon is the fact that investment treaties are generally silent on issues related to corruption; this also has some legal ramifications, such as the importance of addressing corruption in the international investment law system, which would then promote a steady rise in anti-corruption provisions in IIAs. According to the IIA Mapping Project initiated by the United Nations Conference on Trade and Development (UNCTAD), 45 out of the 2,572 mapped IIAs have a clause or clauses concerning anti-corruption in the text (except the preamble).1 Remarkably, several very recently signed and significant IIAs have also incorporated such clauses on how states should react to curb corruption affecting international investment and trade and/ or have offered guidance on how arbitral tribunals should treat corrupt acts that occur in international investment and trade activities. This includes the Comprehensive Economic and Trade Agreement (CETA) (2016) between Canada and the European Union (EU), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (2018), and the United States-Mexico-Canada Agreement (USMCA) (2018). A proposal for a chapter on anti-corruption was also submitted during the negotiations of the Transatlantic Trade and Investment Partnership between the United States (US) and the EU. Another momentous investment agreement that is currently under negotiation is the Comprehensive Agreement on Investment (CAI) between the EU and China, which will have a profound impact on subsequent treaties between the two parties – for instance, a free trade agreement (FTA) between the EU and China – and may also induce a novel rhythm to the conclusion of bilateral or multilateral treaties for promoting reciprocal economic development between and with other states. At the same time, the China–EU CAI will largely

1 UNCTAD, ‘Investment Policy Hub, IIA Mapping Project’, , last accessed on 26 January 2019.

228 Yueming Yan affect the formation and development of international investment relationships between EU member states and China, now that the EU enjoys the exclusive competence on foreign direct investment (FDI) since the 2009 Treaty of Lisbon entered into force.2 Nevertheless, unlike issues of labour standards and environmental protection in the context of sustainable development,3 topics surrounding anti-corruption were always off the table during the 20 rounds of negotiations for the China–EU CAI that had taken place by the end of February 2019. Does this mean that the elimination of corruption in the field of international investment is neither necessary nor imperative? Is it a progressive or an unnecessary step to incorporate anti-corruption provisions in the China–EU CAI? If it is unnecessary, how could one explain the EU’s and China’s active engagement in international anti-corruption movements? Otherwise, what should these provisions look like? To answer these questions, this chapter is divided into five sections: (1) a short introduction to the topic and structure; (2) a careful analysis of cases involving corruption tackled by international investment arbitral tribunals in terms of the challenges revealed and the impacts on the development of IIAs; (3) a practical discussion of the EU’s and China’s policies and/or practice with regard to preventing and deterring corruption; (4) a modest proposal on a comprehensive chapter on anti-corruption that should be inserted in the China–EU CAI; and (5) succinct conclusions.

17.2 Cases involving corruption in international investment arbitration Scrutiny of international investment disputes involving corruption is significant and necessary in terms of the competence of arbitral tribunals and legal consequences of corrupt acts conducted in transnational business activities. These cases and the approaches tribunals have adopted to address allegations of corruption show not only points of divergence but also some common traits. There is no need here to examine each case in detail concerning the parties’ claims, the relevant facts and circumstances, the evidence presented, applicable laws and rules, and the legal consequences of submissions of alleged corruption. But to have a key understanding of current case law with regard to this topic and the primary challenges encountered, as well as its impacts on the global proliferation of anti-corruption provisions in IIAs, the following observations should be highlighted.

17.2.1 Diverse scenarios of allegations of corruption There are a variety of types of corrupt acts that might occur in international investment transactions, and allegations of corruption can be raised for distinct purposes. Among the very limited number of cases involving corruption addressed by international investment arbitral tribunals, the scenarios in which parties made allegations of corruption are highly diverse.

2 Art. 207 of the Treaty on the Functioning of the European Union. 3  European Commission, ‘Report of the 19th Round of Negotiations for the EU-China Investment Agreement’, 13 November 2018, ; see also European Commission, ‘Report of the 17th Round of Negotiations for the EU-China Investment Agreement’, 4 June 2018, , last accessed on 26 January 2019.

Anti-corruption in the China–EU CAI 229 In Tanzania Electric Supply Company Limited v Independent Power Tanzania Limited, the respondent party was the investor, and it was the claimant who made the allegations of corruption.4 In Lucchetti v Peru, the respondent state asserted that a domestic judgment relied on by the investor as a basis for the Tribunal’s jurisdiction was attained by corruption.5 In Rumeli Telekom v Kazakhstan, it was the investor who raised concerns that the national court’s decisions relied on by the respondent state were ‘the result of bias, corruption and/or bad faith’ on the part of one judge who solicited a bribe from the investor unsuccessfully6 and that ‘corruption is prevalent at every stage and level of the judicial process’.7 In F-W Oil Interests v Trinidad and Tobago, it was the claimant who brought allegations of corruption into the arbitration proceedings, submitting that F-W’s claims ‘result from corruption and other unlawful conduct’ by officials of Trinidad and Tobago as F-W refused to pay a USD 1.5 million bribe demanded by these officials.8 At the end of the hearing, however, F-W withdrew the allegations of corruption, resulting in a situation where ‘there ceased to be any reason for the Tribunal to make findings upon them, and there was every reason why it should not’.9 In EDF (Services) Limited v Romania, the investor invoked that the then-prime minister of Romania asked for a bribe of USD 2.5 million after an initial investment was refused by the investor, which made the government change the policy relating to this investment, thereby inflicting unfair and inequitable treatment and unreasonable and arbitrary measures on the investment.10 Nevertheless, the most commonly observed scenario of allegations of corruption in international investment arbitration is that the host state party submitted allegations of corruption in order to request that the tribunal dismiss the investor’s claims, either in the jurisdiction phase or in the merits phase, on the grounds that investments obtained through corrupt acts between the investor and public officials of the host states were not protected under the applicable investment treaty or investment contract. This typical allegation of corruption is observed in the cases of Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt,11 Wena Hotels v Arab Republic of Egypt,12 Methanex Corporation v United States of America,13 World Duty Free v Kenya,14 African Holding v DRC,15 TSA Spectrum v

 4 Tanzania Electric Supply Company Limited v Independent Power Tanzania Limited, ICSID Case No. ARB/98/8, Final Award, 12 July 2001, para. 52.  5 Empresas Lucchetti, S.A. and Lucchetti Peru, S.A. v Republic of Peru, ICSID Case No. ARB/03/4, Award, 7 February 2005.  6 Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 425.  7 Ibid, para. 355.  8 F-W Oil Interests, Inc. v Republic of Trinidad and Tobago, ICSID Case No. ARB/01/15, Award, 3 March 2006, para. 36.  9 Ibid, para. 211. 10 EDF (Services) Limited v Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 221. 11 Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, para. 204. 12 Wena Hotels Limited v Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, 41 ILM 896 (2002), para. 76. 13 Methanex Corporation v United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, 3 August 2005, para. 30. 14 World Duty Free Company v Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 105. 15 African Holding Company of America, Inc. et Société Africaine de Construction au Congo S.A.R.L. v République Démocratique du Congo, ICSID Case No. ARB/05/21, Sentence sur les déclinatoires de competence et la recevabilité, 29 July 2008, para. 53.

