Investment Treaty Practice of China, Japan and Korea

Arbitration Academy 2012: Class 2 Professor Hi-Taek Shin

Seoul National University School of Law

[work in progress: Not to be quoted without permission]

Notes

• The powerpoint files are provided to students of Arbitration Academy 2012.

• As these files are work under progress, no quo-tation is permitted without the author’s written permission.

• In preparing the lecture, the author draws upon the expertise and previous studies by G. Wang, W. Shan and N. Gallagher (on Chinese practice), and S. Hamamoto and L. Nottage (on Japanese practice). However, all mistakes, if any, are the author’s own.

National Treatment

• Promise not to discriminate foreign “investor” or “investment” as compared to domestic counterpart on the basis of “foreignness”

• To whom NT is given?– Investor, Investment, or both?

• With respect to what?– Establishment, acquisition and expansion?

– Other post-establishment business activities?

• Exceptions to NT?

National Treatment: China (1)Model BIT (III) Article 3： Treatment of Investment

2. Without prejudice to its laws and regulations, each Contracting Party shall accord to investments and activities associated with such investments by the investors of the other Contracting Party treatment not less favorable than that accorded to the invest-ments and associated activities by its own investors.

• China has not agreed to date to apply NT to “establishment and ac-quisition”.

– The maximum extent China would be willing to extend NT: “ex-pansion” as provided for in China-Korea BIT of 2007.

– Chinese Model BIT: separate provision dealing with “admission of investment” which reserves the State’s right to admit in-vestment in accordance with its laws and regulations.

Model BIT Art. 2.1Each Contracting Party shall encourage investors of the other Con-tracting Party to make investments in its territory and admit such investments in accordance with its laws and regulations.

National Treatment: China (2)• Due to the long history of planned economy, NT has not been

widely used in Chinese BIT practice.– First Model BIT: no mention of NT at all; – Second Model BIT: only a ‘best endeavours’ clause. – Third Model: NT standard, subject to local laws and regulations.

• In some recent BITs (e.g., Korea-China BIT of 2007), China has

moved a bit further: – These BITs removed the ‘domestic laws and regulations’ quali-

fication from the treaty text, – but retain a ‘grandfather provision’ or ‘freezing clause’ appli-

cable to China, allowing it to maintain and modify existing non-conforming measures inconsistent with the NT standard, as long as this will not increase the general level of inconsistency.

– China also agrees in these BITs to gradually phase out such in-consistent measures.

National Treatment: China (3) Korea-China BIT, Art. 3 (Treatment of Investment)1.  Each Contracting Party shall in its territory accord to investors of

the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments (hereinafter referred to as "national treatment") with respect to the expansion, operation, management, maintenance, use, enjoyment, and sale or other dis-posal of investments (hereinafter referred to as "investment and business activities").

2.  ……. paragraph 1 of the Article 3 do not apply to any existing non-conforming measure maintained within its territory of the People’s Republic of China or any future amendment thereto provided that the amendment does not increase the non-conforming effect of such a measure from what it was immediately before the amend-ment took effect.

Treatment granted to investments once admitted shall in no case be made restrictive than the treatment granted at the time when the original investment was made. The People’s Republic of China will take all appropriate measures to progressively remove all non-conforming measures.

National Treatment: Japan (1)Japan – Korea BIT (2002), Art 2 1. Each Contracting Party shall in its territory accord to investors of

the other Contracting Party and to their investments treatment no less favorable than the treatment it accords in like circumstances to its own investors and their investments (hereinafter referred to as “national treatment”) with respect to the establishment, acqui-sition, expansion, operation, management, maintenance, use, en-joyment, and sale or other disposal of investments (hereinafter referred to as “investment and business activities”).

