The largest number of Chinese BITs belong to the first generation (see Fig. 1).
The first eight pioneering BITs China entered into from 1982 to 1985 do not include ISDS provisions at all (see Appendix Table 2). China’s initial reluctance to consent to investor-state arbitration (ISA) is partially due to the fact that China had not yet become a signatory party to the International Center for Settlement of Investment Disputes (ICSID) Convention until February 1993.Footnote 5 However, this does not mean that the pre-1993 BITs China has concluded are fully insulated from ISA. The first Chinese BIT that envisages ISDS clauses is the China–Belgian–Luxembourg Economic Union (BLEU) BIT concluded in 1984.Footnote 6 Since then China entered into first generation BITs with ISDS provisions with the Netherlands in 1985 up until with Bahrain in 1999 (see Appendix Table 2).
First of all, the overwhelming majority of first generation Chinese BITs include the requirement of an amicable settlement of disputes through negotiation or consultation for a maximum period of six months as a prerequisite for investors to resort to international arbitration.Footnote 7 This is also known as the cooling-off period, during which the disputing parties may resort to amicable means in an attempt to resolve the dispute prior to resorting to ISA, including negotiation, conciliation or mediation (but excluding local administrative or judicial remedies).Footnote 8 A few exceptions to this requirement can be found in 13 first generation Chinese BITs where no such a clause is provided, whereas in another five BITs either a longer or a shorter cooling-off period than the customary six-month one is stipulated (see Appendix Table 2).
Secondly, the ISDS provisions in first generation Chinese BITs include only the arbitrability of disputes concerning the amount of compensation for expropriation, although the formulation of these ISDS provisions is by no means consistent.Footnote 9 In addition to a straightforward stipulation such as ‘disputes concerning the amount of compensation referred to in Article 4 (expropriation)’,Footnote 10 some BITs also admit disputes concerning measures by the host state of an expropriating effect, such as ‘dispute involving the amount of compensation resulting from expropriation, nationalization, or other measures having an effect equivalent to nationalization or expropriation’.Footnote 11
This limited scope of ISDS did not radically change after China’s accession to the ICSID in 1993, as China retained its limited consent to ISA upon its ratification of the ICSID Convention by only adhering to the jurisdiction of the ICSID over compensation resulting from expropriation or nationalization.Footnote 12 In 88 first generation Chinese BITs, only 18 of them provide the ICSID as an optional venue for arbitration, whilst the remaining 70 provide either arbitration ad hoc or no specified arbitration venue at all (see Appendix Table 2). The narrowly constructed scope of arbitration clauses results in compromised effectiveness and unsatisfactory protection in terms of the ISDS mechanism.Footnote 13 Nevertheless, it is deemed to be a rational outcome in the specific economic and political context. Being a capital-importing country at the time, China had little incentive to protect its overseas investment; instead, the limitation of investors’ access to ISDS was aimed at retaining the adjudicative prerogatives within domestic courts in settling disputes with foreign investors.Footnote 14
However, only an extremely rare proportion of first generation Chinese BITs require the exhaustion of local remedies as a precondition before recourse to international arbitration.Footnote 15 The China–Poland BIT (1988) stipulates that ‘if an investor challenges the amount of compensation for the expropriated investment assets, he may file complaint with the competent authority of the Contracting Party taking the expropriatory measures. If it is not solved within one year after the complaint is filed, the competent court of the Contracting Party taking the expropriatory measures or an ad hoc international arbitral tribunal shall, upon the request of the investor, review the amount of compensation.’Footnote 16 The same stipulation is included in the China–Malaysia BIT (1988) and the China–Pakistan BIT (1989).Footnote 17 This means that under these three BITs, investment disputes regarding the amount of compensation for expropriation must first be referred to a competent administrative authority as a prerequisite for subsequent judicial recourse in the host state or international arbitration. In another ten first generation Chinese BITs local remedies are provided only as a choice for investors at their own discretion instead of a mandatory prerequisite prior to international arbitration (see Appendix Table 2). In the remainder of first generation Chinese BITs, there is no mention of local remedies at all.
With regard to the fork-in-the-road provision, 41 first generation Chinese BITs include the fork-in-the-road provision, where the choice of an investor to submit the dispute to either a domestic court or to international arbitration is deemed final and exclusive with regard to either one or the other (see Appendix Table 2).
As to the applicable law, 46 first generation Chinese BITs refer to the following sources: provisions of the BIT itself, the relevant domestic laws of both signatory parties, other agreements that both signatory states have concluded, and the generally recognized principles of international law (see Appendix Table 2). Obviously, both the fork-in-the-road provision and the applicable law provision have been negotiated on a case-by-case basis without a noticeable pattern being followed.