230 Yueming Yan Argentina,16 Metal-Tech v Uzbekistan,17 Niko Resources v Bangladesh,18 Spentex Netherlands v Uzbekistan,19 and Vladislav Kim et al. v Uzbekistan.20

17.2.2 Unsatisfactory approaches to allegations of corruption Amongst all these cases, there are only three (World Duty Free v Kenya, Metal-Tech v Uzbekistan, and Spentex v Uzbekistan) in which allegations of corruption were supported and all the claims of investors were dismissed by the tribunals. As a result, the investors lost their cases and their money while the host states were not held responsible for the evidenced corrupt acts, which purportedly caused an asymmetry of responsibilities for the two sides involved in the corrupt act or acts. In view of the bilateral nature of corruption, the respondent state, if corruption is attributed to it, should bear responsibility for its public officials as the accepting party of a bribe. This happened in EDF (Services) Limited v Romania, where although the alleged facts of corruption were not established with the evidence presented, the Tribunal acknowledged that if a public official solicits a bribe, this would be a ‘violation of the fair and equitable treatment obligation owed to the claimant pursuant to the BIT as well as violation of international public policy’,21 and that if a host state could exercise discretion on the basis of corruption, a ‘fundamental breach of transparency and legitimate expectation’ occurs.22 However, current case law reveals that while investors were denied access to international arbitration if their investments were proven to be obtained through corruption, no states have been held responsible for these corrupt acts conducted by their public officials. For instance, in World Duty Free v Kenya, it was the then president of Kenya, Mr Moi, who solicited USD 2 million from the investor, and the investor ‘passively’ supplied this amount. In the end, the investor gave a bribe of USD 2 million to Kenya and its investment was also expropriated by this government without any compensation. This result is likely to stimulate more corruption in transnational investment activities because states might be encouraged to solicit bribes from investors considering that they will not bear any responsibilities even if they illegally expropriate such investments; meanwhile, investors have no remedies when they encounter a bribe solicited from the host state.

16 TSA Spectrum de Argentina S.A. v Argentine Republic, ICSID Case No. ARB/05/5, Award, 19 December 2008, paras. 63–64. 17 Metal-Tech Ltd v Republic of Uzbekistan, ICSID Case No ARB/10/3, Award, 4 October 2013, para. 110. 18 Niko Resources (Bangladesh) Ltd. v People’s Republic of Bangladesh, Bangladesh Petroleum Exploration & Production Company Limited, and Bangladesh Oil Gas and Mineral Corporation, ICSID Case No. ARB/10/11 and No. ARB/10/18, Decision on Jurisdiction, 19 August 2013, para. 373. 19 The award of this case remains unpublished, but the main decisions are relatively clear to the public, see Vladislav Djanic, ‘In Newly Unearthed Uzbekistan Ruling, Exorbitant Fees Promised to Consultants on Eve of Tender Process are Viewed by Tribunal as Evidence of Corruption, Leading to Dismissal of All Claims under Dutch BIT’, IA Reporter, 22 June 2017, , last accessed on 26 January 2019. 20 Vladislav Kim et al. v Republic of Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, March 8, 2017, para. 543. 21 EDF (Services) Limited v Romania, supra note 10, paras. 187 and 221. 22 Ibid, para. 221.

Anti-corruption in the China–EU CAI 231 Remarkably, in addition to the complete denial of investor’s claims, the majority of arbitrators in the case of Spentex v Uzbekistan further ‘urged’ Uzbekistan to make a substantial donation to a United Nations Anti-Corruption Initiative in the amount of USD 8 million (otherwise Uzbekistan would bear an adverse cost order – a payment of the costs of proceedings and 75% of Spentex’s legal fees and expenses) in order to ensure that neither party could reap the benefits of its corrupt activities as occurred in World Duty Free v Kenya and Metal-Tech v Uzbekistan. However, the third arbitrator held a dissenting position on this creative decision and advocated that such a cost allocation is equal to a recommendation for an order beyond the competence of the Tribunal. She also held that there was no legal basis to differentiate between the parties in relation to costs when both parties should equally bear the consequences of a corrupt act.23

17.2.3 Its impact on IIA-making practice In fact, none of the tribunals in the cases mentioned above relied on any anti-corruption provisions to render decisions on submissions of alleged corruption for the reason that no such provisions existed in the applicable investment agreements. This to some degree inspires sovereign states to insert clauses addressing corruption and anti-corruption in their future treaty-making practice aimed at providing vital guidance on prospective allegations of corruption, if any, for arbitrators. First and foremost, the norms and rules for arbitration in ISDS generally are silent about the legal consequences of a typical act of corruption (as discussed above) in international investment transactions. The adjudication of such conduct therefore relies heavily on the applicable laws and rules in a specific case. In other words, if states intend to eliminate and prevent transnational corrupt acts, the efforts and commitments concerning how to combat corruption in these typical scenarios should become one of the main concerns and subjects during the negotiations of potential IIAs. Secondly, standardization in the making of IIAs can help to avoid future uncertainty about a tribunal’s competence and serve as an effective avenue to protect the domestic legal systems of the states concerned as well. Virtually all states have outlawed both active and passive corruption – both giving a bribe and accepting and soliciting a bribe. If the standards applied in international investment arbitration and the standards employed in domestic courts differ greatly, it will represent a formidable challenge in terms of the enforcement of the arbitration award as well as the integrity of the domestic legal system. Hence, to ensure the rule of justice both domestically and internationally, states may introduce relevant anticorruption provisions to avoid vagueness in the legal rules and standards adopted and maintain consistency between the internal and international legal frameworks. According to the IIA Mapping Project, 45 out of the 2,572 mapped IIAs have already inserted a clause or clauses concerning anti-corruption in the text (except the preamble): 30 are in the form of a bilateral investment treaty (BIT) and 12 are treaties with investment

23 Luke Eric Peterson and Vladislav Djanic, ‘In an Innovative Award, Arbitrators Pressure Uzbekistan – under Threat of Adverse Cost Order – to Donate to UN Anti-Corruption Initiative; Also Propose Future Treaty-Drafting Changes that would Penalize States for Corruption’, IA Reporter, 22 June 2017, , last accessed on 26 January 2019.

232 Yueming Yan provisions (TIPs); 34 are in force and 11 remain signed but are not yet in force; 41 IIAs were concluded after 2000 and only 4 of them were signed before 2000.24 The anti-corruption provisions in these IIAs have some common traits as well as demonstrating certain diversity. In general, states reaffirm the significance of the fight against corruption in international business transactions; make commitments to implement the international anti-corruption standards enshrined in, for instance, the United Nations Convention against Corruption (UNCAC) and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD AntiBribery Convention); and make efforts to seek international and regional cooperation on the prevention and deterrence of corruption. States may also address anti-corruption along with other issues, such as in corporate social responsibility (CSR) clauses or in the chapter on ISDS. In some limited circumstances, states may challenge the jurisdiction of arbitral tribunals on adjudicating investment disputes where the investment was obtained in matters involving corruption. For instance, the EU and Canada agreed in CETA that an investor may not submit a claim under the chapters on ISDS if this claim is based on an investment obtained through corruption. However, no such clause exists in the other two landmark investment agreements, namely the USMCA and the CPTPP. Considering the importance of the investment agreement between the EU and China and the profound impact this agreement will have, whether the China–EU BIT should follow the tendency of incorporating clauses addressing anti-corruption matters in new IIAs requires urgent examination. To this end, this chapter will scrutinize whether this trend is consistent with the EU’s and China’s recent practice and policies on anti-corruption and FDI and will explore whether the insertion will benefit the investors and the economic development of both parties.

17.3 The EU’s and China’s practice and policies on anti-corruption Admittedly, anti-corruption, as one of the significant investment policies acknowledged by the Investment Policy Framework for Sustainable Development, has scarcely been discussed as evidenced from the documents released or news about the negotiations between the two parties. Nonetheless, this is exactly the reason why this topic merits discussion in order to identify the exact attitudes and policies insisted on by China and the EU. Briefly, the practice on anti-corruption within the framework of IIAs exhibits great inconsistency between the two parties. The EU’s practice on combating corruption through the tool of IIAs is progressive, and the EU has signed a number of FTAs or IIAs with anti-corruption clauses or chapters; China’s engagements on this matter, on the other hand, are very limited. However, both the EU and China have clear and strong policies against corruption.

