Investment Treaty Practice of China, Japan and Korea

Investment Treaty Practice of China, Japan and Korea

Arbitration Academy 2012: Class 3 Professor Hi-Taek Shin

Seoul National University School of Law

[Work under 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 quo-

tation 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.

Expropriation• Expropriation:

– What measures would constitute indirect expropriation?• Conditions:

– Public purpose– Non-discrimination– Due process of law v. local law standard?– Standard of compensation: prompt, adequate and effective?

• Exceptions: – taxation measures?

• Additional protections: – Remittance or transfer guarantee– Interest

Expropriation: China (1)Model BIT (III) Article 4： Expropriation1. Neither Contracting Party shall expropriate, nationalize or take

other similar measures (hereinafter referred to as “expropriation”) against the investments of the investors of the other Contracting Party in its territory, unless the following conditions are met:

(a) for the public interests; (b) under domestic legal procedure; (c) without discrimination; (d) against compensation.

2. The compensation mentioned in Paragraph 1 of this Article shall be equivalent to the value of the expropriated investments imme-diately before the expropriation is taken or the impending expro-priation becomes public knowledge, whichever is earlier. The value shall be determined in accordance with generally recognized principles of valuation. The compensation shall include interest at a normal commercial rate from the date of expropriation until the date of payment. The compensation shall also be made without delay, be effectively realizable and freely transferable.

Expropriation: China (2)• Chinese model refers to expropriation, national-

ization, or “other similar measures” in the defini-tion of expropriation.

• “due process [of law]” vs. “in accordance with domestic legal procedure” – Question: is there a significant difference between “local

legal procedure” and the concept of the “due process” as is commonly used in BITs of other states.

– In the tri-lateral investment agreement, China agreed to include “international standard of due process of law”

Expropriation: China (4)• Standard of compensation: – Chinese BITs avoid reference to the commonly

used phrase such as ‘prompt, adequate and ef -fective compensation’ (‘the Hull formula’).

– It states expropriation “against compensation”, then elaborates in the next paragraph that the compensation shall be equivalent to the value of the expropriated investments immediately before the expropriation is taken …… and that the value shall be determined in accordance with generally recognized principles of valua-tion.

Expropriation: China (5)• Question: Would this language which is differently

phrased from the conventional Hull formula justify a state practice which might represent a signifi-cant deviation from the more common practice?

• With regard to the time and method of payment, Chinese BITs require compensation to be made ‘without delay, be effectively realizable and freely transferable’: Is this language could justify a state practice significantly different from the ‘prompt’ and ‘effective’ compensation required under the ‘Hull formula’?

Tza Yap Shum v Peru (ICSID Case No. ARB/07/6, currently under annulment proceeding)

• Claimant: Peruvian tax authority (SUNAT) breached the ex-propriation provision of the China-Peru BIT by its actions (i.e., freezing of bank accounts while tax challenge is pend-ing, thus paralyzed business)

• Legal Issues Discussed by Tribunal (Award of 7 July 2011): – Q 1: Whether SUNAT’s audit constituted an indirect ex-

propriation of Tza’s investment?• The Tribunal’s finding: the audit of TSG appeared to

have been routine in light of TSG’s request in prior years for large refunds on sales taxes

• In light of the deference given to a State’s regulatory and administrative powers, nothing in the conduct of SUNAT’s audit constituted an expropriation

Tza Yap Shum v Peru (2)– Q 2: Whether SUNAT’s imposition of interim measures

constituted an indirect expropriation of Tza’s invest-ment?• Tribunal’s determination: The interim measure was

arbitrary in nature and as such constitute an indirect expropriation

• Significantly interfere with TSG’s operations – “strike at the heart of the operative capacity of TSG”

• “arbitrary”-SUNAT failed to comply with its own inter-nal guidelines and procedures

• “ineffective”: impact was severe on TSG, but the measure itself was ineffective per its purpose

• TSG did not have recourse to effective due process: “formal, rather than substantive” legal recourse

• TSG did not act in bad faith and did not fail to miti-gate its damages

Expropriation: Japan (1)Japan – Korea BIT, Art 10 2. Neither Contracting Party shall expropriate or nation-

alize investments in its territory of investors of the other Contracting Party or take any measure tanta-mount to expropriation or nationalization (hereinafter referred to as “expropriation”) except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) upon payment of prompt, adequate and effective

compensation; and (d) in accordance with due process of law.