NT clauses of the post 2002 new-generation BITs/FTAs applies to investors and their investments with respect to the establishment and/or acquisition of investments as well as post-establishment business activities (such as operation, management, maintenance, use, enjoyment etc.) • Exceptions to NT with respect to the establishment and acquisi-

tion are specified in the so-called 'negative list'. • Negative list identifies:

– all sectors or activities to which the pre-establishment NT obli-gation is not applicable

– All existing (and future) non-conforming measures

National Treatment: Japan (2)• If the other State party would not accept legally

binding NT commitment with respect to estab-lishment and acquisition (e.g., China):

– Japan attempts to secure MFN treatment with respect to establishment and acquisition

• Exceptional cases: Japan was unable to obtain ei-ther NT or MFN with respect to establishment and acquisition (Japan - Papua New Guinea BIT (2011)

National Treatment: Korea (1)

Model BIT 2001 Article 3： Treatment of Investment

1. Each Contracting Party shall in its territory accord to in-vestments and returns of investors of the other Contract-ing Party treatment no less favourable than that which it accords to investments and returns of its own investors or to investments and returns of investors of any third State, whichever is more favourable to investors.

2. Each Contracting Party shall in its territory accord to in-vestors of the other Contracting Party as regards man-agement, maintenance, use, enjoyment or disposal of their investments, treatment no less favourable than that which it accords to its own investors or to investors of any third State, whichever is more favourable to investors.

National Treatment: Korea (2)Korean policy is hybrid:• In Korean Model BIT: NT and MFN treatment, which is

more favorable to investors

• In BITs, Korea applies NT only to the post-establish-ment phases of investment with respect to manage-ment, maintenance, use, enjoyment, or disposal of in-vestments.

• Exception: Korea-Japan BIT (2003)

• In the investment chapters of FTA, – Korea seeks to extend the scope of NT to cover the estab-

lishment, acquisition and expansion

National Treatment: Korea (3)

• The Korea-China BIT accommodates China’s position on NT and provides a unique variation of the NT (and MFN treatment) stan-dards, carving out very broad exceptions only for China.

– NT shall apply to 'the expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of in-vestments.'

– However, the NT does not apply to 'any existing non-conform-ing measure maintained within its territory of People's Republic of China or any future amendment thereto provided that the amendment does not increase the non-conforming effect of such a measure from what it was immediately before the amendment took effect.'

– The Korea-China BIT grants full NT (and MFN) to investors of the other contracting party 'with respect to access to the courts of justice and administrative tribunals and authorities both in pursuit and in defense of their rights.'

National Treatment: Korea (4)

• Article 11.12 of the investment chapter of the Korea-US FTA (modeled after 2004 US Model BIT):– NT is granted with respect to establishment and acquisi-

tion

– Non-conforming measures need to be identified in the appendix

– NT (and MFN treatment) do not apply to 'government procurement' or 'subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance.

NT Clause in BITs

• Post-establishment phase (“with respect to invest-ments, returns and business activities in connection with investment”) (Art. 3.2)

China-Japan (1998)

• Pre-and post-establishment (including “establishment, acquisition and expansion”) (Art. 2.1)

• Exceptions: non-conforming measures listed in Annex

Japan-Korea (2002)

• Post-establishment: with respect to expansion, oper-ation, management, etc. (Art. 3.1)

• Excludes establishment and acquisition• Exceptions: “existing non-conforming measure”

maintained within China or “any future amendment”• China to progressively remove all non-conforming

measure (Art. 3.2)

Korea-China (2007)

BIT

NT Clause in FTAs

• Post-establishment phase: management, conduct, operation and sale or other disposition of invest-ments (Art. 129.1)

• Exception : Existing non-conforming measures, or continuation of, or amendment to, any non-conform-ing measures allowed (Art. 130.1)

• Parties to endeavor to progressively remove all non-conforming measures (Art. 130.2)

China-Peru (2009)

• Pre-and post-establishment phase: Reservations and Exceptions listed in Annex (Art. 8)Japan-Peru (2011)

• Pre-and post-establishment phase: Similar to Japan-Peru (Art. 9.3)Korea-Peru (2011)

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Most Favored Nation(MFN) Treat-ment

• Promise not to discriminate between for-eign investors and investments on the basis of “nationality”

• With respect to what?– Establishment and acquisition [and expan-

sion]?

– Other post-establishment business activities?

• MFN clause applicable to dispute resolu-tion related provisions?