17.3.1 The EU’s practice and policy on anti-corruption As from when the Treaty of Lisbon entered into force, the EU has exclusive competence on FDI, resulting in political changes when drafting a new IIA with other countries. In accordance with the European Commission, anti-corruption has been one of the chief goals in

24 UNCTAD, supra note 1.

Anti-corruption in the China–EU CAI 233 developing economic relationships, and the EU would give trade preferences to countries which share the same objectives.25 Approximately 20 IIAs have been concluded by the EU since 2009, and anti-corruption provisions exist in most of these agreements. Although a few of these agreements are in the form of investment protection agreements (IPAs), the majority are free trade agreements (FTAs) or economic partnership agreements (EPAs) in which few provisions regarding investment are provided, stating that further negotiations will be launched with respect to investment protection and ISDS rules. This should not prevent us from relying on these resources to analyse the attitudes and preferences of the EU on anti-corruption. In fact, the EU has made great efforts to combat corruption in trade transactions, as indicated in these FTAs and EPAs, and it is reasonable to believe that the EU holds the same or similar objectives in the investment field given that it has, in these IIAs, consistently demonstrated and reaffirmed the importance of the fight against corruption ‘in investment and trade transactions’. The EU’s IIAs after 2009 can be classified into four categories in regard to provisions addressing corruption issues. First, there are several agreements where anti-corruption is not mentioned: the EU-Singapore IPA (2018), the EU-Japan EPA (2018), the EU-Korea FTA (2010), and the EU-ESA (Eastern and Southern Africa) Interim EPA (2009). Remarkably, although the treaties signed with Singapore and with Japan contain no anti-corruption provisions, the parties did give some consideration to sustainable development in the preamble, stating that the parties are ‘determined to strengthen their economic, trade, and investment relations in accordance with the objective of sustainable development’. In the second type of the EU’s IIAs, anti-corruption is addressed along with other matters in a limited statement. In CETA26 and the EU-Vietnam IPA (2018),27 the issue of anti-corruption is discussed within the topic of ISDS in the chapter on investment, which provides that investors may not initiate an international investment arbitration proceeding if investors obtain their investments through corruption. In the EU-SADC (Southern African Development Community) EPA (2016), anti-corruption issues are only addressed in clauses relating to customs legislation and procedures,28 while in the Colombia-Ecuador-EU-Peru Trade Agreement (2012),29 the EU-Singapore FTA,30 and the EU-Vietnam FTA (2018),31 the parties reached a consensus on preventing corruption in the context of government procurement. Another category exhibits that provisions addressing corruption are the parties’ mutual commitments to take cooperative measures to achieve the goal of reducing corruption and/or to adhere to international anti-corruption standards, such as under the UNCAC. In the EU-Indonesia Partnership and Cooperation Agreement (2009), the parties merely

25 Alina Mungiu-Pippidi, ‘Anti-Corruption Provisions in EU Free Trade and Investment Agreements: Delivering on Clean Trade’, Workshop requested by the INTA Committee, European Parliament, , last accessed on 26 January, 2019, pp. 1–55, at 6. 26 Art. 8.18 of CETA (2016). 27 Art. 3.27 of EU-Vietnam IPA (authentic text as of August 2018, not signed). 28 Arts. 42 and 43 of EU-SADC EPA (2016). 29 Art. 175(3) of Colombia-Ecuador-Peru-EU EPA (2012). 30 Art. 9.4 of EU-Singapore FTA (authentic text as of April 2018, not signed). 31 Art. 9.4 of EU-Vietnam FTA (authentic text as of August 2018, not signed).

234 Yueming Yan emphasize the importance of cooperative arrangements on curbing corruption,32 while in the EU-Vietnam Framework Agreement on Comprehensive Partnership and Cooperation (2012),33 the EU-Iraq Partnership and Cooperation Agreement (2012),34 the EU-Korea Framework Agreement (2010),35 the EU-Cameroon EPA (2009),36 the EU-New Zealand Partnership Agreement on Relations and Cooperation (2016),37 and the EU-Philippines Framework Agreement on Partnership and Cooperation (2012)38, the parties not only iteratively confirm that it is important to prevent and combat corruption, but also specify their adherence to international standards on anti-corruption enshrined in the UNCAC and the 2000 United Nations Convention against Transnational Organized Crime (UNCTOC) and its three Protocols. In addition to inserting statements on the above aspects, in the EU-CACM (Central American Common Market) Association Agreement (2012), the parties even agreed on a list of mutual measures for the elimination of corruption.39 A comprehensive normalization on anti-corruption issues is presented in the last group of IIAs signed by the EU wherein the illegality of both active and passive corruption in the public and private sectors, international anti-corruption standards, and obligations to take measures to prevent and fight corruption in the implementation of EU funds – financial support the other party received through the relevant funding mechanisms and instruments of the EU – are affirmed by the parties. This is the case in the EU-Armenia Comprehensive and Enhanced Partnership Agreement (2017),40 the EU-Kazakhstan Enhanced Partnership and Cooperation Agreement (2015),41 the EU-Georgia Association Agreement (2014),42 the EU-Moldova Association Agreement (2014),43 and the EU-Ukraine Association Agreement (2014).44 Moreover, the standards in these IIAs not only include the UNCAC and the UNCTOC and its three Protocols but also relevant Council of Europe instruments on preventing and combating corruption. Overall, the practice observed collectively shows that the EU has consistently and largely promoted the strengthening of the fight against corruption in practice, evidencing that the EU plays an active role in the prevention of corruption within the framework of international investment and trade agreements. In combination with the numerous anti-corruption instruments signed by EU member states, effective around the world or within the region of the EU, such as the Council of Europe Criminal Law Convention on Corruption45 and the

32 Arts. 1, 35, 37, and 39 of EU-Indonesia Partnership and Cooperation Agreement (2016). 33 Arts. 23 and 36 of EU-Vietnam Framework Agreement on Comprehensive Partnership and Cooperation (2012). 34 Arts. 43, 106, and 107 of EU-Iraq Partnership and Cooperation Agreement (2012). 35 Arts. 1(4), 2, 35, and 36 of EU-Korea Framework Agreement (2010). 36 Art. 105 of EU-Cameroon EPA (2009). 37 Arts. 31 and 34 of EU-New Zealand Partnership Agreement on Relations and Cooperation (2016). 38 Arts. 2, 22, 23 and 50 of EU-Philippines Framework Agreement on Partnership and Cooperation (2012). 39 Arts. 1(3), 3(2), 30, 37, 38, and 338 of EU-CACM Association Agreement (2012). 40 Arts. 2(3), 4(f), 12(2), 16, 343, 350, and 353 of EU-Armenia Comprehensive and Enhanced Partnership Agreement (2017) (provisionally applied since June 2018). 41 Arts. 235, 242, 262, and 264 of EU-Kazakhstan Enhanced Partnership and Cooperation Agreement (2015). 42 Arts. 2(4), 4, 17, 383, 392, and 394 of EU-Georgia Association Agreement (2014). 43 Arts. 2, 4, 16, 50, 422, 424, and 426 of EU-Moldova Association Agreement (2014). 44 Arts. 3, 14, 22, 347, and 459 of EU-Ukraine Association Agreement (2014). 45 Council of Europe Criminal Law Convention on Corruption, ETS No.173 (opened for signature on 27 January 1999, entered into force on 1 July 2002).