Expropriation: Japan (2)• Japan's BITs/FTAs generally include reference to

indirect expropriation by including any measure “equivalent to” or “tantamount to” expropriation in the definition of expropriation.

• Japanese BITs/FTAs, in principle, provides for four conditions for expropriation to be lawful. (i) for a public purpose; (ii) on a non-discriminatory basis; (iii) in accordance with due process of law ; and (iv) conditional upon payment of prompt, ade-quate and effective compensation.

Expropriation: Japan (3): Treatment of Taxation measures

• Para 6, Agreed Minutes (Japan-Korea BIT of 2002):• … when considering the issues of whether a taxation measure effects an ex-

propriation, the following elements should be borne in mind:• (a) The imposition of taxes does not generally constitute expropriation. The

introduction of a new taxation measure, taxation by more than one jurisdic-tion in respect to an investment, or a claim of excessive burden imposed by a taxation measure are not in themselves indicative of an expropriation.

• (b) A taxation measure will not be considered to constitute expropriation where it is generally within the bounds of internationally recognized tax poli-cies and practices. Taxation measure aimed at preventing the avoidance or evasion of taxes should not generally be considered to be expropriatory.

• (c) While expropriation may be constituted even by measures applying gen-erally (e.g., to all taxpayers), such a general application is in practice less likely to suggest an expropriation than more specific measures aimed at par-ticular nationalities or individual tax payers. A taxation measure would not be expropriatory if it was in force and was transparent when the investment was undertaken.

Expropriation: Japan (4)Japan – Korea BIT, Art 103. Compensation shall be equivalent to the fair market value of the

expropriated investments immediately before the expropriation occurred. The fair market value shall not reflect any change in value occurring because the expropriation had become publicly known earlier.

The compensation shall be paid without delay and shall carry an appropriate interest, taking into account the length of time until the time of payment. It shall be effectively realizable and freely transferable and shall be freely convertible into the currency of the Contracting Party of the investors concerned, and into freely us-able currencies as defined in the Articles of Agreement of the In-ternational Monetary Fund, at the market exchange rate prevailing on the date of expropriation.

4. ……, the investors affected shall have a right of access to the courts of justice or administrative tribunals or agencies of the Con-tracting Party making the expropriation to seek a prompt review of the investors’ case and the amount of compensation in accor-dance with the principles set out in this Article.

Expropriation: Japan (5)• Standard of Compensation:

– The new-generation BITs/FTAs adopt the formula cited above.

– Japan-China BIT: uses different language Japan - China BIT Art 5(2):

'The compensation […] shall be such as to place the na-tionals and companies in the same financial position as that in which the nationals and companies would have been if expropriation, nationalisation or any other measures the ef -fects of which would be similar to expropriation or national-ization […] had not been taken. Such compensation shall be paid without delay. It shall be effectively realizable and freely transferable at the exchange rate in effect on the date used for the determination of amount of compensa-tion.'

Expropriation: Korea (1)Model BIT 2001 Article 5： Expropriation

1. Investments of investors of one Contracting Party shall not be nationalized, expropriated or otherwise sub-jected to any other measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other Con-tracting Party except for public purpose and against prompt, adequate and effective compensation. The expropriation shall be carried out on a non-discrimina-tory basis in accordance with legal procedures.

