CHINA: An Introduction to Dispute Resolution: Arbitration (PRC Firms)

China’s Participation in International Investment Arbitration 

In recent years, international investment arbitration has gained increasing attention from the Chinese government and investors. Employing legal mechanisms to address various investment and trade disputes involving the Chinese government and investors has become a fundamental strategy.

Case Overview and Chinese BITs 

As of the end of 2023, there are a total of nine known international investment arbitration cases involving Chinese government. Out of these, China has won two cases, settled one case, terminated one case, and five cases are currently under trial, with no recorded losses. The two cases won by the Chinese government include the AsiaPhos and Norwest v. China and Ansung Housing v. China.

There are a total of 17 known cases initiated by Chinese investors against the host countries. Out of these, two cases resulted in victories for the Chinese investors, three cases ended in losses, one case was settled, one case was terminated, and 10 cases are currently under trial. In 2023, two new cases were registered with the International Centre for Settlement of Investment Disputes (ICSID), both initiated by Chinese investors against the governments of the host countries.

Among the various legal foundations for international investment arbitration, BITs are more common. Up to now, China has concluded a total of 146 BITs, with 106 still in force, 17 not yet in effect, and 23 terminated. The most recent BIT signed was with Angola in 2023. In 2020, China and the European Union reached the China-EU Comprehensive Agreement on Investment (CAI), replacing BITs with EU countries. China has also concluded 29 treaties with investment provisions (TIPs), of which 24 are already in effect.

BITs typically include Investor-State Dispute Settlement (ISDS) clauses. Chinese BITs have evolved through three phases. In the first phase (1982-1998), China had 88 BITs, namely the first generation BITs, and there was a generally conservative attitude towards the ISDS mechanism. The initial eight BITs lacked ISDS. In 1993, China ratified the ICSID Convention but held a skeptical view of the Convention and the ICSID arbitration system. Concerns were raised about potential restrictions on national sovereignty and jurisdiction. China made a declaration, expressing willingness to consider submitting disputes involving expropriation or compensation amounts to ICSID arbitration. Eighteen BITs in this phase contain ICSID arbitration clauses. Phase Two is from 1998 to 2012. ISDS applicability gradually expanded during this period. China agreed to submit all investment disputes to ISDS arbitration. In Phase Three (2012-present), China’s attitude towards the ISDS mechanism tends to be cautious, with a contraction of its scope. Exceptions have been introduced in some BITs.

China has not only signed a large number of BITs but has also attracted significant foreign investment. However, the number of cases in which China is a respondent is extremely low, a phenomenon known as “China Disequilibrium.”

China’s Approach to ISDS 

The ISDS mechanism has been a subject of continuous debate. For sovereign nations, the ISDS mechanism allows foreign investors to bypass their judicial sovereignty and directly resort to international arbitration tribunals, thereby limiting the country’s judicial jurisdiction. In the process of formulating policies and implementing measures, there may also be a reluctance to act due to the fear of the jurisdiction of international arbitration tribunals, a phenomenon known as “regulatory chill.” This is considered a negative impact of the ISDS mechanism.

For investors, they hope to seek independent third-party remedies beyond the jurisdiction of the host country to eliminate local protectionism and safeguard their investment interests. The ISDS mechanism undoubtedly provides investors with a more reliable legal avenue for redress. Particularly under the ICSID Convention, arbitration decisions are not subject to review by the national courts of the enforcing country, avoiding issues related to the refusal of enforcement under the New York Convention.

China is both an investment destination and a source of outward foreign investment. This dual role necessitates the safeguarding of regulatory space within its sovereignty and the protection of Chinese investors operating abroad. China maintains a positive attitude towards the ISDS mechanism while expressing a desire for its reform. China’s reform proposals include establishing a permanent multilateral appellate mechanism, retaining the parties’ right to appoint arbitrators, improving the selection process and qualification requirements for arbitrators, establishing more effective mediation mechanisms and mandatory consultation procedures, and stipulating disclosure obligations for third-party funding. China’s reform plan was also reflected in the fourth round of ICSID rule revision in October 2016 and China’s proposed amendments included:

(1) further rationalising the management costs of cases;

(2) introducing additional case filing review stages;

(3) expanding third-party funding to include financial and other material assistance;

(4) requiring the parties’ consent for the public disclosure of arbitral awards.

Investment Disputes and Problems Facing China 

The Belt and Road Initiative (BRI) proposed by China involves a wide range of countries and substantial investment. Consequently, there is a significant likelihood of investment disputes. By 2023, China has signed more than 200 Belt and Road cooperation documents with 153 countries and 32 international organizations. However, China has signed BITs with only 105 Belt and Road Countries and 60 BITs belong to the first generation that only recognize ISDS in the dispute over the expropriation and compensation amount.

In response to potential investment disputes, some suggest establishing a Belt and Road Dispute Resolution Center, while others advocate reforming the existing ISDS mechanism. The International Commercial Court of the Supreme People’s Court, established in Xi’an and Shenzhen in 2018, was initially intended to address investment and commercial disputes arising from the BRI.

In addition, several Chinese arbitration institutions have also introduced investment dispute arbitration rules. For example, the China International Economic and Trade Arbitration Commission implemented the “International Investment Dispute Arbitration Rules” on October 1, 2017. The Beijing International Arbitration Center’s “Investment Arbitration Rules” officially came into effect on October 1, 2019. The 2024 edition of the rules of the Shanghai International Economic and Trade Arbitration Commission stipulates that investment arbitration can be conducted in accordance with “UNCITRAL Arbitration Rules”. The 2022 edition of the rules of the Shanghai Arbitration Commission allows for the acceptance of investment dispute arbitration. In 2016, the Shenzhen International Arbitration Court was the first in China to include investment arbitration within its scope and applied the “UNCITRAL Arbitration Rules” to investment arbitration cases.

In addition to BRI related investment disputes, those in connection with economic sanctions and the pandemic are also issues to be addressed. The impact of economic sanctions on international investment arbitration cannot be ignored, yet international investment treaties rarely address issues related to economic sanctions. Many Chinese companies and individuals are currently facing various forms of sanctions. Because of the effects of these sanctions, numerous legal challenges are emerging in the field of investment arbitration, affecting the tribunal’s jurisdiction and the enforcement of awards.

As many cases are still pending, and some arbitral tribunals refuse to analyse disputes related to sanctions, there is no definitive conclusion. With some awards involving economic sanctions still in the enforcement phase, overseas Chinese investors are expected to encounter more challenges, including increased risks of economic sanctions and uncertainties in investment arbitration outcomes.

During the extraordinary period of pandemic prevention and control, countries have implemented extraordinary measures. These measures will have downstream effects on investors and state dispute resolution. Investment disputes involving indirect expropriation and fair and equitable treatment (FET) are likely to arise.

China is currently negotiating new ISDS mechanisms respectively with the European Union and the United States. These negotiations are considered potential fourth-generation BITs for China. In the coming years, China faces the task of actively participating in the improvement of the ISDS system and dealing with potential investment disputes.