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
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.
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：Expropriation
1. 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 immediately
before the expropriation is taken or the impending expropriation
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, nationalization,
or “other similar measures” in the definition 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 effective
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 valuation.
Expropriation: China (5)
• Question: Would this language which is differently
phrased from the conventional Hull formula justify a
state practice which might represent a significant
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
expropriation provision of the China-Peru BIT by its actions (i.e.,
freezing of bank accounts while tax challenge is pending, thus
paralyzed business)
• Legal Issues Discussed by Tribunal (Award of 7 July 2011):
– Q 1: Whether SUNAT’s audit constituted an indirect
expropriation 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 investment?
• 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 internal
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 mitigate its
damages
Expropriation: Japan (1)
Japan – Korea BIT, Art 10
2. Neither Contracting Party shall expropriate or nationalize
investments in its territory of investors of the other
Contracting Party or take any measure tantamount 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, adequate 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
expropriation, 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
jurisdiction 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
policies 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
generally (e.g., to all taxpayers), such a general application is in practice
less likely to suggest an expropriation than more specific measures
aimed at particular 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 10
3. 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 usable currencies as defined in
the Articles of Agreement of the International 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 Contracting Party
making the expropriation to seek a prompt review of the investors’ case
and the amount of compensation in accordance 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 nationals 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 effects of which would
be similar to expropriation or nationalization […] 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
compensation.'
Expropriation: Korea (1)
Model BIT 2001 Article 5：Expropriation
1. Investments of investors of one Contracting Party shall not
be nationalized, expropriated or otherwise subjected to any
other measures having effect equivalent to nationalization
or expropriation (hereinafter referred to as ‘expropriation’) in
the territory of the other Contracting Party except for public
purpose and against prompt, adequate and effective
compensation. The expropriation shall be carried out on a
non-discriminatory basis in accordance with legal
procedures.
Expropriation: Korea (2)
• Expropriation: defined to include “any other measures having [an]
effect equivalent to nationalization or expropriation”
• The expropriation clause in the investment chapter of Korea-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, including fair
and equitable treatment and full protection and security."
• Korea-China BIT: the due process requirement is strengthened 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 knowledge, whichever is
the earlier, shall include interest at the applicable 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 Article shall be applied.
Expropriation: Korea (4)
• Most BITs entered into by Korea require that the expropriation be
accompanied by prompt, adequate, and effective compensation.
– With respect to determining the adequacy of compensation,
Korean BITs typically use the standard of the 'fair market
value of the expropriated investments immediately 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 currencies.
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 measure
that falls short of direct expropriation would not create a claim
for compensation unless there is a special legislation providing
for certain compensation or such regulatory measure is illegal (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
government.
– The annex on expropriation, in Annex 11-B of the investment
chapter of the Korea-US FTA provides the contracting
parties' understanding of indirect expropriation.
Annex 11-B of Korea-US FTA
Investment 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
Investment 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, nondiscriminatory 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
intellectual property rights in accordance with TRIPS Agreement,
or to the revocation, limitation, or creation of intellectual property
rights, to the extent that such issuance, revocation, limitation, or
creation is consistent with Chapter Eighteen (Intellectual Property
Rights).'
Expropriation (1)
• Shall not be subject to “expropriation, nationalization or a
China-Japan
(1998)
ny other measures the effects of which would be similar t
o expropriation or nationalization”
• Conditions: (a) public purpose, (b) non-discriminatory, (c)
“taken against compensation” (FMV not explicitly mention
ed) and (d) “in accordance with laws and regulations”
BIT
• Shall not expropriate, nationalize, or “take any measures ta
Japan-Korea
(2002)
ntamount to expropriation or nationalization”
• (a), (b), (c) “prompt, adequate and effective compensation”
(FMV+interest; freely transferable and convertible), and (d)
due process of law
• Shall not “expropriate, nationalize, or take other similar
measures, directly or indirectly”
Korea-China
• (a), (b), (c) “against compensation” (FMV+interest; freely tr
(2007)
ansferable and convertible) and (d) “in accordance with d
omestic law and international standard of due process of l
aw”
Expropriation (2)
• Protection against direct or indirect expropriation “through m
China-Peru
FTA Investment Chapter
(2009)
easures equivalent to expropriation or nationalization” (Art. 1
33.1)
• Compensation is based on the FMV of the expropriation
investment immediately before expropriation took place (Art.
133.2)
• Protection against direct or indirect expropriation “through measur
es equivalent to expropriation or nationalization” (Art. 13.1)
Japan-Peru
(2011)
• Compensation is the FMV of when expropriation was publicly
announced or when expropriation occurred, whichever is earlier
and explicitly states that FMV shall not reflect any change in value
occurring because expropriation had become publicly known (Art.