Expropriation: Korea (2)• Expropriation: defined to include “any other measures hav-

ing [an] effect equivalent to nationalization or expropria-tion”

• The expropriation clause in the investment chapter of Ko-rea-US FTA: a more detailed phrase similar to the 2004 US Model BIT:– "the expropriation or nationalization, whether direct or

indirect, must be 'in accordance with due process of law and in accordance with customary international law, in-cluding fair and equitable treatment and full protection and security."

• Korea-China BIT: the due process requirement is strength-ened by requiring that the expropriation be 'in accordance with domestic law and international standard of due process of law.'

Expropriation: Korea (3)Model BIT 2001 Article 5： Expropriation

2. Such compensation shall amount to the fair market value of the expropriated investments immediately before expropriation was taken or before impending expropriation became public knowl-edge, whichever is the earlier, shall include interest at the applica-ble commercial rate from the date of expropriation until the date of payment, and shall be made without undue delay, be effectively realizable, and be freely transferable. In both expropriation and compensation, treatment no less favourable than that which the Contracting Party accords to its own investors or to investors of any third State shall be accorded.

3. Investors of one Contracting Party affected by expropriation shall have a right to prompt review by a judicial or other independent authority of the other Contracting Party, of their case and of the valuation of their investments in accordance with the principles set out in this Article.

4. Where a Contracting Party expropriates the assets of a company which is incorporated or constituted under its laws and regulations, and in which investors of the other Contracting Party own shares, debentures or other forms of participation, the provision of this Ar-ticle shall be applied.

Expropriation: Korea (4)• Most BITs entered into by Korea require that the expropria-

tion be accompanied by prompt, adequate, and effective compensation.

– With respect to determining the adequacy of compen-sation, Korean BITs typically use the standard of the 'fair market value of the expropriated investments im-mediately before expropriation was taken or before impending expropriation became public knowledge, whichever is the earlier”.

– The Korea-Japan and Korea-China BITs further add that '[t]he fair market value shall not reflect any change in value occurring because the expropriation had become publicly known earlier' to prevent the host state from driving down the property value.

• With respect to the effectiveness of the compensation, most Korean BITs follow the 2001 Korean Model BIT such as free transferability and convertibility into freely usable cur-rencies.

Expropriation: Korea (5): • Difficulty of defining the line between “indirect expropriation”

and the “legitimate regulatory space” of the host state: • In principle, under Korean law, a government regulatory mea-

sure that falls short of direct expropriation would not create a claim for compensation unless there is a special legislation pro-viding for certain compensation or such regulatory measure is il-legal (if illegal, then claim for damages would exist).

– Thus, the issue of 'indirect' expropriation has become one of the most difficult negotiating items for the Korean govern-ment.

– The annex on expropriation, in Annex 11-B of the invest-ment chapter of the Korea-US FTA provides the contracting parties' understanding of indirect expropriation.

Annex 11-B of Korea-US FTA In-vestment Chapter

• The Parties confirm their shared understanding that: • An action or a series of actions by a Party cannot constitute an

expropriation unless it interferes with a tangible or intangible property right(or property interest) in an investment.

• The determination of whether an action or a series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case–by–case, fact–based inquiry that considers all relevant factors relating to the investment, including:– the economic impact of the government action, although the fact that

an action or a series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

– the extent to which the government action interferes with distinct, reasonable investment–backed expectations; and

Annex 11-B of Korea-US FTA In-vestment Chapter (continued)– the character of the government action, including its

objectives and context. Relevant considerations could include whether the government action imposes a special sacrifice [emphasis supplied] on the particular investor or investment that exceeds what the investor or investment should be expected to endure for the public interest.

• Except in rare circumstances, such as, for example, when an action or a series of actions is extremely severe or disproportionate in light of its purpose or effect, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, the environment, and real estate price stabilization [emphasis supplied] (through, for example, measures to improve the housing conditions for low–income households), do not constitute indirect expropriations.

• Korea explicitly stipulates in the footnote to the effect that

the reasonableness of an investor's expectation may differ according to the nature and extent of the relevant regulatory environment and states that the objectives and context of such state regulations should be taken into account.

