Source: https://iclg.com/practice-areas/investor-state-arbitration-laws-and-regulations/china
Timestamp: 2019-04-23 18:29:01+00:00

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17 free trade agreements (“FTAs”) with investment provisions/chapters.
In addition, the Chinese central government has concluded and ratified special trade and investment arrangements with Hong Kong Special Administrative Region (“SAR”), Macao SAR and Taiwan, respectively.
There are approximately 20 BITs that China has signed but have not yet come into force due to unfinished domestic ratification procedures. Public information only shows two BITs that have not yet been ratified by China (i.e. the Botswana-China BIT (2000) and the China-Turkey BIT (amended)), with the approval of the counterpart states also pending.
No official version of the Chinese model BIT has been published by the Chinese government. However, the reader can find the unofficial versions of the Chinese Model BIT in Norah Gallagher & Wenhua Shan (eds): “Chinese Investment Treaties: Policy and Practice” (Oxford University Press: 2009), Appendices II to IV. As introduced in this treatise, the key provisions in the Chinese Model BIT Version III include fair and equitable treatment (Article 3.1), national treatment (Article 3.2), most-favoured-nation (“MFN”) treatment (Article 3.3), expropriation (Article 4), investor-state dispute settlement (Article 9), an umbrella clause (Article 9.2), etc.
The exchange of diplomatic notes between China and its counterparties will generally be annexed to the relevant BITs as an integral part of them, and published on the official website of the Ministry of Commerce (“MOFCOM”).
In the cases of new or succeeding states, for example, China acknowledges that Serbia, as a successor of the Former Yugoslavia, continues to be the counterparty to the China-Yugoslavia BIT (1995).
To our knowledge, no consolidated official commentaries have been published.
The Selected Works of China’s Practice on International Law (published by the Department of Treaty and Law of the Ministry of Foreign Affairs (“MFA”) in March 2018), may serve as a reference, as it covers the history of China’s treaty practice and China’s position on treaty interpretation, provisional applications, treaty successions, treaty reservations, dispute settlement of treaty-related issues, etc.
Occasionally, after China signs an FTA, MOFCOM will release an interpretation, or a Q&A (in Chinese) to highlight the features, clarify China’s position on specific provisions and explain the rationale behind the text. This practice has been followed by the China-Australia FTA (2015), China-Korea FTA (2015), etc. (available at: http://fta.mofcom.gov.cn/english/index.shtml).
China acceded to the New York Convention on 22 January 1987, with the reservation that it will only apply the New York Convention to the recognition and enforcement of awards made in the territory of another contracting state, and only to differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law. The New York Convention became effective in China as of 22 April 1987, with its effects extending to the Hong Kong SAR and the Macao SAR on 1 July 1997 and Macao on 20 December 1999, respectively, upon resumption of China’s sovereignty.
China signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”) on 9 February 1990 and notified the International Centre for Settlement of Investment Disputes (“ICSID”) on 7 January 1993 that pursuant to Article 25(4) of the ICSID Convention, the Chinese Government would only consider submitting to the jurisdiction of the ICSID disputes over compensation resulting from expropriation and nationalisation. The ICSID Convention entered into force in China on 6 February 1993.
China is not a party to the Mauritius Convention.
Yes. The Law of the People’s Republic of China (“PRC”) on Chinese-Foreign Equity Joint Ventures (amended in 2016, the “EJV Law”), the Law of the PRC on China-foreign Co-operative Enterprises (amended in 2017, the “CJV Law”), and the Law of the PRC on Wholly Foreign-owned Enterprises (amended in 2016, the “WFOE Law”) set forth the conditions, forms and procedures for foreign investment in China.
Expropriation: Article 2 of the CJV Law and Article 5 of the WFOE Law stipulate that the state shall not nationalise or expropriate equity joint ventures (“EJV”) and wholly foreign-owned enterprises (“WFOE”) unless in special circumstances where it is necessary to the public interest and the expropriation or nationalisation is conducted in accordance with legal procedures, with appropriate compensation.
Dispute resolution: pursuant to Article 16 of the EJV Law and Article 26 of the CJV Law, if any dispute arises between the Chinese and foreign investors in equity joint venture or co-operative enterprises, it can be settled through consultation, conciliation or arbitration by a Chinese or other arbitral body agreed on by all parties. Failing a valid arbitration agreement, the dispute can be filed before a People’s Court in China.
There are also various administrative regulations, rules and measures at the national and local levels which provide detailed guidelines on market access, incorporation formalities and other operational aspects of foreign investment.
