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UK China Bilateral Investment Treaty

 

International arbitration is the most widely used form of dispute resolution between commercial entities involving different nationalities, foreign investors, and individual states[1]. The benefit of international arbitration is that it is neutral, consensual, private, binding, and enforceable by means of international dispute resolution. When compared to domestic courts, it is faster, less expensive and reliable means of dispute resolution[2]. The international arbitration mainly relies on the international treaties. The international treaties are often crafted in a manner that blends the elements of civil law and common law. In most cases, the companies frequently include international trade agreements in their commercial contracts to helps to guide possible dispute resolution in the future.

The Bilateral Investment Treaties (BITs) are of great importance when investing in a country like China.  Particularly, the investors from the west need to be extra careful when investing in China considering the level of government regulation and authorizations needed to invest in the country. Around the world, more than 180 states have entered into bilateral agreements with China to protect their businesses there. Therefore, the BIT are designed to protect such investments from any form of exploitation and damage[3].

By description, the BITs are kind of agreements entered as a means of providing protection and protection of investments in foreign states in the territory of the other[4]. In most cases, BITs are entered into by the capital importing and the capital exporting nations during trade negotiations. In this regard, the countries entering the treaty promise to treat the foreign investors fairly and reasonably. Also, each country entering the treaty promises not to discriminate against such investors in terms of economic opportunities and not to nationalize or expropriate their investments without proper compensation[5].

The conditions for the fulfillment of the BIT are that the investor needs to make investments in the host state[6].  The description of investment is the same for most BITs. However, the definition of an investor varies significantly from one BIT to another. Therefore, the definition of an investor can have a significant effect on the ability of foreign investors to gain protection from their investments.

In most cases, the investors are described as the natural persons who are citizens of one party to the BIT. The investors can also be the companies incorporated in one party to the BIT[7]. Unlike other countries, the BITs with China demands that the seat of the investing company be in the other party to the BIT[8]. Funnily, the UK is the only major trading partner to the Chinese that lacks that requirement in its BIT with China. Therefore, if a UK company wishes to take an advantage of the BIT with China but does not have a BIT with China, it can invest through the UK. Due to this, the UK enjoys a superior advantage as an economic power as China continues to grow and expand its economic horizons[9]. As the investments in and out of China grow, so does the UK grow. Specifically, the companies owned by UK investors easily invest in China due to the protection by the UK-China BIT. The UK economy stands to gain tremendously from such an arrangement since it is one of the few countries in the whole world where foreign investors whose seat is elsewhere in the world may set up a special purpose vehicle (SPV) company. Through such a vehicle, the UK has the flexibility of routing their investments in China[10].

The issue here is that the Chinese government has nationalized a UK telecom company Melixa Plc. Six weeks after the expropriation, the company seeks to bring arbitral proceedings against the Chinese government under the UK-China Bilateral Trade Agreement (BIT). The Chinese military seized and took control of the company offices, proclaiming that the company has been nationalized. Also, no compensation was paid to the foreign nationals since the government argued that the company was in negative equity. However, Melixa has insisted that the expropriation was unlawful. My advice to Melixa Plc the company should seek international arbitration under the UK-China BIT. Melixa Plc is a UK company and China was their host country so their trade agreements are protected by the UK-China BIT signed several decades ago.

The UK-China BIT includes a broad definition of investment. It touches on almost every kind of asset that may constitute an investment and gives examples of shares, claims, and rights and performance under contract and intangible rights[11]. Under this BIT, an investment is any kind of asset that is acceptable as an investment by the contracting party in its territories[12]. Therefore, the UK-China BIT recognizes that an investment includes the movable and immovable property and any other rights such as pledges and mortgages. Also, the shares, the stocks, and the debentures of companies are considered properties under the UK-China BIT[13]. Similarly, the claims to money or any other performance under the contract that is linked to some financial value are also regarded as property. Finally, the UK-China BIT considers the copyrights, industrial property rights, good will, and the know-hows as important investments for an investor[14]. From these definitions, the activities being undertaken by Melixa Plc in China qualifies to be termed as investments. Therefore, Melixa already meets the initial and important qualification that is often considered under the UK-China BIT.

These descriptions of investments will allow foreign investors to seek for compensation when an issue arises in their host countries. If the host country breaches the BIT, then it will be possible for investors seek compensation by referring to the definitions of investments[15]. This helps to solve the problems that the shareholders have in bringing claims when the wrong was done to the company they invested in as opposed to the investor itself. Therefore, the Melixa Plc will have the freedom before the arbitral committee to describe their numerous forms of investments as they seek for redress.