Anti-corruption in the China–EU CAI 235 Civil Law Convention on Corruption, it is in no way groundless to anticipate that the EU will continue to carry out this anti-corruption policy in future movements towards establishing multilateral and bilateral investment and trade relationships. This speculation can be further supported by some other IIA-drafting movements conducted by the EU: in the very recent negotiation of the EU-Myanmar/Burma investment agreement,47 the EU-Mexico FTA,48 the EU-Chile FTA,49 and the EU-Tunisia FTA,50 concerns about anti-corruption have already been proposed. 46

17.3.2 China’s practice and policy on anti-corruption BITs and FTAs are important tools for China to develop its economy domestically and internationally, being in line with major policies insisted on for years, such as the ‘Reform and Opening-Up’, the ‘Belt and Road Initiative’ (BRI), and ‘A Community of Shared Future for Mankind’. However, while developed countries are now reforming their IIAs in novel ways, compared to traditional ones, by setting sustainable development objectives such as anti-corruption measures, China is still finding its own approach to establishing investment relations with others. Therefore, it is not surprising to discover that China, to date, has not formulated any anti-corruption provisions in its IIAs. But we should not ignore the fact that China has indeed made some related considerations in the preamble of some of its recent BITs and FTAs, recognizing the need to promote investment based on principles of sustainable development, including the China-Georgia FTA (2017),51 the China-Korea FTA (2015),52 the China-Switzerland FTA (2013),53 the China-Iceland FTA (2013),54 the China-Tanzania BIT (2013),55 the China-Canada BIT (2012),56 the China-Uzbekistan BIT (2011),57 the China-Costa Rica FTA (2010),58 and the China-Peru FTA (2009).59

46 Council of Europe Civil Law Convention on Corruption, ETS No.174 (opened for signature on 4 November 1999, entered into force 1 November 2003). 47 European Commission, ‘Joint Communication to the European Parliament and the Council: Elements for an EU Strategy vis-à-vis Myanmar/Burma: A Special Partnership for Democracy, Peace and Prosperity’, 1 June 2016, , last accessed on 26 January 2019. 48  European Commission, ‘New EU-Mexico Agreement: The Agreement in Principle and Its Texts’, , last accessed on 26 January 2019. 49 European Commission, ‘EU-Chile Trade Talks: Commission Releases Its Proposals and Reports about Progress’, , last accessed on 26 January 2019. 50 European Commission, ‘The Texts Proposed by the EU for a Deep and Comprehensive Free Trade Area (DCFTA) with Tunisia’, , last accessed on 26 January 2019. 51 Preamble of China-Georgia FTA (2017). 52 Preamble of China-Korea FTA (2015). 53 Preamble of China-Switzerland FTA (2013). 54 Preamble of China-Iceland FTA (2013). 55 Preamble of China-Tanzania BIT (2013). 56 Preamble of China-Canada BIT (2012). 57 Preamble of China-Uzbekistan BIT (2011). 58 Preamble of China-Costa Rica FTA (2010). 59 Preamble of China-Peru FTA (2009).

236 Yueming Yan More importantly, China has explicitly manifested its anti-corruption policies and has constantly played an active role in engaging in the deterrence of corruption at both domestic and international levels, such as concluding international anti-corruption conventions, establishing higher standards in domestic laws and rules against corruption, and participating in regional and international anti-corruption forums where China has made strong commitments to cooperate in fighting corruption. While various instruments stipulating measures for the prevention of corruption are available to EU member states to abide by, China, in the region of Asia, has limited resources to refer to when making efforts on this issue, the most important treaty being the UNCAC. China signed the UNCAC on 10 December 2003 and ratified it on 13 January 2006, becoming one of the first contracting states to this treaty with clear understanding of the severe impacts of corrupt acts and on the necessity of international cooperation in the fight against corrupt activities. Various actions were taken by China’s government and institutions to progressively and effectively implement obligations under the UNCAC, including developing policies against corruption, broadening the scope of acts of corruption through national legislation, and establishing anti-corruption agencies. In addition, China is a member state of the Asian Development Bank (ADB)-OECD Anti-Corruption Initiative60 and the Asia-Pacific Economic Cooperation (APEC) AntiCorruption and Transparency Working Group (ACTWG),61 and it has participated in the OECD Working Group on Bribery as an ad hoc observer.62 More importantly, China, as a G20 member state, has also achieved a consensus with other G20 countries on combating corruption by setting up the G20 Anti-Corruption Working Group (ACWG) in 2010 and by regularly endorsing the Anti-Corruption Action Plans and other related documents which encourage transnational practical cooperation in the purposes of reducing corruption more effectively.63 With the aim of carrying out the obligations, commitments, and undertakings contained in the international instruments, China has made numerous efforts, testifying to its active policies on deterring corruption. First and foremost, China now has a comprehensive legal system of rules, regulations, guidelines, and judicial interpretations formulating offences and

60 OECD, ‘ADB/OECD Anti-Corruption Initiative’, , last accessed on 26 January 2019. 61  APEC, ‘Anti-Corruption and Transparency’, , last accessed on 26 January 2019. 62 OECD, ‘Working Group on Bribery, 2011 Annual Report’, , last accessed on 26 January 2019, pp. 1–68, at 26. 63 ‘G20 Action Plan on the 2030 Agenda for Sustainable Development’, G20 2016 China, ; ‘G20 Anti-Corruption Action Plan 2017-2018’, ; for information on the G20 Anti-Corruption Action Plan 2019-2021, see Maria Emilia Berazategui and Poder Ciudadano, ‘From an Anti-Corruption Perspective, Was the 2018 G20 a Success?’ Medium, 10 December 2018, ; other documents concerning anti-corruption include the ‘G20 High Level Principles on Organizing against Corruption’, ‘G20 High Level Principles on Corruption and Growth’, ‘G20 Guiding Principles on Enforcement of the Foreign Bribery Offence (2013)’, ‘G20 Guiding Principles to Combat Solicitation’, ‘G20 High Level Principles on the Liability of Legal Persons for Corruption’, and the ‘G20 High Level Principles on Private Sector Transparency and Integrity’, , last accessed on 26 January 2019.

Anti-corruption in the China–EU CAI 237 liabilities of a wide range of corrupt acts, including active and passive corruption in both the public and private sectors (see Articles 163–164 and Articles 382–396 of the Criminal Law of the People’s Republic of China). Remarkably, several modifications of the Criminal Law were made to conform to the standards recognized in the UNCAC, reflecting that China attaches great importance to the implementation of its international obligations and commitments in relation to the fight against corruption. For instance, in 2011, Amendment 8 of the Criminal Law was added to Article 164 of the Criminal Law, prohibiting individuals or entities giving a bribe to any foreign public official or any international public organization official, as required by Article 16 of the UNCAC. Secondly, to comply with the obligation in Article 6 (establishment of an anti-corruption agency) of the UNCAC, China established the National Bureau of Corruption Prevention (NBCP) in 2007, designated with competences to develop corruption prevention measures both at home and abroad within the framework of the UNCAC.64 The NBCP has held several Corruption Prevention Workshops among developing countries, offering opportunities to share domestic practice and experience; has contributed to facilitating other extensive discussions and dialogues with other countries; and has strengthened cooperation and assistance in the field of the prevention of corruption.65 Last but not least, China has made considerable progress as well as achieved significant success under the domestic anti-corruption campaign initiated by President Xi. In 2017, at the BRI Summit Forum, President Xi stressed the importance of fighting against corruption in line with prior policies implemented unswervingly in China, and reinforcing international collaboration and cooperation on anti-corruption. He also stated that the Chinese government intended to build the BRI as a road to integrity. Overall, it is undeniable that China is now pursuing a clear and robust anti-corruption policy and has actually made great strides in implementing tremendous measures and arrangements in various dimensions to effectively implement this policy. Very limited practice in anti-corruption provisions in the context of IIAs in no way signifies that China negatively participates in bilateral or multilateral anti-corruption cooperation, nor does it imply that China would not, or does not, intend to promote this innovation in future IIAs. On the contrary, China’s increasing awareness of and engagement in promoting sustainable development within the framework of international investment and trade law and its ongoing revolution of concluding more ‘green’ BITs,66 wherein environmental protection issues are addressed, allow us to reasonably expect that China might, in coming years, take steps to further the social values of anti-corruption in the making of IIAs since anti-corruption has become embedded in China’s behaviour in building and maintaining smooth and favourable relations, particularly international investment and trade relations, with other countries.