Most Favored Nation: China (1)

• MFN treatment : common in all Chinese BITs. – All three Versions of the Chinese Model BIT have

a MFN clause covering both ‘investments’ and ‘activities associated with such investments’

Model BIT (III) Article 3： Treatment of Invest-ment

3. Neither Contracting Party shall subject investments and activities associated with such investments by the investors of the other Contracting Party to treatment less favorable than that accorded to the investments and associated activities by the in-vestors of any third State.

Most Favored Nation: China (2)• None of the Chinese Model BITS have included the ‘in like cir-

cumstances’ wording in the MFN provision,; in the more recent treaties signed by China, this phrase is adopted. (China-Mexico BIT (2008))

• In some recent BITs, MFN clauses apply to “admission of in-vestments” (China-Korea BIT, China-Japan BIT).

– While Korea and Japan grant NT with respect to establish-ment and acquisition in Japan-Korea BIT, Chinese investors could benefit the NT with respect to establishment and ac-quisition both in Korea and Japan on the basis of the MFN treatment clause, while Japanese and Korean investors could only get the MFN in China as China has not yet granted NT on establishment and acquisition to any third State.

Most Favored Nation: China (3) • Exceptions to MFN: benefits, preference or privileges by virtue of

– any membership of customs unions, free trade zones, eco-nomic unions or common markets or

– any double taxation agreements• The MFN clause does not expressly refer to dispute resolution. It is

not certain whether the MFN provision in China’s current Model BIT could therefore be extended to apply to the procedural rights of the treaty, i.e., investor State arbitration clauses.

– In light of the recent changes in Chinese BITs which now permit resort to ICSID arbitration for investor-State disputes, the exact scope and application of the MFN clause has significance for foreign investors in China.

– In its more recent treaties, China has included an express pro-vision excluding the application of the MFN clause to dispute resolution provisions. (Art. 5(4) of The ASEAN/China Invest-ment Agreement (2009))

Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Compe-tence of the Arbitral Tribunal 19 June 2009

• The first ICSID tribunal decision interpreting an investment treaty entered into China

• Facts: – Tza Yap Shum is a Chinese national, resident in Hong Kong– Tza owns 90% of TSG Peru SAC (TSG), a Peruvian company en-

gaged in the business of producing fish-based food products and export them to Asian market, indirectly through an off-shore entity

– In December 2004, SUNAT, Peru’s national tax authority, charged TSG for an alleged tax underreporting and imposed a back tax in the amount of approximately US4 million

– TSG filed a challenge to SUNAT’s finding and tax imposition– SUNAT imposed a tax lien on TSG’s bank accounts shortly after

TSG was notified of the tax imposition and while TSG’s legal challenge was pending

– Tza argued that the tax lien effectively paralysed TSG’s busi-ness

Tza Yap Shum v. Peru (2)

• Tza’s Arguments: SUNAT’s freezing of TSG’s bank accounts amounted to

– A denial of "fair and equitable treatment“,

– A denial of "full protection and security“,

– A restriction on the transfer of capital and earnings, and

– Expropriation without compensation,

• all of which are prohibited under China-Peru BIT.

• Peru raised a number of objections to ICSID tribunal’s jurisdiction. In particular,

– The claims were beyond the scope of the BIT’s dispute settlement clause

Relevant Provisions in China-Peru BIT

• Art. 3.2. stipulates an MFN treatment (without any limiting language)

• Art. 8.3. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to nego-tiations as specified in Paragraph 1…, it may be submitted at the request of either party to the International Center for Settlement of In-vestment Disputes (ICSID)…… Any disputes concerning other matters …… may be submit-ted to the Center if the parties to the disputes so agree. ……

Tribunal’s decision on application of MFN clause

• Question: tribunal’s jurisdiction over Tza’s claims other than those concerning expropriation (FET and full protection and security)

• Tza argued that the apparent limitation could be overcome by the operation of MFN treatment clause which entitles him to import the benefit of Peru-Colombia BIT allowing any dis-pute of a legal nature to be referred to ICSID arbitration

• Tribunal rejected Tza’s argument on MFN:– The language in 8.3: specific in that it permits arbitration

of claims other than the amount of expropriation only in accordance with a separate agreement by the parties

– This specific language overrode any more general appli-cation of the MFN clause

– Tza’s claims other than expropriation dismissed for lack of jurisdiction

Most Favored Nation: Japan (1)

Japan – Korea BIT, Art 2

2. Each Contracting Party shall in its territory accord to in-vestors of the other Contracting Party and to their invest-ments treatment no less favourable than the treatment it ac-cords in like circumstances to investors of any third country and to their investments (hereinafter referred to as “most-favoured-nation treatment”) with respect to investment and business activities.