So far there are eight known investment arbitration cases pertaining to first generation Chinese BITs: four of which involve Chinese (including one Hong Kong and one Macao) investors as Claimants;Footnote 18 and four concern China as the Respondent.Footnote 19 The most debated controversy with respect to these cases relates to the interpretation of ‘disputes involving the amount of compensation for expropriation’. As a result, two schools of interpretation have been formed in investment adjudication. A broad view includes both the liability of expropriation (whether an expropriation act has taken place) and the quantification of compensation (the monetary amount to be compensated) as admissible disputes to arbitration, and a narrow view only admits the quantification of compensation to arbitration.
In Tza Yap Shum v. Peru, the Tribunal applied the ‘ordinary meaning’ approach to examine the semantic scope of the term ‘involving’ in Article 8(3) of the China–Peru BIT (1994).Footnote 20 The Tribunal supported the broad view that the amount of compensation for expropriation includes ‘not only the mere determination of the amount but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions and requirements, as well as the determination of the amount of compensation due, if any’.Footnote 21 When examining the Tza Yap Shum v. Peru case, a clearly expressed view is that a broad interpretation of the phrase ‘disputes involving the amount of compensation for expropriation’ is appropriate.Footnote 22 Based on the narrow view, the investors would be allowed to resort to arbitration on the quantification of compensation due only after a domestic court of the host state has first officially proclaimed the existence of the act of expropriation. Whereas according to Article 8(2) and 8(3) of the China–Peru BIT, namely the fork-in-the-road provision, once the investor submits the dispute to domestic adjudication, it loses its eligibility to resort to international arbitration.Footnote 23 Therefore, a narrow interpretation of ‘the amount of compensation for expropriation’ would result in the non-applicability of such an arbitration clause ipso jure.Footnote 24 The Tribunal’s broad view in Tza Yap Shum v. Peru ‘effectively activates the practical utility’ of the arbitration clause in first generation BITs, ‘even though the Award does not have a precedential effect’.Footnote 25
In contrast, one commentator argues that, as a Communist country, China believes that domestic courts instead of international arbitral tribunals should be the sole judge that retains the authority to determine the ownership of property within China.Footnote 26 Hence, China’s original intention in negotiating first generation BITs was to adopt a narrow interpretation thereof, and the issue of the amount of compensation to be paid was only admissible to arbitration after a Chinese court had recognized the fact that there had been an act of expropriation, either lawful or unlawful, in the first place.Footnote 27
In Sanum v. Laos, the Laotian government challenged the jurisdiction of the Tribunal by relying on, inter alia, the argument that Article 8(3) of the China–Laos BIT (1993) only permitted arbitration of ‘a dispute involving the amount of compensation for expropriation’ and not ‘disputes involving expropriation’.Footnote 28 The Tribunal looked at the ‘ordinary meaning’ of the term ‘involving’, noted that ‘it is also consistent with how a similar provision was interpreted by the Tza Yap Shum Tribunal’, made a broad interpretation, and decided that it had jurisdiction because ‘involving’ should be interpreted as an inclusive term (and equal to ‘including’) rather than an exclusive one.Footnote 29 The Laotian government then filed to vacate the Award on Jurisdiction for the Tribunal’s lack of jurisdiction before the High Court in Singapore (SGHC), the seat of arbitration, which then supported Laos and annulled the Award, based on the principal reasoning that the Macau-incorporated Sanum did not qualify as an investor under the China–Laos BIT.Footnote 30 SGHC also interpreted Article 8(3) of the China–Laos BIT, and came to a narrow interpretation of the term ‘amount of compensation for expropriation’. The Judge placed strong emphasis on the context of the treaty and its historical background of negotiation, and relied on an assumption that two Communist states at the time of negotiation were more likely to intend for a restrictive arbitration clause in the China–Laos BIT in order to prioritize national judicial power in resolving investment disputes.Footnote 31 This line of interpretation by the SGHC has been criticized as problematic, unnecessary and superfluous, because the Judge placed strong emphasis on the context of the treaty and its negotiating background in coming to his decision, but was neglectful of the object and purpose of the treaty in promoting foreign investment and protecting foreign investors.Footnote 32
Sanum later appealed to the Singapore Court of Appeal (SGCA), which reversed the High Court’s judgment and sustained the Tribunal’s jurisdiction, in support of an expansive interpretation of Article 8(3).Footnote 33 The SGCA adopted the ‘context, object and purpose’ technique, as well as the principle of effet utile, to interpret Article 8(3), and argued that the fork-in-the-road provision in the China–Laos BIT, if under the narrow interpretation of the ‘amount of compensation for expropriation’, would bar investors from bringing a dispute to arbitration.Footnote 34 Because once an investor submits the dispute on expropriation and any issues relating to it to a domestic court of the host state, the fork-in-the-road provision will prevent the investor from submitting the same issues to arbitration. The SGCA’s reliance on the fork-in-the-road provision to support a broad interpretation of the ‘amount of compensation for expropriation’ has been appraised as a ‘meticulous examination’ of the issue, and an ‘influential and prominent’ decision to ‘avoid an illusory right to arbitration’ to investors.Footnote 35 The limitation of the SGCA’s interpretative approach, however, is that it cannot be applicable to first generation Chinese BITs with no fork-in-the-road provisions in place. After the confirmation of the Tribunal’s jurisdiction, the Tribunal decided in favour of Laos on the grounds of Sanum’s bribery and bad faith in the operation of its investment and unfounded expropriation claims.Footnote 36