64 Mission of the People’s Republic of China to the UN, ‘Work of National Bureau of Corruption Prevention of China Regarding Corruption Prevention Technical Assistance’, , last accessed on 26 January 2019. 65 Ibid. 66 Manjiao Chi, ‘The “Greenization” of Chinese Bits: An Empirical Study of the Environmental Provisions in Chinese Bits and its Implications for China’s Future Bit-Making’, Journal of International Economic Law, Vol. 18 Issue 3 (2015), pp. 511–542, at 542.

238 Yueming Yan

17.4 Anti-corruption provisions in the China–EU CAI As to the question whether it is necessary and imperative to insert anti-corruption provisions in the China–EU CAI, the answer now seems to be clear and affirmative. By assembling the discussions in the preceding sections, this section thus intends to explain why including a comprehensive chapter on anti-corruption in the China–EU CAI is recommended and what substances these provisions should cover.

17.4.1 Inserting an anti-corruption chapter is recommended We cannot deny the consensus between the EU and China on the importance of combating anti-corruption cooperatively, and thus the battle against corrupt acts that affect international investment and trade should no longer be viewed as a completely unreachable or unachievable concept by both parties. In fact, a tendency to insert anti-corruption provisions into IIAs can be reasonably expected on the basis of the statistics from the UNCTAD IIA Mapping Project and, more broadly speaking, introducing social values to rebalance IIAs has become a progressive trend in contemporary investment treaty-making practice.67 As the two leading economies worldwide, the EU and China can take advantage of this CAI by addressing anti-corruption issues in order to implement their enlarged domestic anti-corruption policies and international obligations and commitments as enshrined in international anti-corruption instruments. Remarkably, China and the EU have both committed to conclude a CAI with a high level of investment protection and have on many occasions reached a consensus on achieving the initiative by cooperating in the fight against corruption. Before the negotiations were launched, the impact assessment issued by the EU illustrated that the theme of anti-corruption has been a major concern among European investors and demonstrates the need to take measures to combat corruption in line with international anti-corruption standards.68 In the EU-China 2020 Strategic Agenda for Cooperation, the EU and China also agreed to accomplish their objectives by strengthening their cooperation within the framework of the UNCAC and the UNCTOC.69 Later, the EU adopted a new strategy on China in 2016, manifesting again the EU’s intention to promote fair competition and seek a dialogue with China in terms of best practice, international standards, and cooperation on anti-corruption.70 The ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the EU and China’ also reveals that anti-corruption has increasingly attracted the two parties’ attention in the context of CSR.71

67 Wenhua Shan, ‘Towards a Balanced Liberal Investment Regime: General Report on the Protection of Investment’, ICSID Review, Vol. 25 Issue 2 (2010), pp. 421–497, at 469. 68  European Commission, ‘Impact Assessment Report on the EU-China Investment Relations’, SWD(2013) 185 final, , last accessed on 26 January 2019. 69 EEAS, ‘EU-China 2020 Strategic Agenda for Cooperation’, 23 November 2013, , last accessed on 26 January 2019, pp. 1–16, at 4. 70 European Commission, ‘Joint Communication to the European Parliament and the Council: Elements for a New EU Strategy on China’, JOIN(2016) 30 final, , last accessed on 26 January 2019. 71 European Commission, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China’, November 2017, , last accessed on 26 January 2019, pp. 1–240, at 112.

Anti-corruption in the China–EU CAI 239 Moreover, the European Commission has constantly treated the China–EU CAI as a precious chance for European investors who intend to establish investments in destinations where they can enjoy a level playing field without any discrimination and with greater transparency.72 Inserting anti-corruption provisions into this milestone agreement exhibits further consistency in the EU’s making of IIAs over the past several years. For China, this step might be somewhat ‘radical’ given the country’s total lack of experience in this practice in IIAs. However, we should first realize that Chinese investment inflows from the EU reduced dramatically in 2016, falling to a 10-year low of under EUR 8 billion, due to, as claimed, a worsening investment climate.73 At the same time, Chinese outflows to the EU keep rising.74 This means, in all aspects, that inserting anti-corruption provisions in the China–EU CAI should be regarded as an opportunity for China to enhance investment protection, which not only helps to attract more FDI from the EU but also provides higher protection to Chinese investors who establish investments in the EU region. Additionally, it is acknowledged that China’s old economic and social mode is unsustainable, and China has traditionally refused to address social, environmental, and transparency issues in its BITs.75 But China is now developing its IIA system with the aim of creating a more balanced pattern of development.76 In addition, China continues to accelerate its ‘going-global’ policy and is more determined to further develop free trade and investment by promoting liberalization and facilitation,77 reflecting China’s increasingly important role in exerting influence on the evolving system of global governance. Considering that China has clearly stated its ambition to play a leading role in the making of global investment rules78 and that foreign investors do not fully trust China’s investment environment, inserting anti-corruption provisions into high-level investment protection naturally becomes preferable for China, echoing China’s international and national policies on anti-corruption and on investment.

17.4.2 An anti-corruption chapter should be comprehensive Proposing inserting anti-corruption matters into the China–EU CAI is far from sufficient to achieve the purposes of this chapter, which aims to explore an effective avenue for eliminating corruption that affects investment activities between the EU and China. Instead, defining the extent to which this issue should be addressed also plays a vital role. To relieve concerns about corruption, provisions on anti-corruption in the China–EU CAI should be comprehensive.

72 European Commission, ‘Building Bridges: Strengthening EU-China Trade and Investment Relations’, 6 February 2017, , last accessed on 26 January 2019. 73 Ibid. 74 Ibid. 75 Wenhua Shan and Lu Wang, ‘The China–EU BIT and the Emerging “Global BIT 2.0”’, ICSID Review, Vol. 30 Issue 1 (2015), pp. 260–267, at 263. 76 European Commission, supra note 70. 77 European Commission, supra note 72. 78 Manjiao Chi, ‘The China–EU BIT as a Stepping Stone towards a China–EU FTA: A Policy Analysis’, in Marc Bungenberg et al. (eds.), European Yearbook of International Economic Law (Cham: Springer, 2017), pp. 475–490, at 480.

240 Yueming Yan First and foremost, this comprehensive chapter should cover a wide range of issues, including the definition of corruption; criminalization of corruption offences on both supply and demand sides, with corresponding sanctions for both public and private sectors in national legislation; anti-corruption requirements in the context of CSR; cooperative measures on investigation and prevention between the two parties; and international standards on anti-corruption. These aspects are the most fundamental and major concerns for deterring corruption, which is partly indicated from the EU’s recent IIA-making practice and which is partly reflected in other important IIAs, such as the USMCA and the CPTPP, provided that the two parties commonly anticipate upgrading their investment arrangements by referring to other IIA-making practices in the context of globalization.79 The USMCA and the CPTPP contain comprehensive chapters dealing with anti-corruption issues and these are dealt with mostly in the same manner, ranging from the wide scope of corruption offences (both on the supply side and the demand side), measures to combat corruption, commitment to promote integrity among public officials, encouraging participation of the private sector and society, and the application and enforcement of anticorruption laws. The USMCA further includes a CSR clause in the chapter on investment, acknowledging the importance of encouraging enterprises to incorporate internationally recognized standards into internal policies such as those regarding anti-corruption. We need to note that reaffirming adherence to international anti-corruption standards, such as the UNCAC, potentially provides essential applicable laws and rules for investment tribunals, which helps to some degree to avoid inconsistency in the standards relied upon by arbitrators. All the above are necessary and indispensable aspects of a satisfactory comprehensive chapter on anti-corruption, and thus it is proposed that the China–EU CAI encompasses at least these basic concerns about anti-corruption. Moreover, considering the challenges that exist in investment arbitration where allegations of corruption have been made, it is also recommended to provide national and/or international remedies for foreign investors that are confronted with a host state’s public official soliciting a bribe. As discussed in Section 17.2, public officials of a host state may solicit a bribe from foreign investors and then illegally expropriate the established investments without bearing any adverse legal consequences because host states can invoke allegations of corruption as a defence against any claims raised by investors. This should in no way be regarded as an advisable strategy for host states, in particular for China, as the investment environment in China is not fully trusted by investors from Europe and from other parts of the world. On this occasion, offering some domestic and/or international remedies for foreign investors is therefore likely to mitigate such tension in ISDS. More precisely, states should (1) make commitments to promote the integrity of its public officials to avoid acts of solicitation; (2) establish procedures through which a public official who solicits a bribe from foreign investors is accused under the national legislation, and may be removed, suspended, or reassigned by the appropriate authority in line with relevant domestic laws and rules; (3) provide domestic remedies for foreign investors to initiate a claim when requested by public officials for a bribe; and/or (4) grant international arbitration the competence to adjudicate such issues when investors have exhausted local remedies, which provides international arbitration with an opportunity to fight corruption. This would also be a form of international cooperative measure between national authorities and international institutions to jointly combat corruption.