13.2)
• Protection against direct or indirect expropriation “through m
Korea-Peru
(2011)
easures equivalent to expropriation or nationalization” (Art. 9.
12.1)
• Compensation is based on FMV of expropriated investment
immediately before the expropriation took place (Art. 9.12.2)
Fair and equitable treatment (FET)
• Promise to give “fair and equitable” treatment to
foreign investors and investments – a core concept 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 arbitrations
(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 Investment
1. 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 autonomous
standard without linking it to international law standard.
• 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 international
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 appropriate
standard of treatment accorded in accordance with
generally accepted rules of international law”
 This indicates shift in China’s approach to the application
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 obligation
of each Party not to deny justice in any legal or
administrative proceedings.
FET: Japan (1)
Japan – Korea BIT (2002), Art 10
1. Each Contracting Party shall accord to investments in
its territory of the other Contracting Party treatment fair
and equitable treatment and full and constant
protection and security.
• 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”
FET: Japan (2)
• Contents of, or qualifications to FET:
– The FET obligation ‘do[es] not require treatment in
addition to or beyond that which is required by [the]
customary international law minimum standard of
treatment of aliens’. (Japan-Brunei FTA)
– ‘Fair and equitable treatment’ includes the
obligation of the Contracting Party not to deny
justice in criminal, civil, or administrative
adjudicatory proceedings in accordance with the
principle of due process of law. (Japan-Chile FTA)
FET: Korea (1)
Article 2: Promotion and Protection of Investments
2. 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 autonomous
protection standard without linking it to international law.
• Recent Korean BITs relate the FET standard to international law.
 Korea-Kuwait BIT: ‘investments by investors of either
Contracting Party shall at all times enjoy fair and equitable
treatment …… in a manner consistent with recognized
principles of international law and the provisions 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 minimum
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 covered investments’.
– The concepts of “fair and equitable treatment” and “full protection
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)
China-Japan
BIT
(1998)
Japan-Korea
(2002)
Korea-China
(2007)
• No mention of FET
• “the most constant protection and security” (Art. 5.1)
• Straight-forward FET: “fair and equitable treatment and full
and constant protection and security” (Art. 10.1)
• Not qualified by international law or minimum standard of
treatment
• Straight-forward FET: “fair and equitable treatment and full
and constant protection and security” (Art. 2.2)
• Not qualified by international law or minimum standard of
treatment
Fair and Equitable Treatment (FET)
and Full Protection and Security (2)
FTA Investment Chapter
China-Peru
(2009)
Japan-Peru
(2011)
Korea-Peru (2011)
• “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 minimum
standard of treatment of aliens in accordance with the
standard of customary international law” (Art. 132.2 (a))
• Treatment in accordance with customary international law
minimum standard of treatment of aliens, including FET an
d 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 required
by the customary international law minimum standard of
treatment of aliens” (Art. 5.2)
• Similar to Japan-Peru BIT (Art. 9.5 and Art. 9.5.2)
Performance Requirements
• PR: “Conditions imposed by a host state on the establishment
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 requirements
(measures that are inconsistent with GATT Article III (NT) and
Article XI (elimination of quantitative restrictions)
• 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. 9
1. 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 associated
with investments of that investor;
(e) to restrict sales of goods or services in its territory that an
investment 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 proprietary
knowledge to a natural or legal person or any other entity 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 undertaken 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 region 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 former
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 Contracting 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 TRIMStype performance requirements, any restriction on
sales of goods in the host state.
• The new-generation BITs/FTAs generally allow certain
performance requirements only in exchange for certain
advantages conferred by the host State.
Performance Requirement: Korea
• Similar to the 2004 US Model BIT, Article 9 of the KoreaJapan 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 Korea-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. 7
1. 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 Agreement.
2. No Contracting Party shall, in its territory, impose
unreasonable or discriminatory measures on
investment by investors of another Contracting Party
concerning performance requirements on export or
transfer of technology/
Performance Requirements(PR) (1)
China-Japan
BIT
(1998)
Japan-Korea
(2002)
• No provisions on PR
• Prohibits certain PRs enumerated in the BIT (Art. 9)
• E.g., minimum export or local content; sales or R&
D requirements
Korea-China • Prohibits unreasonable or discriminatory measures
(2007)
concerning local content, technology transfer or
export performance requirements (Art. 2.3)
Performance Requirements(PR) (2)
China-Peru
FTA Investment Chapter
(2009)
• No provisions on PR
• No party may impose or enforce any of the
prohibited PR (Art. 6)
Japan-Peru
(2011)
• Detailed list of prohibited PR as a condition for
investment or for the receipt or continued receipt
of an advantage
• Reservations and exceptions listed in Annex (Art. 8)
Korea-Peru
(2011)
• Similar to Japan-Peru BIT (Art. 9.7.1)