On 19 January 2015, MOFCOM published the draft PRC Foreign Investment Law (the “FIL Draft”) for public comments. In March 2018, the FIT Draft was submitted to the legislative agenda of the PRC State Council.
The FIL Draft commits to investment protection (Article 3), national treatment (Article 6) and investment promotion (Article 7), and adheres to the principles of openness and transparency (Article 8). In particular, Article 10 indicates China’s determination to promote and develop mutual investment with other countries and regions and conclude multilateral, bilateral or regional investment treaties, conventions and agreements. In addition to the newly defined “foreign investor” (Article 11) and “foreign investment” (Article 15), the FIL Draft proposes an independent chapter for investment protection, which covers expropriation (Article 111), state compensation (Article 113), transparency (Article 115) and dispute resolution (Article 118).
Yes. China requires formal admission of a foreign investment, which has been much simplified in the 2018 reform.
Foreign investment in China is subject to the Catalogue of Industries for Guiding Foreign Investment (revised in 2017 and jointly issued by the National Development and Reform Commission (“NDRC”) and MOFCOM, the “2017 Catalogue”), which sets out the “encouraged”, “restricted” and “prohibited” sections for foreign investment. Foreign investors are not allowed to invest in a “prohibited” industry and are recommended to invest in an “encouraged” industry. Compared to “encouraged” industries, foreign investment in a “restricted” industry is subject to stricter conditions, procedures, and a longer time taken for scrutiny and approval by the higher authorities. Foreign investment in industries other than “prohibited”, “restricted” or “encouraged” can be considered “permitted”.
The notable reform is the issuance of the Special Administrative Measures (Negative List) for Foreign Investment Access (2018 Version) (“2018 Negative List”) and Special Administrative Measures (Negative List) for Admission of Foreign Investments to Pilot Free Trade Zones (2018 Version) (“2018 FTZ Negative List”), both of which entered into force on 30 July 2018. Compared with the 2017 Catalogue, the 2018 Negative List reduces the number of “restricted” sections from 63 to 48.
Lou Mengjie v. Aeroflot-Russian Airlines (2017) Hu 02 Min Zhong No. 10786 concerned the compensation standard for a passenger’s claim for luggage damage. When interpreting the conflicting provisions in the Warsaw Convention and Montreal Convention on the limit of liability, the Jing’an District People’s Court of Shanghai Municipality (“Jing’an DPC”) followed the Vienna Convention on the Law of Treaties (“VCLT”) and confirmed that, in terms of the rights and obligations of states’ parties to successive treaties relating to the same subject matter, when the parties to the later treaty do not include all the parties to the earlier one, the treaty to which both states are parties governs the mutual rights and obligations between them. Accordingly, as China and Russia are parties to the Warsaw Convention and as Russia did not ratify the Montreal Convention, the court held that the Warsaw Convention should apply to the compensation standard. The appeal court upheld this decision.
Shanghai Jwell Machinery Co., Ltd. and Retech Aktiengesellschaft, Switzerland (2009) Hu Gao Zhi Fu Yi Zi No.2 Enforcement Review Ruling. In its reconsideration of the binding decision of the Higher People’s Court of Shanghai Municipality (“the HPC of Shanghai”) on the enforcement of a foreign-related award where enforcement actions were also sought in other jurisdictions, the Supreme People’s Court of China (“SPC”) confirmed that the objective of the New York Convention is to facilitate the successful enforcement of arbitral awards in each contracting state and therefore does not prevent the parties from applying to several contracting states for the recognition and enforcement of the award. The case was selected and re-issued by the SPC as a de facto binding Guiding Case to guide the adjudication of similar subsequent cases and ensure the uniform application of law.
Lu Hong v. United Airlines, published in the Gazette of the SPC in 2002 (Issue No. 4). The dispute concerned a personal injury compensation claim of a Chinese citizen against United Airlines. The Jing’an DPC opined that the hierarchy of the applicable law for foreign-related civil cases in China is: international convention or treaties (subject to the reservations); PRC law; and international customs and practice. Since China and the United States are parties to the Warsaw Convention (as well as the Hague Protocol to amend the Warsaw Convention), and the parties also chose to apply the Warsaw Convention, the court ruled that the Warsaw Convention should apply. As permitted by the Warsaw Convention, the court upheld a higher limit of liability agreed by the carrier and the passenger on the flight tickets.