In Beijing Urban Construction Group (BUCG) v. Yemen, the Tribunal concluded that the ‘ordinary meaning’ and scope of the text ‘amount of compensation for expropriation’ were not conclusive to reach either a narrow or broad reading thereof, and that the Tribunal had to move to the ‘context, object and purpose’ of the treaty.Footnote 37 The Tribunal adopted a broad interpretation, by taking the view that ‘the Contracting Parties intended to confer a real choice, not an illusory choice, on investors from their respective countries, and that the words “relating to the amount of compensation for expropriation” must, in context, be read to include disputes relating to whether or not an expropriation has occurred.’Footnote 38
In China Heilongjiang International Economic & Technical Cooperative Corp. et al. v. Mongolia, the Tribunal viewed the plain meaning of ‘involving’ in Article 8(3) of the China–Mongolia BIT (1991) as a neutral one and could neither support a broad or a narrow interpretation.Footnote 39 Moving to the ‘context, object and purpose’ of the treaty, the Tribunal rendered its Award, deciding on its lack of jurisdiction ratione materiae, as a narrow approach in interpreting Article 8(3) was adopted.Footnote 40 The Tribunal took the view that ‘a dispute involving the amount of compensation for expropriation’ only ‘describes a particular category of disputes’, namely ‘whether the compensation which is due […] is equivalent to the value of the expropriated investments’ after an expropriation act has formally been proclaimed by the host state, ‘the occurrence of which is not contested’.Footnote 41 Therefore, the claimants’ request to the Tribunal to first adjudicate whether Mongolia had expropriated the Claimants’ investment fell outside of the Tribunal’s jurisdiction. The decision in China Heilongjiang v. Mongolia marks a turning point in the adjudication of first generation Chinese BITs, as it is the first arbitration case where the Tribunal has adopted a narrow interpretation. Yet the issue of the narrow or broad interpretation of first generation Chinese BITs remains a subject of debate.Footnote 42 In September 2017, the claimants filed a Petition to the New York Southern District Court to annul the Award.Footnote 43 The Court’s order in 2019 confirmed the validity of the Award, stating that ‘the Chinese companies, by initiating this arbitration, affirmatively arguing for the tribunal’s jurisdiction, and vigorously participating in the seven-year-long arbitration proceedings, have waived their opportunity to object now to the arbitrators’ ability to decide the arbitrability of the case. The Court therefore finds that the parties clearly and unmistakably agreed to place the question of arbitrability before the tribunal.’Footnote 44 The Court thus refrained from expressing any opinions on the accuracy of the Tribunal’s analysis of the dispute.
The above four cases demonstrate how the identical wording ‘disputes involving the amount of compensation for expropriation’ in first generation Chinese BITs creates interpretative ambiguities and inconsistency in jurisprudence. In Tza Yap Shum v. Peru, Sanum v. Laos, and BUCG v. Yemen, the Tribunals supported a broad interpretation, whereas in China Heilongjiang v. Mongolia, the Tribunal decided otherwise. All four Tribunals claimed to adhere to Article 31 of the Vienna Convention on the Law of Treaties (VCLT) in terms of their interpretative techniques, namely, to interpret treaty provisions ‘in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’, but emphasized different aspects and came to divergent conclusions. In Tza Yap Shum v. Peru and Sanum v. Laos, both Tribunals relied on the ordinary meaning of the term ‘involving’ to reach a broad view, whilst in BUCG v. Yemen and China Heilongjiang v. Mongolia, both Tribunals moved to the ‘context, object and purpose’ of the treaty, but the former adopted a broad view and the latter a narrow view. The inconsistency of adjudicating techniques and outcomes delivered by arbitral tribunals is further exacerbated by domestic courts. In Sanum v. Laos, the SGHC endorsed a narrow view, which was later overturned by the SGCA in support of a broad view, and confirmed the jurisdiction of the Tribunal. Whereas the New York Southern District Court confirmed the Tribunal’s lack of jurisdiction on the ground of arbitrability.
Because of the lack of a prevailing or authoritative interpretation in adjudicating practice, and the fact that an interpretation given by any tribunals or national courts does not have a binding precedential effect for pending or future cases, first generation Chinese BITs cannot ‘guarantee a formalistic, formulaic or recitative interpretation’.Footnote 45 The inconsistency problem emanated in the adjudication manifests the inherent drawback of the current ad hoc investor-state arbitration mechanism. This creates uncertainty and a great potential for more inconsistent outcomes in future arbitration cases when first generation Chinese BITs are involved, inter alia in the three new pending cases where China is the Respondent.Footnote 46