2nd part - Arbitration Academy

Report
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
quotation 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 investments and associated
activities by its own investors.
• China has not agreed to date to apply NT to “establishment and
acquisition”.
– The maximum extent China would be willing to extend NT:
“expansion” 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 investment in
accordance with its laws and regulations.
 Model BIT Art. 2.1
Each Contracting Party shall encourage investors of the other Contracting
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’ qualification
from the treaty text,
– but retain a ‘grandfather provision’ or ‘freezing clause’ applicable 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
inconsistent 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 disposal of investments
(hereinafter referred to as "investment and business activities").
2. ……. paragraph 1 of the Article 3 do not apply to any existing nonconforming 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 amendment 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, acquisition, expansion,
operation, management, maintenance, use, enjoyment, 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 acquisition are
specified in the so-called 'negative list'.
• Negative list identifies:
– all sectors or activities to which the pre-establishment NT obligation
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
establishment and acquisition (e.g., China):
– Japan attempts to secure MFN treatment with
respect to establishment and acquisition
• Exceptional cases: Japan was unable to obtain
either 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 investments
and returns 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, 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 postestablishment phases of investment with respect to
management, maintenance, use, enjoyment, or
disposal of investments.
• Exception: Korea-Japan BIT (2003)
• In the investment chapters of FTA,
– Korea seeks to extend the scope of NT to cover the
establishment, 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) standards, 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
investments.'
– However, the NT does not apply to 'any existing non-conforming
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 acquisition
– 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
China-Japan
(1998)
BIT
Japan-Korea
(2002)
• Post-establishment phase (“with respect to investments, ret
urns and business activities in connection with investment”)
(Art. 3.2)
• Pre-and post-establishment (including “establishment, acqui
sition and expansion”) (Art. 2.1)
• Exceptions: non-conforming measures listed in Annex
• Post-establishment: with respect to expansion, operation,
management, etc. (Art. 3.1)
Korea-China
(2007)
• Excludes establishment and acquisition
• Exceptions: “existing non-conforming measure” maintained
within China or “any future amendment”
• China to progressively remove all non-conforming measur
e (Art. 3.2)
NT Clause in FTAs
• Post-establishment phase: management, conduct, operatio
FTA Investment Chapter
n and sale or other disposition of investments (Art. 129.1)
• Exception : Existing non-conforming measures, or
China-Peru (2009)
continuation of, or amendment to, any non-conforming
measures allowed (Art. 130.1)
• Parties to endeavor to progressively remove all nonconforming measures (Art. 130.2)
Japan-Peru (2011)
Korea-Peru (2011)
• Pre-and post-establishment phase: Reservations and
Exceptions listed in Annex (Art. 8)
• Pre-and post-establishment phase: Similar to Japan-Peru
(Art. 9.3)
Most Favored Nation(MFN) Treatment
• Promise not to discriminate between foreign
investors and investments on the basis of
“nationality”
• With respect to what?
– Establishment and acquisition [and expansion]?
– Other post-establishment business activities?
• MFN clause applicable to dispute resolution
related provisions?
Most Favored Nation: China (1)
Model BIT (III) Article 3:Treatment of Investment
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 investors of any third
State.
• 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’
Most Favored Nation: China (2)
• None of the Chinese Model BITS have included the ‘in like
circumstances’ 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
investments” (China-Korea BIT, China-Japan BIT).
– While Korea and Japan grant NT with respect to establishment
and acquisition in Japan-Korea BIT, Chinese investors could
benefit the NT with respect to establishment and acquisition
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, economic
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 provision
excluding the application of the MFN clause to dispute resolution
provisions. (Art. 5(4) of The ASEAN/China Investment Agreement
(2009))
Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6,
Decision on Jurisdiction and Competence 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 engaged
in the business of producing fish-based food products and export
them to Asian market, indirectly through an offshore 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 business
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 negotiations as
specified in Paragraph 1…, it may be submitted at
the request of either party to the International
Center for Settlement of Investment Disputes
(ICSID)…… Any disputes concerning other matters
…… may be submitted 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 dispute 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 application
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 investors of
the other Contracting Party and to their investments treatment no
less favourable than the treatment it accords 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 postestablishment 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 returns 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, 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.
 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
Korea-US FTA:
– MFN treatment to cover the establishment,
acquisition 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 monetary
union.
– Double tax treaty
– 'government procurement' or 'subsidies or grants
provided by a Party, including governmentsupported loans, guarantees, and insurance.'
(Korea-US FTA)
Most Favoured Nation (MFN)
Treatment (1)
China-Japan
BIT
(1998)
Japan-Korea
(2002)
Korea-China
(2007)
• In respect of the admission of investment and the matters i
n connection therewith (Art. 2.2)
• With respect to investment, returns and business activities i
n connection with the investment (Art. 3.1)
• With respect to investment and business (defined to includ
e establishment/ acquisition)
• Exception: non-conforming measures specified in Annex (Ar
t. 4, 5)
• With respect to investments and associated activities,
including investment admission (Art. 3.3)
• Exception: subject to typical exceptions for custom unions,
FTA or tax-related treaties (Art. 3.4)
Most Favoured Nation (MFN)
Treatment (2)
• Pre-and post-establishment phase:
• Exception : Cultural industries like production of books, magazines,
FTA Investment Chapter
China-Peru
(2009)
periodical publications, or printed/electronic newspapers 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)
Japan-Peru
(2011)
Korea-Peru
(2011)
• Pre-and post-establishment phase: Reservations and Exceptions listed
in Annex (Art. 8)
• MFN treatment does not encompass dispute resolution mechanisms
(Art. 4.2)
• Pre-and post-establishment phase (Art. 9.4): Exceptions: Nonconforming measures listed in Annex
• MFN treatment does not encompass dispute resolution mechanisms
(Annex 9A)

similar documents