With the deepening of the reform and opening-up since the 1980s, particularly the expansion of outbound trade and investment, China has gradually changed its attitude to investor-state arbitration from caution and prudence to proper openness. Since the conclusion of the China-Barbados BIT in 1998, China has signed an increasing number of new-generation BITs, with a broad arbitration clause covering all disputes arising from the investments. After winning the early dismissal under ICSID Arbitration Rule 41(5) in Ansung v. China, MOFCOM stated that China “will continue to insistently maintain and safeguard its rights under international treaties”, while endeavouring to protect “the legitimate rights of foreign investors”.
Anti-corruption: China-related BITs and FTAs have not included provisions addressing anti-corruption issues. Nonetheless, China was among the earliest countries to ratify the United Nations Convention against Corruption (“UNCAC”) in 2003 and has since increased its anti-corruption campaign domestically, as well as its international cooperation on enforcement, extradition and asset recovery.
Climate change and environmental protection: China-related BITs and FTAs have not included provisions specifically addressing climate change issues. Nonetheless, China ratified the United Nations Framework Convention on Climate Change (“UNFCCC”) in 1993. In 2015, China submitted its new climate action plan to the UNFCCC for the post-2020 period. In 2016, China acceded to the Paris Agreement to mitigate worldwide greenhouse gas emissions.
Some recent BITs have addressed environmental concerns. For instance, Article 23 of the China-Japan-Korea TIA (2012) provides: “Each Contracting Party recognizes that it is inappropriate to encourage investment by investors of another Contracting Party by relaxing its environmental measures. To this effect each Contracting Party should not waive or otherwise derogate from such environmental measures as encouragement for the establishment, acquisition or expansion of investments in its territory”. Similar provisions can be seen in Article 18(3) of the China-Canada BIT (2012).
Transparency: Most of the FTAs signed by China contain a chapter addressing transparency of laws, regulations and policies, which usually requires that the contracting parties publish any laws and regulations regarding the matters covered by the FTA, and that foreign investors be given the opportunity to comment on the relevant legislation proposals. It also requires that the administrative proceedings be conducted in accordance with domestic law. Similar provisions can be found in some BITs concluded after 2010, e.g. Article 10 of the China-Japan-Korea TIA (2012) and Article 17 of the China-Canada BIT (2012). Some newly signed BITs have adopted a greater transparency of dispute resolution. For example, Article 28 of the China-Canada BIT (2012) permits the publication of the awards and other written documents and participation of the non-disputing contracting parties.
MFN: The MFN clause has been a common feature in all Chinese BITs, and may be summarised into two types: (1) a stand-alone treatment expressly set forth in the BIT, e.g. Article 2 of China-Turkey BIT (1990), or Article 3 of China-Belarus BIT (1993); and (2) a treatment linked with a Fair and Equitable Treatment (“FET”) and/or National Treatment standard, e.g. Article 3 of the China-Poland BIT (1988), or Article 3 of the China-Morocco BIT (1995). Notably, some recent BITs, e.g. Article 4(1) of the China-Korea-Japan TIA (2012) and Article 12.1 of the China-Korea FTA (2015), make it clear that the MFN clause does not extend to dispute settlement.
Indirect investment: As not all Chinese BITs recognise indirect investment as an “investment”, it should be examined on a case-by-case basis. Recent BITs recognising indirect investment include, for example, Article 1.3 of the China-Canada BIT (2014) and Article 1(1) of the China-Japan-Korea TIA (2012).
China has not given any notice to terminate any BIT or similar agreements. However, according to the United Nations Conference on Trade and Development (“UNCTAD”), the China-Ecuador BIT, China-India BIT, and China-Indonesia BIT have been unilaterally terminated due to a change in the attitudes of Ecuador, India and Indonesia towards investor-state arbitration.
Concluded: Tza Yap Shum v. Republic of Peru (ICSID Case No. ARB/07/6); Beijing Shougang Mining Investment Company Ltd., China Heilongjiang International Economic & Technical Cooperative Corp., and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. (“Beijing Shougang and others”) v. Mongolia (PCA Case No. 2010-20); Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium (ICSID Case No. ARB/12/29); Standard Chartered Bank (Hong Kong) Limited v. Tanzania Electric Supply Company Limited (ICSID Case No. ARB/10/20); Sanum Investments Limited (“Sanum”) v. Lao People’s Democratic Republic (“Laos”) (PCA Case No. 2013-13); Philip Morris Asia Limited v. The Commonwealth of Australia (PCA Case No. 2012-12); and BUCG v. Yemen (ICSID Case No. ARB/14/30).
Pending: Sanum v. Laos (ICSID Case No. ADHOC/17/1); Standard Chartered Bank (Hong Kong) Limited v. United Republic of Tanzania (ICSID Case No. ARB/15/41).