• The expropriation provision in Korea-US FTA 'does not apply to the issuance of compulsory licenses granted in relation to in-tellectual property rights in accordance with TRIPS Agree-ment, or to the revocation, limitation, or creation of intellec-tual property rights, to the extent that such issuance, revoca-tion, limitation, or creation is consistent with Chapter Eigh-teen (Intellectual Property Rights).'

Expropriation (1)• Shall not be subject to “expropriation, nationaliza-

tion or any other measures the effects of which would be similar to expropriation or nationaliza-tion”

• Conditions: (a) public purpose, (b) non-discrimina-tory, (c) “taken against compensation” (FMV not explicitly mentioned) and (d) “in accordance with laws and regulations”

China-Japan (1998)

• Shall not expropriate, nationalize, or “take any measures tantamount to expropriation or national-ization”

• (a), (b), (c) “prompt, adequate and effective com-pensation” (FMV+interest; freely transferable and convertible), and (d) due process of law

Japan-Ko-rea (2002)

• Shall not “expropriate, nationalize, or take other similar measures, directly or indirectly”

• (a), (b), (c) “against compensation” (FMV+interest; freely transferable and convert-ible) and (d) “in accordance with domestic law and international standard of due process of law”

Korea-China (2007)

BIT

Expropriation (2)• Protection against direct or indirect expropriation

“through measures equivalent to expropriation or na-tionalization” (Art. 133.1)

• Compensation is based on the FMV of the expropria-tion investment immediately before expropriation took place (Art. 133.2)

China-Peru (2009)

• Protection against direct or indirect expropriation “through measures equivalent to expropriation or nationalization” (Art. 13.1)

• Compensation is the FMV of when expropriation was pub-licly announced or when expropriation occurred, which-ever is earlier and explicitly states that FMV shall not re-flect any change in value occurring because expropriation had become publicly known (Art. 13.2)

Japan-Peru (2011)

• Protection against direct or indirect expropriation “through measures equivalent to expropriation or na-tionalization” (Art. 9.12.1)

• Compensation is based on FMV of expropriated in-vestment immediately before the expropriation took place (Art. 9.12.2)

Korea-Peru (2011)

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Fair and equitable treatment (FET)• Promise to give “fair and equitable” treatment to

foreign investors and investments – a core con-cept in modern BITs

• Almost universally accepted. • While the term is undefined in BITs, it is one of

the most frequently invoked treatment standard in investor-State arbitrations• “an almost ubiquitous presence” in investment arbitra-

tions (Prof. Dolzer) • Key issue: FET as an independent standard or

linked to customary international law standard of international minimum standard?

FET: China (1)Article 3： Treatment of Investment1. Investments of investors of each Contracting Party shall all

the time be accorded fair and equitable treatment in the territory of the other Contracting Party.

• All three versions of the Chinese Model BIT contain this standard.

FET: China (2)• In Chinese Model BITs, FET standard is stated as an auton-

omous standard without linking it to international law stan-dard.

• China’s recent treaties started to include explicit reference to general principles of international law:

• In recent Trilateral Investment Agreement with Korea and Japan, China specifically qualified FET standard by the in-ternational minimum standard of treatment of aliens. – Tri-lateral Investment Agreement, Art. 5 (1)

“The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond any reasonable and appro-priate standard of treatment accorded in accordance with generally accepted rules of international law”

This indicates shift in China’s approach to the appli-cation of these principles over the years.

FET: China (3)• Some recent Chinese BIT includes a clause stating an

example of the contents of FET.China-ASEAN Cooperation Agreement (2009):

– Fair and equitable treatment refers to the obliga-tion of each Party not to deny justice in any legal or administrative proceedings.

FET: Japan (1)

• Some early Japanese BITs do not include FET clause at all (e.g., Japan-Egypt BIT of 1977; Japan-China BIT of 1988)

• Recent Japanese BIT (e.g., with Cambodia) provides FET standard as an element of international law. – “treatment in accordance with international law, including fair

and equitable treatment and full protection and security”

Japan – Korea BIT (2002), Art 10 1. Each Contracting Party shall accord to invest-ments in its territory of the other Contracting Party treatment fair and equitable treatment and full and constant protection and security.