Apart from the broad definitions of investment, the UK-China BIT also provides other key provisions similar to other BITs. The UK-China BIT has the provision that provides an assurance that the host state should not expropriate foreign investments without paying the investor promptly[16]. In this case, Melixa Plc was not compensated since the government argued that the company was in negative equity. The BIT requires that expropriation should be done after prompt, effective, and adequate compensation for the devaluation of loss of the investments. However, none of these requirements were met to imply that China was already breaching the stipulations under the UK-China BIT[17].

On the other hand, the UK-China BIT contains the rights that should be enjoyed by the foreign investor related to the fair and equitable treatment. This condition enables the arbitral tribunal to assess the fairness of the host state actions during the investment period. Generally, the host state is expected to provide a stable and predictable investment environment that would help the investor to meet his expectations[18]. The host state is expected to commit and adhere to the terms set in the BIT before making any prompt expropriation decisions. Just like other BITs, the UK-China BIT demands that the host country should treat the investors equally irrespective of their origin. Therefore, the host country should not give special treatment to other investors or its own nationals.

During the arbitral proceedings, Melixa Plc needs to rely on Article 2 sub sections (i) and (ii) in arguing their case. This section contains the provisions that help to promote and protect investments in the host countries. For example, it is evident that China breached the Article, subsection (1) of the UK-China BIT by failing to encourage and provide a favorable business environment for the investor. The decision by the Chinese government to seize and surround the company by the military was against the expectations of the business protection. Article 2 also demands that the investments need to be protected by the security, not to be seized by security forces. Instead of providing adequate security, the Chinese government used the security forces to forcefully seize the properties and investments of Malixa. Therefore, China tool unreasonable discriminatory measures against the management by forcefully seizing its investments. There has not been any recent case where China treated its company in a manner that it treated Malixa Plc. Article 3 subsection (ii) demands that the disposal mechanism used by the host country should not be less favorable than that used for their nationals or companies in any third state[19]. Therefore, China went against the expectations of the UK-China BIT that the host country should treat investments equal.

Article 5 of the UK-China BIT explains the terms and conditions expected during expropriation[20]. This article stipulates that the nationalization of a foreign investment should comply with the nationalization terms for the home companies. Also, the clause demands the expropriation should be done after reaching reasonable compensation mechanisms after establishing the real value of their investments. However, no compensation was done for Melixa Plc. The Chinese government ought to have established the real value of Melixa Plc investments and compensate the foreign nationals accordingly before making the expropriation public. Also, the compensation should be made with undue delay. Currently, the Melixa Plc has already been expropriated and any possible compensation can only come after some time. This implies that any possible compensation has already been delayed. Furthermore, there are no compensation plans by the Chinese government as they insist that the company was in negative equity.

On the other hand, the UK-China BIT contains the consent to the international arbitration under widely accepted rules of the international arbitration[21]. In the event of a dispute, the arbitration has not limits in applying the principles and concepts used in the international arbitration. In case of a possible dispute, the arbitration body will compare the standards of the host country with the expectations of the international law. Therefore, the international law provides the benchmark that should be used to deal with the possible investment disputes under the China-UK BIT. The other possible implication of this is that it is possible to evade the difficulty and high costs associated with seeking legal redress against the host state or entities into the dispute within the local courts[22]. In such a circumstance, the host state laws can be avoided while giving priority to the international arbitration rules. Increasing the mere threat of BIT arbitration by the concerned investor is enough to bring the host state or its representative to the negotiation table. The UK-China BIT also allows for concurrent actions under any investment contract and this allows the investors to maximize the pressure and leverage on both sides to win a case.

According to the international law, the expropriating state should justify the reasons for expropriations as was established in Metalclad v Mexico[23]. The failure to justify the reasons for expropriation will also amount to undermining the contractual agreements as was established in CME v Czech Republic[24]. Therefore, China ought to adhere to these expectations of international law as they are part of the UK-China BIT agreement, by extension. For example, the North American Free Trade Treaty (NAFTA) provides protections for the investors by providing safety nets for possible expropriations and nationalization.

For the UK companies that have invested in China, there are wide options of challenging the host state under the UK-China BIT. This will eventually force China and a contractual counterparty into negotiations, thereby providing a valuable safety net for the investor and his investments. Melixa Plc should bring arbitral proceedings under the terms set in Artice 8 of the UK-China BIT[25]. Melixa has the option to settle the dispute through the diplomatic channels or through arbitral tribunal. However, I would advise Melixa Plc to go for the arbitral tribunal since its more effective and superior to the diplomatic channels. The diplomatic channels are prone to several bureaucracies that may impede the justice process for Melixa Plc. The other benefit of the arbitral tribunal is that their rulings are free from bias and apply the concepts of international law[26]. Therefore, their rulings are free and fair and would help Melixa Plc and China to settle the dispute amicably.