As a respondent, China has participated in three investor-state cases, two of which have been concluded, with one pending.
Concluded: Ansung Housing Co., Ltd. v. People’s Republic of China (ICSID Case No. ARB/14/25); and Ekran Berhad v. People’s Republic of China (ICSID Case No. ARB/11/15).
Pending: Hela Schwarz GmbH v. People’s Republic of China (ICSID Case No. ARB/17/19).
So far, there has been no investment arbitration award made against China.
By ratifying the ICSID Convention, China is obligated to recognise and enforce an ICSID award, pursuant to Article 54 thereof. However, China has not designated a competent authority for this purpose. It is therefore not clear how Chinese courts would deal with the awards seeking enforcement in China. Such uncertainty is increased by Article 55 of the ICSID Convention, which provides that each state’s laws regarding sovereign immunity from execution continue to apply.
No, because China has not lost a case.
The author is aware of a commercial arbitration case following the issuance of an ICSID award on the same substantive claims, but the information is not available in the public domain.
The recently released Procedural Order No. 2 of Hela v. China reveals that the ICSID arbitration originated from a domestic administrative lawsuit in relation to the alleged expropriation of the right to use the land of Hela’s local subsidiary.
Applicable investment treaties: The China-related cases mostly involve the older generation of Chinese BITs. However, two out of three cases in which China was respondent were initiated under the new generation of Chinese BITs, i.e. the China-Korea BIT (2007) and the China-Germany BIT (2003). Since China has signed more than 130 BITs, the old and new generations of BITs may create conflicting problems, such as temporal application issues as reflected in Ping An v. Belgium.
Scope of arbitration: The dispute resolution clauses of the older generation of Chinese BITs often provide for arbitration of disputes “involving” or “relating to” the amount of compensation for expropriation. The Tza Yap Shum v. Peru tribunal ruled that a good-faith reading of the word “involving” means that the reference for arbitration need not be limited to the compensation for expropriation and may also cover the broader dispute about expropriation. Its interpretation approach has been followed by Sanum v. Laos (PCA Case No. 2013-13) and BUCG v. Yemen. In contrast, the Beijing Shougang and others v. Mongolia tribunal, by a restrictive interpretation approach, refused to exercise jurisdiction on the investor’s claim for expropriation when examining a similarly conventional dispute resolution provision. The conflicting results will hopefully be reduced, along with a greater number of new-generation BITs containing a broader and more definite scope of arbitration.
Treaty’s territorial application to Hong Kong and Macao: Whether a BIT concluded by the central government of China can apply to Hong Kong and Macao is pivotal for the investors from these two SARs seeking treaty arbitration for investment protection. In Tza Yap Shum v. Peru, the tribunal held that all Chinese nationals, including those residing in Hong Kong, are covered by the ICSID Convention and the China-Peru BIT. In Sanum v. Laos (PCA Case No. 2013-13), the tribunal concluded that the BIT applies to all the territory over which the PRC is sovereign and that Sanum, as a Macao-registered company, is protected by the China-Laos BIT. The tribunal’s decision was ultimately upheld by the Singaporean Court of Appeal, although Laos was able to successfully challenge the tribunal’s jurisdiction at the High Court of Singapore. The MFA of China has expressed in public its disagreement with the findings of the Court of Appeal; in particular, the weight given to the notes verbales between the MFA of Laos and the Chinese Embassy in Vientiane and the letter from the MFA of China, both confirming that Macao is not covered by the Chinese BITs. The issue is likely to remain uncertain and subject to case-by-case analysis of the evidentiary value of the documents presented.
Although the regulatory framework on third-party funding (“TPF”) has not been established yet, TPF is not prohibited in Mainland China. In a broader sense, TPF has gradually developed by way of costs insurance, claim assignment and other alternative funding options to reduce the parties’ financial burden of pursuing the claims.
In June 2017, Hong Kong SAR passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017, giving the green light to TPF for arbitration and mediations in Hong Kong.
The China International Economic and Trade Arbitration Commission (“CIETAC”) Investment Arbitration Rules include provisions on TPF.
No such case has been reported in China.
Strictly speaking, there is no arbitration funding in China. The litigation financing platforms, such as WeAnd Internet Legal Finance Information Service Co. Ltd. in Shanghai, the Federation of Multi-level Capital Market, and DS Legal Capital in Shenzhen, have grown rapidly in providing funding options for domestic litigation.
Tribunals are free to consider criminal investigations and judgments of the domestic courts as facts.