79 Wenhua Shan and Lu Wang, supra note 75, at 261.

Anti-corruption in the China–EU CAI 241 Overall, such a comprehensive chapter containing the basic aspects of anti-corruption and domestic and/or international remedies for cases of solicitation is the result of examining recent IIA-making practice in combination with controversial issues in ISDS, and is also consistent with the aims determined by the parties as indicated by the name of this treaty – a comprehensive agreement on investment. Such provisions would not only enhance the advancement of the BIT practice of both parties but may also guide a transformation in global IIA practice to establish a more effective approach to eliminating corruption.

17.5 Conclusions This chapter presents a study of the current case law on allegations of corruption in ISDS and the EU’s and China’s practice and policies on anti-corruption, aimed at proposing inserting a comprehensive chapter on anti-corruption into the China–EU CAI. This would be a progressive step in improving the effective elimination of corruption in international investment transactions between the EU’s and China’s entities and, more generally, of the global fight against corruption. The arbitral awards of international investment disputes involving allegations of corruption have demonstrated some dissatisfaction with regard to the approaches adopted to deal with the submissions of alleged corruption raised by the parties. It has also been demonstrated that these tribunals did not rely on any anti-corruption provisions in an investment agreement to render decisions on the legal consequences of a corrupt act in an international investment activity; on the one hand, this explains why these awards have triggered much criticism, and on the other, it reminds states to take anti-corruption issues into consideration when drafting subsequent IIAs. At the same time, the practice and policies on investment development and on the fight against corruption insisted on by the EU and China also support such inclusion of a chapter on anti-corruption in the CAI between the EU and China. Concluding sustainable development-oriented IIAs has been a policy favoured by an increasing number of states, including the EU and China; anti-corruption issues have been consistently addressed in the IIAs signed by the EU over the past few years, in particular as an important aspect of sustainable development. And the EU has concluded a number of IIAs with anti-corruption clauses which suggest that the EU attaches great importance to combating both active and passive corruption and to cooperative measures against corruption. Although no such provision can be found in Chinese IIAs, we cannot deny China’s active and strong policies on preventing corruption at both domestic and international levels, including the obligations and commitments made under the UNCAC and other anti-corruption instruments issued under the context of G20, APEC, and ADB-OECD. Now that the two parties intend to upgrade their investment agreement and enhance investment relations by offering higher investment protection, the EU-China CAI seems to be a real opportunity to achieve this objective by inserting a comprehensive chapter on anticorruption. To be comprehensive, the anti-corruption chapter should include some basic anti-corruption measures, such as the obligation to criminalize a wide range of corrupt acts, the requirement for the private sector to establish anti-corruption measures under the context of CSR, the joining of cooperative efforts to curb corruption between the parties, the reaffirmation of adherence to international anti-corruption standards, and the provision of domestic and/or international remedies for cases where investors are solicited by public officials of host states in the course of establishing an investment. This proposal stems not only from the consistent practice of the EU’s and China’s anti-corruption policies, but also from

242 Yueming Yan the considerations of anti-corruption norms in other significant IIAs, such as the USMCA and the CPTPP, and the lessons learned from case law. This comprehensive chapter on anti-corruption is likely to manifest China’s attitudes and determination with regard to combating corruption in the field of international investment, help China to gain trust from European investors, and serve as a signal to investors from other parts of the world that the investment environment in China is becoming corruptionfree, sound, and desirable. This should not be deemed as a mere result of bilateral bargaining but as a progressive step forward in improving anti-corruption efforts more generally.

Index

16+1 Framework 63 Abengoa S.A. y COFIDES S.A. v Mexico 203 AES v Hungary 32 AI Tamimi v Oman 205 Amicus curiae 172, 175–178, 182, 217–218 Ansung Housing Co., Ltd. v China 88, 157, 165–168 Anti-Corruption and Transparency Working Group (ACTWG) 236 Asian Infrastructure Investment Bank (AIIB) 119–120 Asia-Pacific Economic Cooperation (APEC) 236, 241 Arbitral tribunal’s interpretative approaches: text, context, and purpose 164, 167, 168; good faith 159; ordinary meaning 164 arbitration + mediation 105, 109–111 Beijing Arbitration Commission (BAC) 102, 118 Beijing Urban Construction Group Co., Ltd. v Republic of Yemen 157–158, 160–161, 163–164, 167, 188–189, 203–204 Belt and Road Initiative 63, 101, 102, 103, 104, 115, 118–119, 122–123, 211 BEPS Convention see Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting bilateral investment treaty (BIT): between China and European countries 17–18, 24; European model of 15–16, 151; NAFTA model of 14–15, 47–48; recalibration of 52–53, 55–57 Brazil 71, 113, 221; 2015 Model Cooperation and Facilitation Investment Agreement 72, 115; ombudsperson mechanism 72; state-state dispute settlement 72 Brazil, Russia, India, China and South Africa (BRICS): BRICS Summit 116, 121;

Outlines for BRICS Investment Facilitation 104, 116, 120, 121 Brexit 11, 27, 121 China-Africa Joint Arbitration Centre 102–103 China-ASEAN Free Trade Agreement 174 China-ASEAN Investment Agreement 207–208 China-Australia BIT 174 China-Australia FTA 49, 99, 175–176, 180, 181–182, 208 China-Canada BIT 26, 32–34, 48–49, 174–175, 208, 235 China-EU Comprehensive Agreement on Investment (CAI): background of 11–12; expropriation issues 33–34; human rights issues 62–67; institutional options of ISDS 98–99, 123; market access issues 31–32; motivation of 18–22; negative list approach 23–24; negotiation status of 22–23, 28, 40; objectives of 4, 40; proposal for an anti-corruption chapter 238–242; protection of victims in ISDS 225–226; public policy considerations 49–52; SOE issues 208–211; substantive investment treatment and investor protection issues 22–24; transparency issues 180–183 China-EU investment: evolution of policy relation of 16–18; shift of economic power 23; underdeveloped flow of 1–2, 18–19 China Heilongjiang International Economic & Technical Cooperative Corp. et al. v Mongolia 158, 161, 164, 181, 188–189, 204 China International Commercial Court 102, 119 China International Economic and Trade Arbitration Commission (CIETAC) 101–102, 104, 109–111, 118 China-Japan-Korea Trilateral Investment Treaty 174