FET: Japan (2)• Contents of, or qualifications to FET:– The FET obligation ‘do[es] not require treat-

ment in addition to or beyond that which is re-quired by [the] customary international law minimum standard of treatment of aliens’. (Ja-pan-Brunei FTA)

– ‘Fair and equitable treatment’ includes the ob-ligation of the Contracting Party not to deny justice in criminal, civil, or administrative adju-dicatory proceedings in accordance with the principle of due process of law. (Japan-Chile FTA)

FET: Korea (1)Article 2: Promotion and Protection of Investments2. Investments made by investors of each Contracting Party

shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.

• The 2001 Korean Model BIT provides for FET as an auton-omous protection standard without linking it to interna-tional law.

• Recent Korean BITs relate the FET standard to interna-tional law. Korea-Kuwait BIT: ‘investments by investors of either

Contracting Party shall at all times enjoy fair and equi-table treatment …… in a manner consistent with rec-ognized principles of international law and the provi-sions of this Agreement.’ (art. 2(6))

FET: Korea (2)• The investment chapter of the Korea-US FTA presents FET standard

as elements of customary international law prescribing the mini-mum standard of treatment of aliens.

– ‘each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security’ and further elaborates that this Article ‘prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to cov-ered investments’.

– The concepts of “fair and equitable treatment” and “full pro-tection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights.’

– Furthermore, it has additional clarification providing that: (a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.

Fair and Equitable Treatment (FET) and Full Protection and Security (1)

• No mention of FET• “the most constant protection and security” (Art.

5.1)China-Japan

(1998)• Straight-forward FET: “fair and equitable treatment

and full and constant protection and security” (Art. 10.1)

• Not qualified by international law or minimum stan-dard of treatment

Japan-Ko-rea (2002)

• Straight-forward FET: “fair and equitable treatment and full and constant protection and security” (Art. 2.2)

• Not qualified by international law or minimum stan-dard of treatment

Korea-China (2007)

BIT

Fair and Equitable Treatment (FET) and Full Protection and Security (2)

• “fair and equitable treatment and full protection and security in accordance with customary international law” (Art. 132.1)

• “FET and full protection and security do not require additional treatment to that required under the min-imum standard of treatment of aliens in accordance with the standard of customary international law” (Art. 132.2 (a))

China-Peru(2009)

• Treatment in accordance with customary interna-tional law minimum standard of treatment of aliens, including FET and full protection and security (Art. 5.1)

• FET and full protection and security “do not require treatment in addition to or beyond that which is re-quired by the customary international law minimum standard of treatment of aliens” (Art. 5.2)

Japan-Peru (2011)

• Similar to Japan-Peru BIT (Art. 9.5 and Art. 9.5.2)Korea-Peru

(2011)

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Performance Requirements• PR: “Conditions imposed by a host state on the establish-

ment and operation of a foreign investment in connection with the admission of the investment or in exchange for a special benefit granted to it

• Viewed as a policy tool for the host state to increase the amount of benefits to host state economy

• Typical examples: – Minimum export requirement– Minimum amount of local content

• Agreement on TRIMs (Trade Related Investment Measures) forbids Imposition of local contents and trade balancing re-quirements (measures that are inconsistent with GATT Arti-cle III (NT) and Article XI (elimination of quantitative restric-tions)

• US initiative to include prohibition of PR in the BITs.

• Followed by other capital-exporting states in their BIT negotiations.