In accordance with the CPL and the Arbitration Law, Chinese courts have the jurisdiction to grant provisional relief (e.g. property and evidence preservation measures; and act preservations, which are similar to interim injunctions in English law) in support of an arbitration conducted in China, either before or after the arbitration is initiated. The Chinese courts also have the jurisdiction to determine the validity of an arbitration agreement if one party applies to it to make the decision and the matter has not yet been determined by the arbitral tribunal.
The arbitration proceedings conducted in Mainland China are governed by the Arbitration Law and the Interpretation of the SPC on Certain Issues Concerning the Application of the Arbitration Law of PRC (effective as of 8 September 2006). For procedural matters that are not provided for in the provisions above, references are usually made by tribunals to the Civil Procedure Law (“CPL”) and the relevant interpretations issued by the SPC regulating the enforcement of civil litigation proceedings.
Chinese law contains no explicit provisions on arbitrator immunity.
Article 38 of the Arbitration Law imposes sanctions on an arbitrator in two scenarios: (1) where the arbitrator has privately met with a party or a party’s counsel, or has accepted an invitation to entertainment or a gift from a party or a party’s counsel, and the circumstances are serious; and (2) while arbitrating the case, the arbitrator has accepted bribes, resorted to deception for personal gains or perverted the law in the ruling. Under these circumstances, the Arbitration Law provides that the arbitrator concerned shall assume liability “according to the law”. It is generally understood that the liability may include either civil liability or criminal liability, or even both.
Further, an arbitrator who deliberately renders an award in violation of the law and against the facts may be charged with criminal liability under Article 399 of the Criminal Law.
Under Article 11 of the Arbitration Law, each Chinese arbitration institution must have appointed arbitrators. Article 13 (revised in 2017 and effective from 1 January 2018) further sets out the criteria for a qualified arbitrator. In practice, the major arbitration institutions in Beijing, Shanghai and Shenzhen have adopted the rules to permit the parties to select and appoint arbitrators from outside their lists of arbitrators.
Yes. Under Article 32 of the Arbitration Law, if the parties fail to agree on a method for forming the arbitral tribunal, or fail to appoint the arbitrators within the time limit specified in the arbitration rules, the arbitrators shall be appointed by the chair of the arbitration commission. The arbitration rules of the arbitration institutions often incorporate similar provisions.
No, domestic courts have no role in the selection of arbitrators.
the standard, object and scope of performance of action are clear.
Besides, in cases of enforcement of continuous performance of contract, the award shall specify the specific contents (e.g. scope, method, period, etc.) of the rights and obligations to be continuously performed.
In terms of enforcing a foreign award, the applicant shall supply the documents as required under Article IV of the New York Convention.
China has not adopted the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law, but has adopted separate standards for enforcing foreign/foreign-related arbitral awards and domestic arbitral awards.
Foreign arbitral award: Pursuant to Article 283 of the CPL and Article 4 of the Circular of the SPC on Implementing Convention on the Recognition and Enforcement of Foreign Arbitral Awards Acceded to by China, a Chinese court may deny the recognition and enforcement of a foreign arbitral award if one or more of the grounds set out in Article V of the New York Convention are met.
Foreign-related arbitral award: The grounds for refusing the enforcement of a foreign-related award are set out in Article 274 of the CPL and are very similar to those for refusing enforcement of a foreign award under the New York Convention.
Domestic arbitral award: Article 237 of the CPL allows the court to refuse enforcement on much broader grounds, ranging from defects of evidence to the tribunal’s malpractice.
There is no public record showing that any domestic courts in Mainland China have dealt with issues of sovereign immunity and recovery against state assets.
In the Hong Kong case of Democratic Republic of the Congo v. FG Hemisphere Associates LLC, a 3:2 majority in the Court of Final Appeal held that state immunity covered not only sovereign acts but also the state’s commercial activities, which has been confirmed by an interpretation of the Standing Committee of the PRC National People’s Congress. This means that, as in the rest of China, absolute state immunity applies to Hong Kong.
In March 2016, the draft Foreign State Immunity Act (drafted by the MFA) was submitted to the legislative agenda of the PRC State Council.
China is a signatory to the United Nations Convention on Jurisdictional Immunities of States and Their Property 2005 (the “CJISTP”), which is widely acknowledged to be a treaty that endorses a restrictive approach to state immunity. Under the CJISTP, signatory states will be subject to essentially the same jurisdictional rules as private entities with respect to commercial transactions. However, the CJISTP has not yet come into force in China.
Mainland China has no legislation or case law on the corporate veil issue in relation to sovereign assets.

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