244 Index China-Laos BIT 158, 163, 165 China-Mexico BIT 175, 208, 210 China-Mongolia BIT 161, 164, 189, 204 China-New Zealand FTA 48, 174, 207 China-Peru BIT 158, 167 China-Peru FTA 235 China’s Going-Out (Going-Global) Policy 118, 185, 239 China-South Korea BIT 167 China-South Korea FTA 208 China’s Pilot Free Trade Zones 27, 38; the negative list in 28, 31 China’s socialist market economy 186–188, 191–192 China-US BIT negotiation 27–28 China-US trade war 12 Chinese BIT arbitration cases: application of most-favoured-nation (MFN) to procedural rights 167–168; definition of dispute 162–164; definition of investment 160–162; definition of investor 157–160; fork-in-the-road provision 164–165; Hong Kong and Macao investors as Chinese investors 158–160; interpretative approaches of arbitral tribunals 167, 168; limitation period, dies a quo, dies ad quem 165–166; moving treaty frontier rule 160 Chinese state-owned enterprise (Chinese SOE): as a claimant in ISDS 188–189, 203–204; concerns in the EU 190–192; dominant role in the Chinese economy 186, 189; protection under Chinese investment treaties 207–208; reform of 185–187; unfair competitive advantages of 190 CME Czech Republic B.V. v The Czech Republic 73, 165 commercial arbitration v investor-state arbitration 71, 116, 125–127, 137, 171 Common Commercial Policy 13–14, 59, 177 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): anti-corruption provisions 227, 240; mediation in investment dispute resolution 107; negative externalities of 20 Convention on the Recognition and Enforcement of Foreign Arbitral Awards 78, 108, 115 corporate social responsibility (CSR) 43, 44, 57, 59, 66, 219–221, 232, 238, 240, 241 corruption cases in investor-state arbitration: F-W Oil Interests v Trinidad and Tobago 229; Lucchetti v Peru 229; Metal-Tech v Uzbekistan 214–215, 230; Rumeli Telekom v Kazakhstan 229; Spentex v Uzbekistan 230, 231; Tanzania Electric Supply Company Limited v Independent Power

Tanzania Limited 229; World Duty Free v Kenya 215, 229, 230 Court of Justice of the EU (CJEU) Opinion (2/15) of May 2017 60, 147, 178–179 CSOB v Slovakia 202 District Court of Southern New York 161, 181 domestic courts in investment dispute resolution: avoidance of duplicative proceedings and double compensation 148–149; encouragement to recourse to domestic courts 149, 150–152; exclusion of frivolous and unmeritorious claims 152; exhaustion of local remedies 143, 146, 154, 155; fork-in-the-road 146, 148, 149, 150; legal autonomy of EU law 144; no ‘U-turn’ clause 144, 148, 149, 150; policy positions of the EU 141–147 Dutch Model BIT (2018) 216, 219, 220, 223 EDF (Services) Limited v Romania 205, 229, 230 Ekran Berhad v People’s Republic of China 88, 105, 157 Energy Charter Treaty (ECT) 41–42, 142 EU-Canada Comprehensive Economic and Trade Agreement (CETA): anti-corruption provisions 232, 233; expropriation provisions 33–34; investment court system 66, 88–89; position of domestic courts in investment dispute resolution 148–152; public policy provisions 44–47; SOE provisions 37–38; transparency rules 180 EU-China 2020 Strategic Agenda for Cooperation 238 EU-China Partnership and Cooperation Agreement (PCA) 19–20, 64 EU-China Strategic Partnership 54, 60 EU-China Summit 22, 28, 191 EU competence on FDI: exclusive EU competence on FDI 177, 228, 232; postLisbon 13–16, 53, 59; shared competence in portfolio investment and ISDS 60, 147, 178–179; shift of competence from member states to the EU 13–14 EU-Japan Economic Partnership Agreement 20, 27, 153, 233 EU-Mexico Global Agreement without Prejudice (the New EU-Mexico Agreement) 29–31, 235 European Convention on Human Rights 79, 80, 153 European Court of Human Rights 74, 81 EU’s comprehensive trade and investment agreements 14, 25, 60 EU’s external action 13, 14, 43, 51, 54, 58

Index 245 EU’s foreign investment policy: Common Investment Policy 43, 50, 51, 58; a Comprehensive European International Investment Policy 43, 54, 58, 146, 176; NAFTA-ization of 15 expropriation: definition of indirect expropriation in Chinese IIAs 32–33, 49; definition of indirect expropriation in US model BIT 33; indirect expropriation claims in ISDS 41; indirect expropriation in EU’s IIAs 45–46; involving the amount of compensation for expropriation in Chinese BIT arbitration cases 162–165 see also Chinese BIT arbitration cases, definition of dispute; the legitimate expectation test 32; proportionality approach 32, 46; sole effect doctrine 32, 45–46 fair and equitable treatment (FET) 17, 24, 41–42, 46, 49, 151, 215, 230 Foreign Investment Law of China 27–28, 31, 34, 39, 116 foreign investment screening: Committee of Foreign Investment in the United States (CFIUS) 195, 196; critical infrastructure and technology 2, 22, 193, 194, 195, 196; EU member states with national FDI screening 193, 210; EU Regulation establishing a framework for the screening of foreign direct investments into the Union 2, 21–22, 194–197, 210; French Decree No. 2014/479 193; German Foreign Trade and Payments Regulation (German FDI screening) 2, 193–194; National security 190, 192–194, 196, 200, 210 G20: China’s Presidency 56, 173; G20 AntiCorruption Working Group 236; G20 Guiding Principles for Global Investment Policymaking 49–50, 104, 120–121, 173–174; Germany’s Presidency 120–121 Greek Port of Piraeus 2, 63–64 Hela Schwarz GmbH v China 88, 105, 157 human rights: EU-China Human Rights Dialogue 60–61; in the EU-China Strategic Partnership 60–62; EU’s Action Plan on Human Rights and Democracy 59; in EU’s IIA-making 44; in EU’s investment policy 14, 20, 43, 58–59; in IIAs 55–58; in ISDS 213–217; issues in the making of CAI 51, 53, 64 ICSID Convention: Article 25(1), Jurisdiction 157, 159, 188, 201, 207; Article 52, Annulment 78; Article 53, Enforcement 78

India 12, 121; China-India BIT 49; EU-India FTA negotiation 43, 146; India Model BIT 57, 71 indirect expropriation see expropriation intellectual property: protection 2, 196; rights 14, 19, 44, 49, 64, 65, 159 International Centre for Settlement of Investment Disputes (ICSID): ICSID Appeals Facility 77, 78, 93; ICSID Arbitration Rules 37, third-party submission 217; ICSID Arbitration Rules 41(5), objection to unmeritorious claims 152, 166; ICSID Mediation Rules 107, 108, 109 International Chamber of Commerce (ICC) 117; ICC Belt and Road Commission 117 International Court of Justice (ICJ) 75, 80–84, 97 Investment Court System (ICS): constitution of 88–90; impracticability on the multilateral level 96–98; non-necessity on the bilateral level 95–96; value of 90–95 International Criminal Court 83–84, 97 international investment agreement (IIA): new generation 4, 40, 42, 52–53; the right to regulate in 42, 47, 50, 64; traditional 17, 23, 42 International Law Commission (ILC) Draft articles on Responsibility of States for Internationally Wrongful Acts 33, 205–206 International Mediation Institute Competency Criteria for Investor-State Mediators 107 international rule of law 67, 131 investor-state arbitration (ISA): bias against states 131–132; elitism 134–136; empirics of 127–130; judicialization of 71–86, 137–138; speed, quality and cost 132–134 investor-state dispute settlement (ISDS): call for transparency 171–172; flaws of 71; inconsistency of 73, 93–94; legitimacy concerns of 11, 23, 72, 87, 93, 100, 107, 113, 136, 154, 171; public interest in 41–42, 66, 127, 136–137; regulatory chill of 41; role of victims in 217–219; thirdparty participation in see amicus curiae ISDS institutions: competition of 116–118; prospect of a China-led ISDS institution 118–122 ISDS reform: China’s options of 114–116; incremental 100–101, 112–114, 123; paradigmatic 113, 115; systemic 112–114 jurisdiction ratione materiae 163, 167, 201 jurisdiction ratione personae 188, 203, 207 London Court of International Arbitration (LCIA) 117