In conclusion, Melixa investment in China is protected by the UK-China BIT. This BIT provides the safety net to the foreign investments by avoiding any possible business or economic exploitation from either side. The BIT also provides free and fair treatment of the foreign companies by demanding for similar treatment for both national and foreign companies. By examining the terms of the UK-China BIT, it is evident that China contravened several clauses in its expropriation of Melixa Plc. On the same note, China went against the expectation of the international statutes and laws related to expropriation, Therefore, Melixa Plc should instigate arbitral proceedings against China by taking advantage of the UK-China BIT and other aspects of international law, statutes, and cases.  In simple terms, the Melixa is right to argue inter alia that the expropriation was unlawful.

Bibliography

[1] BERGER, AXEL. (2011) ‘The Politics of China’s Investment Treaty-Making Program,’ in: Tomer Broude, Amy Porges and Marc Busch, eds., The Politics of International Economic Law. Cambridge: Cambridge University Press.

[2] Ibid

[3] FELDMAN, MARK. (2011) ‘The Standing of State-Owned Entities Under Investment Treaties,’ in: Karl Sauvant, ed., Yearbook on International Investment Law and Policy 2010-2011. New York: Oxford University Press.

[4] GALLAGHER, NORAH AND WENHUA SHAN. (2009) Chinese Investment Treaties. Oxford: Oxford University Press.

 

[5] HEPBURN, JAROD AND LUKE PETERSON. (2012) ‘Laos has yet to pay $56 million arbitral debt, but new investors line up to sue; Chines claimant say MRN clause circumvents narrow arbitration clause’ Investment Arbitration Reporter, 19 August 2012.

[6] HANEMANN, THILO AND DANIEL ROSEN. (2012) China Invests in Europe. Rhodium Group.

[7] GUCHT, KAREL DE. (2012) EU-China Investment: A Partnership of Equals. Speech given Bruegel Debate: China Invests in Europe – Pattersn, Impacts and Policy Issues, Brussels, 7 June.

[8] GAUKRODGER, DAVID AND KATHRYN GORDON. (2012). ‘Investor-state dispute settlement: A scoping paper for the investment policy community,’ OECD Working Papers on International Investment No 2012/3.

[9] GALLAGHER, NORAH AND WENHUA SHAN. (2009) Chinese Investment Treaties. Oxford: Oxford University Press

[10] See Cutler, The Treatment of Foreigners, 27 AM. J. INT’L L. 225, 232 (1933).

[11] BERGER, AXEL. (2011) ‘The Politics of China’s Investment Treaty-Making Program,’ in: Tomer Broude, Amy Porges and Marc Busch, eds., The Politics of International Economic Law. Cambridge: Cambridge University Press

[12] UK-China BIT. Treaty Series No. 33 (1986)

[13] Ibid

[14] UK-China BIT. Treaty Series No. 33 (1986)

[15] FELDMAN, MARK. (2011) ‘The Standing of State-Owned Entities Under Investment Treaties,’ in: Karl Sauvant, ed., Yearbook on International Investment Law and Policy 2010-2011. New York: Oxford University Press

[16] GALLAGHER, NORAH AND WENHUA SHAN. (2009) Chinese Investment Treaties. Oxford: Oxford University Press

[17] GALLAGHER, NORAH AND WENHUA SHAN. (2009) Chinese Investment Treaties. Oxford: Oxford University Press

[18] O’CONOR, LEE. The International Law of Expropriation of Foreign-Owned Property: The Compensation Requirement and the Role of the Taking State. Loyola of Los Angeles International and Comparative Law Review

 

[19] UK-China BIT. Treaty Series No. 33 (1986)

[20] Ibid

[21] O’CONOR, LEE. The International Law of Expropriation of Foreign-Owned Property: The Compensation Requirement and the Role of the Taking State. Loyola of Los Angeles International and Comparative Law Review

 

[22] BERGER, AXEL. (2011) ‘The Politics of China’s Investment Treaty-Making Program,’ in: Tomer Broude, Amy Porges and Marc Busch, eds., The Politics of International Economic Law. Cambridge: Cambridge University Press.

[23] See Metalclad v Mexico

[24] See CME v Czech Republic

[25] See UK-China BIT. Treaty Series No. 33 (1986)

[26] Orrego Vicufia, Some International Law Problems Posed by the Nationalization

of the Copper Industry by Chile, 67 AM. J. INT’L L. 711, 722 (1973).

 

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