• Almost all of the Japan's BIT contain MFN clause. – Exception: Japan - Papua New Guinea BIT

• Japan's post-2002 BITs(and FTAs) in general grant MFN treatment with respect to establishment and acquisition as well as post-establishment investment activities.

Most Favored Nation: Japan (2)

• Common exception to MFN treatment: benefit of any treatment granted by virtue of – a customs union, a free trade area or a

monetary union. – Double tax treaty

• Except for two recent BIT/FTA (Japan-Peru BIT and Japan-Switzerland FTA), Japanese BITs/FTAs do not have an explicit provision whether the MFN clause extends to the dispute settlement provisions or not.

Most Favored Nation: Korea (1)

Model BIT 2001 Article 3： Treatment of Investment

1. Each Contracting Party shall in its territory accord to investments and re-turns of investors of the other Contracting Party treatment no less favourable than that which it accords to investments and returns of its own investors or to investments and returns of investors of any third State, whichever is more favourable to investors.

2. Each Contracting Party shall in its territory accord to investors of the other Contracting Party as regards management, maintenance, use, en-joyment or disposal of their investments, treatment no less favourable than that which it accords to its own investors or to investors of any third State, whichever is more favourable to investors.

The 2001 Korean Model BIT: MFN treatment standard apply • to the investment after it is established in its territory, and • to investors with respect to management, maintenance, use, enjoyment,

or disposal of their investments. – Exception: Korea-China BIT and Korea-Japan BIT

Most Favored Nation: Korea (2)• Korea-Japan BIT and the investment chapters of Ko-

rea-US FTA:

– MFN treatment to cover the establishment, ac-quisition and expansion stages of an investment

– detailed lists of non-conforming measures in the annexes to the main body of the agreements.

• The 2001 Korean Model BIT does not include the concept of 'in like circumstances' in connection with national treatment and the MFN treatment.

Most Favored Nation: Korea (3)

• Korean BITs, in general, do not explicitly address whether the MFN treatment would extend to the investor State dispute settlement provisions.

• Common exception to MFN treatment: benefit of any treatment granted by virtue of – a customs union, a free trade area or a mone-

tary union. – Double tax treaty – 'government procurement' or 'subsidies or

grants provided by a Party, including govern-ment-supported loans, guarantees, and insur-ance.' (Korea-US FTA)

Most Favoured Nation (MFN) Treatment (1)

• In respect of the admission of investment and the matters in connection therewith (Art. 2.2)

• With respect to investment, returns and business activities in connection with the investment (Art. 3.1)

China-Japan (1998)

• With respect to investment and business (defined to include establishment/ acquisition)

• Exception: non-conforming measures specified in Annex (Art. 4, 5)

Japan-Ko-rea (2002)

• With respect to investments and associated activi-ties, including investment admission (Art. 3.3)

• Exception: subject to typical exceptions for custom unions, FTA or tax-related treaties (Art. 3.4)

Korea-China (2007)

BIT

Most Favoured Nation (MFN) Treatment (2)

• Pre-and post-establishment phase:• Exception : Cultural industries like production of books, mag-

azines, periodical publications, or printed/electronic newspa-pers and music scores (Art. 131.3)

• MFN treatment does not include preferential treatment based on FTA, free trade zone, etc.

• MFN treatment does not encompass dispute resolution mechanisms (Footnote 14)

China-Peru (2009)

• Pre-and post-establishment phase: Reservations and Excep-tions listed in Annex (Art. 8)

• MFN treatment does not encompass dispute resolution mechanisms (Art. 4.2)

Japan-Peru (2011)

• Pre-and post-establishment phase (Art. 9.4): Exceptions: Non-conforming measures listed in Annex

• MFN treatment does not encompass dispute resolution mechanisms (Annex 9A)

Korea-Peru (2011)

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