246 Index litigation v arbitration: public goods 124, 136–138; utility maximization of arbitrators 126; utility maximization of judges 125 Made in China 2025 23 Maffezini v Spain 167, 168 market access for FDI: in China 2, 3, 19, 28–29, 38; in the EU 21–22, 192–197, 210; pre-establishment national treatment + negative list (PENT+NL) 27, 38; reciprocity of 19 Mauritius Convention on Transparency see United Nations Convention on Transparency in Treaty-based Investor-State Arbitration mega-regional trade and investment agreements 3, 42 Metal-Tech v Uzbekistan 214, 230–231 Methanex Corporation v United States 32, 229 Midea-Kuka takeover 2, 21 Ministry of Commerce of China (MOFCOM) 1, 2, 26, 173, 207 Morocco-Nigeria BIT 220, 221, 222–223 Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting 85 multilateral investment court (MIC): appellate mechanism 76–78, 93–95; consistency of 73, 74–78; first instance 88–89; independence and impartiality of adjudicators 79–82; independence and impartiality of the court 79, 82–84; opt-in mechanism 85–86; permanency of (the standing feature of) 74, 91–93; predictability of 74 Myanmar Investment Law 220 negative list approach: of China 28–29; comparison of China, the US and the EU 31–32; of the EU 29–30; of the US 29 New York Convention see Convention on the Recognition and Enforcement of Foreign Arbitral Awards non-conforming measures: in CETA 44; in Chinese IIAs 24, 49; in USMCA 29 non-governmental organization (NGO) 143; in ISA 65, 182 North America Free Trade Agreement (NAFTA): NAFTA-ization of Chinese BITs 47–48; NAFTA model of IIAs 14 Organization for Economic Co-operation and Development (OECD): Asian Development Bank (ADB)-OECD Anti-Corruption Initiative 236; Convention on Combating Bribery of Foreign Public Officials in

International Business Transactions 232; Guidelines for Multinational Enterprises 221, 225; Guidelines on Corporate Governance of State-owned Enterprises 34; Policy Framework for Investment 56; Restrictiveness Index 19; Working Group on Bribery 236 Permanent Court of Arbitration (PCA) 117; PCA Financial Assistance Fund 219 Philip Morris Asia Limited v Australia 41, 158–159 Philip Morris Brands Sarl et al. v Uruguay 41 Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v Kingdom of Belgium 88, 105, 114, 157, 181 President Trump 12, 14, 20, 121 protectionism 121, 173, 210 protection of victims in ISDS: jurisdictional approach of arbitral tribunals to protect victims 213–215; national contact point (NCP) 221, 225; procedural options for improving victims protection in ISDS 221–224; substantive approach of arbitral tribunals to protect victims 213, 215–217; substantive options for improving victims protection in ISDS 219–221; victims’ role in ISDS 217–219; voluntary sustainability standard (VSS) 220 public policy provisions in IIAs: approaches of incorporation of 42; democracy 51; human rights 51; in China’s IIA-making 47–49; in EU’s IIA-making 43–47; labour rights 51–52; rule of law 51 PV Investors v Spain 41 Regional Comprehensive Economic Partnership (RCEP) 3 regulatory space of the host states 4, 11, 15, 41–42, 44–45, 48–50 Ronald S. Lauder v The Czech Republic 73 Sanum v Lao Republic 105, 114, 158, 160, 163, 165 Shenzhen Court of International Arbitration (SCIA) 3, 101, 104–105, 109–110, 118 Singapore Convention on Mediation see United Nations Convention on International Settlement Agreements Resulting from Mediation Singapore Court of Appeal (SGCA) 158, 160, 163–165 Singapore International Arbitration Centre (SIAC) 118 Slovakische Republik (Slovak Republic) v Achmea BV 142

Index 247 SOEs in international investment regime: attribution of alleged wrongful acts to governments in ISDS 205–207; Broches test 188–189, 201–204, 207; China’s stance 37, 207–208; as a claimant in ISDS 201–204; competitive neutrality 36–37, 200; coverage and definition in IIAs 199–200; the EU’s stance 37–38; a level playing field between SOEs and private enterprises 36, 200, 208, 209; transparency and governance of 209; the US’ stance 35, 36–37 Southern African Development Community Model BIT 221 Standard Chartered Bank (Hong Kong) Limited v Tanzania Electric Supply Company Limited 157 State-owned Assets Supervision and Administration Commission (SASAC) 35–36, 185–186 Stockholm Chamber of Commerce (SCC) 117 Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and China 4, 40, 238 sustainable development: in China’s IIAs 48, 235, 237; in China’s investment policy 121, 241; in EU’s IIAs 44, 233, 241; in EU’s investment policy 14, 43, 54, 58; in FTAs and IIAs 212; in G20 Guiding Principles for Global Investment Policymaking 56; in the making of CAI 12, 20, 22, 24–25, 40, 49–50, 53, 228 sustainable investment 50, 53 Tecmed v Mexico 32 Transatlantic Trade and Investment Partnership (TTIP): competitive neutrality of SOEs 200; Investment Court System 90–91, 101, 156, 191; negative externalities of 20, 25; negotiation of 14, 16; the role of national courts in investment dispute resolution 148–152; transparency provisions 177–179 Trans-Pacific Partnership (TPP): mediation in investment dispute resolution 107; SOE chapter 36–37, 200; US withdrawal from 26 transparency provisions in IIAs: EU’s policy of 176–178; mode of transparency provisions in Chinese IIAs 173–176; mode of transparency provisions in EU’s IIAs 178–179; transparency gap between China’s and EU’s IIAs 180–183 Treaty of Lisbon 13–15, 16, 58–59, 141, 177 Treaty on European Union (TEU): Article 21, Union’s external action 14, 43, 54, 58, 67 Treaty on the Functioning of the European Union (TFEU): Article 63, free movement of

capital 21; Article 107, state grants 38; Article 205, Union’s external action 43; Article 206, customs union 177; Article 207(1), common commercial policy 13, 58, 177 Tza Yap Shum v Republic of Peru 105, 114, 158–165, 167 Universal Declaration of Human Rights (UDHR) 44, 51, 59 umbrella clause 18, 24 United Nations Commission on International Trade Law (UNCITRAL): UNCITRAL Arbitration Rules 117, 172, 181; UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation 107–108; UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (UNCITRAL Transparency Rules) 65, 85, 172, 176, 178–180, 213, 218; UNCITRAL Working Group III 3, 72, 105 United Nations Conference on Trade and Development (UNCTAD): Investment Policy Framework for Sustainable Development 232 United Nations Convention against Corruption (UNCAC) 232–234, 236–238, 240, 241 United Nations Convention against Transnational Organized Crime (UNCTOC) 234, 238 United Nations Convention on International Settlement Agreements Resulting from Mediation 108 United Nations Convention on Transparency in Treaty-based Investor-State Arbitration 85, 115, 172 United Nations Guiding Principles on Business and Human Rights 54, 56, 219 United States-Mexico-Canada Agreement (USMCA) 27, 29; anti-corruption provisions 227, 240; negative list approach 29, 30–31; restricted ISDS mechanism 12 Urbaser S.A. v The Argentine Republic 57, 216–217 US Bipartisan Trade Promotion Authority Act 218 US-China Strategic Economic Dialogue 27 US Model BIT 33–35, 39, 49, 76, 100, 199–200, 209 Vattenfall AB et al. v Germany 41, 88 Vienna Convention on the Law of Treaties (VCLT) 78, 159–162 Vienna Convention on the Succession of States in respect of Treaties 160

248 Index World Duty Free v Kenya 215, 230–231 World Trade Organization (WTO): 11th Ministerial Conference 121; Appellate Body 74, 76, 81, 97; China’s accession to 105–106, 190; Dispute Settlement Body (DSB) 66–67, 97, 98; Dispute Settlement

Understanding (DSU) 75; Friends of Investment Facilitation for Development (FIFD) 121; investment facilitation 104, 116, 120 Yantai Taihai-Leifeld takeover 2, 21