• While typical European BITs do not have a clause on PR, the number of BITs with a PR prohibition clause are on increasing trends since Agreement on TRIMs in 1995

Japan-Korea BIT Art. 91. Neither Contracting Party shall impose or enforce, as a condition for

investment and business activities in its territory of an investor of the other Contracting Party, any of the following requirements:

(a) to export a given level or percentage of goods or services; to achieve a given level or percentage of domestic content;

(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from natural or legal persons or any other entity in its territory;

(d) to relate the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associ-ated with investments of that investor;

(e) to restrict sales of goods or services in its territory that an in-vestment of that investor produces or provides by relating such sales to the volume or value of its exports or foreign exchange earnings;

(f) to transfer technology, a production process or other propri-etary knowledge to a natural or legal person or any other en-tity in its territory, except when the requirement (i) is imposed or enforced by a court, administrative tribunal or competition authority to remedy an alleged violation of competition laws; or (ii) concerns the transfer of intellectual property and is un-dertaken in a manner not inconsistent with the Agreement on Trade–Related Aspects of Intellectual Property Rights, Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization;

(g) to locate the headquarters of that investor for a specific re-gion or the world market in its territory;

(h) to achieve a given level or value of research and development in its territory; to hire a given level of its nationals; or

(j) to supply one or more of the goods that the investor produces or the services that the investor provides to a specific region or the world market, exclusively from the territory of the for-mer Contracting Party.

2. The provisions of paragraph 1 of this Article do not preclude either Contracting Party from conditioning the receipt or continued receipt of an advantage, in connection with investment and business activities in its territory of an investor of the other Contracting Party, on compliance with any of the requirements set forth in paragraph 1 (f) through (j) of this Article.

3. Nothing in this Article shall be construed so as to derogate from the rights and obligations of the Con-tracting Parties under the Agreement on Trade–Related Investment Measures, Annex 1A of the Marrakesh Agreement Establishing the World Trade Organization.

Performance Requirements: Japan• The new-generation of Japanese BITs/FTAs provides for

certain regulations on performance requirements. – Some of them incorporate TRIMS prohibitions by

reference.– The others generally prohibit, in addition to

TRIMS-type performance requirements, any re-striction on sales of goods in the host state.

• The new-generation BITs/FTAs generally allow certain performance requirements only in exchange for cer-tain advantages conferred by the host State.

Performance Requirement: Korea• Similar to the 2004 US Model BIT, Article 9 of the Ko-

rea-Japan BIT prohibits certain types of performance requirements by the host state.

• While the prohibition of the performance requirements in the Korea-Japan BIT applies only to an investor of the 'other Contracting Party,' it is notable that the prohibition of the performance requirement in the Ko-rea-US FTA applies both to 'an investor of a Party or of a non-Party.'

– The rationale behind this approach is to avoid the situation where an investor of a non-Party would receive a favorable incentive for agreeing to a certain performance requirement.

PR in Trilateral Investment Agreements

• Art. 71. The provisions of the Agreement on Trade-Related

Investment Measures in Annex 1A to the WTO Agreement are incorporated into and made part of this Agreement, mutatis mutandis and shall apply with respect to all investments under this Agree-ment.

2. No Contracting Party shall, in its territory, impose unreasonable or discriminatory measures on in-vestment by investors of another Contracting Party concerning performance requirements on export or transfer of technology/

Performance Requirements(PR) (1)

•No provisions on PRChina-Japan (1998)

• Prohibits certain PRs enumerated in the BIT (Art. 9)

• E.g., minimum export or local content; sales or R&D requirements

Japan-Ko-rea (2002)

•Prohibits unreasonable or discriminatory mea-sures concerning local content, technology trans-fer or export performance requirements (Art. 2.3)

Korea-China (2007)

BIT

Performance Requirements(PR) (2)

• No provisions on PRChina-Peru

(2009)• No party may impose or enforce any of the

prohibited PR (Art. 6)• Detailed list of prohibited PR as a condition for

investment or for the receipt or continued re-ceipt of an advantage

• Reservations and exceptions listed in Annex (Art. 8)

Japan-Peru (2011)

• Similar to Japan-Peru BIT (Art. 9.7.1)Korea-Peru

(2011)

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